Post by omohayek on Jan 31, 2016 20:04:32 GMT
Simply allowing the currency to devalue achieves the same objective of discouraging imports without having any of the bad effects I've listed above, which is why economists prefer it.
As for preventing the hollowing out of Nigerian domestic producers going forward, the right policies to take are actually not difficult to figure out. The real problem is getting any Nigerian government to adopt these policies and then actually stick to them when oil prices skyrocket.
- Stop trying to use the government to pick winners and losers. Abolish all protectionist barriers to trade and set a low, uniform tariff. This will drastically reduce the scope for political corruption, and discourage smuggling.
- Properly insulate the Nigerian domestic economy from the effects of oil price volatility, by diverting any income above a low price (e.g. $15/barrel) into the Sovereign Wealth Fund. Do not spend the SWF principal under any circumstances, but allow for interest to be used to help balance the budget only during recessionary periods.
- Grant the CBN real independence, after setting it a fixed annual inflation target (e.g. 3 percent). The CBN will be empowered to use standard tools such as interest rates and reserve requirements to meet the target, and no President will be allowed to interfere with its operations, or even dismiss the CBN board members.
- Enact a budgetary framework for both the FG and the states, requiring them to balance their budgets over a fixed economic cycle: surpluses will be required during booms, to finance deficit spending during bad years.
- Strengthen the abilities of an independent national statistics organization, to provide the necessary figures to guide the budgeting process I've mentioned in point 4.
Believe it or not, none of the items I've listed here will be new or shocking amongst Nigeria's political elite. I know for a fact that at least SLS, Okonjo-Iweala, Soludo and El-Rufai have pushed for such policies in the past, but their calls have gone nowhere. The problem is not that Nigeria lacks the expertise to solve its problems, but that most Nigerian politicians only care about self-enrichment and winning another term in office, so they ignore doing the right thing in favor of their own immediate goals. I don't see Buhari's policies doing anything to alter this reality in the long run.
I agree with your proffered solutions but believe that they should be done in parallel with the diversification of the economy. For example if they were to implement policy no.3 above, how would the CBN ensure that inflation does not cross a certain level if the economy is overly reliant on a single commodity or imports everything it consumes?
To the initial points you raised;
(1) local and foreign goods may not be substitutable - The keyword here is "MAY". A feasibility study should make this conclusive which I want to believe was conducted prior to the restrictions.
(2) we may not actually have a comparative advantage in producing said items, raising costs for any businesses which require the items as inputs - Agree with this as we all know that our erratic power supply means a higher cost of production. However the government can put policies in place to drive costs down e.g. Tax relief
(3) import bans breed corruption, by giving politicians opportunities to hand out exemptions to allies, and encouraging smuggling to evade the bans. - The government has not banned these items. Therefore if importers can legitimately source the currency required for them to buy these goods then they are free to. This is my understanding of the restrictions.
Even putting efficiency issues aside, given what you know of corruption in Nigeria, how can you possibly expect that putting such decisions in government hands will lead to a good outcome? I don't know about you, but I'm old enough to remember the cement scandals of the Gowon era, and the rice importation scandal of Shagari's period. I remember that these two schemes were how Dangote made his first big money, at the expense of every single Nigerian who eats rice or needs shelter.
(2) The best way to assist domestic businesses isn't by manipulating tax rates in favor of some over others, but by getting the infrastructure and regulatory framework in place to make all sectors of the domestic economy more competitive. That means not just regular, reliable power, good roads and a properly functioning rail system, but also minimizing the amount of red tape businessmen have to put up with in their daily lives.
(3) Assuming you're correct, this is better than an outright ban, but it still means that the government is using public money to artificially subsidize foreign currency for some groups over others. Not only could this money be better spent on other priorities (e.g. education, infrastructure), but it also distorts the economy, making it less efficient. Just consider how many people who could be doing more meaningful work are now spending their energies making money from "round tripping" instead.