ARDL Approach to Trade Libralisation and Economic Growth in the Developing Country: Evidence from Nigeria

Abstract

This study examined the trade impact of trade liberalization in the developing economies from 1981 to 2014. It employed the Autoregressive Distributed Lag (ARDL) bound test approach. Two measures of trade liberalization were used to form an index of trade openness, while three measures of financial sector development were used to construct index of financial development using principal component analysis. The result suggested that the long run impact of trade liberalization on the economic growth of Nigerian is found to be negatively significant. The short run impact of trade liberalization on economic growth was found to be positive and significant. In total, the long and short run impact of trade liberalization to economic growth suggested that the Nigeria economy is yet to harness the benefits of international trade. It was also suggested that trade liberalization could enhance economic growth. However, the introduction of other variables in the likes of financial development, labour force and gross capital formation, none played a significant impact on economic growth in the Nigeria. The findings of this study offer some important policy implications. Trade liberalization could be another avenue for economic diversification through foreign direct investment and by so doing there will be improved in gross capital formation and indeed economic growth. Nigeria also needs to create diversified, dynamic and competitive sectors capable of absorbing the more educated labour force to translate human capital to higher economic growth

Key Words: Trade liberalization, Economic growth, Labour force, gdpc, ARDL, cointegration