Trade and Trade Policy: A Comparative Study of Nigeria and Indonesia

Abstract

This paper compares how trade policies impact on trade patterns and structures, and how trade impacts economic growth in Nigeria and Indonesia. The study uses the standard measures of trade openness. Import plus export, as well as total imports and total exports separately, as proxies for trade policies and trade respectively, and includes real exchange rate to complete the explanatory variables. The dependent variable is the growth rate of real Gross Domestic Product. The study uses Vector Error Correction Model for annual data set extracted from the World Bank's World Development Indicators spanning from 1981 to 2014. Findings from this study show that total imports and total exports positively and significantly impact economic growth in both countries but that these impacts are stronger in Indonesia than Nigeria. This might have been because Indonesia trade policies are more growth enhancing than that of Nigeria. Trade openness negatively and significantly impact on economic growth in both countries, and this may be attributed to the detrimental effects of trade openness on developing countries. Real exchange rates impact significantly on economic growth in Indonesia but not Nigeria and this is attributed to difference in foreign exchange policies in both countries. Indonesia has a more flexible exchange regime than Nigeria. This study therefore recommends that policy makers in Nigeria can learn some lessons from Indonesia in respect of how to improve trade volumes and effective management of exchange rate to spur economic growth.