1.1 Background of the Study
Starting from Adam Smith’s discussion on specialization and the extant of the market by international trade, to the debates about import substitution versus exported growth (growth based on exporting more goods and services), to recent work on increasing returns and endogenous growth models, there are increasing debates among economists about the international trade and economic growth ( Dushko and Darko2012).
Economists have long been interested in factors which cause different countries to grow at different rates and achieve different levels of wealth. One of such factors is trade. Nigeria is basically an open economy with international transactions constituting a significant proportion of her aggregate output (Mike and Okojie 2012). The Nigerian government like many other developing countries considers trade as the main engine of its development strategies, because of the implicit belief thattrade can create jobs, expand markets, raise incomes, facilitate competition and disseminate knowledge (Ogbajiand Ebebe 2013).Nevertheless, while trade between countries may generate growth globally, there are no guarantees that its aggregate benefits are distributed equitably among trading partners. There are winners and losers in any trading relationship. However trading partners all may gain differing degrees. Many factors determine the extent to which a country may benefit from a trading relationship. These include the terms of trade a country faces vis-à-vis its trading partners, the international exchange rate among the traded goods and the market characteristics of the country’s exportable goods (Eravwoke and Oyovwi 2012).This has been the experience of Nigeria since the 1960s even though the composition of trade has changed over the years. Foreign trade has been an area of interest to decision makers, policy makers as well as economists. It enables nations to sell their locally produced goods to other countries of the world (Adewuyi, 2000) as quoted by (JohnAiyelabola 2012).The word trade has been defined in the Oxford Advanced Learner dictionary as “the activity in which people are buying and selling or exchanging the goods and services between countries”. International trade is the exchange of capital, goods, and services across international borders. Zahoor,Imran,Anam,Saif-ullaha,Ashraf (2012) said it is a system where the goods and services are advertised, sell and switched between two or more than two countries through import and export.
The role of foreign trade in economic development is considerable. The classical and neo-classical economists attached so much importance to foreign trade in a nation’s development that they regarded it as an engine of growth. Over the past several decades, the economies of the world have become greatly connected through international trade and globalization. Foreign trade has been identified as the oldest and most important part of a country’s external economic relationships. It plays a vital and central role in the development of a modern global economy. Its impact on the growth and development of countries has increased considerably over the years and has significantly contributed to the advancement of the world economy. The impact of foreign trade on a country’s economy is not only limited to the quantitative gains, but also structural change in the economy and facilitating of international capital flow. Trade enhances the efficient production of goods and services through allocation of resources to countries that have comparative advantage in their production. Foreign trade has been identified as an instrument and driver of economic growth (Frankel and Romer, 1999).
According to Oluwasola and Olumide(2012), the basis for foreign trade rests on the fact that nations of the world do differ in their resource endowment, preferences, technology, scale of production and capacity for growth and development. Countries engage in trade with one another because of these major differences and foreign trade has opened up avenues for nations to exchange and consume goods and services which they do not produce. They further said that the differences in natural endowment present a case where countries can only consume what they have the capacity to produce, but trade enables them to consume what other countries produce. Therefore countries engage in trade in order to enjoy variety of goods and services and improve their people’s standard of living.
The current period in the world economy is regarded as period of globalization and trade liberalization. In this period, one of the crucial issues in development and international economics is to know whether foreign trade indeed promotes growth. With globalization, two major trends are noticeable: first is the emergence of multinational firms with strong presence in different, strategically located markets; and secondly, convergence of consumer tastes for the most competitive products, irrespective of where they are made. In this context of the world as a “global village”, regional integration constitutes an effective means of not only improving the level of participation of countries in the sub-region in world trade, but also their integration into the borderless and interlinked global economy.
Foreign trade allows a country or nation to expand her markets for both goods and services that otherwise may not have been available to her citizens. Foreign trade means per capita income has been based on the domestic production, consumption activities and in conjunction with foreign transaction of goods and services.
It has been established in several literatures that export trade is an engine of growth. It increases foreign exchange earnings, improves balance of payment position, creates employment and development of export oriented industries in the manufacturing sector and improves government revenue through taxes, levies and tariffs. These benefits will eventually transform into better living condition for the nationals of the exporting economy since foreign exchange derived would contribute to meeting their needs for some essential goods and services. However, before these benefits can be fully realized, the structure and direction of these exports must be carefully tailored such that the economy will not depend on only one sector for the supply of needed foreign exchange (John and Aiyelabola 2012).
Foreign trade has been regarded as an engine of growth (Adewuyi, 2002). Foreign trade as it has been regarded as an engine of growth must lead to steady improvement in human status by expanding the range of people’s standard and preference. Since no country has grown without trade, foreign trade plays a vital role in restructuring economic and social attributes of countries around the world, particularly the less developed countries (Usman 2011).
Though international trade can be made up of Foreign Direct Investment and Foreign Portfolio Investment, Foreign Direct Investment is often preferred as a means of boosting the economy. This is because FDI disseminates advanced technological and managerial practices through the host country and thereby exhibits greater positive externalities compared with Foreign Portfolio investment which may not involve positive transfers, just being a change in ownership. In addition, available data suggest that FDI flows tend to be more stable compared to Foreign Portfolio Investment (Lipsey, 1999). This is because of the liquidity of Foreign Portfolio Investment and the short time horizon associated with such investments. Also, FDI inflows can be less affected by change in national exchange rates as compared to Foreign Portfolio Investment. However, a balanced combination of the two, taking into consideration the unique characteristics of the recipient economy will bring about the required effects on the economy (Tokunbo and Lloyd 2010).
Since the 1980s, flows of investment have increased dramatically the world over. Despite the increased flow of investment to developing countries in particular, Sub-Sahara African (SSA) countries are still characterized by low per-capita income, high unemployment rates and low falling growth rates of GDP, problems which foreign private investment are theoretically supposed to solve. Nigeria, being one of the top three countries that consistently received FDI in the last decade is not exempted from this category (Ayanwale, 2007).
Growth performance of the Nigerian economy has been determined by both domestic production and consumption activities as well as foreign transactions in goods and services. Before her political independence, the Nigerian economy was well known for its exports-driven growth particularly before the discovery of oil when the country used to record a huge success in the export of non-oil products especially agricultural produce. It is obvious that for long the non-oil exports in Nigeria had been taken over by the oil sector, even though the performance of the economy in the last decade was quite very surprising. This is partly because of the country’s stronger ties with developed and emerging economies especially after the transition to civilian rule in 1999 and partly the recent global economic and of course Niger Delta crises, which rendered the oil sector at disadvantage when it comes to the sector’s contribution to the growth of the economy. This underscores the need to not only diversify the economy but also target the country’s rate of growth through agricultural and non-oil exports. This is also particularly important when one considers the comparative advantage the country has had in agricultural and non-oil exports as a labour abundant economy with huge minerals and arable but uncultivated lands (Sikiru, Shehu Dan, DOGON-DAJI, Jimoh 2012).
Before the discovery of oil in 1960’s, the Nigerian government was able to execute investment project through domestic savings, earning from agricultural product exports and foreign aids. Since the advent of oil as a major source of foreign exchange earning Nigeria in 1974 the picture has been almost that of general stagnation in agricultural exports. This led to the loss of Nigeria’s position as an important producer and exporter of palm oil produce, groundnut, cocoa and rubber (CBN annual report, 2006). Between the year 1960 and 1980, agricultural and agro-allied exports constituted an average of sixty percent of total export in Nigeria, which is now accounted for, by petroleum oil export.
Furthermore, by 1977, export stood at N7, 881.7 million. Between 1960 and 1977, value of export grew by 19 percent. It should be noted that before 1972, most of the export were agricultural commodities like cocoa, palm produces, cotton and groundnut. Thereafter, minerals, especially crude, petroleum, became significant export commodities. Imports also increased in values during the period. By 1960, import were valued at N432 million. They increased to N758.99 million and N8.132 million in 1970 and 1978 respectively, rising to N124, 162.7 million in 1992 and N681, 728.3 million in 1997.
However, from 1974, food import became noticeable in Nigeria foreign trade. The country had an unfavourable trade balance from 1960 to 1965, partly because of the aggressive drive to import all kinds of machinery to stimulate the industrialization strategy pursued immediately after independence. Thereafter, export of crude petroleum guaranteed a favourable trade balance. The oil sector dominates export while the non oil sector dominates import. Between 1960 – 1970 oil export grew by 44.6 percent and 31.6 percent respectively. Also, for this period, non-oil export showed marginal growth of 1.2 percent and 6.6 percent.
In addition, in 2005, Nigeria imported about US$26 billion of goods. In 2004, the leading sources in import were China (9.4 percent), The United States (8.4 percent), the United Kingdom (7.8 percent), the Netherlands (5.9 percent), France (5.4 percent), Germany (4.8 percent), and Italy (4 percent). Principal imports were manufactured goods, machinery and transport equipment, chemical and food and live animal. Also in 2005, Nigeria exported about US$52 billion of goods. In 2004, the leading destinations for export were the United State (47.4 percent), Brazil (10.7 percent), and Spain (7.1 percent). In 2004, oil accounted for 95 percent of merchandise export, and cocoa and rubber accounted for almost 60 percent of the remainder. Nigeria exports go to almost the same source where her imports come from (Usman 2011).
The Nigerian Government is putting so much effort into attracting foreign investors and yet the economy is still dwindling (Tokunbo and Lloyd 2010) In response to these enormous problems, Structural Adjustment Program (SAP) was introduced in 1986 in the country. This was to liberalize and diversify the economy. With SAP in place, several export promotion strategies and policies especially on manufacturing export were formulated, which include various incentives on export, Research and Development (R&D) etc. Despite this effort to improve and diversify export the outcomes were not recommended. This was because the share of manufacturing export remains so low in the total export earning as compared to the oil sector in particular or primary goods in general. Evidence shows that the share of manufacturing export as percentage of total export remains less than 1 percent up to year 2000, as compared to average level of other sub-Saharan African countries of 6.2 percent of more than 70 percent of Eastern Asian countries. This is the nature and trend of Nigeria’s export over decades as well as how, from experience, the fluctuations in the volume of the export affect the level of economic growth.(John and Aiyelabola 2012).