CHAPTER ONE
1. O INTRODUCTION
1.1 BACKGROUND
The major goals of macro-economic policy are: to achieve full employment
in other words maintain a low and stable level of unemployment. To maintain a
relative stable level of price payment position at a fixed stable exchange rate of
growth.
Practically, inflation which is a persistence increase in general price level is
one of the macro-economic problems facing Nigeria today. According to Ewa Udu
and Agu G.A it began in Nigeria during and after the Nigeria civil war (that is from
1965-1970).Before the war, there was noticeable increase in the price of so many
commodities such as a bag of 50cups of rice that cast #14.00 rises to #43.00
immediately after the civil war in 1970. Also there was an increase in the price of
other goods and since 1979 the rate of inflation in Nigeria has been increasing.
Again, the Nigeria civil war (that is secessionist Biafra) was faced with
hyperinflation. During that time everything was scarce relative to demand. This is
because there was excess supply of money by the federal government in attempt
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to persecute the war with few available goods. More so inflation has been a
scarce of concern to the government and something that was to be abided
absolutely at any cost, because it is one of the worst imaginable social evil in a
society.
However, there have been observed period of unemployment in Nigeria
until 1930’s when the classical economist theory which propound that the
demand for labor will also be equal to the supply of the labour at the prevailing
money wage rate, as this theory collapsed, due to the depression of the 1930’s
government has lend to accept periods of unemployment as inevitable. Since
independence in 1960 and in mid of 1980’s unemployment have been viewed as
one of the most untreatable problem facing the Nigeria economy up till today. It
assumes alarming dimension with the emergence of graduate unemployment. As
a result of this, the government has made many attempts at achieving full
employment through their various policies.
Nigeria economy has undergone strains and stresses in their balance of
payment since the collapse of the oil boom in early 1980’s. During that time,
Nigeria export was mainly crude oil which grew steadily from 1975 and reached a
peak in 1980, the import grew faster, bringing about a growth deficit in the visible
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trade balance. Also the production and consumption patterns that emerged from,
the era of the oil boom could not be sustained in the face of declining export or
foreign exchange and inflation resulted from the heavy borrowing by the civilian
administration, this made the balance of payment, capital account balance to
reduce to degree of deficit which leads to low external reserve. Furthermore
inflation is generally used to describe a situation of rapid persistence and
unacceptable increase in general price level in any economy which brings about
decrease in the value of currency.
Also Lerner (1949: pg 27) describe inflation as an excess of demand over
supply. Again Solow (1970) sees inflation as going on when one needs more and
more money to buy some representative bundle of goods and services meaning
that inflation is a part of the adjustment process between two equilibrium.
However it is not every rise in price that is being regarded as inflation but a
persistent rise in aggregate price of goods and services; this is because price may
be rise to support a higher level of aggregate welfare.
The main reason for allowing inflation is because it allows for substantial
redistribution of income and wealth from savers to borrowers that is from those
who cannot protect themselves from the rise in the price of what they buy by
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raising the price of what they sell to those who can afford. High inflation hamper
growth and development of an economy as it discourage savings and investment.
Meanwhile, the dynamic feature of unemployment has several factors
being temporal or chronic in nature. A person is said to be unemployed when he
or she is able and willing to work and is available for work (the person is actively
searching for employment) but does not have work. There are so many types of
unemployment which are functional unemployment which result from normal
turnover of labour , a structural unemployment refers to unemployment rising
because there is a mismatch of skills and job opportunities when the pattern of
demand and production changes, mass unemployment is the most serious type of
unemployment. Since it occurs because of general deficiency in demand and
equally affects every sector of the economy. We are concerned about
unemployment for many reasons firstly; unemployment generally reduces output
and aggregate income. Increase inequality since the unemployed lose more than
the employed. Secondly it makes the unemployed ones sometime feel as if the
society does not need them. This therefore, causes misery, social unrest and
hopelessness. There are so many causes of unemployment such as demographic
factors, low rate of industrialization strategy and the minimum role of the
government.
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The balance of payment is a record of all economic transaction involving
payment and receipt between the residents of one country and the residents of
other countries of the world in any period usually in one calendar year.
Specifically the balance of payment records the import of goods and services,
income transfer as well as changes in country liabilities to claim assets on the rest
of the world. It is a flow not a stock concept and involves more than payment,
that is transaction that are not paid in cash and kind, deferment of debt, services
payment due to unremitting profits among others. Exceptional financial items
means those transactions that finance balance of payment needs or are
undertaken to bridge the gaps in the balance of payment. As a result of the
importation of crude oil in the economy, Nigeria balance of payment is divided
into oil and non-oil sectors. The oil sector is the most significant components of
the economy and the largest foreign earner.
In assessing the cost of inflation distinguish between perfectly anticipated
inflation which occurs when the rate of inflation is expected and has been taken
into economic transaction that is the exchange rate will be adjusted tp eliminate
any adverse effects of inflation on the balance of payment. For instance, ’’if
Nigeria inflation rate is above that of her competition the value on naira would
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depreciate quickly to restore price competitiveness, but in reality exchange rate
do not adjusted perfectly anticipated inflation rate means unexpected inflation.
One of the causes of balance of payment problems is domestic inflation.
Inflation create no problem for the balance of payment if all one’s competitor are
also inflating at the same rate since it is relative prices that matters in
international trade as domestic trade if however, one country’s price level is rising
faster than the levels of competitors countries, imports will rise more than the
levels of export and balance of payment problem will ensure moreover, a
necessary condition to concern about the balance of payment in the policy
decision is support a fixed exchange rate rather than allow the rate to be
determined in free market, so as to eliminate fluctuation in the balance of
payment rate.
In the recent years there has been emphasis laid pertaining to the
relationship between inflation and unemployment. According to Milton Friedman,
high inflation increase unemployment in several ways:
I. High inflation may lead to government to impose wages and price
control thereby impending market forces which increase
unemployment.
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II. High inflation rate increase the risk associated with any assessment of
future returns on investment.
III. High inflation may depress consumption as it reduces the purchasing
power of any currency.
Friedman’s observation shows that there is a positive link between the
rate of inflation and the rate of unemployment. That is, inflation and
unemployment moves in the same direction. The question at this point
is does inflation and unemployment really moves in the same direction,
do they move in the same direction in Nigeria? What is the trade off like
in Nigeria? Although low rate of inflation is an advantage to a country, it
could be argued that the disadvantages of inflation are greater than its
advantage.
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1.2 STATEMENT OF PROBLEM
Inflation, unemployment and maintenance of stable balance of payment are
all basic macro-economic problems facing every government in the world today.
Inflation causes uncertainty about future prices, thereby affecting the decision on
expenditure, savings and investment and causes misallocation of resources. High
inflation equally boosts growth and development policies of the policy makers.
Our concern on unemployment is based on the fact that high unemployment
leads to loss of output and reduction in aggregate income, it increases inequality
since the unemployed loose more than the employed. Prolonged unemployment
can cause misery, social unrest, loss of confidence and hopelessness for the
unemployed; more so unemployment usually unwanted by the unemployed.
Nigeria’s balance of payment have continued to show deteriorating trends.
The cause of this deterioration includes, the import syndrome, mounting external
indebtedness, hostile international environment, over dependence on crude
petroleum etc, there is a link among these variables, which after time leave
government confused and defected. This is because low unemployment is
associated with a rapid rate of inflation; similarly high unemployment implies selflabor markets and consequent inability to push up wages. Consumers income and
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spending and also depressed and demand condition for rapid inflation are
therefore unfavorable. Therefore, there is a tradeoff between the rate of inflation
and unemployment. Price stability can only occur at the cost of high
unemployment rate and low unemployment rate can only occur at the cost of
inflation.
However, the Nigerian economy does not reflect this so called tradeoff.
This is because experience has shown that rising inflation also leads to
unemployment rate increase, despite the monetary and physical policies by the
authoritative in Nigeria.
1.3 OBJECTIVE OF THE STUDY
The objective of the study; “an empirical analysis of the link between
inflation, unemployment and balance of payment in Nigeria” includes the
following:
i. To analyze the impact of inflation and unemployment on balance of
payment.
ii. To determine the rate of inflation or unemployment that hampers
economic growth and hinders development.
iii. To make useful recommendation based on the empirical find.
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1.4 HYPOTHESIS OF THE STUDY
This hypothesis is formulated to acquire necessary information and basic
assumption of the study. Hypotheses are formulated in two forms namely:
I. Null hypothesis (Ho): Is a hypothesis which states a no difference or no
relationship exists between two or more variable. It also states a negative
direction.
II. Alternative hypothesis (Hi): It specifies any of the possible conditions not
anticipated in the null hypothesis and it also states the positive direction.
Ho: Inflation and unemployment have no effect on balance of payment in Nigeria.
Hi: Inflation and unemployment have an effect on balance of payment in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
The study is significant in many ways:
i. It will bring into live light the salient features of the issues being discussed.
ii. The study will aid the police makers in Nigeria in terms of management
policies to curb inflation, reduce unemployment especially among the
youths etc.
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iii. The study will underscore some of inadequacies of the authorities in their
quest to solve the macro-economic problems and thus providing a spring
board for better decision.
1.6 SCOPE AND LIMITATION OF THE STUDY
The study was carried out in Nigeria to establish the import between
inflation and unemployment on balance of payment. The scope of the study
covers from 1980-2010.However in the study of this nature there is usually a
possibility of encountering certain difficulties which eventually act as constraints
to the validity of conclusion arrived at. These difficulties did not discourage the
researcher as the challenges were boldly faced. The limitation to the study
includes: the financial difficulties in an effort to have a sufficient research
materials to be able to write extensively on the subject matter, the researcher
was faced with some financial predicament considering high cost of not only
education materials coupled with the high transport fare. Again time factor, the
research work was conducted simultaneously with normal academic work within
a short period of time in which some valuable information could be obtained.
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