Empirical Analysis of Trade and Economic Growth Nexus: A Regression-Based Approach

Empirical Analysis of Trade and Economic Growth Nexus: A Regression-Based Approach

¹Udegbule, Chima Stanley, ²Chinanuife, Emmanuel, ³Ekadi, Hannah Ebikiwenimo, ⁴Esara, Esther, ⁵Ndah-John, Onyekachukwu Judith

^1,2,4 Department of Economics, Topfaith University, Mkpatak, Akwa Ibom State, Nigeria

³Federal Polytechnic Ekowe, Bayelsa State, Nigeria

⁵Department of Accounting, Topfaith University, Mkpatak, Akwa Ibom State, Nigeria

DOI: https://dx.doi.org/10.47772/IJRISS.2025.915EC0052

Received: 07 May 2025; Accepted: 11 May 2025; Published: 27 June 2025

ABSTRACT

The nexus between trade and growth can be traced back to the mercantilist theoretical analysis. The expositions and assumptions that underline the mercantilist theory provides clear insights into how trade stimulates economic growth in a country. This study tries to examine the trade-growth correlation of the Nigerian economy between 1980 and 2023. The econometric model adopted in this study was estimated using Ordinary Least Square (OLS) with data of the macroeconomic variables from the Central Bank of Nigeria Statistical Bulletin. The empirical results from the econometric analysis showed that there was a structural break of the Nigerian economy as a result of trade liberalization of 1986. Oil exports and imports have a positive and significant impact on growth. Non-oil exports have a positive but insignificant impact on growth, while inflation had negative but significant impact on growth and exchange rate had a negative and significant impact on growth. From the results, it was recommended that, there is need for intensive resource industries, gradual scaling down of barriers to trade, and promotion of domestic and foreign investment in the service industries.

Keywords: Economic Growth, Economy, Exchange rate, Import-Export, Trade

INTRODUCTION

Africa’s most populous nation, Nigeria, has always played a major role in the continent’s economic environment. Its economy is very diverse, with the GDP coming from industries including manufacturing, services, oil and gas, and agriculture. Nigeria’s economy has grown significantly as a result of both internal and foreign trade (Ojeyinka & Adeboye, 2017). This has led to increased job creation and technological development.

Nigeria has a long history of trading before colonisation. Gold, salt, and slaves were among the commodities traded in the region’s well-known trans-Saharan commerce. Nigerian trade entered a new phase with the entrance of European traders in the 15th century. Before the British colonised Nigeria, the Portuguese were among the first to develop trading links. Nigeria’s trade was mostly concentrated on exporting primary commodities to the British market during the colonial era, such as cocoa, rubber, and palm oil, in return for manufactured goods (Akinboyo, 1989).

Nigeria tried to broaden its economic base and commerce after gaining independence in 1960. However, the nation’s trade pattern underwent a dramatic change in the 1970s when oil was discovered in commercial quantity. Nigeria’s export revenue was largely derived from oil, which emerged as the main export commodity. Because Nigeria’s economy was overly dependent on oil exports, it was susceptible to changes in the price of oil globally (Ajakaiye & Fakiyesi, 2012).

Nigeria has implemented varied trade strategies to stimulate economic growth. In the 1980s, the Structural Adjustment Programme (SAP) launched trade liberalization measures like lifting import barriers and depreciating the naira, intending to boost industry competitiveness and stimulate export – led growth (World Bank, 1988). Nigeria has ratified the AfCFTA and joined regional and global trade agreements like ECOWAS, opening up new markets for domestic companies (UNCTAD, 2020). The structural adjustment programme led to a structural break in Nigeria economic structure and trade policies. The introduction of SAP expanded the volume of trade and economic growth thereby increasing the level of economic empowerment of people through provision of job opportunities (Chinanuife, Uyanto & Sunday, 2022).

However, these policy measures have produced a range of results. The SAP encountered obstacles resulting from inadequate infrastructure, including but not limited to poor roads, ports, and power supply, which hampered non – oil exports. High – level corruption and bureaucracy in trade administration also undermined policy effectiveness (Anyanwu, 2012). Despite efforts at diversification, the economy’s over-reliance on oil exports has weakened other industries like manufacturing and agriculture and rendered it susceptible to changes in the world’s oil prices. It has also contributed to the Dutch disease phenomenon (Badeeb et al., 2017).

Nigeria’s active participation in both international and regional trade has increased in recent years through the country’s involvement in trade agreements. Both the African Continental Free Trade Area (AfCFTA) and the Economic Community of West African States (ECOWAS) are ratified by the nation. According to UNCTAD (2020), these agreements are anticipated to give Nigerian companies additional chances to grow their markets and become more competitive.

Indeed, trade has had a significant impact on Nigeria’s economic growth. Export earnings from oil have provided the country with the foreign exchange needed to import capital goods and technology, which have been used to develop other sectors of the economy. Additionally, trade has also contributed to employment generation, particularly in the agricultural and manufacturing sectors (Oyejide, 2007).

Regrettably, discrepancies in the rates of growth of exports have been wider in value terms, because the terms of trade of developing countries like that of Nigeria, have deteriorated in comparison with those of the developed countries. This accounts for the fall of developing countries share of the total value of world trade from 30 percent in 1980 to 20 percent in 1990’s (Thirlwall, 2000). Also, Nosakhare and Milton (2014) observed that the significant fluctuations in Nigeria trade could be attributed to own shocks and foreign trade innovations. However, the positive predictions of trade theory notwithstanding the issue for developing countries in general, and Nigeria in particular, is not so much as whether to trade or not, but in what to trade and on what terms. It is against this backdrop that this study examines the moderating effect of trade liberalization on the effect of trade on economic growth in Nigeria.

LITERATURE REVIEW

Studies have long examined the connection between trade and economic expansion. Adam Smith and David Ricardo, among other classical economists, established the groundwork for our current understanding of the advantages of trade. Smith’s theory of absolute advantage and Ricardo’s theory of comparative advantage, argued that nations can boost their total output by focusing on producing items in which they are superior and engaging in trade with other nations.

Early studies on the relationship between trade and economic growth frequently utilised Cross-country regression analysis. For instance, Balassa (1978) looked at the connection between export growth and economic expansion in emerging nations. The study after adjusting for other variables including population growth and investment using data from a sample of developing nations over a given time span, discovered a strong and positive correlation between the two variables, indicating that nations with greater export growth rates typically had faster rates of economic expansion. Also, Feder (1982) created a model that differentiated between the export and non-export sectors in another significant study. According to the concept, the export sector can contribute to overall economic growth by having positive externalities on the non-export sector. Feder’s empirical findings corroborated this theory, demonstrating that exports significantly boost economic growth in the nations he researched.

The claims that there are no long-term effects of growth on income and income growth are specifically tested by Brummer (2003) using a dynamic panel model with criminal data sets collected from 125 nations over 33 years. Brummer extended Frankel and Romer’s (1999) cross-sectional technique to the instance of a panel data approach in order to address the potential for endogeneity. The empirical findings showed that while trade significantly and favourably affects income levels, its impact on income growth is not resistant to the model’s assumptions. In a study of the impact of trade on economic expansion of East Asia, Jin (2017) observed that the impact of foreign pricing and fiscal policy shocks on economic growth was more than that of the openness shock. Although the findings were in line with the belief that government intervention is essential to the expansion of East Asian economies, they were not very consistent with the new growth theories that contend that long-term growth is impacted by increased openness. However, the existence of positive significant long-run and short-run relationship between monetary policy and fiscal policy with economic growth was observed in Pakistan economy (Awan, Wagas & Aslam, 2020).

Several studies have also looked into how trade affects economic growth in Nigeria. Oyejide (2007) conducted a study that examined the Nigerian experience within the sub-Saharan African environment. Oyejide discovered that although commerce has helped Nigeria’s economy flourish, its full potential has been constrained by the country’s excessive reliance on oil exports. Nigeria’s oil industry, which accounts for the majority of its exports, has not produced any meaningful connections with other economic sectors like manufacturing and agriculture.

The contribution of trade policies on Nigeria’s economic development was studied by Ajakaiye and Fakiyesi (2012). They discovered that trade liberalisation initiatives, like those carried out in the 1980s under the Structural Adjustment Programme (SAP), have produced a range of outcomes. On the one hand, trade liberalisation has made foreign goods and technologies more accessible, which can boost economic expansion. However, Nigeria’s high level of corruption and inadequate infrastructure have made it difficult for local firms to compete on the international stage.

Chimobi (2016) examined the causal relationship among financial development, trade openness and economic growth in Nigeria for the period of 1970 to 2015. The co-integration and Granger causality were employed to analyse the data. The stationarity property of the data and the order of integration of the data are tested using both ADF test and Philip-Peron test. The Granger causality empirical finding suggests that, trade openness and financial development does have causal impact on economic growth; conversely growth have causal impact on trade and financial development, implying support for growth-led trade, but no support for trade-led growth. Domestic credit, private credit and broad money, as percentages of GDP show no causal impact on economic growth, rather economic growth is seen to necessitate these credits and the supply of money.

Alimi and Atanda (2011) examine the effect of mobilization on economic growth in Nigeria between 1980 and 2018. The study employed autoregressive model that regresses trade openness, cyclical foreign investment to GDP, external services, debt stock and exchange rate on real GDP. The result revealed that mobilization has positive and significant effect on economic growth in Nigeria, while the positive effect of business cycle on real output growth was insignificant. External reserves tend to significantly shield the economy from external shocks and the international relative prices stabilize the growth rate of real output in Nigeria. The result equally indicated that globalization and cyclical movement in foreign investment has significantly enhanced economic growth in Nigeria for the period under review.

Aloyebi et al, (2012) examined the impact of international trade on economic growth in Nigeria from 1970 to 2015. The Johansen (1988) technique was used to establish if the non-stationary variable was co integrated. The results of the stationarity and normality test revealed that, the model was fairly well specified and would be used for policy analysis. These variables were statistically significant at 5% level, and the variables were export, foreign direct investment and exchange rate, and they were positively related to real GDP, while import, inflation rate, openness exert a negative effect on real GDP. The study suggested that increase participation in global trade helps Nigeria to reap static and dynamic benefits of international trade despite non-conformity of the coefficient of the openness variables to prior expectations.

Omogu and Adesanya (2013) analyzed the effects of trade on economic growth in Nigeria using data from 1980 to 2018. The econometrics model was gotten from a production function in which the level of a country’s productivity depends on Foreign Direct Investment (FDI), total value of transaction exchange rate and government expenditure. The OLS was employed in the analysis and the result showed that foreign trade exerts a significant positive effect on economic growth in Nigeria, while FDI government expenditure exchange rate was positive, but insignificantly impact on economic growth in Nigeria.

Alajekwu, Ezeabasili and Nzotta (2013) examined the effect of trade openness on stock market development and economic growth of Nigeria. Annual time series date of 26years spanning 1996 to 2021. The ADF test revealed stationarity of the variables at first difference. The Johansen Multivariate Co integration test confirms a long-run relationship among the variables at 5% level of significant. The regression estimate showed that trade openness response to stock market development does not have significant effect on economic growth. The pair wise granger causality test showed that there was no causal relationship between trade openness and economic growth on one hand; and trade openness and stock market development on the other hand. The study concludes that exposure to external economies (under openness) has no significant contribution to the development of Nigeria stock market in particular and the economy in general.

Adelowokan and Maku (2020) investigated the effect of trade and financial investment openness on economic growth in Nigeria between 2000 and 2020. The study employed the Kim (2008) econometric model to examine whether trade openness contribute to standard of living and long-run economic growth for selected developing countries. Estimates from the reported dynamic regression model indicate that trade openness and foreign investment exert positive and negative effect on economic growth respectively. Also, the empirical results showed that the partial adjustment terms, fiscal deficit, inflation and lending rate increased during the reviewed periods. Also, a long-run relationship existed among trade openness, foreign investment and economic growth in Nigeria.

Mubi (2018) conducted a study on the effects of capital inflows, trade openness and economic growth in Nigeria using data that spanned the period of 1996 to 2018. The study employed the composite indicator derived from principal component analysis (PCA) in ARDL bound testing model to explore the interactive effects of capital inflow and trade openness to economic growth. The derivation of the composite indicator from the PCA in the ARDL bound testing model makes their work outstanding in econometric approach. The result revealed that the economic significance of foreign capital and its interaction with trade openness indicators in the growth model depended on the method employed to measure capital inflow and trade openness.

Nduka (2017) tested whether openness of trade leads to economic growth in Nigeria between 1980 and 2017, using OLS technique and data from CBN annual statistical bulletin. The study regressed GDP as a dependent variable and openness, investment, government expenditure and lagged GDP and the independent variables. The independent variables have direct impact on the economic growth. The results indicated that a unit increase in the degree of openness, holding other variables constant, leads to about 5% increase in GDP; 1% increase in investment, holding other variables constant, leads to 18% increase in GDP; 1% increase in government expenditure given other variables, leads to 9.7% increase in GDP and 1% increase in previous GDP, holding other variables constant, leads to about 100% increase in current GDP. The study revealed that openness impact significantly on economic growth in Nigeria.

Alimi and Musa (2013) in an attempt to validate the export led growth hypothesis, employed unit root test, co-integration analysis and VAR Granger causality test to examined the role of export in the economic growth process in Nigeria using series data from 1970 to 2009. The study used three measures of export; total export, oil export and non-oil export to enhance the stability and robustness of results. The unit root test showed that both economic growth and export are integrated of orders one. The Granger causality test was applied to test the causal relationship between GDP and economic growth. Results from the test indicated the presence of uni-directional causality between export and economic growth in Nigeria. The study provided support for growth-led export and recommended that efforts should be directed toward policies that will enhance economic growth such as; import substitution industrialization strategy.

Model Specification

The importance of trade among countries cannot be overemphasized as trade allows for consumption of foreign goods and services as argued by various theories of international trade. This study is anchored on David Ricardo and Heckscher-Ohlin theories of international trade. David Ricardo argued that countries should produce and trade on goods and services they have comparative advantage and in which there are abundant resources. Similarly, Heckscher-Ohlin further emphasized that differences in the factor endowment of countries drive trade among them. Though, both theories argued that trade affects economic growth, but the extent of the effect may differ among countries.

As a result, the functional specification is given by;

After regressing equation 3, the two policies are shown by assigning 0 to D_t in the pre-liberalization and 1 to the post-liberalization period.

RESULTS PRESENTATION

Table 1: Results of ADF Test

Source: Authors 2025

The ADF result in table 1 shows that only TRADE was stationary at level while the series RGDP, OEXP, NOEXP, TOIMP, INF and EXR were not stationary at level form. This is because the calculated ADF statistic for each of the variables is greater than or less than the critical ADF value at the 5% significant level. It is important to carry out the stationarity test of the lagged first difference terms with the aim of solving the problem of non-stationarity time series.

Table 2: Results of ADF test (series in first Diff.)

Source: Authors 2025

First differencing of the variables makes them stationary. i.e. they are all integrated of order 1(1) process. However, it is possible that these series contain a common stochastic trend and their regression will not necessarily be spurious. Despite the disequilibrium in the short-term trend, they will move together other time such that will be cointegrated.

Table 3: ADF Test on Residuals of Cointegration Regression Between Real GDP and Individual Dependent Variables

Source: Authors 2025

The unit root test on the residuals, U_t from the co-integration regression, we find out that, t-stat of all the variables are statistically significant because their respective Prob.(t): Oil exports 0.03, non-oil exports 0.04, imports 0.04, inflation 0.02, and exchange rate 0.01, are less than the alpha or 0.05. We reject the null hypothesis of no co-integration and accept the alternative that there is co-integration between real GDP and each of the variables.

Table 4 ADF Test Equation

Dependable variable: (COINREGRES)

Method: Least squares

Source: Authors 2025

The ADF test on the residuals of multiple co-integration regression confirms an equilibrium long-run relationship between GDP and the variable chosen.

Table 5: Regression of Structural Break in the Nigerian Economy, 1980 – 2023

Dependable variable: LOG (RGDP_t)

Method: Least squares

The diagnostic tests showed series correlation and an incorrect functional form as the F-stat of the Breusch-Godfrey LM and Ramsey RESET tests are above the critical level, and to solve the problem we introduce a new autoregressive process into the model.

Table 6: Re-estimated model of structural break in the Nigerian Economy (1980 to 2023)

Dependable variable: LOG (RGDP_t)

Method: OLS

The test indicated acceptance of the null hypothesis at the 5% significance thus, the model is free from autocorrelation and heteroskedasticity, while the error terms are normally distributed and the model well specified. The signs of the parameters of the explanatory variables conform to a priori expectation. Specifically, trend, trade, openness, the dummy variables are all increasing functions of log of real GDP.

Table 7: Error correction model between oil exports, non-oil exports, imports, inflation, exchange rate growth and growth in Nigeria (1980 to 2023)

The test showed the acceptance of the null hypothesis at the 5% significance, showing that the model is free from autocorrelation and heteroskedasticity, while the error terms are normally distributed. The signs of oil-exports, non-oil exports and imports are positive, a priori, while that of inflation and exchange rates are negative.

By implication, in the short-run, a percentage increase in oil exports, non-oil exports and imports would stimulate growth by 2.14%, 2.58% and 2.98% respectively. While a percentage charge in inflation and exchange rate would depress growth by 0.85% and 4.13%, respectively. The coefficient for residuals ECM (t-1) confirms disequilibrium in the model. The coefficient of 0.6384 suggests that the discrepancy due to short term disequilibrium is corrected, that is, 63.84% of the discrepancy between actual growth rate and the disequilibrium is corrected over the next one year. The entire result is statistically significant at the 5% level because the prob (f-stat) of 0.0417 is less than 0.05.

CONCLUSION AND RECOMMENDATIONS

The study was conducted using macroeconomic data of the Nigerian economy between 1980 and 2023 to establish the linkage between trade and growth. The estimated macroeconomic model demonstrated that, there was a structural shift in the Nigeria’s economic growth trajectory following opening of the economy in 1986, and growth has a positive and significant relationship with oil exports and imports, positive but insignificant relationship with non-oil exports, negative and insignificant relationship with inflation, and a significant relationship with exchange rate.

Findings from the study showed that Nigerian economy derived modest gain in total factor productivity in export, through the mid-1980s as shown by the coefficient of non-oil export. Also, the use of import protection by Nigeria gives room for distortions in the prices of capital goods and encourages industrial policies which can be a source of rents. And the protectionist policy may have damped the non-oil export performance in Nigeria.

The study recommends that, government should improve the total factor productivity of domestic resource intensive industries, especially, in the non-oil sector, scaling back trade barriers and encouraging domestic and foreign investment in service industries.

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