Basically, this survey examines a possible linkage among fiscal development, trade liberalisation and Economic Growth in Nigeria. For this intent, the time-series econometric methodological analysis of Cointegration and Granger Causality trial are used to analyse informations for period between 1960 and 2009. Result suggest that a long tally equilibrium relationship exists between existent income and its determiners, viz. international trade and fiscal development. Granger causality trial consequences besides reveal causalities among these variables exist both in the short term and long term of the Nigerian Economy.

Keywords: Granger Causality, Economic Growth, Financial Development, Trade Openness, Nigeria.

JEL Classification: F43, G18, O10

1. Introduction

In his work “ the wealth of Nations ” Adam Smith propounded theories for economic growing. A centre point he emphasized on was the economic sciences of international trade where he suggested the scheme of absolute advantage. In a similar mode, writers like David Richardo in 1817, developed the comparative cost advantage theory which was targeted to do up for the relics of the Adam Smith ‘s failure[ 1 ]. Beck ( 2003 ) emphasized on factor gifts, engineering and graduated table of economic systems as beginnings of comparative advantage and therefore determiners of trade flows between states. Whereas, in 1960s there was broad credence of import-substitution by concerned economic systems ; in 1980s, it turned to be a paradigm displacement towards export publicity and trade liberalisation. A standing point for this displacement is identified to be the weak consequence of import permutation on growing, and the turning empirical grounds demoing a causal relationship between trade openness and economic growing.[ 2 ]However, there were besides clip series consequences that claim the consequence of trade on growing is non every bit important as they have been preached ( see Taylor, 1991 ; Hirschman, 1968 ) .

Understanding the significance of trade is dynamic. There are groundss that export trading is the coveted signifier of trade as it generates foreign exchange for economic systems which in bend promotes growing ( Titus, 2008 ) . This position is non to evade the importance of import trading in international economic sciences. The international trade theory has besides suggests that the degree of fiscal deepness impacts significantly on trade openness. This averment may non be true for all economic systems as some research workers have through empirical observation proved that fiscal development instead than influence trade has posed in an opposite way ( Foster, 2008 ) . What seems to be a major concern of development economic experts is factors that determine the growing of a state. Some writers have suggested a finance-led growing, others suggests a trade-led scheme.

Sing the possibility of finance as an of import component of economic growing, there has been a bifurcated position on the existent way of relationship. Several surveies have justified the demand for a vivacious money sector as it holds positive relationship with economic growing. Mckinnon ( 1973 ) and Shaw ( 1973 ) postulate that authorities restraints on fiscal system through involvement rate ceilings and domestic control of money supply, in add-on to recognition penchant for selected sectors, among other policy control measures, regulates fiscal development which they say is cardinal for economic growing ( besides see, Schumpeter, 1911 ; Hicks, 1969 ; Goldsmith, 1969 ; Ogboru, 2006 and Anyanwu, 2006 ) . On the other manus, surveies by influential economic experts have documented a negative relationship between fiscal development and economic growing ( see for illustration, Kuznets, 1955 ; Friedman & A ; Schwartz, 1963 ; and Lucas, 1988 ) . Murende and Eng ( 1994 ) made a clip series empirical trial on their work utilizing the unit root and co-integration techniques within a bivariate VAR ( BVAR ) theoretical account. They applied clip series econometrics to the instance of Singapore. Based on collated quarterly informations for periods between 1979 and 1990, grounds proved a unidirectional causality from fiscal development to economic growing.

Furthermore, assorted surveies have applied cross-sectional analysis to associate indexs of fiscal development to long-term economic growing. Emerging grounds from cross subdivision growing arrested development showed estimations of fiscal development impact on growing, ignoring the state specific factors.[ 3 ]Sing trade openness and growing, there has been legion research asking about the exact relationship that exists between economic growing and trade openness. Most surveies have shown causality between trade openness and economic growing. However, the argument on trade openness for economic growing is portion of a larger argument of what indexs to utilize for mensurating trade openness. Rodrik ( 1997 ) argues that in most surveies on trade openness and growing, inappropriate indexs have been used to reflect trade government. A more common step of openness is ratio of trade ( amount of imports and exports ) to GDP.

Hence, the kernel of this paper is to through empirical observation analyze a possible linkage among fiscal development, trade liberalisation and Economic Growth in Nigeria. Nigeria is one of the largest economic systems in Africa. In the past few decennaries, activities engineered towards a sustainable economic growing have been anchored on the edification of her fiscal sector. Besides, financial policies have turned towards publicity of cross boundary line trading. Then the inquiry is- do these policies propagate growing for Nigeria? Is at that place any causal relationship between the selected variables? If yes, does it transform to a long-term equilibrium? What is the way of causality?

This paper contributes to literature by supplying long coveted empirical grounds through clip series analysis applied to the instance of Nigeria. First, unit-root trial of stationarity on each input variable would be validated utilizing the Augmented Dickey-Fuller ( ADF ) and Phillip-Perron ( PP ) trial. Subsequently, Econometric techniques of Cointegration and Granger Causality test shall be used to analyse informations for period between 1960 and 2009. The paper is farther structured as follows: Section 2 provides an overview of trade openness, fiscal development and growing in Nigeria, Section 3 defines the variables and explains the methodological analysis, Section 4 nowadayss and discusses empirical consequences, and Section 5 points out the decisions and the policy deductions from the survey.


There has been ongoing argument on the right manner to mensurate trade openness, fiscal development and economic growing. To set up a purposeful yardstick for mensurating these variables, it is indispensable we consider some notes on the constructs and likely associate them theoretically to each other. Financial development is the development program that expands the money sector of an economic system. It may be through money supply, involvement rates repression or through domestic loaning. Some surveies include net foreign direct investing and foreign adoption in mensurating fiscal development. In a research by the International Monetary Fund ( IMF ) , Creane et Al ( 2003 ) assessed fiscal sector development by building an index which captures six elements ; pecuniary policy, growing in bank liability, ordinance and supervising, non-bank fiscal sector, fiscal deepness and institutional quality[ 4 ].

International trade has been necessitated by the lifting demand to incorporate universe economic systems and redistribute wealth of states harmonizing to demands and comparative advantage. The extent of international trading has been the major concern of authoritiess, differing from size economic system to degree of development. Shang-Jin ( 2002 ) identifies that developing economic systems are perturbed about the consequence of openness of the economic system to international trade. In his position, Trade openness may do the hapless poorer and the rich richer ( Shang-Jin, 2002 ) . On a contrary, Butcher and Agama ( 2003 ) posits that trade openness has promoted political and economic reforms in the development states particularly when supported with strong economic policies and institutional model. Trade openness relays the extent of integrating of a domestic economic system to the universe market for tradable. It is an avenue to bring forth foreign exchange and increase state ‘s foreign militias. Although trade openness has been adjudged to hold more benefits than cost, the way of trade is a cardinal determiner of its impact. Surveies have revealed than little economic systems and 3rd universe economic systems tend to be prone to bad lucks in the planetary market as they trade more on imports ( Kuznet, 1957 ) .

Although some research workers like Carbaugh and Robert ( 1988 ) have suggested that states should maximise exports and minimise imports. They further suggest that imports be restricted through duty governments and restrictive policies, exports they say should be promoted through subsidies. Of class, most welfare economic experts fall to this position because it generates exchange and strengthens the local currency in the dollar market. Economic growing fundamentally connotes addition in end product ( GDP or GNP ) of a state.

Common variables used to mensurate fiscal development include: wide money ( M2 ) as a ratio of GDP, ratio of domestic recognition to GDP, ratio of bank recognition ( private sector ) to GDP, or liquid liabilities ( M3 ) over GDP[ 5 ]. For trade openness, Perritchet ( 1996 ) , Rodrik and Rodriguez ( 2000 ) and Garrett ( 2001 ) have asserted that mensurating trade openness poses a major challenge for analysing trade policy impacts. Some surveies have made usage of export growing rate, imports growing rate ; rate of alteration in amount of imports and exports[ 6 ]. Rodrik ( 1998 ) measured trade openness as ratio of entire export and import weighed over GDP. Growth is normally measured either as existent GDP, GNI or existent GDP per capita. For this survey, we adopt the measuring proposed by Rodrik ( 1998 ) for trade ; i.e. amount of the value of import and export, divided by existent GDP. Financial development is measured as ratio of wide money to existent GDP, and ratio of domestic recognition to existent GDP.


The paper employs one-year informations for Nigeria, covering period from 1960 to 2009. Data were sourced from the World Bank databank and Central Bank of Nigeria ( 2010 ) . Financial development is represented by M2 and DC. M2 stands for the ratio of wide money to GDP. M2 equals the summing up of currency in circulation, account balance in Bankss, and non-institutional money history. DC is the ratio of domestic recognition to GDP and it shows the deepness of activities in the fiscal market including bank loaning to private sector. GDP as we know is the gross end product of a state. Todaro ( 2000 ) defined economic growing as increasing end product. X bases for ratio of entire exports to GDP, M is entire import as a proportion of GDP. TR represents trade and it is the amount of X and M.

For our mold, it is necessary we consider stationarity trial for each variable to find if the variables integrate at the same order. To accomplish this, we conduct a unit root trial utilizing the Augmented Dickey-Fuller ( ADF ) and Phillips-Perron ( PP ) trial. ADF is a modified signifier of the Dickey-Fuller trial which has been developed to rectify for the unit root trial in state of affairs where T is non white noise. The Augmented Dickey-Fuller involves gauging the undermentioned equation:

Where T is Gaussian white noise, Y is the series ; t = clip ( tendency factor ) ; I? = changeless term ( impetus ) ; and m = the slowdown order. The figure of lags “ m ” in the dependant variable was chosen by the Akaike Information Criteria ( AIC ) to guarantee that the mistakes are white noise.

The Phillips-Perron trial is an alternate to the Augmented Dickey-Fuller. It is a non-parametric technique of extinguishing high order consecutive correlativity in a series, and ensures that the bring forthing procedure is a simple first order autoregressive[ 7 ], i.e. AR ( 1 ) . It estimates residuary discrepancy using the widely used Newey-West method for rectifying autocorrelation. Both ADF and PP trials are tailored towards the constitution of possible presence of unit roots ; i.e. non stationary variable. For this intent, we province the hypothesis as follows:

H0: there is unit root ( series is non stationary )

H1: no unit root ( series is stationary )

First status is that the estimation for t-statistic must be less than zero ( t-stat & lt ; 0 ) , so we compare the absolute value of the estimation with the Mackinnon ( 1996 ) critical values for the trial. If absolute value for t-statistic is greater than the McKinnon critical values at changing degree of significance, we reject the void hypothesis and conclude there is no unit root ; in other words, we say the series is stationary. Otherwise, we accept the hypothesis for unit root and see taking first or 2nd difference to prove for unit root at their case. Unless the research worker knows the existent informations bring forthing procedure, there is a inquiry refering whether it is most appropriate to include changeless term and tendency factor in the unit root procedure ( Enders 1995 ) . Therefore it is of import to bring forth the unit root estimations based on three conditions- tendency and intercept, intercept, and no intercept no tendency[ 8 ].

To further beef up the unit root consequences obtained from the ADF and PP trials, KPSS trial is used to extinguish a possible low power against stationary near unit root processes which occurs in the ADF and PP trials ( Kwiatkowski et al, 1992 ) . However, hypothesis for KPSS trial is the contrary of ADF and PP. Null hypothesis in this instance is that, a series is important.

Furthermore, the cointegration trial is used to find a longrun equilibrium among economic variables ( Thomas, 1993 ) .