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Is Nigeria’s protectionist industrial strategy working?

On Wednesday (yesterday), President Muhammadu Buhari ordered the re-opening of four borders such as Seme in Lagos, Illela in Sokoto, Maigatari in Jigawa and Mfun in Cross River, pledging to reopen others before December 31st, 2020.

Though it was a step in the right direction, it was borne out of local and international pressure due to the imminent African Continental Free Trade Area (AfCFTA) starting on January 1, 2020.

If anyone thinks Buhari’s protectionist worldview has gone away, the person had better remember that there are 44 items permanently barred from the foreign exchange market and Buhari has asked Central Bank of Nigeria not to “give penny” for the importation of any food item.

Protectionism is an economic strategy which has been adopted by past and present administrations in Nigeria. It involves restriction of importation or an outright ban on goods into a country in order to support local production. It supports the use of tariffs and import quotas to limit importation. Proponents of protectionism argue that it safeguards employment, protects the economy against dumping and promotes industrialisation.

Protectionism has been in existence for several centuries, and virtually all developed countries today have adopted one form of it or another. Paul Bairoch, a Swiss economic historian, wrote in one of his articles that “historically, free trade is the exception and protectionism the rule.”

It is a self-preservation principle that tells any country to protect itself against another. The United States has been described as the mother of protectionism since the 18th century. Before the work of Douglas Irwin was produced, historians had attributed America’s development to protectionist policies such as high tariffs, which, according to them, boosted local manufacturing capacity and jobs. But Irwin, an economic historian, found that high tariffs shrank the growth of the United States by 0.5 percent in early 1900s. A little research on Wikipedia would show that Europe became more protectionist in the 18th century after the Napoleonic Wars, but historians reckoned that it increased the cost of living for workers and reduced their disposable incomes. This, in turn, shrank their capacity to buy from local manufacturers. The local manufacturing sector suffered in Europe, especially in Britain, despite restrictions that were imposed to support them.

Over the years, Nigeria has adopted the simplistic argument that banning importation will stimulate local production. For elevated self-interest, Nigerian manufacturers have adopted this argument in all their presentations and treatises, and are fully convinced that their problem is government’s lack of grit to ban all imports and allow manufacturers to produce and sell to the consumers.

However, Nigeria’s economic history shows that bans and import prohibitions have produced bizzare outcomes for the economy. An example with textile will suffice. Since the British colonial days, the Nigerian textile industry had enjoyed protection from European and Japanese competition. High import duties were imposed on foreign textile and fabrics (eight pence per square yard). The industry boomed up till 1970s and 1980s due to government interventions and support. But problem started when it became obvious that the industry was being shielded from competition. There was poor innovation, but players relied heavily on government bans to prosper. Little was done about potential threats such as obsolete equipment, lack of black oil/ high energy cost, and high cost of cotton, among many others. When the Structural Adjustment Programme (SAP) came in 1986, it became obvious that borders would be thrown open for competition to thrive. Many textile companies fizzled out in the process because they could not compete with imports. There were also poorly though-out economic plans that nailed the coffin of several textile firms in the country, but most of the companies were never competitive in the first place.

Incidentally, this coincided with the period of global oil price crash when local textile companies could not find dollars to import new machines. And imports were cheaper than locally manufactured goods. This was the similar story with many industries in Nigeria, including palm oil.

Today, money is still being budgeted to that obsolete sector, the same way it is budgeted and wasted each year on Ajaokuta Steel, which, though unproductive, gulps part of Nigeria’s budget. Apart from over $8 billion gulped by that plant for many years, $1 billion was proposed by the Senate in 2019 for Ajaokuta. In 2016, N3.9 billion was budgeted for the plant by the Buhari administration, which rose to N4.27 billion in 2017. Export grant also goes to the moribund plant even when it produces nothing. What a wasteful country!

It is often believed that once you ban an item, local manufacturers will ramp up production and meet the needs of expected consumers. Again, history has shown that this is only a half truth. Products such as tomato paste, wood, and rubber, among many others, have been on the Nigeria Customs Service’s Import Prohibition List for long, but have their local production met the demand? Today, some of the products on the prohibition list are smuggled because of the surging local demand. Rice is a typical example. With the border closure for 15 months, rice prices have risen by over 50 percent in some cases. Before August 2019 when the Nigeria-Benin border was shut down, a 50kg of rice went for N16, 000 to N18, 000. Today, the price has exceeded N30, 000, showing that the fundamental issues about productivity are still there. Who has suffered it? Consumers. Who has gained from it? Portfolio farmers and middle-men.

Analysts have often suggested that ban must not be any government’s first choice policy. The reason is that it is often counter-productive. The Tomato Policy of 2016 prohibited the importation of concentrate because of the entrance of big local players. But issues like regular supply of fresh tomato, cost of fresh tomato, logistics and many others were not considered before that policy came into place. After the policy was launched in 2017, Dangote Tomato stopped operations. It is still not easy for the company to get sufficient fresh tomato from local farmers today. In fact, it has been under lock and key since May 2020 and will hopefully re-open in March 2021. This is the second or third time the plant has shut down. In other words, the Tomato Policy looks more like a failed policy because, as usual, prohibition was the central policy, rather than addressing reasons why the country did not have a manufacturer of tomato concentrate more than 55 years after Independence.

The point often missed by proponents of protectionist policies is that the consumers bear the greatest brunt. As Adam Smith and many free trade proponents argued, protectionism promotes monopolies and creates cabals who may determine prices to the detriment of the consumers. In a country like Nigeria, where 87 million people are extremely poor or 100 million people in multidimensional poverty, according to well-known international studies, it amounts to punishing the poor when a government simply shuts down borders to promote local manufacturing.

This sometimes stems from poor understanding of the major challenges faced by Nigerian manufacturers. Even if you ban electronics because a few companies are now making them, what guarantees that the consumers will get them at reasonable prices? Can local manufacturers really sell at reasonable prices when they are like local governments on their own—providing their own power, water, and sometimes roads? The Apapa and Tin Can ports today are critical de-industrialisation points which nobody in government is taking seriously. The interest of successive governments, including the present one, has always been to shut down borders on some products and then create monopolies and punish the consumers who voted them into power.

A recent empirical study by Volker Treichel, Mombert Hoppe, Olivier Cadot and Julien Gourdon showed that the policy of extensive import bans in Nigeria has a heavy cost on poor Nigerians and that changing it could allow 3.3 million Nigerians to leave the poverty bracket. Food inflation today is 17.38 percent—highest in 32 months—with the poor unable to buy the staple and a few middlemen (not even real farmers) raking in millions of naira.

Policy makers have always referred to the lessons from cement industry to show that bans work. It is public knowledge that the government of Olusegun Obasanjo, in 2005/2006, summoned Aliko Dangote and encouraged him to invest in cement, assuring him that his firm would be protected. Investors willing to set up local plants were, like Dangote, given the license to import up to a period of time when they would scale up. That policy worked because there was sincerity on the part of the then government and the new investor (s) to implement it. This same policy later failed in rice industry during Goodluck Jonathan administration because the then government accused some companies of sabotaging the policy by exceeding the quotas given to them. There is no guarantee that the policy will ever work in today’s climate, with Customs officials getting increasingly corrupt and economy becoming more difficult for the people.

Dani Rodrik, Harvard economist, opines that “a serious retreat into protectionism would hurt the many groups that benefit from trade and would result in the same kind of social conflicts that globalization itself generates.” Trade, whether anybody likes it or not, makes everybody better.

Nigeria must learn lessons from history by addressing structural problems affecting the manufacturing sector, rather than believing that protectionism is a one-size-fits-all. If President Muhammadu Buhari and the Central Bank governor Godwin Emefiele are serious with lifting 100 million people out of poverty (which is a will-o-the-wisp, anyway) or support industries, then they must take some lessons from growing economies like China, India, Bangladesh, and several Asian economies who use trade as a weapon to increase export and foreign exchange to keep inflation and cost of doing business down.

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