Impact of Trade Reform on Nigeria's Trade Flows

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Impact of Trade Reform onNigeria's Trade FlowsAdeolu O. Adewuyi a & Godwin Akpokodje ba Department of Economics , University of Ibadan ,Ibadan, Nigeriab Economic Development Division, Nigerian Instituteof Social and Economic Research (NISER) , Ibadan,NigeriaPublished online: 12 Oct 2010.

To cite this article: Adeolu O. Adewuyi & Godwin Akpokodje (2010) Impact of TradeReform on Nigeria's Trade Flows, The International Trade Journal, 24:4, 411-439, DOI:10.1080/08853908.2010.513642

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IMPACT OF TRADE REFORM

ON NIGERIA’S TRADE FLOWS

Adeolu O. Adewuyi

Department of Economics, University of Ibadan, Ibadan,Nigeria

Godwin AkpokodjeEconomic Development Division, Nigerian Institute of

Social and Economic Research (NISER), Ibadan, Nigeria

This study examines the impact of trade liberalizationon Nigeria’s trade flow. It covers the period from 1973 to2006 and employs the Ordinary Least Squares (OLS) andGeneralized Method of Moment (GMM) techniques. Resultsreveal among other findings that all categories of export exceptoil perform better during the trade liberalization period thanbefore the trade liberalization period. Further analysis sug-gests that while the impact is significant enough to producepositive growth of manufactured exports, it is not so in thecase of agricultural and aggregate non-oil exports. The resultsindicate that all categories of import experience improvedperformance during trade liberalization compared to the pre-liberalization period. However, the result suggests that in mostcases the impact is not strong enough to turn the mean growthof imports positive. The study concludes that trade liberalizationhas not produced an impact that is significant enough to boostNigeria’s trade flows.

Correspondence should be addressed to Adeolu O. Adewuyi,Department of Economics, University of Ibadan, Ibadan, OyoState, Nigeria. E-mail: [email protected]

411THE INTERNATIONAL TRADE JOURNAL, Volume 24, No. 4, October–December 2010

ISSN: 0885-3908 print/1521-0545 online. DOI: 10.1080/08853908.2010.513642

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412 THE INTERNATIONAL TRADE JOURNAL

KEYWORDS trade liberalization, trade flows, exports,imports, Nigeria

* * * * *

I. INTRODUCTION

This study examines the impact of trade liberalization onNigeria’s trade flow. The significance of this issue lies in the ideathat the Nigeria government is confronted with challenges oftrade reform from all fronts (unilateral, bilateral/regional, andmultilateral). Trade reform has been adopted with the basicobjective of promoting non-oil exports and reducing the levelof import dependency.

Trade has been widely accepted as a major engine of eco-nomic growth. Indeed, this has been the experience of Nigeriaover the years. Prior to the 1970s, agricultural exports were thecountry’s main source of foreign exchange and taxes on agricul-tural products were a major source of revenue to the government.Current account and fiscal balances depended on the agriculturalsector during this period. But with the discovery and export ofcrude petroleum in the late 1960s and early 1970s agriculturalexports as apercentage of total exports declined from about 43%in 1970 to slightly over 7% in 1974.

The average annual growth rate of agricultural exportsdeclined by 17% from the mid- 1970s. The oil price shocks of1973–1974 and 1979 were a major cause of this development, theresult of which were the large receipts of foreign exchange bythe country and the ensuing neglect of agriculture coupled withovervaluation of exchange rate (“Dutch Disease Syndrome”).As a result of the neglect and reduced competitiveness ofagriculture, Nigeria began to import agricultural products itformerly exported and other food crops it had been self-sufficientin. For example, between 1970 and 1982, Nigeria lost over 96.6%

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Adewuyi and Akpokodje: Impact of Trade Reform . . . 413

of her agricultural exports in nominal terms. Domestic food pro-duction also declined substantially, engendering huge food importbills to the tune of US$4 billion in 1982. Oil revenues provided thefinancing of the increasing imports. This ensured current accountpositive balances in 1979 and 1980.

But as a result of the plunge in the oil market in the early1980s, the country’s ability to finance the huge import bills andthe persistent current account deficits became threatened. Theresult was the accumulation of unpaid trade bills to the point thatforeign suppliers began to not honor letters of credit originatingfrom Nigeria. This precarious situation was further exacerbatedby the declining terms of trade during this period.

Several policy measures were put in place to checkmatethe deteriorating balance of payment position and the generaleconomic and social maladies confronting the country at thebeginning of the 1980s. But rather than attempt to stabilizethe economy, the government responded to the deteriorating eco-nomic environment by increasing trade protection and exchangecontrols in order to avoid a balance-of-payments crisis, whilemaintaining the unsustainable trend in aggregate demand.

The worsening macroeconomic imbalances led to capitalflight, depreciation of the exchange-rate (which was hitherto over-valued), and persistent fiscal deficits. An overvalued real exchangerate was often seen by the government not so much as an obsta-cle to growth, but, rather, as a convenient means to achievetwo objectives: as a complement to quotas and tariff barriers,to increase protection of highly import-dependent industries, aspart of import substitution strategies of industrialization; andto reduce the need to print money to cover the budget deficit,insofar as buying foreign exchange from the private sector at anofficial rate substantially below its market-clearing level implic-itly involves taxing the foreign exchange-earning export sector ofthe economy. The overvalued exchange rate was a major incen-tive for the rising importation of goods and a major disincentive

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for exports of both agricultural and manufactured goods whichpartly triggered the balance of payment disequilibrium in thecountry.

By 1986, it had become clear that more drastic policies wereneeded in order to put a halt to economic deterioration andsteer the economy back to a growth path. More specifically, itwas necessary that the rising and declining trends in importsand exports be reversed. In order to achieve this, there was theneed to reform the existing trade policy regime. This reform wascontained in the Structural Adjustment Program (SAP) whichwas introduced in mid-1986. During this period, various exportincentive schemes were introduced, tariffs were reduced substan-tially, import licenses were gradually rescinded, the export taxwas eliminated, and export promotion policies were pursued.

The major purpose of the change in trade policy regime,in the wake of the debt crisis of the early 1980s, was to accel-erate economic development and to “grow out” of debt. Tradeliberalization was undertaken with a view to stemming balanceof payment disequilibrium through its effects on exports andimports. The growth in Gross Domestic Product (GDP) has fluc-tuated over the years as the country staggered from one crisis toanother. However, growth has been higher during trade liberal-ization. For instance, the average growth rate of GDP increasedfrom 2.36% prior to liberalization (i.e., 1971–85) to 3.26% dur-ing liberalization (1986–2003). The emerging research questionsin this study include the following: Has there been any changein the structure and composition of imports and exports sincethe adoption of trade reform which informs the situation? Hastrade reform been able to stimulate exports, especially non-oilexports? What are the effects of trade reform on Nigeria’s tradeflows? This article examines these issues.

The above-mentioned issues are significant because the effectof trade liberalization on trade performance is a fundamental andcontroversial issue. This is a result of the tendency to improve

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imports more than exports resulting in trade deficits with neg-ative repercussions for economic growth. The initial consensusof a positive correlation between trade liberalization and highertrade volumes and between the latter and economic growth wasdebunked by Rodriguez and Rodrik (2000), thereby engenderingthe call for further empirical studies.

Furthermore, recent research on trade liberalization has notgiven much attention to the issue of imports. It is conceivable thattrade liberalization may lead to faster growth of imports thanexports if the country is highly protected in the pre-liberalizedperiod. The faster growth in imports in relation to exports couldhave serious implications for balance of trade and this in itselfcould constrain economic growth in a country. Trade liberaliza-tion may promote growth on the one hand from the supply sidethrough a more efficient allocation of resources while it may con-strain growth from the demand side unless a balance betweenexports and imports can be maintained through trade policiessuch as real exchange rate depreciation or deficits in the shortrun can be financed by capital inflows.

Econometric analysis conducted to address the issues in thisstudy reveals that foreign income has a significant enhancingeffect on exports of all categories. It also shows that the exchangerate reform in Nigeria (which leads to currency depreciation) pro-motes agricultural and non-oil exports but not manufactured andoil exports. The result indicates that all categories of exports,except oil, perform better during the trade liberalization periodthan before the trade liberalization period. This result is in linewith some previous studies such as Bleaney (1999) and Ahmed(2000). Further analysis suggests that while the impact is sig-nificant enough to produce positive growth of manufacturedexports, it is not so in the case of agricultural and aggregate non-oil exports. Domestic income has a significant positive impacton all categories of imports. The results indicate that all cate-gories of imports experience improved performance during tradecompared to the pre-liberalization period as mentioned in some

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studies including Bertola and Faini (1991). However, the resultsuggests that in most cases the impact is not strong enough toturn the mean growth of imports positive. The study concludesthat trade liberalization has not produced an impact significantenough to boost Nigeria’s trade flows.

A preview of the article is in order. First, a brief overviewof Nigeria’s trade liberalization is presented. A review of rele-vant empirical literature is contained in section three. Sectionfour focuses on the methodology while the results and discus-sions are presented in section five. The summary and conclusionare discussed in the sixth section.

II. NIGERIA’S TRADE PERFORMANCE ANDSTRUCTURE

Trade performance and structure as well as trade positionsin Nigeria are presented in Tables 1–3. Table 1 shows that realexport performance has been mixed over time. Real export ofgoods and services, which rose significantly during 1970 to 1980,fell by about 8.0% in the 1980–1985 period and later rose byabout 13.0% in the 1985–1990 period. The poor export perfor-mance in the 1980–1985 period was not unconnected with theunfavorable and fluctuating terms of trade as well as internalmacroeconomic crises which adversely affected domestic sup-ply capacity and the international competitiveness of exports.The adoption of the adjustment reform (SAP) might have ledto the improved export performance witnessed in the 1985–1990 period. However, by the 1990–1995 period, the improvedexport performance recorded in the previous period was not sus-tained as real export of goods and services declined by over5.0%. Nonetheless, real export of goods and services has risenby about 29.0 and 6.5% in the subsequent periods, 1995–2000and 2000–2006, respectively.

An examination of imports in Table 1 shows that real importswhich rose significantly during 1970 to 1980 fell by about 16.5

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Tab

le1

Tra

dePer

form

ance

inN

iger

ia

Indic

ato

r1970–1975

1975–1980

1980–1985

1985–1990

1990–1995

1995–2000

2000–2006

(A)

Gro

wth

Per

form

ance

Gro

wth

ofre

alex

port

sof

goods

and

serv

ices

15.3

18.4

−7.6

812

.86

−5.3

328

.88

6.3

Gro

wth

ofre

alim

port

of

goods

and

serv

ices

20.9

38.2

−16.

48−1

.61

3.75

7.35

4.6

(B)

Share

ofTra

de

inG

DP

Share

ofto

talex

port

sin

GD

P2.

628.

2818

.424

.62

36.9

40.7

438

.9

Share

ofoil

export

sin

GD

P2.

67.

6517

.77

23.2

935

.91

39.8

437

.83

Share

ofnon-o

ilex

port

sin

GD

P0.

520.

630.

631.

331

0.9

0.58

Share

ofto

talim

port

sin

GD

P2.

026.

9816

.94

13.5

925

.35

27.6

825

.53

Share

ofoil

import

sin

GD

P0.

070.

140.

331.

94.

496.

154.

47

Share

ofnon-o

ilim

port

sin

GD

P1.

566.

8616

.61

11.6

920

.86

21.5

321

.54

Share

ofto

taltr

ade

inG

DP

inG

DP

4.64

15.2

635

.34

38.2

162

.25

68.4

265

.5

(C)

Tra

de

Posi

tion

Curr

ent

Acc

ount

Bala

nce

−50

42.6

13057.9

10738.9

79810.1

−186085

1054888

(a)

Mer

chandis

eA

ccount

173

1487.1

13975.8

11421.4

76188

247178

1567454

(b)

Export

Acc

ount

891.4

5116.1

14.1

86

11.7

20.8

109880

825670

2924135

(c)

Import

Acc

ount

−718.4

−3629

−210.2

−229.4

−33698.1

−578492

−1356681

(d)

Ser

vic

esand

Inco

me

−268

−1367.7

−3462.2

−2617.7

−28998.3

−48411

−713654

Sourc

es:U

nder

lyin

gdata

obta

ined

from

Cen

tralB

ank

ofN

iger

ia(C

BN

),Sta

tist

icalBullet

in,and

AnnualRep

ort

and

Sta

tem

entof

Acc

ounts

,vari

ous

yea

rs.

417

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4


and 1.6% in the periods 1980–1985 and 1985–1990, respectively.Real imports rose steadily in the subsequent periods, 1995 to2006 by between 3.0 and 7.5%. The macroeconomic crises in theearly 1980s which adversely affected real export performance alsohindered imports. However, the improved income growth expe-rienced in the subsequent periods might have stimulated rapidgrowth of imports. Developmental programs and promotion ofprivate investment embarked upon in recent times might havealso contributed to rapid growth of real imports, particularlyfrom 2000 to 2006.

With respect to the contribution of external trade to grossdomestic output (GDP), it is revealed in Table 1 that the exportshare of GDP has risen persistently over time, while that ofimports has dwindled. The export share of GDP rose from 18.4%in the 1980–1985 period to 40.7% in the 1995–2000 period, andfell marginally to 38.9% in the 2000–2006 period. This impressiveexport performance was a result of the favorable development inthe oil export market over time, as the share of oil exports onlyin GDP rose from 17.8% in the 1980–1985 period to over 37.0%in the 1995–2006 period. The contribution of non-oil exports toGDP has been abysmally low over time. Consequently, Nigeria’sexport sector has remained undiversified despite all efforts includ-ing the reform programs and incentives. This therefore informs are-examination and fine tuning of reform policies and programsaimed at stimulating non-oil exports in Nigeria.

In the case of the share of imports in GDP, it has variedover time. The import share of GDP which was about 16.9% inthe 1980–1985 period, declined to about 13.6% in the 1985–1990period. Subsequently, it increased from about 25.4 and 27.7% inthe 1990–1995 and the 1995–2000 periods, respectively, beforeit dropped to 25.5% in the 2000–2006 period. The contributionof imports to GDP had been driven by non-oil imports as theyaccounted for an overwhelming proportion of the import share ofGDP.

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In general, the total trade share (exports and imports) inGDP had be in line with the trend of export share in GDP,which has consistently risen over time from over 35.0% during1980–1990 to over 65.0% during 1990–2006. This shows that thedegree of openness of the Nigerian economy has risen significantlyover time. There is need for diversification of the economy fromoil to non-oil activities such that manufacturing and other indus-trial sub-sectors will contribute immensely to exports and overalloutput.

Given the performance of exports vis-a-vis imports, it isexpected that current account positions will be favorable overtime. The merchandise account was favorable throughout theperiods under review, while the services and income accountswere unfavorable most times. However, the overall currentaccount position was favorable most years, particularly in theselected years except 1995 when it was unfavorable.

Nigeria’s export and import structures are presented inTables 2, 3. It can be observed from Table 2 that over the periodunder review, oil exports dominated total exports as its shareranged between 76.0 and 98.0%. Further, the table shows thatbeside 2000–2006 period, agriculture accounted for the substan-tial part of non-oil exports as its share was between 64.0 and72.0% during these periods. This implies that manufacturing’sshare of non-oil exports has been insignificant except in 2000–2006 when it was about 45.0%. Although agriculture’s share ofnon-oil exports has been substantial, its contribution to totalexports has been very low and declining, while manufacturing’sshare has been lower and less than 1.0% over time. It can beinferred from the table that, since mining accounted for over90.0% of total exports,any efforts directed at diversifying exportsfrom oil to non-oil products are yet to materialize. This situationhas made the Nigerian economy vulnerable to external shocksand has limited the scope and effectiveness of macro-economicpolicies in promoting external trade.

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Tab

le2

Stru

ctur

eof

Nig

eria

’sE

xpor

ts

Str

uct

ure

(%)

1970–1975

1975–1980

1980–1985

1985–1990

1990–1995

1995–2000

2000–2006

Share

ofoil

into

talex

port

s76

.992

.23

96.6

94.2

697

.33

97.6

797

.45

Share

ofnon-o

ilin

tota

lex

port

s23

.17.

773.

415.

742.

672.

332.

55Share

ofA

gri

cult

ure

innon-o

ilex

port

s67

.24

65.0

270

.89

64.9

872

.03

67.0

442

.52

Share

ofM

anufa

cturi

ng

innon-o

ilex

port

s15

.211

.15

12.3

86.

486.

3819

.23

45.6

6

Oth

ernon-o

ilex

port

s17

.56

23.8

316

.73

28.5

421

.69

13.7

310

.82

Tota

l100

100

100

100

100

100

100

Com

posi

tion

ofE

xport

sA

gri

cult

ure

15.3

84.

92.

23.

751.

931.

681.

46M

inin

g77

.82

92.2

496

.894

.27

97.3

297

.497

.34

Tex

tile

1.26

0.98

00.

050.

150.

130.

14M

anufa

cturi

ng

3.44

0.68

0.47

0.4

0.5

0.8

0.6

Oth

ers

2.1

1.2

0.58

1.5

0.1

0.18

0.23

Tota

l100

100

100

100

100

100

100

Sourc

e:U

nder

lyin

gdata

obta

ined

from

the

Cen

tralB

ank

ofN

iger

ia(C

BN

),Sta

tist

icalBullet

in,and

AnnualRep

ort

and

Sta

tem

ent

ofAcc

ounts

,vari

ous

yea

rs.

420

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In the case of imports, it can be seen from Table 3 that non-oil activity has dominated, as it accounted for between 77.0 and98.0% of total imports. It can be observed that the dominanceof non-oil activity has decreased over time due to the need toimport more refined oil products because of the poor state ofrefineries in the country. In this regard, the share of non-oil itemsin total imports which was about 98.0% during the 1980–1985period and declined to about 77.0% during the 1995–2000 period,even though it has risen again to about 82.0% during the 2000–2006 period. At the sectoral level, manufacturing accounted forbetween 77.0 and 87.5%, while agriculture’s share ranged between9.0 and 18.5%. Manufacturing’s share of total imports rose fromover 77.0% during 1980–1985 to over 87.0% during 1990–1995and stood at about 80.0% in the subsequent periods. However,the share of agriculture in total imports fell from about 18.4during 1980–1985 to about 9.2% during 1990–1995 and hoveredaround 14.0% in the subsequent periods. The share of mineral fuelhas remained very low over these periods. This analysis has indi-cated heavy dependence of the manufacturing sector on imports.

An insight into the utilization of imported commodities canbe gained by examining the three categories of imports presentedin Table 3. It can be seen from the table that capital goods andraw materials which are production inputs constitute 65–70% oftotal imports between 1980 and 1995 and about 80.0% beginningin the late 1990s. The increasing trend of this category of importswas due to the need to revamp the ailing manufacturing sectorand availability of cheaper import substitutes to local inputs. Thisimplies that Nigeria relies more on imports for production inputsthan for consumption goods.

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Tab

le3

Stru

ctur

eof

Impo

rts

inN

iger

ia

Str

uct

ure

(%)

1970–75

1975–80

1980–85

1985–90

1990–95

1995–00

2000–06

(i)

Share

ofoil

into

talim

port

s4.

482.

052.

0213

.32

17.8

722

.56

17.6

6(i

i)Share

ofnon-o

ilin

tota

lim

port

s95

.597

.94

97.9

886

.68

82.1

377

.44

82.3

4

Tota

l(%

)100

100

100

100

100

100

100

(i)

Share

ofA

gri

cult

ure

into

tal

import

s15

.69

17.2

18.3

911

.79

9.22

1413

.93

(ii)

Share

ofM

anufa

cturi

ng

into

talim

port

s81

.179

.877

.18

83.6

987

.13

79.8

879

.58

(iii)

Share

ofM

iner

alFuel

inim

port

s1.

011.

121.

130.

690.

641.

351.

43

(iv)

Oth

erim

port

s2.

21.

883.

243.

83

4.77

5.06

Tota

l(%

)100

100

100

100

100

100

100

Com

posi

tion

ofIm

port

s(%

)(%

)(%

)(%

)(%

)(%

)(%

)(i

)C

onsu

mer

goods

31.8

829

.68

32.8

739

.27

30.4

820

.85

21.5

0(i

i)C

apit

algoods

38.4

45.1

427

.87

33.0

337

.75

41.0

838

.78

(iii)

Raw

mate

rials

30.0

825

.18

39.2

627

.731

.77

38.0

739

.78

Tota

l(%

)100

100

100

100

100

100

100

Sourc

e:U

nder

lyin

gdata

obta

ined

from

the

Cen

tralB

ank

ofN

iger

ia(C

BN

),,Sta

tist

icalBullet

in,and

AnnualRep

ort

and

Sta

tem

ent

ofAcc

ounts

,vari

ous

yea

rs.

422

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4


III. LITERATURE AND THEORETICALFRAMEWORK

The conventional argument in the development literature isthat trade is beneficial to growth. Trade is based on the notionthat although one country may have a higher productivity in theproduction of all goods compared to another country, its rela-tive productivities in producing different goods will differ. Tradeis based on this relative (comparative) advantage and increaseswelfare in both countries.

Within each country there will be winners and losers followingtrade liberalization. The import competing sector(s) loses, whilethe consumers, and the importing and exporting sectors win. Forinstance, a fall in tariff on exports will raise the level of demandfor exports and consequently result in a rise in demand for labor(if the export sector is relatively labor intensive) and therebyraises profitability and wages, and lowers return to capital (Moore2002).

It is also argued in the literature that trade liberalization mayadversely affect profitability of firms and income of labour partic-ularly those in the protected import competing sector since theywill be exposed to intense foreign competition (Pavenik 2004).On the other hand, trade liberalization has the effect of lower-ing prices of consumer goods and of increasing consumer choice,while also allowing the reallocation of production factors towardshigher productivity activities (Moore 2002). This will in turnhave a positive effect on the well-being of people in the liberaliz-ing economy, including workers. However, since the overall effectis positive, it is possible that winners compensate losers. At thetime, this theory was a radical break with mercantilism whichstated that welfare would only come from increased exports.

The supposed benefits of trade liberalization are based onthese theoretical ideas on the benefits of free trade. Consequently,

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trade liberalization is defined as policies that diminish restric-tions to the free international movement of goods and services.Trade liberalization involves reduction in import quotas and tar-iffs, removing anachronistic barriers to exports, and reducingexport taxes. These result in declining prices of importables,but rising price of exportables. This holds true only for domes-tic prices. Ceteris paribus, these measures lead to increases inimports and exports.

In reality, however, “trade liberalization” is not unaffectedby structural adjustment programs. Most structural adjustmentprograms aim not only at freeing international markets but alsoat the stabilization of the economy and promoting exports. Theformer may lead to an overvalued exchange rate, implying thatthe relative price of tradables is low compared to non-tradables.However, importables will be relatively cheap while exportableswill be relatively expensive. This stimulates more imports buthampers exports. Specific measures to stimulate exports tend tobe taken in order to compensate the overvaluation of the currencyor because they are aims in itself. Typically, export promotingmeasures involve drawback schemes, export subsidies, tax exemp-tions for exports, etc. These measures usually are considered partof a trade liberalization program in view of their intended effects.

Four major arguments have been advanced in favor of tradeliberalization (see Rodrik 1995). The first is a reduction in staticinefficiencies. This is in consonance with the Ricardian argumentfor free trade. Secondly, there are dynamic effects: trade enhancestechnological change, learning, and economic growth. Thirdly,economies with more trade adjust more easily to adverse externalshocks, and fourthly, trade liberalization reduces waste stemmingfrom rent-seeking activities.

Empirically, findings on the relationship between trade lib-eralization and trade performance have been conflicting. Some

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studies provide evidence confirming that countries that imple-mented liberalization programs also had improvement in theirexport performance (Ahmed 2000; Bleaney 1999; Helleiner 1994;Joshi & Little 1996; Thomas et al. 1991; Weiss 1992). However,other studies provide limited evidence substantiating the asso-ciation between trade liberalization and export growth (Agosin1991; Clarke & Kirkpatrick 1992; Greenaway & Sapsford 1994;Jenkins 1996; Shafaedin 1994; UNCTAD 1989). For imports,there is a strong positive impact of trade liberalization on thegrowth of imports through the sensitivity of price and incomechanges (Bertola & Faini 1991; Melo & Vogt 1984).

Moreover, Thirlwall and Santos-Paulino (2004) found thatthe impact of liberalization differs as to between highly pro-tected countries and less protected countries. The positive effectof trade liberalization on import growth is far greater in theindustries that were highly protected during the period beforeliberalization. Their results also showed that the impact of a moreliberalized trade regime, independent of duty reductions, raisedimport growth by more than exports. Their overall conclusionwas that free trade and flexible exchange rates do not alwaysensure that unemployed domestic resources are easily convertedinto scarce foreign exchange.

Parikh and Stirbu (2004) found that trade contributes toimprovement in real income and per capita growth, but notethat if trade is not combined with adequate policies to balanceimports against exports, it could trigger off trade balance andbalance of payments deficits, resulting in deterioration in incomegrowth. Garces-Diaz (2008)1 examined the relationship betweenthe Mexican and US economies over the 1980–2000 period. Hereported that liberalization policies in Mexico and NAFTA didnot have any significant impact on some macroeconomic vari-ables including exports and imports. He found that there is

1There is a dearth of studies in this area since 2004.

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strong and quick response of Mexican trade balance to changesin the US economy and the real exchange rate in particular. Andthat NAFTA did not have any significant impact on economicperformance.

IV. ANALYTICAL FRAMEWORK ANDMETHODOLOGY OF THE STUDY

This study adopts an econometric approach in estimat-ing the effect of trade liberalization on trade flows in Nigeria.Two equations are specified. These are the export and importequations.

Export Equation

A standard export growth function is specified, in whichexports are considered to be a function of price competitiveness-measured by the real exchange rate (or real effective exchangerate), and world income. Assuming constant price and incomeelasticities of demand for exports, the function can be expressedas (Thirlwall 2003):

X = A{

Pf EPd

}β1

WY β2(1)

where A is a constant, Pd are domestic prices, Pf are foreignprices, WY is world income, and E is the nominal exchange ratemeasured as the domestic price of foreign currency; β1 and β2

denote price and income elasticities, respectively. Taking logsof the variables, and differentiating with respect to time, thefunction that captures the determinants of the rate of growthof exports (including a constant which may pick up supply-sidefactors) is expressed as:

x = α + β1(pf + e − pd ) + β2wy(2)

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The equation to be estimated can be expressed as:

xt = α + β1pt + β2wyt + μt(3)

where pt stands for the rate of change of competitiveness (realexchange rate), μ t is an error term and t represents the timeperiod. Since rate of change of price competitiveness is mea-sured as real effective exchange rate (REER) then its coefficient(elasticity) β1 is expected to be negative, implying an inverserelationship between this variable and exports. This implies thatfalling REER (depreciation) promotes exports, and vice-versa. β2

is expected to be positive implying a direct relationship betweenworld income and exports.

To test for the impact of liberalization, a dummy variable isused. It takes the value of zero prior to the liberalization episode(i.e., 1973–1985) and one afterwards. Thus, the extended exportdemand function to be estimated is:

xt = α + β1pt + β2wyt + β3D + μt(4)

where D is a shift dummy variable to capture the impact ofliberalization. The rest of the variables are as defined earlier.

Import Equation

One of the most common effects of trade liberalization, par-ticularly in developing countries, is that it increases imports bymore than exports (Thirlwall & Santos-Paulino 2004). This isinvestigated. As in the case of exports, a standard import growthfunction where imports are assumed to be a function of price com-petitiveness measured by the real exchange rate (or real effectiveexchange rate), and domestic income is considered. Assumingthat the price and income elasticities of demand for imports areconstant, the function can be written as (Thirlwall 2003):

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M = L(

Pf EPd

)δ1

NY δ2(5)

where L is a constant, NY is Nigeria’s income, and the rest of thevariables are as described before; δ1 and δ2 denote the price andincome elasticities, respectively. Taking logs of the variables inequation (4) and differentiating with respect to time, the functionthat captures the determinants of the rate of growth of imports(including a constant) is written as:

m = λ + δ1(pf + e − pd ) + δ2ny(6)

The equation to be estimated can be expressed as:

mt = λ + δ1pt + δ2nyt + εt(7)

where pt is the rate of change of the real exchange rate, εt isthe error term, and t represents the time period. It is expectedthat the price elasticity of import demand (δ1) is positive show-ing that there is a direct link between REER and imports. Thisimplies that falling (depreciation) REER hinders imports whilerising (appreciation) promotes it. Income elasticity of imports(δ2) is positive, implying a direct relationship exists betweendomestic income and imports.

To take account of the effect of trade liberalization on importgrowth, equation (7) is extended to include a shift dummy vari-able (D) which is treated in a similar manner as described above.The extended import growth function is expressed as:

mt = λ + δ1pt + δ2nyt + δ3Dt + εt(8)

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Data Measurement, Sources and EstimationTechniques

Values of exports (X) and imports (M) are converted toreal using the composite consumer price index (CPI). Nationalincome (NY) for Nigeria is measured as GDP and it wasconverted to real using the CPI. Price competitiveness (p) ismeasured by the real effective exchange rate (REER tradeweighted). All these variables are available in the publica-tions of the Central Bank of Nigeria (Statistical Bulletin-2007 ;and Annual Report and Statement of Account-various volumes).World income (WY) is available in the World Bank database(World Development Indicators-WDI). Therefore data covering1973 to 2006 were culled from the Central Bank of Nigeria pub-lications and were complemented by data from the World Bank,World Development Indicators and the International MonetaryFund (IMF), International Financial Statistics (IFS).

As in the equations to be estimated, the real values ofimports, exports, national income, and world income are con-verted to growth rates. The ordinary least square technique wasemployed in estimating the models. The unit root test (testfor stationarity) and the co-integration test (long-run test) wereconducted using the augmented Dickey Fuller and Johansen co-integration approaches, respectively. The unit root test showsthat most of the data are stationary, while the co-integrationtest (long-run test) indicates absence of co-integration equation. 2

This implies that there is no need to set up a parsimonious errorcorrection model (ECM).

In order to check the robustness of the model results andthe existence of endogeneity problem, we have estimated the

2These results can be provided when requested. The results may be attributedto the fact that the variables were used in growth terms.

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models using the Generalized Method of Moment (GMM) esti-mate on technique. Some diagnostic tests such as those for serialcorrelation test (Breussch-Godfrey Serial Correlation-LagrangeMultiplier, LM test), white heteroskedasticity, ARCH effect(LM), and normality tests (Jarque Bera) were carried out. Anautocorrelation problem is corrected using autoregressive terms(AR).

V. RESULTS AND DISCUSSION

Analysis of Results of Export Equations at BothAggregate and Disaggregate Levels

The results of the estimated export equations are reported inTable 4. It can be seen from the table that the models are wellbehaved judging by the coefficients of determination (AdjustedR-Squared) that show that in all the estimated equations betweenover 70.0 and 80.0% of the variations in the dependent variable(or its behaviors) are explained by changes in the explanatoryvariables. The values of the Durbin Watson statistics also showabsence of autocorrelation.3 The results of the specification andevaluation tests (test statistics for Lagrange Multiplier-LM test;normality-Jarque Bera; heteroskedasticity; and ARCH effect) donot detect any problems. This is because the coefficients of theirtest statistics are not significant implying that the problems arenot serious.

Focusing on the coefficients of the explanatory variables, irre-spective of the estimation technique adopted (OLS or GMM),the traditional determinant of exports has a significant effecton exports at both the aggregate and disaggregate levels.Specifically, world income has a significant enhancing effect onexports of all categories (agriculture, manufactured, non-oil, oil,and total). This is consistent with the a priori expectation and

3In very few cases where it exists initially, AR terms have been used to correctthe problem.

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Tab

le4

Est

imat

edR

esul

tsfo

rA

ggre

gate

and

Dis

aggr

egat

eE

xpor

tE

quat

ions

Agri

cult

ura

lE

xport

sM

anufa

cture

dE

xport

sN

on-O

ilE

xport

sO

ilE

xport

sTota

lE

xport

s

Vari

able

sO

LS

GM

MO

LS

GM

MO

LS

GM

MO

LS

GM

MO

LS

GM

M

Const

ant

−0.8

14−0

.781

0.11

2−0

.128

−0.8

76−0

.092

0.93

4−0

.862

0.10

8−0

.912

(2.2

33)∗

∗(5

.137

)∗∗∗

(2.0

75)∗

(3.3

75)∗

∗∗(0

.287

)(6

.638

)∗∗∗

(1.9

40)∗

(4.0

69)∗

∗∗(2

.023

)∗(4

.210

)∗∗∗

RE

ER

−0.6

88−0

.215

−0.0

42−0

.140

−0.5

34−0

.187

−0.7

27−0

.242

−0.7

08−0

.252

(2.8

60)∗

∗(2

.705

)∗∗

(0.0

77)

(1.5

57)

(2.1

68)∗

∗(2

.219

)∗∗

(1.5

18)

(1.2

64)

(1.0

10)

(1.3

96)

Fore

ign

inco

me

0.78

20.

451

0.72

60.

558

0.14

90.

557

0.87

90.

512

0.84

30.

540

(1.1

59)∗

∗(4

.033

)∗∗∗

(2.2

03)∗

∗(3

.456

)∗∗∗

(1.6

40)∗

∗(6

.217

)∗∗∗

(3.6

76)∗

∗∗(4

.489

)∗∗∗

(2.7

85)∗

∗∗(4

.687

)∗∗∗

Lib

eraliza

tion

Dum

my

0.62

90.

492

0.22

90.

383

0.40

00.

345

0.59

30.

658

0.60

20.

663

(1.9

89)∗

(2.2

10)∗

∗(2

.290

)∗∗

(4.0

53)∗

∗∗(2

.627

)∗∗∗

(3.0

10)∗

∗∗(1

.104

)(1

.039

)(1

.146

)(1

.211

)A

R(1

)0.

788

0.67

90.

823

0.11

80.

111

(6.8

46)

(1.9

24)∗

(2.7

22)∗

∗∗(2

.829

)∗∗∗

(2.8

03)∗

∗∗A

dju

sted

R-s

quare

d0.

836

0.92

00.

766

0.94

40.

762

0.90

40.

868

0.77

70.

869

0.78

7D

urb

in-W

ats

on

2.13

21.

934

2.11

22.

099

2.22

32.

194

1.92

41.

8712

1.92

71.

872

F-s

tati

stic

155.

23∗∗

0.08

717

2.67

∗∗∗

0.01

220

6.73

7∗∗∗

0.08

914

3.13

8∗∗∗

0.10

414

8.91

7∗∗∗

0.10

7B

reusc

h-G

odfr

eySer

ialC

orr

elati

on

LM

+

1.24

3–

1.02

1–

0.33

9–

0.26

8–

0.24

4–

(0.6

78)

(0.2

34)

(0.4

32)

(0.2

41)

(0.2

48)

Het

erosk

edast

icity+

2.12

–2.

879

–0.

478

–1.

031

–0.

986

–

(0.2

43)

(0.2

34)

(0.8

91)

(0.1

06)

(0.3

54)

AR

CH

LM

+1.

987

–0.

549

–0.

051

–0.

044

–0.

025

–(0

.175

)(0

.466

)(0

.821

)(0

.834

)(0

.868

)Jarq

ue

Ber

a+

0.04

6–

1.17

6–

2.44

9–

1.36

0–

1.71

4–

(0.9

77)

(0.5

55)

(0.2

91)

(0.1

41)

(0.5

64)

Note

s:T

he

t-valu

esare

show

nin

pare

nth

eses

.∗∗

∗ show

sth

at

coeffi

cien

tsare

signifi

cant

at

the

1%

level

.∗∗

at

5%

level

.∗ a

t10%

level

.+m

eans

figure

sin

pare

nth

eses

are

pro

babilit

ies.

431

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shows that exports are income inelastic (that is, any change inthe world income will lead to a significant change in the worlddemand for Nigeria’s exports). The results also show that thereal exchange rate (measured as real effective exchange rate-REER) has a significant effect on agricultural exports and non-oilexports.

The negative sign of the coefficient of the real effectiveexchange rate in the export equations is consistent with the apriori expectation and this signifies that there is an inverse rela-tionship between these variables (REER and exports). Thus,this suggests that a fall in the real effective exchange rate(i.e., improvement in competitiveness following devaluation anddepreciation resulting from liberalization of the foreign exchangemarket in Nigeria since the adoption of SAP) engenders anincrease in agricultural and non-oil exports due to the declinein the relative price of exports. The coefficient of REER impliesthat exports are price inelastic, suggesting that any change inexport price will cause a significant change in the demand forexports.

Agricultural exports constitutes a significant proportion ofnon-oil exports in Nigeria and this is why the impacts of thevariable are similar. The impact of real exchange rate on man-ufactured exports is not significant. This is expected becauseNigeria’s manufactured exports have not been competitive inthe world market and this is responsible for its very small shareof GDP and exports. The impact of real exchange rate on oilexports and total exports is not significant.4 This is expectedsince oil exports are influenced not by policy per se but by theregulations of the Organization of Petroleum Exporting Country(OPEC–Nigeria is a member since 1970), which is a cartel thatcontrols both volume and price of oil exports in the internationalmarket. As discussed in the previous section, oil constitutes over

4Significant at a little above the 10.0% level (10.7%).

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90.0% of total Nigerian exports and that is why the latter reflectssimilar impact as the former.

The results show that irrespective of estimation techniquesadopted, all categories of exports (except oil) perform betterduring the trade liberalization period than before the trade lib-eralization period. This suggests that trade liberalization has afavorable impact on non-oil exports. This result is in line withsome previous studies such as Bleaney (1999) and Ahmed (2000).

Further analysis suggests that while the impact is significantenough to produce positive growth of manufactured exports, it isnot so in the case of agricultural and aggregate non-oil exports.Previous explanations on the impact of policy on oil exports stillhold. All these results suggest that while the impact of liber-alization is significant enough to produce a positive impact onmanufactured exports, it is not so in the case of agricultural andaggregate non-oil exports.5

Analysis of Results of Import Equations at BothAggregate and Disaggregate Levels

Table 5 presents the results of the estimated import equa-tions. It can be observed from the table that the model iswell behaved as adjudged by the coefficient of determination(Adjusted R-Squared) that shows that in all the estimated equa-tions between over 75.0 and 80.0% of the variations in thedependent variable (or its behaviors) are explained by changesin the explanatory variables. The values of the Durbin Watsonstatistics indicate absence of autocorrelation. As in the caseof exports, the results of the specification and evaluation tests(test statistics for Lagrange Multiplier-LM test; normality-Jarque

5(For manufactured export: 0.112 + 0.229 = +0.341); (for agricultural export:−0.814+ 0.629 = −0.285) and (for non-oil export: −0.876 + 0.400 = −476). Thenegative sign of the intercepts or constant terms implies that the mean growth isnegative.

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Bera; heteroskedasticity; and ARCH effect) do not detect anyproblems as the coefficients of their test statistics are notsignificant, implying that the problems are not serious.

The results of the estimated equations reveal that irrespectiveof estimation techniques adopted, domestic income is a significantdeterminant of all categories of imports (capital goods, raw mate-rials, and consumer goods). It has a significant positive impact onthem, which is consistent with the a priori expectation. Again,the result shows that imports are (domestic) income inelastic.The results show that the real exchange rate has an insignifi-cant impact on the consumer goods imports. However, the resultsseem inconclusive in the case of other categories of imports, as thedifferent estimation techniques produce different results. Thus,while the OLS shows the significant impact of real exchangerates on capital goods imports, the GMM indicates an insignifi-cant impact. The reverse is the case for raw materials and totalimports. The negative sign of the REER implies that a fall in it(depreciation) promotes imports. However, the a priori expecta-tion is that real exchange rate depreciation dampens imports(because imports become expensive). This inconsistent resultmay be reflecting the high import dependency of the Nigerianeconomy.

Again, the results of the trade liberalization dummy vari-ables are significant and positive for all categories of imports.This implies that all categories of imports experience improvedperformance during a trade liberalization period compared tothe pre-liberalization period as reported in some previous stud-ies such as Bertola and Faini (1991). However, the result suggeststhat in most cases the impact is not strong enough to turn themean growth of imports to positive.6 All the above results suggest

6When the coefficients of the dummy variables are added to the constant terms,the results are negative.

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Tab

le5

Est

imat

edR

esul

tsfo

rA

ggre

gate

and

Dis

aggr

egat

eIm

port

Equ

atio

ns

Capit

alG

oods

Raw

Mate

rials

Consu

mer

Goods

Tota

lIm

port

s

Vari

able

sO

LS

GM

MO

LS

GM

MO

LS

GM

MO

LS

GM

M

Const

ant

−0.6

94−0

.953

−0.7

92−0

.708

−0.6

86−0

.686

−0.5

37−0

.810

(2.4

55)∗

∗∗(2

.164

)∗∗∗

(2.5

68)∗

∗∗(3

.449

)∗∗∗

(1.8

09)∗

(4.8

09)∗

∗∗(0

.010

)(6

.575

)∗∗∗

RE

ER

−0.5

39−0

.198

5−0

.354

−0.3

52−0

.210

−0.2

10−0

.275

−0.2

08(2

.134

)∗∗

(1.4

23)

(1.5

67)

(3.5

58)∗

∗∗(0

.438

)(0

.438

)(1

.394

)(2

.033

)∗∗

Dom

esti

cin

com

e0.

680

0.78

60.

183

0.80

60.

647

0.62

90.

520

0.66

8(3

.522

)∗∗∗

(2.8

43)∗

∗∗(2

.561

)∗∗∗

(4.4

11)∗

∗∗(1

.790

)∗(5

.790

)∗∗∗

(2.4

64)∗

∗∗(5

.794

)∗∗∗

Dum

my

0.16

00.

274

0.37

20.

407

0.13

50.

253

0.11

10.

319

(3.6

56)∗

∗∗(1

.987

)∗(1

.814

)∗(3

.539

)∗∗∗

(1.7

96)∗

(1.8

96)∗

(2.1

99)∗

(2.0

23)∗

AR

(1)

0.29

00.

030.

571

0.99

9(1

.615

)∗(0

.132

)(2

.811

)∗∗∗

(2.9

95)∗

∗∗A

dju

sted

R-s

quare

d0.

751

0.87

20.

917

0.89

40.

932

0.92

10.

878

0.81

6D

urb

in-W

ats

on

1.99

81.

867

1.94

31.

810

1.89

71.

897

2.16

51.

882

F-s

tati

stic

7.36

4∗∗∗

0.16

83.

588∗

∗∗0.

054.

753∗

∗∗0.

235

2.57

2∗∗∗

0.09

1B

reusc

h-G

odfr

eySer

ial

Corr

elati

on

LM

+0.

202

–1.

553

–1.

451

–0.

785

–(0

.324

)(0

.365

)(0

.396

)(0

.210

)H

eter

osk

edast

icity+

0.43

7–

0.55

3–

0.63

6–

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435

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that trade liberalization and other reforms have not produced animpact that is significant enough to boost Nigeria’s trade flows.

VI. SUMMARY OF FINDINGS, IMPLICATION,AND CONCLUSION

This study examines the impact of trade liberalization onNigeria’s trade flow. The significance of this issue is in theidea that the Nigeria government is confronted with chal-lenges of trade reform through unilateral, bilateral/regional, andmultilateral fronts. There is therefore the need to examine thisissue for the purpose of policy.

Econometric results reveal that foreign income has a signif-icant enhancing effect on exports of all categories (agriculture,manufactured, non-oil, oil, and total). The results also showthat the real (effective) exchange rate has a significant positiveeffect on agricultural exports and non-oil exports (expansion-ary effect) but an insignificant effect on manufactured exports.The impact of the real exchange rate on oil exports and totalexports is not significant because oil exports are influenced notby policy per se but by the regulations of the Organization ofPetroleum Exporting Country (OPEC). The results show thatall categories of exports (except oil) perform better during thetrade liberalization period than before the trade liberalizationperiod. However, further analysis suggests that while the impactis significant enough to produce positive growth of manufacturedexports, it is not so in the case of agricultural and aggregatenon-oil exports.

With respect to imports the results reveal that domesticincome is a significant determinant of all categories of imports(capital goods, raw materials, and consumer goods) and it has asignificant positive impact on them. The results respecting real(effective) exchange rate show that it has an insignificant impacton the consumer goods imports. However, although the results

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seem inconclusive in the case of other categories of imports realexchange rate seems to promote them. Results indicate that allcategories of imports experience improved performance duringa trade liberalization period compared to the pre-liberalizationperiod. However, the result suggests that in most cases the impactis not strong enough to turn the mean growth of imports to pos-itive. All the above results suggest that trade liberalization andother reforms have not produced an impact that is significantenough to boost Nigeria’s trade flows. There are a number offactors hindering Nigeria’s exports flow. These factors includeinadequate supply response capacity (due to poor infrastructure)and market access problems (such as high non-tariff barriers inthe developed nations).

The heavy reliance on imports in Nigeria may make exchangerate policy ineffective in controlling imports. This is becausewhen depreciation supposed to hinder imports does otherwise.Therefore there is the need to reduce the degree of importdependency in Nigeria by promoting made in Nigeria goods andparticularly by discouraging imports of commodities that havelocal substitutes. If this is not done it may lead to balance ofpayments problems and unwillingness on the part of governmentto pursue trade liberalization policy. The foregoing suggests thatalthough exchange rate deregulation policy promotes exports,trade liberalization and other policies have not produced animpact that is significant enough to boost Nigeria’s trade flows,particularly exports flows. Therefore, there is the need to inten-sify trade liberalization policy and other reforms to make themmore effective in terms of promoting exports. The instability inthe implementation of the policy should be addressed in Nigeria.

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Impact of Trade Reform on Nigeria's Trade Flows