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TRADE LIBERALIZATION AND PERFORMANCE OF THE NIGERIAN TEXTILE INDUSTRY (1986 – 2015)

TRADE LIBERALIZATION AND PERFORMANCE OF THE NIGERIAN TEXTILE INDUSTRY (1986 – 2015)

ABSTRACT

Nigerian textile industry is characterized with ineffective incentives, political uncertainty, acute power shortage, poor infrastructure, smuggling and red-tape bureaucracy, among others. However, government of Nigeria in appreciation of the role of industrialization in growth process now motivates firms. This is done through various government policies and establishment of various agencies. All these policies were designed to address these problems and encourage textile industry performance with a view of diversifying the productive base of the economy and increase its output for both domestic and export earnings. These problems necessitated the need to examine the effect of trade liberalization on textile industry performance in Nigeria.

The study modified the endogenous growth model within a time series estimation techniques of Autoregressive Distributed Lagged model (ARDL). The data spanned between 1986 and 2015, while four different models were tested. Findings revealed a co-integrated relationship for all model estimated. Specifically, the effect of simple tariff rate on textile industry is negative and statistically significant in the long-run; while trade liberalization policy measure through simple tariff rate has a lag effect before it can be effective in the textile industry. In both short and long run, real effective exchange rate depreciation worsens the performance of textile industry in Nigeria. Similarly, the effect of weighted tariff rate on textile industry is negative and statistically insignificant, while short-run result evidence that trade liberalization policy measure through weighted tariff rate has a lag effect before it can impact on textile industry performance in Nigeria. Specifically, a 1.0% rise in past weighted tariff rate value (trade liberalization policy) raises the level of textile performance by about 0.99%, while the current increases in tariff rate improve the textile industry performance by 1.19% over the period of analysis, though not significant.  In the long run, a 1.0% rise trade openness would decrease the level of textile industry performance by about 17.49%. Thus, factors affecting textile industry performance in the short run are simple tariff rate, exchange rate changes, trade openness and labor and capital inputs in Nigeria. Similarly, causality tests results showed unidirectional causality running from trade liberalization (both measure) to textile industry performance.

The study concluded that trade liberalization has both lag and significant effects on the performance of the Nigerian textile industry from 1986 to 2015. It was recommended that government should make concerted efforts toward providing a favorable and conducive business environment for the textile industry to strive. 

Keywords:     Trade liberalization, Industrial Performance, Trade openness, Real Effective Exchange Rate, Nigeria. 

Word Count: 398

CHAPTER ONE

INTRODUCTION

  • Background to the Study

Trade arrangements and engagement between Nigeria and its trading partners are in tandem with the magnitude of various endowments the country possesses. For instance, Nigeria is endowed with a population of over one hundred and seventy (170) million citizens, oil production of over two (2) million barrels per day and a Gross Domestic Product (GDP) of over USD 500 billion (U.S. Department of State, 2015:3). On trade footprint, the country’s total external trade stood at N16, 426.8 billion at the end of the fourth quarter of 2015, with an import value of N2, 833.5 billion from Asia, N2, 501.6 billion from Europe, N871.3 billion from America, N420.4 billion from within the African continent, and N213.8 billion from ECOWAS region (National Bureau of Statistics, Foreign Trade Report, 2015: 1-2).

According to the U.S. Department of State (2015:3), Nigeria is the thirteenth world’s largest oil producer and sixth largest oil exporter, producing high-value and low-sulfur crude oil. The contribution of crude oil to the value of total domestic export trade in 2015 amounted to N6, 945.3 billion (NBS, Foreign Trade Statistics Report 2015: 3). Chete, Adeoti, Adeyinka and Ogundele (2014), assert that prior to the discovery of crude oil, agriculture was the mainstay of the Nigerian economy. The agricultural sector provided food, raw materials, revenue and employment for the nation’s teeming population. However, after discovering crude oil in commercial quantities after the nation’s independence in 1960’s, its exploration and exportation weakened the agricultural sector and led to a shift away from industrial activities of a productive nature towards an over-reliance on a single commodity, which is – crude oil (Chete et al., 2014; UNCTAD, 2015).

Correspondingly, Nigeria’s trade policy after the nation’s independence in 1960 was largely based on an import substituting strategy (World Bank, 2010). However, in the early 1980’s, Nigeria encountered various economic problems, which stirred up the need to adopt an effective expansionary trade policy that could ameliorate the apparent economic problems in the country. Hence, in 1986, the expanding economic crisis and its degrading effects on the nation’s economy formed the basis for the adoption of the Structural Adjustment Program (SAP), as unguardedly imposed by the World Bank and the International Monetary Fund (Olaniyi, 2014; Odejimi & Odejimi, 2015).

The Structural Adjustment Programme (SAP) was widely acknowledged as a profound economic reform for reversing the downward trends in the economy. The policy was aimed at; promoting investments, reducing the total reliance on crude oil revenue, developing and utilizing domestic technology, encouraging the use of local rather than imported raw materials, privatizing and commercializing state-owned enterprises (Chete et al., 2014). These initiatives were proposed by the global financial institutions, that is, the institutions of the Washington Consensus as the panacea for the promotion of industrial efficiency, and improvement in the performance of the nation’s industrial sector (Tamuno & Edoumiekumo, 2012; Olaifa, Subair & Biala, 2013; Chete et al., 2014).

Also, documented evidence reveal that trade liberalization was one of the fundamental objectives of the Structural Adjustment Programme (Olaifa et al, 2013). Initially, it was expected that the implementation of the trade liberalization policy, under the platform of SAP, would assist in eliminating foreign exchange control, removing price control, disbanding commodity boards and industrial output in the Nigerian economy (Tamuno & Edoumiekumo; 2012; Olaifa et al., 2013; Osa, 2014). However, Tamuno and Edoumiekumo (2012) posit that the adoption of the Structural Adjustment Program (SAP) in Nigeria failed to meet up with these expectations and was unable to reverse the economic crisis in the nation. Pragmatically, the SAP prescription only succeeded in worsening the socioeconomic and political experiences of the country. More importantly, the policy prescription was largely blamed for destroying the economy of the country, as it did to most of the developing countries that adopted it (Olaifa, Subair & Biala, 2013; Chete et al., 2014).

According to Omolo (2011), trade liberalization is a process that spurs the removal and reduction of barriers to trade. The process ensures free movement of goods and services from one nation to another. Osa (2014) opines that trade liberalization is a trade policy with minimal tariffs, tamed quantitative restrictions, and less effective devices obstructing the free movement of goods between countries. While, Asongo, Jamala, Joel and Waindu (2013) define trade liberalization as the process of meaningfully reducing restrictions in international trade. However, for the purpose of this study, trade liberalization is defined as as a deep-rooted agreement by compliant nations for the complete removal or partial reduction of several trades’ restrictive instruments that hinders the free flow of goods across borders.

Advocates of trade liberalization believe that it; promotes competition, deters monopoly, links national interests, breaks down national animosities, offers consumers broad varieties of product to choose from, encourages domestic firms to be innovative and increases the likelihood of firms to operate in many new markets around the globe (Boyrie & Johns, 2013; Parinduria & Thangavelu, 2013; Falvey, Foster-McGregor & Khalida, 2013). However, in contrast with the assertion of the proponents of trade liberalization, critics of free trade emphasize that there is likelihood that trade liberalization may harm fragile domestic industries and their workers, more than the economy as a whole (Czinkota, 2010; Bittencourt, Larson & Kraybill, 2010; Borraz, Rossi & Ferres, 2012). These authors argued further that, in the absence of matching domestic reforms and policies that maximizes gains from trade, and protect fragile industries from transitional costs, regressive outcomes are more prone to occur. Further evidence also reveals that unguided trade liberalization has the potential to endanger not only the inexperienced domestic producers, but also unduly entrench the monopolistic hands of foreign competitors in the domestic market in a way that erodes the proceeds of liberalization.

In line with some of the observations presented in the preceding paragraphs, the last quarter of the 20th century has shown remarkable improvement in the volume of cross-border trade, as well as a considerable reduction of trade barriers in the global market (Hill, 2014). Prior to this period, various countries protected their fledging industries by setting high tariffs and administrative restrictions on imported products. This trend propelled other nations to also retaliate with the imposition of strict measures on international trade and contributed to the Great Depression of the 1930’s (Case, Fair & Oster, 2013; Hill, 2014). Hence, in the light of the paradigm shift of global trade after the World War II and the experience of the Great Depression, twenty three advanced industrial nations under the leadership of the United States, moved a motion to correct the trend in international trade that led to global economy depression by establishing a multilateral agreement known as the General Agreement on Tariffs and Trade (GATT) in 1947 at Geneva, for regulating international trade and promoting trade liberalization (Begg, Vernasca, Fischer & Dornbusch, 2011; Case et al., 2013; Hill, 2014).

According to Falvey et al (2013), the upsurge in the adoption of trade liberalization policy in developing countries within the last three decades, is as a result of the preponderance of empirical evidence that links trade liberalization with economic growth, the dissatisfaction of the developing countries with the import substitution strategy, as well as the inclusion of trade liberalization reforms as a major requirement for obtaining financial loans and grants from the International Monetary Fund (IMF) and the World Bank. Correspondingly, Amiti and Davis (2011) assert that, while developing countries are being persuaded to open their economy to international trade by removing or reducing trade restrictions, industrialized countries continue to protect the sectors, such as the textiles sector which developing countries have comparative advantage. Equally, Shakur (2012) reiterates that despite GATT’s achievement in minimizing tariff rates on manufactured products, most developing countries still experience a systematic discrimination against their products from the developed countries.

The textile industry plays a central role in the economic development of many developing countries and about one hundred and thirty (130) developing nations depend on the textile industry for employment and exports (Seyoum, 2010). Likewise, a report by the United Nations Industrial Development Organization (2015) reveals that among the developing Asian economies, Pakistan’s and India’s growth rates are largely attributed to the growth of their textile industries (UNIDO, 2015).  The Nigerian textile industry performed these roles as well, especially up to the 1980s. In this early period, the country’s textile industry with over 250 functional factories was rated the largest in Africa after Egypt and South Africa (Bello, Inyinbor, Dada & Oluyori, 2013). The industry was also the second largest employer of labor providing an estimated direct employment which was about 500,000 persons and indirectly about 1,750,000. The industry further served as a major source of revenue to the government (Aguiyi et al, 2011).

The Nigerian textile industry was well-established in the pre-colonial era when for many years, various textile processes including textile weaving, spinning and dyeing, ginning and carding were done with bare hands. At that time, the industry offered good support to the economy because the country had adequate raw materials for textile production (Bello et al, 2013).  The modern industrial production of textile was pioneered by the Kaduna Textile Mills that was established in 1956 and followed by the establishment of Nigerian Textile Mills in 1960.

Table 1.1 below shows the prominent textile firms in Nigeria in the 1960s by their locations and year of establishment.

Table 1.1: Players of the Nigerian Textile Industry in 1960s

       Source: Bello et al, (2013)

In Nigeria, the structure of the textile industry producing fabrics was similar to the global structure whereby there were over 250 functional factories between 1970s and 1980. Textile companies were spread across Lagos, Kaduna, Kano, Funtua, Gusau, Asaba, Aba and Port-Harcourt.  Lagos had the highest number of textile factories with mostly small and un-integrated single-process plants in contrast to the integrated factories in Kaduna where the oldest integrated textile mills were located. Various government policies encouraged process integration of the textile industry.

Table 1.2: The Location and Range of Products of Existing Textile Companies

Location Number of textile Companies Range of Number of Products
Aba 1 2
Kano 10 1 to 4
Kaduna 1 3
Lagos 16 1 to 8
Zaria 1 1
Funtua 1 3
Port Harcourt 1 3
Warri 1 3

Source: The Nigerian Textile Manufacturers Association (NTMA), 2013

Textile companies and the membership of NTMA are contained in Table 1.2. The range of products varies from yarn production to fabrics, among others. Presently, Nigeria’s textile industry is oligopolistic in nature as the industry now comprises of few firms largely dominated by only three: United Nigerian Textiles Ltd (merged with NICHEMTEX Industries Ltd) and International Textile Industries (ITI) Nig. Ltd in the Lagos axis; as well as African Textile Manufacturers Ltd in the Kano axis. Potential new entrants are discouraged more due to massive smuggling, unstable political situation, low purchasing power, high cost of production, poor infrastructure, high exchange rate which is challenging because of import dependence for inputs, high interest rate, multiple taxes, and Dutch disease which also affected Nigeria’s agriculture.

The Nigerian textile industry produces fabrics and where some exports are done, these activities are expected to feed into the garment manufacturers’ part of the global value chain. In other words, exports of Nigerian fabrics would provide materials to the garment factories in the global market. The extent of the exports by Nigerian firms is assessed by an examination of the exports of fabrics in global fabrics exports. Table 3.4 indicates that Nigeria’s exports of fabrics to the world are quite insignificant. In value terms, the country is improving on its record of exports of fabrics. However, the insignificance of the country’s share suggests that it is not a player in that part of the global textile value chain which is currently dominated by China.

The British textile firm, David Whitehead and Sons, in collaboration with the Nigerian government established the first textiles firm, known as Kaduna Textiles Ltd (KTL) in 1956 (Maiwada & Renne, 2013). The primary reason for setting up the mill was to process the cotton that was being produced in the northern part of the country. Correspondingly, after the establishment of KTL in 1956, several textile firms were also established in Nigeria (Gado & Nmadu, 2011; Eneji, et al., 2012; Maiwada & Renne, 2013). Although, at its peak, the Nigerian textile industry was ranked the third largest in Africa, next to Egypt and South Africa, as well as the second largest employer of labor in Nigeria, with a total number of about 700,000 workers, operating up to 175 mills, generating a turnover of over US$8.95 billion and contributing about 25 per cent to the nation’s manufacturing value added, however, over the years, the performance of the Nigerian textiles industry has dwindled significantly (Gado & Nmadu, 2011; Muhammad, 2011; Banjoko, Iwuji & Bagshaw, 2012; Maiwada & Renne, 2013; Maiyaki, 2013; NIRP, 2014).

However, over the years the performance of the industry has dwindled considerably. According to Eneji, et al. (2013) the dependence of Nigeria textile businessmen on liberal imports from China and other countries led to the dismal performance of the Nigerian textile industry. Likewise, while many Nigerians blame the Chinese textiles industry for the collapse of Nigeria’s local textile industry, some argued that the major factors that contributed to the dwindling performance of the industry is the lack of government policy implementation in the industry, which created an avenue for the infiltration from textiles industry, as well as a corresponding reduction of the exportation of the Nigerian textiles products (Gado & Nmadu, 2011; Muhammad, 2011; Eneji et al.,2012; Maiwada & Renne, 2013).

 

  • Statement of the Problem

The Nigeria textile industry is characterized with questionable incentives, political uncertainty, acute power shortage, poor infrastructure, smuggling and red-tape bureaucracy, among others. However, the government of Nigeria in appreciation of the role of industrialization in growth process now motivates firms. This is done through various government policies and establishment of various agencies. These policies were designed to address these problems and encourage textile industry performance with a view of diversifying the productive base and increasing the output for both domestic and export earnings (Banjoko et al, 2012; Eneji et.al, 2012; Maiwada & Renne, 2013).

Other identified objectives of the incentives are to address the problem of inputs supply, demand, and price competitiveness of the Nigerian textile industry, the provision of foreign exchange requirements to direct cash grant on export performance, trade liberalization, tax relief inducements and some other industrial assistance in the form of marketing, technology advancement, packaging quality, R&D, innovation and price competitiveness of Nigeria textile products, all are to improve productivity (NIRP, 2014).

Though, these programmes and policies are well intentioned and designed, they are yet to achieve the desired objectives because the industry has recently experienced a serious performance decline. For instance, the number of firms in the industry declined to about 42 in 2003, 25 in 2010 and 10 in 2011 with employment falling to 60,000 in 2002 and 24,000 in 2010 (Banjoko et al, 2012). Smuggling is also common in the industry (Uexkull & Shui, 2014). This decline in the performances of the Nigerian textile industry occurs despite various policies designed in its support. It is notable that textile is a major item on the Nigerian import prohibition list. Firms in the industry also benefit from some incentives in the forms of pioneer status and subsidies.  Therefore, given the declining performance of the industry, there is the need to evaluate the effect of trade policies such as trade liberalization on the performance of textile industry in Nigeria.

1.3       Objective of the Study

The major objective of this study is to assess the effect of trade liberalization on the performance of the Nigerian textiles industry. While, the specific objectives of the study is to;

  • determine the effect of simple tariff on the exportation of textiles product in Nigeria;
  • examine the effect of the real effective exchange rate on textiles export value in Nigeria;
  • ascertain the effect of weighted tariff rate on the exportation of textiles product in Nigeria;
  • determine the effect of trade openness on textiles export in Nigeria textiles industry in Nigeria;
  • uncover the causal relationship between trade liberalization and textile industry export performance in Nigeria.
    •      Research Questions

The following are the research questions for assessing the effect of trade liberalization on the performance of the Nigerian textiles industry.

  1. What is the the effect of simple tariff on the exportation of textiles product in Nigeria?
  2. How does the real effective exchange rate impact on textiles export value in Nigeria?
  3. What is the effect of weighted tariff rate on the exportation of textiles product in Nigeria?
  4. What is the effect of trade openness on textiles export in Nigeria?
  5. Does trade liberalization have a causal relationship with textile industry export performance in Nigeria?
    • Hypotheses

The following hypotheses were formulated for assessing the effect of trade liberalization on the performance of the Nigerian textiles industry. The hypotheses were tested in this study at 5% significant level.

Ho1:      Simple tariff rate has no significant effect on the exportation of textiles product in Nigeria.

Ho2:     Real effective exchange rate has no significant effect on textiles export value in Nigeria.

Ho3        Weighted tariff rate has no significant effect on the exportation of textiles product in Nigeria.

Ho4:       Trade openness has no significant positive effect on the Nigerian textiles industry export rate.

Ho5:       Trade Liberalization has no significant causal relationship with textiles industry export performance in Nigeria.

1.6       Scope of the Study

This study employed secondary annual time series data that covers the period from 1986-2015 to evaluate the effect of trade liberalization on the performance of the Nigerian textiles industry. The secondary data were retrieved from the World Bank’s Development Indicators (WDI, 2016) and World Integrated Trade Solution (WITs, 2017) database. The time frame of the study represents the inception of trade liberalization in Nigeria, under the auspice of SAP to the period that trade liberalization was re-implemented in 2015 under the auspice of CET. During this period, Nigeria adopted several multilateral, regional and bilateral trade liberalization policies that affected the nation’s textiles industry. It must be noted that there were series of intermittent policy volatility between1986 to 2015.

1.7      Rationale for the hypotheses

The following assumptions serve as the basis for assessing the effect of trade liberalization on the performance of the Nigerian textiles industry.

Ho1:      Simple tariff rate has no significant effect on the exportation of textiles product in Nigeria.

Several studies have been conducted to determine the effect of simple tariff rate on firm’s performance (Chemingui & Bchir, 2010; Yimer, 2011; El-Wassal, 2012; Munemo, 2013; Thu & Lee, 2015). Although, some studies show that simple tariff has positive effect on performance (Yimer, 2011; El-Wassal, 2012). However, the findings of other scholars negate such belief and the effect of simple tariff rate on export performance remains largely inconclusive (Chemingui & Bchir, 2010; Munemo, 2013). In the light of this, the study hypothesizes that simple tariff rate has no significant effect on the exportation of textiles product in Nigeria.

Ho2:     Real effective exchange rate has no significant effect on textiles export rate in Nigeria.

Erdal, Erdal and Esengu (2012) conducted an empirical study on the effect of real effective exchange rate volatility on agricultural export in Turkey and found out a positive long-term relationship between real effective exchange rate and agricultural export. This finding is also supported by the result of similar studies that have established a positive relationship between real exchange rate and export rate in literature (Omojimite & Akpokodje, 2010; Adeniyi, et al., 2011; Akinlo & Adejumo, 2014).

In contrast, Buertzer et al. (2012) discovered no evidence of the positive effect of real exchange rate on export. Similarly, other scholars found no significant effect of real exchange rate on export performance (Opaluwa, Umeh & Ameh, 2010; Ettah et al., 2011; Imoughele & Ismaila, 2015). Also, within the Nigerian context, Ettah, Akpan and Etim (2010) discovered that real exchange rate has a negative effect on the exportation of cocoa in Nigeria. Thus, based on the findings of Ettah, et. al. (2010), this study assumed that real exchange rate has no significant effect on export rate of textiles materials in Nigeria.

Ho3        Weighted tariff rate has no significant effect on the exportation of textiles product in Nigeria.

The effect of a country’s weighted tariff rate on export rate has been a subject of controversy among scholars (Hussien et al, 2012; Sunariyo et al, 2015). Thu and Lee (2015) discovered that the removal of tariffs on traded goods has had a strong positive impact on total output, exports and imports in Vietnam, while others studies negate such findings (Frensch, 2010).The finding of their study is also supported by the work of (Yimer, 2011). In line with these findings, this study postulates that weighted tariff rate has no significant effect on the exportation of textiles product in Nigeria.

Ho4:       Trade openness has no significant effect on the Nigerian textiles industry export rate.

Lileeva and Trefler (2010) discovered that the productivity of industries that were induced to export in Canada increased compared to firms that do not export their product. Others studies also supported their findings that trade openness contributes to the productivity of firms and industries (Yu, 2010; Topalova & Khandelwal, 2011; De Loecker, 2011; Nanthakumar et al., 2011; Yoko, Dalin, Takahiro, Seiha & Tatsufumi, 2013; Parinduria & Thangavelu, 2013; Hu & Liu, 2014).

Conversely, other studies revealed that trade openness does not contribute to productivity (Majumdar, 2010; Dadakas & Katranidis, 2010; Sunariyo et al, 2015). This view is supported by the findings of Seyoum (2010) that trade openness leads to rationalization of production that enables only the most efficient partner in a trading situation to control a bigger share of the global market. Hence, in line with the findings of Seyoum (2010), this study assumes that trade openness has no significant effect on the Nigerian textiles industry export rate.

Ho5:       Trade Liberalization has no significant causal relationship with textiles industry export performance in Nigeria.              

Up till-date, studies that focus exclusively on the effect of trade liberalization on textile export performance in Nigeria are very limited. Also, evidence provided by various empirical studies in literature is mixed, and a consensus has not yet emerged. Some studies have established a positive relationship between trade liberalization and export performance in literature (Kazem & Reza, 2012; Manni & Afzal, 2012; Yahya, Dantama & Abdullahi, 2013). Conversely, within the Nigerian context, findings of other scholars negate the belief that trade liberalization has a negative effect on industrial performance (Adewuyi & Akpokodje, 2010; Olaifa et al., 2013; Oluwaleye, 2014).  Thus, based on the findings of these scholars, this study postulates that trade liberalization has no significant causal relationship with textiles industry export performance in Nigeria.

1.8       Significance of the Study

An understanding of the effect of trade liberalization on the performance of the Nigerian textiles industry would enable policymakers in Nigeria to set-up appropriate measures that would enhance the resuscitation of the nation’s textiles industry. Also, this study would provide an avenue for the society at large to have a good knowledge of how international trade evolved, what trade liberalization entails, the advantages and disadvantages of trade liberalization, instruments of trade liberalization, various forms of trade agreement and several measures of trade liberalization.

Similarly, the findings of this study would enable Nigerian policymakers to provide the necessary infrastructural facilities in the country and to create an enabling environment suitable for enhancing the performance of Nigerian textiles industry. This study would also augment the findings of previous researchers and enhance the ability of subsequent researchers to draw useful inferences for their study. In addition, this study would serve as a reference material for researchers in the field of management and international business.

Furthermore, the study would help the Nigerian government to combat the proliferation of foreign textiles products in the Nigerian market that enters the country through unauthorized means. Apart from the disbursement of several intervention funds for encouraging the exportation of Nigerian textiles products, the study would enable policymakers in Nigeria to device other means to encourage the exportation of Nigerian textiles products in the global market. Equally, the study would assist policy makers in the global market, such as, the World Trade Organization (WTO) as well as international financial institutions, such as the International Monetary Fund (IMF) and World Bank (WB) to consider the aftermath of trade liberalization policies on industrial performance before mandating all member countries to adopt such policies.

1.9       Operationalization of the Variables

                           Y   =     f (X)

Where:   Y   =    Textiles Industry Performance

X   =    Trade Liberalization

This study augmented the endogenous growth model. The endogenous growth model explains countries’ long-run growth as emanating from forces that are internal to a system. In the model, the main drivers of long run growth considered are human capital, labor force, physical capital and total factor productivity. These inputs are paid their marginal products. A formal analytical framework for deriving the determinants of output performance in which trade policies such as trade liberalization is included is developed. The initial step in the process is the specification of an explicit Cobb-Douglas production function of the usual form as follow;

……………………………………………………….  (1)

Note:

(2)

Where Y is the output of textile, k and L are measures of capital and labor services employed, while A is the measure of total factor productivity performance. Substituting equation (2) in (1), we have;

………………………………………………… (3)

Taking the growth rate of equation (3), we have;

(4)

Where y is the growth rate of textile output, k and L are the growth rates of measures of capital and labor services employed, while components of (a) are measures of growth rate of output which are linearly associated with measures of trade policy such as trade liberalization. Equation (4) implies that trade policy influence the efficiency of the production process. However, in order to investigate the effect of trade liberalization on performance of textiles industry, equation (4) is transformed to the following:

(5)

Where e is the random variable or white noise error term which captures the impact of other variables not included in the model. Therefore, this thesis incorporated other growth determinants variables such as energy required to produce textile product, financial development, human capital and trade openness. This is done in order to underscore whether there are different effects of and for incorporating these macroeconomic series in modeling the relationship between trade liberalization and performance of textiles industry in Nigeria.

Equation 5 with other determinants of variables that influence the performance of textile industry could be explained with equation 6

(6)

Thus, the relationship between trade liberalization and performance of textiles industry in Nigeria is examined in equation (6) with the addition of other important determinants factors. To this end, equation 6 could be converted into a linear relationship given in equation (7)

 

Since the main objective of this paper is to investigate the effect of trade liberalization on the textile industry performance in Nigeria, there is a need to decide on the measurement of trade liberalization indicators. Following the literature, two popular trade liberalization indicators have been chosen in this study; most favored nation (MFN), simple mean, all products (%), and weighted mean, all products (%). The first trade liberalization variable used in this thesis is the tariff rate, MFN simple mean for all products. The World Trade Organization (WTO) defines tariffs as customs duties levied on merchandise imports that provide an advantage to domestic producers and also provide revenue for the government (WTO, 2015). Tariffs are popular measures of trade restrictiveness because they are the most direct of all measures and generally tend to have data available. Simple average tariffs calculated the unweight average of effectively applied rates for all imported goods. The main problem with simple average tariff method is that it treats all goods identically and not according to their importance. The trade weighted average tariff on the other hand has been suggested as an alternative measure whereby only the average rate is calculated based on the share of imports in the trading basket (Harrison, 1996).

This present study would embrace a time series data in Nigeria within a framework of theoretical linear autoregressive distributed lag model (ARDL). The model of ARDL helps researchers to capture both linear short run and long run impacts of trade liberalization on the textile industry performance in Nigeria. The co-integration techniques suggested by Pesaran, Shin, and Smith, (2001), the autoregressive distributed lag model (ARDL) would be used. This method can be adopted regardless of whether the variables are integrated of order (1) or (0) and compared to other multivariate co-integration methods such as Johansen and Juselius (1990); ARDL is a simple technique that allows the co-integration relationship to be estimated in a single equation specification; once the lag order of the model is identified.

The estimable model for this thesis could be specified as follows[1];

 

Therefore, from equation (8 and 9), the ARDL estimable model is specified as:

The calculated F-statistics from the ARDL bound test is compared to the upper and lower critical values. If computed F-statistic falls below the lower bound value, I (0), the null hypothesis of no level relationship cannot be rejected. However, if the computed F-statistic is greater than the upper critical bound value, I(1) the null hypothesis of no level relationship can be rejected, which implies the existence of co-integration among the variables, hence, short-run impact can be examined. However, if the calculated F-statistics falls within the band, then our inference is inconclusive.

Where:

y = Output of textile industry that is proxy by textile export value

K = Physical capital that is proxy by gross fixed capital formation (% of GDP)

LAB = Labour force that is proxy by population, total

Energy = Energy use (kg of oil equivalent per capita)

Find = Domestic credit to private sector (% of GDP)

EXC = Real effective exchange rate index (2010 = 100)

Openness = Trade Openness (the ratio of total trade to GDP)

HC = human capital that is proxy by school enrollment, secondary (gross), gender parity index (GPI)

STR = Tariff rate, most favored nation, simple mean, all products (%)

WTR = Tariff rate, most favored nation, weighted mean, all products (%)

= White noise stochastic term

t= time (1986 – 2015)

The definition and measurement of the study’s variables are as follows:

Trade Openness: This is the most natural measure of a country’s integration in world trade (WTO, 2012). Trade Openness is measured as the sum of imports and exports over a country’s Gross Domestic Product (GDP).

Real Effective Exchange Rate (REER): The real effective exchange rate is a measure of the domestic economy’s price competitiveness in comparison with its trading partners (WTO, 2012). The calculation of Nigeria’s REER calculations is retrieved from the world development indication, 2017 online version from 1986 to 2015.

Textiles Industry performance: is the value of Nigeria’s textiles exports to the rest of the world over a period of time. The aggregate export data on textiles products is available at the World Integrated trade Solution from 1986 to 2015. This data set was used to measure textiles industry performance rate in this study.

Simple Tariff Rate: The indicator can be defined as the simple average tariff imposed on all exports from developing countries and LDCs. The simple average tariff was the unweight average of the effectively applied rates for all products. The data set is freely available at the World Development Indicator, 2017 database. This study used the simple tariff rate, most favored nation[2], simple mean, all products (%).

Weighted Tariff Rate: This refers to tariff subjected or adjusted effectively for applied rates for all products. It is measured as tariff rate, most favored nation, weighted mean, all products (%). The calculation of Nigeria’s weighted tariff is retrieved from the World Development Indication, 2017 online version from 1986 to 2015.

1.10     Operational Definition of Terms

Absolute advantage: The ability of a firm, industry or a country to produce more goods than competitors, using the same amount of resources.

Autarky: A situation in which a country does not trade with other countries.

Balance of payment: The record of a country’s trade with other countries goods, services and assets.

Bretton woods system: An exchange rate system that lasted from 1944 to 1973, under which countries pledged to buy and sell their currencies at a fixed rate against the dollar.

Closed economy: An economy that has no interactions in trade or finance with other countries

Comparative advantage: The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than its trading partners.

Currency appreciation: An increase in the market value of a nation’s currency relative to another currency.

Currency depreciation: A decrease in the market value of a nation’s currency relative to another currency.

Deflation: A decline in the price level.

Devaluation: A reduction in a fixed exchange rate.

Disinflation: A significant reduction in the inflation rate.

Dumping: The selling of imported goods at lower prices below its actual cost in the home country

Exchange rate: The ratio at which two currencies are traded

Exchange rate system: An agreement among countries about how exchange rates should be determined.

Employment rate: The proportion of the labour force that has a job.

Exports: Goods and services produced domestically but sold in other countries.

Exports Commodity Price: Price of goods produced domestically but sold in other countries.

Externalities: This is the consequence of an economic activity experienced by unrelated third parties. It can either be positive or negative.

Factor endowments: The quantity and quality of labour, land, and natural resources of a country.

Factors of production: Labour, capital, natural resources, and other inputs used to produce goods and services.

Fixed exchange rate system: A system under which countries agree to keep the exchange rates among their currencies fixed.

Free trade: Trade between countries that is without trade restrictions.

Gross Domestic Product (GDP): The market value of all final goods and services produced in a country during a period of time, typically one year.

Globalization: The process of countries becoming more open to foreign trade and investment.

Heckscher-Ohlin theorem: A theory that explains the existence of a country’s comparative advantage by its factor endowments.

Imports: Goods and services bought domestically but produced in other countries.

Import Commodity Price: Price of goods and services bought domestically but produced in other countries.

Inflation rate: The percentage increase in the price of goods and services from one year to the next.

Labour productivity: The quantity of goods and services that can be produced by one worker or by one hour of work.

Less than fair value: A situation whereby foreign exporters set the price of a product either below the normal price it charges in other markets or below the cost of production plus a normal profit.

Material injury: A situation whereby domestic industry suffers from dumped imports

Multi-Fiber Arrangement (MFA): A system of quantitative restrictions that governed global trade in textile and apparel products for 30 years before its eventual phase-out in 2005.

Multilateral trading system: The global system that governs international trade among countries.

Open economy: An economy that has interactions in trade or finance with other countries.

Price discrimination: Charging different prices to different customers for the same product when the price differences are not due to differences in cost.

Productivity: The measure of the efficiency of creating goods or services which has value and contributes to the utility of individuals. It is measured as the ratio of output to inputs used in the production process.

Protectionism: The use of trade barriers to shield domestic firms from foreign competition.

Quota: A numerical limit a government imposes on the quantity of a good that can be imported into the country.

Recession: The period of a business cycle during which total production and total employment are decreasing.

Subsidies: Assistance rendered by government to enhance the ability of domestic firms to compete with foreign firms.

Tariff: A tax imposed by government on imports.

Terms of trade: The ratio at which a country can trade its exports for imports from other countries.

Trade balance: The difference between the value of exports and imports

Trade deficit: The amount by which the value of imports exceeds the value of exports in a given time period.

Trade liberalization: A deep-rooted agreement by compliant nations for the complete removal or partial reduction of several trade restrictive instruments that hinders the free flow of goods across borders.

Trade surplus: The amount by which the value of exports exceeds the value of imports in a given time period.

Voluntary export restraints: An agreement negotiated between two countries that place a numerical limit on the quantity of a good that can be imported by one country from the other country.

1.11     History of the Nigerian Textile Industry

The history of textiles industry in Nigeria dates back to the early nineteenth century, when the British textile firm, David Whitehead and Sons in a joint effort with the Nigerian government set up the first textile firm in Nigeria, known as Kaduna Textiles Limited (KTL) in 1956. Likewise, alongside the generation and production of attractive textiles materials for the Nigerian market, global trading firms such as UAC and Paterson Zochonis (PZ) likewise bought KTL items and permitted the factory to utilize their organization trademarks on materials that were sold to their organizations (Eneji, et al, 2012; Gado & Nmadu, 2011; Maiwada & Renne, 2013; Muhammad, 2011).

Prior to the establishment of the first textile firm in Nigeria, foreign textile companies were already supplying Nigerian retailers directly with imported textiles products from British, German, Dutch, Lebanese and India. Equally, during the colonial era, the British government usually transports raw materials extracted from Nigeria to UK before exporting it back to Nigeria for sale through the agents of British trading firms in the Nigerian market. However, in a bid to move closer to the source of raw materials and their customers, the British government established a liaison office in Nigeria, headed by the chairman of David Whitehead & Sons, Mr. Whittaker in 1954 (Maiwada & Renne, 2013; Plankensteiner, 2013).

After some years, the Nigerian government decided to set up a textile mill to be run and operated solely by Nigerians. Nevertheless, lack of experience and adequate training of the Nigerian labor force, as well as the anti-manufacturing policy that has been implemented by Sir Frederick Lugard, the Governor-General of Nigeria (1914 -1919) prevented the Nigerian government to set-up its own textile mill. Thus, this incited a need to partner with a well-established textile manufacturing firm that could provide the Nigerian labor force with adequate training and provide the required equipment in order to operate the enterprise successfully (Diogu et al., 2014; Maiwada & Renne, 2013).

Correspondingly, the visitation of the former premier of the Northern regional government, Sir Ahmadu Bello, to Zimbabwe where the first mill in Africa was built, also incited the need to imitate similar accomplishment in Nigeria. Hence, a move was finally made to collaborate with the British manufacturing firm, David Whitehead & Sons, in conjunction with the Northern Regional Marketing Board (NRMB) and the Northern Regional Development Corporation (NRDC) for the establishment of textile mills in Nigeria. Hence, on 22nd November 1957, the first textile mill in Nigeria was opened and production from the first mill reached 8 (eight) million meters (Gado & Nmadu, 2011; Maiwada & Renne, 2013).

Also, in preparation for Nigerian independence in 1960, the British colonial officials were anxious to show the positive efforts toward self-governance, modernization and development that KTL represented, through Kaduna ‘Made in Nigeria’ exhibition in May 1959. This was also done to negate the insinuation of the British colonial opposition to industrialization in Nigeria. Hence, after Nigeria’s independence in 1960, more textile mills were established in different parts of Nigeria (Diogu et al., 2014; Maiwada & Renne, 2013). According to Plankensteiner (2013), in spite of the establishment of the KTL and other textiles firms in Nigeria market, other countries such as Austria still maintained their textiles trading activities in Nigeria and the first Austrian textiles pioneers in Nigeria sought contact, personally, with textile traders along Kosoko Street, which was the centre of the Nigerian textile market on the Lagos Island, during that period.

Documented evidence revealed that the Iyaloja of Egbaland, Chief Modupe Asabi Obebe from Abeokuta was one of the first importers of textiles product into the Nigerian market in the early nineteenth century. Later, Prince Shafi Mobolaji Shitu, the Baba Adinni and former Olowu of Aiyepe also became one of the biggest importers of textiles products in the 1970s and 1980s (Maiwada & Renne, 2013; Plankensteiner, 2013). Prince Shittu specialized in the importation of stiff brocades, popularly known as damask, in Nigeria, as well as Guinea brocade, which is also known as plain cotton damask, from Germany. Likewise, Chief Temitenjo Mercy Owolana, the Iyaloja of Remo was also another major importer of textiles products in Lagos in the mid-nineteenth century.

Likewise, in the Western region of Nigeria a textile firm known as Austro-Nigerian Embroidery Factories Ltd (ANEF) was established by Prince Shittu in Aiyepe in 1972. The textile firm distinguished its products with a brand name called Aiyepe Lace. Likewise, another well-known production company known as Shokas was established by Shote & Kasim Industries. Similarly, Chief Blaser and Alhaja Agberu Agba also established textiles factory known as Novelty Embroideries in the Western region of Nigeria (Maiwada & Renne, 2013; Plankensteiner, 2013).

After some years, the Nigerian government finally banned the importation of textiles products in Nigeria with the aim of strengthening the Nigerian textiles industry. At first, textiles materials confiscated at the airport were sold to Nigerians at low prices and the revenue was remitted to the federal government, however, the government later considered it more proper to burn the smuggled goods openly, in order to discourage the infiltration of foreign textiles materials in the Nigerian market. This practice was documented with series of photographs in the newspapers and it became a topic of heated debate in the nation (Plankensteiner, 2013).

During that period, most textiles firms in Nigeria were performing extremely well and there was growing demand for domestic textiles products and hand-woven textiles, popularly called aso-oke in the Western part of Nigeria. However, one of the difficulties of the textiles industry at that time was that, the import ban affected the importation of some essential raw materials needed for the production of textiles materials in Nigeria.

Likewise, problems such as, poor infrastructural facilities, high rate of smuggling, cheap products from foreign competitors, high production costs, difficulties in obtaining raw materials, inefficient technology, obsolete machines and equipment, among others affected the Nigerian textile industry and led to the collapse of most textile firms in Nigeria (Diogu et al., 2014; Eneji, et al, 2012; Gado & Nmadu, 2011; Maiwada & Renne, 2013; Muhammad, 2011; Plankensteiner, 2013).

Table 1.3       Chronology of the Nigerian Textiles Industry

Year Event
1956 Establishment of the first textiles firm in Nigeria, that is, Kaduna Textiles Limited (KTL).
1972 Nigerian Enterprise Promotion Decrees of 1972 and 1977, known as the Indigenization policy which switched ownership of textile firms from foreign to Nigerian.
1977 Import ban on foreign textiles by the Nigerian government to enhance the sustainability and growth of local textiles industry.
1980 The ranking of Nigerian textiles industry as the 3rd largest textile industry in Africa, next to Egypt and South Africa.
1986 The implementation of SAP policy which had an adverse effect on the Nigerian textiles industry.
1990s A period of political instability in Nigeria, which contributed to the decline of the textile firms in Nigeria.
1997-2000

 

Influx of foreign textiles at cheaper price, after the removal of import ban.
2002-2004 Rapid decline in the number of operational textile firms.
2004 Import ban on textile products with the aim of resuscitating the moribund textiles firms in Nigeria.
2009 The disbursement of N100billion Cotton, Textile and Garment (CTG) revival fund to textile firms in Nigeria, by the Bank of Industry (BoI)
2012 Launching of Agricultural Transformation Agenda (ATA) for resuscitating the Nigerian textile industry and for boosting cotton production.
2012 Rapid decline of textile firms capacity utilization

 

 

2012 Reports of the importation of about N300bn worth of textiles into the Nigerian market by the National Union of Textile Garment and Tailoring Workers of Nigeria.
2014 Report by BoI that about seventy (70) companies had accessed N52.515bn from the CTG, but none have fully paid back the loans.
2014 Allegation by National Association of Chambers of Commerce and Industry, Mines and Agriculture [NACCIMA] of the failure of CTG fund to address the textiles industry’s lack of raw materials and inadequate modern technology.
2014 Signing of MOU by the Nigerian government with cotton-dependent countries, that is, Germany and Pakistan.
2015 Introduction of 20% import levy on textiles by the Nigerian government to fund the growth of domestic textiles industry.
2015 Launching of National Cotton, Textile and Garment policy by the Nigerian government for, boosting cotton production to 500,000 metric tons by the end of 2015, increasing employment rate in the sector to 100,000 by 2017 and for raising $3bn annually from textile export.
2015 Nigeria elections which contributed to high demand of textile products used for political rallies.
2015 Signing of MOU with Dutch textile and design company, VLISCO Group & Woodin Nation.
2015 Launching of a brand of VLISCO Nigeria in Lagos, to connect with other popular brands like Daviva & SuperWax in the Nigerian market.

Source: African practice (2015)

[1] Incorporating these two measures of trade liberalization into equation 7 yield 8 and 9;

[2] Most-Favored Nation Tariffs (MFN) tariffs are what countries promise to impose on imports from other members of the WTO, unless the country is part of a preferential trade agreement (such as a free trade area or customs union).

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