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Nigeria must help its industries succeed, but not by cocooning them

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Last week, I wrote in defence of free trade. That won’t have surprised regular readers of this column, who are familiar with my views on open trade. But I pitched the argument explicitly within the context of consumers versus producers, drawing on Adam Smith’s famous words that “consumption is the sole end and purpose of all production” and that “the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer”. Thus, the self-interested, profit-maximising producers are only useful to the extent that they produce things that benefit the society in terms of utility, quality and value, and contribute to national welfare. But I want to take that discussion forward this week, and address the question: Does the society, through government, have a role in providing businesses with what they need to succeed and serve the public interest better?

The eighteen century French physiocrats coined the phrase “Laissez faire et laissez passer” (Let be and let pass) as an economic philosophy that says government must leave economic activities strictly and entirely to the operation of market forces. Today, the physiocrats’ disciples are the libertarians, who believe government should leave economic actors alone on the basis that through the exercise of their freedom of choice and voluntary interactions, a spontaneous order would emerge that would produce optimum economic and social benefits for individuals and the society.

But the libertarian views are not shared by economic liberals even though they have many things in common. For instance, both economic liberals and libertarians share a common belief that the market mechanism, not government, is most efficient allocator of resources. However, while the libertarian believes that a market will self-adjust if it fails, an economic liberal believes such self-adjustment may be difficult without a limited and targeted government intervention. For instance, would the global financial crisis of 2008 have eventually sorted itself out without the coordinated response of governments? The libertarian would say yes, the economic liberal would say no!

That said, both libertarians and economic liberals believe that government failures are far more common and worse than market failures. Indeed, it is precisely because government interventions often result in failures that libertarians don’t want government to interfere at all in economic activities. But economic liberals believe governments have a limited role under certain conditions. In any case, isn’t the government responsible for providing some of the public goods that the market needs to be more efficient?

Adam Smith, the father of capitalism, was not a purist libertarian or a full-fledged adherent to the laissez-faire doctrine. He believed that government had an important role in supporting the market mechanism as a social institution, and that government policies, such as the provision of certain public goods and the establishment of a system of law and justice, could allow the “invisible hand” of the market to operate more effectively. As Martin Wolf, the Financial Times chief economics writer put it recently, “Adam Smith wants capitalism to operate within a law-governed and competitive market, overseen by an honest judiciary”. Truth is, competition policy, contract and property rights protection, the rule of law and robust public institutions and infrastructure, which are essential for the proper functioning of the market, can only be provided and guaranteed by the government.

So, how can government help businesses to succeed? Well, the answer is clear from the above: to create the policy and institutional environment that improves their productivity and enhances their competitiveness so that they can compete and thrive in the global market. I said “the global market” because, in today’s globalised world, any business in a traded sector that is producing only for its domestic market will struggle to survive. Unless that business is shielded from foreign competition by its government, which is certainly not an acceptable form of government intervention, it will not survive exposure to foreign competition.

As the saying goes, “industries thrive locally when they can compete globally”. What’s more, a World Bank study shows that “exporters on average are more productive, capital intensive, larger and pay higher wages than non-exporters”. Thus, it follows that a government that cocoons its industries, rather than challenging them to compete internationally, is not only damaging them but also condemning its people to low-wage jobs. After all, higher productivity leads to higher wages and exporting companies are more productive than non-exporting ones!

Unfortunately, government interventions in Nigeria are not designed to help industries succeed; they are not designed to shake industries out of their lethargy and sclerosis so that they can compete in the global market. Indeed, according to the “Nigerian Industrial Revolution Plan”, published by the Jonathan administration and adopted unchanged by the Buhari government, “the Nigerian manufacturing sector has failed to undergo critical structural transformation”. Its share of GDP is less than 3%, its contribution to foreign exchange earnings is just about 3% and its shares of employment and government generated revenue are miniscule. Surely, the diagnosis even by the government suggests a sector in deep crisis. Elsewhere, the focus of the government would be to engineer the structural transformation of the sector through the right incentives; any industrial policy or strategy would not be aimed at protecting the sector but to improve its productivity and enhance its international competitiveness.

But the truth is that Nigeria is not helping its businesses even to survive at home, let alone compete and thrive globally. Yet, unless Nigerian businesses can compete globally, they will struggle in the long-run to survive domestically. According to World Bank study, any government that wants to improve its export performance needs to address three broad determinants of trade competitiveness that affect the ability of industries to participate actively in the export market. First, it must address supply-side factors undermine business competitiveness; second, it must secure market access for its businesses; and, third, it must develop trade promotion infrastructure. Of course, Nigeria doesn’t provide any of these.

Take the first. There are huge supply-side constraints limiting industrial performance in Nigeria. Although Nigerian industries have firm-level technical inefficiency and other internal weaknesses, the supply-side problems they face result mainly from government’s policy and institutional failures. Surely, in a country where the exchange rates are not stable, energy costs are too high, high and multiple taxes exist, cost of borrowing, i.e. interest rates, is excessive, right skills are not available, and intermediate and backbone services or infrastructure are non-existent or weak, it is difficult to expect industries to be internationally competitive. But that, sadly, is the situation in Nigeria.

Then, take market access. Nigeria is doing nothing to negotiate trade agreements that would enable its businesses to enter and compete in foreign markets without tariff and non-tariff barriers. By refusing to sign the African Continental Free Trade Area (AfCFTA) and the European Union-ECOWAS Economic Partnership Agreement (EPA), Nigeria has shown that it doesn’t value securing access for its businesses in foreign markets. In any case, you can’t seek market access in other countries while restricting or banning imports!

Surely, if Nigeria can’t tackle the supply-side problems facing its industries, if it can’t and won’t negotiate trade agreements to secure frictionless access for them in foreign markets, it’s not surprising that it doesn’t take export promotion seriously by addressing market and government failures that restrict export participation, such as Nigeria’s poor standards and certification regime.

The truth is that Nigeria is not helping its businesses to succeed by developing their capacity to export. Instead, its protectionist trade and industrial policies have simply created zombie industries, with anti-export bias. But that’s not how a government should support businesses!

 

Olu Fasan

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