IMPACT OF EXTERNAL TRADE ON NIGERIA’S ECONOMIC GROWTH (1980-2013)
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 CONCEPTUAL FRAMEWORK
2.1.1Overview of the Nigerian Economy
Nigeria is a middle income, mixed economy and emerging market, with expanding financial, service, communications, and entertainment sectors. It is ranked 30th (40th in 2005, 52nd in 2000), in the world in terms of GDP (PPP) as of 2013, and the largest within Africa, on track to becoming one of the 20 largest economies in the world by 2020. Its re-emergent, though currently underperforming, manufacturing sector is the third-largest on the continent, and produces a large proportion of goods and services for the West African region (Wikipedia 2013).
Previously hindered by years of mismanagement, economic reforms of the past decade have put Nigeria back on track towards achieving its full economic potential. Nigerian GDP at purchasing power parity (PPP) has almost trebled from $170 billion in 2000 to $451 billion in 2013, although estimates of the size of the informal sector (which is not included in official figures) put the actual numbers closer to $630 billion. Correspondingly, the GDP per capita doubled from $1400 per person in 2000 to an estimated $2,800 per person in 2013 (again, with the inclusion of the informal sector, it is estimated that GDP per capita hovers around $3,900 per person). (Population increased from 120 million in 2000 to 160 million in 2010). These figures might be revised upwards by as much as 40% when the country completes the rebasing of its economy later in 2013(Wikipedia 2013).
Although much has been made of its status as a major exporter of oil, Nigeria produces only about 2.7% of the world's supply (Saudi Arabia: 12.9%, Russia: 12.7%, USA:8.6%). To put oil revenues in perspective: at an estimated export rate of 1.9 Mbbl/d (300,000 m3/d), with a projected sales price of $65 per barrel in 2011, Nigeria's anticipated revenue from petroleum is about $52.2 billion (2013 GDP: $451 billion). This accounts about 11% of official GDP figures (and drops to 8% when the informal economy is included in these calculations). Therefore, though the petroleum sector is important, it remains in fact a small part of the country's overall vibrant and diversified economy (Wikipedia 2013).The largely subsistence agricultural sector has not kept up with rapid population growth, and Nigeria, once a large net exporter of food, now imports a large quantity of its food products, though there is a resurgence in manufacturing and exporting of food products. In 2006, Nigeria successfully convinced the Paris Club to let it buy back the bulk of its debts owed to the Paris Club for a cash payment of roughly $12 billion (USD) (Wikipedia 2013).
Nigeria's economy is struggling to leverage the country's vast wealth in fossil fuels in order to displace the poverty that affects about 45% of its population. Economists refer to the coexistence of vast wealth in natural resources and extreme personal poverty in developing countries like Nigeria as the "resource curse". Although "resource curse" is more widely understood to mean an abundance of natural resources, which fuels official corruption resulting in a violent competition for the resource by the citizens of the nation. Nigeria's exports of oil and natural gas-at a time of peak prices-have enabled the country to post merchandise trade and current account surpluses in recent years. Reportedly, 80% of Nigeria's energy revenues flow to the government, 16% covers operational costs, and the remaining 4% go to investors. However, the World Bank has estimated that as a result of corruption 80% of energy revenues benefit only 1% of the population (Wikipedia 2013).
From 2003 to 2007, Nigeria attempted to implement an economic reform program called the National Economic Empowerment Development Strategy (NEEDS). The purpose of the NEEDS was to raise the country's standard of living through a variety of reforms, including macroeconomic stability, deregulation, liberalization, privatization, transparency, and accountability. The NEEDS addressed basic deficiencies, such as the lack of freshwater for household use and irrigation, unreliable power supplies, decaying infrastructure, impediments to private enterprise, and corruption. The government hoped that the NEEDS would create 7 million new jobs, diversify the economy, boost non-energy exports, increase industrial capacity utilization, and improve agricultural productivity. A related initiative on the state level is the State Economic Empowerment Development Strategy (SEEDS).
A longer-term economic development program is the United Nations (UN)-sponsored National Millennium Goals for Nigeria. Under the program, which covers the years from 2000 to 2015, Nigeria is committed to achieve a wide range of ambitious objectives involving poverty reduction, education, gender equality, health, the environment, and international development cooperation. In an update released in 2004, the UN found that Nigeria was making progress toward achieving several goals but was falling short on others.
Agriculture has suffered from years of mismanagement, inconsistent and poorly conceived government policies, neglect and the lack of basic infrastructure. Still, the sector accounts for over 26.8% of GDP and two-thirds of employment. Nigeria is no longer a major exporter of cocoa, groundnuts (peanuts), rubber, and palm oil. Cocoa production, mostly from obsolete varieties and overage trees, is stagnant at around 180,000 tons annually; 25 years ago it was 300,000 tons. An even more dramatic decline in groundnut and palm oil production also has taken place. Once the biggest poultry producer in Africa, corporate poultry output has been slashed from 40 million birds annually to about 18 million. Import constraints limit the availability of many agricultural and food processing inputs for poultry and other sectors. Fisheries are poorly managed. Most critical for the country's future, Nigeria's land tenure system does not encourage long-term investment in technology or modern production methods and does not inspire the availability of rural credit. Agricultural products include cassava (tapioca), corn, cocoa, millet, palm oil, peanuts, rice, rubber, sorghum, and yams. In 2003 livestock production, in order of metric tonnage, featured eggs, milk, beef and veal, poultry, and pork, respectively (Wikipedia 2013). In the same year, the total fishing catch was 505.8 metric tons. Round wood removals totaled slightly less than 70 million cubic meters, and sawn wood production was estimated at 2 million cubic meters. The agricultural sector suffers from extremely low productivity, reflecting reliance on antiquated methods. Although overall agricultural production rose by 28% during the 1990s, per capita output rose by only 8.5% during the same decade. Agriculture has failed to keep pace with Nigeria's rapid population growth, so that the country, which once exported food, now relies on imports to sustain itself.
Nigeria's foreign economic relations revolve around its role in supplying the world economy with oil and natural gas, even as the country seeks to diversify its exports, harmonize tariffs in line with a potential customs union sought by the Economic Community of West African States(ECOWAS), and encourage inflows of foreign portfolio and direct investment. In October 2005, Nigeria implemented the ECOWAS common external tariff, which reduced the number of tariff bands. Prior to this revision, tariffs constituted Nigeria's second largest source of revenue after oil exports. In 2013, Nigeria received a net inflow of US$85.73 billion of foreign direct investment (FDI), much of which came from Nigerians in the Diaspora. Most FDI is directed toward the energy and banking sectors. Any public designed to encourage inflow of foreign capital is capable of generating employment opportunities within the domestic economy. The Nigerian Enterprises Promotion (NEP) Decree of 1972(revised in 1977) was intended to reduce foreign investment in the Nigerian economy. This type of policy is not relevant in an economy with a rapidly growing force like Nigeria. Although one may accept the rationale for the promulgation of that decree at that time i.e. to promote indigenous entrepreneurship. But the decree or any exchange control policy that has the potential to discourage foreign investment will not be relevant under the present economic dispensations. The abrogation of the NEP decree was therefore a step in the right direction.
Furthermore, another reason for the low level of foreign investment in Nigeria is political instability. The various coups and counter coups since 1966,the discontentment and politically motivated riots following the long-drawn and inconclusive political engineering of the Babaginda Military Administration, all combined to create an environment not conducive to foreign investment. Foreign direct investment(FDI)is arguably an important source of employment opportunities for developing countries like Nigeria.
Given this development, Ikiara (2002), UNIDO (2002), UNCTAD (1997) recognize and emphasize the significance of FDI in providing technological know-how, capital, management and marketing skills, facilitating access to foreign markets and generating both technological and efficiency spillovers to local firms provided the right policy and business conditions are available. In planning to achieve all the benefits of FDI Nigerian must first of all, just like other nations engaged in external trade. And looking at the mono-economy system ( i.e large dependent on oil) being operated in Nigeria and the dangers it poses to the economic growth and development in Nigeria, this study is going to extensively discuss the external trade and the Nigerian economy and the benefit therein, laying emphasis on non-oil sectors in Nigeria. How the sector can be revitalized and also reap the huge benefits that come with it.
2.1.2External trade- Defined
Trade is a repeated sequence of exchanges of goods through market transactions (Abebefe 1995). It is referred to as international if it involves transactions beyond the boundaries of a sovereign political authority. Accordingly, Samuelson and Nordhaus (2002) see external trade as the system by which, nations export and import goods, services, and capital. They identify three differences between domestic and external trade as: expanded trading opportunities, sovereign nations and exchange rates adding that these have important practical and economic consequences. The forces that lie behind external trade are that trade promotes specialization; and specialization increases productivity (Ingram and Dunn 1993, Samuelson and Nordhaus 2002) as quoted by (Ezirim, Aloy, Okeke, Titus,Akpobolokemiand Patrick2011).
In the simplest form, external trade means exchange of goods and services across international borders. In other to know what is happening in the course of external trade, governments keep track of the transactions among nations. The records of such transactions are made in the balance of payment accounts. External trade and balance of payment are therefore two important aspects in the relationship between nations.
2.1.3History of External trade
External trade has been and is today an economic force that has spurred commerce, promoted technology and growth, spread cultural patterns, stimulate exploration and colonization, and frequent fanned the flames of war.
The history of external trade has gone hand in hand with the development of civilizations. From very ancient times, external trade brought about the exchange of products and raw materials between one land or nation and another. Although such trade was often conducted in barter form and was of small volume by today’s standard, this interchange of products was important in economic and historic development.
External trade in its early beginnings was necessary, not just because it provided one society with products such as cowries from West Africa to other areas; external trade also formed the basis for cultural interchange, thus trading not only on product, but also on lifestyles, customs and technology.
In addition external trade prompted the development of monetary system of record keeping and accounting, and of an entire vocation of commerce. In-fact external trade added in public displeasure towards usury (interest in excess of legal rate charged to a borrower for the use of money). One can state that the economic and political development of the entire western world was spurred and enhance by external trade.
Another distinct contribution of external trade was the strong promotion given to the field of exploration, map making, and ship construction technology. Early external trade routers ranged over vast expanses, thus requiring advances in transportation to make possible further search for new products and markets. Let us not forget, of course, that such desire for new trade routes products, and markets was the driving force that launched explorations leading to the discovery of the new world.
Columbus set out, as you can recall, not to settle in a new nation, but to discover a new trade route of the Orient. The interest upon his return to Europe center not on his accounts of forest and soil, but on the new products available such as tobacco, corn, cowries etc (oviemuno 2007)
As external trade progressed and technology developed, these explorations were to turn up another area of foreign trade, still important today. This was the import of raw materials by a nation and the re-export of finished and manufactured products. As a result, not only living standards advanced, but national incomes were also increased.
2.1.4The Terms of Trade
The terms of trade refer to the rate at which the goods of one country exchange for the goods of another country (Jhingan2013). It is a measure of the purchasing power of exports of a country in terms of its imports, and is expressed as the relation between export prices and import prices of its goods. When the export prices of a country rise relatively to its imports prices, its terms of trade are said to have improved. The country gains from trade because it can have a larger quantity of imports in exchange for a given quantity of exports. On the other hand, when its imports prices rise relatively to its export prices, its terms of trade are said to have worsened. The country’s gains from trade are reduced because it can have a smaller quantity of imports in exchange for a given quantity of exports than before (Jhingan 2013).
2.1.4.1 Exchange Control
Exchange control is one of the important devices to control external trade and payments. It aims at equilibrating foreign receipts and payments, not through such market forces or flexible exchange rates but through direct and indirect control of foreign exchange. Thus exchange control means that all foreign receipts and payments in the form of foreign currencies are controlled by the government. Prof. Haberler defines exchange control as “state regulation excluding the free play of economic forces from the foreign exchange market” (Jhingan 2013). Prof. Ellsworth has explained it more explicitly. According to him, “Exchange control deals with the balance of payments difficulties, disregards market forces and substitutes for them the arbitrary decisions of government officials. Imports and other international payments are no longer determined solely by international price comparisons, but also by consideration of national need”.
2.1.4.2Foreign Exchange Rate
The foreign exchange rate or exchange rate is the rate at which one currency is exchanged for another. It is the price of one currency in terms of another currency. It is customary to define the exchange rate as the price of one unit of the foreign currency in terms of the domestic currency. The exchange rate between the Naira and the dollar is expressed as N158=$1 i.e the number of Naira required to get one dollar.
The exchange rate of $2.50 = €1will be maintained in the world foreign exchange market by arbitrage. Arbitrage refers to the purchase of a foreign currency in a market where its price is low and sells it in some other market where its price is high. The effect of arbitrage is to remove differences in the foreign exchange rate of currencies so that there is a single exchange rate in the world foreign exchange market. If the exchange rate is $2.48 in the London exchange market and $2.50 in the New York exchange market, foreign exchange speculators, known as arbitrageurs, will buy pounds in London and sell them in New York, thereby making a profit of 2 cents on each pound. As a result, the price of pounds in terms of dollars rises in the London market and falls in the New York market. Ultimately, if it equals in both the markets arbitrage comes to an end. If the exchange rate between the dollar and the pound rises to $2.60=€1 through time, the dollar is said to depreciate with respect to the pound, because now more dollars are needed to buy one pound. When the rate of exchange between the dollar and the pound falls to $2.40=€1, the value of the dollar is said to appreciate because now less dollars are required to purchase one pound. If the value of the first currency depreciates that of the other appreciates, and vice versa. Thus a depreciation of the dollar against the pound is the same thing as the appreciation of the pound against the dollar, and vice versa (Jhingan 2013).
2.1.4.3The Foreign Exchange Market
The foreign exchange market is the market in which different currencies are bought and sold for one another. For example, dollars are traded for marks, marks for francs, francs for yens or yens for dollars. Thus the national currencies of all countries are the stock-in-trade of the foreign exchange market. As such, it is the largest market to be found around the world which functions in every country.
The principle participants in the foreign exchange market are banks, foreign exchange dealers, brokers, firms and central bank. For instance in Nigeria the central bank of Nigeria authorizes banks and other financial institutions to transact foreign exchange business. They are called Authorised Dealers. There are also Authorised Money Changers who are issued licenses to transact foreign business of issuing and cashing travellers’ cheques and foreign currencies.
Banks dealing in foreign exchange are the “market makers” in the market. This means that they quote buying and selling rates of a currency (say $) in relation to another currency (say N) and are prepare to buy and sell it at those rates. The brokers in the foreign exchange market act as middlemen between two banks. They inform the banks about rates at which buyers and sellers are prepared to buy and sell the specific currency. The broker strikes the deal and collects his commission. But brokers do not buy or sell currencies themselves. Thus the foreign exchange rates are set in these inter-bank and bank-broker dealings. Firms need foreign exchange for making payments of imports and interest on foreign loans, conversion of exports receipts, hedging of receivables and payables, etc. they do not deal in foreign exchange like banks. The central bank intervenes in the foreign exchange market from time to time to influence the exchange rates when the country is not on a fully flexible exchange rate system. Even in countries with full flexible systems, the central banks do intervene to smooth out fluctuations in the exchange rate when the situation demands. This is called “dirty floating” system. The foreign exchange markets “follow the sun around the globe”. In other words, they function 24 hours a day with the fastest possible communication through telephones, telexes, computers and other means of communications with the help of satellites. Some of the major foreign exchange centers are: New York, London, Tokyo, Frankfurt, Zurich, Paris, Singapore and Hongkong. The main functions of the foreign exchange market are: 1. to transfer funds through one currency of a country to another currency; 2. to provide short-term credit to finance trade between countries through various credit instruments; and 3. to facilitate avoidance of foreign exchange risks or hedging or speculation (Jhingan 2013).
2.1.4.4 Balance Of Payments: Meaning and Components
The balance of payments of a country is a systematic record of all its economic transactions with the outside world in a given year. It is a statistical record of the character and dimensions of the country’s economic relationships with the rest of the world. According to Bo Sodersten, “the balance of payments is merely a way of listing receipts and payments in international transactions for a country”. It shows the country’s trading position, changes in its net position as foreign lender or borrower, and changes in its official reserve holding” (Cohen 1969).
The balance of payments account of a country is constructed on the principle of double-entry book-keeping. Each transaction is entered on the credit and debit side of the balance sheet. But balance of payments accounting differs from business accounting in one respect. In business accounting, debits (-) are shown on the left side and credits (+) on the right side of the balance sheet. But in balance of payments accounting, the practice is to show credits on the left side and debits on the right side of the balance sheet.
When a payment is received form a foreign country, it is a credit transaction while payment to a foreign country is a debit transaction. The principal items shown on the credit side (+) are exports of goods and services, unrequited (or transfer) receipts in the form of gifts, grants, etc. from foreigners, borrowings from abroad, investments by foreigners in the country, and official sale of reserve assets including gold to foreign countries and international agencies. The principal items of the Debit side (-) include imports of goods and services, transfer (or unrequited) payments to foreigners as gifts, grants etc, lending to foreign countries, investments by residents to foreign countries, and official purchase of reserve assets or gold from foreign countries and international agencies.
These credit and debit items are shown vertically in the payments account of a country according to the principle of double-entry book-keeping. Horizontally, they are divided into three categories the current account, the capital account, and the official settlements account or the official reserve assets account.
Example of balance of payment account
Credits (+) Debits (-)
(receipts) (Payments)
1. Current Account
Exports Import
(a) Goods (a) Goods
(b) Services (b) services
(c) Transfer payments (c) Transfer Payments
2. Capital Account
(a) Borrowing from (a) Lending to Foreign
Foreign countries Countries
(b) Direct Investments (b) Direct Investments in
by Foreign Countries Foreign countries
3. Official Settlements Account
(a) Increase in Foreign (a) Increase in Official Reserve of
Official Holdings Gold and Foreign currencies
2.1.4.5 Balance of Trade and Balance Of Payments
The balance of payments of a country is a systematic record of its receipts and payments in international transactions in a given year. Each transaction is entered on the credit and debit of the balance sheet (see table above)
While the balance of trade is the difference between the value of goods and services exported and imported. It contains the first two items of the balance of payments account on the credit and the debit side. This is known as “balance of payment on current account”. Some writers define the balance of trade as the difference between the value of merchandise exports and imports. Prof. Meade regards this way of defining the balance of trade as wrong and of minor economic significance from the point of view of the national income of the country. In equation from, the balance of payments of Y=C + I + G + (X –M) which includes all transactions which give rise to or exhaust national income. In the equation, Y refers to national income, C to consumption expenditure, I to investment expenditure, G to government expenditure, X to exports of goods and services and M to imports of goods and services. The expression (X – M) denotes the balance of trade. If the difference between X and M is zero, the balance of trade balances. If X is greater than M, the balance of trade is favourable, or there is surplus balance of trade. On the other hand, if X is less than M the balance of trade is in deficit or is unfavourable.
2.1.6Importance of External trade
There are many areas in which the importance of trade can be established. Perhaps the most critical of these areas concerns economic growth. During the 19 and the 20 centuries, trade has played a leading role in bringing about global economic growth. In addition to its role as an “engine of growth" for the world economy, external trade has also played a pivotal role in bringing about rapid economic growth and development in several countries. The 19 century was perhaps the important century for (primary commodity) export-led growth. Expansion of exports can lead to growth through stimulating technical change and investment, or by spilling demand over other sectors.
Expansion of primary commodity exports often led to growth in the 19 century particularly in Sweden, Australia and Canada. In Sweden, growth was propelled by the exportation of timber and wood products and in Australia; growth was driven by the exportation of wool, lamb and mutton. In Canada, growth was propelled by the export of wheat. This gave rise to the so-called “staple theory" of growth. In practice, different primary products will have different effects on economic growth because they differ as regards conditions of supply and demand. Those primary products with high income and price elasticity of demand are likely to be more growth-inducing than orders. Of course, the most favourable situation is when exports (with high elasticity) are sold in an expanding market at rising prices as was the case with Swedish exports into the U.K. providing foreign exchange for buying capital imports. In the 20 century, for a host of reasons, there have been no good examples of primary product led-growth, but there are several examples of industrial led growth. These include the city-states of Hong Kong and Singapore, also Taiwan and South Korea (oviemuno 2007).
2.2 THEORETICAL REVIEW
2.2.1Trade as Engine of Growth Theoretical Review
Literature on external trade and growth of the Nigerian economy are large. Whereas some scholars argued that external trade promote economic growth and development, others argued that it does not. For instance, winters (2002) submitted that trade liberalization is beneficial because it affords a country the opportunity to trade in larger markets and therefore the risks associated with trading in smaller markets are significantly reduced. Winters et al (2004) argued that one of the consequences of external trade is that it exposes the participating countries to foreign shocks, but the intensity or otherwise of these shocks would depend on the nature of existing institutions, policy measures and the capacity of the country to absorb or counter the shocks. Studies conducted by Edwards, (1993); Frankel and Romer (1999); Dollar and Kraay (2001 and 2002) laid emphasis on the positive effect of external trade on economic growth and poverty reduction. Dollar and Kraay (2001 and 2002) studies supported the view that external trade has positive effect on economic growth and development by submitting that foreign trade increases the domestic income of participating countries. This is because opening the economy to international commerce allows domestic entrepreneurs to learn new methods of using or producing quality inputs quicker at lower cost, increasing total factor productivity, human capital accumulation and in harnessing overall national technological capacity. This argument is consistent with the findings of Romer, (1992); Obstfeld and Rogolt (1996). Oviemuno (2007) looks at external trade as an engine of growth in developing countries: a Case Study of Nigeria (1980-2003) as case study, he uses four important variables which are export/import, inflation and exchange rate. The results show that Nigeria exports value does not act as an engine of growth in Nigeria.
2.2.2 Hecksher – Ohlin Trade Theory
Eli Hecksher and Bertil Ohlin are two Swedish economist that postulates a theory that addressed two issues that the Ricardian theory could not explain; what factors determine the comparative advantaged and what effect does foreign trade have on the factors incomes in the trading nations.
The Hecksher – Ohlin theory focuses on the differences in relative factors endowments and factors prices between nations as the most determinants of trade (On the assumption of equal or similar technology and tastes). Hecksher Ohlin maintained that the sources of the factors endowments determine a nation’s comparative advantage.
This arrangement is the basis of the theory to be referred to as factor endowment theory. The theory analyzed the differences in factors endowment on international specialization.
The model was based on two main prepositions; firstly, a country with specialization in the production and export of a commodity whose production requires intensive use of abundant resources. This implies that goods differ in factor requirement. Secondly, countries differ in factor endowment. Some country has mush capital per worker and some have less. Countries could be ranked by factor abundance.
The Hecksher – Ohlin model identified difference in pre-trade product prices between nations as the immediate basis for trade. The prices depend on production possibility curve (supply side) and then taste and preferences (demand side) in the trading nations. Production possibility curve depends on technology and resources endowment.
According to the theory, a nation should produce and export a product for which the large amount of the relative abundance resources is used. Such country should import the commodity in which a great deal of its relative scarce and expensive factors is used.
Where a resource is abundant, its cost is less than the cost in country where it is relatively scarce. This scenario facilitates comparative advantage. The effect of factor endowment on comparative advantage is seen as follows; differences in relative resource endowment leading to differences in relative resource prices and later to differences relatives’ resource prices.
The model suggests that the less develop countries that are labour abundant should specialize in the production of primary product especially agricultural product because the labour requirement of agricultural is high except in the mechanized form of farming. On the other hand, the less developed countries should import capital-intensive product mostly the manufactured goods from developed countries that are capital intensive.
The model assumed two countries, two commodities and two factors. There is perfect competition in both factor and product market. It assumed that factor inputs; labour and capital in the two countries are homogeneous.
Production function also exhibits constant return to scale. Production possibility curve is concave to the origin.
Due to the proposition upon which the theory is based, the Hecksher Ohlin suffers some criticisms. Factors inputs are not identical in quality and cannot be measured in homogeneous units. Furthermore, factor endowment differs in quality and variety. Perfect competition does not exist in real world. Products are rather differentiated. Relative factor prices reflect differences in relative factors endowment. Supply therefore outweighs demand in the determination of factor prices.
Conclusively, from the Hecksher Ohlin theory, trade increase total world output. All countries gain from trade. Trade enables countries to secure capital and consumption of goods from other parts of the world. In this way, trade stimulates growth or serves as engine of growth(Usman 2011).
2.2.3 Theories of Economic Growth
Economic growth means the steady process by which the productive capacity of the economy is increased over time to bring about rising levels of national output and income. Economic growth could be said to comprise three component; capital accumulation, growth in population and eventual growth in the labour force, and technological progress. Capital accumulation results when some proposition of personal income is saved and invested in order to augment future output and income. Capital accumulation involves a trade-off between present and future consumption, giving up a little now so that more can be had latter.
Population growth, and the associated increase in the labour force, has traditionally been considered a positive factor in stimulating economic growth. A larger labour force means more productive workers, and a large overall population increases the potential size of domestic markets. Technological progress results from new and improved ways of accomplishing traditional tasks. Technological progress could be neutral, labour-saving, and capital-saving.
Neutral technological progress occurs when higher output levels are achieved with the same quantity and combinations of factor inputs. Computers, the internet, tractors, mechanical ploughs and many other kinds of modern machinery and equipment can be classified as products of labour-saving technological progress(Usman 2011).
2.2.4 Harrod-Domar Growth Model
This is referred to the economic mechanism by which more investment leads to more growth. It is often referred to as the AK model because it is based on the liner production function with output given by the capital stock (K) times a constant, often labeled A. In order to grow, new investments representing net additions to the capital stock are necessary. In this theory, investment is considered fundamental in the process of economic growth. Investment according to the theory creates income as well as augments the productive capacity of the economy by increasing the capital stock. In as much as there is net investment real income and output will continue to expand. 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.
According to the theory, 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 ensure full capacity use of a growing stock of capital. It follows that any net addition to the capital stock in the form of new investment will bring about corresponding increase in the flow of national output. Suppose that this relationship, known in economics as the capital-output ratio, is roughly 3 to 1. If we define the capital-out put ratio as K and assume further that the national net savings ratio, S is a fixed proportion of national output and that total new investment is determined by the level of total savings, economic growth model could be constructed, net savings (S) is some proportion, S, of national income
(Y), such that we have;
S= sY………… (1)
Net investment is defined as the change in the capital stock, K and can be represented by ΔK;
I = ΔK ……….. (2)
But because the total capital stock, K, bear a direct relationship to total national income, Y, as expressed by the capital-output ratio, k, it follows that
K = k or ΔK = k
Y ΔK
Or ΔK = k ΔY ……….. (3)
Because net national savings, S, must equal net investment, I, we can write this equality as;
S = I ……….. (4)
But from equation (4) we know that S = sY, and from equation (2) and (3);
I = ΔK = kΔY
The identity of saving equaling investment in (4) could be written as
S = sY = kΔY = ΔK = I ………… (5)
Or simply as
SY = k ΔY ………….. (6)
Dividing both sides of equation (6) first by Y and the by k,
ΔY = s
Y k …………… (7)
ΔY/Y represents rate of growth of GDP. Equation (7), states simply that the rate of growth of GDP is determined jointly by the net national saving 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 savings ratio, that is, the more an economy is able to save and invest out of a given GDP, the greater the growth of that GDP will be, and negatively related to the economy’s capital-output ratio, the lower the rate of GDP growth. To grow, economic must save and invest a certain proportion of their GDP(Usman 2011).
2.2.5 Traditional Neoclassical Growth Theory
It expanded on the Harrod-Domar formulation by adding a second factor, labour and introducing a third variable, technology, to the growth equation. Solow’s neoclassical growth model exhibited diminishing returns to labour and capital separately and constant returns to both factors jointly. Technological progress because the residual factor explaining long term growth, and its level was assumed by slow and other neoclassical growth theorists to be determined exogenously, that is, independently of all other factors.
According to traditional neoclassical growth theory, output growth results from one or more of three factors; increase in labour quantity and quality (through population growth and education), increase in capital (through and investment), and improvements in technology. Closed economies with lower saving rates (other things being equal) grow more slowly in short run than those with high savings rates and tend to converge to lower per capita income levels. Open economies, however, experience income convergence at higher levels as capital flows from rich countries where capital-labour rations are lower and thus returns on investments are higher. Consequently, by impeding the inflow of foreign investment, the heavy-handedness of less developing countries governments, according to the neoclassical growth theory, will retard growth in the economics of the developing world. In addition, openness is said to encourage greater access to foreign production ideas that can raise the rate of technological progress(Usman 2011).
2.2.6 Endogenous Growth Theory
Endogenous growth economists believed that improvements in productivity can be linked directly to a faster pace of innovation and extra investment in human capital. They stress the need for government and private sector institutions which successfully nurture innovation, and provide the right incentives for individuals and businesses to be inventive. There is also a central role for the accumulation of knowledge as a determinant of growth. Supporters of endogenous growth theory believed that there are positive externalities to be exploited from the development of a high value-added knowledge economy which is able to develop and maintain a competitive advantage in fast-growth industries within the global and maintain a competitive advantage in fast-growth industries within the global economy. The main points of the endogenous growth theory are as follows:
The rate of technological progress should not be taken as a constant in growth model-government policies can permanently raise a country’s growth rate if they lead to more intense competition in markets and help to stimulate product and process innovation. There are increase returns to scale from new capital investment. The assumption of the law of diminishing returns is questionable. Endogenous growth theorists are strong believers in the potential for economies of scale (or increasing returns to scale) to be experienced in nearly every industry and market. Private sector investment in research and development is a key source of technical progress. The protection of private property rights and patents is essential in providing appropriate and effective incentives for businesses and entrepreneurs to engage in research and development. Investment in human capital (including the quantity and quality of education and training made available to the workforce) is an essential ingredient of long-term growth. Government policy should encourage entrepreneurship as a means of creating new businesses and ultimately as an important source of new jobs, investment and innovation(Usman 2011).
2.2.7Relationships between Trade and Economic 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 Nation” 1776. The theory emanated due to the demise of mercantilism. 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. (Atoyebi, Adekunjo, Edun and Kadiri 2013).
2.2.8 Mercantilist Trade Theory
Mercantilist provided the earlier idea on foreign trade. The doctrine was made up of many features. It was highly nationalistic and considered the welfare of the nation as of prime importance. According to the theory, the most important way for a nation to be become rich and powerful is to export more than its import. Some of the mercantilism are: Jean Baptiste Colbert and Thomas Hobbes. It was understood then, that, the most important in which a country could be rich was by acquiring precious metals such as gold. This was achieved by ensuring that the volume of export was better than the volume of import.
Trade has to be controlled, regulated and restricted. The country was expected to achieve favourable balance of payment. Tariffs, quotas and other commercial policies were proposed by the mercantilism to minimize imports in order to protect a nation’s trade position. Mercantilism did not favour free trade. Mercantilism belief in a world of conflict in which the state of nature was a state of war. The need for regulation to maintain order in human affairs and economic affairs were taking for granted. To the mercantilist, the world wealth was fixed. A nation’s gain from trade was at the expense of its trading partners. That is, not all national could simultaneously benefit from trade. Towards the end of 18th century, the economic policies of mercantilism came under strong attack. Hum criticized the favourable trade balance as being short run phenomenon which could be eliminated automatically overtime. The other nation is likely to retaliate. Mercantilism was also attack for their static view of the world economy. Adam Smith also criticized the notion that the world wealth is fixed with the advantages of specialization and division of labour. With specialization and division of labour, the general level of productivity within a country will increase.
Despite the criticism faced by the foundation of mercantilism, mercantilism is still alive today. New mercantilism now emphasized employment rather than holding some gold. They also postulate that exports are beneficial as jobs are provided domestically. Import are considered bad as jobs are taken away and transferred to the foreign workers. To the new mercantilist, trade is a zero sum activity which a country must loose for the other to gain. And that there is no acknowledgment that trade can provide benefits to all countries (John andAiyelabola2013).
2.2.9Absolute Advantage Trade Theory
The theory of absolute cost advantage was propounded by Adam Smith in his famous book, “Wealth of Nation” 1776. The theory emerges as a result of the criticism levied against mercantilism. He advocated free trade as the best policy for the nations of the world. Smith argued that with free trade each nation could specialize in the production of those commodities in which it could produce more efficiency than the other nations, and import those commodities in which it could produces less efficiently.
This international specialization of factors in production would result in increase in world output, which would be shared by the trading nations. Thus, a nation need not gain at the expense of other nations, all nations could gain simultaneously.
In other words, according to the theory, a nation should specialize in the production of export of commodities in which it has lower cost or absolute cost advantages over others. On the other hand, the same country should import a commodity in which it has higher cost or absolute cost disadvantage(Usman 2011).
2.2.10Comparative Advantage Theory
Absolute advantage fails to analyze where a country has comparative advantage in the production of two goods, will trade still be necessary or beneficial to the country in question? David Ricardo tackled this question.
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.
Ricardo assumed the existence of two countries, two commodities, and one factors of production, labour. He assumed that labour was fully employed and internationally immobile and that the product and factor of prices were perfectly competitive. There are no transport costs or any other impediments to trade,
In 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 community in which it has a comparative disadvantage. Since comparative costs are the other side of comparative advantage, the theory could be expressed 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 production and comparative cost is higher in pre-trade isolation.
The theory also assumed the level of technology to be fixed for both nations. Different nations may use different technology but all firms within each nation utilize a common production method for each commodity. It also assumed that trade is balanced and rolls out the flow of money between nations. The distribution of income within a nation is not affected by trade.
Most assumption of the Ricardian theory is unrealistic. The theory is based on labour theory of values which states that the price of the values of a commodity is equal to or can be inferred by the quality of labour time going into its production process. Labour theory of values is based on-labour is the only factor of production. Labour is used in the same fixed proportion in the production of all commodities. Labour is homogenous. This underline proposition is quite unrealistic, because as labour is categorized into skilled, semi-skilled and unskilled labour, there are other factors of production.
Despite its shortcomings, the law of comparative advantage cannot be discarded off because it found application in study of economics. The law is valid and can be explained in terms of opportunity cost in the modern theory of trade (Usman 2011).
2.3 EMPIRICAL REVIEW
2.3.1 Trade-Growth Debate
There are comprehensive empirical studies on the impact of trade on economic growth. Before the 1960s, research on external trade effects was limited to a few specific countries. With the development of econometrics, however, many complicated methods based on a mathematical model were introduced to analyze the interactive impact between trade and economic growth(Peng and Almas 2010). The effect of foreign trade on economic growth has been an important and controversial subject for several decades. Whereas some scholars argued that trade promote economic growth and development, others argued that it does not. For instance,
Winters(2002) submitted that trade liberalization is beneficial because it affords a country the opportunity to trade in larger markets and therefore the risks associated with trading in smaller markets are significantly reduced. Studies conducted by Edwards, (1993); Frankel and Romer (1999); Dollar and Kraay (2001 and 2002) laid emphasis on the positive effect of trade liberalization on economic growth and poverty reduction. Dollar and Kraay (2001 and 2002) studies supported the view that trade openness has positive effect on economic growth and development by submitting that foreign trade increases the domestic income of participating countries. This is because opening the economy to international commerce allows domestic entrepreneurs to learn new methods of using or producing quality inputs quicker at lower cost, increasing total factor productivity, human capital accumulation and in harnessing overall national technological capacity. This argument is consistent with the findings of Romer, (1992); Barro (1990); Obstfeld and Rogolt (1996).Frankel and Romer (1999) find significant impact of trade openness on level of per capita income. They posits that trade possibilities enhance growth through greater capital stock, stock of education and higher total factor productivity. They, however, warned explicitly against drawing inferences for trade policies based on their results as it brings different factors into play. Dollar (1992) argued that outward oriented developing economies achieve more rapid growth than inward oriented developing ones. Sachs and Warner (1995) construct a policy index to analyse economic growth rate and found that the average growth rate in the period after trade liberalization is significantly higher than in the period before liberalization. Baldwin (2003) demonstrated persuasively that countries with few trade restrictions achieve more rapid economic growth than countries with more restricted policies. As poverty will be reduced more quickly through faster growth, poor countries could use trade liberalization as a policy tool. Trade liberalization reduces relative price distributions 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 labour supply. Trade restrictions or barriers are associated with reduced growth rates and social welfare and countries with higher degree 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 cost that producers have to absorb, which could reduce output and growth. In another study, Michael and Ruhwedel (2005) examined the link between production variety and economic growth using panel data for 14 transition countries. Their results show that open economies attain higher economic growth than closed ones. They attributed the gap to the role of external trade and co-operation. Coe and Helpman (1995) using time-series data show that trade affect economic growth positively through technological transfer. Similarly, Bayoumi et al. (1999) assert that research and development, its spillover and trade play important roles in promoting economic growth both in industrial and developing countries. The results of Coe and Moghadam (1993) suggests that trade and capital have positive influence on growth in France. Lin (2000) investigated the relationship between trade and economic growth based on China’s national data for the period 1952-1997. The results reveal that the growth rate of export, growth rate of import, growth rate of the volume of trade and labour force growth were positively related to economic growth. Maddison (1998) showed that the gradual trade liberalization and capital flows in the OECD countries stimulated Western Europe’s reconstruction, recovery and catch up growth. Also, the outward orientation, gradual trade liberalization and inward investment in some East Asian countries like China, Hong Kong and Singapore have significantly contributed to their sustained economic growth. Drabek and Laird (1998) noted that developing countries with progressively more liberal trade policies are those with growing ratios of trade, inward investments, and national income and its growth rates. Earlier studies by Singer (1950) and Prehisch (1962) disagreed with the widely held notion that free market and trade would solve the development problem in poor countries. They calculated the net terms of trade of developing countries and found that the terms of trade of these countries have worsened over the years. They concluded that the division of labour between rich countries and poor ones has brought about a state of underdevelopment in less developed countries. More over Apple-yard et al. (2006) noticed that there is a common misconception that China’s economic growth is taking place at the expense of its many trading partners-Nigeria being its largest trading partner in Africa. Contrarily, a critical overview of the impact of Chinese investment and trade on the growth and development of Nigeria as explicated by Nabine (2009) shows that in the short term, the bilateral trade doesn’t contribute to Nigeria’s economic growth but the long-term relationship can enhance Nigeria’s economic growth.
On the other hand, albeit, the advantages of trade liberalization are numerous, for example, it enhances the socio-economic performance and promotes a fair degree of stability in countries that embraced it. However, high vulnerability to external shocks and the resultant uncertainties are increasing in recent times. For instance, Winters et al (2004) argued that one of the consequences of external trade is that it exposes the participating countries to foreign shocks, but the intensity or otherwise of these shocks would depend on the nature of existing institutions, policy measures and the capacity of the country to absorb or counter the shocks. Dercon (2001) in his study discussed the adverse effects of trade openness and the channels through which a country is exposed to different types of shocks and this can frustrate domestic policy initiatives to address the adverse effect of external shocks. Among others, the channels include globalization characterized by weak domestic financial institutions and market reforms. Cooper (2001) addressed the influence of foreign trade and investment on growth via inequality and distribution of income in developing countries. He argued that survey of theory and empirical evidence are inconclusive. He states that there are no compelling theoretical reasons to believe, in general, that trade promotes growth and empirical works supporting a connection at country level has been heavily criticized on methodological grounds (Rodriguez and Rodrick, 2000). He further argued that it would be difficult to believe that trade liberalization has not contributed significantly to the growth of the world economy in the second half of the 20th century. He concluded that trade was a product of economic growth; and that the world economy would have grown as rapidly as it did even if trade barriers are as high as they were in the 1950s implying that other factors aside trade also promotes growth. Rodriguez and Rodrik (2000) provided a critique of the various studies that concluded that liberal trade fosters growth. They found fault with the various data, variables, specifications and methodology adopted by most of these studies on the ground that they were based on anecdotes and case studies.
There are various hypotheses that underscore the possibility of a country’s participation in external trade resulting to adverse economic performance. Razin and Rose (1992) argued that one possibility is the failure of countries to specialize in areas of comparative advantage and poor diversification of export base. This exposed open economies to shocks in their exports markets. The second is the inconsistency in policy choices, the nature of prevailing shocks and the structure of domestic markets. Third, the occurrence of booming burst cycles of investment brought about by opening the economy to external trade in countries characterized by poor infrastructure (Razinet al 2003). Lastly, policy responds sluggishly to distortions and shocks because the existing institutions are weak (Garvin and Housmann, 1996).
A number of empirical studies on the relationship between export and economic growths have found export growth to be associated with increase in output or GDP (Michaely, 1977; Tyler, 1981 and Balassa, 1985). Michaely (1977) used simple regression and correlation analysis to investigate the relationship between exports and growth. He found that in less developed countries, there was a weak correlation. He, however, raised an important issue as to determine the minimum level of development a country has to attain in order to benefit from trade. As a follow-up on Michaely (1977) work, Tyler (1981) worked on a sample of 55 developing countries. He confirmed the positive relationship between expansion of exports and increase in production. In his analysis, he observed that it is necessary for some countries to achieve a minimum level of development in order to benefit from export expansion, especially of manufactured exports. This conclusion was later supported by Jude and Pop-Silaghi (2008) in the case of Romania. Rana (1988) questioned Balassa (1985)’s finding that the contribution of exports to growth has increased in the post-1973 period compared with the pre-1973 period. He argued that Balassa’sanalysis used heterogeneous samples. He used a balanced sample of 45 developing countries and found that the contribution of export, although significant but reduced in the post-1973 period. Also, some studies built on the import-growth relationship have found positive impact of import on growth especially through the impact of technology imports in the production process of developing countries (Perreira, 1996). Grossman and Helpman (1991) demonstrated the importance of imports of foreign technology in the growth process of a country. He explained that the importation of foreign equipment creates a more efficient production system, increases productive capacity, global output, technological capacity development and economic growth.
External trade also impacts the economic growth of countries through the attraction of foreign direct investment (FDI). According to Lall (2000) and TeVelde (2001), the main channels through which FDI contributes to economic growth are technology transfer, capital accumulation, access to international market, job creation and managerial and marketing practices; and Blomstrom and Kokko (2003) added that trade and FDI can only facilitate growth after the minimum level of human capital, infrastructure and technology have been met (Karbasi et al., 2005). Karbasi et al. (2005) analyzed the role of FDI and trade in promoting economic growth in 42 selected developing countries. They argued that FDI, human capital, trade and domestic investment are important source of economic growth for developing countries. They found a positive significant relationship between trade and growth. They concluded that the contribution of FDI to economic growth is enhanced by its positive interaction with human capital and sound macroeconomic policies and institutional stability. This point is also confirmed by Jude and Pop-Silaghi (2008) who concluded that the FDI induced a false effect on growth in the Romanian economy when other factors of growth are omitted. In the same vein, Fogel (2006) opined that for China to achieve the desired objective of quadrupled rate of GDP by 2020, improvement in quality of education, political stability and institutions’ quality should be the key major priorities. Fosu and Magnus (2006) examined the long-run impact of FDI and trade on economic growth in Ghana between 1970 and 2002. They found a long-run relationship between economic growth and its determinants in the model. The results showed a positive and negative growth effect of trade and FDI respectively. This result is in agreement with Jude and Pop-Silaghi (2008) for Romania Akinlo (2004) investigates the impact of FDI on economic growth in Nigeria using data for the period 1970 to 2001. His error correction model (ECM) results show that both private capital and lagged foreign capital have small and insignificant impact on economic growth, this study however established the positive and significant impact of export on growth. Financial development which he measured as M2/GDP has significant negative impact on growth. This he attributed to capital flight. In another manner, labour force and human capital were found to have significant positive effect on growth. Osinubi and Amaghionyeodiwe (2010) too carried out empirical investigation of foreign private investment and economic growth in Nigeria, using co-integration and error-correction framework over the period covering 1970 to 2005. The study found that foreign private investment, domestic investment growth and net export growth positively influenced economic growth in Nigeria. Similarly, Ayanwale and Bamire (2004),Ayashagba and Abachi (2002) found positive effect of FDI on economic growth for Nigeria.
In exchange rate, Arratibel, Furceri, Martin and Zdzienicka (2009) research on the impact of exchange rate stability on growth has tended to find weak evidence in favour of a positive impact of exchange rate stability on growth. For large country samples such as by Ghosh, Gulde and Wolf (2003) there is weak evidence that exchange rate stability affects growth in a positive or negative way. The panel estimations for more than 180 countries by Edwards and Levy-Yeyati (2003) fund evidence that countries with more flexible exchange rates grow faster. Eichengrean and Leblang (2003) reveal a strong negative relationship between exchange rate stability and growth for 12 countries over a period of 120 years. They concluded that the result of such estimations strongly depend on the time period and the sample. Another study by Mireille (2007) argues that overvaluation of exchange rates have constituted a major setback in the recovery process of Nigeria and Benin Republic. In addition, the author suggests that devaluation accompanied with well-targeted measures alongside an upward adjustment in the domestic price of tradable goods, could restore exchange rate equilibrium and improve economic performance. In a related study, Aliyu et al (2009) examined exchange rate pass-through in Nigeria for the period 1986 to 2007. Quarterly series was employed and a vector Error Correction Model estimation was used in the estimation process. The authors found that exchange rate pass-through in Nigeria during the period under consideration was low and declined along the price chain, which partly overturns the conventional wisdom in the literature that exchange rate pass-through is always considerably higher in developing countries than developed countries. The authors conclude that in the long run, pass through would likely increase and monetary policy should be designed to accommodate the effect. From a short term perspective, fixed exchange rate can foster economic growth by a more efficient international allocation of capital when transaction costs for capital flows are removed. From a long term angle, fluctuations in the exchange rate level constitute a risk to growth in emerging market economies as they affect the balance sheet of banks and enterprises where foreign debts tend to be denominated in foreign currency Eichengreen and Hausmann (1999). The case of Commerce Bank of Nigeria buttresses this when the then NERFUND Loans were given out in 1995. High depreciation inflates the liabilities in terms of domestic currency, thereby increasing the probability default and crises. In debtor country with highly dollarized financial sector, the incentive to avoid sharp exchange rate fluctuations is stronger Chmelarova and Schnabl (2006). Maintaining the exchange rate at a constant level or preventing sharp depreciation is equivalent to maintaining growth McKinnon and Schnabl (2004).
In Nigeria, some authors had examined the performance of foreign trade and economic growth. For instance, Ezenwe (1979) also examines against the background of the current world trade relationships, the importance of foreign trade to Nigeria’s economic development and the appropriate policy mix required to realize this role in the 1980s and finds that foreign trade is the most dynamic sector of the economy since independence. Obadan (1989) also writes on the impact of export instability on the economic development of Nigeria, during 1960 – 1977. More importantly, the study examines whether or not fluctuations in Nigeria’s export earnings have adverse effects on the economy. The results of the study using multivariate analysis as the framework, confirm the hypothesis that export instability is an important obstacle to Nigeria’s economic development. In particular, export instability is found to be highly detrimental to the growth rate of investment as well as resulting in smaller proportions of national income being invested. The result also supports the claim that Nigeria’s economic growth is export led. Akerele (2001), relying on appropriate quantitative techniques identified sources of instability in export earnings for the Nigeria economy for the period 1980-1997. He observed that political as well as economic factors provided sources of instability in Nigeria’s export earnings. The influence of political factors is not surprising, since the period of the study coincided with the imposition of various sanction on Nigeria for failing to adopt western-style democracy. Ogbokor (2001), investigated the macroeconomic impact of oil exports on the economy of Nigeria. Utilizing the popular OLS technique, he observed that economic growth reacted in a predictable fashion to changes in the regressors used in the study. He also found that a 10% increase in oil exports would lead to 5.2% jump in economic growth. He concluded that export-oriented strategies should be given a more practical support. Oviemuno (2007), looks at external trade as an engine of growth in developing countries taking Nigeria (1980-2003) a case study, he uses four important variables, which are export, import, inflation and exchange rate. The findings show that Nigeria’s export value does not act as an engine of growth in Nigeria and that Nigeria’s inflation rate does not act as an engine of growth in Nigeria. Standing on the previous empirical analysis this study is to examine further into Nigeria external trade from 1980-2013 to ascertain whether external trade have a positively impact on Nigeria economic using different variables as against oviemono (2007) submission on external trade as engine of growth in Nigeria (1980-2003).
2.4 REVIEW SUMMARY
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 consumer 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. Therefore countries engage in trade in order to enjoy variety of goods and services and improve their people’s standard of living
There has been increasing interest in the study of foreign trade and its benefits particularly to developing countries. Until recently, there has been a general consensus that every country benefits from trade. However, recent empirical investigation has shown that less developed countries has not benefitted from trade as much as their developed counterparts. Besides, the poor state of these economies in terms of gross domestic product, per capita income, unemployment, human capital and poverty level despite several decades of participation in trade has further heightened the trade-development debate. For instance, Nigeria’s volume of trade has increased significantly over the years without a corresponding and major increase in growth and development. While the classical and neo-classical schools of thought see foreign trade as beneficial to growth and development, other schools/authors hold that foreign trade has only contributed to international inequality, a situation where developed countries have become richer at the expense of less developed ones(Omoju and Adesanya 2013).