By the time the last gavel bang stopped echoing around the room at the last ArtHouse Contemporary Modern and Contemporary Art auction in Lagos in May 2017, a quick back of the envelope calculation suggested that nearly ₦210 million worth of art had been sold in a few hours of gab and champagne sipping. All this in a depressed economy. Even with increased patronage of the art galleries springing up in places like Lagos and Abuja, collecting art remains a preserve of a tiny class of Nigerians. Despite this, we can learn surprising lessons about the economy and markets from this activity that are relevant to everyone, regardless of class or income.
For a transaction to take place, you need a willing buyer and a willing seller to settle on a mutually agreeable price for an item. One other component is required – Trust. The buyer trusts that the item she purchases is what it says on the tin, and the seller trusts that the buyer is good for the promised amount. We rarely think about trust as a part of the equation, but without it, markets can break down pretty quickly.
Imagine if a hawker could not guarantee that the Gala I want to buy is not a counterfeit. The price I offer – if I offer at all – will be much lower than if I was sure it was genuine. When trust is absent in markets, we end up with low prices being offered by buyers and in response, sellers only offering the lowest quality items. This is an infamous problem of information asymmetry, a Nobel-winning economic concept that is unusually simple to understand.
Art auctions have all the elements needed for a functioning market. Willing sellers have put up works for auction, buyers bid and a trade happens as long as the reserve price for the lot is met. Meanwhile, while most people can distinguish between a rotten tomato and a good one, verifying the authenticity of art is not as straightforward. And so the auctioneer plays the crucial role of verification.
Now You See It, Now You Don’t
My first art transaction was a trade between two friends, settled with a handshake and a mobile money transfer. Highly informal, it nonetheless met all the requirements identified for a trade above, with the trust bit coming from the existing relationship between the two market participants. Without trust, I doubt such an informal agreement would have been struck. Meanwhile, without any competitive bidding (just some haggling), there was no way to be sure current market information was priced into that trade. And because the transaction was informal, the government and its tax agents were completely oblivious to it.
Nigeria’s informal markets employ millions of citizens and contribute to a substantial portion of the country's GDP. And markets pop up every day in Nigeria – we simply love to trade. Whether it’s hawkers in Lagos traffic jams, or random vendors offering ad-hoc towing services for disabled cars in the aftermath of the recent floods, there’s a constant creation of informal markets all around us, and visibly so. Yet, these activities are hidden from the state, and this is an obstacle in efforts to diversify Nigeria’s revenue as you cannot tax transactions you don't see. In the art auction from the opening paragraph, the value added tax (VAT) accrued to the government comes to roughly ₦12 million – additional tax revenue the government can exploit because of the formal exchange of art between collectors.
Don’t Push! Nudge.
According to the Nigerian Art Market Report 2015, roughly ₦480 million worth of art was sold in auctions that year. That value of sales is strongly attributed to the increased activity of galleries in creating a formal secondary market for art. Art auctions didn’t become regular in Nigeria because of legislation or government interventions. Entrepreneurs were simply responding to a need in the market to capture higher value art transactions. Formal markets developed because market participants desired them for their benefits: capturing market information in pricing, verification of exchanged items, and traceability. So the push for formalisation does not just rest on the argument for greater tax revenues, but because formal markets create additional opportunities for buyers and sellers.
One way of achieving this is in making it easier to register and form businesses, allowing traders to formalise their trading entities. Recent moves by the Presidential Enabling Business Environment Council (PEBEC) in simplifying company registrations are welcome in this light. Also, to counter the preference of some entrepreneurs to stay in the dark for tax advantages, a progressive tax rate for SMEs and tax breaks for new registrations are incentives that may bring larger numbers out of the shadows.
In the end, however, the invisible hand of the market may provide the biggest nudge as a free market with multiple self-interested individuals should, in theory, operate to determine the best price for artwork. Formal markets bring trust and trust allows appropriate pricing. It’s unlikely the headline sale of the auction I attended could have happened as an informal trade. It is a 1962 bronze sculpture by Ben Enwonwu, and it sold for ₦47 million. Would-be gallerists everywhere are paying attention.