ECONOMY - 28 JUL 2015

Home Comforts

Home Comforts
None

In 2012, the Federal Government directed the Ministries, Departments and Agencies (MDAs) to buy more Made-in-Nigeria products. The move was aimed at stimulating economic growth through local job creation. Such a forceful directive has a number of important socioeconomic implications. 

Economic theory makes the normative prescription that an extra naira to be spent or invested should be directed towards the most profitable alternative. Actual decisions do not play out this way in the real world. Rather, people exhibit preferences for certain alternatives based on supposedly irrelevant factors. One such factor is the national origin of the product (here used to convey both consumption goods and investment opportunities). This often manifests as home-bias. Understanding why we collectively deviate from theory may help us better navigate the path to economic development.

One obvious reason we buy local is loyalty. Charity begins at home or, in other words, we prioritise local products over foreign ones in a show of support and loyalty. The idea is simple yet runs deep. For example, from an evolutionary standpoint, we benefit more when we support those in close proximity to us as we can more readily rely on them for reciprocal behavior. Although it is unclear why such sentiments should influence economic decisions, the idea persists worldwide. The successes of “Buy American” campaigns can be attributed to the greater sense of natural pride in the US compared to other nations, as much as economic incentives. 

This loyalty argument is particularly compelling for developing countries as citizens feel an obligation to contribute towards the growth of local industries. Some time ago, Aliko Dangote was heavily linked to buying a stake in Arsenal Football Club in the UK and this news was subsequently juxtaposed with the mediocre state of the Nigerian Premier League. One commenter, responding to critics who questioned why the billionaire could not focus his attention closer to home, pointed out that Dangote also owed a degree of loyalty to Arsenal, his club. So it seems, appealing to loyalty does not take us very far.

The opposing argument is largely economic. It is based on the idea that such decision rules are unsustainable. Although a society might feel compelled by loyalty to adopt home-bias, everyone would lose out if such thinking became widely adopted. This is known as the beggar-thy-neighbor problem and was first articulated in response to the mercantilist policies implemented in Europe from the 16th to 18th century. It has also been used to discourage countries from engaging in protectionist behaviour in the face of economic challenges. Promoting the idea to “buy local” is potentially as damaging as economic nationalism. Free trade is good because it diverts resources to the most productive use. When the destination of resources becomes a primary function of location then these resources may become marooned in local, unproductive uses. Home-nation bias does not seem to make much economic sense.

For Nigeria, an economic case could be made for home-bias. Firstly, Nigeria is still at the stage where the gross marginal return to investment is relatively high (to compensate for greater risk for example) so given the right conditions, investing locally would represent an efficient use of resources. Furthermore, given the potentially significant impact of investment such as Dangote’s planned refineries, it would be uncontroversial to suggest that fostering a culture and environment that both promotes and enables local investment would be beneficial. 

Incentivising local investors to keep their funds within our borders is crucial. Secondly, home-bias can have a demand-pull effect on local production and in turn, encourage higher quality products. Many local industries cannot thrive until a critical threshold of demand is reached to sustain them and home-bias is one way of facilitating this. This is particularly relevant to Nigeria as many locally produced goods lose out to foreign-bias — A level of prestige is artificially attached to foreign goods and services in our society, which in turn generates a stigma on Nigerian-made products.

Given the origins of international trade, it is surprising that pure economic theory pays so little attention to national origin. In the real world, economic agents originate from particular countries and so do the products they encounter. Indeed, the post-2008 policies of many countries and the narrative of the ongoing EU crisis suggest a persistent home-bias that neither free trade nor technology have yet been able to conquer. For economic agents, there is still no place like home.

 

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Kitan Williams

Kitan Williams

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