Trade Liberalisation, Capital Formation and Economic Growth in Nigeria: A Structural Vector Autoregressive Model

Abstract

This research investigates how trade liberalisation can influence Nigeria’s economic growth through capital formation. To achieve this, a Structural Vector Autoregressive (SVAR) model is utilised to assess the relationship between trade liberalisation and economic growth using quarterly data from 1986Q1 - 2023Q4. Findings indicate that trade liberalisation affects capital formation positively. The study further reveals a significant association between external trade sector liberalisation and economic performance, facilitated by investment in physical assets in the economy. Also, the impulse response functions suggest a weak relationship among trade liberalisation, capital formation, and economic growth in the short term due to temporary external shocks. The variance decomposition reveals weak shocks between trade liberalisation and capital accumulation on real GDP in the short term. Based on the empirical evidence, the study recommends that the federal government should reduce trade barriers and prioritize investment in physical infrastructure; tax incentives, subsidies, and grants should be provided to the private sector; and financial institutions should be strengthened to boost the confidence of foreign and domestic investors. By reducing tariffs and other regulatory restrictions to trade, economies are expected to be better positioned to engender production, attract foreign investment, and also enhance capital accumulation of productive capital over time.