Journal of Business Administration and Management Sciences Research Vol. 2(12), pp. 319-329, December, 2013
Available online athttp://www.apexjournal.org
ISSN 2315-8727© 2013 Apex Journal International
Full Length Research Paper
How far and wide? A cointegration analysis of trade
openess and economic growth in Nigeria (1980-2011)
OGUNRINOLA, Ifeoluwa Israel
Department of Economics and Development Studies, Covenant University, Ota, Nigeria. Email: proxydave@yahoo.com
Accepted 15 November, 2013
The study examines the relationship between trade openness and economic growth in Nigeria but
focuses on how wide in terms of volume the nation should be towards foreign trade. The study employs
the ADF test for unit root to investigate the presence or otherwise of unit root in the model. The
variables were found integrated of order 1. The OLS estimation technique was also employed to
establish linear relationship between variables in the regression model while a co-integration analysis
was carried out to determine if there exists a long run relationship between variables of interest in the
study. The study confirmed statistical significance of most variables in the model while a long run cointegration relationship was found of the variables involved. The period under study is from 1980-2011.
The study concludes by agreeing that for the Nigerian economy to experience long run growth, it
should focus on a fairly restricted policy oriented, open/receptive economy for international trade.
Keywords: Trade openness, economic growth, nigeria, cointegration.
INTRODUCTION
In the world economy since 1950 there has been a
massive liberalization of world trade, first under the
auspices of the General Agreement on Tariffs and Trade
(GATT), established in 1947 and now under the auspices
of the World Trade Organization (WTO) which replaced
the GATT in 1993. According to Thirwall (2000), tariff
levels in highly developed nations have skimmed down
dramatically, and now average approximately 4 percent.
Tariff levels in developing nations of the world have also
been reduced, although they still remain relatively high,
averaging 20 percent in the low-and middle-income
countries. Non-tariff barriers to trade, such as quotas,
licenses and technical specifications, are also being
gradually dismantled, but rather more slowly than tariffs.
Regional Trade Agreements (RTAs) have also become
very fashionable in the form of Free Trade Areas and
Customs Unions. The WTO lists 76 that have been
established or modified since 1948. The major ones are
the European Union (EU); the North American Free
Trade Area (NAFTA); Mercosur covering Argentina,
Brazil, Paraguay, Uruguay and Chile; APEC, covering
countries in the Asia and Pacific region; ASEAN covering
South-East Asian countries, and SACU, covering
countries in southern Africa. The liberalization of trade
has led to a massive expansion in the growth of world
trade relative to world output. While world output (or
GDP) has expanded fivefold, the volume of world trade
has grown 16 times at an average compound rate of just
over 7 percent per annum. In some individual countries,
notably in South-East Asia, the growth of exports has
exceeded ten percent per annum. Exports have tended to
grow fastest in countries with more liberal trade regimes,
and these countries have experienced the fastest growth
of GDP (Thirwall, 2000).
Foreign trade can be defined as commercial transactions (in goods and/or services) across international
frontiers or boundaries. Foreign trade plays a vital role in
estimating economic and social attributes of countries
around the world. The workings of an economy in terms
of growth rate and per-capita income have been based
on the domestic production and consumption activities
and in conjunction with foreign transactions of goods and
services. Further, the role of foreign trade in economic
development is considerable and the relationship
between openness and economic growth has long been
a subject of much interest and controversy in international trade literature. The classical and neo-classical
economists attached so much importance to foreign trade
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J. Bus. Admin. Manage. Sci. Res.
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 inflows.
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).
It has been stated theoretically and proven empirically
that economic openness contributes to the level of the
economy (Ersoy and Deniz, 2011; Sakyi, 2011; Chaudhry
et al. 2010). This is because in a competitive
environment, prices get lower and the products become
diversified through which consumer surplus emerges.
Gains from specialization and efficiency are also further
advantages of economic openness. Hence, it is quite
reasonable that economies generally desire to be
economically open.
Of the various objectives of foreign trade, the promotion
of economic growth and stability holds more weight.
Various researchers have, in their various research
works, delved into studying the numerous advantages
and gains obtainable from trade between economies. As
a result, there has therefore been an increasing interest
in the study of foreign trade and its benefits particularly to
developing countries. However, (recent) empirical
investigations have not been able to show how healthy or
otherwise, vastly (or scarcely) opened boarders are to
economic growth. Actual gains from trade rather than
gains accrued to vastly or scarcely open boarders are
most often, the major points of discourse in most
research. To this end, this research work concerns itself
with examining how porous the Nigerian economy should
be towards foreign trade. How exactly wide and receptive
should the economy accommodate foreign trade in the
quest for sustained long run economic growth?
This study focuses extensively on the trade pattern of
Nigeria over the years with more attention on the various
trade policies or programs that had been adopted over
the years. Relevant trade theories ranging from classical
theories to contemporary trade theories shall be highlighted. The Real Gross Domestic Product (Real GDP)
shall be used as the indicator for the economic growth of
Nigeria. The study time frame shall be restricted to fall
between 1980 and 2011. The relevant questions in this
research are: What has been the pattern of international
trade in Nigeria? Has trade openness in Nigeria
stimulated economic growth? To what extent should the
economy be open to foreign trade in the quest for
sustainable long run growth and development?
Therefore, the main objectives of this paper are to: (1)
examine the pattern of international trade in Nigeria. (2)
determine if indeed, trade openness stimulates economic
growth in Nigeria and, (3) determine the extent to which
the economy should be open to foreign trade in the quest
for sustainable long run growth and development.
Cointegration analysis is adopted for this study to test
for the long run relationship between trade openness and
economic growth in Nigeria. Individual variable
relationship between the various trade openness
indicators and economic growth variable (Real GDP) will
be established and actual functional relationships will be
determined using the OLS estimation method. The
Augmented Dickey-Fuller unit root test for stationarity will
also be conducted for the variables of interest. Secondary
data would be used in this study. The relevant data to be
used would be sourced from the Central Bank of
Nigeria’s statistical reports, annual reports and statement
of accounts for the years under review.
REVIEW OF RELATED LITERATURE AND THEORIES
Openness refers to the degree of dependence of an
economy on international trade and financial flows. Trade
openness on the other hand measures the international
competitiveness of a country in the global marked. Thus,
we may talk of trade openness and financial openness.
Trade openness is often measured by the ratio of import
to GDP or alternatively, the ratio of trade to GDP. It is
now generally accepted that increase openness with
respect to both trade and capital flows will be beneficial to
a country.
Increased openness facilitates greater integration into
global markets. Integration and globalization are
beneficial to developing countries although there are also
some potential risks (Iyoha and Oriakhi, 2002). Trade
openness is interpreted to include import and export
taxes, as well as explicit non tariff distortions of trade or
in varying degrees of broadness to cover such matters as
exchange-rate policies, domestic taxes and subsides,
competition and other regulatory policies, education
policies, the nature of the legal system, the form of
government, and the general nature of institution and
culture (Baldwin, 2002).
One of the policy measures of the Structural Adjustment Programme (SAP) adopted by Nigeria in 1986 is
Trade Openness. This means the dismantling of trade
and exchange control domestically. Trade liberalization
has been found to perform the role of engine of growth,
especially via high real productivity export (Obadan,
1993). He argued that with export, a nation can take
advantage of division of labour and procure desired
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goods and services from abroad, at considerable savings
in terms of inputs of productive resources, thereby
helping to increase the efficiency of the export industry.
Export growth sets up a circle of growth, so that once a
country is on the growth path, it maintains this momentum, of competitive position in world trade and performs
continually better relative to other countries.
The doctrine that trade enhances welfare and growth
has a long and distinguished ancestry dating back to
Adam Smith (1723-90). In his famous book, and inquiry
into nature and causes of the wealth of nations (1776),
Smith stressed the importance of trade as a vent for
surplus production and as a means of widening the
market thereby improving the division of labor and the
level of productivity. He asserts that “between whatever
places foreign trade is carried on, all of them derive two
distinct benefits from it. It carries the surplus part of the
produce of their land and labour for which there is no
demand among them, and brings back in return
something else for which there is a demand. It gives
value to their superfluities, by exchanging them for
something else, which may satisfy part of their wants and
increase their satisfaction. By means of it, the
narrowness of the labour market does not hinder the
division of labour in any particular branch of art or
manufacture from being carried to the highest perfection.
By opening a more extensive market for whatever part of
the produce of their labour may exceed the home
consumption, it encourages them to improve its
productive powers and to augment its annual produce to
the utmost, and thereby to increase the real revenue of
wealth and society” (Thirwall, 2000). We may summarize
the absolute advantage trade theory of Adam Smith,
thus, countries should specialize in and export those
commodities in which they had an absolute advantage
and should import those commodities in which the trading
partner had an absolute advantage. That is to say, each
country should export those commodities it produced
more efficiently because the absolute labour required per
unit was less than that of the prospective trading partners
(Appleyard and Field, 1998).
In the 19th century, the Smithian trade theory
generated a lot of arguments. This made David Ricardo
(1772-1823) to develop the theory of comparative
advantage and showed rigorously in his principles of
political economy and taxation (1817) that on the
assumptions of perfect competition and the full employment of resources, countries can reap welfare gains by
specializing in the production of those goods with the
lowest opportunity over domestic demand, provided that
the international rate of exchange between commodities
lies between the domestic opportunity cost ratios. These
are essentially static gains that arise from the reallocation
of resources from one sector to another as increased
specialization, based on comparative advantage, takes
place. These are the trade creation gains that arise within
customs to trade are removed between members, but the
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gains are once-for-all. Once the tariff barriers have been
removed and no further reallocation takes place, the
static gains are exhausted. The static gains from trade
stem from the basic fact that countries are differently
endowed with resources and because of this the
opportunity cost of producing products varies from
country to country.
The law of comparative advantage states that countries
will benefit if they specialize in the production of those
goods for which the opportunity cost is low and exchange
those goods for other goods, the opportunity cost of
which is higher. That is to say, the static gains from trade
are measured by the resource gains to be obtained by
exporting to obtain imports more cheaply in terms of
resources given up, compared to producing the goods
oneself. In other words, the static gains from trade are
measured by the excess cost of import substitution, by
what is saved for not producing the imported good
domestically. The resource gains can then be used in a
variety of ways including increased domestic
consumption of both goods (Thirwall, 2000).
Baldwin (2003) has demonstrated persuasively that
countries with few trade restrictions achieve more rapid
economic growth than countries with more restrictive
policies. As poverty will be reduced more quickly through
faster growth, poor countries could use the trade
liberalization as a policy tool. Trade liberalization reduces
relative price distortions and allows those activities with a
comparative advantage to expand and consequently
foster economic growth. Poor countries tend to engage in
labour-intensive activities due to an overabundance of
available labour. Thus the removal of trade barriers in
these countries promotes intensive economic activity and
provides employment and income to many impoverished
people. On the other hand, the pursuit of trade-restrictive
policies by labour endowed poor countries distorts
relative prices in favor of capital-intensive activities. The
removal of trade barriers could lead to a decline in the
value of assets of protected industries and therefore to
the loss of jobs in those industries. This implies that trade
liberalization has distributional effects as industries adjust
to liberalized trade policies.
Economist Ann Harrison‘s 1991 paper makes a
synthesis of previous empirical studies between
openness and the rate of GDP growth, comparing the
results from cross-section and panel estimations while
controlling for country effects. Harrison concluded that on
the whole, correlations across openness measures seem
to be positively associated with GDP growth - the more
open the economy, the higher the growth rate, or the
more protected the local economy, the slower the growth
in income. On the other hand, trade restrictions or
barriers are associated with reduced growth rates and
social welfare, and countries with higher degrees of
protectionism, on average, tend to grow at a much slower
pace than countries with fewer trade restrictions. This is
because tariffs reflect additional direct costs that
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producers have to absorb, which could reduce output and
growth.
Frankel and Roma (1999) and Irwin and Tervio (2002)
in their separate and independent studies also suggested
that countries that are more open to trade tends to
experience higher growth rates and per-capital income
than closed economy. Klanow and Rodriguez – Clare
(1997) used general equilibrium model to establish that
the greater number of intermediate input combination
results in productivity gain and higher output, despite
using the same capital labour input which exhibit the
economics increasing international trade return to scale.
Nigeria is basically an open economy with international
transactions constituting a significant proportion of her
aggregate output. To a large extent, Nigeria’s economic
development depends on the prospects of her export
trade with other nations. Trade provides both foreign
exchange earnings and market stimulus for accelerated
economic growth. Openness to trade may generate
significant gains that enhance economic transformation.
This means that, there will be diffusion of knowledge and
innovation amongst other open economies of the world.
Trade openness has been hailed for its beneficial effects
on productivity, the adoption and use of better technology
and investment promotion – which are channels for
stimulating economic growth. Over the years, Nigeria has
identified deeper trade integration as a means to foster
economic growth and to alleviate poverty.
Theoretical Review
Trade theories: Trade as engine of growth
The origins of trade can be traced to the absolute and
comparative advantage as well as Hecksher Ohlin
theories (Jayme, 2001). The theory of absolute advantage was formulated by Adam Smith in his famous book
title “Inquiry into the nature and the wealth of Nations”
1776. The theory emanated due to the demise of mercantilism. Smith argued that with free trade each nation
could specialize in the production of those commodities in
which it could produce more efficiently than other nations
and import those commodities it could not produce
efficiently.
According to him, the international specialization of
factors in production would result in increase in the world
output. Thus this specialization makes goods available to
all nations.
Comparative advantage theory
This theory was propounded David Ricardo. The theory
assumed the existence of two countries, two commodities
and one factors of production. To him a country export
the commodity whose comparative advantage lower and
import commodity whose comparative cost is higher. The
theory also assumed that the level of technology is fixed
for both nations and that trade is balanced and rolls out
the flow of money between nations. However, the theory
is based on the labour theory of values which states that
the price of the values of a commodity is equal to the
labour time going into the production process. Labour is
used in a fixed proportion in the production of all
commodities. But the assumptions underlying is quite
unrealistic because labour can be subdivided into skilled,
semiskilled and unskilled labour and there are other
factors of production. Despite the limitations, comparative
cost advantage cannot be discarded because its
application is relevant in explaining the concept of
opportunity cost in the modern theory of trade.
Hecksher-Ohlin trade theory
The theory focuses on the differences in relative factor
endowments and factor prices between nations on the
assumption of equal technology and tastes. The Model
was based on two main propositions; namely; a country
will specialize in the production and export of commodity
whose production requires intensive use of abundant
resources.
Secondly, countries differ in factor endowment. Some
countries are capital intensive while some are labour
intensive. He identified the different in pre-trade product
prices between nations as the immediate basis of trade,
the prices depends on production possibility curve
(supply side) as well as the taste and preference
(demand side). But the production possibility curve
depends on factor endowment and technology. To him, a
nation should produce and export a product for which
abundant resources is used be it capital or labour. The
model suggests that developing countries are labour
abundant and therefore they should concentrate in the
production of primary product such as agricultural product
and they should import capital intensive product i.e.
manufactured goods from the developed countries. The
model also assumes two countries, two commodities and
two factors and that two factors inputs labour and capital
are homogenous. The production function is assumed to
exhibit constant return to scale.
However, the theory is not free from criticism and this
because factors inputs are not identical in quality and
cannot be measured in homogenous units. Also factor
endowment differs in quality and variety. Relative factor
prices reflect differences in relative factor endowmentsupply therefore outweigh demand in the determination of
factor prices.
Despite this criticism, trade increases the total world
output. All countries gain from trade and it also enables
countries to secure capital and consumption of goods
from the rest of the world.
Theories of economic growth
Economic growth is best defined as a long term
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expansion of productive potential of the economy. Trend
growth is the smooth path of long run national output i.e.
it requires a long run series of macroeconomic data
which could be twenty years or more. The trend of growth
could be expanded by raising capital investment
spending as a share of national income as well as the
size of capital inputs and labour supply, labour force and
the technological advancement. There are different
schools of thought that have discussed the causes of
growth and development and they are discussed as
follows:
Neo-Classical growth theory
This was first propounded by Robert Solow over 40 years
ago. The model believes that a sustained increase in
capital investments increased the growth rate only
temporarily, because the ratio of capital to labour goes
up. The marginal product of additional units is assumed
to decline and thus an economy eventually moves back
to a long term growth-path with the real GDP growing at
the same rate as the growth of the workforce plus factor
to
reflect
improving
productivity.
Neo-classical
economists who subscribe to the Solow model believes
that to raise an economy long term trend rate of growth
requires an increase in labour supply and also a higher
level of productivity of labor and capital.
Differences in the rate of technological change between
countries are said to explain much of the variation in
growth rates. The neo-classical model treats productivity
improvements as an exogenous variable which means
that productivity improvements are assumed to be
independent of the amount of capital investment.
Endogenous growth theory
To them, they believe that improvements in productivity
can be attributed directly to a faster pace of innovation
and external investment in human capital. They stress
the need for government and private sector institutions to
encourage innovation and provide incentives for
individual and business to be inventive. There is also
central role of the accumulation of knowledge as a
determinant of growth i.e. knowledge industries such as
telecommunication, electronics, software or biotechnology are becoming increasingly important in developed
countries. The proponent of endogenous growth theory
believes that there are positive externalities to be
exploited from the development of a high value added
knowledge economy which is able to developed and
maintain a competitive advantage in fact growth within
the global economy. They are of the opinion that the rate
of technological progress should not be taken as a
constant in a growth model- government policies can
permanently raise a country growth rate if they lead to
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move intense competition in markets and help to
stimulate product and process innovation. That they are
increasing returns to scale from new capital investment
and also private sector investment is a key source of
technical progress and that investment in human capital
is an essential ingredient of long term growth.
Harrod – Domar growth model
Harrod-Domar opined that economic growth is achieved
when more investment leads to more growth. They theory
is based on linear production function with output given
by capital stock (K) tines a constant. Investment
according to the theory generates income and also
augments the productive capacity of the economy by
increasing the capital stock. In as much as there is net
investment, real income and output continue to expend.
And, for full employment equilibrium level of income and
output to be maintained, both real income and output
should expand at the same rate with the productive
capacity of the capital stock.
The theory maintained that for the economy to maintain
a full employment, in the long run, net investment must
increase continuously as well as growth in the real
income at a rate sufficient enough to maintain full
capacity use of a growing stock of capital. This implies
that a net addition to the capital stock in the form of new
investment will go a long way to increase the flow of
national income. From the theory, the national savings
ratio is assumed to be a fixed proportions of national
output and that total investment is determined by the
level of total savings i.e. S = SY which must be equal to
net investment, I.
The net investment which is I = ∆K = K∆Y because K
has a direct relationship to total national income. And,
therefore SY = K∆Y which simply means ∆Y/Y is growth
rate of GDP that is determined by the net national
savings ratio, s and the national capital output, K in the
absence of government, the growth rate of national
income will be positively related to the saving ratio i.e. the
more an economy is able to save and invest out of a
given GDP, the greater the growth of GDP and which will
be inversely related to capital output ratio. The basis of
the theory is that for an economy to grow, it should be
able to save and invest a certain proportion of their GDP.
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. 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.
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Therefore countries engage in trade in order to enjoy
variety of goods and services and improve their people’s
standard of living.
Some stylized facts
Nigeria is Sub-Saharan Africa’s second largest economy,
with nominal 2006 GDP of $235bn (at PPP) behind South
Africa’s $600bn. It has also been one of Africa’s fastest
growing economies, outpacing South Africa, Kenya,
Ghana and most of its neighbors with a CAGR of 7%
over the past 10 years. However, its growth has been
more erratic due to the high reliance on natural resources
(see further UNDP, Human Development Report 2007).
Despite the fast pace of growth and the strong resource
endowment, Nigeria has so far not increased its GDP per
capita beyond that of its smaller and resource-poor
neighbors. It’s GDP per capita is below that of Cameroon,
Ivory Coast, Kenya, and it is only 12% that of South
Africa. Poverty and the rural nature of the Nigerian
economy put pressure on financial services institution to
innovate and to reach out to poor customers.
Nigeria’s economy is heavily reliant on the oil and gas
sector. It makes up more than 40% of the GDP (Natural
Resources and Industry), and accounts for virtually 100%
of exports and 80% of budgetary revenues for the
government. Nigeria is the world’s 12th largest producer
of oil, mainly supplying the US. Next to natural resources
the most important sector is agriculture, accounting for
approximately 35% of GDP. A large portion of this is
subsistence farming with declining productivity. This
composition of GDP is quite unlike that of its neighbors,
due to the importance of natural resources in the country.
The natural resources sector is one of the drivers of
sophistication in the financial services industry. While
rising oil and gas prices have had a strong positive effect
on GDP, exports and government revenues over time, it
has however, not been Nigeria’s only driver of growth.
For instance, in 2007 political unrest in the Delta region
affected oil production, but strong growth in the non-oil
sector meant that overall GDP still grew by 5.8%. The
non-oil sector has grown at a 7% CAGR over the past 10
years. This growth is expected to remain robust, due to
good performances in certain sectors of the economy,
particularly in communications, wholesale and retail
trade, and construction; the financial sector will play a key
part in facilitating further growth in the economy. Hence,
as a result of the large volume of oil export in Nigeria, it is
clear that foreign trade is essential in ensuring foreign
earnings which should enrich the nation’s foreign
exchange/national reserves with a view to exploring such
surpluses into growth related activities for the country.
RESEARCH
RESULT
This
METHODOLOGY
aspect basically
concerns
AND
itself
EMPIRICAL
with
the
methodology of the research as well as presenting the
result of econometric estimation and gives explanation of
various findings. The importance of this section lies in its
quantitative and empirical content within which the
purpose of this study would be justified. Also of
importance, the overall findings and validation of
hypothesis tested.
Model specification
Following the production function theory which show how
the level of a country’s productivity depends on foreign
direct investments (FDI), trade openness (OPN),
exchange rates (EXRT) and government expenditure
(GEXP), we specify our model showing how the interplay
of these chosen variables actually affect the economic
growth of Nigeria. The mathematical model will be based
on the methodology adopted by Jude and Pop-Silaghi
(2008) for the countries Romania and Karbasi;
Mohammed and Ghofrani (2005) for 42 developing
countries. However for this study, we make some slight
adjustments to the adopted methodology to suit the
scope within which this study covers. The model used for
this study has been so chosen because of its relevance
to the Nigerian environment and availability of data.
The dependent variable chosen for this study as proxy
for economic growth is the real gross domestic product,
written as RGDP. The explanatory variables are:
Exchange rate, Foreign Direct Investment, Government
Expenditure and Trade Openness.
Mathematically, the functional relationship between
variables of interest is shown:
RGDP = f(OPN, EXRT, FDI, GEXP) …………………..(i)
Writing the above equation explicitly in an econometric
sense, we have:
RGDP = β 0 + β1OPN + β 2 EXRT + β3 FDI + β 4 GEXP + ε ….(ii)
(+/-) (+/-)
(+)
(+)
(+/-)
With a view to linearizing equation (ii), we apply the
Logarithmic function thus:
LGRGDP = β 0 + β1LGOPN + β 2 LGEXRT + β3 LGFDI + β 4 LGGEXP + ε
………………………………………………………..…(iii)
Where β 0 , β1 ,
β 2 , β3 and β 4 are regression
ε is the standard error term, which is a
parameters and
random variable and has well defined probabilistic
properties.
Also, OPN = Degree of openness, determined by the sum
of total imports and exports, divided by total output i.e.
M +X
GDP
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325
Table 1. The augmented dickey-fuller test for stationarity.
Variables
LGEXRT
LGFDI
LGGDP
LGGEXP
LGOPN
ADF test statistic
ST
At level
At 1 difference
-2.271587
-3.241196
-0.149602
-10.90008
0.900422
-3.854137
-0.082212
-3.720971
-1.326643
-5.301568
Critical values (5%)
ST
At level
AT 1 difference
-2.960411
-2.963972
-2.967767
-2.967767
-2.960411
-2.963972
-2.960411
-2.963972
-2.963972
-2.963972
Order of
integration
I(1)
I(1)
I(1)
I(1)
I(1)
Source: Author’s computation
EXRT = Real exchange rate in Nigeria
FDI = Foreign Direct Investments from abroad to the
country
GEXP = Government Expenditure in the country.
of central bank of Nigeria, Economic and financial Review
and Central bank of Nigeria Statistical bulletin.
DISCUSSION
The signs on the variables are based on the apriori
Unit root test result
expectations from theory, which is the direction of the
relationship between the respective independent
Literature has established that most time series variables
variables and the explained or dependent variable.
are not stationary. Therefore, using non-stationary
The Real GDP variable is included to capture the
variables in the model might lead to spurious regression
growth and activity of the economy. How well an
which cannot be used for precise prediction (Gujarati,
economy is performing, how rich an economy is, as well
2003). Hence, our first step is to examine the characas how the condition of general well-being in an economy
teristics of the time series data used for estimation of the
is are all captured in the RGDP variable.
model to determine whether the variables have unit roots,
The degree of openness, OPN, measured as the ratio
that is, whether they are stationary or otherwise. The
of the sum of total export and total imports to the GDP.
Augmented Dickey-Fuller test is used for this purpose. A
According to Alege and Osabuohien (2013), African
variable is considered stationary if the absolute ADF teconomies can be regarded as largely open in view of
statistic value is higher than any of the absolute
OPN at an average of about 104.85% over the period of
Mackinnon values. The test is conducted with intercept
study and 82.26 per cent in 2007 only. Open economies
term.
are preferred by market seeking and efficiency seeking
From the unit root test as summarized in Table 1, it
investors since there are fewer trade restrictions, broader
shows that all variables in the model (LGEXRT, LGFDI,
market access, numerous advantages from international
LGGDP, LGEXP and LGOPN) are all non-stationary at
division of labor and wider economic linkages.
level i.e. they all contain a unit root. However,
The Real Exchange Rate variable, EXRT, measured by
differencing each variable once makes all non stationary
the amount of the national currency required in exchange
variables stationary at 5% level of significance. This now
for one unit of another foreign currency, notably the US$
implies that the variables no longer contain a unit root or,
is another variable which measures the growth rate of an
we say they are integrated of order one i.e. they are I(1).
economy. When this number increases, depreciation of
This therefore, makes the variables suitable for the OLS
local currency occurs while when it is lower, appreciation
regression analysis which follows.
of local currency also occurs.
The Foreign Direct Investment (FDI) from abroad to the
The OLS estimation
country is included in the model since the contribution of
foreign investments to an economy may affect long run
From the regression result, in Table 2, the estimated
growth.
model can be re-written thus:
Finally, Government Expenditure (GEXP) is set to
capture the effects of government consumption
expenditure or public spending on international trade on
DLGRGDP = 17.52990 - 0.223382DLGOPN − 0.138123DLGEX
economic growth
in the country
since- some
evidences
DLGRGDP
= 17.52990
0.223382D
LGOPN − 0.138123DLGEXRT − 0.027512DLGFDI + 0.230351DLGGEXP
suggest a positive relationship between government
spending and economic growth.
As earlier mentioned, annual time-series data on the
The implication of the OLS estimation
variables under study covering a nineteen-year period
1980-2011 are used for estimation of functions. Data
The R squared which measures the goodness of fit of the
were collected from various editions of the various issues
estimated parameters stands at 91.8998%, implying a
326
J. Bus. Admin. Manage. Sci. Res.
Table 2. OLS analysis result.
Dependent Variable: DLGGDP
Method: Least Squares
Date: 07/28/13 Time: 13:02
Sample (adjusted): 1982 2011
Included observations: 30 after adjustments
Variable
DLGOPN
DLGEXRT
DLGFDI
DLGGEXP
C
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
Coefficient
-0.223382
-0.138123
-0.027512
0.230351
17.52990
0.918998
0.906038
0.064314
0.103406
42.48615
1.345918
Std. Error
0.079919
0.036675
0.029505
0.034258
0.769473
t-Statistic
-2.795107
-3.766129
-0.932448
6.724046
22.78171
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)
Prob.
0.0098
0.0009
0.3600
0.0000
0.0000
22.01654
0.209810
-2.499077
-2.265544
70.90883
0.000000
Source: Author’s computation from EViews 5.0 Software package.
good fit. However, the adjusted R squared which takes
care of the degree of freedom and the number of
regressors in the model stands at 90.6038%. This also
implies a good fit.
The Durbin-Watson statistic which measures the level
of serial correlation among variables in the model reads
1.345918. This point out the presence of a positive serial
correlations between variables in the model.
The joint significance of variables in the model
measured by the F statistic is 70.90883 with p value of
0.000000. This implies that all variables in the model are
jointly significant in explaining variations in the Real GDP.
Individual significance as measured by the t-statistic for
LGOPN, LGEXRT and LGGEXP are -2.795107, 3.766129 and 6.754046 respectively. This means that
LGOPN, LGEXRT and LGGEXP are individually
statistically significant in explaining variations in the
dependent variable, LGGDP. However, LGFDI is not
individually statistically significant in explaining variations
in LGGDP because of its low t-statistic value (-0.932448).
The log-linear form of the model compels an
explanation of the behavior of individual variables in form
of elasticity. Hence, all explanatory variables in the model
(with the exception of the constant term) are inelastically
related to the dependent variable. More explicitly, an
increase in each of the independent variables by 1 per
cent yields a less than 1 percent increase in the
dependent variable.
According to apriori, the constant term is expected to
show either positive or negative sign. From the result, we
observe a positive sign. The trade openness variable is
expected to carry either a positive or a negative sign.
From the result, we observe a negative sign, though
statistically significant. This imply that trade openness,
though important in stimulating economic growth, can
deter the rate of growth through external shocks on the
domestic economy from the international market,
weakness of domestic industry as a result of overreliance on imports, large disparities in foreign exchange
rates, and much more. It is from these and many more
reasons that the openness variable caries a negative
sign. The exchange rate and fdi variables also carry a
negative sign which negates expectation from apriori.
These may be caused by various reasons such as:
i. Use of domestic resources (both human resources,
sometimes capital and natural resources) while repariating profits from such investments abroad (i.e. home
country of the foreign investors). This leads to the
continuous use of Nigeria’s resources of all sorts in the
generation of output whose profits are not accounted for
in the country’s GDP.
ii. Exchange rate disparities which leads to deficits in the
balance of payments
iii. Increase in the cost of imports to the country.
iv. Deficit financing of trade transactions by the
government
v. Poor trading policies and terms of trade, e.t.c.
Government expenditure shows statistical significance
and a positive relationship to economic growth as indicated by the positive sign. This suggests the importance
of government spending in foreign trade and the possible
effects it has on economic growth. this also imply that as
government makes more effort in financing international
trade arrangements, as well as providing other fiscal and
monetary services such as subsidy arrangements to
Ogunrinola
327
Table 3. Co-integration test result.
Date: 07/27/13 Time: 22:09
Sample (adjusted): 1983 2011
Included observations: 29 after adjustments
Trend assumption: Linear deterministic trend
Series: LGGDP LGOPN LGEXRT LGFDI LGGEXP
Lags interval (in first differences): 1 to 1
Unrestricted Cointegration Rank Test (Trace)
Hypothesized
Trace
0.05
No. of CE(s)
Eigenvalue
Statistic
Critical Value
None *
0.803271
102.0035
69.81889
At most 1 *
0.632638
54.85155
47.85613
At most 2
0.403887
25.81076
29.79707
At most 3
0.304443
10.80835
15.49471
At most 4
0.009614
0.280142
3.841466
Trace test indicates 2 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized
Max-Eigen
0.05
No. of CE(s)
Eigenvalue
Statistic
Critical Value
None *
0.803271
47.15199
33.87687
At most 1 *
0.632638
29.04079
27.58434
At most 2
0.403887
15.00241
21.13162
At most 3
0.304443
10.52821
14.26460
At most 4
0.009614
0.280142
3.841466
Prob.**
0.0000
0.0096
0.1345
0.2236
0.5966
Prob.**
0.0008
0.0323
0.2887
0.1795
0.5966
Max-eigenvalue test indicates 2 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Source: Author’s Computation from EViews 5.0 Software Package.
domestic trading partners, the economy stands a better
chance of experiencing admirable growth progressions in
time.
Cointegration analysis
Co-integration analysis is carried out to determine the
existence of long-run relationship that exists between the
dependent variable and its regressors. When one or all of
the variables is/are non-stationary at level, it means they
have stochastic trend. Essentially, co-integration is used
to check if the independent variables can predict the
dependent variable now (short-run) or in the future (longrun). The long run relationships among the variables are
examined using the Johasen (1991) cointegration framework. The cointegration result is presented in Table 3.
From the co-integration result presented in Table 3, the
indication of two co-integrating equations from the trace
test statistic was observed. To this end, we reject the null
hypothesis that there is no co-integration between
variables in the model. In conclusion, we validate the
existence of a long run relationship between LGRGDP,
LGEXTR, LGFDI, LGOPN and LGGEXP in the model.
Conclusion
How wide, really, does an economy need to open up to
foreign transactions with other nations of the world to
attain sustainable long run growth and development?
The result of this study has indicated that trade
openness, exchange rate, foreign direct investment and
government expenditure can serve as a stimulant of
growth in Nigeria given that the country is “open enough”
for international trade arrangements with other countries.
Also, going by apriori, other variables save the exchange
rate and foreign direct investment conform to expectation
which implies that the chosen variables indeed show
conformity with relevant theories in confirming the
importance of each variable as well as the combination of
all on the economic growth of Nigeria. The influence of
the degree of openness of trade on economic growth is a
circle of causation. First, external trade increases the
quantity and quality of foreign direct investment. This
leads to the upgrading of all other sectors of the
economy, which in turn raises the national productivity
level. Foreign direct investment by itself increases the
productivity level of other sectors which increases
national output and causes an upgrade in living
328
J. Bus. Admin. Manage. Sci. Res.
standards. A poor external trade system will produce
aneconomy that will prevent investment from producing
positive trickle down effects in a recipient (open)
economy. We find that although, trade openness shows
statistical significance, it is however negatively related to
growth; a behavior which has been predicted by apriori.
In conclusion, it has been learnt from the study that for
an economy to grow, it must strengthen its relative
capacity to trade by improving its domestic industry for
exports in order to avoid over reliance on imports, render
its economy less vulnerable to trade shocks by
implementing new workable international trade policies
while making necessary adjustments to existing ones and
also create an enabling environment for trade. For the
case of Nigeria however, how permeable her economy is
to foreign international trade should be curtailed for the
following reasons, among others:
i. Due to its relatively weak economic and financial
structure, overly profound volumes of international
dependence in Nigeria may further weaken the economy
as a result of direct shock effects on the economy.
Exchange rate volatility may cause further disequilibrum
on the balance of payments, turn the government to
harmful deficit financing policies and may also render the
domestic currency valueless over time.
ii. The Nigerian economy is characterized by a largely
uncatered informal sector. Such sector which is very
large is needed to drive the economy through domestic
production to cater for domestic needs. However, a
widely open boarder for imports of all domestic substitute
goods kills domestic initiatives, causes unhealthy
competition with domestic production and results in over
reliance on imported goods rather than focusing on
domestic strengths.
iii. Negligence of other sectors in the economy other than
the oil sector as a result of a very porous international
barrier on oil exports.
iv. Various unhealthy international trade transactions
which may be detrimental to the general well-being of
economies and its citizenry may result from a largely
porous foreign trade barrier in an economy.
For these reasons, and many more yet unmentioned, the
degree of openness to trade in Nigeria must be wide
enough, yet with sufficient restrictive foreign trade
policies in order to help foster sustainable long run
growth and development in the country.
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Ogunrinola
329
APPENDIX
Data set table
YEAR
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
EXRT
0.546781
0.617708
0.673461
0.72441
0.766527
0.893774
1.754523
4.016037
4.536967
7.364735
8.038285
9.909492
17.29843
22.0654
35.48194
65.09269
86.89102
86.53464
80.42102
92.3381
101.6973
111.2313
120.5782
129.2224
132.888
131.2743
128.6517
125.8081
116.383
148.9
150.3
153.86
GDP
3233459068
3406878861
3379066399
3534949883
3479589248
3337557583
3303604303
3280269197
2871881520
2823128094
2820500756
2815121711
2825973080
2814919609
2908866342
3080833198
3276286557
3406249572
3532675436
3781225303
3936327817
4052872049
4083427038
4186354768
4408746006
4597552925
4856157720
5091775108
5274667877
5103701327
5490032606
5420517562
Source: CBN Statistical Bulletin (2010), World Bank (2004, 2012)
FDI
-7.39E+08
5.42E+08
4.31E+08
3.64E+08
1.89E+08
4.86E+08
1.93E+08
6.11E+08
3.79E+08
1.88E+09
5.88E+08
7.12E+08
8.97E+08
1.35E+09
1.96E+09
1.08E+09
1.59E+09
1.54E+09
1.05E+09
1.01E+09
1.14E+09
1.19E+09
1.87E+09
2.01E+09
1.87E+09
4.98E+09
4.85E+09
6.04E+09
8.20E+09
8.56E+09
6.05E+09
8.03E+09
OPN
48.6
49.1
38.7
31.1
27.8
28.5
37.6
53.3
45.1
57.9
72.2
68.6
82.7
97.8
82.5
86.5
75.6
82.7
71.6
78
86
75.3
64.4
83.1
75
77.6
70.6
67
74
64.7
65.1
77.4
GEXP
45152999360
52806799808
55053099584
59381700096
62400800256
69707599552
75547999616
1.04596E+11
1.43652E+11
2.07851E+11
2.22528E+11
3.08819E+11
6.09301E+11
9.9706E+11
1.22483E+12
1.93614E+12
2.23937E+12
2.72797E+12
2.95713E+12
3.34714E+12
3.64997E+12
4.76749E+12
7.17711E+12
8.54482E+12
1.01684E+13
1.24527E+13
1.58773E+13
1.77262E+13
2.17168E+13
2.37687E+13
3.25392E+13
3.6247E+13