ECONOMY - 24 SEP 2015

Protecting Local Industries

Protecting Local Industries
Nestle Maggi Factory

In the last year, global economic tailwinds have forced Nigeria to increasingly look inwards for economic salvation. The focus on economic diversification bodes well for the future as diversification will yield a stronger economy at the end of this economic cycle. Therefore, protecting certain industries could be expedient to accelerating the process of diversification. Luckily, understanding the justifications for protecting local industries can guide Nigeria in determining what industries to prioritise.

Why protect?

Protectionism, in any form, gets a negative response these days. Understandably so. International trade and specialisation have ushered in a new era of prosperity. The worry is that increasing protectionism, even for the sake of protecting local industries, could cause globalisation’s retreat.

Yet specialisation can be stretched too far. As a democratic sovereign state, a level of self-sufficiency is required to survive. The social tensions in Greece caused by the belief that the EU is bypassing Greek democracy in bailout negotiations shows how economic dependency can erode sovereignty, at the extreme.

And there are strong economic justifications for protecting local industries. Nigeria’s economy remains too vulnerable to oil and public finance shocks and the process of diversification will sometimes need to be facilitated by traditionally protectionist policies. Some industries need to be protected while they grow. Initiatives such as supplying cheap funding to revive the textile industry and providing investment tax breaks to pharmaceutical companies are salient examples of how Nigeria may foster growth in local industries.

Jobs, Jobs, Jobs.

Protecting local jobs is usually held up as the primary reason for promoting local industry through protectionism and in Nigeria’s case there is some truth to it: Reparameterised unemployment has hit 8.2% and young people in particular have suffered with many leaving university with little hope of finding a formal job.

But there is a danger of jumping from the frying pan and into the fire. The last thing a struggling young worker needs is to be retrained in a skill or industry that is unsustainable on its own. Such obsolete jobs should not be protected.

Anti-protectionist advocates argue that workers should find their way to the competitive, hiring industries and when this does not happen, the problem should be addressed through social mobility programs. This debate over job protection highlights the importance of protecting the right industries.

What should we protect?

Most people agree that given her history, market size and geography, Nigeria has a comparative advantage in agriculture. Therefore, agriculture is a prime candidate for protection – at least until it rediscovers past glories. Indeed, agriculture is at the centre of our diversification efforts. However, we must not fall into the trap of assuming that because palm oil was produced and exported profitably up till the 60s, the same is true today. Rather than base decisions on what was produced historically, agribusiness must be geared towards exploiting our present capabilities and anticipating future trends. Only then will Nigeria become the agricultural powerhouse it aspires to be.

Another strategic industry has suffered from Nigeria's obsession with oil. This is the idea expressed by Nigerian writer and entrepreneur, Okechukwu Ofili who posed the question – ‘What if Nigeria treated Her people like oil?’ The sentiment provides a compelling example of a local industry worth protecting – education. Education at all levels in Nigeria continues to flounder compared to rival nations and there has been no serious cultural outcry to this phenomenon. Yet Nigeria needs home-grown talents as much as it needs any other resource. With the population estimated to reach 400 million by 2050, and a significant proportion below 30 years old, there is a potential demographic dividend to be reaped. Worryingly, not much is being done to address the education sector in Nigeria, with only the growth of private universities offering some promise. We need to do more to protect our education industry.

What should we be wary of?

One damning counter is that protectionism has often failed in Nigeria. Rather than encourage the growth of competitive local industries, protectionist measures have usually benefited a powerful group of large manufacturers as smaller firms often lack the capacity to take advantage of the policies.

Unsurprisingly, the problem is rotted in corruption. The Economist gave a recent example: “Nigeria’s imports of cars have plummeted as a 70% tariff imposed by the previous government is phased in. Mysteriously, those to the tiny nearby countries of Benin and Togo have soared.” One need not go far to envisage similar patterns with soap, cosmetics and toothpicks, three items on the recent CBN foreign exchange restriction list.

Another important caveat is the infrastructure deficit. Many industries in Nigeria struggle due to poor power, transport and legal infrastructure. Addressing this longterm problem would be a cost-effective way of increasing their competitiveness. Without addressing the infrastructure deficit, policies to protect local industries would be addressing the symptoms of the malaise rather than the cause.

What next?

Economies that seek to isolate themselves quickly become pariahs in today’s global market. That is the danger of protectionism taken too far. Nigeria’s protection of the naira has attracted a recent reputation as a rogue economic state. Any policies that could entrench this reputation should be handled with care.

It is clear that Nigeria is more serious about achieving inclusive economic growth through diversification. Focus has shifted away from oil and towards industry. A cautionary note then: It is not enough to look inwards, we must look to the right places.

 

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Kitan Williams

Kitan Williams

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