Market failure in Africa

AFRICA IS A CONTI NENT BUBBLING with untapped potentials. The abundance of these untapped resources – human, natural economic – also points to the profundity of the underlying inefficiency in resource allocation. From the traditional laws on land which perpetuates subsistence farming and frustrates commercial agriculture, to the absence of motorable roads that will enable the evacuation of produced agricultural commodities and ease intra-location movements, inefficiencies abound. For instance, good transport infrastructure, as well as adequate information on the collection and transportation of grass to the shepherding nomads in the northern part of the country, would substantially resolve the often bloody conflicts between Fulani herdsmen and farmers in the southern parts of Nigeria. In the same way, reducing the high costs of fresh tomatoes all year round is possible if there are large-scale modern warehouses that could preserve freshly harvested vegetables in the northern parts of Nigeria. It is clear, therefore, that the enormous marketing costs of private transacting underlie the regular conflicts and high prices. These high costs of transacting put in a wedge on the prosperity of the continent.

African governments’ inability to effectively help the institutions of the market in resolving these inefficiencies define the failure of government as a critical source of the underdevelopment of the region. The costs of transacting frustrate the allocative efficiencies of the market. And the more the government fails in these regards, the deeper the failure of the market to distribute resources that orchestrates development efficiently. Collaborating with the investment banking segment in this respect could help.

Un-optimal levels of investment banking leadership of developmental growth in the continent is a major causal factor. Mainstreaming the structure and institutions for large-scale and long-term capital mobilisation for investments in the critically needed transaction cost-reducing infrastructure will considerably resolve these challenges. That is the forte of the investment banking business. With generous support from the government, investment banks operating in Africa can lead in such areas as infrastructure development and in new investment vehicles that reduce transaction costs. Similarly, governments’ plans and programmes should recognise those transaction cost driving activities. That should naturally result in higher-frequency promarket policies, programs, and projects. But the government also needs to directly intervene where existing market incentives may not be adequate in the short term to drive investment inflows.

In addition to the failure of government, it is not strange to discover pockets of single entities entirely controlling the market for particular goods and services in some. For instance, in Nigeria, DStv maintains an unparalleled control of the digital satellite television market. A few competitors have come up but could not survive in the market. The organisation controls the demand and supply at both the premium and mass-market segments. This example is just one of many instances. For that reason, the prices of cable television subscription are by far much higher than it ordinarily should be. Again, the entry of the billionaire merchant Alhaji Aliko Dangote into the Nigerian refining and petrochemical business may appear to be another good example. As it stands today, four of the Nigerian government’s owned refineries are running far below capacity and not profitable. As a result, there seems to be a future for the country in the ‘look-like’ adoption of the privately-owned prospective Dangote refinery to serve the purpose that those refineries did not achieve. The likelihood, therefore, is their possible annexation by the Dangote refinery and the latter’s further consolidation of the market power in that critical resource. Aside from the market power is also the question of negative externalities

Consider, for instance, the compounded destructive impact on the Niger Delta region’s native enterprises of fishing and farming by the decades of its environmental damage through crude oil exploitation. As it has been in the Niger Delta region, so was it across the fields of Africa. From the coal mines in South Africa to the diamond mines in Sierra Leone and Liberia and all countries within the continent where large-scale exploitation of natural resources have been taking place. In most of these countries, other economic activities receive a death sentence because of the negative externalities of one that is backed by market power. In Nigeria, Shell petroleum and a few other crude oil exploration companies had their way and were backed by the government who benefited extensively through petroleum royalties and taxes. Its negative externality creating activities was also tacitly supported by corrupt bureaucrats who lived off it. In Liberia and Sierra Leone, it triggered wars and insurrection, which practically halted economic activities in those countries for several years. Better access to information probably would have helped in stemming these undesirables.

Subjective decisions made on both the demand and supply sides of the market spectrum are mostly the products of available information. While it is challenging for all market participants to have democratically open access to the same information, competitive fairness demands that. The predominance of personal rule in the continent worsens the degree of discrimination and information access. Perhaps, this is not obvious in regular goods markets. A great deal of it, however, follows the same pattern of political appointments in many African countries. Information that potentially confers enormous wealth is often consciously withheld from most stakeholders who need them for rivalrous engagements. Instead, it is craftily made available to a few persons that could factor in substantial corrupt rent for the information provider. This trend was slightly rife at the earliest stages of the development of the capital market in the continent. It is also quite common among corrupt bureaucrats in the public sector. It used to be a dominant part of the budgeting process called “padding” where projects are overtly over invoiced and still approved by the legislature who claimed to have investigated them. Thus, by keeping the outcomes of the investigation secret, the public is misled into believing that assumed project costs in the budget are authentic.

It is not difficult to see the correlation between the dense information asymmetry in the continent and the creation of monopoly controls of markets. Amplified deficient public sector accountability has facilitated the creation of several unnatural monopolies. Through waivers and executively ordered concessions mashed with private information, some influential market-controlling entrepreneurs emerge now and then as a consequence. And to perpetuate economic rent derived, as a result, protective market entry barriers are erected and fortified by the corrupt benefiting bureaucrats.

Managing the underlying causes of the very high costs of transaction and the failure of the market to deliver the desired prosperity in the continent can never be easy. Several reform efforts are also taking place at different country levels to improve the conditions for doing business. The gap from the desired state is, however, enormous. A combination of constitutional and legal reforms in various countries as well as institutional efficiency may help in curtailing these incidences. Technology adaptation, – particularly the Internet – in combination with governments lead role in creating the environment for the private provision of public infrastructure is critical.

The constitutions of several African countries fall into any of these three categories. The first group are countries with re-polished versions of what they inherited from the colonialists. The second group have constitutions written by a military ruler and his cohorts. The third category has the ‘’copied and pasted” version. The tragedy in all three is that the rules do not derive its essence from the economic, social, and political needs of the individual countries. Many of the documents serve the interests of distinct groups and therefore perpetuated practices that do not guarantee competitive fairness and equity. Secondly, most of them do not apportion the right and proper consequences (penalties) for the breach of the rights of others. Thirdly, in many instances, they were unable to expressly give powers to dedicated institutions to enforce accountability and transparency in many of the departments with primary responsibility for implementing equity, fiscal impact as well as effectiveness.

Accordingly, the major problem is, therefore, not the inadequacy of institutions but the incapacity of the existing institutions to deliver on the purpose of their establishment. A good example is the Nigerian raw materials research Institute which after thirty-three years in existence was only able to produce a machine for mass-producing ‘kilishi’. Yet this institution is one of the most heavily funded by the government. But because the public never really understood its purpose, it received very little attention regarding its output. And therefore, for several years, Nigerian manufacturers sourced their raw materials from China and beyond. The billions of dollars spent on this institution remained unaccounted while the citizens never received help from its existence. The raw materials research Institute is critical for the survival of the Nigerian manufacturing sector. Its failure as an institution is invariably one of the biggest drivers of transaction costs that also orchestrates failure in the manufacturing industry. As mentioned, the combination of inadequate information about some of these institutions sustains the opaqueness and sleaze they warehouse. This last factor equally provided the incentive for the multiplicity of duplicate weak performing institutions that dot the public sector landscape of African countries. Many of the institutions of government perform precisely the same functions and most of the time have perennial conflicts around their duplicated statutory duties. Overall, the biggest undoing of the continent is the institution of justice system design and implementation, which bears the handprints of inefficiency in rule development, interpretation, and application.

In addition to improving the institutional arrangement is enhanced acceleration of technology adaptation. Thankfully, the increasing democratisation of telephony and the Internet has considerably improved access to information as well as market response. It is also a robust platform for the public reaction to the inefficiencies in the government. Today, rural market women in most of the remotest parts of Africa can now settle transactions over the phone. For instance, urban buyers of agricultural produce typically aggregated in rural villages can easily make transactional exchanges over the phone. This improved communication is also increasingly the norm, even among such rural dwellers and producers. Increased efforts in promoting and democratising the digital financial system using digital phones, is the new frontier of prosperity for the continent.

Government’s role in all of these is still paramount. Aside from its support and enablement of the private sector provision of publicly used infrastructure, the government needs to engage in the provision of some infrastructure directly where market incentives may not work. Some level of fiscal realignment is necessary here. The first is the government’s identification of those public infrastructures that the private sector can conveniently produce or provide given the available incentives. Second, is to facilitate the private sector engagement in the provision of such infrastructure. Thirdly budgetary savings through this process should now be channelled in the provision of those infrastructures where market incentives may not help.