EFFECT OF POPULATION GROWTH ON DEMAND FOR IMPORTED CONSUMABLE GOODS IN NIGERIA’S ECONOMY (1981-2014)

CHAPTER TWO

LITERATURE REVIEW

Nigeria is endowed with substantial natural resources. These include 68 million hectares of arable land, fresh water sources covering 12 million hectares, 960 kilometres of coastline and an ecological diversity. This enables the country to produce a wide variety of crops and livestock, forestry and fishery products. Backed by oil wealth, Nigeria has the potential to become one of the strongest agricultural economies in Africa.

Obasanjo as military head of state launched operation feed the nation where he states that, “a nation which cannot feed itself is at the mercy of others and has a lot to lose.” Operation Feed the Nation was to bring about increased food production but did not achieve desired objectives. The green revolution was launched by Shehu Shagari, who succeeded the military regime in October 1980. The strategy is to encourage entrepreneurs to establish large-scale farms and improve productivity of the previously ignored small holders.

One of the challenges facing Nigeria is population explosion, a situation in which the magnitude of growth in population is not matched by increase in resources. This chapter considers previous research work conducted by scholars, authors and researchers which are related to population growth and agricultural production and development.

2.1 EFFECT OF POPULATION GROWTH ON ECONOMIC DEVELOPMENT

Encarta (2004) defines population as the total of human inhabitants of a specified area, such as a city, country, or continent, at a given time. Population growth reduces self-sufficiency in food, availability of vital natural resources, standard of living, and ultimately the nations’ national security.

The relationship between population dynamics and development has occupied an important position since its inception of demographic studies Orubuloye & Oyeneye (1983). Malthus was perhaps the first scholar to draw attention to the imbalance in the rate of population increase and the means of subsistence was the major cause of poverty in the society.

In recent years, technological development has made increase in productivity possible. Orubuloye & Oyeneye (1983) states that the problem of imbalance between population and the means of subsistence has taken a different dimension particularly in the less developed countries. The general concern in most of these countries including Nigeria includes provision of food in sufficient quantity and quality for the fast growing population, provision of education, health, better nutritional facilities, reduction in unemployment and underemployment, a rise in the standard of living, good housing and sanitation, equitable income distribution and provision of skilled man power.

The problem therefore shuffled from that of providing for subsistence to one of imbalance between population and available resources. The effect of population growth on economic development of any country depends on the classification of the country, whether it is a developed, developing or underdeveloped country. Oyewole (2006) states that in a developed country like USA, population growth could be favourable and in a developing country like Nigeria it may be dangerous because in a developed country, increase in population adds to the labour force which in turn leads to increase in aggregate supply and further boost economic growth while in a developing country which is characterised by unemployment, increase in population could widen the gap of poverty.

2.2 POPULATION AND AGRICULTURAL DEVELOPMENT

In developing countries where people mostly live in rural areas, agriculture is their main occupation, such that with population growth, the land-man ratio is distributed. Pressure of population on land increases because the supply of land is inelastic. It adds to disguised unemployment and reduces per capita productivity. As the number of landless workers increases, their wages fall. Thus low per capita productivity reduces the propensity to save and invest. As a result, the use of improved techniques and other improvements on land are not possible.

In the view of Jones (1992), for developing countries like Nigeria to have an improvement in living standards of her citizens, he opines that the country must bring enough new investment into agriculture to increase production and productivity on farms and enough new investment in industry to increase production and relieve population pressures on land. But as a condition to adequate new investment in agriculture and industry, there must be greatly increased expenditures on education, health, a variety of other public services and more efficient government administration.

2.3 NEGATIVE CONSEQUENCES OF POPULATION GROWTH

In the view of Tomas Nilsson (2005), the negative consequences of population growth includes:

• Resource scarcity: The standard definition of economics is “the allocation of scarce resources among competing ends”. Immigration and population growth of necessity makes that task more difficult because it creates more competing ends; thus by definition is a bad economic outcome. In other words, if there are more people living on the same amount of land, with the same amount of natural resources then there will be fewer resources and land available per person, and thus less wealth per person. Land in general becomes relatively scarce as the population increases, and thus people find it harder to afford land for agricultural or domestic use. In relation to cities, the effect of population growth has at least two negative cost-related effects. Firstly, builders tend to build houses on relatively flat land, but as the flat land is used up, builders (and property developers) need to build on increasingly more steep land. This is much more expensive. Secondly, as inner-city land is used up, people have to build their house increasingly further away from the city centre. This involves a greater cost for people living further away to travel to and from their place of work (commonly in the city centre) each day.

• Overburdened Infrastructure

State and federal governments often support population growth but ignore the costs of such growth. For example there is a nationwide shortage of public hospital beds, yet population growth adds to the demand on hospitals. Many of the nation’s roads cannot cope with the existing amount of traffic, let alone more. Many capital cities are experiencing water supply problems. Even if people supported population growth, the logical course of action would be to solve the nation’s infrastructure problems before bringing in large numbers of overseas migrants. However, in reality proponents of population growth probably have not even taken the increased burden on infrastructure into consideration.

• Wage decline

An increase in the supply of labour (through population growth and immigration) relative to the supply of capital (which in the short-term is fixed, and in the long-term is costly to increase) and supply of natural resources (which is fixed in the short and long-term) will in a free labour market cause wages to fall. Where there is workplace bargaining working conditions such as holidays and sick leave are also likely to suffer.

• Shortage of Affordable Housing

There is a widespread shortage of affordable housing at present in Nigeria. This has largely been caused by rapid population growth through immigration. Obviously if the population increases then so does the demand for housing, and if this happens too quickly then demand will outstrip supply. In other words the building industry cannot build houses fast enough to accommodate the extra people.

• Unemployment

A rapidly increasing population reduces incomes, savings and investment, thus, capital formation is retarded and job opportunities are reduced, thereby increasing unemployment.

THEORETICAL FRAMEWORK

The framework for foreign trade is based on the law of comparative costs, otherwise known as the theory of comparative cost. It is the classical theory of international trade formulated by David Ricardo, and later improved by John Stuart Mill, Cairnes and Bastable. Its best exposition is found in the works of Taussig, and Haberler (1988).

2.2.1 Theory of Comparative Cost

Comparative cost assumes that trade will be beneficial to a country if it concentrates on the production of those goods in which it has the greatest relative advantages over its trading partners. The law is however, an extension of the absolute advantages paradigm in industry. That is gain will be available to a given country so long as it transfers resources towards the industry in which its absolute or comparative advantages is greater. The country then sells the surplus to other country that in their turn channel resources towards those industries in which their deficiency is least (Dereck, 1974)

The theory discussed above depends on the existence of certain conditions for international trade, and complications arise if these conditions are not met. These conditions include:

Existence of free trading environment that enables a country to concentrate on the production of the good or goods for which its comparative advantage is greatest.

There should be free movement of factors from one industry to another.

The production opportunity cost ratios in different countries must differ.

The exchange rate of currency must lie between the limits set by the international (non-trading) price ratio for different product.

Transport cost should not be so high to out reign the price advantage enjoyed by exporter over domestic producers, and

Trade should not be seriously inhibited by artificial barrier to trade (Dereck 1974 and Livesey 1978).

2.2.2 Theory of Reciprocal Demand

Ricardo expounded the theory of comparative advantage without explaining the ratio at which commodities would exchange for one another. It was J.S Mill (1848) who discussed the latter problem in details in term of his theory of reciprocal demand. The term ‗reciprocal demand‘ introduced by Mill explains the determination of the equilibrium terms of trade. It is used to indicate a country‘s demand for one commodity in terms of the qualities of another commodity it is prepared to give up in exchange. It is reciprocal demand that determines the terms of trade which, in turn, determine the relative share of each country. Equilibrium would be established at that ratio of exchange between the two commodities at which quantities demanded by each country of the commodities which is imports from the other, should be exactly sufficient to pay for one another.

To explain his theory of reciprocal demand, Mill first restated the Ricardian theory of comparative cost ―instead of taking as given the output of each commodity in the two countries, with different labour costs he assumed a given amount of labour in each country, but different outputs‖ (Mill, 1848). Thus his formulation ran in terms of comparative advantages; or comparative effectiveness of labour, as contrasted with Ricardo‘s comparative labour cost.

2.2.3 Haberler’s Theory of Opportunity Costs

Haberler‘s (1961) opportunity cost theory overcomes the major criticism of the Ricardo‘s comparative cost theory which is the labour theory of value and explain the doctrine of comparative cost in terms of what he called ‗the substitute curve‘ or what Samuelson terms ‗Production Possibilities Curve‘ or ‗Transformation curve‘ or what Lemer calls ‗Production Indifference Curve or Production Frontier‘.

A production possible curve (PPC) shows the various alternative combinations of the two commodities that a country can produce most efficiently by fully utilizing its factors of production with the available technology. The slope of the production possibilities curve measures the amount of one commodity that a country must give up in order to get an additional unit of the second commodity. In other words, the slope of the PPC is its marginal rate of transformation (MRT).

It is the shape of the PPC under different cost conditions that determines the basic and the gains from international trade under theory of opportunity costs.

2.2.4 Heckscher-Ohlin Theory

Berth Ohlin in his famous book Interregional and international trade (1933) criticized the classical theory of international trade and formulated the general Equilibrium or factor proportions theory of international trade. It is also known as the Modern Theory of International Trade or the Heckscher-Ohlin’s (H-O) theory. In fact, it was Eli Heckscher, Ohlin‘s teacher, who first propounded the idea in 1919 that trade results from differences in factor endowment in different countries, and Ohlin carried it forward to build the modern theory of international trade.

The H-O theory states that the main determinant of the pattern of production, specialization and trade among regions is the relative availability of factor supplies. Regions or countries have different factor endowments and factors supplies ―some countries have much capital, others have more labour. The theory now says that countries that are rich in capital will export capital-intensive goods and countries that have much labour will export labourintensive goods‖ (Ohlin, 1933).

To Ohlin, the immediate case of international trade always is that some commodities can be bought more cheaply from other regions, whereas in the same region their production is possible at high price. Thus the main case of trade between regions is the different in prices of commodities. The model is more realistic than the classical theory, in that, the former leads to complete specialization in the production of one commodity by one country and of the other commodity by the second commodity when they enter into trade with each other.

However, the principal objective of any theory of international trade is to explain the cause of trade. Two other objectives of a theory of international trade are to explain the composition and volume of external trade. A theory, which explains these three issues: cause, composition (structure) and volume of trade is conventionally said to be a ―complete" theory of international trade. The two complete theories of international trade in existence are the Classical (also called Ricardian) theory and neo-classical theory.

2.2.5 THE CLASSICAL THEORY OF INTERNATIONAL TRADE

David Ricardo, the 18th century British economist was the author of the classical theory of international trade and the doctrine of comparative advantage. Ricardo was the first to demonstrate that external trade arises not from difference in absolute advantage but from difference in comparative advantage. By ―comparative advantage" is meant by ―greater advantage". Thus, in the context of two countries and two commodities, trade would still take place even if one country was more efficient in the production of both commodities (provided the degree of its superiority over the other country was not identical for both commodities).

In his theorizing, Ricardo assumed the existence of two countries, two commodities and one factor of production, labour. He assumed that labour was fully employed and internationally immobile and that the product and factor prices were perfectly competitive. There are no transport costs or any other impediments to trade.

According to Ricardo, differences In climate and environment tend to result in differences in comparative advantage; differences in comparative advantage lead to trade. In the context of a model of two countries, two commodities and one factor of production, Ricardo obtained the result that a country will tend to export the commodity in which it has a comparative advantage and to import the commodity in which it has a comparative disadvantage. Since comparative costs are the other side of comparative advantage, the classical theory is easily couched in terms of comparative costs. Specifically, the theory now states that a country will tend to export the commodity whose comparative cost is lower in autarky and import the product the comparative cost of which is higher in pre-trade isolation.

2.2.6 NEO-CLASSICAL THEORY OF INTERNATIONAL TRADE

The Neo-classical theory of trade evolved in an attempt to modify some unsatisfactory aspects of the classical theory. Thus, the Neo-classical theory, also called the modern theory, advanced a more satisfactory explanation for the existence of comparative cost differences between countries; introduced capital as a second factor of production; and allowed for international differences in the pattern of demand. The Neo-classical theory is therefore a 2 2 2 model (i.e., it assumes the existence of two countries, two commodities, and two factors of production). The introduction of a second factor of production turns out to e very important. This makes the approach of Neo-classical theory to be different n certain fundamental respects from the classical theory, namely, in handling of the relationship between factor allocation, income distribution and international trade