The current period in the world economy is regarded as period of globalization and trade liberalization. In this period, one the crucial issues in development and international economics is to know whether trade openness 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. (NEEDS, 2005).
Since 1950, the world economy has experienced a massive liberalization of world trade, initially under the auspices of the General Agreement on Tariffs and trade (GATT), established in 1947, and currently under the auspices of the World Trade Organization (WTO) which replaced the GATT in 1993. Tariff levels in both developed and developing countries have reduced drastically, averaging approximately 4% and 20% respectively, even though the latter is relatively high. Also, non-tariff barriers to trade, such as quotas, licences and technical specifications, are also being gradually dismantled, but at a slower rate when compared with tariffs.
The liberalization of trade has led to a massive expansion in the growth of world trade relative to world output. While world output (or GDP) has expanded fivefold, the volume of world trade has grown 16 times at average compound rate of just over 7% per annum. In fact, it is difficult, if not impossible, to understand the growth and development process of countries without reference to their trading performance. (Thirlwall, 2000).
Likewise, Fontagné and Mimouni (2000) noted that since the end of the European recovery after World War II, tariff rates have been divided by 10 at the world level, international trade has been multiplied by 17, world income has quadrupled, and income per capita has doubled. Incidentally, it is well known that periods of openness have generally been associated with prosperity, whereas protectionism has been the companion of recessions. In addition, the trade performance of individual countries tends to be good indicator of economic performance since well performing countries tend to record higher rates of GDP growth. In total, there is a common perception that even if imperfect competition and second best situations offer the possibility of welfare improving trade policies, on average free trade is better than no trade.
From the ongoing discussion, it is evident that trade is very important in promoting and sustaining the growth and development of an economy. No economy can isolate itself from trading with the rest of the world because trade act as a catalyst of growth. Thus Nigeria, being part of the world, is no exemption. For this reason, there is a need to thoroughly examine the nature of relationship between trade openness and output growth in Nigeria.
1.1.2 TRADE OPENNESS AND OUTPUT GROWTH: HISTORICAL EXPERIENCE OF THE NIGERIA ECONOMY
Today, Nigeria is regarded to have the largest economy in sub-Saharan Africa, excluding South Africa. In the last four decades there has been little or no progress realized in alleviating poverty despite the massive effort made and the many programmes established for that purpose. Indeed, as in many other sub-Saharan Africa countries, both the number of poor and the proportion of poor have been increasing in Nigeria. In particular, the 1998 United Nations human development report declares that 48% of Nigeria’s population lives below the poverty line. According to the report (UNDP, 1998). The bitter reality of the Nigerian situation is not just that the poverty level is getting worse by the day but more than four in ten Nigerians live in conditions of extreme poverty of less than N320 per capita per month, which barely provides for a quarter of the nutritional requirements of healthy living. This is approximately US 8.2 per month or US 27 cents per day.
Doug Addison (unpublished) further explained that the Nigeria economy is not merely volatile; it is one of the most volatile economies in the world (see figure 1 below). There is evidence that this volatility is adversely affecting the real growth rate of Nigeria’s gross domestic product (GDP) by inhibiting investment and reducing the productivity of investment, both public and private. Economic theory and empirical evidence suggest that sustained high future growth and poverty reduction are unlikely without a significant reduction in volatility. Oil price fluctuations drive only part of Nigeria’s volatility policy choices have also contributed to the problem. Yet policy choices are available that can help accelerate growth and thus help reduce the percentage of people living in poverty, despite the severity of Nigeria’s problems.