EFFECT OF FOREIGN INCOME ON NIGERIAN EXPORTS
Zakaree S. Saheed and Y.O. Adegoke
Department of Economics, Achievers University, Owo
This paper examines the effect of foreign income in terms of Gross Domestic Products of some of the major trade partners of Nigeria, on the exports of Nigeria, with 15 (fifteen) years period of observation. The countries include United States of America, Canada, Italy, Spain and Brazil. Simple regression analysis was carried out to investigate the impact of this variable on the exports of Nigeria. Empirical results indicate that the income of all of these countries as independent variable have a positive and significant effect on the dependent variable, except Brazil which has a negative, weak and insignificant impact on the dependent variable. Based on these findings, some recommendations are offered to aid policy design to promote Nigerian exports, and maintain its competitiveness in the international markets.
Keywords: Effect, foreign, income and exports
Nigerian exports are distributed across a large number of countries, but most are to industrialized countries. About 72 percent of merchandise exports in 2003 were to industrialized countries, of which the United States alone accounted for 40 percent. Exports to the European Union also benefit from preference under mainly the Cotonou Agreement. While exports to African and Asian countries accounted for 10 percent and 11 percent of total merchandise exports respectively.
In a bid to expand her market access, Nigeria has signed bilateral, regional and trade preferential agreements with different countries. Apart from signing bilateral agreement with Benin republic, Bulgaria, Equatorial Guinea, Jamaica, Niger Republic, Romania, Turkey, Uganda and Zimbabwe, the government has also signed investment promotion and protection treaties with France, Switzerland, the United Kingdom, the Netherlands, North Korea and China. Nigeria is one of the founding members of Economic Community of West African States (ECOWAS) and of the World Trade Organization (WTO) and a signatory of the Lome Convention (Rosemary, N.O., 2004).
Nigeria is the largest U.S. trading partner in sub-Saharan Africa, based mainly on the high level of petroleum imports from Nigeria. Total two-way trade was valued at US$ 30.8 billion in 2006, a 19% increase over 2005. Leading U.S exports to Nigeria were machinery, wheat, and motor vehicles. Leading U.S imports from Nigeria were oil and rubber products. Nigerian exports to United State under the African Growth and Opportunity Act (AGOA), including its Generalized System of Preferences (GSP) provisions, were valued at US$ 25.8 billion during 2006, a 15% increase over 2005 due to increase in oil exports. Non-oil AGOA trade (leather products, species, cassava, yams, beans and wood products) totaled US$ 1.4 million in 2006, almost double the amount in 2005 (Bureau of African Affairs, U.S. Department of States, 2007).
Nigerian trade partners in European Union include Germany, United Kingdom, Netherlands, Italy, France and Spain. European Union is the second largest Nigerian trading partner after United State. Nigerian total export to European Union countries attained N1,221,357,300,000.00 (US$ 9.28 billion) in 2005, an increase of 38.76 percent over 2004.
Nigeria is the United Kingdom’s largest market in sub-Saharan Africa after South Africa. The value of United Kingdom exports has increased steadily from ₤535 million in 2000 to ₤817.81 million in 2005. Imports from Nigeria were worth ₤88.56 million in 2003 and rose to ₤163 million in 2005. The United Kingdom is one of the largest investors in Nigeria, with cumulative investment of several billion pounds by shell in the oil and gas sector. Other large British companies active in Nigeria include Guinness, Unilever, Cadbury, British-American Tobacco, GlaxoSmithKline, British Airways and Virgin Atlantic.
Italy is one of the most important economic partners of Nigeria being her 10th importer country and 7th exporter country. About 40% of Italian exports to Nigeria are composed of Industrial machineries, household electrical products and refined petroleum products. Nigeria on the other hand, is Italy’s second most important trading partner in sub- Africa both in terms of exports and imports (Embassy of Italy, Abuja. www.ambabuja.esteri.it/ambasciata-abuja).
Nigeria is Canada’s second largest trading partner in sub-Saharan Africa. Bilateral trade totaled C$284 million in 2002, down from previous years. Canada purchased C$196 million in crude oil and C$7 million in cocoa, while Nigeria purchased C$80.5 million in various goods, mostly grains, machinery, plastic and vehicles. There are more than 200 Canadian companies in Nigeria, particularly in the energy and telecommunications sectors. Canadian direct investment in Nigeria totaled C$375 million in 2001.
Nigerian exports to Brazil in 2005 was valued US$ 4.9 billion, while Brazil exported goods and services amounting to US$900 million to Nigeria (Kayode Garrick, Nigerian envoy to South American nation, as quoted by Tralac, 2006).
The relationship between Nigeria and Brazil took a major leap with the signing of bilateral agreements which bordered mainly in four major areas of trade and investment, technical cooperation and cultural revival, by the presidents of the 2 countries in 2005 (ThisDay Online, Nigeria., 2005).
However the volumes of exports that are supplied and demanded are influenced by a variety of factors both from the supplying side and the demanding side, including foreign income. Of what effect is national income of countries like the United States of America, Italy, Spain, Canada, and Brazil who the major trading partners of Nigeria, on the exports of Nigeria? Based on this back ground, this paper proposes to critically examine the relationship between foreign income and the exports of Nigeria.
Table 1.0: Gross domestic product of the 5 major trading partners of Nigeria (US$ million), 1991 - 2005
YEAR U.S.A SPAIN ITALY BRAZIL CANADA
1991 5,995,920 571,000 1,161,243 405,797 598,198
1992 6,337,750 575,000 1,231,408 418,245 579,198
1993 6,657,400 569,000 993,391 438,266 563,678
1994 7,072,230 580,000 1,025,402 546,220 564,477
1995 7,397,650 597,000 1,097,211 704,168 590,500
1996 7,816,820 610,000 1,232,885 774,935 613,775
1997 8,304,330 559,000 1,166,796 807,740 637,527
1998 8,746,980 581,800 1,196,658 787,740 616,783
1999 9,268,430 677,500 1,180,437 536,634 661,251
2000 9,816,970 720,800 1,097,347 601,735 724,236
2001 10,127,900 721,016 1,090,397 508,434 715,062
2002 10,469,600 850,700 1,186,391 460,838 735,956
2003 10,960,700 885,500 1,507,109 505,731 866,921
2004 11,712,500 937,600 1,724,522 603,948 991,668
2005 12,455,800 1,033,000 1,762,473 795,925 1,129,856
Source: IMF International Financial Statistics and CIA World fact book.
Trade provides benefits by allowing countries to export goods whose production makes relatively heavy use of resources that are abundant, while importing goods whose production makes heavy use of resources that are locally scarce (Krugman and Obstfeld,1998) A rough measure of economic relationship among nations or their interdependence, is given by ratio of their import and export of goods and services to their gross domestic product (Salvatore, 2001)
Export is the purchase of the people of other countries which increases the national income of the domestic economy. Export activities will not only improve a country’s balance of trade and payment, but also positively affect other economic indicators like employment and gross domestic product, since export represent the expenditure of the people of other country on the commodities produced domestically (Toga, 2006).
Export of a country to another country either from a formal or informal sectors, is affected by many economic factors like exchange rate, inflation rate, import quota of other country and foreign income. Foreign income in the context of this research is represented by the gross domestic product of the country of destination. Gross domestic product itself is “the sum of incomes in the economy during a given period” (Oliver, 2003, p.24). Foreign income tends to be associated with the volume of exports from another country (Mark Smith, n, p.6).
Data compilation technique
In the context of this research, this paper relies on secondary data collected from the National Bureau Statistics, Central Bank of Nigeria, and National Exports Promotion Council, Abuja, as well as internet, especially the websites of the International Monetary Funds. The secondary data comprises of the total exports of Nigeria to other countries, the Gross Domestic Products or national income of foreign trade partners of Nigeria and other information relating to this research within the period of observation, that is, fifteen year.
The definition of operational variables in the context of this paper is the concepts of the parameters and variables used in the analysis.
The independent variable = Foreign incomes denoted by Y
The dependent variable = Exports of Nigeria, denoted by X
Construction of simple regression model for the hypothesis:
Linear regression model is a form of model with a linear parameter, and can be used quantitatively to analyses the effect of one variable on another. Linear regression can be a simple linear regression or a multiple regression (Nachrowi and Hardius, 2006, p. 7).
Analysis of partial effect of independent variable, that is, foreign incomes on the dependent variable, which is the exports of Nigeria (Y). An empirical model is applied as follows:
X = a+ β Yf + ε ------- (3.1)
β1 > 0 (expectation)
X = Exports of Nigeria
Yf = Foreign Income.
Statistical hypothesis tests
Hypothesis tests are use to examine whether a regression coefficient is significant or not. Significant here means that a certain coefficient of a regression is not statistically zero. Should a coefficient of a slope be zero, it implies that there is no enough evidence to conclude that an explanatory variable influences the dependent variable, Y. There are 2 types of hypothesis tests that can be conducted in relation to coefficient of regression, they are F-Test and T-test (Nachrowi and Hardius, 2006).
T-test is use to confirm whether or not the available data contain any evidence suggesting a dependent variable, say Y, is related to independent variable, say X. The hypothesis is written as follows:
H0: β = 0 independent variable X is not related to Y
H1: β ≠ 0 independent variable X is related to Y
To confirm whether the data contain any evidence suggesting dependent variable, Y is related to independent variable, X we test the null hypothesis.
H0: β = 0
Against the alternative hypothesis
H1: β ≠ 0
H0 is rejected while alternative hypothesis, H1 is accepted, if value of the t-statistic is greater than the value of t-table, indicating that the data contain evidence suggesting that independent variable partially influences the dependent variable (Cartel, et. al, 1997).
Result and discussion
Hypothesis: ln.X = a + β lnYf + ε
Dependent variable : Exports of Nigeria
Independent variable: Foreign Income
Period of observation: 1991 - 2006
Variable lnX ln.YUSA lnX ln.YSpain lnX ln.YItaly lnX ln.YCanada ln.X ln.YBrz
(B) -130.666 4.612 -133.078 .130 -113.617 4.323-115.922 4.499 15.82 -0.389
t-Statistic -4.536 4.770 -4.689 4.926 -2.297 2.433 -3.492 3.694 0.389 -0.224
Probability 0.001 0.000 0.001 0.000 0.039 0.030 0.004 0.003 0.704 0.827
R : 0.798 0.807 0.559 0.716 0.062
R-Square 0.636 0.651 0.313 0.512 0.004
Adj R-square: 0.608 0.624 0.260 0.475 -0.073
Source: Data processed.
X = Exports of Nigeria
YfUSA = Gross domestic products of United States of America
YSpain = GDP of Spain
YItaly = GDP of Italy
YCanada = GDP of Canada
YBrz = GDP of Brazil
Based on the analyses done on the available data processed on SPSS 11.5, using simple regression model, the result obtained indicated that there is a positive impact between the gross domestic product of United States of America (foreign income) and Nigerian Non-oil and gas exports from the period of 1991 until 2005.
According to statistic summary, the gross domestic product (foreign income) of United States of America has a coefficient of 4.612 in relation to Nigerian non-oil and gas exports, indicating that any change of 1% in the gross domestic product of United States of America will lead to a positive change of about 4.6 % in Nigerian exports. However if the gross domestic product of United States of America be nil, it implies that there might not be export of non-oil and gas of Nigeria to United States of America, instead there may be imports.
The United States of America income has a R square of 0.636 with Nigerian non-oil and gas exports. The coefficient determinant of 63.6% indicates that about 63.6% of the Nigerian non-oil and gas exports can be explained by factors of United States of America’s income, while about 36.7% can be explained by factors outside the model. With probability of 0.000 and a t-statistic of 4.770, the coefficient of regression is significant at α = 5% level of tolerance.
ln.X = ln.a + β ln Foreign Income + ε
ln.X = -130.666 + 4.612 YfUSA + ε
Spain has a coefficient of 5.130 in relation to Nigerian exports, indicating that any change of 1% in the gross domestic product of Spain will lead to a positive change of about 5.1 % in Nigerian exports, provided all other factors remain constant. With probability of 0.001 and a t-statistic of 4.926, the coefficient of regression is significant at α = 5% level of tolerance.
ln.X = ln.a + β ln Foreign Income + ε
ln.X = -133.078 + 5.130 YfSpain + ε
Italy Income has a coefficient of 4.323 in relation to Nigerian exports, indicating that any change of 1% in the gross domestic product of Italy will lead to a positive change of about 4.3 % in Nigerian exports, provided all other factors remain constant. With probability of 0.030 and a t-statistic of 2.433, the coefficient of regression is significant at α = 5% level of tolerance.
ln.X = ln.a + β ln Foreign Income + ε
ln.X = -113.617 + 4.323 YfItaly + ε
Canada has a coefficient of 4.499 in relation to Nigerian exports, indicating that any change of 1% in the gross domestic product of Canada will lead to a positive change of about 4.5 % in Nigerian exports, provided all other factors remain constant. With probability of 0.003 and a t-statistic of 3.694, the coefficient of regression is significant at α = 5% level of tolerance.
ln.X = ln.a + β ln Foreign Income + ε
ln.X = -115.922 + 4.499 YfCanada + ε
Brazil has a coefficient of -0.336 in relation to Nigerian exports, indicating that any change of 1% in the gross domestic product of Brazil will lead to a negative change of about 0.3 % in Nigerian exports, provided all other factors remain constant. With probability of 0.827 and a t-statistic of -0.224, the coefficient of regression is insignificant at α = 5% level of tolerance.
ln.X = ln.a + β ln Foreign Income + ε
ln.X = 15.823 - 0.336 YfBrazil + ε
Conclusion and recommendation
Based on the analyses done on the available data processed on SPSS 11.5, using simple regression model, the result obtained indicated that there is a positive impact between gross domestic product of the major trading partners of Nigeria, and the Nigerian non-oil and gas exports from the period of 1991 until 2005, except for the gross domestic product of Brazil which is insignificant at a α = 5% level of tolerance.
Among all the five major trading partners of Nigeria sampled, the Spain’s gross domestic product has the strongest coefficient of 5.130 followed by United States of America’s gross domestic product of 4.612. Italy has a coefficient of 4.323 in relation to non-oil and gas exports of Nigeria, followed by Canada with 4.499, and Brazil is the least with a coefficient of -0.336.
Based on the result obtained, non-oil and gas exports are very crucial towards achieving a sustainable development and poverty reduction, hence government policies towards promotion of non-oil and gas export are important to diversify the economy. However it is equally important to ensure that the goods are able to compete internationally in terms of quality and prices in order to maintain the competitive advantage of Nigerian non-oil and gas exports with the trading partners like United States of America, Spain, Italy and Canada.
Erratic electricity and fuel supply has been a major factor for the excessive high domestic production cost which in turn has led to cost push inflation, hence the government need improve its effort to effectively resolve electricity and fuel crisis, by increasing investment in research and development to find alternative source for electricity supply.
Exportation of products in its primary or natural form tends to undermine the market value of such commodity, hence the government and private sectors should invest in facilities to process or transform some of these natural resources to at least a semi processed form before being export, so as to give an added value to the commodity, thereby improving its export price.
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