Africa enjoys a very active and international community of interested and informed commentators on African economic and development policy; most notably on various social media platforms.
The strongest voices are often in favour of policies intended to prioritize low consumer prices and view development-oriented policy advice with suspicion. They often accuse promoters of such schemes of financing unearned rents for well-connected economic insiders with a tax of artificially high prices levied on consumers — particularly the poor. African economic policy is often judged by the price of rice, a staple in many African cuisines.
I sympathize with such caution and the concern for economically disadvantaged members of society. However, the focus on reducing prices and maximizing the consumption potential of the economy as a whole suggests a potential misunderstanding of how development works.
How Development Works
Instead of focusing energy on raising wages, for instance, development is best encouraged through the expansion of the production capacity — particularly in the domestic manufacturing of various nodes of the value chains consumed by the economy in question which represent attractive markets that support opportunities for significant returns to scale.
In Africa, many consumer categories — including rice — have the majority of their value chains abroad; particularly in Asia where it is often cheaper to produce and export to African markets. Nigerian tomato pastes, which are overwhelmingly imported from China as tomato puree, also fits this model.
The Nigerian Government has intervened strenuously in this category, given tomato paste’s ubiquitous presence in the cuisine of Nigeria’s diverse, 200 million-strong population. I’m talking about Nigerian dishes ranging from the world-famous jollof rice to Nigeria’s famously spicy soups. According to Harvard Business Review, Nigeria is simultaneously the world’s 13th largest tomato producer and the world’s largest importer of tomato paste. This begs the question: how can you be a massive tomato producer and yet be much more attracted to import and distribute paste? Why does no one want to make tomato paste with local tomatoes?
As it turns out, the retail prices for finished tomato goods do not cover the production cost of growing and processing tomatoes locally. The tomatoes simply cost too much for local paste processors to use as inputs and profitably produce value-added products that can compete with the prices of products derived from imported purees. As such, upwards of 70% of Nigeria’s fresh tomatoes — grown primarily in the country’s poverty-stricken northern region — rot unpurchased before getting to market.
The vast majority of Nigeria’s paste processing capacity goes underutilized or mothballed, thereby hampering further investments in production stock. It goes without saying that underutilized and mothballed processing plants do not employ many people — and Nigeria would sorely benefit from the high-quality jobs additional processing facilities would create.
Capacity and the Role of Consumer Prices
This is the classic chicken and egg problem of development: encouraging investment in manufacturing and production capability often requires attractive (read: high) end-product pricing to support wages and profits upstream in the value chain. This is important because domestic operators and entrepreneurs will likely be uncompetitive when competing with cheaply imported finished products from sophisticated foreign manufacturers. Tomato puree manufacturers in China enjoy Olympic scale production, which the by-product of decades of relentless investment by the Chinese public and private sector — in addition to efficient transport logistics, cheap credit, and abundant gas, power, and other related infrastructure.
The producing nations of Asia and the West became efficient in the first place by pumping tens of billions of dollars into propping up upstream value nodes like tomato growers, restricting imports for a time, and providing cheap credit and other support to value additive production activity such as creating paste processing sales. This makes you wonder- how can countries just starting out on the development curve, like Nigeria, possibly compete?
They don’t do it by simply importing cheap Chinese paste — which certainly brings down the market price of tomato soup whilst ensuring that African populations remain poor. To tackle thorny issues like migration and extremism, driven by large and largely idle populations, African nations will ultimately need to create the sort of sustainably robust jobs that come with processing and adding value to consumer products like food. Thus, policy focus should be almost entirely on increasing local, domestically-owned production capacity that will neither be globally competitive nor efficient at first. Local entrepreneurs with the financial capacity will be inexperienced and those with some know-how are likely to be undercapitalized, suggesting production prices will be high. How can high production prices be sustained in a world of cheap imported alternatives?
Sustaining High Production Prices…
One proven method is to manage imports such that demand is supported for nascent local producers. There is broad agreement that governments and development investors should provide subsidies such as cheap credit, preferential tax treatment for capital investments and generous public sector purchases to nascent industrial producers.
These production subsidies can help level the playing field for local players but do not work without tariffs and other measures to discourage imports of items that could be manufactured locally supporting local wages. Limiting supply and maintaining the elevated pricing needed to support less efficient local production helps protect local manufacturers as they learn to become more competitive and make investments in scale.
Thus, higher domestic prices support job-creation in the manufacturing sector — helping to jumpstart the value chain. Without this interim bump in prices, producers will never achieve the scale and acquire the capacity to produce cheaper tomato puree or parboiled rice profitably.
Countenancing short term high consumer prices to fund development is not an easy or politically expedient proposition — the payoffs are long term and the costs are immediate. In contrast, reducing the market price of rice by allowing cheap imports offers immediate consumer relief which will be popular with voters — akin to a sugar high for politicians and policymakers. However, doing so costs Africa the jobs that would have been created if those processors of rice and tomato puree achieved scale.
This does not mean giving favoured local manufacturers free rein and a blank check. African Governments should enact policies that encourage competition between local producers for subsidies, cheap credit, government contracts and other rents provided by the government and force manufacturers to iterate towards efficiency and competitiveness within an explicit time frame. They should also be required to spend a share of profits on R&D, perhaps further subsidized with development capital from the government and other institutions.
A brief look back at history
Tariffs and outright import bans, mercantilist policy relics of a bygone era are sensitive, unpopular topics in an era of free trade consensus. But it was during those bygone mercantilist periods that most modern developed nations became rich. Similarly, the so-called “Asian tiger” economies dusted off the textbooks of Friedrich List and employed industry incubating import management to great effect over much of the post-war 20th century, joining the rich nations’ club in the process.
Western policy experts, led by Bretton Woods Institutions, fretted about infant-industry driven protectionism and warned that high consumer prices and persistent food inflation during the development journeys of Asian tigers portended disaster. This advice ignored the development experiences of the Western nations themselves in the century prior — where prices were high by design and limited inflation was often the result of expanding employment: new industrial jobs gave workers more money to spend and still more producers sprung up (often with direct and indirect government support) to meet the sudden new demand. Africa should borrow this leaf from European and Asian textbooks.
People will complain — loudly, at first — about high prices. However, so long as you complete the loop to higher wages and jobs, in the end, the cost is likely worth bearing. Historically, successful economic development has focused almost entirely on expanding production, not promoting cheap consumption, and is not free. You solve poverty by creating jobs and increasing wages — by making and selling ever more valuable things — not by encouraging ever cheaper consumption of imported products. If you want to raise consumption — focus on higher incomes, not lower prices.
The focus and the logic
Development has a cost , and that cost is always, in part, higher prices. In other words, Nigeria should focus on how to pay people enough to buy tomato-based products at the price it costs to make them in Nigeria.
Quite frankly, you do not make people less poor by reducing the cost of food. You simply enable people who remain poor to consume more and remain unproductive; any poor person would prefer doubled wages to a halving of the price of rice. In the pursuit of higher production capacity, it is misguided and unhelpful (and slightly condescending) to view the inevitable by-product of higher prices as a “tax on poor people”. There is a tax on everyone in a development policy regime.
Development has a cost; anyone claiming to be able to immediately raise wages and cut prices is being dishonest. Faced with a choice between policies that prioritize low consumer prices or policies that support expanded employment and higher wages, it is empirical fact that a focus on wages has generally led to widely-shared prosperity.
Note that development policies emphasizing low prices invariably reward past investments in production scale and capacity by wealthier countries who have elected to pay the cost of development. These countries now have higher domestic prices and much higher domestic wages underwritten by the massive scale paid for by those higher prices and are now in a position to export cheap parboiled rice and cheap tomato puree profitably to countries like Nigeria.
Nigeria, like many African nations, has a “non-consumption” problem: sellers faced with robust demand and willing buyers are unable to drop their prices — they are operating at marginal cost. This suggests that the economic problem for policy to solve is not that prices are too high, it is that the buyers don’t have enough resources to transact. To jump-start such a stuck transaction you need to arm the buyers with the necessary income to meet the market clearing price.
READ FURTHER: Dangote tomato factory reopens amid fall in local demand
Solving for the price issue by opening the flood gates to cheaper products from highly sophisticated foreign suppliers will ensure the poverty of both your consumers and your suppliers — cementing low wages, insufficient jobs and a dearth of local capital for savings and further production capacity investments. Such policy measures smack of low ambition and lower imagination. Africans are voting with their feet: the migration pipeline grows by the day as able-bodied, economically valuable citizens frustrated with a dearth of remunerative career opportunities opt to take their chances crossing the Mediterranean for a better life. Long term, a policy of cheap imports means poverty for all.
NOTE: This article was written by Franklin Olakunle Amoo, a Partner at Baylis Emerging Markets and a Director of Whitman Group Holdings.