EXPORTS AND ECONOMIC GROWTH IN NIGERIA: A CAUSALITY APPROACH

Transcription

1 EXPORTS AND ECONOMIC GROWTH IN NIGERIA: A CAUSALITY APPROACH BY KAREEM OLAYINKA IDOWU DEPARTMENT OF ECONOMICS UNIVERSITY OF IBADAN IBADAN, NIGERIA E- MAIL : olayinkaidowuus@yahoo.com Nobility_research@yahoo.com Telephone:

2 EXPORTS AND ECONOMIC GROWTH IN NIGERIA: A CAUSALITY APPROACH ABSTRACT We have tried to test the long run causality between Exports and Economic growth in Nigeria, using Co-integration and Granger Causality tests derived from Errorcorrection Mechanisms. Different techniques had been used by to test and estimate the unit root of the time series, co-integration as well as the Error-correction models of the variables. The research findings show that there is significant feedback causality between exports and economic growth in Nigeria and single co-integrating vector in the model. An important Policy implication is that the government should pursue both the inward and outward oriented industrial strategy. INTRODUCTION Nigerian economy is basically an open economy with international transactions constituting an important proportion of her aggregate economic activity. As a result of this, the economic prospects and development of the country, like many developing countries rest critically on international interdependence. The Nigerian economy is significantly characterized by a large foreign sector. However, over the years, the degree of openness of the economy has grown considerably. Prior to Nigeria political independence in 1960, agriculture was the mainstay of the economy, which supplied nearly all the food needs of the people and accounted for the largest part of the foreign exchange of the country. But, the advent of crude oil

3 production and related activities particularly in the 1970s changed the structure of the Nigerian economy. The bulk of the foreign exchange earnings from this crude oil exports was used to accelerate the importation of finished goods. The agricultural sector exports was indeed rendered less competitive overtime due to the overvalued currency, inappropriate pricing policies and dearth of farm labour caused by the migration of productive youth to the urban centers in pursuit of wage employment in the nonagricultural sectors. However, due to the glut in the international oil market in the early 1980s, there was reduction in the foreign exchange earnings from exports and the import dependent industrial structure of the country became unsustainable. Due to this, several policy measures were put in place to correct the situation, including the Stabilization Act of 1982, tight monetary policy and stringent exchange control measure of the 1984, all prove ineffective. Therefore, the Structural Adjustment Programme was put in place in And, part of the programme is the export promotion industrialization policy, which tends to encourage both agricultural and industrial output for exports given the financial liberalization policy embedded in it. The exports sector of the economy responded positively to this programme as more exports were recorded during the period. But, thereafter, there had been unimpressive performance of the non-oil export, despite the fact that the total output of the country captured in the Gross Domestic Product (GDP) has been increasing consistently. It is as a result of this that in this study, the main objective is to examine the causal relationship between exports and economic growth in Nigeria during the period This will be in terms of the application of Good Practice of the Johansen s Multivariate Co-

4 integration technique because little or no previous studies is specific to Nigeria. In order to achieve this goal, this study applies the Multivariate co-integration technique proposed by Johansen (1988) and (1991), and Johansen and Juselius (1990), (1992) and (1994), which estimates all the possible co-integrating vectors that prevail within a vector of variables, the study also provides a test on the coefficients penetrating the co-integrating vectors and provides a test statistic that is more cogent in its efficiency to reject a false null hypothesis. The study applies co-integration methodology in order to test the long run values. This research works sheds light on the dynamic structure of the model which is a pertinent factor in drawing up reasonable conclusion about the speed of adjustment in the model. Section two of this study deals with the performance of Nigeria s exports, while the third and fourth sections describe the methodology and empirical findings of the study, respectively, and the final section provides the study conclusion and policy implications. NIGERIA S EXPORTS PERFORMANCE Before the oil boom of 1970s, Nigeria s economy was mainly an agrarian economy, which the majority part of its foreign exchange comes from the sales of cash crops such cocoa, groundnut, coffee, cotton, solid minerals and palm produce. But, due to the oil boom of 170s, Crude oil then took over from agricultural as the major Foreign exchange earner to the country and it constitute about 93% of the total exports between And, by , it has risen to 96.8%, while by 2000 it got to 99% (Kareem, 2004).

5 However, the share of non-oil exports in total exports declined from 7.0% in the period to about 4% between 1986 and The decline recorded in the nonoil exports was due to the problems being encountered by the agricultural sector which was worsened by inappropriate pricing policies, and a dearth of farm labor caused by rural-urban migration, as well as infrastructural inadequate in the rural areas. The government made appreciable efforts to resuscitate the non-oil sector of the economy during the SAP era. But, despite all the measures that were put in place, the performance of the non-oil export sector has remained unencouraging, as crude oil still remains the major Nigeria s export. On the present trends, the structure of Nigerian economy as reflected I her trade exports makes it unlikely that the country will be able to take the advantage of increased liberalization and openness of the economy to achieve trade induced growth. The border of the country had been thrown open since the independence in 1960 with 32% level of openness, which later rose to 48%in 1977 during the import substitution era. It got to 68%in 1992 during the SAP period and later increased to its peak of 92% in 2000 due to the oil imports and exports. Despite the increase in Nigeria s total exports earnings, the country has been confronting a considerable amount balance of payment deficit over the years. thus it is imperative and worthwhile to examine whether export growth can enhance economic growth to help reduce this deficit, and also to know if there is casual relationship between exports and economic growth in Africa

6 REVIEW OF EMPERICAL STUDIES There has been increased interest by developing economist in the association between exports and economic growth in the developing world. The literature shows that some recent empirical studies that were carried out in this area applied Granger causality test based on Vector Autoregressive (VAR) models to determine the extent and the direction of causality between these two variables. But most of the econometric techniques used in these studies have not been supportive of a direct causal relationship running from exports to economic growth. Chow (1987) reported feedback causality for 6 countries out of 8 NICs, unidirectional causality from export to growth was found for one while independent causality was found for the last country. Hsiao (1987) found evidence of independent causality from GDP to export was found. Jung and Marshall (1985) got evidence of unidirectional causality from exports to growth for only 4 countries out of 37. Ahmed and Kwan (1991) found independent relationship in ASEAN countries. Kwan and Cotsomotis (1991)got bilateral causality in China for and independent causality for the sub period Most recently; Thornton (1996) discovered that Granger causality test from error correction models confirmed unidirectional causality from export to economic growth in Mexico. Ahmed and Hamhirun (1995) found independent causality between exports and economic growth for 4 out of 5 ASEAN countries and feedback causality for Singapore. Abhayaratne (1996) in his study of the causality between foreign trade and GDP growth found no evidence for causality in Sri Lanka. Ghatak, et al (1997) got evidence to confirm the unidirectional Granger causality running from exports to GDP Growth in Malaysia. Wadud (2000) also discovered that there is unidirectional causality from exports to economic growth in Bangladesh.

7 Therefore, for the development strategies of Nigerian, the achievement of causality has an important policy implication. In the sense that the import led growth strategy is appropriate for the country if export growth causes export growth (export GDP), but if economic growth causes export growth (GDP export) then a certain level of economic growth may be a prerequisite to extend its exports (Chow( 1987), Moschos (1989)), due to the fact that economic growth may help achieve efficient allocation of resources according to comparative cost advantage and realization of economies of scale which lower the cost of exportable which make exports more competitive in international markets while bilateral causality can reinforce each other. RESEARCH METHODOLOGY The study set up an econometric model to test the long run relationship and direction Causality between exports and economic growth (GDP shall be used to measure economic growth). Many of the Macroeconomic time series are characterized by a unit root so that their first differences are stationary (Engel and Granger, 1987); Nelson and Ploser, (1982). If a statistical test, like co-integration establishes co-movements in these time series, the residuals from the regression can be used as error correction terms in the dynamic first-difference equation (Ahmed and Harnhirun, (1995). Thus, given two time series that are integrated at order 1, i.e. I(i), and co-integrated, then there must exist Granger causality in at least one direction in the I(0) variables (Engle and Granger, (1987) and hence a VAR model can be prepared with an error correction term for

8 doubled co-integrated I(0) time series to cover the short run dynamics and to decrease the chance of observing spurious regression in terms of the levels of data or their first differences. Therefore, after testing the stationary and co-integration attributes of the variables, the study shall test for Granger causality with the error-correction model between exports growth and economic growth (in terms of GDP growth) of the country. What we shall first do under the methodology here is to test the order of integration, i.e. the stationarity of the variables of the natural logarithm of the level of exports, (LnExp) and GDP (LnGDP). Two methods are used in practical application to test stationarity allowing the chance of autocorrelation: Augmented Dickey-Fuller (ADF) test (Dickey and Fuller, 1981) and the non-parametric adjustment Phillip-Perron test (Phillip and Perron, (1988). The Augmented Dickey-Fuller test requires the following as. GDPt = + t + GDPt-1 + GDPt-1 + е t (1) EPt = + t + EP t-1 + EP t-1 + е t (2) Where Lt in the two equations are assumed to be identically independently distributed random variable. This ADF statistic test the null hypothesis that the time series has a unit root, i.e. r = 0, under the alternative hypothesis of stationary time series. After this stationarity test, e now test for co-integration theory in the issue of Johansen s Trace and Max-Eigen statistic estimation approach (Johansen, (1988); Johansen and Juselius, 1990, and Johansen, 1991). The Johansen s test for the multivariate co-integration approach is based on the following econometric model of the VAR process: GDP = oy + β 1y t - y EPt-1 + r 1y EPt-1 + y wt +е t (3)

9 where EPt = ( yt, zt ), GDPt is an My * 1 vector of jointly determined endogenous I(1) variables, EPt is an Mt * 1 vector of exogenous I(1) variables: Zt = β oz + r 1z EPt-1 + zwt + Vt (4) Wt is a q x 1 vector of I(0) variables excluding the interception and trends, the stochastic term vector et and vt fulfill. Ut = ( vt et ) iid ( 0, ) Where Ω is a symmetric positive definite matrix, the stochastic term Ut are distributed independently of Wt: E(Ut/Wt) = 0, the intercept and trend coefficients, β0y and β1y are My x 1 vectors: πy is the My x M long-run multiplier matrix, m = mx + my, r1y,., r(p-1)y are My x M coefficient matrices capturing the short-run dynamic effects and φy is the My λ q matrix of coefficients on the I(0) exogenous variables. The Augmented Engle-Granger test (Enlge and Granger, 1987), Co-integrating Regression Durbin-Watson (CRDW) test Sargen and Bhargawa, 1983) and Engle-Granger test, are applied in testing order of integration of the co-integrating regression error term. The Granger causality test would be either unidirectional or feedback and must exist in at least the I(0) variables if cointegration is established. Furthermore, another test involved to ascertain whether there exist causality between exports and GDP growth. The Granger Representation Theorem states, if two time series are both I(0) and are co-integrated, then a dynamic error-correction representation would prevail and vice versa. Thus, assuming the integration of order I(1) and Co-integration

10 between the logarithm of the levels of exports and GDP, the following ECM, based on Engle and Granger (1987) is formulated to carryout the standard Granger causality test: lngdpt = o + j lngdpt-1 + Pi lnept-1 + ECT t-1 + е t (5) lnept = β 0 + β i lngdpt-1 + λ j lnept-1 + ECT t-1 + е t (6) Where depicts the difference operator, е t implies a non zero serially independent random stochastic term ECTt-1and is the error-correction term obtained from the long-run co-integrating regression. The dynamic in the short run, which are inevitable to the long run equilibrium attainment, can be given by the causal relationship between variables. The Error Correction Model (ECM) method allows the distinction between short run and long run Granger causality. When variables are co-integrated in the short un, the differences from the long run equilibrium will feedback on the changes in the dependent variable so as to force the movement towards the long run equilibrium; if the dependent variable is caused directly by this long run equilibrium error, then it is reacting to this feedback and if not, it is responding only to the short-run shocks to the stochastic environment (Hassan and Tufte, 1998). The short run adjustment coefficient, derived by estimating the coefficient of the lagged error correction term, represents the ratio by which the long run disequilibrium in the dependent variable is being corrected in each short-run period. The short run causal effects are indicated through the significance of the F-tests of the differenced independent variables whereas the significance of that t- test of the lagged error-correction term provides the long run causal relationship.

11 THE EMPIRICAL FINDINGS We are going to test for the stationarity and co-integrating properties of our selected variables in the light of the empirical methodology. We used annual time series data from , and they are obtained from Federal Office Statistics (FOS) and Central Bank of Nigeria (CBN) statistical Bulletin. The ADF test and Phillip Perron test for unit root as a formal test are applied to test the stationary property of the variables. Table 1 shows the ADF test results for the variables both at level and first differences. These results indicate that we accept the null hypothesis at 5% level of significance for the variable at level, but we reject the null hypothesis that there is unit root at the first difference at 5% level of significance. Therefore, we draw the conclusion that at first differences the GDP and exports are stationary. Hence, the results confirm that all variables are integrated of order one at levels but integrated of order zero at first differences, i.e. lnep I(1), InGDP I(1), DInEP I(0) and DInGDP I(0). The Phillip- Perron stationarity tests are shown in table 2. This results support what we got form the ADF test. Thus, we proceed to the co-integration test. Here, we used Johansen maximum likelihood approach to test for co-integration in the model. Table 3. Shows the results of the co-integration test based on the maximum Eigen value and trace statistic. Both test statistics indicate that maximum Eigen value and trace statistic are well above both the corresponding 5% level of significance, which indicates that the variables are cointegrated and that there will be no loss of information in the long run. These results also confirm a single co-integrating vector and that there is a genuine long-run relationship between exports and GDP growth.

12 TABLE 1: Augmented Dickey- Fuller Test for Unit root Test Statistic Variable Level First difference LnGDP lnep Note: The 5% critical value for the ADF Statistic approximately for levels and for first difference. These critical values are computed from McKinnon(1996). TABLE 2 Phillips Perron Test for Unit root Test Statistic Variable Level First difference lngdp lnep Note: The 5% critical value for Phillips- Perron statistic is approximately for levels and for first differences. These critical values are computed from McKinnon (1996). TABLE 3 Results of Johansen s Co-integration Test Hypothesis Maximum Eigenvalue Trace test statistic Null Alternative Statistic Critical value at 5% Statistic Critical value at 5% r = o r = r 1 r = Table 4 shows the results of the Granger causality test from Error correction Model (ECM). This suggest that the coefficient of the error-correction term (ECT) for equation (5) and (6) are statistically significant with both negative signs, and that the f-statistic indicates that it is significant at 5% level for both equations. Therefore, this means that

13 as Exports growth Granger cause economic growth, so economic growth Granger cause exports, hence there is a bilateral or feedback causality between the variables. Thus, the results support export/gdp led growth strategy hypothesis, that is, both exports growth and economic growth cause change in one another. And this support the results that Chow (1987) got for 6 countries out of 8 NIEs as well as confirm what Ahmed and Harnhirun (1995) got for Singapore and that of Kwan and Cotsomotis (1991) in China for TABEL 4. Granger Causality Test From Error - Correction Model Dependent Variable Coefficient for ECT T- Statistic for ECTt-1 F-statistic for lnept-1 lngdp * * lnep * * * means significant at the 5% level Furthermore, the estimated coefficients for the ECT and represent the ratio by which the long-run disequilibrium in the dependent variables GDP and exports, respectively, is being corrected in each short-run period. CONCLUSION AND POLICY IMPLICATIONS The aim of this paper is to test and estimate the long-run behavioural relationship between exports and economic growth in Nigeria during the period The approach of co-integration has been applied as a pivot test to Granger tests of causality from the error correction model between the two variables. Out results show that both variables have unit roots at levels and were only stationary at first difference. These

14 results support a stable long run relationship between exports and economic growth, and thus, yield evidence of a single co-integrating vector. Furthermore, a significant and positive feedback Granger causal relationship exists between exports and economic growth in the long period in Nigeria. These results attest to the fact that exports and GDP growth are an important aspect of economic growth and development in Nigeria. And that the export promotion industrialization strategy of the government should be intensifying since it has the potential and ability to translate into positive multiplier in the economy. Also GDP growth is a factor that can accelerate economic activities in all sectors of the economy and which will enhance the country s exports in the long run and lead to stable macroeconomic environment and growth sustainability. Therefore, export policy and promotion measures as well as outward oriented development strategies adopted by the present government should be intensified aggressively so as to attain sustainable economic growth and development. However, an important aspect of this paper is the forcasting conclusion which indicates that there is feedback causality between exports and economic growth, with the policy implication that if economic growth of the country decline in the future, then there is the possibility that export would augment and resuscitating it, vice versa. REFERENCES Abhayaratne, A.P.S., (1996), Foreign Trade and Economic Growth Evidence from Sri-Lanka, , Applied Economics Letters, 3:

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