Import substitution: The other side of the rice coin

The Nigerian government is a big fan of import substitution policies, a branch of protectionism. The logic is simple. The government argues that Nigerians import too much of said product, and that the country would be better off if we produced said product locally. The government then proceeds to ban or increase tariffs on said imported product with the hope of spurring domestic production. Sometimes the tariffs are combined with other supportive policies. If the products start getting produced locally then it is touted as a successful policy.

The policy framework has been implemented in Nigeria many times before for things such as fruit juice, cement, and cars. The latest flavour of the month is rice. The government has recently launched a war on imported rice. It has combined increased tariffs and bans on rice importation through land borders with other actual war-like tactics, like militias, also known as customs agents, running around shooting people illegally importing rice. It has also implemented a couple of other supportive policies such as, the Central Bank’s much promoted anchor borrowers programme which tries to provide cheaper financing for farmers. There has also been some supportive policies for the rest of the rice value chain with particular emphasis on rice millers. Some genuinely good stuff.

So is the policy working? Well in a country as big as Nigeria, almost anytime the government bans or raises tariffs on something, there will be an increase in domestic production. Especially if it’s something that is not technically difficult to produce. Like fruit juice or cement. It appears to be the same with rice. Although the official numbers are not yet out, it does appear that we will produce more rice this season than we have in a while. Is the increased rice production enough to say that the policy is working?

To answer that question we first need to look at the other side of the coin; the consumers of rice. One side effect of the import substitution strategy is that it raises relative prices for the targeted product. These increased prices help spur domestic production. The governments war on imported rice has resulted in relative increases in the price of rice, which is all good if you produce rice. But what this also means is that everyone who consumes rice has taken a loss due to the policy. And we have a lot of rice consumers in Nigeria. Just pulling a statistic out of thin air, I would argue that at least half of the 190m Nigerians eat rice at least once a week. Which means that the price increases have led to a serious loss of welfare for rice consumers.

For the policy to be deemed a success, it would have to be the case that the increase in welfare from the increase in rice production, and the revenue from tariffs, is more than the loss of welfare from Nigerians having to pay more for rice. If you have taken economics classes and are familiar with the concept of dead weight loss then you know that, all things being equal, the welfare loss is typically greater than the welfare increase from a tariff. Unless something else changes, tariffs typically results in overall welfare losses.

That something else is typically productivity. The productivity in the rice value chain would need to increase enough, to make up for the welfare loss from the tariffs on imported rice. Increased productivity should eventually result in prices lower than their imported competitors. Given that rice prices are still higher, then it means the productivity increases required, have not happened yet. So let us not call the policy a success.

If we are being honest, the policy, even if it could, isn’t really expected to be successful overnight. It takes time to move from a low level of productivity to a higher level. It takes time to increase yields, it takes time to develop high quality milling capacity, and it takes time to build a reputation. Will the productivity increases required happen this time around? I don’t know. But I do know that in almost every instance where protectionist policies have led to increased productivity, the focus has always been on exports. Unfortunately, exports are not our focus here but a misguided quest for self-sufficiency. So I am not optimistic.

On a final note, the government is always quick to point to South Korea and Taiwan as examples of cases where protectionism is associated with increased productivity. It would be nice if they also talk about the failures as well, such as much of Latin America, and our very own Nigeria. Perhaps we should be asking what else the South Koreans and Taiwanese did besides being protectionist.

•Nonso Obikili is an economist currently roaming somewhere between Nigeria and South Africa and tweets @nonso2. The opinions expressed in this article are the author’s and do not reflect the views of his employers.