TRADE LIBERALIZATION A TOOL FOR POVERTY REDUCTION IN NIGERIA [1986-2014] ABSTRACT Poverty alleviation, a complex multidimensional phenomenal is among the most formidable challenges for policy makers in developing nations. Despite missed result on the long term impact on poverty, the general view is that if implemented and manage carefully, it can be alleviated. The objective of the study was based on the impact of trade liberalization on poverty reduction in Nigeria taking a long time series of 1980 to 2014. The result of the research work was carried out through the use of Ordinary Least Square (OLS) method of multiple regression analysis and the source of the data was mainly from CBN and other financial reviews were consulted. The analysis of the result shows that, the independent variables used (trade openness, investment, tariff and exchange rate) as relationship with the dependent variable (poverty) has direct and positive relationship with poverty level though holistically expert investment which have inverse relationship with poverty level in Nigeria within the observed years. While investment is a key to promoting business climate, trade openness can also help by improving business climate, access to modern capital and technical know-how and lead to sustained economic growth. Hence, the study calls attention to the fact that, the policy of trade liberalization should be complemented with appropriate macroeconomic and sectoral policies that will ensure that gains from trade are equitably distributed.
TABLE OF CONTENT
Table of Content
CHAPTER ONE: INTRODUCTION
Background of the Study
Statement of the Problem
Objectives of the Study
Significance of the Study
Scope of the Study
CHAPTER TWO: LITERATURE REVIEW
2.2 Conceptual Frame Work
2.2.1 The Nigerian Economy
2.2.2 The Concept of Poverty
2.2.3 Measurement of Poverty
2.2.4 Causes of Poverty in Nigeria
2.2.5 Incidence of Poverty and Trends in Poverty Level in Nigeria
2.3 Conceptual Issues and Some Linkages
2.3.2 Measurement of Openness
2.4 Complementary Policies to Trade Reform
2.5 Theoretical Review
2.5.1 Trade and Growth
2.5.2 Trade Liberalization and Poverty
2.5.3 Channels by Which Trade Liberalization Affects Poverty
2.6 Review of Empirical Findings
2.7 Summary of the Empirical Review CHAPTER THREE:METHODOLOGY
3.2 Model Specification
3.3 Identification of Variables
3.4 Apriori Expectation
3.5 Estimation Techniques
3.6 Sources of Data CHAPTER FOUR: RESULTS AND DISCUSSION
4.2 Results Presentation
4.3 Interpretation of Results
4.4 Discussion of Findings CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.3 Recommendations REFERENCES CHAPTER ONE INTRODUCTION 1.1 Background of the Study
The reduction of poverty is the most difficult challenges facing any country in the developing world where the average majority of the population is considered poor. According to Ogwumike (1995), Rural Development shows evidence that the number of those that lives in poverty in Nigeria has continued to increase from 27% in 1980 to 46% in 1985, it declined slightly to 42% in 1992, and increased very sharply to 67% in 1996. By 1999, when the present administration came to power, the estimated figure showed that more than 70% of Nigerians still lived in poverty that was why the government declared in November 1999 that, the N 470 billion budget for year 2000 was “to reduces poverty” this now lead to a proliferation of studies on the subject of poverty because poverty reduction has increasingly become a focal concern of both national and international development policies, and partly because the social consequence of globalization have become a major political issue in the developed and developing countries.
A Striking feature of current policy debated on trade and poverty that, it is narrowly famed. Indeed, its central focus is not actually trade and poverty but rather trade liberalization and poverty. This situation is evident in the fact that most current policy analysis relating to trade and poverty focuses on understanding the effects of trade liberalization on poverty. United Nations Conference on Trade and Development. (UNCTAD, 2004)
Trade can be a powerful source of economic growth while trade liberalization is the common policy prescription for increasing trade flows (Malhotra, 2004). A country’s trade policy is the key link in the transmission of price signals from the world market to the national economy. Undistorted price signals from world markets in combination with the exchange rate allow resources allocation consistent with comparative advantage, thereby increasing productivity. According to Coe, Helpman and Hoffmaister (1997), an open trade and investment regime encourages integration into the global trading environment and the import of diverse and modern technologies that are diverse and modern technologies that are important for productivity improvement.
As an integral element of the Structural Adjustment Programmes (SAP), trade liberalization was being implemented by most countries in Sub-Saharan African including Nigeria. According to Effiom et al (2011), the cornerstone of the SAP included policy was the opening up of domestic economies to face increased competition in order to ensure efficiency in resources use, removal of wastages, elimination of persistent misalignment in external and domestics sectors which ensured continuous balance of payments disequilibrium and a general redirection of the economy to the path of recovery and growth. The policy measures implemented included the elimination of non-tariff barriers to imports, the rationalisation and reduction of tariffs, the institution of market determined exchange rates and the removal of fiscal disincentives and regulatory deterrents to exports. Trade liberalization was espoused on the argument that it enhances the welfare of consumers and reduces poverty as it offers wider platform for choice from among wider variety of quality goods and cheaper imports. There are two fundamental reasons for this potential of welfare improvement: First, the nation would have access to many goods at relatively cheaper prices than in the domestic market; they also find more profitable markets in which to sell the products of her industries. Second, production of goods in which the country has comparative advantage expands, while those sectors displaying comparative disadvantage shrink. It is against this backdrop that many developing countries liberalized their imports, reduced average tariffs and dismantled significant number of Non-Tariff Barriers (NTBs).
Nigeria being fully integrated into the global economic system is a member and signatory to many multilateral and regional trade agreements. The policy response of such economic partnership agreements on trade policy has been to remove trade barriers, reduce tariffs and embark on outward oriented trade policies. Expectations are that following Nigeria’s obligations and commitments in the trade agreements, tariffs will reduce drastically as required by the World Trade Organisation (WTO) protocols and in compliance with regional trade agreements. Illustratively, as in the ECOWAS Common External Tariff, where member nations are gearing to latch on the West African Economic and Monetary Union (UEMOA) rates of four bands – 0, 5, 10, 20%; Nigeria was required to reduce tariffs by as 84% since Nigeria has 9% of its tariffs same with UEMOA, while 84% of tariff lines higher than UEMOA rates (Soludo etal; 2005). Also, for some years, the Nigerian government has been going through the process of adopting the ECOWAS Tariff rates in line with its Trade Liberalization Scheme (TLS). The TLS, as part of the efforts aimed at promoting economic integration of the West African Sub-region, involves removing tariffs on intra-ECOWAS trade and establishing common External Tariff (ECT) and other ECOWAS countries. Other groups and agreements also call for a reduction of tariffs [as-well as non-tariff barriers to trade] by Nigeria and other countries.
All these efforts of the Nigerian government in opening up the economy are predicted on the unanimous agreement reached in the Washington consensus in the early 1980s on the beneficial effects on growth and development of trade liberalization. Long-term growth is generally seen as being dependent on openness to trade; also it is generally believed (as some studies have shown) that economic growth can lead to reductions in poverty. However, it should be noted that in general, changes in poverty are mostly the growth that is due to trade liberalization which is different from growth in general. That is, it is possible that trade liberalization generates a sort of growth that is particularly anti-poor. There are strong reasons to suppose that trade liberalization will benefit the poor at least as much as it benefits the average person.
In this study, an empirical investigation on the effect of trade liberalization on economic poverty and some other macro economic variables shall be conducted with the aim of examining the constraints and prospects Nigerian economy faces in the context of policy reforms which is the focus of the present administration in Nigeria in recent times. 1.2 Statement of the Problem
It has been stated theoretically and proven empirically that economic openness contributes to the level of the economy, Ersoy and Deniz (2011), Sarkyi (2011), Chaudhry et al (2010). This is because, in a competitive environment, prices get lower and the products become diversified through which consumer surplus emerges. Gains from specialization and efficiency are also further advantages of economic openness. Hence, it is quite reasonable that economies generally desire to be economically open. Sub Saharan African (SSA) including Nigeria have been involved in immense economic reforms for the past few decades in order to remove or substantially reduce market distortions created mainly by government intervention in the productive sector since independence. Their ability to succeed will depend on the political which allow private firms to play their roles as the engine of growth of their economies but only when the proper attention and encouragement has been given to private sector to ensure growth, sustainability and ability to export.
Olofin (1992), Abebefe (1995), and Agbaje and Jereme (2004).Major exchange rate re-alignments were needed if the goal of stimulating agricultural production and exports is to be achieved. It should be noted that exchange rate reforms were aimed not only at the agricultural sector but was a measure aimed amongst other things at ensuring external balance and improve competitiveness, the implication for rural poverty and inequality is obvious. Hence, the rate at which the domestic currency will exchange for international currencies were measures undertaken under the SAP includes the removal of bureaucratic controls on trade. The import licensing system together with exchange control on all current transaction was abolished as soon as exchange liberalization began in September 1986. By 1995, more emphasis was placed on market oriented exchange rate system to enhance export competitiveness. A new seven-year tariff reform programme was also introduced in 1995 with frequent adjustment and exchange to the tariff structure. As at 2004, the applied tariff rate average about 25% in which some exceeds 100%. Currently, Nigeria maintains a 150% ceiling rate binding on all agricultural goods. In general, recourse to quantitative restrictions on imports is on the decline, Nigeria still bans imports of such products as maize, sorghum, millet, wheat flour, vegetables and plastic articles. The above review suggests that, trade policy in Nigeria has focused both on relative price incentives (in terms of exchange rates and tariff adjustments) and quantitative restrictions in term of quota and outright ban.
This to a large extent explains the phenomena progress made in poverty alleviation in China, Singapore, Hong-Kong, Japan and the Republic of Korea. All these countries dramatically increased their exports (and trade of GDP ration), raised incomes and reduced poverty and are now active participants in the global trading environment.
Although, export expansion is thus, the common element to all the success stories of poverty reduction and there are considerable differences in the model of trade policy that these countries and economies have adopted. Ajakaiye and Adeyeye (2001) however, find a paradox of growth without poverty reduction as they discover that while economic growth was positive for most part since the1980s in Nigeria, poverty intensified. Between 1980 and 1985, poverty headcount index rose sharply from 28.2% to 46.3%, fortunately, it decreased by 1992 but since then, it has been on the increase.
Why as Nigeria remained poor despite the often-heard claims of the benefits of trade liberalization? A satisfactory explanation of Nigeria’s poverty status may be elusive but what is certain is the overriding imperative to raise economic growth in Nigeria so that the inhabitants can attain higher standard of living and succeed in alleviating their pervasive poverty. 1.3 Objectives of the Study
The main objective of this study is to examine empirically the impact of trade liberalization on poverty reduction in Nigeria. Specifically, the study set out to:
(i) Assess the incidence of poverty and the trends of poverty level in Nigeria.
(ii) Analyze the impact of trade liberalization on poverty in Nigeria. 1.4 Research Questions
In an attempt to proffer solution to the problem stated, the researcher intends to carry out an analysis on the impact of trade liberalization on poverty reduction by providing answers to the following questions:
(i) Does poverty level in Nigeria have an incident on economic growth?
(ii) Does trade liberalization have impact on poverty reduction in Nigeria? 1.5 Research Hypothesis
It is pertinent based on the objectives of the study to test for the following hypothesis:
(i) Ho: The poverty level has no incident on economic growth in Nigeria.
(ii) H1: the poverty level has an incident on economic growth in Nigeria.
(i) Ho: The trade liberalization has no impact on poverty reduction in Nigeria.
(ii) H1: The trade liberalization has impact on poverty reduction in Nigeria. 1.6 Significance of the Study
The evaluation of the role of trade liberalization as a tool for promoting growth and alleviating poverty in LDC’S like Nigeria is of obvious importance, though diverse positions can be taken on the subject especially at the theoretical level. For instance, the standard neo-classical approach to the growth trade nexus concludes that, a country will have static gains from lowering its trade barriers and that trade policy like other government policies has only level effects not growth effects (Solow, 1956; and Swan, 1956). However, according to the endogenous growth theory approach, trade policy can impact on income and long-run growth permanently; thus, the need to find evidence from the Nigeria experience. Trade liberalization is a key element in the fast-expanding globalization process. There is preponderance of evidence (Dollar, 1993; Ben David, 1993; Edwards, 1998; Frankel and Roemer, 1999; Sachs and Warner, 1995) that claims trade liberalization promotes higher growth rate of income and output. According to Bhagwati and Snnivasan (1999), numerous individual country studies cover the past three decades suggest that “trade does not seems to create sustain higher growth”. Growth in income of the poor is strongly related to overall growth in the economy although the relationship differs substantially from country to country. The link of overall growth to poverty reduction has been demonstrated both in cross-country analyses and for individual countries. For example, Roemer and Gugerty (1997), Dollar and Kraay (2010), and Deininger and Squire (1998), shows that the income of the poor tends to grow proportionally with mean per capita growth.
In addition, Ghura et al. (2002), find in a large panel of counties that the elasticity of income of the poor with respect to average income at 0.94 is close to one. Also, Srinivasan (2000), found that of the 17% points reduction in the population below the poverty line from 1951-55 and 1993-96, 15% points may be attributed to growth and 2% points to redistributive policies. This suggests that our focus on growth as the core of poverty reduction strategy is well founded. Recently, there have been attempts to link trade liberalization directly with reduction in absolute poverty. Dollar and kraay (2010) is the most well-known study which found that trade liberalization leads to faster economic growth and poverty reduction in poor countries. However, these finding have been criticized based on the indicators of trade openness used. Questions on the direction of causality and correlation measure of trade openness with other policy variables that affect growth.
In Nigeria’s case, with the exception of few, studies on the subject matter did not examine the various channels and circumstances under which trade liberalization may affect poverty level. Okunmadewa (1999), kuji (2004), and Ogundele (2005) do not examine the poverty implications of trade openness in Nigeria. While Okunmadewa (1999), analyses the impact of trade liberalization on food security, left to be determined by market forces with some intervention by the government as deemed appropriate. The naira which exchange for about a dollar per unit of the naira in 1985 exchange for about 130 naira per unit of the dollar in 2004. A prominent exchange rate policy measure in 1980s and the 1990s was the setting up of a Second-Tier Foreign Exchange Market (SFEM) as a mechanism for securing a more market friendly rate for the naira and aligning relative prices so as to enhance efficiency in resource allocation and to promote domestic based production and non-oil exports.
As a policy objective, the liberalization and de-regulation of the exchange control regime are designed to facilitate and enhance trading activities. Items on import prohibition list have over time been drastically reduced, with government opting to utilise tariff structures to protect end-user product pricing of local industries and discourage frivolous imports. For instance, in 1998, the import prohibition list was reduced to items. Aside, drastic exchange rate reform measures was embarked upon since 1986, and numerous tariff and non-tariff measures were also implemented with the aim of stimulating production and exports of non-oil goods particularly agricultural commodities. In general, trade policy reforms were largely designed to provide incentives for non-oil sector particularly the rural agricultural sector with the hope that rural poverty and inequality will be reduced.
Some specific trade liberalization Kuji (2004), examines its impact on some imports and government tariff revenue in some sectors, and Ogundele (2005), examines its impact on exports. Fouratan (1993), discusses the sustainability of the process but does not analyse its impact on poverty. Olofin et al (2001), study the impact of trade and exchange rate liberaliation on macro economy. However, there is little examination of the way the poor will be affected. Oyejide (1986), analyses the impact of trade liberalization on three major sectors’ output: non-tradable, importable and exportable. In view of these concerns, there is need for the study to investigate empirically on the impact of trade liberalization on poverty reduction for Nigeria case. 1.7 Scope of the Study
This study will focus extensively on trade pattern of Nigeria over the years with more attention on the various trade policies that had been adopted over the years. The empirical analysis will focus on the impact of trade liberalization policy of Nigeria government that was adopted as part of the Structural Adjustment Programmes. The study time frame will be restricted to 1980-2010.
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