Government fiscal bahaviour and Globalization of World Economy

Compiled by Mustapha Muktar, Ph.D

Department of Economics

Bayero Univeristy Kano

Government’s Fiscal Behaviour Fiscal Policy

Fiscal policy involves the use of government spending, taxation and borrowing to influence both the pattern of economic activity and also the level and growth of an economy. Fiscal policy is a stabilization tool used to control and stabilize an economy. Fiscal policy therefore is a deliberate attempt by the government of a country or nation to stabilize economy using fiscal policy tools. Fiscal policy is said to be tight or contractionary when revenue is higher than spending (i.e., the government budget is in surplus) and loose or expansionary when spending is higher than revenue (i.e., the budget is in deficit). Objectives of Fiscal Policy 1.      To achieve price stability 2.      To achieve high rate of employment 3.      To reduce income inequality among citizens 4.      To achieve high rate of economic growth 5.      To achieve balance of payment equilibrum Instruments of Fiscal Policy 1.      Government Budget/expenditure 2.      Taxes and taxation 3.      Wages and Salaries 4.      Subsidies and other concessions. Fiscal policy in Developing Countries The objectives of fiscal policy in developing countires like Nigeria are abit different because of the backwardness, therefore the need is to have self sustaining economic growth and stability in prices; specifically the objecitves are; 1.      To increase revenue surplus for development expenditure 2.      To increase agricultural and industrial production 3.      To reduce import of unnecessary items 4.      To provide incentives to savings and investments 5.      To boost economic growth Measures of Achieving Fiscal Policy Objectives in Developing Countries 1.      Deficit financing 2.      Prioritization of development expenditure 3.      Provision of capital and credits 4.      Encouraging exports 5.      Encouraging of savings 6.      Public works programmes

 

 

 

 

 

 

Globalization and the World Economy

Introduction

Globalization refers to the trend toward countries joining together economically, through education, society and politics, and viewing themselves not only through their national identity but also as part of the world as a whole. It implied multiplicity of linkages and interconnections that transcend the nations and economies which make up the modern world system. Globalization is a process through which events, decisions and activities in one part of the world can come to have a significant consequence for individuals and communities in other parts of the globe. Alternatively, globalization might be characterized functionally by an intrinsically related series of economic phenomena. These include the liberalization and deregulation of markets, privatization of assets, reduction in state functions, and diffusion of technology, foreign direct investment, and the integration of capital markets. In its narrowest formulation, the term refers to the worldwide spread of sales, production facilities, and manufacturing processes, all of which reconstitute the international division of labor.

 

Economic "globalization" is a historical process, the result of human innovation and technological progress. It refers to the increasing integration of economies around the world, particularly through the movement of goods, services, and capital across borders. The term sometimes also refers to the movement of people (labor) and knowledge (technology) across international borders. There are also broader cultural, political, and environmental dimensions of globalization.

The term "globalization" began to be used more commonly in the 1980s, reflecting technological advances that made it easier and quicker to complete international transactions both trade and financial flows. It refers to an extension beyond national borders of the same market forces that have operated for centuries at all levels of human economic activity village markets, urban industries, or financial centers.

Some Indicators of Globalization

• The value of trade (goods and services) as a percentage of world’s GDP increased from 42.1 percent in 1980 to 62.1 percent in 2007
• Foreign direct investment increased from 6.5 percent of world GDP in 1980 to 31.8 percent in 2006
• The number of minutes spent on cross-border telephone calls, on a per-capita basis, increased from 7.3 in 1991 to 28.8 in 2006
• The number of foreign workers has increased from 78 million people (2.4 percent of the world population) in 1965 to 191 million people (3.0 percent of the world population) in 2005.

The growth in global markets has helped to promote efficiency through competition and the division of labor the specialization that allows people and economies to focus on what they do best. Global markets also offer greater opportunity for people to tap into more diversified and larger markets around the world. It means that they can have access to more capital, technology, cheaper imports, and larger export markets. But markets do not necessarily ensure that the benefits of increased efficiency are shared by all. Countries must be prepared to embrace the policies needed, and, in the case of the poorest countries, may need the support of the international community as they do so.

The broad reach of globalization easily extends to daily choices of personal, economic, and political life. For example, greater access to modern technologies, in the world of health care, could make the difference between life and death. In the world of communications, it would facilitate commerce and education, and allow access to independent media. Globalization can also create a framework for cooperation among nations on a range of non-economic issues that have cross-border implications, such as immigration, the environment, and legal issues. At the same time, the influx of foreign goods, services, and capital into a country can create incentives and demands for strengthening the education system, as a country's citizens recognize the competitive challenge before them.

Globalization implies that information and knowledge get dispersed and shared. Innovators either in business or government can draw on ideas that have been successfully implemented in one jurisdiction and tailor them to suit their own jurisdiction. Just as important, they can avoid the ideas that have a clear track record of failure.

Advantages of Globalization
1. Increased free trade between nations
2. Increased liquidity of capital allowing investors in developed nations to invest in developing nations
3. Corporations have greater flexibility to operate across borders
4. Easy flow of information and knowledge
5.Increased flow of communications allows vital information to be shared between individuals and corporations around the world
6. Greater ease and speed of transportation for goods and people

7.Reduction of cultural barriers and greater interdependence of countries

8.Increases in environmental protection in developed nations.

Disadvantages of Globalization
1. International bodies like the World Trade Organization infringe on national and individual sovereignty

2.increase the gap between rich and poor nations

3.Increase in the chances of war within and between countries as they vie for resources
4.Decreases in environmental integrity as polluting corporations take advantage of weak regulatory rules in developing countries
5.Increased unemployment of labour as machine displaces labour.
6.Increased likelihood of economic disruptions in one nation effecting all nations
7.Greater risk of diseases being transported unintentionally between nations

Globalization seems to be gathering more and more momentum as it has come to stay the question frequently asked about globalization is not whether it will continue, but at what pace? Globalization has contributed a lot to the world today. It boosts countries’ economies, advance technologies and improve daily life of the people. But in the meantime whether it is a blessing or a curse has sparked much debate. This is because the benefit of globalization always comes with the drawbacks. Convincing argument can be made that globalization has led to advancement in technologies. This advancement has built the new world without boundaries. So, the communication can be made with any other parts of the world through technologies such as internet and telephone. Hence, ideas exchange can be done among intellectuals, journalists, scientists or ordinary people. As a result, the best ideas will be spread all over the world which led to enhance the world achievements. However, there are some disadvantages of the globalization. The absence of boundaries of the world through technologies could create harmful to the people through for example access to the bad and scandalous website in internet such as fraud, drugs and pornography could affect people minds. There is no doubt that globalization has both good and bad effects towards people and the world. However, the disadvantages of globalization could be reduced if the responsible authorities provide best solution to curb these problems.

 

BUS 8315: Fundamentals of Economic Theory: Module II

Fundamentals of Economic Theory I

Bayero University Kano

Faculty of Social and Management Sciences

Department of Business Administration

BUS 8315:Fundamentals of Economic Theory

Course Facilitator: Dr. Mustapha Muktar

Lecture Schedule: Wednesday 11 – 1 am

COURSE OUTLINE

Introduction

The aim of this course is equip students with morden economic theory so that  they will have a clear understanding of key economic models relevant to firm level strategy. The topic to be covered ranges from theories of consumer bahaviour down to the theories of production to distribution.

1.      Introduction to morden economic theory

2.      Theories of consumer behaviour

3.      Theories of production and distribution

4.      Theories of firm and market structure

5.      Theories of consumption

6.      Government fiscal behaviour

7.      Globalization and the world economy

Contact: No 10 Department of Economics

Blog:  http//www.mustaphamuktar.blogspot.com

e-mail: mmuktar75@yahoo.com

Reading Lists

International Trade and the Challenges of Sustainable Development in Nigeria: Towards Conceptual and Theoretical Explanations

International Trade and The Challenges of Sustainable Development In Nigeria: A Review of Conceptual and Theoretical Issues

S. D. Dogon-daji, and M. Muktar

Introduction

The importance of international trade to a nation’s economic welfare and sustainable development has been much recognised in the economics literature (Morgan and Katsikeas, 1997). The trade is based on the fact that no country can produce all goods and services, which people require for their consumption largely owing to resources differences and constraints (Mannur, 1995). As a result, this trade relationship suggests that economies need to export goods and services in order to generate revenue to finance imported goods and services, which cannot be produced domestically (Coutts and Godley, 1992; McCombie and Thirlwall, 1992 cited in Morgan and Katsikeas, 1997). Thus, as many countries have recorded sustainable growth and development through an export–led strategy, effective venturing into international trade is expected to assist Nigeria get sustained growth at the rates needed to make a visible impact on poverty reduction.

However, it has been observed that the Nigerian economy has grossly under-performed relative to its enormous resource endowment and her peer nations. With about 37 solid mineral types and a population of over 150 million persons, one of the largest gas and crude oil reserves in the world the economic performance of the country was described rather weak when compared to the emerging Asian countries such as Thailand, Malaysia, China, India and Indonesia. Those countries had by far lagged behind Nigeria in terms of GDP per capita in 1970, but later they were better able to  transform their economies to emerge as major players on the global economic arena. In 1970 for instance, Nigeria had a GDP per capita of US$233.35 and was ranked 88th in the world, when China was ranked 114^th with a GDP per capita of US$111.82 (Sanusi, 2010). Today, China occupies an enviable position in the global scheme of affairs largely owing to her self-esteemed trade position.

It is against this background that this work attempts to review the challenges of sustainable development in Nigeria through international trade. The chapter is divided into four sections including the introduction. The second section deals with conceptual issues and reviews of theories on international trade. The third section draws the relevance of these theories to Nigeria and finally the fourth section concludes the chapter.

Conceptual and Theoretical Issues

Conceptual Issues

Mannur (1995) defines international trade as an exchange of goods and services between the residents of a given country and those of the rest of the world. It is, therefore, a mechanism, which links the countries of the world through commodity trade, service flows and factor movements. As noted earlier, international trade was based on the fact that no country can produce all goods and services, which her people require for their consumption mainly due to resources constraints and differences (Mannur, 1995). Therefore, this trade relationship provides an opportunity for countries to export goods and services in order to generate revenue to finance imported goods and services, which cannot be produced domestically (Coutts and Godley, 1992; McCombie and Thirlwall, 1992 cited in Morgan and Katsikeas, 1997).

On the other hand, sustainable development is described as a development that meets the needs of the present generation without compromising the needs of the future ones (WCED, 1987 cited in Ite, 2003 and Ikeme, 2000). It is a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development, and institutional change are made consistent with future as well as present needs (Bonn, n. d.). It is also an alternative development strategy for improving the living conditions of the human population without degrading the quality of the environment. The concept thus came into being following the realisation that economic development and environment are closely linked, even though it was popularised by the report of the Brundtland Commission, which the United Nations General Assembly assigned to serve as long-term environmental strategies for achieving sustainable development by the year 2000 and beyond (Boon, n. d.).

The understanding that sustainable development encompasses a number of areas is very true (political and moral inclusive) but the three most essential elements are: economic, environmental, and social equity; and hence they are often referred to as the Sustainable Development Triangle (Daud and Nor Azam, 2011). Economic sustainability has to do with sound macro-economic management, poverty alleviating growth, appropriate agricultural policies, role of the state, and cost internalisation. Sustainable social development is concerned with equity in the distribution of wealth, resources and opportunity to all citizens at all levels and it implies amongst other things access to minimum standards of security, human rights, social benefits including food, health, education, shelter and opportunities for self-development. Environmental sustainability on the other hand deals with environmental protection and thus it requires the use of environmental goods and services in such a way that their productive capacity are not reduced, nor their overall contribution to human well-being diminished (Ite, 2003). For the purpose of this work all three dimensions are relevant but emphasis will be given on economic sustainability.

Theories of Trade

The Classical Trade Theory

According to the classical trade theory, countries are better able to gain and sustain development if each devotes resources to the generation of goods and services in which they have an economic advantage (Smith, 1776; Ricardo, 1817 cited in Morgan and Katsikeas, 1997). The theory thus explains the scenario where a country generates goods and services in which it has an advantage not only for domestic consumption but also exports (the surplus) and imports those goods and services in which they have an economic disadvantage. Economic advantages and disadvantages usually arise from country differences in factors such as resource endowments, labour, capital, technology or entrepreneurship. The classical trade theory, therefore, contends that the basis for international trade and sustainable development can be traced to differences in production characteristics and resource endowments which are founded on domestic differences in natural and acquired economic advantages (Morgan and Katsikeas, 1997). Specifically, the theory was based on the principles of comparative cost advantage and specialisation, which lead to gains for the trading partners (Umo, 2007). One of the weaknesses of this trade theory is that investment resources are not internationally mobile, i.e. only commodities can move and investment decisions are taken on a national basis (Caballero et al., n. d.). In today’s world, capital is highly mobile across national boundaries, and likewise technology (Caballero et al., n. d.).

The Factor Proportion Theory

The factor proportion theory on the other hand is able to give an explanation for difference in advantage exhibited by trading countries. As explained by the theory, countries tend to generate and export goods and services that harness large amounts of abundant production factors that they possess, while they import those that need large amounts of production factors which are relatively scarce (Heckcher and Ohlin, 1933 cited in Morgan and Katsikeas, 1997). The theory explains the concept of economic advantage in the context of endowment and costs of factors of production.

The Product Life Cycle Theory

The Product Life Cycle Theory was developed in line with some developments to do with the changing commercial realities like the role played by technological progress and multinational enterprises in trade and sustainable development of their home countries. The theory suggests that a trade cycle emerges where a product is produced by a parent firm, then by its foreign subsidiaries and finally anywhere in the world where costs are at their lowest possible (Vernon, 1966, 1971; Wells, 1968, 1969 Morgan and Katsikeas, 1997). It also explains how a product may emerge as a country’s export and work through the life cycle to ultimately become an import (Morgan and Katsikeas, 1997). According to the theory, technological innovation and market size are very critical for gaining in international trade and of course sustainable development.

Trade Theories and the Challenges of Sustainable Development in Nigeria

Virtually, nothing is properly working in Nigeria and likewise the doctrines of trade theories are not much respected in the country. The classical trade theory for instance, had emphasised on achieving sustainable development through international trade on the basis of comparative economic advantages and disadvantages. Using the doctrines of this trade theory, Nigeria was supposed to specialise in agriculture, especially considering her enormous uncultivated arable land and abundant labour resources. Unfortunately, since the oil price boom of the early 1970s, the country abandoned the agricultural and industrial sectors of the economy. Both the public and private sectors of the economy concentrate their efforts in the oil and gas industry to the extent that the mainstream economy is denied funding, requisite investment and even managerial capabilities. Thus, the mainstream economy has become uncompetitive globally while the country has turned into a trading outpost for foreign companies (Sanusi, 2010). The petroleum industry in Nigeria is characterised by wastage, corruption, low productivity and unchecked dominance of foreign multinationals (Hassan et al., 2002). The country has been relegated to a mono-product economy with the bulk of government revenue coming from oil exports which is susceptible to shocks in the international oil market. Moreover, many other solid minerals with which the country is richly endowed with remain generally untapped. More fundamentally, the economy has dis-proportionately relied on the primary sector (subsistence agriculture and the extractive industry) without any meaningful value addition. In light of this, the little growth recorded in the economy, thus far, has been without commensurate employment, positive attitudinal change, value re-orientation, and equitable income distribution, among others.

      Coming to the factor proportion theory, Nigerian had over the years massively been spending on the importation of technologically related items mostly from Western Europe, even though the country was not seriously exporting agricultural produce. An examination of the Nigeria’s import profile during the period from 1980-1985 for instance disclosed that the import category of machinery and equipment alone accounted for almost 40% of the country’s imports every year during the period. The introduction of SAP did change the situation as in 1990 for example; $2,755 million (89.8%) of the $3, 067 million of the country’s foreign exchange earnings was allocated to machinery, spare parts and raw materials. The figure went even higher in 1991 when it was increased to $3,344 million (93.3%) of the $3, 584.1 million totals, all in the name of industrialisation through technology transfer (Ogbimi, n. d.).

As a technologically weak and backward country, the product life cycle theory is to some extent not relevant for Nigeria, even though the country used to be leading exporter of rice in the 60s but now turned to be a major importer of same rice. For example, the year 2008 ended in Nigeria with the massive importation of rice and grains into the country worth N 80 billion (Ikeokwu, 2008).

Nigeria is also unable to achieve sustainable development through international trade due to factors such as poor policy and hostile external environment, lack of good governance, corruption, poverty, insecurity, poor human capital and infrastructural development amongst others. Some of these are discussed below:

Corruption

Corruption is a daunting obstacle to sustainable development as it adversely affects not only international trade but also education, healthcare and poverty alleviation. The 2004 Corruption Perceptions index by Transparency International (TI) ranked the country as the third most corrupt country in the world, against its second position in 2003 (Dike, 2008). A World Bank estimate has indicated that 80% of energy revenues benefit only 1% of the Nigerian population, owing to massive corruption in the country (Odularu, 2007). The oil funds from the removal of oil subsidy are unlikely to bring sustainable development for Nigeria owing to massive corruption created by lack of accountability, respect for rule of law and check and balance in the country. Similarly, the alleged corruption case against Senator Faruk Lawal – a Chairman to the investigation of squandered oil subsidy money is a clear testimony to establish how corrupt the country is. Thus, corruption serves as a clog in the wheel of economic growth by limiting the pace, reducing the amount of public resources, discouraging private investment and savings and it further impedes the efficiency use of foreign aid. Similarly, corruption is a growth retarding factor in any economy because resources which should be utilised for development are stolen and diverted to non-growth promoting activities like acquisition of luxurious goods, investment in other economies, promotion of conflicts, etc. More so, a number of studies have shown that corruption affects sustainable development directly and indirectly through both domestic and foreign investments as well as low productivity.

      Combating corruption however, requires international cooperation involving foreign governments, foreign banks and foreign financial supervisory and regulatory institutions, which also is not forthcoming (Daud and Nor Azam, 2011).

Poor Infrastructural Development

Another major sustainable development challenge facing Nigeria through international trade is the poor state of infrastructures. Foreign aid can have beneficial effects on the economies of recipient countries when it helps in the development of social and physical infrastructures, thereby boosting employment and enhancing productivity (Daud and Nor Azam, 2011).

Bad Governance

Trade offers opportunities for the poor and food security by creating a condition, which raises their incomes and lives, opening small farmers to international competition which can also undermine the agricultural sector with long term negative effects for poverty and hunger (Pingali et al., 2006). The process of the international trade between Nigeria and the West has largely created an opportunity for the International Financial Institutions (IFIs) and the West to exploit and force the country to debt crisis. Similarly, the process was used to create stolen wealth for Nigerians, by the IFIs and the West at the detriment of Nigeria (AFRODAD, 2007 cited in Ikejiaku, 2008). This is not surprising as Multinationals have taken advantage of trade to exploit the country through dumping and over-invoicing (Ogbimi, n. d.). The activities of transnational corporations have increased the level of environmental gradation in Nigeria (Ite, 2003). This is evident in terms of water, air and land pollutions owing to their hazardous and selfish operations. Although good governance is at the centre of sustainable development and poverty alleviation, same is lacking in Nigeria. There is absence of rule of law and transparency, responsiveness, participation, equity, and accountability are denied by bad governance. In this situation we cannot expect international trade to serve as an engine of sustainable development for the country. There is no doubt that among the major manifestations of poor governance and deficient leadership is misplaced policies and priorities, which have almost become permanent features of the country (Daud and Nor Azam, 2011).

Poor Technological and Educational Development

Nigeria has implemented SAP for decades now, but none of the objectives has been achieved so far via the chosen programme instrument (Ogbimi, n. d.). International trade is supposed to make a decisive contribution to sustainable development by way of equitable integration of Nigeria into the global economy (Ahmed, 2006). The western induced policies like SAP and their existing conditionalities particularly the removal of oil subsidy have failed and could not bring sustainable development for the country. Sustainable development is usually achieved through appropriate technological development as supported by product life cycle theory. On the other hand, technological development is realised through learning and acquiring new knowledge, skills and capabilities (Ogbimi, n. d.). Human capital development (HCD) means the training and retraining which the workforce receives to become more competent and suitable to contribute positively and purposefully to sustainable development. Thus, he opines that human capital investment is an inevitable component of the development process, which must be given topmost priority (Daud and Nor Azam, 2011). Part of the reasons why Nigeria has failed to attain sustainable development is related to the poor state of its educational institutions. Unfortunately, investment in human capital is a critical area Nigeria has neglected for too long now (Dike, 2008).  In Nigeria for instance, few people possess the necessary knowledge and skills in the productive sector and due to the mismatch between education and productive training; the country is for long experiencing mass unemployment (Ogbimi, n. d.). It is sad to note that at 50 years of independence Nigeria is not even near achieving sustainable development despite her vision 20, 2020 (Abdullahi et al., 2012).

Poverty

The incidence of poverty has been high and on the increase in Nigeria since 1980. Data from the Federal Office of Statistics (FOS) on poverty profile in Nigeria showed that the incidence of poverty rose from 28.1% in 1980 to 43.6% in 1985, but dropped slightly to 42.7% in 1992 from where it rose sharply to 65.6% in 1996 and steadily rose to 70.2% in 2003 (Chinedu et al., 2010). There is a saying that a poor man is a hungry man and a hungry man is an angry man, hence poverty tends Nigerians to become aggressive. Today, widespread of conflicts, kidnapping and hostage among others are not only gradually becoming common but also threatening international businesses and sustainable development in Nigeria (Oritsejafor, n. d.).

Conclusion and Recommendations

Conclusion

From the foregoing explanations, the work has concluded that Nigeria has been unable to attain sustainable development through international trade owing to obvious violation of trade doctrines particularly specialisation based on factor proportion and endowment.

Recommendations

The work thus recommended that Nigeria should give more emphasis to specialisation on agriculture so as to diversify her production and export base in order to enable the country gain all the benefits of trade including sustainable development. This would go a long way in harnessing the Nigeria’s abundant land and labour resources, which in turn would help in reducing present unemployment and poverty crises in the country. Similarly, government should take serious measures with a view to overcoming the trade related challenges of sustainable development identified by the study.

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