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TRADE LIBERALIZATION IMPLICATION FOR NIGERIA’S INDUSTRIAL GROWTH.
1.1 Background of Study
There has been a massive liberalization of world trade since 1950 following the establishment of General Agreement on Tariffs and Trade (GATT). Ever since, global economy has become much more interconnected especially, in recent decades. World trade has increased faster than world Gross Domestic Topic (GDP) over the years with majority of this trade in manufactured goods (Thirlwall 2000, McCalman 2004). This points to the fact that the role of industrial development in the economic wellbeing of any economy cannot be overemphasized. The reason is that international development experiences suggest that a country can earn a relatively high per capita income when the growth of industrial output is relatively high (Adeyumi, 2005). Contrary to the conventional wisdom that trade liberalization is always good for development, Thirlwall (2000) states that economic theory offers a wide array of views on the issue.
The overall pattern portrays a long-held belief that trade policy can be used to influence the trade regime in directions that can promote growth. Consequently, many economic development analysts have proposed that Nigeria has no option but to integrate into the global market or risk being excluded in the scheme of things in the world economy (Amponsah, 2002). Also, Miles and Scott (2005) are of the view that trade liberalization under the framework of comparative advantage shows that a country as a whole can benefit from free trade but does not show that everyone within a country benefits. Some groups within society are better off as a result of trade but the standard of living of others remains unchanged even declines in some cases. Despite such observations, the global economy has been persistent in its move towards barrier-free borders; perhaps in finding solace in the words of Adam Smith: “when it comes to international trade, not only the prejudices of the public but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it” (see Mikic, 2006). Though the concept of trade liberalization was popularized by Adam Smith in 1776, trade across country’s borders has spanned over two centuries with early doctrines on free trade traced to 1400s (Ursprung 1999). Economists however, base their acceptance of the mutual benefits from trade across borders on the theory of comparative advantage which is most closely associated with the writings of the great English classical school economist, David Ricardo (Krol 2008).
Trade liberalization has come to stay in Nigeria through policies that encourage the expansion of trade openness, capital account liberalization, establishment of free trade zones, regional integration, bi-lateral and multi-lateral trade agreements, and so on. Nigeria’s trade policy profile shows different policy swings since 1960 starting with import substitution strategy between 1960s till early 1980s. The import substitution strategy appeared to have placed the economy on the part of rapid growth until global economic downturn that plagued most developing countries of the world in the in the late 1970s and early 1980s began to throw its negative trends on the economy. As a result, Nigeria adopted a trade liberalization, the Structural Adjustment Programme (SAP) in September 1986 as recommended by the World Bank and International Financial Institution (IMF). With the introduction of SAP, the economy began to pave way for market forces to determine resource allocation in the economy with a view to improving competition and efficiency in trade and overall economic performance (Shafaeddin 2005, UNEP 2005, Obokoh 2008, Lionel, Okon, and Eyo 2011). The liberalization policy prompted the government to commence the removal of different forms of protection and subsidies for local industries in terms of sourcing for raw materials and foreign exchange to such extent that special credit arrangement necessary for industrial growth was further removed in 1992. The call for trade liberalization intensified in 1993 with the establishment of World Trade Organization (WTO) which replaced GATT of 1947 (Thirlwall 2000).
In other to make sure that improved industrial performance in the face of this arrangement, a number of industry pro-policies have been introduced under such national development platform as National Economic Empowerment and Development Strategy (NEEDS) and Vision 20:2020 (Alao, 2010). The Federal government has maintained an attitude of opening up avenues of negotiation capable of promoting trade liberalization through bilateral and multilateral development cooperation, agreements and trade interests. Nigeria is also taking part in the African Growth and Opportunity Act (AGOA) proposed by United States of America, and the new EU-African, Caribbean and Pacific (EU-ACP) Agreement in response to trade liberalization arrangement (UNEP 2005).
Observations arising from existing literature show that while some countries count their gains, others count serious losses under trade liberalization arrangements. Many are of the view that trade liberalization widens the gap between developed economies and their less developed counterparts. Abimanyu (1996) in Gallagher and Ackerman (2000), reveals that when the concept of comparative advantage is coupled with controls for other economic factors that influence trade, the relationship between trade liberalization and other macroeconomic concerns with special reference to location of industry, becomes weaker.
In the wake of this discourse, there is an urgent need to investigate the effects of Nigeria’s trade liberalization on its industrial growth over the decades. This is the motive behind this study.
1.2 Statement of the Problem
The philosophy behind the recommendation of trade liberalization is that trade openness would aid industrialization and economic development (Shafaeddin, 2006). Anderson and Wincoop (2004) however, warn that a country taking up liberal trade must seriously weigh its ethical status since liberal trade is strengthened by ethical considerations and the trade policies of rich countries hurt the poor disproportionately. This supports the view that liberalization is essential when an industry reaches a certain level of maturity provided it is undertaken selectively and gradually. This perhaps influences Obokoh (2008) and Shafaeddin (2005) views when they opine trade liberalization as recommended by the Bretton Wood institutions is more likely to lead to the destruction of the existing industries particularly those that are at their early stages of infancy as well as hamper the emergency of new ones.
Many scholars have variously shown that Nigeria is already losing its competitive manufacturing edge and has become increasingly marginalized in the global industrial scene; a phenomenon that has made the economy more dependent on petroleum as a source of foreign exchange (Anyanwu 1996, obokoh 2008). Nigerian industrial development index shows that industrial development in Nigeria has suffered serious setback. The sector has witnessed growth in industrial index at a very poor/disappointing marginal rates. The sectors’ share in gross domestic product fell persistently, from 9.2% in 1981-1985 to 8.3% for the period 1986-90, 7.5% in 1991-95 and 6.3% in 1996-1998. These poor trends in the sector only indicate falling productivity and poor industrial efficiency in Nigeria economy.
Source: Authors’ computation with data from CBN bulletin (2011)
In response, the federal government relaxed some of the SAP programme and embraced steps which include monetary, fiscal and industrial policy measures in the early 1990s with a view to promoting industrial growth in Nigeria. This is found in the areas of funding, setting up of industrial estates to reduce overhead costs, specialized financial schemes/institutions such as the Nigerian Industrial National Economic Reconstruction Fund (NERFUND), Nigerian Industrial Development Bank (NIDB), Nigerian Bank for Commerce and Industry (NBCI) and Bank of Industry (BoI) with the aim of providing long-term credit facilities for industrial resuscitation (see Briggs 2007, Olorunshola 2003, and Obokoh 2008). Through the help of donor agencies, the government has also helped in securing external financing from World Bank, the African Development Bank (ADB) and other international financial institutions with a view to improving industrial growth.
In the midst of this trend, there is a dearth of empirical inquiry into the effects of trade liberalization on Nigeria’s industrial growth in existing literature. Related works come from Lionel et al (2011), Mesike, Giroh and Owie (2008), Obadan, Okojie, and Elizabeth (2008), and Akanni et al (2008) but none of these works addressed the following research questions:
- Does trade liberalization significantly account for Nigeria’s poor industrial performance?
- What are the channels through which trade liberalization impact on Nigeria’s industrial growth?
1.3 Objectives of the Study
This study has a general objective of establishing the effects of trade liberalization on Nigeria’s industrial growth. The general objective is guided by the following specific objectives:
- To examine the nexus between trade liberalization and industrial policy regimes in Nigeria
- To estimate the impact of trade liberalization on Nigeria’s industrial growth over the years
1.4 Statement of Hypotheses
We propose the following research null hypotheses:
H1: There is no nexus between trade liberalization and industrial policy regimes in Nigeria.
H2: Trade liberalization has no significant impact on Nigeria’s industrial growth.
1.5 Significance of Study
This study will be beneficial in a number of ways. In first instance, it will show the effects of liberalization on Nigeria’s poor industrial growth which will help in understanding if actually trade liberalization has a significant role to play in this regard. Secondly, it will contribute to the body of literature on trade liberalization; thereby helping to bridge the information gap between the concept of trade liberalization and growth in the economy with special reference to Nigeria. Thirdly, it will be of help to policy makers in fashioning out appropriate measures with a view to promoting industrial growth in Nigeria. It shall also serve as a reference material to researchers as well as stimulate further research efforts in this regard.
1.6 The Scope of Study
This study examines the effects of trade liberalization on Nigeria’s industrial growth. The time dimension of the study is between 1986 and 2012. This period includes most of the major reforms in Nigeria’s trade policy.