Real exchange rate and non oil export in nigeria (1980-2010)

Thesis Overview

<p> </p><div><p><strong>INTRODUCTION</strong></p><p><strong>1.1</strong>&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<strong>BACKGROUND</strong><strong>OF</strong><strong>THE</strong><strong>STUDY</strong></p><p>Since exportation has a special share in the economic growth of many advanced</p><p>and developing countries; as far as making those countries as the strongest countries,</p><p>the effective factors; in turn, could pave way for progress of countries, particularly the</p><p>developing countries. Since increase or decrease in currency exchange rate leads to</p><p>the decrease or increase in export.</p><p>Nigeria is endowed with various kinds of resources needed to place her amongst</p><p>the top emerging economies of the World. Unfortunately, the nation has not</p><p>adequately benefited from the economic prosperity expected of a nation so richly</p><p>blessed.</p><p>Non-oil exports are products, which are produced within the country in the</p><p>agricultural, mining, quarrying and industrial sector that are sent outside the country to</p><p>generate revenue for the growth of the economy, excluding oil products. These non-oil</p><p>exports include products like coal, cotton, timber, groundnut, cocoa, beans, gum</p><p>arabic etc. while real exchange rate basically, can be defined as the nominal exchange</p><p>rate that takes the inflation differentials among the countries into account. Its</p><p>importance stems from the fact that it can be used as an indicator of competitiveness</p><p>in the foreign trade of a country. Exchange rate is used to determine an individual</p><p>country’s currency value relative to the other major currencies in the index, as adjusted</p><p>for the effects of inflation. All currencies within the said index are the major</p><p>currencies being traded today: U.S. dollar, Euro pounds, etc. This is also the value that</p><p>an individual consumer will pay for an imported good at the consumer level. This</p><p>price includes tariffs and transactions costs associated with importing the good.</p><p>It is imperative to note that exchange rate, whether fixed or floating, affects</p><p>macroeconomic performance such as import, export, national price level, output,</p><p>interest rate etc as well as economic units such as individuals’ purchasing power,</p><p>firms’ performance etc (Chong and Tan, 2008). Chong and Tan (2008) empirical</p><p>analysis revealed that the real exchange rate volatility is responsible for changes in</p><p>macroeconomic fundamentals for the developing economies.</p><p>Export earnings assume vital importance not only for developing, but also for</p><p>developed countries. Developed countries mainly export capital and final goods, while</p><p>the main part of export of developing countries consists of mining-industry goods</p><p>especially natural resources. According to export-led growth hypothesis increased</p><p>export can perform the role of “engine of economic growth” because it can increase</p><p>employment, create profit, trigger greater productivity and lead to rise in accumulation</p><p>of reserves, allowing a country to balance their finances (Emilio (2001), Goldstein and</p><p>Pevehouse (2008), Gibson and Michael (1992), McCombie and Thirlwall (1994)). In</p><p>this context there are some challenges for countries with natural resource abundance</p><p>such as oil in comparison with other countries. The main point is that in parallel with</p><p>windfall of oil revenues these countries have to pay more attention to the development</p><p>2</p><p>of the non-oil sector as well as its export performance (Sorsa, 1999). Because in the</p><p>most of the cases oil driven economic development leads to some undesirable</p><p>consequences such as Dutch Disease in the oil rich countries. &nbsp; In this regard Dutch</p><p>Disease concept provides certain link between the real exchange rate and non-oil</p><p>export. According to this concept the appreciation of a country’s real exchange rate</p><p>caused by the sharp rise in export of a booming resource sector draws capital and</p><p>labour away from a country’s manufacturing and agricultural sectors, which can lead</p><p>to a decline in exports of agricultural and manufactured goods and inflate the price of</p><p>non-tradable goods Corden (1982) and Corden and Nearly (1984).</p><p>The discovery of oil and the realization that foreign exchange could comparatively</p><p>be easily derived from relegated attention to the non-oil sector to the background.</p><p>There are some motivations for conducting this research. The main motivations is</p><p>that some seminal theoretical and empirical studies predict that most natural</p><p>resource rich countries suffer from serious socio-economic problems caused by their</p><p>resource revenues and in this regard these natural revenues are a curse rather than a</p><p>blessing for these countries (Sachs and Warner, 1997; Auty, 2001; Gylfason, 2001;</p><p>Gylfason and Zoega, 2002 ). One of these resources causes, the so called Dutch</p><p>disease, is mainly related to an appreciation of the real exchange rate, sourced from</p><p>inflow of resource revenue into country, which undermines &nbsp; &nbsp; the competitiveness of</p><p>the non-resource sector’s (manufacturing and agriculture) export and therefore</p><p>deteriorates this sector while it leads to higher demand for imports and services</p><p>3</p><p>(Corden and Nearly, 1982; Corden, 1984). This prediction, in particular the ultimate</p><p>role of exchange rates in economic challenges of these countries, is supported by a</p><p>number of empirical studies. For example, Wakeman-Linn et al. (2002) and sturm et</p><ol><li>(2009)concluded, that the exchange rate is a key economic policy issue in oil</li></ol><p>exporting countries.</p><p>Another motivation would be to examine whether or not the predictions of the</p><p>international trade theory holds in an economy such as Nigeria. One of the</p><p>motivations is that without conducting empirical analysis it is quite difficult or</p><p>impossible to make effective policy measures for the international trade of a country.</p><p>Government especially thinks that the non-oil export based development can be an</p><p>engine of sustainable economic growth for the country particularly in the future</p><p>post-boom period; it would be useful to investigate the impact of the real exchange</p><p>rate on the non-oil exports of Nigeria.</p><p>Appreciating exchange rate is one of the major factors that impede the growth of</p><p>non-oil export in Nigeria. Another non-oil export that could be dwelled on is the</p><p>industrial sector. It is the fastest growing sector in Nigeria economy. It comprises of</p><p>mainly manufacturing and mining. But one can clearly see that since the inception of</p><p>oil in Nigeria, the country has been running on a monotonic state (concentrated only</p><p>on oil), as its main source of revenue and for its expenditures. These have resulted to</p><p>a break down in some sectors of the Nigeria economy. The agricultural sector since</p><p>the emergence of oil has been partially abandoned, the farmer’s in the country only</p><p>operate on a subsistence level, due to the fact that the policy mapped out by the</p><p>government has not been really implemented and it has brought about low</p><p>productivity in the economy. Efforts kicked off by the World Bank and other state</p><p>and national agencies (Fadama I, II &amp; III policy) were not able to fully revive the</p><p>agricultural sector, due to the country mainly depends on oil for its survival.</p><p>Looking at the industrial sector you see that you have little or no export to other</p><p>countries. Nigeria has many unused resources that if really developed can create</p></div><h3></h3><br> <br><p></p>