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.
CHAPTER ONE
INTRODUCTION
1.1
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
|
Company
|
Location
|
Year of Establishment
|
Quoted Year
|
Delisted Year
|
Operational Status
|
|
Aba
|
Aba
|
1962
|
1993
|
2009
|
Closed (2000)
|
|
Afprint Nigeria
|
Lagos
|
1964
|
1979
|
2010
|
Diverted to cars and edible oil
|
|
Arewa
|
Kaduna
|
1965
|
|
|
Closed (2002)
|
|
Asaba
|
Asaba
|
1964
|
1995
|
2009
|
Closed (2004)
|
|
Enpee
|
Lagos
|
1968
|
1978
|
2008
|
Divested to packaging (2004)
|
|
Kaduna
|
Kaduna
|
1956
|
|
|
Closed (2002)
|
|
Nigerian
|
Lagos
|
1960
|
1971
|
2008
|
Closed (2007)
|
|
United
Nigeria
|
Kaduna
|
1964
|
1971
|
2011
|
Closed (2007)
|
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).
1.2
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......
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