Manipulating the price of consumer welfare, By Uddin Ifeanyi

After a fashion, an economy is like a latex balloon. Squeeze air out of a part of it, and it shows up in a new bulge elsewhere. Without blowing up the balloon, the air it contains remains unchanged irrespective of any shape one attempts to force on it. When a government raises taxes for example, the resulting enhancement to the national treasury simply reflects a lessening in consumers’ disposable incomes and/or in the funds available for businesses to invest — technically, both are drags on the economy. However, were the economy to grow on the back of the government’s deployment of these new funds this dynamic changes radically.

Government spending could also improve an economy’s outcomes. But this takes place only when governments spend to remove constraints to business growth and Investment (by reducing red tape, improving and extending infrastructure, easing logistics bottlenecks, etc.), or on health and education that increase both labour productivity and young school leavers’ employability, or through conditional transfers that drive up effective demand at lower income levels.

A report, last week, by the Federal Competition and Consumer Protection Commission (FCCPC) adds colour to this dilemma. After a three-month cross-border investigation in “response to widespread public complaints over the high cost of cement”, the commission established a preliminary basis for investigating possible price manipulation in the industry.

Does the FCCPC’s description of the state of the local cement industry underline the tension between consumer welfare and the profit initiative? While this conclusion is the easiest to reach, it is not necessarily the only one. Neither is it an entirely accurate description. First, the contradiction between both concepts is a false one. In any economy, the nature of the market is the most important variable for determining how well resources are allocated and used. In a competitive market, businesses make profits by producing things or services that people want, and at prices they are willing to pay. The presence of competing products or services, motivates firms to improve quality, reduce costs, and innovate.

Where market imperfections exist — because of the existence of monopolies, oligopolies, information asymmetry, natural monopolies, network effects, externalities, or high barriers to market entry — and the regulatory space is insufficiently developed, firms make profits without adequately serving customers. Otherwise, a functioning regulatory space intervenes to protect consumers and preserve the conditions for competition, and not to make businesses unprofitable.

Aside from the burdens posed by a weak-to-non-existent domestic regulatory framework, an additional vulnerability in the Nigerian example lies in the structure, and intent of our industrial policy. For a variety of reasons, including poor macroeconomic conditions that have ceaselessly driven up domestic prices and eroded consumer spending, doing business in Nigeria is a mug’s game. Beginning in the early 1970s, successive federal governments have interpreted the task of enhancing domestic manufacturing capacity as one of circling the wagons around local industry — even when some of the lead entities in these industries bore marques such as Volkswagen and Peugeot.

As a result, for just as long, national industrial policy has ignored the latex balloon plasticity of the economy. Import and tax waivers along with tariff and non-tariff barriers have been erected to protect domestic industry even when all these achieved was simply move scarce resources from the treasury to the profit and loss accounts of the cosseted businesses. The higher profits that these protected segments of the economy also enjoyed from not having to compete with imports or other local firms encouraged the price gouging that again just moved money from people’s pockets to businesses’ books of accounts. Any which way, the national ledger suffered, especially because, thus protected, our domestic businesses have had no incentive for leaving their babyish stages.

As incentives to further rapid development of the economy, there is an ironclad case for including strong expiry clauses in the design of tariff and non-tariff protection for local “virgin” businesses. The choice of the “why” of the sunsets on these protections matters as much if not more so than the decision about their duration. This is why in the design of our industrial policies, the quid pro quo for protection must be that such businesses are able to stand their own against foreign competition after clearly defined time periods. In designing the sweeteners that industrial policy is built on, clear agreements on the period over which this should happen and after which all protections fall off is of the essence.

Even then, it is a far better application of scarce domestic resources for government to fix structural impediments to doing business in the country — by dismantling barriers to entry across all markets, making information generation and exchange less opaque, removing incentives to market power, fixing the logistic chokepoints that impede the movement of people, goods, and capital across the economy, etc. — than to endlessly erect barriers purporting to protect domestic businesses, but which end up allowing captains of industry to fleece consumers. Along this path, government could do one better, by also addressing the volatility that afflicts domestic prices from fiscal incontinence, and amateurish management of monetary policy.

Uddin Ifeanyi, a journalist manqué and retired civil servant, can be reached @IfeanyiUddin.