The invisible hand and the power of MSMEs in Nigeria

The invisible hand is a concept in economics introduced by Adam Smith in his magnum opus “The Wealth of Nations”. The concept metaphorically explains the unobservable market forces that help the demand and supply of goods in a free market to reach equilibrium. He explained that an economy will comparatively work and function well if the government will leave people alone to buy and sell freely among themselves. Suggesting that if people were allowed to trade freely, self-interested traders and players in the MSME ecosystem present in the market would compete, leading markets towards the positive output with the help of an invisible hand.

I have spent an enormous amount of my time observing the dynamism in the face of overwhelming structural issues in the MSME ecosystem. This is largely due to my concern for the economy of the country and of course my role in the Development Bank of Nigeria PLC.

The Small and Medium Enterprise Development Agency (SMEDAN) in their report stated that there are 41.5 million MSMEs, comprising of at least 41.4 million micro enterprises; and 73,081 small and medium enterprises. Collectively, they contribute about 50 percent of GDP, about 8 percent of total exports, and are responsible for 59.6 million jobs which is roughly estimated to be over 80 percent of the labour force. As you can see from the statistics presented, the power of the MSMEs should not be taken for granted.

The notion of creating an enabling environment can only be viable if “all” benefit. MSMEs on average, suffer from information asymmetry

According to the PWC 2020 MSME survey, some of the major challenges faced by players in the ecosystem include:

1. 57% of MSMEs have stated that multiple taxes & levies/lack of coordination of federal & state agencies and the absence of technology platform(s) as challenges in paying their taxes.

2. 22% stated that obtaining finance was their most pressing problem. While sourcing for customers (16%), infrastructure deficit (15%) and insufficient cash-flows (14%) followed closely.

3. 22% also stated that the pressure to reduce prices is the topmost economic issue. Rising inflation (19%), low demand for products and services (16%) High interest rate (14%) High exchange rate (14%) while 10% exclaimed all the above.

4. MSMEs revealed that they have experienced delayed payment due to the terms of trade policies of larger corporates.

Picture a Nigeria where the market forces produce negative outcomes and then the government meets the needs of the players in the ecosystem. For instance, the MSME clinics, a novel initiative by the federal government in partnership with the Ministry of Industry, Trade and Investments and several other agencies to create a platform to assist the plight of MSMES. One can argue that there have been positive benefits with this initiative which has yielded positive outcomes for most players within the ecosystem.

Read also: Emerging Africa to raise N250bn for MSMEs, infrastructure in Northern Nigeria

Technically, the invisible hand speaks to a free-market scenario where there are no regulations or restrictions imposed by the government, if someone charges less; the customer will buy from him/her. Therefore, you must lower your price or offer something better than your competitor. We have observed that the government plays a significant role in business operations. The notion of creating an enabling environment can only be viable if “all” benefit. MSMEs on average, suffer from information asymmetry. For instance, when there is a change in “terms of trade” and these individuals are in the value-chain of a large enterprise then one should expect a prolonged delay of payment and in some cases, there might be no payment at all. Once again, MSMEs have lower savings propensity, and as such are unable to withstand the endogenous shock.

Consider the enactment and subsequent implementation of African Continental Free Trade Agreement (AfCFTA). Numerous scholars and practitioners have argued that Nigeria stands to gain from increased access to cheaper goods and services from neighbouring countries. On the other hand, arguments have been made that Nigeria will be a net loser given that it will be ground zero for “dumping” of goods. Currently, intra-African regional trade is low. In 2020 only 8% of Nigeria’s net imports were from African countries. More specifically, Nigeria’s intra-Africa imports were predominantly from South Africa, Eswatini & Egypt.

Other benefits espoused by proponents of the free trade agreement expect the AfCFTA to aid in the reduction of poverty, increase competitiveness amongst firms in the MSME ecosystem and boost intra-African trade and investment. According to a Brooking report by the authors Yewande Olapade and Chukwuka Onyekwena, 6 out of 10 businesses expect the AfCFTA to lead to a reduction in material and labour costs, increase production capacity, expand market and consumer size, and reduce prices.

Zeroing in on the potential setbacks MSMEs may face with the AfCFTA implementation, one must not overlook the importance of the following roles these key institutions must play to facilitate ease of transactions.

· The Nigeria Customs must play a pivotal role in the AfCFTA implementation. For example, on the list of duties and charges waived for liberalized goods under AfCFTA. The list of the 90% liberalized national trade offers (NTOs); the list of the 70% non-liberalized exclusive goods at the regional level; and the list of the 3% non-liberalized sensitive goods. Additionally, on the border protection component of the Nigerian Customs role, I am of the view that strict enforcement of illegal goods must be restricted from entry and failure to enforce must be sanctioned by the respective divisions within the agency.

· The Standard Organization of Nigeria is an agency charged with ensuring the preparation of Standards relating products, measurements, materials, processes and services amongst others and their promotion at National, Regional, and international levels; certification of products, assistance in the production of quality goods and services; improvement of measurement accuracies and circulation of information relating to standards. In short, SON should be the chief promoter of Nigerian goods to be competitive at inter-continental levels. Consequently, to achieve the synchronization of all goods produced in Nigeria by MSMEs, it would be important for continuous sensitization and education of AfCFTA standards to maximize the benefits offered by the trade agreement.

· The National Agency for Food and Drug Control (NAFDAC) mandate is to regulate and control the manufacture, importation, exportation, distribution, advertisement, sale and use of Food, Drugs, Cosmetics, Medical Devices, Packaged Water, Chemicals and Detergents. Once again, the agencies’ pivotal role in ensuring MSMEs benefit from the opportunities of the AfCFTA. Like SON, I believe it would be important for continuous sensitization and education of players in the ecosystem to maximize the benefits of the AfCFTA.

In the end, the coordination of these agencies is sacrosanct to ensure there are no gaps in process implementation which may lead to information asymmetry causing more harm for the intended beneficiaries of the trade agreement. In the earlier section of the article, I mentioned that 57% of MSME opined this as a major challenge even more so than access to finance. While there has been an immense push for the digitization of processes in the ports for ease of transactions, MSMEs are often not kept abreast of the policy or regulatory changes of types and qualities/packaging of goods that can pass through the ports causing unexpected charges and business loss to the MSMEs. As earlier stated, the MSMEs are a power force in the Nigerian economy for the numerous roles they play, and these agencies are the visible hand in government that can ensure MSME accrue the benefits of the free trade agreement.

Note: The views expressed herein are those of the author and not necessarily those of the Development Bank of Nigeria

Professor Nnanna is chief economist, Development Bank of Nigeria