1
EXPORT INCENTIVES AND THE PERFORMANCE OF NIGERIA’S TRADE ON
MANUFACTURES
BY
R.O. OJIKE
DEPARTMENT OF ECONOMICS
CARITAS UNIVERSITY
AMORJI NIKE
ENUGU- NIGERIA
J.I. AMUKA (PhD)
DEPARTMENT OF ECONOMICS
UNIVERSITY OF NIGERIA NSUKKA
ENUGU-NIGERIA
A.O. AGU
DEPARTMENT OF ECONOMICS
ANAMBRA STATE UNIVERSITY
IGBARIAM CAMPUS
ANAMBRA – NIGERIA
2
Abstract
For more than two decades now, government of Nigeria has made several efforts to
diversity its export revenue base away from oil. Its attempt to promote non-oil export (especially
manufactures) led to the introduction of export incentives such as selected credit, trade
openness, duty draw back and export expansion grant. Research finding shows that export
incentives have not yielded the desired result of promoting export of manufactures in Nigeria.
The performance of Nigeria’s trade on manufactures was better before the introduction of those
incentives than after.
Key words: Export, Incentives, Performance, Trade, Manufactures.
ACRONYMN
CBN: Central Bank of Nigeria
UNCTAD: United Nations Conference on Trade and Development
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INTRODUCTION
The dismal state of Nigeria economy after the sudden fall in the international price of crude
petroleum in early 1980s forced the country to serious economic reforms, including trade policy
reform in 1986. Before the country’s independence in 1960, agriculture commodities dominated
her export trade, followed by manufactures and mining. Unfortunately, the trend reversed after
the discovery of oil as the contribution of manufactures to merchandise export decreased from
13.10 percent in 1960 to 0.28 percent in 1980. Its contribution to total export decreased from an
average of 1.94 percent between 1970 and 1985 to an average of 0.75 between 1986 and 1998
(CBN, 1960-1999). The manufacturing capacity utilization which was on the average of 74.3
percent between 1975 and 1982 fell to 49.7 percent in 1983 and further down to 29.3 percent in
1995. Though, manufacturing capacity utilization rose to an average of 42.6 percent between
2001 and 2003 from its 1995 level (CBN, 2003), it has continued to fall since then.
Nigeria government discovered that the country cannot rely so much on the export of
crude oil following the sudden fall in the price of crude petroleum in early 1980s. This is because
the fall in the price of crude petroleum in the international market brought government activities
to a stand still, and as a result of the growth in size of government due to the large revenues
coming to her during the boom era, the private sector activities (particularly agriculture and
manufacturing) were crowded out of their roles as growth drivers. The consequences of the
crowding-out were severe government borrowing, high unemployment, low domestic output of
goods, rising prices and balance of payments deficits. In order to overcome the economic crisis
that followed the sharp fall in oil price, the country reviewed its trade policy to help diversify the
export base away from oil.
The Nigeria Export Promotion Council (NEPC) was established following the introduction
of Structure Adjustment Programme (SAP) in 1986 to help the country in her export
diversification effort. Among the instruments of the export promotion policy are the following:
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a. Duty Drawback- Duty drawback is meant for manufacturers of export goods that requires
imported raw materials for their production. Manufacturers in this category are allowed claim of
the duty they paid on raw materials imported which are used in manufacturing the export
commodities.
b. Export Expansion Grant- The export expansion grant is a financial assistant given to
exporters to help them boost their export capacity.
c. Nigerian Export Import Bank (NEXIM): The bank was established to give credit to exporters
at less stringent conditions.
Among other incentives given to exporters of non oil commodities are establishment of
export processing zone, abolition of marketing board and liberalization of trade.
Even though export incentives were put in place in 1988 in Nigeria, a look at the
performance of the manufacturing export after the incentives is not encouraging. For instance,
the share of manufactured export as percentage of non-oil export was 9.8 percent in 2005 and
11.1 percent in 2006 respectively (CBN 2006). They are far from the percentage share of 13.1
percent of total non-oil export in 1960. The scenario is worrisome and poses a serious question
on the effect of the export incentives on Nigeria’s trade on manufactures.
Related Literature
Different industrialization policies have been pursued in Nigeria to develop the industrial
capacity of the country and launch the economy to a growth part that can be sustained in the
long-run.
THE INDIGENIZATION POLICY
The indigenization policy introduced in Nigeria in the 1970s was done to promote local
participation of Nigerians in industrial, commercial and financial activities that go on in the
country. Through the policy, the percentage stake of foreigners in financial and industrial
production organizations were reduced and majority of their shareholdings sold to the
5
indigenous people. The ‘Nigerianization’ policy as it was called enabled civil servants, military
leaders, business professionals and members of the academic community to acquire shares in
the multinationals formerly dominated by foreigners. The policy changed the fortunes of many
Nigerians and helped them to sit on top of board of directors of big industries.
IMPORT SUBSTITUTION POLICY
Nigeria shifted from production of primary products to the production of those goods that
are of import nature. The major policy debate on the pursuance of the policy was the need to
maintain favourable trade balance and lessen the pressure on foreign exchange demand.
Unfortunately, instead of producing those goods of import, the country turned out to be an
assemblage of those goods imported (Udabah, 1999). Rather than going to produce those
goods that were previously imported, they were only imported in parts and assembled or
packaged in the country.
LOCAL RESOURCE-BASED POLICY
The dwindling oil revenues and foreign exchange for importation of raw materials and
spare parts compelled government to emphasize on local sourcing of raw materials by the
industries operating in Nigeria. By this, industries are encouraged to find local substitutes to
their raw materials import. For instance, brewery and bakery industries were directed to
encourage the production of millet and maize for use instead of relying on wheat that is
imported from outside. Onumaegbu (1990) contend that the dependency on foreign technology
and raw materials places the advanced nations as the decider of success or failure of local
industries. The expectation is that local resource-based policy is not only going to reduce the
pressure on foreign exchange demand, it is going to create employment opportunity to the
unemployed Nigerians.
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EXPORT TRADE AND ECONOMIC GROWTH
Economic history shows that exports are in fact crucial factors in the development
process and there is strong evidence linking economic growth with export growth. A good
example in history is Great Britain whose exports on textiles, iron and coal stimulated its growth
ahead of others in the nineteenth century. The success of Malaysia, Korea and Singapore
provide more recent evidence of the positive relationship between exports and economic
growth.
Indeed, the relationship between exports and economic growth was first exponented by
Adam Smith in his ‘wealth of Nations’ in 1776. He sees international trade as a dynamic force
which widens the extent of the market, increases division of labour, raises skill and
specialization, and brings technical innovations. Meier (1980) draws attention to the
‘fundamental educative effect’ of international contracts that instill new wants and transfer of
technology, skills and entrepreneurship. Keynes (1936) maintains that large exports
unaccompanied by large imports would increase foreign exchange reserves, and in a country
where the supply of money is directly connected to these reserves, the resulting increase in
money supply will lower interest, and thereby stimulate domestic investment.
Writing on Nigeria’s export incentives, Awoga (1994) contends that it is to encourage
and stimulate the export sector and diversity the productive base of the country’s economy, and
Ahuja (2001) stresses that export incentives are important factors in the promotion of export.
Hattingh (2008) on the other hand contends that trade liberalization failed in Africa because
African countries removed incentives given to farmers (subsidy) that serve as stimulating factor
and encouragement. UNCTAD (2008) shared the same view with Hattingh and states that the
performance of Africa’s export trade runs short of expectation, and that African countries have
not diversified their exports towards more dynamic primary commodities and manufacturing
goods. Contributing to the debate on the importance of manufacturing in development of an
economy, Nicholls (1960) says that in all circumstances, increase in manufacturing activity
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makes important contribution to the general economic development because it is one of the
conditions required for a country to take-ff into self-sustained economic growth. Oluwansani
(1961) contends that manufacturing sector has a crucial role to play in the early stage of the
economic development because it creates employment opportunities, expands export earnings
to finance import and brings an improvement in standard of living of the people. Study by Were
et al (2002) found that Kenya’s export performance with globalization was still saddled with
traditional export of coffee and tea. Their research finding shows that the country’s export has
only shown great response to real exchange rate, and investment was only significant on export
of coffee.
ANALYTICAL TECHNIQUES
As the problem with all time series study, almost all time series data suffer from nonstationarity and to overcome it, the test for stationarity and cointegration was carried out. The
test became necessary to avoid spurious result and invalid forecasting.
The study covered two periods of pre-export incentive and post-export incentive. The
data for each period were interpolated to yield quarterly time series data.
The model
Specifying the inter temporal dynamic error correction representation of manufactured
exports,
MEt  0  1OPNt  2 RIRt  3CRt  4RERt  5RPSt  U t          1
But, change in error term could be written as a function of its own lagged values.
Thus, Ut  6 Ut 1   et ................2
Where
change
in
dependent
variable
becomes
MEt  0  1OPNt  2 RIRt  3CRt  4RERt  5RPSt  6 (U t 1 )  et ............3
8
Where
ME
=
Manufactured export
OPN
=
trade openness
RIR
=
real interest rate
CR
=
credit available to manufacturers
RER
=
real exchange rate
RPS
=
relative prices
U
=
error term
t
=
time horizon

=
elasticity
But,
Ut-1 = MEt 1  0  1OPNt 1   2 RIRt 1  3CRt 1   4 RERt 1  5 RPSt 1        4
Substituting Ut-1, the explanatory variables with  and their parameter with i in (3),
5
5
L 1
i 1
MEt   0   i t   6 ( MEt 1   0   i
= 0 
5
5
i 1
i 1
t 1
)  et ..........5
 i t  6 MEt 1  6 0  6  i t 1  et              6
5
  0   i t   6 ( ECM t 1 )  et                7
i 1
discreti :5  i  1
Where
 is an nx1 matrix of explanatory variables. Equation (6) is the error correction
representation of the relationship of the manufactured export and the vector of explanatory
variables  as listed earlier. The parameter i measures the long run relationship between
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manufactured export and the vector of explanatory variables  , while (  6 ) is the measure of
adjustment to previous period equilibria achieved in the current period.
Test for structural stability
Chow test for structural stability was conducted for significance difference between pre
and post export incentives.
Data and Result
Data for the analysis were sourced from central Bank of Nigeria statistical Bulletin
between 1971 and 2004 and Nigeria Export Promotion Council between 1986 and 2004.
Test for stationarity result
Unit root test shows that all the variables are stationary at first differencing 1 (I). They
are statistically significant at both 5% and 1% levels respectively.
Table 1
Variable
ADF
Order
integration
Pooled
Pre/post
5%
1%
1
ME
-10.173
-6.969
-1.94
-2.58
1
OPN
-12.014
-7.884
-1.94
-2.58
1
RER
-10.980
-7.966
-1.94
-2.58
1
RIR
-11.299
-7.788
-1.94
-2.58
1
CR
-10.266
-7.033
-1.94
-2.58
1
RPS
-13.022
-8.296
-1.94
-2.58
1
of
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Cointegration/Error Correction Mechanism (ECM) test
Table II
t- adf
Pooled
Pre/post
5%
1%
Lag
Residual
-2.479
-1.933
-1.945
-2.598
2
Residual
-3.565
-2.976
-1.945
-2.598
1
Residual
-6.328
-5.358
-1.945
-2.598
0
Result presented in table II above shows that there is a cointegration between the
dependent and independent variables at the first difference and the residual unit root tests are
significant at 5% and 1% levels respectively.
Regression Result
Table III
Variable
Pooled model
Pre-incentive
Post-incentive
Dependent
DME
DME
DME
Constant
143.80(0.517)
0.10912(0.090)
439.10(0.757)
DOPN
1.2013(4.812)xx
107.23 (1.409)
DRER-3
-0.015272(-0.801)
DRIR-1
0.12181(0.599)
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DCR
4.0813(11.709)xx
0.0013050(2.784)xx
0.036783(7.163)xx
6.6704(1.923)X
DRPS-1
DRER
62.799(2.325)X
DRIR-3
24.647(0.506)
DRPS-3
5988.5 (1.204)
1554.8 (1.625)
OPN-1
48.266 (1.051)
RER-2
-1.3579(-0.261)
R2
0.77
0.68
0.79
F
32.53
9.05
15.98
DW
2.06
2.03
2.00
NB: Figures in parenthesis are t-values.
X = significant at 5%
Xx = significant at 1%
Test of structural stability (chow Test)
Chow test is very useful in comparing two policy regimes to know whether there is an
improvement in result as a result of policy shift. From the test,
F-calculated = 1.09
F- (5%) = 1.79
F- (1%) = 2.27
Discussion of Result
The result presented in table III should give someone some worry from policy point of
view, even though it reflects to a greater extent the working of Nigerian economy within the
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period of study. In order to fully understand the importance of the result, the variables will be
discussed one after the other.
Degree of openness
Before the structural adjustment in 1986, Nigeria regulated her international trade,
especially import trade. Restriction of import at the time was done for two major purposes,
namely, to check against adverse balance of payments condition, and to avoid making the
country a dumping ground for manufactured goods by other countries. On the other hand,
opening up of the economy in 1986 was to expose the domestic manufactures to international
competition. From result presented in table III, manufactured export performed well during the
period of regulated trade. Trade regulation had positive and significant effect on Nigeria’s trade
on manufactures. This was not the case when trade was liberalized and the economy opened to
international competition. Manufactured export declined as a result of openness to trade. There
is reality in the result when one considers the poor state of the country’s infrastructure
(especially electricity supply) since 1994. Irregular electricity supply has increased the cost of
production as many of the industries now rely on independent source of power for production.
Manufacturing capacity utilization has continued to decline since then and many industries (for
instance Michelin) have relocated to other neighbouring West Africa countries.
Exchange Rate
Trade experts argued that deregulation of the foreign exchange market has become
important because the rise in the fortune of oil in the international market has caused an overvaluation of the domestic currency. The effect of the overvaluation was that manufactured
imports have become cheaper than domestic produced goods. Thus, rather than produce such
goods at home, businesses prefer to import and sell in the domestic market. In order to reverse
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the trend, foreign exchange market alto be deregulated so that demand and supply of foreign
exchange will relocate resources efficiently to their best uses. As an incentive to manufacturers,
currency retention policy that allows manufacturers of export goods to retain their foreign
exchange earnings was introduced. So far, exchange rate reform had a positive and significant
effect on manufactured export within the period of study. Unfortunately, it did not satisfy the
economic theory argument as it appeared with wrong sign.
Interest Rate
During the economic reform of 1986, interest rate reform was made to favour the real
sectors of the economy (agriculture and manufacturing). Interest rate charge on the two sectors
was made lower than normal rate charged to other sectors so that the real sectors can play their
roles as growth drivers of the economy. Unfortunately, Post incentive result shows that the
interest rate policy has no significant effect on manufactured export. It equally failed the apriori
expectation test.
Credit Availability
Government mandated commercial banks doing business in Nigeria to make certain
percentage of their loans available to manufacturers to help them overcome financial constraints
always encountered in business expansion intention. Credit availability to manufacturers has a
stimulating effect on manufactured exports before and after economic reform of 1986 in Nigeria.
The evidence is clearly shown in table III above.
Export incentive and Manufactured Export
The main concern of the work is to find out the impact of export incentives on the growth
of Nigeria’s manufactured export trade. Using pooled data results, the Chow stability test was
carried out to evaluate the impact of those incentives on manufactured export commodities in
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Nigeria. From Chow test, F calculated is 1.09 and F tabulated at both 5% and 1% levels are
1.79 and 2.27. Since F tabulated at both 5% and 1% are greater than F calculated, there is no
significant difference between the pre-incentive and post-incentive trade policy regimes. Hence,
it has shown that export incentives have no growth effect on Nigeria’s manufactured export
trade between 1988 and 2004.
Speed of Adjustment
Table IV
Pooled
Pre-incentive
Post-incentive
ECM-1
-0.24
-0.226
-0.309
t- value
3.08
-2.37
-3.4
5%
-1.98
-1.95
-1.95
1%
-2.58
-2.6
-2.6
Table 1V is another indicator confirming poor performance of manufactured exports after
trade policy reform in Nigeria. The speed of long-run equilibrium adjustment of both trade
regimes is negative, but the negative speed of adjustment is higher in post incentive era. There
is decreasing difference between pre and post export incentive regimes in favour of pre-export
regime.
Policy Issues
Viable manufacturing sector is sine qua non for sustainable economic growth and
development as primary goods export is not a reliable source of sustainable growth in a world of
constant technology changes. African countries like Nigeria, Ghana, Cote Divore and Zimbabwe
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are among those countries that have failed to achieve sustainable growth despite long time of
successful primary commodity exports.
The poor response of manufactured export to export incentives in Nigeria may not be
unconnected with the manner those incentives were implemented. Export Expansion Grant and
Duty Draw Back schemes are among the key stimulus packages introduced during the trade
reform that failed to materialize. Names of firms listed to have benefited from the schemes by
the agency in charge of the implementation were mostly found to be inexistence, and some that
exist are not manufacturers of any export commodity but those involved in buying and selling.
Adenikunju and Chete (2002) noted that price adjustment incentive and subsidy of the
manufacturing export sector have been poorly implemented. Poor implementation of the
incentive in the midst of trade liberalization has caused the dwindling of Nigeria’s manufactured
exports. The liberalizations has brought unhealthy competition between manufacturers in
developed world with economies of scale and better technology and local manufacturers in
Nigeria who have technology disadvantage and lack institutional support.
Manufacturing activities provide factor opportunity for rapid generation of national wealth
and employment since they yield higher rate of returns to investment. Trade on manufactures is
the only way to achieve sustainable favourable balance of trade, and the only way Nigeria can
achieve this is to lend good support to the sector. That means there should be a revisit to the
implementation of the policy already in place to look at possible revision and correction of the
lapses there in. if not, the country’s manufacturing sector will die a natural death soon.
CONCLUSION
Export incentive was part of the economic reform measures introduced by government
during the structural adjustment in Nigeria in 1986. The essence of the incentives was to
stimulate growth in manufactured export so as to diversity the country’s export revenue base
away from oil. Research finding has shown that the desired result has not been achieved.
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The finding conforms with CBN (2006) discovery that the index of manufacturing
production declined by 1.5 percent in 2006 from its 2005 level. The deterioration in performance
was attributed to worsening power supply situation which has raised the cost of production. In
an era of open trade, such rising cost of production brought unfair competition from cheaper
imports. As a consequence, many manufacturing industries that could not break-even folded up.
Export of manufactures is essential in international trade and Nigeria has the potential to
do it. What is lacking is the political will and the sooner it is done the better for the economy.
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