CHAPTER ONE
1.0 INTRODUCTION
1.1 Motivation
Trade is widely accepted as a major engine of economic growth. This has been the experience of
Nigeria since the 1960s even though the composition of trade has changed over the years.
International 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.
International trade is the exchange of capital, goods and services between countries.
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 the literature 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.
According to (Grossman and Helpman 1997) a theoretical view and (keller 2002) an empirical
view has argued that openness is important for growth because it generates channels for
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technology diffusions, which makes the less developed countries to import such goods from the
developed countries.
International 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. Before 1972, most of Nigerian
exports were agricultural commodities like cocoa, palm produces, cotton and groundnut.
Thereafter, minerals, especially petroleum, became significant export commodities. By 1960,
imports were valued at N432million. They increased to N758.99million and N8.132million in
1970 and 1978 respectively, rising to N124, 162.7million in 1 and N681, 728.3million in 1987.
Food import became noticeable in Nigeria foreign trade. The country had an unfavorable 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 favorable trade balance. The oil sector
dominates export while the non-oil sector dominates import.
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, Nigeria has been an active player on the field of foreign trade, initially
with predominately agrain products, but presently dominated by petroleum products.
Since the discovery of oil in commercial quantity in Oloibiri in the present day Delta State,
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Nigeria has been an important player in world affairs, economically and otherwise, particularly
being the 6th largest producer of crude oil in the organization of petroleum exporting countries
(OPEC).
Prior to the discovery of oil in 1960s, the Nigerian government was able to execute investment
projects through domestic savings, earnings from agricultural product exports and foreign aids.
However, the capacity of the economy to accumulate domestic savings to finance investment
was limited.
This study is going to take a position, whether Nigeria‟s economic under-development can be
attributed to international trade or whether her relative economic prosperity, in terms of growth
and development can be attributed to her taking part in the field of international trade. In other
words, how effectively has trade contributed to Nigeria‟s economic growth and development?
This is the important question which this study attempts to answer.
Since the last twenty years, economic policy in Nigeria can be characterized by trade
liberalization and regional integration which is defined by the radical reducing or removal of
trade barriers. The World Trade Organization (WTO) the IMF and especially the World Bank
(WB) have obtained considerable powers to sway policies in countries towards this path. As
apart of the global Structural Adjustment Programme, it is assumed and argued that trade
liberalization improves the welfare of consumers and trims down poverty. The assertion was
two-fold and simple. First, it is argued that liberalization offers wider room for choice from an
array of quality goods and cheaper imports also find more lucrative markets in which their
products can be sold. A second argument is that, the production of goods in which a country has
comparative advantage expands, while the sectors without comparative disadvantage minimize.
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This is believed to lead to an overall rise in real GDP since there would be reallocation of the
productive factors from less efficient sectors to more efficient sectors.
The importance of foreign trade in the development process has been of interest to development
economists and policy makers alike. Imports and exports are key parts of foreign trade and the
import of capital goods in particular is vital to economic growth.
Promotion of economic growth is one of the objectives of foreign trade but in recent times, this
has not been the case because the Nigerian economy still experience some element of economic
instability such as high level of unemployment, price stability and adverse balance of payment to
mention a few. One of the major obstacles why benefits of foreign trade cannot be translated into
economic growth is the macroeconomic policy distortions resulting from the trade which turned
the country into an import dependent economy. The import of the country grew from N0.7
billion in1970 to over N562 billion in 1996 and later increase to N1, 266 billion in 2001, (CBN
Annual Report, 2004). More so, foreign trade has not accrued into economic growth because
some of the goods imported into the country were those that cause damage to the local industries
by rendering their product inferior and being neglected, this thereby reduces the growth rate of
output of such industries and this later spread to the aggregate economy.
Due to the reasons stated above, it is worthy of note to analyze the influence of foreign trade on
economic growth in Nigeria. To this ends, to what extent should Nigeria allow the importation of
goods and services to avoid damages to local industries? And what kind of standard should be
adopted for upgrading the exportation of goods and services. The main objective of this study is
to evaluate the performance of foreign trade and its contribution to economic growth in Nigeria.
Most economists especially development and international economists have argued in favor of
international trade as it relates to global and domestic economic growth and development. They
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believed that international trade leads to specialization, increase in resource productivity, large
total output, creation of employment, generation of income and relaxation of foreign exchange
restraints (Nnadozie, 2003). The positive relationship that exists between global trade and
economic growth may be as a result of the likely positive externalities due to the involvement of
different countries in the international trade. Many empirical studies have argued in favor of the
importance of global trade on economic growth using the degree of trade openness, terms of
trade, tariff and exchange rate as variables to explain the claim that open economies grow faster
than closed economies (Edwards, 1998). On the contrary, some economists have argued that the
practice of protectionism is better means for domestic economic growth because in some
instances the domestic economy may have comparative advantage over the foreign economy
(Nnadozie, 2003). Nevertheless, the overwhelming evidence of positive impact of international
trade on economic growth cannot be overemphasized. However, there are some questions to ask:
what relationship exists between Nigeria‟s involvement in international trade and her economic
growth?
1.2 Statement of the Problem
The importance of international trade in the development process has been of interest to
development economists and policy makers alike (Arodoye and Iyoha, 2014). Imports and
exports are a key part of international trade and the import of capital goods in particular is vital
to economic growth. This is so because imported capital goods directly affect investment, which
in turn constitutes the motor of economic expansion. Economic reform is expected to affect
imports as part of the strategy to restore external balance. However, unless policy makers know
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what the major components of imports are and how they are determined, such a policy decision
can be harmful to investment and output if domestic production relies on imports.
In Nigeria, some people are in favor of protectionist and highly regulated economy and have
even criticized the previous Nigerian government, for signing the treaty of the World Trade
Organization (WTO), claiming that, Nigeria was not adequately represented in the negotiations
and should push for a fairer deal. As regards to this statement, some people, particularly
economists pushed for the implementation of the Structural Adjustment Programme (SAP) in
1986 which brought about deregulation of formerly regulated areas of the economy, so that the
country could reap the benefits of economic openness.
The main thrust of this research is to take an objective view regarding the controversy of the role
of international trade, in the progress of a country in terms of economic growth of Nigeria. It has
been eluded by the dissenting voices in the 21st century that trade could be negative in terms of
acting as a catalyst of economic growth and development, being a retrogressive force, in the
journey to economic independence. But ironically, past experience has proven the potency of
trade as a catalyst of economic progress, with regards to growth and development.
1.3 Research Questions
This work will be guided through the following questions;
(i) What is the impact of international trade on the economic growth in Nigeria?
(ii) To what extent exchange rate policy impacted on the economic growth in Nigeria?
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1.4 Objectives of the Study
International trade has, by and large, been an “engine of growth” for global economy (Usman,
2011); Obadan and Okojie, 2010) and may well be the condition needed by small countries to
record rapid growth (Arodoye and Iyoha, 2014). But there have been large dissenting voices in
the 21st century, claiming that international trade only perpetuates the under-development of
poor countries due to the fact that there is a disproportionate share of gains from trade that
accrues to industrialized countries. This research work focuses on the following objectives:
(i) To examine the impact of international trade on the economic growth of Nigeria;
(ii) To determine the extent to which exchange policies have impacted on the growth process of
Nigerian economy
1.5 Justification of the Study
This study will be essential to policy maker to know more about the performance of foreign trade
and economic growth. It will also assist in providing the frame work of where work has been
done by earlier researchers. It will also provide a framework on which further research in foreign
trade could be carried out.
1.6 Scope of this study
This study will basically cover a period of 32 years (1981-2013). This study is limited to
international trade as it affects the growth and development of the Nigerian economy using the
data covering the 32 years period(1981-2013)
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