• Tuesday, February 27, 2024
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Protectionism: The wrong approach to addressing Nigeria’s import dependence

Cargoes

 

The Nigerian government’s recent decision to close the country’s land borders to all goods is the latest addition to the nation’s litany of protectionist measures implemented in recent years. In fact, protectionism in its various forms, including import restrictions, tariffs, exchange rate controls etc. has been the go-to policy for Nigerian policymakers.

For decades, successive Nigerian governments have resorted to protectionist measures to combat the nation’s dependence on imports. Although the protectionist measures have never achieved the policy objective of industrialising Nigeria, this has not stopped successive governments from constantly adopting them.

The allure of protectionism has always been strong in Nigeria especially in the face of an economic crisis. In the early 1980s, the Shehu Shagari government responded to Nigeria’s first major economic crisis with import restrictions. When the Buhari military regime replaced Shagari’s government in 1983, it escalated the existing import restrictive policy by placing all imports under licensing and closing Nigeria’s land borders. Similar protectionist principles, albeit in various guises, guided successive military regimes. A situation which failed to improve under the civilian dispensation that started in 1999.

Indeed, the Obasanjo administration in 2002 prevented import licenses being granted to cement companies who could not show proof that they were building local processing capacity. Fast forward over a decade afterwards, and similar policies remain in place and are constantly enacted. In June 2015, the CBN published a list of 41 items ineligible for forex, including essentials like rice and cement. In the following years, the CBN added fertilizers and textiles to the list.  And about a month ago, the current administration closed the country’s land borders to all goods.

All of these have been undertaken to spur growth in the local industry such as the textile, cement, auto manufacturing and agriculture industries. Nevertheless, the fact that Nigeria is yet to become self-sufficient in these industries highlights the failure of the nation’s long-standing protectionist stance.

Ironically however, industries which have not been protected have experienced the strongest growth while the protected ones have declined or stagnated.

The services industry, which scarcely benefitted from protectionist policies has flourished, and now constitutes over 50 percent of the nation’s GDP. On the other hand, the share of manufacturing as a percentage of GDP, for example, has remained more or less flat at less than 15 percent of GDP.

The effects of protectionism on Nigerians are glaring. For example despite the existence of a number of restrictions around importing cement into the country, and numerous incentives to promote local cement production, local cement prices remain prohibitively high. The auto manufacturing industry tells a similar tale. Despite the heavy duties on imported cars in 2015, there has been no significant growth in the local auto manufacturing industry.  Furthermore, for all the rhetoric about the progress Nigeria has made with local rice production, Nigeria remains the world’s second-largest importer of rice. All of these highlight the failure of these policies, an unsurprising outcome due to a variety of reasons.

Nigeria’s protectionist policies fail because policy makers often fail to recognise that imported products thrive not only because they are of higher quality, but mainly because they are cheaper. As the nation with the highest number of poor people in the world, Nigerians are price sensitive, thus will often choose a cheaper product, irrespective of its origin. Unfortunately, this does not bode well for locally manufactured products which tend to be more expensive, as they cost more to produce due to the tough business environment.

Nigeria’s protectionist policies fail because policy makers often fail to recognise that imported products thrive not only because they are of higher quality, but mainly because they are cheaper

Nigerian companies typically battle against a plethora of challenges in the local business environment, including poor infrastructure, erratic power supply, expensive alternative sources of power, multiple taxation, a high cost of borrowing, an onerous regulatory environment, inefficient ports etc. All of these bottlenecks often ensure that locally produced items are often more expensive than imported items.

The failure of Nigerian businesses to take advantage of the nation’s protectionist measures also illustrates the fact that protectionist policies are not viable alternatives to sound economic policies and a friendly business environment. Basically, rather than imposing these policies, the government should direct its focus to addressing the multiple dysfunctions in the local business environment which leave local companies unable to compete with imports or even satisfy local demand. Therefore, the government, rather than enact protectionist policies should focus on making doing business easier.

Furthermore, protecting industries where Nigeria has no comparative advantage is a futile approach. Comparative advantage describes the economic reality of the work gains from trade for individuals, firms, or nations, which arise from differences in their factor endowments or technological progress. This simply means that a nation should focus on the production of a good where it has a cost or production advantage. Therefore, there is no need for the country to try to produce every type of product. Rather, the nation should focus on those products which it can produce cheaper and more easily.

Overall, there is a clear case for protecting young industries to boost local capacity. However, such policies should only be enacted when there is a sound economic logic supporting them and not simply to fulfil the fantasies of policymakers.