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The need for the right signals to go with the right polices

The economy is brought up at some point in almost every conversation in Nigeria today. The moment Linda Ikeji begins to put up daily exchange rates on her blog, you know the economy is the most important thing on the minds of most Nigerians. You can’t blame us, for the first time in over a decade and a half, Nigeria is in a recession. Not only that, we are in a recession many Nigerians believe that despite the fall in global oil prices, this recession was deepened by the actions of either the current or the previous administration – which administration one blames pretty much depends on the politics of the person doing the blaming.

As you would expect, our current government is saying pretty much all the right things to get us out of the crisis – apart from maybe saying “Recession is just a word”. That was definitely not the right thing to have voiced by a top government official. However, the current worry of most people is that despite government saying the right things, they will not successfully bring us out of the recession in the shortest possible time.

Why do I have this opinion? The government is doing many things that signal the opposite of what they intend. This is a fair worry, because as we all know, actions speak louder than words.

Last time out, we talked about our industrial policy and the bad incentives that frustrate our policy goals. So this time, we’re going to talk about how bad signaling frustrates our growth policy goals.
But first of all, we should get on the same page as to what ‘Signaling’ is. I could give you the economic definition, but let me break it down through a story instead.

But first of all, we should get on the same page as to what ‘Signaling’ is. I could give you the economic definition, but let me break it down through a story instead.

Once upon a time, you and I opened used car shops next to each other. We sold similar cars to a similar group of customers. We both proclaimed that we were honest businessmen and that our used cars were of top quality. However, we both found out that every time a buyer showed up to close the deal, they brought a mechanic with them. We were both upset that the buyers did not trust our claims and so, we came up with plans to resolve them.

You decided to bear the cost of the mechanic who reviewed the car. The prospective buyer was allowed to bring in any mechanic they wanted and you would cover the cost of inspection. I decided differently. I decided to create a pool of mechanics from my staff for the buyers to pick from to certify the cars were okay and charge the buyers for the service.

An interesting thing happened, people stopped bringing their mechanics to be able to buy cars from you. The very fact that you were willing to pay for the mechanic gave people confidence that there was nothing wrong with the cars you were selling. People started to believe what you said. However people refused to use my mechanics, and insisted that they used their own. When I refused, they then decided to buy from you.

Despite the fact that we announced the same policy of having great used cars, our actions post the announcement generated different responses from the buyers. You took actions that signaled that you believed your claims about you cars while I refused to do the same. As a result, the buyers rewarded you for your signaling and punished me for mine.

Similar to my announcement that my used cars are the best, a lot of the announced government policies have been steps in the right direction. Unfortunately however, many of the subsequent steps taken by the government have been similar to my decision to restrict the mechanics who can inspect the cars I am selling.

Let me illustrate with a much praised policy. Earlier this year the Federal Government announced the deregulation of the downstream petroleum sector particularly the market for petrol. The Minister of Petroleum further announced that the market would determine the prices of downstream products. While not explicitly said, it was inferred that the PPPRA template would remain on the website as a guide.

Now if you were an investor, you would likely be excited about the deregulation of downstream as Nigeria has a large market. However, imagine if just before you invested, you read an announcement by the Federal Government that neither the foreign exchange devaluation nor the increase in oil prices were reason enough to increase prices. Soon after, you then heard that the CBN has mandated that the international oil companies sell US Dollars directly to the importers of petroleum. You finally notice that the price of diesel has moved by N30 to N40 but the price of petrol has not moved.

If I asked you if there was a deregulation, what would you tell me? If you were waiting for downstream deregulation to invest would you invest given the government’s action?

If the answer to any of those questions is no, then like me, you are more focused on ‘signaling’ than on policy announcements. The honest truth is that policy positions are straightjackets – they tend to force you to act in a certain way. If you are not fully committed to a policy, it is better to not implement it than to do so and effectively reverse the policy with other actions. It undermines credibility, and credibility is one of the most important asset a government has.

From the flexible foreign exchange regime, to our agricultural policy to regulatory independence, to export promotion, there are many instances of our government acting inadvertently to undermine the very policies it espouses.

The cynical amongst us believe that the government is only paying lip service to the policies, some believe that the sabotage is on purpose. However, I chose to believe that our government sincerely wants to implement the policies but is held back by a fundamental mistrust of the market and the lack of control that implies.

My belief is that we should continue to demand that the government stand firm on the policies it claims to believe in. We should continue to point out the discrepancies as they arise. We should insist that the government act like the used car sales man who pays for mechanics. It sounds scary and counter-intuitive, but sending the right signals really does lead to the right outcome.

In this article:
CBNEconomy recession

  • Nigeria has been in a recession since 2014, it took the country a harsh reality smack in the face to realize the truth. This is the second one in the past decade.

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