Open Economy 1

Why not, instead, we focus on policies that make the economic space freer? One, in other words, that allows just about every one of us to earn a legitimate naira doing things that we love to, and that others find useful? If, in truth, there are as many of us as we imagine, then the increased output levels that this would stimulate should have the added gain of attracting investment into the economy.


As the domestic economy continues to tread water, our talking heads find themselves preoccupied; both with the intensity of the new narratives; and because of the variety of panaceas on offer. For the audience, it is becoming hard to keep track of the diverse conversation threads around possible remedial policy options.

One of the more seductive of the options increasingly being canvassed is arguably the simplest to elaborate. Two interrelated notions are central to this discourse. First, strong arguments are being made for the development of an internal market. Stripped of all its fancy, the basic contention here is that a captive population of 160 – 180 million people ought to provide enough demand for a variety of domestic businesses’ products and services. In addition, this new focus on the internal market should wean the economy off its traditional dependence on export earnings, while yet creating sustainable value.

But how we build a domestic economy based on local entrepreneurship in the teeth of the technical production advantages currently enjoyed by companies in the West, and the benefits from cheap labour (and better resource management practices) that is at the heart of east Asia’s manufacturing successes? The answer is simple. And in the Buhari administration, the main plinth of this new platform — strengthening the state — finds its strongest, albeit not so articulate, advocate. The rest of the platform proceeds to provide, on the back of a strong state, targeted and cheap credit to preferred industrial sectors; broaden the domestic tax base, and build both tariff and non-tariff hurdles against foreign imports.

…our economy gained far less from investment in this policy than it committed to its implementation. Add the loses from cutting off cheaper imports, and the downsides were deeper still. However, those were not the only losses. Barriers to import invariably mean that the output of domestic industries are more expensive than their imported substitutes.

Despite the façade of novelty donned by this argument, as an economy, we have been here before. And at the height of our “import substitution” experiments in the 1970s and 1980s, the subsidies and cheap credit around which the strategy was built, were salted away into the pockets of a nascent proto-industrial elite. The economy was plagued by a rash of zombie firms. And the rest of us ended up with substandard products.

What went wrong? Unquestionably, the biggest shortcoming of the “import substitution industrialisation” (ISI) in just about every economy where it was assayed, was the absence of domestic competitors for the preferred sectors. Because of which, enterprises in those sectors had no incentive to develop new products and processes, nor to drive costs reductions that delivered lower prices. A paucity of local managerial savvy, non-existent technical/industrial base, and weak research and development competences only further exacerbate this problem.

Consequently, our economy gained far less from investment in this policy than it committed to its implementation. Add the loses from cutting off cheaper imports, and the downsides were deeper still. However, those were not the only losses. Barriers to import invariably mean that the output of domestic industries are more expensive than their imported substitutes. This higher prices are a tax on domestic economic activity that falls disproportionately on the poor. Thus, we confront the rich irony of a programme whose main consequence is to undermine its sole reason for being — protection of the poor and vulnerable segments of the population.

Unlike in the 70s and 80s, though much has changed today. The global economy is much more integrated. So it is going to be that harder for any part of it to ring-fence its economy from the rest (apologies to the North Koreans). But that is far from the whole tale, for much of the goods and services that we are persuaded may be produced locally today are at the bottom of the industrial chain.

Still, this is not all. If the autarchic economy at the bottom of the ISI policy is to have any hope of success, external borders must be near impermeable. Or else smugglers will cream the benefits from the higher tariffs on imported goods, while disrupting in the process the coddled industries. Government, of course, loses all round. In support of this aspect, one need only look at the relative import bills for The Republic of Benin and Nigeria last year. One estimate puts these at about US$52bn and US$65bn respectively. Such is the latter country’s bulimia for imports that it recently completed a fancy upgrade of its port complex. With respective populations of 10.4m and 181.56m, one does not need a séance to establish the final destination of much of Benin’s imports.

Unlike in the 70s and 80s, though much has changed today. The global economy is much more integrated. So it is going to be that harder for any part of it to ring-fence its economy from the rest (apologies to the North Koreans). But that is far from the whole tale, for much of the goods and services that we are persuaded may be produced locally today are at the bottom of the industrial chain. Where our most indigent compatriots feed. A ban on such products/services would thus hurt the poor the most, without any guarantee of the policy’s eventual success.

Why not, instead, we focus on policies that make the economic space freer? One, in other words, that allows just about every one of us to earn a legitimate naira doing things that we love to, and that others find useful? If, in truth, there are as many of us as we imagine, then the increased output levels that this would stimulate should have the added gain of attracting investment into the economy. And each new investment would drive domestic responses that while supportive builds new domestic capacity.

A virtuous cycle? Yes. But even more than this, as we purport to build a modern state, both policy makers, and the citizenry must begin to recognise that political rights can only be exercised fully if economic rights are also guaranteed.