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Is Nigeria undermining its Digital Economy with bad policy decisions?

April 5, 2016 • Top Stories, West Africa

Lagos Nigeria

Nigeria’s government and economy has come under enormous pressure recently, due principally to the cratering of oil prices. (Image Source: afritramp.fr)

Nigeria’s government and economy has come under enormous pressure recently, due principally to the cratering of oil prices. Unfortunately, in its search for alternative sources of growth and revenue, Nigeria’s government has doubled down on misguided protectionist policies in the e-commerce and information and communication technology (ICT) sectors. But it’s a bad bet. These short-sighted policies undermine Nigeria’s broader economy, its emerging tech start-up scene, and its potential to be the center of Africa’s digital economy.

In a classic case of misguided state-directed development, Nigeria is mandating that a range of ICT products be made with up to 50 percent locally produced hardware components within the next three years. Recent notices also raise the prospect of requirements for majority Nigerian equity ownership in ICT firms. These policies and requirements for companies to submit plans on everything from their local content programs to the number of jobs they will create is reminiscent of failed central planning strategies that are out of touch with the modern, globalized nature of technology development and production.

The policies probably won’t even lead to more equipment production, either, as can be seen by looking at the nations that signed the 1996 Information Technology Agreement (ITA), which eliminates tariffs on a wide range of IT imports. The nations signing onto it ended up growing IT production much faster than nations that did not, because companies use dispersed global supply chain networks—for research, production, and assembly—to take advantage of different countries’ comparative advantages. When a nation throws a wrench into these kinds of global flows, as Nigeria is doing, it sends a clear signal to global tech firms to not locate production there. Yet Nigeria has not only erected these new laws, it has shown its ambivalence by not signing onto the original ITA or its recent expansion.

Nigeria’s approach fails to recognize that the vast majority of ICT’s economic benefits—namely, spurring productivity and enabling innovation—come through its adoption, not its creation. Local content requirements merely increase ICT costs, which slows adoption. The ICT-producing sector usually only accounts for 3 percent to 4 percent of GDP in developing countries, while the technology has a much larger impact when firms use it to spur competition and productivity in traditional sectors, such as retail, banking, and manufacturing.

Nigeria’s policy to force firms that collect data on Nigerians to store it locally will also have the effect of raising the costs for Nigerian businesses and consumers while sending a message to global IT companies that Nigeria isn’t a member of the open and global digital economy. While many governments claim that this rule is needed to protect security and privacy, that is a canard, as the Information Technology and Innovation Foundation has explained in “The False Promise of Data Nationalism.” What really matters are the cybersecurity, privacy rules, and enforcement practices in each country.

In the short term, this digital protectionism benefits Nigeria’s homegrown champion in telecom services and networking solutions, MainOne. This company is relatively new and is now the largest data center and Internet transit provider in West Africa, with regional expansion plans. So it is unsurprising that MainOne happily supports data localization and has called for all government departments and Nigerian companies to store their data locally. In a similar vein, Nigeria is considering regulations and license fees for firms such as Skype, Facebook, and Whatsapp to protect telecommunication operators who are complaining about a loss of revenue, but this will only make things worse for Nigerian consumers.

In the long run, data-localization requirements actually raise the risk of a security breach, because it forces companies to use local service providers that may not be the best the world has to offer. Forced localization also increases costs of data processing and storage, which in turn reduces ICT use by Nigerian businesses and consumers. The claim that it will boost jobs and investment is not only incorrect, but also shortsighted given the broader costs. In fact, the European Center for International Political Economy has found that localization measures similar to Nigeria’s will cost countries such as Brazil, China, India, Indonesia, and Vietnam from 0.2 percent to 1.7 percent of GDP and from 0.5 percent to 4.2 percent in domestic investment.

For political leaders and policymakers, focusing on producing or basing ICT locally is more tempting than fixing underlying problems like lack of available wireless spectrum and multiple, overlapping regulations and taxes for ICT deployment. Nigeria’s approach will also undermine its startup scene, which has shown remarkable resilience to overcome issues with Nigeria’s poor business environment.

Instead of compulsory measures, Nigeria should follow an attraction strategy to improve its business environment. Greater Internet and ICT availability, accessibility, and affordability should be the driving concern for Nigeria. A World Bank Study shows the payoff: African firms that use the Internet have on average 3.7 times higher labor productivity than non-users and 25 percent higher total factor productivity. Yet Nigeria still has a long way to go—for example, survey data shows only 22 percent of Nigerian firms have websites (compared to 33 percent in Sub-Saharan Africa) and only 23 percent of firms using email with clients and suppliers (compared to 60 percent in Sub-Saharan Africa). But to bridge the gap, Nigeria needs to recognize the broader economic benefits from competition and ICT adoption and resist the call for incumbent firms for protection and support.

By Nigel Cory who is a trade policy analyst at the Information Technology and Innovation Foundation, a think tank focusing on the intersection of technological innovation and public policy. Follow him on Twitter @NigelCory.

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One Response to Is Nigeria undermining its Digital Economy with bad policy decisions?

  1. Yinka Talabi says:

    "Nigeria’s policy to force firms that collect data on Nigerians to store it locally" Mr Cory is this statement correct. Can you share the policy statement from the government?

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