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CAUSALITY BETWEEN GLOBALIZATION AND
ECONOMIC GROWTH: EMPIRICAL EVIDENCE FROM NIGERIA
Evelyn N. Iyoko.
Department of Economics, Novena University, Ogume
Matthew Eboreime, Western Delta University, Oghara
The concomitant unequal distribution of the benefits of globalisation and the fear expressed by most developing countries about its negative impact, have made the question on the relationship between globalization (characterized by foreign direct investment, economy openness and net capital flows) and economic growth both in developed and developing countries lie at the heart of debates on economic development policy. This paper investigates the causal relationship between globalization (characterized by FDI and Openness) and Economic Growth using co-integration techniques on time series data in Nigeria. The result of the study shows a unidirectional causality between FDI and Growth with FDI Granger causing growth while there was no causality between Openness and Growth. Rather, openness Granger causes external debt in Nigeria. The study encouraged that the country should imbibe some of the sketched contours of an appropriate development strategies for developing economies which includes debt reduction, domestic fiscal discipline, effective exchange rate policy and the diversification of the domestic base.
Keywords: Globalization, Economic Growth, Granger causality, Nigeria.
Globalization and economic competitiveness remains one of the most controversial subjects in recent discourse. Several authors have critically examined its usage, ideological implications and economic benefits associated with it (Spybee, 1996; Scholte ,2000; Onyeonoru, 2003; Onyemenan, 2004; Eboreime and Iyoko 2008).
Globalization which is characterized by an intensification of cross-border trade and increased financial and foreign direct investment flows promoted by rapid liberalization presupposes that globalization is beneficial to the extent that it can lead to increase in capital flows and economic growth. Yet the concomitant unequal distribution of these benefits and the fear expressed by most developing countries about the negative impact of globalization, has made the question on the relationship between globalization (characterized by foreign direct investment, economy openness and net capital flows) and economic growth both in developed and developing countries lie at the heart of debates on economic development policy.
The empirical result on the relationship is neither straight forward nor clearly distinct. While several researches using different approaches have found growth to be enhanced by globalization and its channels (Ojo and Oshikoya, 1995; Edwards, 1998; Ben-David et al 2000), others found a negative effect of globalization characterized by openness and FDI on growth (Ndiyo and Ebong, 2003; Edison et al, 2002; Reisen and Solo-2001).
The negative results on the effect of globalization were attributed to the economic situation in the countries under the study. Most of these countries mere not fully ready and developed to stomach and accommodate globalization and the competitiveness associated with it. It further points out that the level of development of a country in terms of her domestic financial system and other factors determines the flow of globalization and its benefits. Therefore, it becomes imperative not just to investigate if there is a relationship between globalization and economic growth but also to investigate the causal link between globalization and economic growth given that globalization and economic growth are determined simultaneously.
Thus the objective of this paper is to investigate the causal relationship between globalization and economic growth using co-integration techniques on time series data in Nigeria. So far, majority of the empirical studies focused only on the relationship between globalization and economic growth. Only few studies have looked at the causality relationship between globalization’s channels and economic growth in a developing country like Nigeria.
The ambiguity on the growth enhancement of globalization both theoretically and empirically has led to different studies being carried out by different researcher on different countries/set of countries. This paper is focused on investigating the causal relationship between economic growth and globalisation proxied by foreign direct investment and openness using time series data of Nigeria from 1981 to 2006.It is thus expected that this paper will contribute to the expanding body of literature as well as fill in the gap of the periods of the few studies that has been done in this area.
Theoretical Issues on Globalization and Economic Growth
There is no particular theory of globalization. Nevertheless, the process is driven by a continuum of theories such as the theory of comparative advantage by David Ricardo which encompasses the international competitiveness and growth models (Beck et al 1994; Eboreime and Iyoko, ibid). The law of comparative advantage states that countries will benefit by specializing in the production of goods for which the opportunity cost is lower and exchange these goods for others with higher opportunity cost. Thus with greater openness to trade, productive resources tend to move towards activities where they are used with comparative advantage and away from less effective activities. (Agenor 2002).
Globalization is the driving force of the intense competition among nations. Many writers have come up with different views of the terms globalization can be defined as a multidimensional process of unprecedented rapid and revolutionary growth in the extensiveness and intensity of interconnections on a Purdy global scale. It can also be defined as a process of growing economic liberalization followed by integration of markets domestic economics for capital, good, technology and labour leading to new trends, risks and opportunities (Aina, 1997). Thus Obadan (2003) opined that, openness and markets constitute the platform of globalization while trade, finance, investment and entrepreneurs are the heart.
While economic globalization is defined as the integration of the domestic economics with the world economy through channels such as free capital, economic growth on the other hand is defined as the steady process of increase in the productive capacity of the economy over a period of time and this is brought about by some factors such as the advancement of technology, trade liberalization development of capital and labour, sound macro economic policies among others (Uwatt, 2003). From the above theoretically analysis, it is clear that globalization and economic growth are related. There are different channels or link through which globalization affects growth.
Openness – Growth theories suggests that there is a positive relationship between openness and the rate of growth in the long run. Thus the static allocative efficiency gains theory suggests that greater openness yields great gains to the country mostly in terms of economic performance that yields a higher level of output. This is because the removal of trade barriers expands the feasible set of consumption possibilities by providing a more efficient technology to transform domestic resources into goods and services (Martin, 1992).
The new growth theory also suggests that greater openness result in a higher long-run growth rate through the expansion in the size of market facing domestic exporters. They however did not predict any positive link since increase in openness can lower growth as a result of increase in competition. Thus the relationship between growth and openness with its theoretical ambiguity has raised a lot of question for empirical investigation.
Foreign Direct Investment (FDI) and Capital Flows- These are also major channels through which globalization affects an economy. Increase in FDI and capital flows provides capital for the recipient country as well as increased productivity and growth through the transfer of technology as well as organizational skills (Masson, 2001; Obioma and Osanyintugi, 2003). The classical economist argues that that free capital flow allows countries with limited savings to attract financing for productive domestic investment. This promotes trade and high rate of return, encouraging savings and investment that brings about faster economic growth. This portrays a positive relationship between FDI and capital flow and economic growth. But the ability of capital flows and FDI to promote growth depends on the volatility of the flows. Such volatility can be damaging to the growth of an economy since it exposes the country to risk of financial markets, speculation attacks and crashes. (Easterly. Islam and Stiglitz, 2000). This has raised some ambiguity on the theoretically relationship between FDI and economic growth as well as capital flows and economic growth. Thus there is a need to empirically investigate this relationship and throw light to the Growth-Globalization link
Empirical Issues on Globalization and Economic Growth
These unclear effects of globalization channels on growth, has led to a lot of empirical investigation by different researchers. Some researches found globalization characterized by foreign trade, openness, FDI or capital flows to be growth enhancing (Martin 1992; Edwards, 1998; Ben-David (op cit). But as pointed out be Rodriguez and Rodrik (2001), in Uwatt (2003), these studies failed to address the problem of simultaneity that arises form trade and output.
Other studies that looked at financial aspect of globalization come up with mixed results. While studies such as Bekaert, Haniey and Hundbold (2001) found a positive effect of globalization on growth, others such as Chanda (2001); Edison (op cit) found mixed effects. Dc Mello (1999) used data for 1980, and found that foreign direct investment (FDI) flows promotes economics growth while Reisen and Soto (2001) examined six types of capital long-term bank credits, short-term credits and official flows) for the period 1986-1997. They used a dynamic panel regression framework, and found that only FDI and Portfolio equity flows positively effects economics growth.
In the study carried out by Bala (2002), on the relationship between openness and economic growth, he used a vector autoregressive (VAR) model and error correction techniques to test the existence and nature of the causal relationship between output level on in ward FDI and exports using data from 1960-2001 on a cross section of both developed and developing countries. The result showed a bi-directional causality between export growth and economic growth; the economic growth and FDI relationship had mixed results.
Uwalt, (2003) examined how globalization effects economic growth in Africa using panel data regression with trade-GDP ration and net capital flow-GDP ration as proxies for globalization. The results for the 41 countries used in the study are mixed based on the estimation method. The result showed weak and mixed result regarding the impact of globalization on growth in Africa. However there was evidence that globalization can positively affect growth in the region depending on how fast Africa countries become integrated.
In addition, Ndiyo and Ebong (2003) carried out a study on the challenges of openness in developing economics evidence from Nigeria. They used a VAR model on Nigeria time series data from 1970-2000 on growth rate of output (GDP), openness, foreign direct investment (FDI), external reserves (EXTR), foreign exchange rate (FEIR), net foreign indebtedness (NFI), fiscal deficit (FDEF), average world prices (WPNCE) and Balance of payments (BOP). The result reveals a negative influence of openness exchange rate, fiscal deficit, average world prices and balance of payments on economic growth while external reserves, net foreign indebtedness and foreign direct investment exert a positive impact on the Nigeria economy for the period under study.
Thus the difference in the results may be attributed to the measures of globalization used, the sample period, the country/set of countries under the study, the type of data used as well as the methodology used for the different studies. These few studies are limited to establishing only if there was a positive or negative relationship without investigating the possibility of casual relationship between globalization and economic growth.
Nigeria in the Global World
The place of Nigeria in the globalizing world requires some in-depth study. Following the globalization trend Nigeria liberalized its economy embracing the policies of structural adjustment programme (SAP) in the late 1980s. Nigeria is economically weak which can be attributed to the inadequate domestic capacity to boost the country’s productivity, the monocultural dependency, the unfavorable terms of trade as well as the excruciating debt. Iyoha, (2003) observed that SAP had a negative effect on the economy making the economy weak in the global competition, the weak economy due to the inadequate domestic economy capacity social infrastructure as well as the mono-dependency and unfavorable terms of trade in its export trade have been a hindrance to the full achievement of the benefit of globalization as a result of the negative effect of the economic situation on investment especially foreign investment.
In the pre-SAP period, the manufacturing sector for instance recorded a growth rate of 8.4% of GDP in 1980 but it fell to 5,29% in 1989 while it ebbed lower to 4% in 1993. It recorded a negative growth rate for the entire period from 1994-2004 and a zero growth rate in 2005 (CBN, 2006).The exchange rate which was at #1.60 to US$1.00 in pre-SAP period plummeted exchanging at #4.6 to US$1.00 in 1986 and stands at 128.65 in 2006(CBN,2006). FDI flows to Nigeria amounted to $588million in 1990. This rose to $1.079million in 1995 but declined to $930million in 2000. With the worldwide FDI flow of $823.8 billion in 2001, Nigeria attracted only $1.1billion which is 0.13% of the world flow (UNCTAD 2002b in Onwuka and Eguavoen, 2007). This meager share shows the country’s marginalized status within thee orbit of modern capitalism
The World Bank (2000) estimating the degree of trade openness in Nigeria showed that trade openness was 26.2% in 1960, this rose to 66.7% in 1991, 75.2% in 1997 and 89% in 2003 but fell to 45% in 2006 (appendix 1). With this level of openness, the ration of FDI to GDP ration has consistently been declining since despite the drastic cumulative increase in the global FDI flows. Appendix 1 shows that that the FDI to GDP ration that was 7.3 in 1980 rose to 12.9 in 1986 but fell to 9.6 in 1993 and ebbed lower to 1.6 in 2006. This points out that despite the fact that the nominal value of FDI was on the increase, its contribution to GDP was falling. The figures of the FDI flow and the nature of Nigeria trade structure which is monoculture depending on oil, also shows that the FDI flow were only in the petroleum sector rather than the agricultural and the manufacturing sector that needs more of the technologies for the economy to reap much benefit from globalization of the word.
The growth of GDP is not also encouraging. GDP growth rate which was 13.8% in 1985 fell to 1% in 1986, which was the early period of SAP. This rose to 49% in 1987 fell to 15.9% in 1991 which was the core period of SAP and globalization in Nigeria while in 2001 GDP growth rate was 13.2% and in 2006, the economy recorded a GDP growth rate of-83.5%. The above analysis points out that despite the high degree of openness which is one of the major channels of globalization, the economic growth of Nigeria has not been encouraging. They also points out that Nigeria has not really benefited in the globalization that have come to stay in the world.
As presented in the proceeding section, different techniques have been used in various studies to test the relationship between globalization and economic growth. This paper uses con-integration models to test for the direction of causality between economic growth and globalization proxied by openness and FDI. Building on the Mendel Fleming’s model of open macroeconomics elaborated by Obaseiki (1999) and Ndiyo and Ebong (2003), our growth – globalization equation which captures some of the channels through which globalization is expected to affect growth is as stated below.
GDP=f(OPEN, FDI, EXD, EXR)….(1)
GDP= Growth Rate of Output.
OPEN = Total trade-GDP ration, used as proxy for openness.