THE EFFECT OF GOVERNMENT INTERFERENCE IN MANAGEMENT OF FINANCIAL INSTITUTION

EFFECT OF PUBLIC EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA (1981-2013)

CHAPTER ONE

INTRODUCTION

• BACKGROUND TO THE STUDY

The subject of government involvement in resource allocation stems from the failure of market mechanism to effectively and efficiently perform this task. From the very inception, government is not to be involved in the day-to-day running of an economy as propounded in the doctrine of laizzez-faire by Adam Smith, but to provide an enabling environment for the economy to operate, while maintaining law and order and protecting the nation from external aggression. The market mechanism could to a greater extent cater for the allocation of private goods based on exchange and competition but certainly not reliable for public goods. Public goods according to Wikipedia encyclopaedia is non-rivalry and non-excludable. Non-rivalry implies consumption of good by one individual which does not reduce its availability for consumption by others; while non-excludability means, no person can be effectively excluded from using the good. In reality, it might be difficult to absolutely come across non-rivalled and non-excludable good, however, economists reason that some goods such as defence, health, roads and others approximate the concept closely enough for analysis to be economically useful.

Consequent upon the precedent of Musgrave (1959), governmental activity can be broken into three parts or branches, namely allocation, distribution and stabilization and growth. Broken down further, directly or indirectly, the various governments provide education, health care, national defence, police and fire protection, and provide or support a substantial amount of housing, recreation facilities, and parks. They set health standards and ensure adequate water supplies, transportation and other public facilities. They seek to attain a reasonably equitable distribution of income, to stabilize the economy, and to ensure adequate rate of growth. Therefore, they affect innumerable decisions of individuals by the large amount of revenue they collect in oil proceeds and taxes to finance these various activities. Huge amount of resources are required to fund these activities of government.

The size of government expenditures and its effect on long-run economic growth, and vice versa, has been an issue of persistent interest, analysis and debate for decades. Lopzides and Vamvoukas (2005) identified two levels of empirical literature on the subject matter. One set of studies has explored the principal causes of growth in the public sector while the other has been directed towards assessing the effects of the general flow of government services on private decision making and, more specifically, on the impact of government spending on long-run economic growth. In the late 19^th century, Adolph Wagner, the German economist made an in-depth study relating to rise in government expenditure. Based on his study, he propounded a law called “The Law of Increasing State Activity”. According to Wagner (1893), as the economy develops over time, the activities and functions of government increase. Wagner’s Law indeed is one of the first efforts at emphasising economic growth as the basic cause of public sector growth. Empirical tests of this hypothesis have yielded diverse results differing from country to country (Eberts & Gronberg, 1992). Concentrating on inter-country cross-section comparison have been bedevilled with shortcomings. Besides the obvious problem of comparability of data, especially between advanced and developing countries, cultural and institutional dissimilarities also compound the analysis. Works that have used either standard regression analysis (Ganti & Kolluri, 1970; Georgakopoulos & Loizides, 1994) or error-correlation regression (Kolluri, Panik, & Wahab, 2000) have not only encountered these but other problems.

Evidences from Nigeria show that the total government expenditure in terms of capital and recurrent expenditures have continued to rise in the last three decades. Expenditures on defence, internal security, education, health, agriculture, construction, transport and communication are rising over time. For instance, government total recurrent expenditure increased from N4,846.70 million in 1981 to N36,219.60 million in 1990 and further to N461,600.00 in 2000 and later to N3,310,343.38 in 2010 while government capital expenditure rose from N6,567.00 million in 1981 to N24, 048.60 million in 1990. Capital expenditure stood at N239, 450.90 million and N883,874.50 million in 2000 and 2010 respectively and by 2011, it was N1,934,524.20 (Central Bank of Nigeria Statistical Bulletin, 2012). The various components of capital expenditure have risen between 1981 and 2011. The expanding public expenditures is not peculiar to Nigeria, as it applies to any other country of the world. As Akpan (2005) observes that the perceived growth in government expenditure appears to apply to most countries notwithstanding their level of economic development. Consequently, the need to ascertain whether the behaviour of Nigerian public spending and the economy can be hinged on the Wagner’s (1883) Law of Ever-increasing State Activity, or the Keynesian (1936) theory and Friedman (1978) or Peacock and Wiseman’s (1979) hypotheses.

Generally, it is believed that government plays a significant role in the development of a country and public expenditure is a principal means for a government to manage the economy. Economists have been well aware of its impact in promoting economic growth. The general belief is that public expenditure whether recurrent or capital expenditure, notably on social and economic infrastructure can engender growth. In the view of Omoke (2009), an increase in government expenditure will yield a positive increase in the growth of the economy by increasing the national income, especially when it is injected into development programmes. For instance, government expenditure on health and education is capable of raising the productivity of labour and increase the growth of national output (Oni, 2014). Likewise, expenditure on infrastructure such as roads, communications, power, etc., reduces production costs, increases private sector investment and profitability of firms, thus promoting economic growth. Macroeconomics, notably the Keynesian school of thought, upholds that total spending in the economy affects output and inflation. In order words, this school suggests that government spending accelerates economic growth. It is therefore asserted that government expenditure is the exogenous factor that changes aggregate output.

On the whole, what has emerged from this investigation is significant as far as the new evidence suggests that public spending (i.e. in whatever form this is envisaged) can also be thought of as a mechanism for the promotion of growth as well as a mechanism for the resolution of social and economic issues such as social cohesion, poverty reduction, social conflicts, income disparities between various groups, regions etc. Creating a stable environment, fuelled by government spending, might be an option for high levels of economic growth (Alexiou, 2009).

However, some scholars are not in support of the assertion that increasing government expenditure promotes economic growth, instead they claim that higher government expenditure may slowdown overall performance of the economy. For instance, in an attempt to finance rising expenditure, government may increase taxes and/or borrowing. Higher income tax discourages individuals from working for long hours or even searching for jobs. This in turn reduces income and aggregate demand. In the same vein, higher profit tax tends to increase production costs and reduce investment expenditure as well as profitability of firms, (Landau, 1983; Engen & Skinner, 1991), and Folster and Henrekson (2001) obtained negative evidence.

However, following the Keynesian’s view that government expenditures boost economic growth and supported by (Ram, 1986; Kormendi & Meguire, 1986; Akpan, 2011; Olabisi & Funlayo, 2012); it is expected that the rising government expenditure in Nigeria should translate into significant growth and development. That would not be, rather the country is still ranked among the poorest countries in the world, with human development index (HDI) of 0.504 (UNDP, 2013), about 63.1 per cent (in 2004) and 68 per cent (in 2010) citizens living on less than US$1.25 a day (Poverty & Equity Databank and PovcalNet, povertydata.worldbank.org/poverty/country/NGA).Even when GDP grew from 4.3 per cent in 2012 to 5.4 per cent in 2013 less than 2 per cent are super rich. Furthermore, decayed infrastructure is prevalent in bad roads and epileptic power supply leading to the collapse of many industries. Subsequently associated with high level of unemployment and abandonment of projects. In addition, the macroeconomic indicators such as balance of payments, import obligations, inflation rate, exchange rate, national savings, foreign reserves, debt profile and mortality rate are all hallmark that Nigeria has not been doing well economically in the last couple of years.

 

In view of the forgoing, this study sets to investigate empirically the effect of public expenditure on economic growth in Nigeria. The variables of public expenditure are total capital expenditure and total recurrent expenditure at disaggregated level. Other variables considered in the review of related literature are human capital (education and health) and expenditure on national defence (Mann, 1994; Usman, Mobolaji, Kilishi, Yaru, & Yajuku, 2011). Economic growth is measured by real gross domestic product (GDP). The study which covers a period of 33 years (1981-2013) is carried out to compliment the work of other researchers who have not considered the variable combination considered in this work. Another reason for focusing this study on Nigeria is because of the impressive growth rate of real gross domestic product that have averaged 5.15 per cent (IMF World Economic Outlook, October 2013).

 

• STATEMENT OF THE RESEARCH PROBLEM

In the last two decades, government expenditure in Nigeria has been rising rapidly, with the structure now tilted toward recurrent expenditure. Between 1997 and 2012, consolidated government (Federal, States & Local government) expenditure rose from N551bn to N9.5tn, a massive 683 per cent jump in 15 years, increasing at an annual average rate of 22 per cent. Recurrent expenditure grew by 742 per cent during this period, while capital spending grew by 586 per cent (CBN Statistical Bulletin, 2012).

Equally important is the composition of government expenditures, which reflects government spending priorities. The top three expenditures for Nigeria in 2013 were education, defence, and police formations and command. It is noteworthy that among the top ten priority on the spending list, security related departments appear three times.

 

However, the rising government expenditure has not translated into meaningful growth and development, as Nigeria ranks among the poorest countries in the world. In addition, many Nigerians have continued to wallow in abject poverty, because nearly 70 per cent of over 160 million of the population are poor. To worsen the situation is the dilapidated state of infrastructure (particularly public transport, power supply and roads) that has led to the collapse of many industries, exacerbating unemployment (Nurudeen & Usman, 2010). For a rich country, it is contradictory having nearly 70 per cent of its population living in poor conditions, its infrastructures in a state of degeneration, its education, health and other growth-promoting and welfare-enhancing institutions in near state of collapse. In the same vein, the roads (virtually all) have become deadly to drive on because of their state, and the power sector is moribund (Nurudeen & Usman).

 

On this basis, it is expected that the share of capital expenditure in the total expenditure dominates that of recurrent expenditure, considering the role it plays in economic growth and human development, but this has not been the case in Nigeria. The high and increasing rate of unemployment, illiteracy, poverty (expressed as the number of people living in shanties and ghettos, with little or no access to quality education, medicare, potable water, low human development index, do not correspond with the ever rising expenditures dominated by recurrent expenditure.

In the light of this, it is appropriate to reason that increase in government spending and change in expenditure composition help or hinder economic growth. Also, whether an increase in spending in capital and recurrent expenditure effective in improving human development outcomes and complementing private sector investment; whether such public expenditure boost long-term growth given the weakness in public budget administration that plague the country.

Given the issues raised above, it is important to examine the effect of public expenditure on economic growth in Nigeria using GDP as dependent variable, and capital expenditure and recurrent expenditure as independent variables adopting time series data.

• RESEARCH QUESTIONS

This research will seek answers to the following questions:

1. How far does capital expenditure affect economic growth in Nigeria?
2. How far does recurrent expenditure impact on economic growth in Nigeria?
3. To what degree does a cointegrating relationship exist between government expenditure and economic growth?
4. Would a causal relationship exist between government expenditure and economic growth in Nigeria?
5. How far does total government expenditure impact on economic growth?

 

• OBJECTIVES OF THE STUDY

The main focus of this paper is to examine the effect of public expenditure on economic growth in Nigeria. The specific objectives, however, include:

1. To examine the effect of capital expenditure on economic growth in Nigeria.
2. To analyse the impact of recurrent expenditure on economic growth in Nigeria.
3. To investigate whether a cointegrating relationship exists between government expenditure and economic growth
4. To find out the direction of causality between government expenditure and economic growth in Nigeria.
5. To examine the effect of total government expenditure on economic growth.

 

• RESEARCH HYPOTHESES

The following research hypotheses were tested in this study:

1. Capital expenditure did not have a positive and significant effect on economic growth in Nigeria.
2. Recurrent expenditure did not have a positive and significant effect on economic growth in Nigeria.
3. Aggregate government expenditure did not have during the period a cointegrating relationship with economic growth in Nigeria.
4. Capital expenditure and recurrent expenditure did not have a causal relationship with economic growth in Nigeria.
5. Aggregate public expenditure did not have during the period a positive and significant effect on economic growth in Nigeria.

 

 

• SCOPE OF THE STUDY

This study examined the relationship between public expenditure and economic growth in Nigeria, with a view to establishing the existence or otherwise of any long-term relationship and direction of causality among the variables. Public expenditure was considered in disaggregated form – capital expenditure and recurrent expenditure, they acting as independent variable while real gross domestic product proxied economic growth. Time series data from 1981 to 2013 was utilised indicating the period before, during and after the structural adjustment (SAP) periods; while applying Ordinary Least Square (OLS) technique.

 

• SIGNIFICANCE OF THE STUDY

This study will be most significant to the following groups.

1. Policy Makers/Government Authorities:

The empirical findings should help in determining appropriate policy measures to address some of the fiscal challenges facing Nigeria. According to Sanni (2007), Nigeria’s fiscal processes over the years have resulted in varying degrees of deficit; the financing of which has had remarkable implications for the economy. The study makes a modest contribution to the body of knowledge on the nexus between government expenditure and economic growth, using time series data.

Several lessons can be drawn from this study. It was established that various types of government spending have differential impacts on economic growth, implying greater potential to improve efficiency of government spending by reallocation among sectors. Furthermore, governments should reduce their spending in unproductive sectors such as defence (results show defence spending does not impact growth), and curtail excessive spending in those areas that do not provoke economic chain reaction in the aggregate economy. Rather, government should increase spending on production-enhancing and human capital development investments such as health, education and agriculture. This type of spending will not only yield high returns to agricultural production, but will also have a large impact on poverty reduction since most of the poor still reside in rural areas and their main source of livelihood is agriculture (Olufeagba, 2014).

This study incorporates the most recent data and employs both qualitative and a more advanced econometric technique model to study the effect of public expenditure on economic growth. Thus the outcome of this study will provide result and policy implication to policy makers by bridging the aforementioned gap – the gap existing between sectorial budgetary allocation and real growth.

2. Academia

This work is aimed at contributing in enriching empirical literature in the area of public finance, specifically the effect of public spending on economic growth for a developing economy like Nigeria. Despite its importance, though some work has been done, there is still more need for empirical work in the area of economic growth and development in Nigeria. Furthermore, this study will likely provoke and pave a way for further studies in the area as it reveals the difficulty in resolving the empirical question of the effect of government spending on growth.

3. General Public

The outcome of this study, it is hoped will be of immense benefit to the general public, particularly those interested in public finance. Politicians will also benefit from this research.

• LIMITATIONS OF THE STUDY

One of the limitations of this study arises from lack of consensus on the causes of economic growth. Economists are not yet certain about the relative importance of factors which affect economic growth. With such knowledge lacking, it becomes difficult to draw any meaningful conclusion on the effect of government expenditure on economic growth.

Another limitation of the study is that it does not explicitly consider the quality of government spending, which is probably the most important factor. The calibres of civil servants and the conditions in which they function have impact on creative and efficient use of public resources. Unproductive public spending can take various forms, including spending on wages and salaries of unproductive or ghost workers. Public spending is also unproductive when government expenditure does not reach designated spending objectives. This happens for example when government officials are corrupt and seek bribeor preferentially selecting beneficiaries of government programmes, and for authorising private investment projects.

The data used for this study covers only the period 1981 to 2013, no matter the relevance of time series data for any period before or after this period for this analysis, are not considered. The variables included in the study are real gross domestic product (RGDP), capital expenditure (CAPEXP) and recurrent expenditure (RECEXP). No matter the relevance of other variables in explaining the effect of public expenditure on economic growth, they are not included.

• OPERATIONAL DEFINITION OF TERMS

Capital expenditure. Refers to expenditure on fixed assets such as roads, schools, hospitals, building, plant and machinery etc., the benefits of which are durable and lasting for several years (nairaproject.com/m/projects/458.html).

Classical economics. The macroeconomic generalizations accepted by most economists before 1930s which led to the conclusion that a capitalist economy could employ its resources fully (https://www.studyblue.com).

Current (Recurrent) Expenditure. Refers to spending on wages and salaries, supplies and services, rent, pension, interest payment, social security payment. These are broadly considered as consumable items, the benefits of which are consumed within each financial year (Anyafor, 1996).

Economic Growth represents the expansion of a country’s potential GDP or output. Growth means an increase in economic activities. According to Kuznets (1971), a country’s economic growth may be defined as a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity based on advancing technology and the institutional and ideological adjustments that it demands. Increase in an economic variable, normally persisting over successive periods. Increase in real output or in real output per capita. The variable concerned may be real or nominal GDP (Kuznets, 1971).

Government Expenditure. Spending by government at any level. It consists of spending on real goods and services purchased from outside suppliers; spending on employment in state services such as administration, defence, education and health; spending on transfer payment to pensioner; spending on community services; spending on economic services (Ekpo, 1994).

Gross Domestic Product. Refers to the money value of goods and services produced in an economy during a period of time irrespective of the people (Erkin, 1988).

Health Financing. The World Health Organization (WHO) defines health financing as the function of a health system concerned with the mobilization, accumulation and allocation of money to cover the health needs of the people, individually and collectively, in the health system. It states that the purpose of health financing is to make funding available, as well as to set the right financial incentives to providers, to ensure that all individuals have access to effective public health and personal health care (WHO, 2000).

Human Development Index (HDI). A comparative measure of life expectancy, literacy, education, and living standards. It is a standard means of measuring well-being. It is used to distinguish whether the country is a developed, developing, or underdeveloped country, and also measures the impact of economic policies on quality of life (UNDP, 2013).

Keynesian Economics. The macroeconomic generalization that lead to the conclusion that a capitalistic economy does not always employ resources fully (Keynes, 1936).

Market Failure. Refers to a label for the view that the market does not provide panacea for all economic problems (Anyafor, 1996).

Neo-Classical Economics. The theory that, although unanticipated price level changes may create macroeconomic instability in the short-run, the economy is stable at full employment level of domestic output in the long-run because of price and wages flexibility (Kalio, 2000).

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EFFECTIVE OF CREATIVE ACCOUNTING ON SHAREHOLDERS WEALTH IN A MANUFACTURING FIRM

INTRODUCTION

1.1       Background of the Study

Globally, for users of financial report to make economic decisions, financial reports must provide useful information (Ezeani, Ogbonna & Ezemoyih, 2012). This information can only be useful if it fulfills basic qualitative characteristics of financial statements (Amat & Gowthorpe, 2010). The International Accounting Standard Board (IASB, 2009) Framework emphasizes that relevant financial information should be predictive or confirmatory in nature. This should be such that the financial information of a specific entity was considered material when its omission influences economic decision of its users.

Sawabe (2009) emphasized the innovative aspects of creating accounting in maneuvering accounting numbers and argued that innovation is an essential part of creative accounting practices involved in innovative accounting practices. The managers are entrusted to take care and grow the shareholders‟ wealth. Salome, (2012), explains that information asymmetry creates agency conflict between management and shareholders as explained the agency theory. Accountants, who are stewards of shareholders, collaborate with directors in manipulating accounting figures rather than showing a true and fair view of financial accounts. A need therefore arises to identify creative accounting practices, how they are practiced, as well as looking at the effect they have on shareholders’ wealth.

According to Gherai and Balaciu(2011), the anticipations of a company becoming reality, a great need to generate trust with an accurate image reinforces a feeling that such a company practicing transparency is safe. The freedom of decisions allowed by most accounting regulatory bodies are characterized by inadequacy of accounting regulations, their heterogeneity and the evolving process of harmonization encourage an increase in creative accounting practices. They also emphasized that creative accounting and fraud are practiced when enterprises face financial difficulties and are motivated by the desire to deceive. These practices disappeared only with the fading of their primary causes.

Simser (2008) elucidates that taxpayers are required to pay taxes based on accounting and legal advice provided which should be aligned to the firm’s financial reports and the existing tax rules. Taxation is complex and exploring the tax system requires the guidance of skilled lawyers, accountants and other advisors. Tax evasion is unacceptable and/or illegal while tax avoidance is perfectly acceptable however there is no clear line between the two. This is the dilemma that is faced by the advisors. Tax evasion is perpetrated through acts such as presenting incorrect statement of accounts, making false entries or alterations, or false books or records, destruction of books or records, concealment of assets or covering up sources of income constitute tax evasion (Malkawi, and Haloush, 2008).

Ozkaya, (2014) studied creative accounting practices in the Turkish government specifically in the public sector. These practices manifested in hidden debts affecting IMF‟s stabilization programme forecasts. Odia and Ogiedu(2013) stated that in Nigeria the creative accounting practices are prevalent and attributed to bad corporate governance. Salome, (2012) studied strategies used by accountants in Nigeria to practice creative accounting and found out that they use profit eroding mechanisms which lead to drastic consequences like corporate scandals and collapse both international and locally as in the case of WorldCom and Enron. In Nigeria, there are companies that over-report their Shareholders wealth to meet targets and please ever demanding shareholders. This highlights the existence of creative accounting. According to Kamau et al., (2012), this trend has now more than ever ensures that financial statements are sternly scrutinized. Kotter (2008), discovered robust association between the variables (creative accounting and Shareholders wealth) among listed companies in Nigeria. Most companies use creative accounting practices abusively.

Shah, (2011) explained creative accounting as the intentional influence exerted on financial reported figures to suit the impression of managers to stakeholders by a view other than the actual performance or financial position of the company by applying accounting knowledge and discretion within the jurisdiction of laws set up by accounting regulatory bodies.

Practices of creative accounting has facilitated many companies beyond financial crises than put them into crisis. The fault when it emerges lies with the user of the financial information. A study carried in India by Shah et al., (2011) clearly showed how creative accounting was used to by companies producing cement during financial crises in the country. Many companies used the creative accounting techniques to remain afloat. Companies showed profits or minimized losses by change of depreciation policy when demand and production of cement was low. This kept investors reasonably comforted and staff relaxed by paying out dividends out of the profits. Shareholders‟ wealth was increased as per the reported profits. Even when demand and production increased they did not change the accounting policy.

With increasing hard economic times, companies may be motivated to practice creative accounting for diverse reasons. Players in the accounting profession may not fully understand the operations of creative accounting because different companies practice creative accounting for different reasons. Carrying out research on the effect of creative accounting practices on shareholders wealth of audit firms in Nigeriahelped the players in accounting profession to empirically understand the implications of such practices on shareholders wealth of firms in Nigeria

It is upon this backdrop that the study intends to find out whether such practices as tax avoidance, accelerated depreciation, and income smoothing as part of the major creative accounting practices have an influence on the shareholders wealth of selected auditors in Nigeria.

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ABSTRACT

Foreign trade enlarges the market for a country’s output. Exports may lead to increase in national output and may become an engine of growth. Expansion of a country’s foreign trade may energize an otherwise stagnant economy and may lead it on to the path of economic growth and prosperity. The relationship between trade and growth is envisaged through an export led growth strategy. The study focuses on Impact of International Trade on Growth of the Nigerian economy. In carrying out this project, linear multiple regression analysis techniques was used in assessing various components of foreign trade. Data used in this study were extracted from CBN statistical bulletin, 2011 edition; secondary data for the period 1980 to 2012 was used for the study.  The regression analysis was carried out using E-views statistical tool. From the analysis the results shows that  export, exchange rate, foreign direct investment are positively related while import is negatively related to output (proxy by GDP) of Nigeria and the Adjusted R2 is 0.96 for the period of 1980-2012. This study has examined the performance of foreign trade in relations to economic growth in Nigeria. It is therefore concluded that, conscious efforts should be made by government to fine-tune the various macroeconomic variables in order to provide an enabling environment to stimulate foreign trade by engaging in more of export trade and in effect curtail on import trade which has a negative effect or strain the economy. Also government should encourage export diversification.

 

CHAPTER ONE

INTRODUCTION

 

1.1 Background of the Study

Starting from Adam Smith’s discussion on specialization and the extant of the market by international trade, to the debates about import substitution versus exported growth (growth based on exporting more goods and services), to recent work on increasing returns and endogenous growth models, there are increasing debates among economists about the international trade and economic growth ( Dushko and Darko2012).

Economists have long been interested in factors which cause different countries to grow at different rates and achieve different levels of wealth. One of such factors is trade. Nigeria is basically an open economy with international transactions constituting a significant proportion of her aggregate output (Mike and Okojie 2012). The Nigerian government like many other developing countries considers trade as the main engine of its development strategies, because of the implicit belief thattrade can create jobs, expand markets, raise incomes, facilitate competition and disseminate knowledge (Ogbajiand Ebebe 2013).Nevertheless, while trade between countries may generate growth globally, there are no guarantees that its aggregate benefits are distributed equitably among trading partners. There are winners and losers in any trading relationship. However trading partners all may gain differing degrees. Many factors determine the extent to which a country may benefit from a trading relationship. These include the terms of trade a country faces vis-à-vis its trading partners, the international exchange rate among the traded goods and the market characteristics of the country’s exportable goods (Eravwoke and Oyovwi 2012).This has been the experience of Nigeria since the 1960s even though the composition of trade has changed over the years. Foreign trade has been an area of interest to decision makers, policy makers as well as economists. It enables nations to sell their locally produced goods to other countries of the world (Adewuyi, 2000) as quoted by (JohnAiyelabola 2012).The word trade has been defined in the Oxford Advanced Learner dictionary as “the activity in which people are buying and selling or exchanging the goods and services between countries”.  International trade is the exchange of capital, goods, and services across international borders. Zahoor,Imran,Anam,Saif-ullaha,Ashraf (2012) said it is a system where the goods and services are advertised, sell and switched between two or more than two countries through import and export.

The role of foreign trade in economic development is considerable. The classical and neo-classical economists attached so much importance to foreign trade in a nation’s development that they regarded it as an engine of growth. Over the past several decades, the economies of the world have become greatly connected through international trade and globalization. Foreign trade has been identified as the oldest and most important part of a country’s external economic relationships. It plays a vital and central role in the development of a modern global economy. Its impact on the growth and development of countries has increased considerably over the years and has significantly contributed to the advancement of the world economy. The impact of foreign trade on a country’s economy is not only limited to the quantitative gains, but also structural change in the economy and facilitating of international capital flow. Trade enhances the efficient production of goods and services through allocation of resources to countries that have comparative advantage in their production. Foreign trade has been identified as an instrument and driver of economic growth (Frankel and Romer, 1999).

According to Oluwasola and Olumide(2012), 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 consume goods and services which they do not produce. They further said that the 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.

The current period in the world economy is regarded as period of globalization and trade liberalization. In this period, one of the crucial issues in development and international economics is to know whether foreign trade indeed promotes growth. With globalization, two major trends are noticeable: first is the emergence of multinational firms with strong presence in different, strategically located markets; and secondly, convergence of consumer tastes for the most competitive products, irrespective of where they are made. In this context of the world as a “global village”, regional integration constitutes an effective means of not only improving the level of participation of countries in the sub-region in world trade, but also their integration into the borderless and interlinked global economy.

Foreign trade allows a country or nation to expand her markets for both goods and services that otherwise may not have been available to her citizens. Foreign trade means per capita income has been based on the domestic production, consumption activities and in conjunction with foreign transaction of goods and services.

It has been established in several literatures that export trade is an engine of growth. It increases foreign exchange earnings, improves balance of payment position, creates employment and development of export oriented industries in the manufacturing sector and improves government revenue through taxes, levies and tariffs. These benefits will eventually transform into better living condition for the nationals of the exporting economy since foreign exchange derived would contribute to meeting their needs for some essential goods and services. However, before these benefits can be fully realized, the structure and direction of these exports must be carefully tailored such that the economy will not depend on only one sector for the supply of needed foreign exchange (John and Aiyelabola 2012).

Foreign trade has been regarded as an engine of growth (Adewuyi, 2002). Foreign trade as it has been regarded as an engine of growth must lead to steady improvement in human status by expanding the range of people’s standard and preference. Since no country has grown without trade, foreign trade plays a vital role in restructuring economic and social attributes of countries around the world, particularly the less developed countries (Usman 2011).

Though international trade can be made up of Foreign Direct Investment and Foreign Portfolio Investment, Foreign Direct Investment is often preferred as a means of boosting the economy. This is because FDI disseminates advanced technological and managerial practices through the host country and thereby exhibits greater positive externalities compared with Foreign Portfolio investment which may not involve positive transfers, just being a change in ownership. In addition, available data suggest that FDI flows tend to be more stable compared to Foreign Portfolio Investment (Lipsey, 1999). This is because of the liquidity of Foreign Portfolio Investment and the short time horizon associated with such investments. Also, FDI inflows can be less affected by change in national exchange rates as compared to Foreign Portfolio Investment. However, a balanced combination of the two, taking into consideration the unique characteristics of the recipient economy will bring about the required effects on the economy (Tokunbo and Lloyd 2010).

Since the 1980s, flows of investment have increased dramatically the world over. Despite the increased flow of investment to developing countries in particular, Sub-Sahara African (SSA) countries are still characterized by low per-capita income, high unemployment rates and low falling growth rates of GDP, problems which foreign private investment are theoretically supposed to solve.  Nigeria, being one of the top three countries that consistently received FDI in the last decade is not exempted from this category (Ayanwale, 2007).

Growth performance of the Nigerian economy has been determined by both domestic production and consumption activities as well as foreign transactions in goods and services. Before her political independence, the Nigerian economy was well known for its exports-driven growth particularly before the discovery of oil when the country used to record a huge success in the export of non-oil products especially agricultural produce. It is obvious that for long the non-oil exports in Nigeria had been taken over by the oil sector, even though the performance of the economy in the last decade was quite very surprising. This is partly because of the country’s stronger ties with developed and emerging economies especially after the transition to civilian rule in 1999 and partly the recent global economic and of course Niger Delta crises, which rendered the oil sector at disadvantage when it comes to the sector’s contribution to the growth of the economy. This underscores the need to not only diversify the economy but also target the country’s rate of growth through agricultural and non-oil exports. This is also particularly important when one considers the comparative advantage the country has had in agricultural and non-oil exports as a labour abundant economy with huge minerals and arable but uncultivated lands (Sikiru, Shehu Dan, DOGON-DAJI, Jimoh 2012).

Before the discovery of oil in 1960’s, the Nigerian government was able to execute investment project through domestic savings, earning from agricultural product exports and foreign aids. Since the advent of oil as a major source of foreign exchange earning Nigeria in 1974 the picture has been almost that of general stagnation in agricultural exports. This led to the loss of Nigeria’s position as an important producer and exporter of palm oil produce, groundnut, cocoa and rubber (CBN annual report, 2006). Between the year 1960 and 1980, agricultural and agro-allied exports constituted an average of sixty percent of total export in Nigeria, which is now accounted for, by petroleum oil export.

Furthermore, by 1977, export stood at N7, 881.7 million. Between 1960 and 1977, value of export grew by 19 percent.  It should be noted that before 1972, most of the export were agricultural commodities like cocoa, palm produces, cotton and groundnut. Thereafter, minerals, especially crude, petroleum, became significant export commodities. Imports also increased in values during the period. By 1960, import were valued at N432 million. They increased to N758.99 million and N8.132 million in 1970 and 1978 respectively, rising to N124, 162.7 million in 1992 and N681, 728.3 million in 1997.

However, from 1974, food import became noticeable in Nigeria foreign trade. The country had an unfavourable trade balance from 1960 to 1965, partly because of the aggressive drive to import all kinds of machinery to stimulate the industrialization strategy pursued immediately after independence. Thereafter, export of crude petroleum guaranteed a favourable trade balance. The oil sector dominates export while the non oil sector dominates import. Between 1960 – 1970 oil export grew by 44.6 percent and 31.6 percent respectively. Also, for this period, non-oil export showed marginal growth of 1.2 percent and 6.6 percent.

In addition, in 2005, Nigeria imported about US$26 billion of goods. In 2004, the leading sources in import were China (9.4 percent), The United States (8.4 percent), the United Kingdom (7.8 percent), the Netherlands (5.9 percent), France (5.4 percent), Germany (4.8 percent), and Italy (4 percent). Principal imports were manufactured goods, machinery and transport equipment, chemical and food and live animal. Also in 2005, Nigeria exported about US$52 billion of goods. In 2004, the leading destinations for export were the United State (47.4 percent), Brazil (10.7 percent), and Spain (7.1 percent). In 2004, oil accounted for 95 percent of merchandise export, and cocoa and rubber accounted for almost 60 percent of the remainder. Nigeria exports go to almost the same source where her imports come from (Usman 2011).

The Nigerian Government is putting so much effort into attracting foreign investors and yet the economy is still dwindling (Tokunbo and Lloyd 2010)

In response to these enormous problems, Structural Adjustment Program (SAP) was introduced in 1986 in the country. This was to liberalize and diversify the economy. With SAP in place, several export promotion strategies and policies especially on manufacturing export were formulated, which include various incentives on export, Research and Development (R&D) etc. Despite this effort to improve and diversify export the outcomes were not recommended. This was because the share of manufacturing export remains so low in the total export earning as compared to the oil sector in particular or primary goods in general. Evidence shows that the share of manufacturing export as percentage of total export remains less than 1 percent up to year 2000, as compared to average level of other sub-Saharan African countries of 6.2 percent of more than 70 percent of Eastern Asian countries. This is the nature and trend of Nigeria’s export over decades as well as how, from experience, the fluctuations in the volume of the export affect the level of economic growth.(John and Aiyelabola 2012).

Since the last twenty years, economic policy in Nigeria can be characterized by trade liberalization and regional integration which is defined by the radical reducing or removal of trade barriers. The World Trade Organization (WTO) the IMF and especially the World Bank (WB) have obtained considerable powers to sway policies in countries towards this path. As a part of the global Structural Adjustment Programme, it is assumed and argued that trade liberalization improves the welfare of consumers and trims down poverty. The assertion was two-fold and simple. First, it is argued that liberalization offers wider room for choice from an array of quality goods and cheaper imports also find more lucrative markets in which their products can be sold. A second argument is that, the production of goods in which a country has comparative advantage expands, while the sectors with comparative disadvantage minimize. This is believed to lead to an overall rise in real GDP since there would be reallocation of the productive factors from less efficient sectors to more efficient sectors (John and Aiyelabola 2012). Therefore, research on how international trade contributed to Nigeria’s economy growth can serve as a distinguishing case study revealing a latecomer catches up with forerunners by increasing his participation on the global stage. Against this background, this study is focused on analyzing and making attempt to advance on other works in international trade and growth of the Nigerian economy from 1980-2013 with main focus on Nigerian non-oil sector

 

1.2 Statement of the Problem

The importance of international trade in the development process has been of interest to development economists and policy makers alike. Imports and exports are a key part of international trade and the import of capital goods in particular is vital to economic growth. This is so because imported capital goods directly affect investment, which in turn constitutes the motor of economic expansion. Economic reform is expected to affect imports as part of the strategy to restore external balance. However, unless policy makers know what the major components of imports are and how they are determined, such a policy decision can be harmful to investment and output if domestic production relies on imports. In Nigeria, some people are in favour of protectionist and highly regulated economy and have even criticized the previous Nigerian government, for signing the treaty of the World Trade Organization (WTO), claiming that, Nigeria was not adequately represented in the negotiations and should push for a fairer deal. As regards to this statement, some people, particularly economists pushed for the implementation of the Structural Adjustment Programme (SAP) in 1986 which brought about deregulation of formerly regulated areas of the economy, so that the country could reap the benefits of economic openness.

Promotion of economic growth is one of the objectives of foreign trade but in recent times, this has not been the case because the Nigerian economy still experience some element of economic instability such as high level of unemployment, price instability and adverse balances of payment to mention a few.

A recent study  by the U.N. Secretariat provides ample  proof, that the problem  of  the economic development of the low-income  countries  cannot be solved  without  these  countries  becoming not only producers, but  also exporters of manufactured goods, on  an important scale. At present 86 per cent of the exports of the developing countries consists of primary products, and only 14 percent of manufactured goods. If the primary  exporting regions were to continue to depend mainly on the exports  of primary products,  their export receipts  to the outside world could not be  expected to  increase by more than three per cent annually, even if their export prices remained constant. Their import requirements, on the other hand, would be bound to increase  faster  than their domestic product mainly because their import requirements for capital goods  increase  faster  than their domestic  fixed capital  formation, and also because their own  income elasticity  of imports of consumer goods and raw materials  are high (Nicholas 2000).

One of the motives why benefits of foreign trade cannot be translated into economic growth is the macroeconomic policy distortions resulting from the trade which turned the country into an import dependent economy. The import of the country grew from N0.7 billion in 1970 to over N562 billion in 1996 and later increase to N1, 266 billion in 2001, (CBN Annual Report, 2004). Also as one of the reason why the benefits of foreign trade cannot be translated into economic growth is that most of the goods and services exhibited are in respect to service rendering.

The importance of foreign trade in the Nigeria economy has grown rapidly in recent time, especially since 2002. Economic openness, measured as the ratio of export and imports to GDP has risen from just above 3 percent in 1991 to over 11 percent in 2008. The moderation in the growth rate of trade in 2008 partly reflects the unrest in Nigeria’s oil producing Niger Delta region, which resulted in significant disruption in oil production and shortfalls in oil export from Nigeria(Usman 2011).

Furthermore, foreign trade has not accrued into economic growth because some of the goods imported into the country were those that cause damages to local industries by rendering their product inferior and being neglected, this thereby reduces the growth rate of output of such industries and this later spread to the aggregate economy.

For this reason, it is worthy of note to analyze the international trade and growth of the Nigerian economy, laying emphasis on Nigerian non oil sector. The main thrust of this research is to take an objective view regarding the controversy of the role of international trade, in the progress of a country in terms of economic growth of Nigeria. It is evidenced that Nigeria is practicing a mono economy system i.e a heavy dependence on oil for its foreign exchange earnings. It has also been observed that Nigerian governments have seriously neglected the non-oil sector which has been our major source of foreign exchange earnings in the early 1960s. This study seeks to analyze critically, Nigeria’s involvement in international trade and the contributions of the non-oil sector so far from 1980-2012 and proffer solutions on how Nigerian governments can revitalize the sector so as to attract foreign direct investment (FDI), and achieve a favourable balance of payment which will invariably lead to economic growth.

 

1.3 Objective of the Study

The main objective of this study is to evaluate the performance of foreign trade and its contribution to economic growth in Nigeria. Specifically the research work will focus on the following objectives:

 

1. To ascertain the impact of export trade on the Nigerian economy
2. To determine the impact of import trade on the Nigerian economy

• To assess the effect of exchange rate on economic growth in Nigeria.

1. To find out the consequence of foreign direct investment on Nigerian economic growths.

 

1.4 Research Questions

The study shall be guided by the following research questions,

1. To what extent does export impact on economic growth in Nigeria?
2. To what extent does import impact on economic growth in Nigeria?

• How far does an exchange rate have impact on economic growth in Nigeria?

1. What are the effects of foreign direct investment on economic growth in Nigeria?

 

 

1.5 The Research Hypotheses

H0: Export trade does not have a significant positive impact on the Nigeria’s economic growth

H0: There is no significant impact of import trade on the Nigerian economic growth

H0: Exchange rates do not have positive impact on the Nigerian economic growth

H0: Foreign direct investment does not have any impact on the Nigerian economic growth

 

1.6 Scope of the Study

This research work is going to cover Nigeria international trade involvement from the point of Import and Export activities within the period 1980-2012 (32 years).This period is believed to cover the major part of Nigerian participation in international trade;it is within the geographical zone of Nigeria. Thus, it is a country-specific research. This research exercise, like every other research work, is really a rigorous one that consumes much time and energy especially in the area of data sourcing, data computation and modeling. This work is relatively limited base on time constraints, data availability, precision of data and data range, and methodology adopted which could further be verified by future research. Nevertheless, the researcher has properly organized the research so as to present dependable results which can aid effective policy making and implementation at least for the time being.

 

1.7 Significance of the Study

The findings of this research work transcend beyond mere academic brainstorming, but will be of immense benefit to, policy makers, intellectual researchers, government students and the general public.

Policy makers: This  study  will  be  essential  to  policy  maker  to  know  more  about  the  performance  of  foreign  trade  and economic growth.

Academic researchers: It will assist in providing the frame work of where work has been done by earlier researchers. It will also provide a framework on which further research in foreign trade could be carried out.

Student: This research work will further serve as a guide and provide insight for future research on this topic and related field for students who are willing to improve it.

Government: It will also help the government to see the effectiveness of trade liberalization policy on the economic growth of the nation over the years.

General public: It will also educate the public on various government policies as related to trade issues.

 

1.8 Operational Definition of Terms

International Trade: It is a system where the goods and services are advertised, sell and switched between two or more than two countries through import and export.

Foreign Portfolio investment: It is the entry of funds into a country where foreigners make purchases in the country’s stock and bond markets.

Exchange Rate: It is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency.

Globalization: It is the closer integration of countries and peoples of the world and the breaking down of artificial barriers to the flow of goods, services, capital, knowledge and people across national borders; a process of creating a global market of investments, trade and information through the integration of economic decision making on consumption, investment and savings across the world (Bank of Industry 2004:1)

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