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EXPORT DIVERSIFICATION IN THE CONTEXT OF PRICE UNCERTAINTY: Empirical Analysis of Nigeria’s Case

EXPORT DIVERSIFICATION IN THE CONTEXT OF PRICE UNCERTAINTY: Empirical Analysis of Nigeria’s Case

 

Abstract: This study follows the modern portfolio theory on efficient portfolio diversification based on return-risk trade-off to analyse export diversification in the context of uncertainty in world market prices using Nigeria as a case study. It also examined the effect of world price uncertainty and other factors on export earning variability with respect to Nigeria. Three methods (vertical, horizontal and Herfindahl index) were used to analyse the extent to which Nigeria diversified her exports from 1970 to 2012. The results showed that Nigeria’s export was more diversified in the 1970s, became concentrated in the 1980s and 1990s, and became more diversified towards 2012. The M-V Optimizer was used to estimate the mean-variance efficient frontier of Nigeria’s export. The result showed that the location of Nigeria’s export structure is at a distance from the mean-variance efficient frontier. This indicates a sub- optimal export portfolio or diversification. The results also revealed that welfare will be doubled as Nigeria moves toward efficient export portfolio. The GMM estimator results indicated that world market price uncertainty, openness, export concentration, foreign income volatility, and output (GDP) supply shock are the major causes of Nigeria’s export earnings variability. Among the policy lessons are that Nigeria should strive towards optimal export diversification so as to maximize welfare gains. The results also suggest that Nigeria needs to manage the degree of openness of the economy and change the structure of output from primary to manufactured products so as to reduce the variability of her export earnings.

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