IMPACT OF EXPORT EARNINGS ON THE ECONOMIC GROWTH OF NIGERIA (1981-2013)
CHAPTER TWO
2.0 REVIEW OF RELATED LITERATURES
2.1 THEORETICAL REVIEW
The literature on international trade which suggests that exports have a positive impact on economic growth is known as the Export-led-growth (Giles & Williams, 2000). Different reasons have been proposed for explaining the evidence found in previous studies dealing with this issue on export-led growth. The simplest explanation is that, as
the contribution to growth made by domestic consumption is limited to the size of regional (or national) markets, sales to foreign markets represents an additional consumption demand which increases the amount of real output produced in the economy (Giles & Williams, 2000). Another more elaborated explanation is that exporting is associated with more productive firms (Bernard & Jensen, 1999; Bernard & Wagner, 1997), and thus export-led growth at aggregate level may be the result of both the accumulation of within-firm productivity gains from export participation, or the reallocation of resources from comparatively less productive non-exporters to more productive exporters (Bernard & Jensen, 2004; Roberts & Tybout, 1991).
According to Uche (2009), the relevance of exports in boosting economic growth and prosperity is captured in the theoretical justification for international trade. In the mercantilist economic thought, for instance, foreign trade is seen as an indispensable engine of economic growth and prosperity (Roll, 1953; Bhatia, 1978). Indeed, foreign trade under mercantilism is considered to be profitable only when there is positive balance of trade thus implying that exports are the most crucial aspect of international trade. But as pointed out by Ozughalu and Ajayi (2004), if every country ensures that it gets a surplus in international trade, there will be high degree of protectionism and many barriers to the flow of foreign trade; and these are incompatible with the essence of globalization. A highly robust theoretical underpinning for international trade lies in the classical economic theory of comparative cost advantage. The theory of comparative cost advantage states that global output will reach its optimum level if every country specializes in the production of the commodity (or commodities) in which it has comparative cost advantage over others; this is seen as the basis for profitable trade (Ozughalu and Ajayi, 2004). In contemporary economics, the dominant model of comparative cost advantage is known as Heckscher – Ohlin model.
As pointed out by Sodersten and Reed(1994), this is a theory of long-term general equilibrium in which two factors of production – labour and capital – are both mobile between sectors. The Heckscher – Ohlin theory postulates that international trade – of which exports are expected to constitute the major component – will significantly reduce the gap between the rich and poor countries. The theory contends that inter-country differences in factor endowments are the basis for foreign trade. Comparative cost advantage comes as a result of different factor intensities in the production of various commodities (Sodersten and Reed, 1994).
The Heckscher-Ohlin theory also implies that free trade specialization in production based on relative factor endowments will tend to bring about factor price equalization and thus will increase the returns to labour in poor countries to the levels in rich countries; this suggests that international trade in general and exports in particular have the ability to mitigate inequality in income and wealth distribution between and within nations as well as the ability to bring about a convergence in absolute poverty incidence between the rich and poor countries (Ozughalu and Ajayi, 2004).
The relationship between exports and economic growth has always been a hot issue and has often generated heated debate among economists and policy makers. As observed by Lin and Li (2007), there are basically two approaches used in addressing the issue. The first approach has to do with studying the contribution of exports to the economic growth of an economy through analysis of the supply side of the economy. This approach emanates from the neo- classical economic growth theory/model. The approach states that the major source of economic growth lies in two major areas namely: increases in factor input(s) and improvements in efficiency. Following the above statement, analysis from the approach often regards exports as a factor that can affect technological progress or to be among factors that are related to economic efficiency. In practical terms, the contribution of exports is thought to be included in the residuals of growth accounting.
It is noteworthy that the new growth theory/model endogenises the mechanism through which exports impact on economic growth. In line with this theory/model, Grossman and Helpman (1990) proposed a two-nation growth model with endogenous technological progress. As shown in their model, exports help to promote technology and knowledge and thus accelerate economic growth. It is instructive to state here that how to introduce exports into the production function is the major problem involved in the econometric analysis that follows the neo-classical approach. Some analysts directly include exports in the production function as the third variable while others use more sophisticated methods. The second approach is to study the contributions of exports to a country’s economic
growth through analysis of the demand side of the country’s economy. The demand side approach is also called demand oriented analysis or post-Keynesian analysis.
According to the traditional Keynesian theory, an increase in exports is one of the factors that can cause increases in demand and thus will surely bring about increases in outputs, all other things being equal (Lin and Li, 2007). It is important to note that though this approach is highly sophisticated and robust, it has not been widely used. This is partly because of the remnant of Say’s law in people’s mind (McCombie and Thirlwall, 1994). Indeed most people believe that the major constraints of modern economic growth lie on the supply side instead of on the demand side. In other words, they believe that only increases in factor inputs and improvements in economic efficiency can stimulate economic growth (Lin and Li, 2007). However, proponents of the demand- oriented analysis disagree with the above view and argue persuasively that it is growth in exports that is the major stimulant of aggregate economic activity and economic growth.
Thirlwall(1987), McCombie (1985), McCombie and Thirlwall (1994, 1997 and 1999) and others later developed the argument of the proponents of the demand-oriented analysis into a powerful theoretical framework that analyses the relationship between exports and economic growth. Put briefly, the theoretical framework has the following characteristics: (a) contrary to popular belief, the Keynesian theory/model can be used to analyze long-term phenomena such as economic growth; (b) exports are an autonomous component of demand; (c) the role that exports play in an open economy model is as important as investment in a closed economy model; and (d) the role of the balance of payments as a constraint on economic growth is important.
2.2 EMPIRICAL REVIEW
It is important to note that a large number of studies on the importance of exports in economic performance and the relationship between exports and aggregate economic activity/economic growth have been conducted over the years, particularly in recent years. It is gratifying to observe that in recent times, there has been great and increasing interest in the study of exports and economic growth within the context of developing countries; a great number of research works have captured this interest. The research works may be said to be of two main categories. The first category concentrates on individual countries and assesses the implications of export promotion versus import- substitution strategies for economic growth (Bhagwati,1978 and Krueger,1978).
As observed by Fosu (1990), such analyses may provide useful country specific information on the success or failure of various development mechanisms, at least as they relate to the period of analyses. However, the long gestation periods associated with economic projects, in conjunction with the usual lack of adequately detailed data for individual countries, may prevent the proper evaluation of the importance of exports in any general fashion. The second category of studies examines the extent to which export performance differences may explain inter-country economic growth differentials. Studies in this category include Balassa (1978 and 1985), Ram (1985), Feder (1982) and Michaely (1977). Most of These studies employed a production function framework that included exports as an additional argument of the production function.
As shown by Fosu (1990) in Uche (2009), the standard justification for such a treatment is based on the fact that the development of exports allows the home country to concentrate investment in those sectors where it enjoys a comparative advantage and the resulting specialization is likely to augment overall productivity; similarly the larger international market permits economies of scale to be realized in the export sector; in the same way worldwide competitive pressures are likely to reduce inefficiencies in the export area and result in the adoption of more efficient techniques in the overall traded goods sector; and a larger export sector would make available more of the resources necessary to import in a more timely fashion both physical and human capital, including advanced technologies in production and management, and for training higher quality labour. The numerous studies on exports and economic growth as found in the literature were conducted along various methodological lines.
The early studies examined the simple correlation coefficient between export growth and economic growth (Michaely, 1977 and Balassa, 1978). These studies in general concluded that there is strong evidence in favour of
the export-led growth hypothesis based on the fact that export growth and economic growth were found to be highly correlated. The principal weakness of this group of studies is that they used a high degree of correlation between the two variables as evidence supporting the export-led growth hypothesis. But high degree of correlation between the two variables is not a sufficient condition to validate the export-led growth hypothesis. It is well known in econometrics and statistics that correlation does not necessarily imply causality.
Following the early group of studies on exports and economic growth, we have the next group, which may be called the second generation of studies on the issue. This group examined whether or not exports are driving output by estimating output growth regression equations based on the neoclassical growth accounting technique of production function analysis, including exports or export growth as an explanatory variable (Feder, 1982; Balassa, 1985; and Ram, 1987). This second generation of studies used a highly significant positive value of the coefficient of export growth variable in the growth accounting equation and a significant improvement in the coefficient of determination with the inclusion of the export growth variable in the regression equation as evidence for the export-led growth hypothesis. This group of studies has been severely criticized based mainly on a methodological issue (Ekanayake, 1999). The studies in general made a priori assumption that export growth causes output growth and they did not consider the direction of causal relationship between the two variables.
There is a third generation of studies, which is relatively recent. This group of studies laid emphasis on causality between export growth and economic growth. This approach has been taken in a large number of recent studies designed to assess whether or not individual countries exhibit evidence for export-led growth hypothesis using Granger (1969) or Sims (1972) causality test (Ahmad and Kwan, 1991; Serletis, 1992; Jin and Yu, 1995; and Holman and Graves, 1995). The major weakness of this generation of studies (that are based on causality tests) is that the traditional Granger and Sims causality tests used in the studies are only valid if, among other things, the original time series are not co-integrated; the tests are invalid and misleading when the original time series are integrated of order one and are co-integrated. (Granger, 1980, 1986 and 1988; Engel and Granger, 1987; and Ahmad and Harnhirun, 1996).
Therefore, there is need for one to check for stationarity and co-integration properties of original exports and output time series before using Granger or Sims causality test. Despite the weaknesses associated with the techniques adopted by the foregoing generations of studies they are still very relevant for they can provide useful insights on the relationship between exports and economic growth. Indeed the techniques serve as simple and handy analytical methods of testing the validity of the export-led growth hypothesis and other related hypotheses. It is interesting to point out here that there have been relatively new studies on exports and economic growth that have used modern econometric techniques of co-integration and error-correction models (Oxley, 1993; Ghatak, Milner and Utkulu, 1997; and Islam, 1998).
As observed by Ekanayake (1999), this new generation of studies does not suffer from the shortcomings found in the methodologies adopted in the previous studies. In fact, the new group of studies has produced highly robust and reliable results; this is largely because they used modern econometric techniques that are not only highly sophisticated but also highly efficient.
There is a dearth of studies on exports and economic growth based on modern econometric techniques in Nigeria. The few studies on exports and economic growth in Nigeria that used modern econometric methods that is within our reach include Ekpo and Egwaikhide(1994), Odusola and Akinlo(1995), Idowu(2005) and Uche (2009). These studies suffer from some methodological defects. Ekpo and Egwaikhide(1994) analyzed the relationship between exports and economic growth within the framework of a general production function. The study employed modern econometric techniques of co-integration and error correction model in its analysis. In particular, the study used the Engel-Granger two-step procedure of co-integration as well as the associated error correction modeling technique in the analysis. The study in general validated the export-led growth hypothesis for Nigeria. However, the study did not address the issue of causality and the direction of causality. Suffice it to say that the issue of causality is very crucial in assessing the validity of the export-led growth hypothesis.
Odusola and Akinlo(1995) as cited by Uche (2009) used the traditional Granger causality test in examining whether the export-led growth hypothesis is valid for Nigeria. The results of the study indicated that a bidirectional (or feedback effect) relationship between exports and economic growth exists in Nigeria. Thus the study validated both the export-led growth hypothesis and the growth-driven export hypothesis for Nigeria. Though the study examined the stationarity properties of the variables used, it did not consider the issue of co-integration. The issue of co- integration is very important in determining whether or not to apply the traditional Granger (1969) causality test in the analysis of causality.
Idowu(2005) used the traditional Granger causality and Johansen co-integration tests in his analysis of exports and economic growth in Nigeria. The results of the study showed a bi-directional causality and long-run relationship between exports and economic growth in Nigeria. However, given that the variables in question (i.e. exports and GDP) are integrated of order one and are co-integrated, the use of the traditional Granger (1969) causality test is not appropriate; Granger causality test should have been done in the framework of error correction model. Given the methodological defects of the aforementioned earlier studies on exports and economic growth in Nigeria their results are apparently suspect.
Uche (2009) in his studies employed econometric methodologies to assess the impact of oil export and non-oil export on the growth of Nigerian economy and discovered that there is a unidirectional casuality from oil export to GDP which goes to support the export-led-growth in the case of Nigeria but with reference to oil sector only. He also found non-oil export does not granger cause economic growth in Nigeria. This work followed most of the set rules in econometric analysis and may have generated a robust result but was not able to cover up to 2011 period, and government have taken a number of steps to improve the non-oil sector of the Nigerian economy and the effect of these policies and programe by the government may have improved the impact of non-oil sector to the growth of Nigerian economy. And so, a resent look at this subject area becomes important to give consideration to the responds of these government policies and program aimed at improving the non-oil sector of the economy. Thus this study intends to correct these methodological defects in most of the works mentioned. It is worthwhile to further point out that the earlier studies did not recognise the dichotomy between oil exports and non-oil exports except Uche (2009).
In Nigeria, oil exports have overwhelmingly dominated non-oil exports for many years now. Thus, in any econometric modeling, it is important to specify oil and non-oil exports separately instead of combining them together as total exports. This will provide some insights as to the relative impact of each category on economic growth. This study specifies oil and non-oil exports separately and this approach paves the way for robust analysis. It is important to point out here that where the impact of exports on economic growth is considered to be direct such as the case of Nigeria, both short-run and long-run modeling may include only exports and economic growth variables (Idowu, 2005).