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The Big Debate: Is Nigeria right to close its borders?

Franklin Cudjoe
By Franklin Cudjoe

Franklin Cudjoe is the founding director of the think tank IMANI, dedicated to fostering public awareness of important policy issues concerning business, government and civil society.

Rick Rowden
By Rick Rowden

Senior Economist at Global Financial Integrity (GFI), a Washington, DC-based think tank producing research on illicit financial flows.

Posted on Thursday, 14 November 2019 13:20

Are Nigeria's actions an open and shut case? Pictured, the Seme border with Benin in July 2019. REUTERS/Afolabi Sotunde

Two development thinkers respond to Nigeria's decision to close its borders in a bid to protect local economic actors.

First, Franklin Cudjoe, the founding president of IMANI, a think tank based in Ghana.

Nigeria has closed its borders until January 2020, stifling the free flow of goods and people within the West African sub region.

There is an assumption that Nigeria will automatically become prosperous by closing its borders to other markets, in furtherance of the age-old but discredited policy of import substitution. Some are urging Ghana and others to do same. But lessons must be learnt from the mistakes of others who took that path.

In the 1950s and 1960s, governments of many countries in Africa and Latin America erected trade barriers. The plan was to enable the industries of their countries to grow, “protected” from outside competition. What actually happened was the opposite.

Although the industries in these “protected” countries grew for a short period, the lack of competition meant that their industries became inefficient and fell behind the rest of the world. Also, because imports were very expensive or even unavailable, their costs of production rose as they were stuck using old technologies.

Soon these “protected” industries were producing goods that few people wanted, exports fell and, in many cases, the industries – usually run by friends of the president – had to be subsidised by the state in order to keep them afloat.

Governments paid for these subsidies by taxing farmers (either directly or by forcing farmers to sell to marketing boards) and by borrowing – one of the reasons why so many African and Latin American countries have such large debts. Some governments, such as Brazil’s, printed money to pay off the debt and this led to hyperinflation, reduced confidence in the economy and caused massive disinvestment.

The lesson we should learn from this is that governments should not try to create national champions by “protecting” them from competition or by subsidising them. There are reports of food inflation in Nigeria following the border closure.

Harvard Professor of economic development, Ricardo Hausmann, explained in a 2014 World Economic Forum publication, titled ” Why do some countries develop faster than others?” that it was simply because richer countries adopted the mores of “open trade policy, because it requires sending goods across borders many times.”

Prof. Hausmann realised the need for some level of control, but didn’t prescribe an overkill of border control.

Instead, he urged laggards to adopt “activist policies” that enhance productivity and eventual competition: “But this does not imply laissez-faire; on the contrary, it requires activist policies in many areas, such as education and training, infrastructure, R&D, business promotion, and the development of links to the global economy.’’

Prof. Hausmann concludes: “Some dismiss this strategy, arguing that countries end up merely assembling other people’s stuff. But, as the famous astronomer Carl Sagan once said: “If you want to make an apple pie from scratch, you must first invent the universe.”

Nigeria may well find out that the very insecurity she claims it wants to reduce by the obstinate border shut down, may well be the conduit for more uprising.  As the famous French journalist, economist and writer, Frederic Bastiat is reported to have said: “if goods and people fail to cross borders, soldiers will”.

 

In rebuttal, Rick Rowden, a development economist at the Global Financial Integrity, a think tank based in Washington, D-C.

Mr. Cudjoe errs in his analysis of development policy by throwing out the baby with the bathwater.

In fact, the historical record shows that import substitution has been used both badly and successfully by different countries at different times, and indeed as a policy tool, it played an important role in the histories of most of today’s successfully industrialized economies.

From the earliest European city-states 400 years ago, through the successful industrialization of the UK, the US and Europe, Japan, the four Tigers of East Asia and China, people figured out the hard way through trial and error that if you lower your trade tariffs too much, people will choose the cheaper imported goods rather than the domestically produced goods, holding back the development of the national economy over time.

So they all used tariffs strategically at different points along their developmental trajectories.

What I think Mr Cudjoe alludes to is the unsuccessful uses of import-substitution industrialization (ISI) strategies adopted by many African and Latin American countries in the 1960s and 1970s, in contrast to the more successful uses of such policies in East Asia.

In Africa and Latin America, many of the ISI trade and industrial policies failed because they were used inappropriately, with poor sequencing, and were often driven by political considerations or corruption rather than economic analyses or strict efficiency grounds.

In Latin America, often the policies were kept in place too long, and were too inwardly focused on small domestic markets, neglecting the need to develop international competitiveness.

In contrast, the political economies of East Asian countries included institutions that tended to enforce stricter rules for which industries got trade protection and subsidies, and which got cut off from them when they failed to meet performance targets.

The East Asian countries which used ISI approaches also adopted a more outward orientation in their industrialization strategies, with clear commitments to improving their international competitiveness over time.

But what Mr. Cudjoe neglects is that this history says more about how to use trade protection and industrial policies successfully — not if they should be implemented at all.

There is an important temporary issue at work here about timing, pacing and sequencing that amounts to a basic rule of thumb or historical best practices by the countries who industrialized successfully: use trade protection at first until the point at which the domestic firms become competitive in international markets, then liberalize.

While this basic rule of thumb may not be taught in economics courses these days, economic historians are certainly aware of it.

Some degree of competition from imports is good to inspire efficiency improvements in domestic industries, but too much competition can hold them back, or in some cases wipe them out altogether.

Again, the rich countries all learned these basic lessons through trial and error of 400 years, but developing countries are taught the opposite –to liberalize their trade too prematurely before they have built up the international competitiveness of their domestic industries first.

This is why trade officials from Accra to Kampala struggle to comply with trade liberalization commitments only to watch their markets then be flooded with Chinese or European manufactured goods.

It was for precisely this reason that Nigeria was absolutely correct to reject the European Union’s proposed Economic Partnership Agreement (EPA).

The Manufacturing Association of Nigeria was opposed for exactly the same reasons that US manufacturing associations had opposed free trade with the UK in the middle of the 19th Century.

Contrary to what economics students are often taught today, and what institutions like the World Bank advise, many African countries need to use industrial policies, such as temporary trade protection, subsidized credit, and publically supported R&D with technology and innovation policies, if they are ever to get their manufacturing sectors off the ground.

This is true for all the same reasons that it was true for the U.K. and other nations that have industrialized successfully. According to today’s ideology of free trade and free markets, however, many of these key policies are condemned as “bad government intervention.”

Bilateral and multilateral aid donors advise against them (and structure loan conditions accordingly). WTO agreements and new regional free trade agreements (FTAs), as well as bilateral investment treaties (BITs) between rich and poor countries, frequently outlaw them.

While this is all a great debate on development policy strategies, the issues at hand in Nigeria’s borders are likely to be much more simple and mundane.

Nigeria needs to tighten its control over its own customs, immigration and other security agencies operating at its borders, both through increased prosecutions for corruption and by providing higher wages to staff.

Nigeria also needs to work better with customs officials of its bordering countries.

While Nigeria’s intent to better develop its own domestic rice production capacity is laudable, its own customs, immigration and other security agencies have broadly failed to stop the problem of illegal importation of rice from Benin.

With tariffs on imports of rice into Benin markedly lower than the tariffs on imports of rice into Nigeria, Benin has become a major importer of rice from India, Thailand and other sources, with much moving informally into the Nigeria market.

Benin is also a major pathway for second-hand European cars to Nigeria, where there is a ban on importing cars that are more than 15 years old.

The informal trade also moves in both directions, with many smugglers selling cheap subsidized Nigerian petroleum in neighboring countries.

In this regard, the border shutdown has more to do with Nigeria’s inability to control these smuggling channels than it does with any broader shift in Nigeria’s broader long-term national economic development policies.

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