Godwin Emefiele, Nigeria’s central bank governor, is very unhappy and angry. He is deeply frustrated that his Soviet-style command-and-control planning of the economy is being undermined by smuggling and dumping. “Nigeria is very good at making brilliant economic policies”, he said recently, “but we have identified smugglers and dumpers as those sabotaging these policies”. As a result, the governor is threatening draconian, Stalinist measures against the economic saboteurs.
Recently, Emefiele announced that the CBN would “block smugglers’ accounts” and “blacklist” from the foreign exchange market and banking industry anyone or firm smuggling or dumping any of the 43 items, including rice and toothpicks, for which importers are denied access to foreign exchange from the official windows.
You might wonder: Does the central bank know the smugglers? Well, Emefiele said “We have their names”. Which won’t be surprising. After all, as former finance minister Dr Ngozi Okonjo-Iweala wrote in her book Reforming the Unreformable, “Nigeria must be one of the few countries in the world where smugglers are known and talked about openly, and where these same big-time smugglers walk around freely in the corridors of powers”. So, the CBN probably knows the smugglers. Even then, extrajudicially blocking the accounts of “smugglers” or cutting an individual or a firm accused of smuggling or dumping from the lifeblood of the economy is redolent of Stalin’s regime of terror and totalitarian rule.
In civilised societies, alleged smugglers are apprehended and charged before a court of law and those accused of dumping are subjected to rigorous anti-dumping investigations. But such rule of law process is hardly followed in Nigeria. Instead, in this case, a Presidential Order has authorised the CBN to deal “aggressively” with “smugglers” and “dumpers”. Of course, as Dr Okonjo-Iweala’s statement above suggests, politically connected smugglers won’t face such draconian measures. Only the small fries, the small-scale smugglers, are likely to be blacklisted or have their accounts blocked. And God help any individual or firm that’s wrongly accused of smuggling or dumping – they will suffer without remedies!
Of course, smuggling is rife and flourishing in this country. For instance, a World Bank report notes that, “The total amount of potential smuggling from Benin is estimated at close to $5bn, nearly 10% of Nigeria’s official imports”, adding: “Tackling this would lead to an estimated gain of $1.2bn in government revenue”. Recently, the Financial Times published a story entitled “Smuggled rice makes mockery of Nigerian question to boost farming”, in which it said that “more than 1 million tonnes of rice entered Nigeria through its porous border with Benin in the first three months of this year”.
Yet, the government’s Gestapo-style response to the smuggling challenge is shadow boxing, ignoring the real issue.There is a large body of knowledge on the relationships between trade policy and smuggling, but Nigeria is fretting about smuggling without facing the fact that its economic policies, particularly its trade policy, create the huge incentives for the phenomenon.
Let’s start with the economic theory of smuggling. The economists Jagdish Bhagwati and TN Srinivasan posit in a paper entitled “Smuggling and trade policy” that smuggling could be a welfare-enhancing activity because it constitutes (partial or total) evasion of high tariffs and import bans that represent a suboptimal policy. Put another way, smuggling is a response to severe policy distortions and can alleviate those distortions.
But smuggling can only improve economic welfare if its costs are lower than the costs of complying with trade protection. Smuggling involves a real cost: the hazards of avoiding the legal channels, the risk of being caught, the cost of bribing customs officials, the risk of losing the smuggled imports etc. So, if smuggling is pervasive in a country, it must, from the point of view of economic rationality, be that the costs of smuggling are far lower than the costs of adjusting to, or complying with, import protection and other policy distortions.
So, how does the theory apply to Nigeria? Well, it’s import barriers are among the highest in the world. Indeed, Nigeria has deliberately made protectionism in the forms of prohibitive tariffs, exchange controls and import prohibitions the core of its trade and industrial policies. To protect its highly inefficient and struggling manufacturing and agricultural industries, Nigeria has long maintained import-prohibition lists, while applying high tariffs to most of the products not on those lists. In 2015, the central bank published a list of 41 items, later 43, wide-ranging in scope, whose imports were/are deemed ineligible for foreign exchange through the official windows. With that policy, Nigeria introduced direct exchange control as a protectionist tool. But the very high level of protection has impeded legal trade in Nigeria and provided large incentives for smuggling, and it is wrong for the government to ignore that!
Of course, there would be little smuggling if there is no demand for smuggled goods. But truth is, there are high demands for smuggled products in Nigeria because they are cheaper than local ones. For instance, a rice retailer recently told the Financial Times, “Cotonou (rice) is cheaper than Nigerian rice — it is not supposed to be like this,” adding “Nigerian rice should be cheaper.”And that’s the heart of the matter. It defies economic logic to expect rational actors to voluntarily adjust to a policy distortion that worsens, rather than improve, their welfare. If a government policy makes a domestic product very expensive, why would most people not prefer the cheaper, probably even better-quality, foreign one, smuggled or not, if they can easily access it? And, of course, once there are large differentials in the retail prices of local products and like foreign ones, which create demands for the foreign products, there would be incentives for smuggling, unless the costis prohibitive.
But to make the cost of smuggling prohibitive, the government has to invest heavily in detection, particularly in stringent border enforcement. The truth, though, is that few developing countries have the resources to spend on border control and detection. Nigeria, in particular, is noted for its extremely porous borders. It lacks the financial resources, the technology and the disciplined officials to ensure efficient and effective border control. I mean, Nigerian customs officers are among the most corrupt in the world!
All this brings us back to the biggest incentives for smuggling: economic and trade policy distortions. That, ultimately, is where the solution lies. Unless Nigeria reduces the incentives for smuggling by significantly lowering its extremely high rates of protection, it would continue to experience pervasive smuggling, which would mean, one, that its desired policy objectives are not achieved, and, two, that it suffers unnecessary decline in the optimal tariff revenues that should have accrued from legal imports.
But no country is an island, and, so, having a good domestic trade policy is not enough. It’s important for a country to harmonise trade policies with its neighbours through regional integration because divergent economic policies between neighbouring countries increase smuggling. Which is why Nigeria should be actively involved in ECOWAS and the new African Continental Free Trade Area (AfCFTA).Yet, Nigeria is a perfidious member of ECOWAS and still refuses to join AfCFTA, even though its customs officials believe that non-participation would increase smuggling into Nigeria.
So, Emefiele is wrong when he says that “Nigeria is very good at making brilliant economic policies”, but smugglers and dumpers sabotage them. It is, indeed, Nigeria’s penchant for making suboptimal economic policies, such as its trade policy distortions and its failure to fully embrace regional integration, that create the huge incentives for smuggling. And unless it addresses the policy suboptimality and distortions, blacklisting smugglers or blocking their accounts would amount to nothing more than shadowboxing: treating the symptoms of the smuggling disease, not the cause!
Olu Fasan
