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WAGE AND EMPLOYMENT EFFECTS OF TRADE POLICY REFORM: EMPIRICAL EVIDENCE FROM NIGERIA’S MANUFACTURING SECTOR Presented By A.O. Adewuyi Trade Policy Research & Training Programme (TPRTP), Department of Economic University of Ibadan, Nigeria I.1 Introduction The role of Trade in promoting industrialization and development Nigeria’s trade policy experience in promoting the Manufacturing Sector and the entire economy (a) Unilateral initiatives: ISI facilitated by trade control regime(1970- 85), plus tax holidays, preference in credit & forex allocations, etc SAP – trade liberalisation regime(1986 – 93) Scrapping of CMB, dereg. Forex Mkt.& exch rate, Export tax elimination, reduction of import tariffs and items in import prohibition list, etc Tariff policy reform (1995 – 2001). Recent TP regime is relatively protective (b) Bilateral, Regional and Multilateral Initiatives (ECOWAS, LOME convention, Cotonou Agmt., EPA, AGOA, WTO): I.2 Problem Statement/Research issues Despite various trade policy reforms introduced by the government over the years, Nigeria’s Manufacturing sector experienced: Fall in real output and wage as well as unstable rate of growth of employment The rate of import dependency increased While the contribution of the sector to exports and output of the economy was less than 10.0 per cent. The research issues and rationale are: What is the impact of trade policy reforms on wage and employment in Nig.’s manufacturing sector?; In Nig., few studies exist in this area and have applied a single equation model which may be confronted with the endogeneity problem; and Controversies generated by the debates in the literature on the impact of trade policy reforms on wage, output and employment are yet to be resolved. I.4 Objectives of the Study The primary objective of the study is to investigate the impact of trade policy reform on wage and employment in Nigeria’s manufacturing sector. Specifically, this study intends to: examine the wage effects of trade policy reform in Nigeria’s manufacturing sector; investigate the employment effect of trade policy reform; and Scope and analytical approach This study covers 1970 to 2005 (Pre-SAP reform (1970-85): SAP reform (1986-93) and Post-SAP (1994-05) The analytical approach adopted in this study is the specific factor model with two major inputs-labour and capital and two goods or sectors- Exportable and importable. The trade model has been linked with constrained profit maximisation conditions and imperfect labour market xteristics to arrive at estimated model to be presented later. Contd. Ten Sub-sectors were covered which include: Food & others (FBT); Textiles & others (TWCL); Wood & others (WWPF); Paper and others (4Ps); Chemical and others (CHEMPHA); Plastic, rubber and others (DIPR); Non-metallic mineral products (NMMP); Metal and Iron products ( BMIS); Electrical and Electronic appliances (EEA); Motor Vehicle and Miscellaneous Assembly (MVMA) The sub-sectors were regrouped into two main sectorsExportable and importable sectors based on the relative share of exports and imports in the total output and The degree of market orientation. Simultaneous Equations Estimated . In wit = z0 + z1InQit + z2InLit + z3Inrit + z4 In RERit + z5 ln MASit + z6 lnIMSit + z7 lnEXSit + z8 lnPCMit + z9WA it +z10 WR it + uit …………………………………………...(a) In Lit = m0 + m1InQit + m2Inrit + m3 ln MASit + m4 lnIMSit + m5 lnEXSit + m6 lnPCMit + m7WA it +m8 WR it + uit ……………………………………………...…(b) In Qit = n0 + n1InLit + n2InKit + n3InOP + n4Tit + n5 ln MASit + n6 lnIMSit + n7 lnEXSit + n8 lnPCMit + n9wit + uit Definition of variables wit = Average real wage in manufacturing sub-sector i in time t; Qit = Real value added in manuf. subsector i in time t; Lit = Number of labour employed in manuf. sub-sector i in time t; rit = rental cost of capital proxied by bank lending rate. WA & WR = Alternative wage and wage rent respectively. Ait = Efficiency and total factor productivity growth parameter which is linearly related to trade and commercial policy (measured by average tariff rate or export-, import- output ratios). contd. MAS = Kit = Tit = OP ATR = = Oil price; Average tariff rate IMS = Import share; EXS = Export share; PCM = Price -cost Margin; RER = Real exchange rate. Macroeconomic instability variable (Inflation rate); Capital employed in manuf. sub-sector i in time t; Time trend to measure technological progress; Data Sources & Measurement Sources of data include: The annual abstract and digest of statistics as well as annual industrial survey conducted by the National Bureau of Statistics; Nigeria Trade summary Publications of the Central Bank of Nigeria (CBN)Statistical Bulletin; and annual report and statement of accounts. Measurement Manufacturing output:- Value added: gross output net of intermediate inputs; Employment:- Labour input as total number of people employed in the establishment. Wages and salaries:- Gross cash payment to employees before any deductions as well as other labour benefits such as, bonuses, gratuities, etc; Estimation Techniques Since a simultaneous relationship exists between the equations, we have adopted the Generalised method of moment (GMM) techniques. Other reasons for using GMM are: The need to transform out the fixed effect time – invariant sectoral effects The need to solve the problem of endogeneity in the model. This is done by using differences rather than levels of variables as instruments and by including lag values of the endogenous variables. Summary of Findings & Conclusions Results for the pre-reform period suggest that protectionism is unfavourable to the exportable sector in terms of: labour wage and employment but favourable to the importable sector. the effects of trade policy on wage and employment differ by sector during this period. The results for the reform period suggest that: trade policy reform did not impact positively on wage, and employment of the manufacturing sector. Summary of Findings & Conclusions However, the impact of trade policy reforms are more pronounced in the post reform period especially in the importable sectors of the manufacturing sector. Generally, the trade policy variables have no significant effect on the manufacturing wage and employment during the reform period. In Nig. the need to capture the economic wide effects of trade policy reforms necessitates more studies using CGE model. Simulations should be conducted to examine the potential effects of CET on sectoral wage and employment The impact for other sectors need to be estimated. Studies should be funded for LDCs and other developing countries.