GLOBALIZATION AND ITS IMPACT ON ECONOMIC GROWTH OF THE NIGERIAN ECONOMY (1986 - 2008) ABSTRACT
This research work Globalization and its impact on the growth of the Nigerian economy from periods of 1986 to 2008 is basically to determine the impact of globalization on the Gross Domestic Product of the Nigerian economy as well the impact of financial integration on the Nigerian economy. It was found out in recent years that the Nigerian economy has developed economically wise due to globalization. Globalization being a process of interconnections between countries of the world has turned out to have a positive effect on the Nigerian economy most especially in the telecommunication and industrial sectors of the Nigerian economy. This work shows the impact and those variables responsible for the impact. From evaluation and analysis of result, this work shows that only Foreign Direct Investment proved to have a positive impact on the Nigerian economy through globalization and hence it should be given lots of concern. Other variables used alongside Foreign Direct Investment, in judging this impact were Real Interest rate, Openness and Real Exchange Rate. Also necessary recommendations were made at the concluding part of this work (chapter five) to help boost the economic growth and development of Nigeria based on the indices used if properly applied and implemented.
CHAPTER ONE
1.1 BACKGROUND TO 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.
1.2 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).
.