TRADE OPENNESS, GOVERNMENT EXPENDITURE AND ECONOMIC GROWTH

CHAPTER ONE:

INTRODUCTION

Background of the Study

The relationship between economic growth and government spending, or more broadly, the size of the public sector, is a central topic of analysis and debate in economic literature. A critical question within this global discourse is whether public sector spending can sustainably increase the long-run steady-state growth rate of an economy. The prevailing view is that while public expenditure (particularly on physical infrastructure or human capital) can enhance growth, the methods of financing such expenditures, such as taxation, can potentially impede growth due to disincentive effects Nyamkure (2022). This dynamic, where government activity interacts with the private sector to influence total output, underscores the complex nature of fiscal policy's impact on economic growth. Globally, the impact of trade openness on economic growth has also been a significant and widely debated issue. The theory of comparative advantage suggests that countries benefit from trade by exporting products in which they have a relative efficiency and importing those in which they do not. This leads to increased efficiency and supports economic growth Bustinza (2024). Numerous empirical studies have demonstrated a strong association between trade openness and economic growth, asserting that economies with higher degrees of openness tend to experience more rapid growth. Despite this, there remains ongoing debate about the causal direction and magnitude of these effects, with some researchers arguing that the relationship is more complex and context-dependent. Trade openness provides several advantages, including increased opportunities for exports and imports, which in turn create employment and drive economic growth. Neoclassical economists argue that trade is a primary engine of growth, highlighting the significant relationship between trade and economic performance. In addition to trade, government spending plays a pivotal role in economic development across the globe. Public expenditure is utilized by both developed and developing countries to improve income distribution, allocate resources, and influence national income composition (Assi et al., 2019; Vtyurina, 2020). In developing economies, government spending is crucial for providing basic infrastructure and initiating projects that the private sector may not undertake due to their risky nature. However, the sustainability and efficiency of large government sizes continue to be a topic of both political and academic debate. Moreover, fiscal policy and trade policy are vital macroeconomic tools that foster technological advancements and, consequently, economic growth. The endogenous growth theory emphasizes the importance of endogenous technology in driving a nation's economic progress Pathompituknukoon (2024). Similarly, the new international trade paradigm suggests that technology transfer through the flow of foreign goods and services accelerates economic growth in the home country Khan (2024). Despite the numerous studies linking trade openness and government spending to economic growth, the exact nature of their relationship, especially in the context of developing economies, remains an area of active inquiry and debate. This study aims to model the dynamics between trade openness, government spending, and economic growth, contributing to the global discourse on how these macroeconomic variables interact. By examining these relationships, the research seeks to provide insights that can guide policymakers in both developed and developing countries in formulating strategies that optimize economic growth in an increasingly interconnected world.

Nigeria, as a developing economy, has experienced fluctuating trends in trade openness, government spending, and economic growth. The country’s economic structure is heavily reliant on the export of crude oil, which accounts for a significant portion of its revenue and foreign exchange earnings. However, this dependence has exposed Nigeria to global oil price shocks, which have, in turn, influenced the country's economic policies, including trade and government spending strategies. The Nigerian government has historically played a substantial role in the economy, primarily through its fiscal policies. Government spending in Nigeria has been characterized by a mix of consumptive and productive expenditures, with varying impacts on economic growth. As studies suggest, while productive government spending on infrastructure and human capital development tends to foster economic growth, excessive consumptive spending can hinder growth by crowding out private Christie (2014). In the Nigerian context, this dynamic has been observed, with periods of high government expenditure coinciding with both positive and negative growth outcomes, depending on the composition and efficiency of the spending (Saidu & Ibrahim, 2019; Awode & Akpa, 2018). Trade openness in Nigeria has been influenced by both global and domestic factors. The adoption of Structural Adjustment Programs (SAPs) in the 1980s, under the guidance of the International Monetary Fund (IMF) and the World Bank, marked a significant shift in Nigeria’s trade policy. These programs aimed at liberalizing the economy, reducing trade barriers, and encouraging private sector-led growth. However, the implementation of these policies had mixed outcomes, with some studies pointing to the negative effects of rapid liberalization on domestic industries and the broader economy Wahyudi & Ayunindien (2022). Despite these challenges, trade openness has also provided Nigeria with opportunities to integrate into the global economy. The increase in trade flows, particularly in exports of oil and other commodities, has contributed to periods of robust economic growth. However, the benefits of trade openness have not been evenly distributed across sectors, with the non-oil sector often lagging behind Nyarko-Asomani et al. (2019). Moreover, the reliance on imports for essential goods has at times exposed the Nigerian economy to external vulnerabilities, including inflationary pressures and exchange rate volatility Gukat & Ogboru (2017). In recent years, the Nigerian government has sought to balance the benefits of trade openness with the need to develop domestic industries and reduce dependency on oil exports. Policies aimed at promoting industrialization, improving infrastructure, and enhancing human capital are seen as critical to achieving sustainable economic growth. Additionally, there is ongoing debate regarding the optimal composition of government spending to support these goals, with some advocating for increased investment in productive sectors to drive long-term growth Jibir & Babayo (2015).

The complex interplay between trade openness, government spending, and economic growth in Nigeria underscores the need for a nuanced approach to economic policy. As the country continues to navigate the challenges of globalization and domestic development, the effectiveness of government interventions and the openness of its economy will remain pivotal to its economic trajectory Srinivasan (2017)

Statement of Research Problem

Trade openness, government spending, and their combined impact on economic growth remain areas of substantial interest, particularly in Nigeria. Research by Chen (2006) highlights the critical role of public spending composition in optimizing economic growth, but it lacks exploration of how trade openness interacts with this dynamic. Furthermore, Saragiha et al. (2020) show that while foreign direct investment and trade openness significantly affect short-term economic growth, gross fixed capital formation and government development expenditure have a lesser impact. This indicates a significant gap in understanding how various aspects of government spending and trade openness jointly influence economic growth over time.

The Nigerian context provides a pertinent case study for examining these dynamics. Historically, Nigeria has experienced periods of high trade openness alongside varying fiscal policies, leading to inconsistent economic growth rates. For instance, Nigeria's economic performance has been affected by global oil price fluctuations, changes in trade policies, and shifts in government expenditure patterns. These factors suggest that the interplay between trade openness and government spending could have a complex and nuanced impact on Nigeria's economic growth.

Moreover, similar issues have been observed in other countries such as Jordan as researched by Al_kasasbeh et al. (2022), where the economic impact of the Syrian refugee crisis and trade disruptions highlight the need to assess how fiscal policies and trade liberalization affect growth. In Indonesia as researched by Nursini (2017), varying trade openness and fiscal policies have led to inconsistent economic growth rates, raising questions about policy effectiveness. Similarly, Nepal's underexplored role of trade openness and government spending in fostering economic growth further underscores the need for a detailed analysis Bhandari (2023).

This study aims to bridge the gap in understanding by examining how trade openness and government spending collectively influence economic growth in Nigeria. By conducting a comprehensive analysis that considers structural breaks and specific country contexts, this research seeks to provide actionable insights for policymakers to enhance economic growth through optimized trade and government spending.

Objective of The Study

To examine the relationship between trade openness and economic growth in Nigeria.
To examine the relationship between government spending and economic growth in Nigeria.

Research Question

To what extent does trade openness influence economic growth in Nigeria?
To what extent does government spending influence economic growth in Nigeria?

Research Hypothesis

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