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THE IMPACT OF GLOBALIZATION ON THE ECONOMIC GROWTH OF NIGERIA (1986-2008)

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Generally, globalization can be viewed as the integration of national economics through trade, capital flows and the accompanying convergence of economic policies. It is the process whereby political, social, economic and cultural relations increasingly take on a global scale and which has a profound consequence for individual’s local experience and everyday lives (Bilton, 1997). The definition above implies that globalization operates both at global and local levels and therefore impacts on the economy and politics of a country as well as the culture and well being of the citizens.

Globalization is rooted in multinational trading and investments arrangements and the opening up of trade, through liberalization of the financial sector as well as the economy as a whole. The reasoning behind this policy thrust is that the promotion of trade enriches the wealth of nations. For instance, trade liberalization under the Uruguay round of multilateral trade agreement of 1995 was estimated to have provided over 100billion U.S dollars a year in net benefits accruing mainly to those countries that have removed trade barriers (Hausters, Gerd, 2000). Financial integration as a part of globalization therefore envisages the free flow of loanable funds, openness of capital flows when combined with sound domestic policies, allow countries access to be much larger pool of capital. High capital flows leads to enhanced investment and economic growth, particularly when the inflows are in foreign direct investments, as against potentially volatile short term portfolio flows.

Furthermore, Foreign Direct Investment not only complements domestic savings but also enhances the depth and efficiency of the domestic financial markets and the absorption of foreign technologies. However, the monetary and fiscal policy framework of the nation must be appropriate for the economy to benefit financial globalization (Yusuf, 2001). Globalization is not a new phenomenon, as it has progressed throughout the course of history dating back to the late 19th century. The history, was however, conquered and the speed slowed down until the new era of global integration facilitated by the removal of trade barriers and capital flows as well as the advancement in communications and computer technologies which have made easy the collection and processing of data needed for decision making. Consequently, the world exports of goods and services have more than tripled between 1983 and 2005. These changes have also stimulated demand for cross border finance, against the background of financial liberalization in many countries, promoted a pool of global liquidity to meet such demand.

Globalization have no doubt increased opportunities for accessing capital funds for both domestic and foreign sources more cheaply and on better terms. This is because financial sector liberalization and product innovations have in many countries been helped by technological advances. This in turn enhances financial intermediation and creates a more competitive market environment for financial institutions. The downside of those benefits is that international capital flows could be very volatile and thereby pass serious threat to financial and macroeconomic stability. On the other hand, reversal of capital flows as witnessed during the Mexican crisis of 1994 to 1995 and the Asian and Russian crisis of 1997 to 1998 could endanger the financial stability of the individual countries particularly where banks are weak and poorly regulated. The contagion effect could as well threaten the stability of the internationally financial system. There is also the risk that during the period of boom and burst, asset prices may overshoot economic fundamentals, thereby saddling banks with non- performing loan backed by collaterals that have lost much of their values.  

Globalization influences the financial sector in different and complex ways. Typically, capital flows, exchange rate crisis and inflationary pressures are some of the major avenues through which the impact of globalization can quickly be transmitted into the domestic economy. The implication of globalization for monetary policy can be seen through two channels. First, volatile short term capital flows and exchange rate movement which are associated with globalization can cause an increase in the uncertainties surrounding the outcome of monetary policies. Secondly, globalization forces policy makers to undertake structural adjustments or reform which changes the conditions under which monetary policy targets, strategies and instruments. It is generally believed that the more discretionary monetary and fiscal policies are constrained, the more open an economy becomes.

Globalization also compels government to exercise greater fixed discipline and to ensure sound institutional and political frameworks. In order words, it does act as a force for stability by limiting the scope for countries to pursue policies that are consistent with medium term financial stability. High fiscal deficit and unsound financial policies that lead to inflationary pressures, current account deficits and/or high real interest rate, attracts the attention of international investors and capital market operators. Thus, the room for fiscal rascality or unsustainable policies is much reduced in a globalized world.

Specifically, monetary and exchange rate policies have undergone changes in line with broad economic objectives. From independence up till 1986, the conduct of monetary policies was mainly by direct control, which involved the impositions of ceilings on aggregate bank credit expansion, sectoral allocation of credit, administrative control of interest rate, prescription of cash reserve requirement, exchange rate controls and the mandatory holding for government securities. The financial market during this period was mainly underdeveloped, repressed with a limited money market instruments and fixed and inflexible interest rate. A fully developed economy is that which have passed the various stages of development. This development will be achieved more rapidly if foreign investors have access to the domestic markets.

STATEMENT OF THE PROBLEM

There are problems associated with the development of the Nigerian economy in her different sectors based on the impact of globalization. These problems may be economic problems based on the rate of instability, policy barriers to capital flows, inappropriate economic policies and political instabilities. There may also be problems like market liquidity. In using liquidity as a measure of stock market development, it seems that the Nigerian capital market is illiquid to an extent and it has contributed very little to the growth of the Nigerian economy (Ibrahim, 2002).

Therefore, this research work shall answer the following questions

Does globalization produce a rapid flow of foreign capital for the Nigerian economy?

Does globalization significantly improve management techniques for firms operating in Nigeria?

To what extent has globalization brought about an advancement of new technologies in the Nigerian economy?

Has globalization resulted in inequality between Nigeria and the western nations?

OBJECTIVES OF THE STUDY

Specifically, the objectives of this study can be written as

To verify the impact of globalization on Nigerian economy.

To verify the impact of financial integration on Nigerian economy.

STATEMENT OF HYPOTHESIS

In view of the above mentioned objectives, the hypothesis of this research would be

Hypothesis I

Ho: Globalization has no significant impact on the Nigerian economy.

H1: Globalization has a significant impact on the Nigerian economy.

Hypothesis II

Ho: Financial integration has no positive impact on Nigerian GDP.

H1: Financial integration has positive impact on Nigerian GDP.

SIGNIFICANCE OF THE STUDY

The economic relevance of studying the impact of globalization on the economic growth in Nigeria needs not to be over emphasized. This study is very imperative given the recent efforts by monetary authorities in Nigeria to re-launch the banking sub-sector to glorious heights. Globalization has brought about the rapid change in the Nigerian economy that seeks to increase their share of financial and direct investment in the international market. Globalization has by no doubt increased opportunities by accessing capital funds from both domestic and financial sources. More so, investors can now tailor their portfolio risk to their preferences.

This study is of great importance to;

Academic institutions: Globalization has played an important role in the improvement of learning techniques. These techniques includes the use of electronic gadgets such as computer, printers, laptops etc. which facilitate learning processes as well as creating  basis for understanding new technological processes that will aid student academically.

Firms: Through the help of globalization, there has been easy and accessible communication network which facilitate production, distribution of goods and services both domestically and internationally, as well as attracting new investors.

Government: In terms of governance, globalization has improved our system majorly in areas of budget. With the help of globalization, revenue collected and expenditure made are accounted for with little or no errors.

SCOPE AND LIMITATIONS OF THE STUDY

This study covers the impact of globalization on the growth of the Nigerian economy from the period of 1986-2008. This research work was limited by insufficient fund and limited time to carry out the research.

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