Can Foreign Trade Propel Economic Growth in Nigeria? Evidence from Causality Analysis

Author: Ogbokor, Cyril A.

Documented studies in the existing literature pertaining to causality relationships between foreign trade and economic growth indicators are quite enormous. This study investigates the dynamic causal relationship between foreign trade and economic growth in Nigeria during the period extending from 1995:Q1 to 2015:Q4. The study responds to the issue of omitted variable bias by incorporating trade openness and exchange rates as control variables. The study employed the granger-causality tests to determine the causal relationship, and in particular the direction of causality among the variables examined after carrying out the stationarity, cointegration and diagnostic tests. The study found a number of distinctive unidirectional causalities running from trade openness to exports, exports to exchange rates, real GDP to exports, trade openness to exchange rates, as well as from real GDP to exchange rates. These results suggest that, to increase and sustain economic growth, Nigeria should commit huge resources to its infrastructural development, diversification strategy, incentives pertaining to the country’s manufacturing sector, trade promotion policy, as well as having in place, an effective monitoring mechanism of curbing dumping activities of multinational corporations. The study recommends that, in future studies, efforts should be made to increase the variables used in the causality model. It is also suggested that future research endeavours, should engage other causality models in the existing literature to further investigate the issue under consideration.