Trade liberalization is the way to go

The coming Nigerian elections in 2023 have presented another opportunity for debates on the most appropriate government policies to pull the most people out of poverty at the quickest rate. In 2019, according to the Nigerian statistics bureau, 4 in 10 people were living below the national poverty line. While the COVID-19 global pandemic and the subsequent economic crisis have exacerbated the problems, there is strong evidence that the current administration's protectionist policies intensified them. The data and analysis show that trade liberalization remains the best national strategy.

For the past seven years, Nigeria pursued strong protectionist policies - a targeted import substitution strategy, an increase in tariffs, and most alarmingly increased restrictions in capital mobility. These policies have been a monumental failure, and the increased contraction in the global economy and the effects of the pandemic have made it painful for the average citizen. The evidence from other countries supports the fact that trade liberalization promotes economic growth and development. No country has recently seen economic success with respect to considerable rises in the standard of life for its citizens without being open to the rest of the world. On the contrary, trade liberalization (with an opening to foreign direct investment) has significantly influenced East Asia's economic growth as the region's average import tariff decreased from 30% to 10% between 1980 to 2000.[1]

Nigeria should see international trade as a conduit for poverty reduction, through its effects on investment, technology transfer, and competition, trade can help growth by boosting job creation, and increasing the domestic value added[2] while decreasing the price of goods and services for Nigerians. This is clearly shown in the traditional economic trade models such as the Ricardian and Heckscher-Ohlin models as well as the standard trade model. This is driven by competition that goods from countries with competitive advantage create.  We see that trading countries manage consistently to grow faster than ones that choose autarky.  For example, we see that the benefits of trade liberalization can exceed the costs by more than a factor of 10.[3]We saw in the countries that opened their economies in the late twentieth century like India, Vietnam, and Uganda, experienced faster growth and more poverty reduction.  On average, those developing countries that lowered tariffs sharply in the 1980s grew quicker in the 1990s than those that did not.

However, there are distributive effects of embracing trade, especially after a long period of protectionism. It is likely to impact various segments of the population differently. For example, depending on where a home is located, the type of work they do, and whether they are wealthy or poor, trade may have varying effects on that household. For example, in areas that depend on local manufacturing such as Aba, or the cement factory in Obajana competition will likely affect the jobs in those industries. However, the overall effect on most Nigerians will be reduced prices, it will likely reduce the inflationary prices that the Nigerians are experiencing.

The well-being of households is directly impacted by trade in two different ways. First, the costs of the goods that households must purchase are determined by trade rules. Second, by altering the cost of the items that households create, trade policies have an impact on how much money they can make. There are also significant indirect consequences; for instance, trade can change the mix of jobs that are available in the economy by boosting private investment while also exposing domestic enterprises to global competition.

Based on the World Bank’s “Household Impacts of Tariffs” (HIT) impact simulation tool, while the average Nigerian could gain from trade liberalization, the approach indicates that some households could lose out on trade restrictions removal. If the government embraces full trade liberalization, predictions show that average incomes will increase in all states except Cross River, and poverty to increase in four states: Benue, Cross River, Edo, and Ondo Trade liberalization would negatively impact at least some vulnerable Nigerians just above the poverty line in those four states, even if the average household gains.[4] Partly, this emanates from the mix of income-generating activities that dominate in those states. For example, the World Bank data suggests that trade liberalization will negatively impact Benue and Cross River states, where relatively large shares of workers are engaged in agricultural activities. And the lower cost of purchasing the goods will not provide adequate compensation.

In conclusion, embracing trade liberalization will require a complex set of targeted policies. There will be a few losers, but most Nigerians will gain from it. By planning for the associated negative impacts and distributional effects, we can cushion the effect on households. For example, heavy investments in education could channel talent to jobs in technology and other sectors. For example, there is potential for Cross River to gain in the entertainment industry, which is gaining more consumers outside of the country.

[1] World Bank, Globalization, Growth, and Poverty: Facts, Fears, and an Agenda for Action, forthcoming.

[2] Domestic value added in gross exports is an estimation of value added, by an economy, in producing goods and services for export, simply defined as the difference between gross output at basic prices and intermediate consumption at purchasers' prices. The measure is a percentage share of value.

[3] David Dollar, "Globalization, Inequality, and Poverty since 1980", World Bank mimeo, 2001.

[4]Jonathan Lain & Jacob Engel, Barriers to trade, barriers to poverty reduction? How Nigeria can harness trade to lift people out of poverty