NESA UNILAG presents TheDiscoursePapers, a series of papers presented at the maiden edition of the NESA Economic Discourse on the 7th of April, 2016. These papers seek to address contemporary economic issues. Part 3 of 3 was written by Ajetomobi Feranmi Kayode
THE NIGERIAN ECONOMY: THE CLOSED ECONOMY DEBATE AND STRATEGY FOR DEVELOPMENT
The recent freefall of the naira has led to various analyses aimed at providing the government with the best of options on tackling the economic hardships predicated on the currency’s nose- diving. These analyses have constantly hovered around two major points: a closed economy and an enforced rise in demand for local content.
Unsurprisingly, questions have also evolved alongside these analyses, such as: “How workable is a closed economy?” and “Why are Nigerians not doing enough to boost demand for local content?” The answers to these questions, which this paper would try to provide, would help pave intelligent guides towards policy developments with respect to the nature of the economy and patriotic motivation of Nigerians towards local content.
In the following paragraphs, this paper would be elucidating opinions on these questions with the hope that you can learn more on the benefits of closed and open economies, and consumer psychology as they all relate to our present economic dilemma.
DANGERS OF A CLOSED ECONOMY
Calls for a closed or somewhat closed economy, based on research for this paper, are predicated on the assumption that it would help trigger local production, purchase of local content and boost exports, hence boosting the strength of the Naira. The anomaly here; is the expectation that a closed economy would lead to a boost in exports.
To counter this expectation, a report by Cornelius Fleischhaker and Philip Schellekens, using Brazil as a case study, was reviewed. The report shows that a closed economy would affect exports of a nation drastically.
Despite the fact that a closed economy might boost local production, the country would still need foreign revenue to compliment local financial contributions. Due to a country’s — whose economy is closed — decision to import a few components and intermediate goods from other countries, there would be natural consequences.
Consequently, trade relations with other countries are affected hence reducing the possibility rate of exports. However this leads to a question on how China was able to boost economic growth with a closed economy — that is if it actually did so with a closed economy. It would interest you to know that China didn’t boost its economic growth through a closed economy — it is a general assumption that China’s growth is a result of a closed economy.
To clarify this, Brookings’ study shows that China — a socialist state — was able to lift over 200 million people out of poverty from the 1980s to the early 2000s, through an open economy (with some controls though) and not a closed economy. In fact, a closed economy was no good for China1. For a side-fact, it would also interest you to know that China is the world’s second largest importer.
Furthermore, on the openness of the Chinese economy, growth was made possible through the development of a leverage that attracted and is still attracting a high inflow of foreign direct investments. . The nation is blessed with large population, this has enabled her to offer labor intensive manufacturing processes at a reduced cost hence attracting foreign direct investments and constructive imports. Parts of various complex systems are imported and coupled — at a cheaper rate when compared to countries like Hong Kong and Taiwan — for exports out of China. Although, there are still a lot of controls in the economy, the Chinese is relatively an open economy.
In light of the points above, the government needs to invest more in the manufacturing and service sectors, so as to catalyze the development of firms that would work closely with multinationals in the development of exportable products and services.
A good number of luxurious mobile phones like the iPhone by Apple are coupled in China, knowledge gained from the coupling process has led to the emergence of local phone makers that are thriving in China. At the end, the country is gaining both ways. China was able to cut through the ice with the development of SPECIAL ECONOMIC ZONES.
SPECIAL ECONOMIC ZONES
“A special economic zone (SEZ) refers to designated areas in countries that possess special economic regulations that are different from other areas in the same country. Moreover, these regulations tend to contain measures that are conducive to foreign direct investment. Conducting business in a SEZ usually means that a company will receive tax incentives and the opportunity to pay lower tariffs.”- Investopedia (investopedia.com)
Special economic zones are usually equipped with infrastructure necessary for production. China
built its economy through the creation of economic zones, with attractive features that motivated the influx of foreign investors, this is against the assumption that such was achieved as a result of a closed economy.
When infrastructure is discussed, the epileptic power supply of the nation pops up. The assumption predicated on this anomaly is that the whole of Nigeria needs to have access to steady power supply at the same time to become an industrial nation. The process can be a gradual one that can be achieved through the establishment of special economic zones.
For this purpose, locations aside Lagos must be considered. This is due to the ever rising population of Lagos. Most importantly, such areas must also have access to constant power supply and ports. An area with such potential in Nigeria can be found in the Niger-Delta region of the nation.
To clarify this opinion of Niger Delta as a preferred region; it is well known that this region is surrounded by ports and endowed with gas deposits that can be easily converted to thermal energy for power generation. Limiting generated power to this areas would maximize the supply of power in these areas. Combining steady power supply with other incentives such as tax reductions, security amongst others, will attract — foreign and local — investment.
Furthermore, policies must be set up to protect the interest of Nigerians. Policies that would see to the establishment of highly beneficial partnerships between foreigners and citizens on projects or firms to be established before permission for operations in the special economic zones can be granted. That way citizens are empowered and the rate of capital flight can be curbed
Finally, on special economic zones, with increase in production exports can be boosted. Energy generated from such areas can later be boosted to contribute to the national grid, hence fostering a gradual and long-lasting development. Although this might encourage local producers to boost production, does this mean such goods would attract local patronage talk less of international patronage? The next section seeks to provide answers to this questions.
LOCAL CONTENTS AND PATRIOTISM
Without doubt, production will be boosted through special economic zones, but this does not mean such productions would translate to purchase of local content produced in such zones. Buy made in Nigeria to save the naira is now a popular mantra on the lips of many Nigerians, a campaign one arguably relate to Senator Ben Murray Bruce, whom some have described as populist. Populist or not, the senator has sparked up a campaign that is gaining grounds.
Senator Ben’s campaign is a persuasive one, appealing to Nigerians to patronize products made in Nigeria out of patriotism and help save the naira by doing so. The issue with this campaign is encapsulated in the question: “how far can patriotism go?”, it is hard to believe that anyone will keep paying for a product or a service out of patriotism at the expense of his (or her) satisfaction. A popular economic thought states that individuals make decisions at the margin. This means people make decisions that maximize their satisfaction. Mr. A might choose a Toyota car that he isn’t spending much, while Mr. B might prefer a more expensive Benz car because he feels more satisfied with the nature of the seats. Hence, satisfaction is relative, therefore creating a need for proper market research. To illustrate the importance of market strategy, an illustration involving big players in the production of soda drinks will be used.
THE BIG COLA STRATEGY
Competing with established terms can be termed as entrepreneurial suicidal, interestingly Big Cola doesn’t seem to be aware of this fear in the entrepreneurial world. Big Cola is capturing parts of the market share, which has forced the big players — Coca-Cola and Pepsi — to run promotions that would encourage consumers to keep patronizing them.
There are lessons to be learnt from the entry of Big Cola into the market. No one is buying Big Cola because it is made by a foreign company — Aje Groups — but because it is capitalizing on consumer satisfaction that is related to quantity for lower prices. People love to have more at a reduced price. This was the same strategy Aje used to break into the Mexican market, despite Pepsi and Coca-Cola’s promotions aimed at countering the competition, a large part of the population returned back to Big Cola — due to its consistency in providing more at a reduced price. Can Nigerian companies do this? Rather do they need to do this? Yes.
Nigerians have been exposed to varied tastes. Lower prices might not attract majority of the market share for a particular product or service, but it would surely help in capturing a good part of the market like it did for Big Cola
QUALITY ASSURANCE AND MARKET ANALYSIS
Furthermore, the variant foreign tastes have created a market that would take more than patriotism to get them to buy products made in Nigeria. Trying to enforce such would only lead to smuggling which would have a further negative effect on our present economic situation.
In fact, it isn’t about bashing Nigerians for not being patriotic but encouraging producers to invest more in consumer psychology. Acts such as imitation of foreign products, overpricing of products, and lack of ingenuity in designs amongst others should be avoided. How about advertisements? Until Senator’s Ben’s recent campaign, a lot did not even a motor vehicle manufacturing company known as Innoson existed. By all means, Nigerian firms must intensify the use of market analysis tools like the PORTER’S FIVE FORCES.
Patriotism should be motivated through accessible quality at a moderate price. To be sure of the quality to be purchased, regulatory organizations must be effective. People will feel more confident if they can constantly and easily hold producers responsible for substandard products. More often than not it is usually a goose chase or tedious when a customer tries to legally take up a producer who creates substandard products.
Finally, an economic system focused on developing itself with no plans of contributing to global economic development, through bilateral trades will most likely fail. It is necessary for the Monetary Policy Committee and the FG to wake up to calls for the naira to float. The government should also work on integrating branding programs in its small and medium scale development programs; boosting production is a flop when such production doesn’t translate to sales. Alongside, stronger regulations shouldn’t be created on limiting imports but on ensuring development of product quality.
Cornelius Fleischhaker and Philip Schellekens, (2015). The Cost of Brazil’s Closed Economy.
Nicholas R. Lardy, (February 24, 2000). Is China a “”Closed”” Economy? http://www.brookings.edu/research/testimony/2000/02/24china-lardy
Damilare Opeyemi, (October 7, 2015). Is the New Aje Group’s Big Cola Drink a Worthy Opponent for Coca-Cola in Nigeria? http://venturesafrica.com/is-the-new-aje-groups-big-cola-drink-a-worthy-opponent-for-coca- cola-in-nigeria/
Wikipedia (March, 2014). Special Economic Zones of China. https://en.wikipedia.org/wiki/Special_Economic_Zones_of_China