This piece was triggered by a recent encounter on social media. And so let me start by narrating it to provide context for the discussion that follows. As some readers know, I am on Twitter, but not an avid user. Twitter can dominate the lives of its aficionados. I rarely follow individuals outside the areas of my intellectual or professional interest, which, understandably, is why I don’t have many followers myself. But, occasionally, some Nigerians and other individuals decide to follow me, which I appreciate. On 21 December, I received an important notification: “Tolu Ogunlesi is now following you on Twitter!” Of course, every member of Nigeria’s intelligentsia, commentariat and, indeed, political class should know Ogunlesi. He is a prolific and respected journalist and writer. He is also a dedicated tweeter, who, as at the time of writing this, has 199,000 followers!
Anyway, I followed Ogunlesi back. And within minutes, his tweets were coming in thick and fast. On the day of President Buhari’s budget speech, he was giving a blow-by-blow account of the speech, tweeting extracts from it. I was tempted to reply to some of the tweets, but didn’t. Then, he tweeted this extract from the president’s speech: “We remain committed to economic diversification through import substitution and export promotion”. Now, I couldn’t resist the urge to reply, and so I tweeted: “Import substitution and export promotion? That’s contradictory.” Six people retweeted the tweet, and a Nigerian, Omolola Salawu, replied, saying: “Explain the contradiction please, so as to help we that do not understand,” adding: “On the surface it isn’t.”
But Twitter is not a place to engage in complex discussions! So, I decided I would not respond to Salawu’s request via Twitter but rather deal with the subject in this column. And hence this intervention! Now, there are two issues that the president’s statement and Salawu’s comment raised. One is about import-substitution policy itself and the other is whether you can have an import-substitution regime and hope to promote export at the same time. I will address the two issues in turn.
Well, in the spirit of New Year’s wishes and resolutions, I want to start with a request. I would really like our government to stop talking about “import substitution” as a deliberate policy for this country. Nigeria should not, in the 21st century, be framing its economic policy in such an old-fashioned language. It’s atavistic, a throw-back to the 1950s and 1960s when most developing countries pursued an industrial policy that drove them into an economic cul-de-sac. Import-substitution industrialisation is a tried, tested and failed policy. We should stop hankering after it!
But what does it really mean? Well, import substitution simply means substituting imported products with similar domestically produced goods. That, in itself, is not a problem if it comes about through free market interactions. But it’s a different matter when it becomes a deliberate government policy. The government will then need to introduce a range of restrictive measures, including import bans, prohibitive tariffs, capital control, foreign exchange restrictions, etc. In other words, it will have to run a closed or very restrictive economy. But hardly any country has ever industrialised and achieved sustained economic growth on the back of such a highly protectionist economy. The industrial revolution of the 18th and 19th centuries was accompanied by Britain’s unilateral free trade policy. In recent times, closed economies had to open up to become competitive. For instance, China joined the WTO, and, following its accession in 2001, its simple average tariff fell from about 40 percent in 1985 to under 10 percent in 2014. The Soviet Union, of course, collapsed, but its successor, Russia, went through tough reforms to join the WTO. No serious country today still talks about import-substitution. Such policies are counter-productive and harm a country’s productive sectors. It is not surprising, for instance, that
Nigeria’s manufacturers are being hurt by the central bank’s restrictive foreign exchange policy.
Of course, Nigeria must industrialise and diversify its production. I wrote an article, published in the current edition of Euro-Atlantic magazine, titled “The significance of industrialisation and trade for developing countries”. I began the article with the following quotation from Adam Smith: “No nation is ever rich by the exploitation of the crude produce of the soil but the exportation of manufactures and services.” I argued that if any country wants to be rich, it must, as Adam Smith postulated, industrialise and export value-added manufactures and services.
But a country does not industrialise by simply banning imports; it does by removing all the supply-side constraints that hinder manufacturing performance, including lack of access to finance and critical inputs, poor infrastructure, excessive regulations and controls, high taxes, etc. Furthermore, a country industrialises by recognising and exploiting its comparative advantage, and by enabling its manufacturers to benefit from the global diffusion of technology and innovation, which comes through exposure to international trade. Unfortunately, these are not what an import-substitution policy does; its aim is simply to artificially boost demand for domestically produced manufactures by shielding local producers from international competition.
So, having understood what import-substitution entails, let’s now look at the second issue in the debate. Are import-substitution and export-promotion compatible? Well, the answer is “No”. A policy of import-substitution harms export-promotion in at least two ways. First, it reduces industry’s capacity to export and creates an anti-export bias. And second, it risks breaching WTO rules and can provoke a tit-for-tat retaliation from other countries.
Take the anti-export bias argument first. The truth is that export performance is only improved when resources can move from less productive to more productive exporting sectors. But all the measures required to sustain an import-substitution policy only lead to an inefficient allocation of resources. Furthermore, export performance is linked to having an export-oriented mindset. But the whole essence of import-substitution is to create an internal market and not to produce for export. Yet, there is no way a firm produces for export without being strong domestically. But, as a World Bank study on Nigeria once noted, “A major impediment to export growth is the strong anti-export bias of Nigeria’s trade regime.” So, an import-substitution policy undermines export promotion.
Now, take the second reason. Import and export are two sides of the same coin. And it’s basic logic that you cannot restrict imports and be promoting exports at the same time. If you ban products from other countries, they are at liberty to ban products from yours as well. That’s the realist world we live in. Then, there is the WTO element. An import-substitution policy is likely to breach WTO rules. For instance, Nigeria is currently being challenged at the WTO for classifying 41 foreign products as ineligible for foreign exchange. Clearly, such import-substitution policy measures are bound to attract hostile foreign reactions and provoke tit-for-tat retaliations, which would harm Nigeria’s export-promotion drive.
Of course, these are difficult times. There is enormous pressure on the naira due to the collapsing oil prices. Nigeria, it is said, is import-dependent, which is putting further pressure on the naira. Furthermore, it is alleged that cheap foreign goods are being “dumped” in Nigeria, causing serious injuries to local producers. It is difficult to dismiss these concerns, but we now live in a world in which globalisation and global rules constrain the use of protectionist policies, such as import-substitution. So, how can Nigeria address these challenges and still stay within international rules? I would suggest the following.
First, Nigerians can vote with their own pockets by buying Nigerian-made products instead of foreign ones. Such individual voluntary choices are consistent with rational behaviour. Recently, some commentators even suggested that Nigerians should stop sending their children to foreign schools and universities! Perhaps our leaders and the elite should also stop taking holidays abroad; stop going, or taking their families, for medical treatment abroad; and start using everything Nigerian! My point here is that if Nigerians really want import-substitution, they should put their money where their mouth is! Such ‘patriotism’ and leadership by example do not require government interventions.
Second, the government should allow the naira to find its equilibrium, market-determined, level. There is currently a contradiction between the government’s trade and foreign exchange policies. The government says Nigeria is too import-dependent and wants to control this, yet it wants to fix the value of naira and maintain a strong currency. A country’s exchange policy needs to mirror its economic and trade policy. For instance, the US is a consuming nation, which is why it’s called the “locomotive of global growth”. It doesn’t want to control Americans’ huge appetite for consumption, so it needs a strong dollar and has an interest-rate policy that achieves that. China, on the other hand, is export-driven and doesn’t encourage too much consumption, so it prefers a weak renminbi. Another point, as Charles Soludo, former central bank governor, argued in a recent speech, citing the example of Indonesia, is that a weak currency can indirectly lead to import-substitution by protecting domestic firms and encouraging domestic production. This is also what David Hume implied centuries ago with his adjustment theory called price-specie-flow mechanism.
Thirdly, Nigeria must take advantage of the flexibilities in WTO and other trade agreements. In particular, there must be laws and institutional capacity in place to deal with dumped and subsidised imports, and to apply safeguard measures. I was pleased to read a recent BusinessDay report, titled “Stringent laws against dumping of foreign products underway”. I commend the member of House of Representatives, Abdullahi Faruk, who introduced the bill, and urge the National Assembly to pass it into law without delay. If Nigeria wants to create a competitive economy that supports industrialisation, it also needs to create a level-playing field for Nigerian firms, and tackling dumping and other unfair trade practices is a crucial step in that direction.
Any of the above measures can reduce import-dependency without being restrictive. But any import-substitution policy that involves import bans and other protectionist measures is likely to breach international rules, provoke retaliations and, what’s more, undermine export promotion. So, my Twitter friends, I hope this explains the contradiction in having a twin-policy of import-substitution and export-promotion!
Olu Fasan
