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POLICY NOTE NO. 28 MARCH 2012
HIGHLIGHTS
IMPORT BANS …
reduce the amount and increase the
price of the controlled goods. The
justification for such policies is
usually that with protection,
domestic firms will increase output
and jobs. But in practice import bans
can just lead to higher profits for
domestic firms.
IN NIGERIA…
importation of 24 groups of items is
currently prohibited. However, the
bans are circumvented by smuggling
and by official granting of licenses to
import, with huge profits likely for
those who selling the banned imports
at the inflated domestic prices
EFFECTS OF IMPORT BANS
In Nigeria the bans raise the cost of
living; more than 4 million Nigerians
could leave poverty if the bans were
replaced by tariffs set at a level
applied to similar products. The bans
also reduce government revenues and
undermine trade facilitation. Positive
impacts on jobs are unclear.
WORLD BANK
Volker Treichel, Mombert Hoppe, Olivier Cadot and Julien Gourdon
Import Bans in Nigeria Increase Poverty
Nigeria currently prohibits importation of 24 groups of items. These
include a range of food products, certain medicines, industrial products
such as glass bottles and textile fabrics and consumer products including
footwear and furniture.
i
The use of import prohibitions in Nigeria is part
of a trade policy regime that seeks to protect existing domestic industries
and reduce the country’s perceived dependence on imports. The bans
are often justified on the grounds of preventing importation of all
products that the county is deemed to be capable of producing itself.
Those protected by the bans argue that the countries’ lack of
infrastructure, especially energy, means that they cannot compete
effectively with imports without protection.
The import bans benefit domestic producers since they reduce the
amount of goods that are available on the national market and hence
limit competition for domestic firms. As a result, prices for these
products are higher in the domestic market than they are in the world
market. However, this has negative impacts on consumers of these
products who have fewer varieties to choose from and have to pay more.
The welfare of consumers is typically not well represented in discussion
and decisions on trade policy measures such as these import bans.
Moreover, import bans raise the price of inputs to producing industries,
including those with the highest growth and employment potential.
Building materials such as cement, steel, timber and concrete blocks are
an example of how trade policy can have an impact throughout the value
chain, as these materials are protected by high tariffs, while structural
timber imports are banned. The resulting increase in construction costs
hampers the growth of this industry which has considerable employment
potential.
This note focuses on how the import bans affect poor people in Nigeria
and shows that, by raising the cost of living, they increase the number of
people living below the poverty line. Many of the banned goods are
necessities for which there is strong demand from the poor, who cannot
afford the inflated prices.
Africa Trade Policy Notes
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Removing the bans and replacing them with tariffs set at a level of those applied to similar products would allow
more than 4 million Nigerians to exit poverty.
The use of import bans creates an incentive to circumvent the restrictions and indeed substantial volumes of
goods are smuggled into the country via porous borders with Benin and other neighbours.
ii
At the same time,
for specific products substantial amounts of goods are imported under import licenses that are granted for the
import of these ―banned‖ products.
iii
Allocation of these licenses is very opaque and has recently drawn criticism from civil society in Nigeria by
giving potentially huge profits to the particular individuals granted licences. Nevertheless, both these channels
for importing banned products involve costs and the level of imports cannot meet the demand that would exist
in the absence of the import bans. Implementation of the bans also requires redirecting customs officials away
from regular duties of control at the border to prevent smuggling. This has in turn led to increasing delays at
ports as clearance times for regular imports increase, increasing the prices of all imports. This further raises the
costs for consumers and undermines competitiveness of Nigerian firms since critical inputs are more expensive
and delivery times uncertain.
If bans are replaced by tariffs set at levels that reduce product prices, then a) the cost of living will fall and the
welfare of domestic consumers will rise, b) profits accruing to domestic producers in the protected sectors will
decline, c) government tariff revenue will increase and d) customs resources can be reassigned to standard
border control and trade facilitation activities. In the remainder of this policy note, we estimate the impact of
replacing import bans with tariffs on prices and welfare of domestic producers, using a three-step approach: first,
identify the share of household expenditures on affected products, second, estimate price difference between
the banned products in Nigeria and the same products in comparator countries which have not prohibited
import of these products, and finally simulate the impacts of replacing import bans with tariffs. We conclude by
briefly examining some of the likely effects on domestic producers.
Expenditure patterns for products on the import prohibition list in Nigeria
We first estimate the share of each prohibited product in household expenditure, using data from Nigeria’s
household expenditure survey and information on prices from the National Statistical Institute. Food items
represent a very large share of household expenditure, and the share of products affected by the import bans
among those is substantial. At the national average level, expenditure on food items represents 65.4% of total
household expenditure. Roughly 13 to 15% of that expenditure is on products affected by the current import
prohibitions. As for non-food items, nearly 10% of household expenditure is affected by the bans.
The share of products affected by the import bans varies slightly across Nigeria’s regions, although differences
are moderate. Expenditure patterns in the North are slightly skewed in favor of the products affected by import
bans compared to the South. In the North, those products represent 26% of household expenditure whereas
they only represent 21% in the South. Expenditure shares for these products seem to be lower in the Western
zone as compared to the East and Central zone but differences are not very pronounced.
In terms of the differences in the basket of commodities between the 25% poorest and the 25% richest, there is
no systematic difference across income groups in the share of products affected by imports bans with the share
of those products being around 24% at all income levels. On the basis of the observed expenditure patterns, the
bans do not seem to be specifically regressive or progressive.
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Table 1: Household expenditure patterns, by income quartile
Estimating price gaps for banned products
Estimating ―ad-valorem equivalents‖ (AVE) for the prohibitions, product by product, we calculate the rate of
tariffs that would leave domestic prices constant. For this, we have used price data provided by the Economist
Intelligence Unit for Lagos and ―comparator‖ cities (Nairobi and Douala). Our price-gap estimates are
calculated in a way that ―filters out‖ general differences in the cost of living between Lagos and comparator
cities.
Using price gaps to calculate the AVE of non-tariff measures is the method recommended by the WTO in
Annex V of the Agricultural Agreement.
iv
The ―price gap‖ for a product affected by a non-tariff measure (NTM)
such as a prohibition is the difference between its domestic price and the counterfactual price that consumers
would have to pay in the absence of the NTM. As this counterfactual is actually not observed, we need to use an
approximation to estimate the price-gap. The WTO recommends using the price of the same good in a
―similar‖ market not affected by NTMs. The choice of a similar market is a matter of judgment, involving
comparisons of size, proximity, transport costs, domestic market structure, and income level, and—most
important of all—data availability.
For the products affected by Nigeria’s import prohibitions we use prices published by the Economist
Intelligence Unit (EIU) for a basket of consumption goods observed in the world’s largest cities. In the case of
Nigeria’s prohibitions, we have used Nairobi as the main comparator city for Lagos.
v
Price comparisons by
aggregates are shown in Table 1. They show that, as expected, price gaps are systematically larger for banned
products than for other products. For banned products, the simple average difference is a whopping 92%
(upper cell in the last column). For non-banned products, it is 15% (lower cell in the last column). That is, we
will subtract 15% from the banned products’ observed price gaps in order to correct for general cost-of-living
differences between Lagos and Nairobi. In other words, assuming that Kenya is representative of countries that
do not ban imports of these products, then consumers in Nigeria typically pay 77% more for the group of
banned products than consumers in countries that do not impose bans on these products.
FOOD National 0-25 25-50 50-75 75-100
Total Food items 65.37 71.17 68.5 66.11 60.58
Food items under bans 13.47 14.19 13.79 13.43 13.01
Staples 5.73 6.60 5.97 4.75 5.14
Meat 6.23 6.94 6.87 6.60 6.72
Beverage 0.64 0.40 0.62 0.67 0.72
NON FOOD FREQUENT National 0-25 25-50 50-75 75-100
Total Frequent items 24.76 21.18 23.17 24.42 27.44
Frequent Items under bans 4.31 4.84 4.58 4.24 3.70
Household supplies 3.13 3.97 3.64 3.20 2.43
Medicaments 0.91 0.84 0.88 0.99 0.90
NON FOOD Less FREQUENT National 0-25 25-50 50-75 75-100
Total Less Frequent items 9.87 7.65 8.34 9.47 11.97
Less Frequent under bans 5.42 5.61 6.02 6.3 7.29
Textile and Clothing 5.13 4.61 4.86 5.05 5.56
AC/Refrigerator-Freezer 0.13 0.01 0.03 0.04 0.29
TOTAL Under Bans 23.2 24.64 24.39 23.97 24
Coverage by Income
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Table 2 : Price-gap calculations, Lagos vs. Nairobi (percent)
Source : EIU, PRMTR calculations
The price gap approach can also be used to estimate the impact of the import prohibitions on different regions
across the country. Since prohibited goods can be obtained in practice through smuggling, we might also
observe a price gap between cities close to the Beninese border and cities further away. We then adjust our
price estimates by regional zones, using price data from the National Statistical Institute, in order to take into
account within-country price differences. In general, prices are lower in western provinces. This is illustrated in
Figure 1, which shows regional prices for selected groups of products (Lagos = 100).
The same cross-regional pattern of prices holds, qualitatively, for banned products and for those not banned.
However, the bans seem to magnify price dispersion between Western and other provinces. This can be seen in
Figure 1: Price levels, by cluster and region (Lagos = 100)
Clothing Staples Protein Beverages
Household
supplies
Personal
care
products
Total
Banned products 115 178 30 -7 67 194 92
Other 15 61 -24 -26 -12 -17 15
85
90
95
100
105
110
SW
SE
SC
NW
NE
NC
Household supplies & Medicaments
85
90
95
100
105
110
SW
SE
SC
NW
NE
NC
Textile and Clothing
85
90
95
100
105
110
SW
SE
SC
NW
NE
NC
Others (AC/refrigerator)
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Figure 2: Price levels, by region, for banned and other products (Lagos = 100)
Note: SW: South West – SE: South East – SC: South Central - NW: North West – NE: North East – SC: North Central
Figure 2 across selected product clusters. Thus, it is as if the presence of the bans magnifies transportation-cost
differences across regions, perhaps because they force traders to use smaller side roads, transport goods in
smaller consignments, increasing transport costs, or they have to make more frequent or higher unofficial
payments during the overland transportation.
Estimated impacts of import bans on poverty
Last, we simulate the impact of the removal of import bans and their replacement by tariffs equivalent to those
applied to similar products and estimate the effects on real household income and poverty, as well as inflation.
vi
Effect on Income
Overall, the welfare gain attributable to the replacement of the bans is equivalent to a 9.4% increase in
household real income. Figure 3 shows the real-income gains by type of prohibited product and indicates that
the removal of the import prohibitions leads to larger gains for the first (poorest) quartile of the income
distribution. This is because the current import prohibitions have a mildly regressive character (i.e. they are
hurting poorer households relatively more). The figure also shows that a substantial chunk of those gains results
from the elimination of import bans on household products, followed by textile and clothing. This is valid for
every income group.
85
90
95
100
105
110
Bans
No Bans
Staples
West
Central
East
85
90
95
100
105
110
Bans
No Bans
Household supplies
West
Central
East
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Figure 3: Real-income gain, by income level and product category
Finally, Figure 4 presents the real-income gains by region. Households in the Northern regions are expected to
benefit substantially more from the removal of the import bans than those in other regions. This difference in
gains arises for two reasons: (i) the share of prohibited products in household spending is slightly higher in those
regions; (ii) price gaps tend to be higher in those regions as well—not only are absolute prices higher in those
regions than in Lagos, but the difference between the prices of prohibited products and the price of other
products is also larger in the North as compared to Lagos. Thus, eliminating the bans would benefit consumers
in those regions more.
Figure 4: Real-income gain, by region Figure 5: Shift in the distribution of real income generated
by the bans’ elimination
All in all, it appears that the elimination of the import bans has a pro-poor impact, both directly through
differential impacts across the distribution of income, and indirectly, through differential impacts across regions.
The effect on poverty can only be approximated since Nigeria does not report poverty headcounts, Gini
coefficients, or any other measure of the distribution of income in the World Development Report. We use the
household survey to reconstruct these measures, and calculate a poverty headcount ratio at the $1.25 a day
poverty line of 67.5%.
vii
The change in real income induced by the removal of the import bans leads to a
reduction of the poverty headcount ratio by 2.48 percentage points in our estimation. This would mean that the
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Total
1st
Quartile
2nd
Quartile
3rd
Quartile
4th
Quartile
AC/refrigerator
Textile and Clothing
Household supplies
Medicaments
Beverage
Staples
Protein
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
SW
SC
SE
NW
NC
NE
0
.00001 .00002 .00003
0 20000 40000 60000 80000 100000
x
Baseline Simulated
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headcount ratio would fall to 65.0%. Given a population of 167(??, can we double-check this number? ) million
inhabitants, about 4.1 million Nigerians would leave poverty, in real terms, as a result of eliminating the import
prohibitions. In order to give a graphic rendering of the effect of the real-income increase involved, we blow up
nominal individual incomes by the inverse of the price decrease and re-draw the entire income distribution. The
resulting rightward shift in the distribution is shown in Figure 5.
Effect on Inflation
The changes in prices resulting from the elimination of the import bans would also have macroeconomic effects
by reducing inflation through two transmission channels:
A direct, one-time impact effect on inflation due to the drop in the price of banned products following
the removal of the import bans
A long-term reduction in the rate of inflation due to the fact that inflation is lower on imported products
than on those domestically-produced. Eliminating the import ban links affected products more closely
with world market prices and changes their classification from high-inflation to low-inflation categories.
Table 3 shows the difference in inflation rates across these three categories of goods and shows that imports
contribute substantially to slow down the rate of inflation. This is a common mechanism in a fixed-exchange
rate regime. The last column illustrates the impact effect by highlighting the large price drop to be expected
from the elimination of the import bans.
Table 3: Inflation rates on locally produced, imported, and banned products
Against a background of slowly decelerating inflation (from 11.9% in 2009 to 9.6% forecast in 2011), the
elimination of the import bans has a huge effect, knocking out a full 7.2 percentage points off the inflation rate
on impact; thereafter, the effect is more subdued, but still far from negligible (2% less than in the baseline
scenario). This long-term effect illustrates the often observed empirical regularity that import competition
disciplines the market power of local producers, especially under a fixed-exchange rate regime. Figure 6
illustrates the effect, showing the divergence in the path of the CPI with and without the removal of the import
bans.
Inflation
on Local
goods
Inflation
on
Imported
goods
Inflation on
prohibited
goods
Share in
Household
consumption
Expected
drop in price
from ban
elimination
(%)
Staples 14.70% 11.80% 13.20% 5.73 -20
Protein 15.90% 8.80% 17.10% 6.23 -10
Beverages 16.20% 8.10% 13.10% 0.64
Household supplies 9.30% 5.90% 10.50% 3.13 -50
Medicaments 10.30% 6.40% 0.91 -60
Textile and clothing 7.90% 5.13 -45
Other imports 9.90%
Average on Goods 14.00% 9.10% 11.40%
Lodging 18.30%
Utilities 22.20%
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Figure 6: Path of the CPI with and without the elimination of import bans
Conclusions
The analysis presented here suggests that the policy of extensive import bans in Nigeria has a heavy cost for
poor Nigerians and that there replacement by tariffs set at a level of those applied to similar products could
allow 3.3 million Nigerians to leave poverty. These substantial benefits to ordinary Nigerians of removing the
bans would be complemented by higher tax revenues to the government and more effective control of borders
by Customs, since resources that are currently devoted to implementing the bans could be reallocated to
improving border procedures for all traded goods; both imports and exports. In addition, the fall of costs of
key inputs to industries with high growth and employment potential as a result of the removal of import bans
could lead to a substantial boost to the growth performance of these sectors.
The removal of import bans will have a negative impact on those domestic producers who are currently
protected by the bans and those who make large profits by smuggling banned products or who are given licences
to import them officially. If the import bans have just allowed the owners of domestic firms to make higher
profits, and there has been little investment and job creation, then their removal will simply entail redistribution
from higher income to poor people. On the other hand, if the import bans have led to increased output and
employment their removal could result in job losses with a consequent impact on poverty. This will offset, but
cannot exceed, the benefits for the population from the removal of import bans, given the estimated
substantially higher real household incomes. However, government programs to assist those that become
unemployed would then be essential. An issue on which the World Bank could bring global expertise regarding
the most efficient program design.
This issue requires some careful empirical analysis but initial findings from a small survey of producers
conducted with the Manufacturers Association of Nigeria suggests that for many of the banned products, local
producers are reaping considerable profit margins behind import protection and that in sectors such as textiles
there has not been an effort to invest and become competitive and to expand output and employment. Given
the high costs that poor consumers are incurring as a result of the import bans, it seems pertinent that those who
wish to maintain the import bans clearly demonstrate that they are delivering tangible benefits to the Nigerian
economy.
100
105
110
115
120
125
130
135
140
2008
2009
2010
2011
Baseline
With bans phased out
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About the Authors
Volker Treichel
is Lead Economist in the Development Economics and Research Group of the World Bank
.
Mombert Hoppe
is an Economist in the Poverty Reduction and Economic Development Department of the
World Bank. Olivier Cadot is professor of International Economics and the director of the Institute of Applied
Economics at the University of Lausanne.
Julien Gourdon
is an Economist with the Centre d'Etudes
Prospectives et d'Informations Internationales (CEPII).
Paul Brenton
and
Gözde Isik
, Trade Practice Leader
and Economist, respectively, in the Africa Region of the World Bank, are editors of the Africa Trade Policy
Notes and edited this note from a longer version by the authors. This work is funded by the Multi-Donor Trust
Fund for Trade and Development supported by the governments of the United Kingdom, Finland, Sweden and
Norway. The views expressed in this paper reflect solely those of the authors and not necessarily the views of
the funders, the World Bank Group or its Executive Directors.
References
Bacchetta, Marc; O. Cadot, M. Fugazza and R. Piermartini (forthcoming), Handbook of Applied Trade
Analysis ; WTO/UNCTAD.
Raballand, Gaël and Edmond Mjekiqi (2010) ―Nigeria’s Trade Policy Facilitates Unofficial Trade but not
Manufacturing‖ chp. 6 in Volker Treichel (ed)
Putting Nigeria to Work: A Strategy for Employment and
Growth
, World Bank, Washington, D.C.
Treichel, Volker (2010) ―Employment and Growth in Nigeria‖ , chp.1 in Volker Treichel (ed)
Putting Nigeria
to Work: A Strategy for Employment and Growth
, World Bank, Washington, D.C.
i
The current list of banned products comprises 1.Live or Dead Birds including Frozen Poultry, 2.Pork, Beef, 3. Birds Eggs, 4. Refined Vegetable
Oils and Fats, 5. Cocoa Butter, Powder and Cakes, 6. Spaghetti/Noodles, 7. Fruit Juice in Retail Packs, 8. Waters, including Mineral Waters and
Aerated Waters, 9. Bagged Cement, 10. Certain Medicaments including Paracetamol Tablets and Syrups, Aspirin Tablets, Ointments –
Penecilin/Gentamycin, Intravenous Fluids, 11. Waste Pharmaceuticals, 12. Soaps and Detergents, 13. Mosquito Repellant Coils, 14. Sanitary Wares
of Plastics, 15. Rethreaded and used Pneumatic tyres, 16. Corrugated Paper and Paper Boards, cartons, boxes and cases made from corrugated
paper and paper boards, Toilet paper, Cleaning or facial tissue, 17. Telephone Re-charge Cards and Vouchers, 18. Textile Fabrics, 19. All types of
Footwear and Bags including Suitcases of leather and plastics, 20. Glass Bottles of a kind used for packaging of beverages by breweries and other
beverage and drink companies, 21. Used Compressors, Air Conditioners and Used Fridges/Freezers, 22. Used Motor Vehicles more than 15 years
from the year of manufacture, 23. Furniture, 24. Ball Point Pens
ii
Raballand and Mjekiqi (2010) estimate that $5 billion worth of imports are smuggled through Cotonou alone and that 50 per cent of the value of
smuggled goods is textile products. They estimate that replacing bans on textiles by a 15 percent tariff would render smuggling unprofitable and
result in a yearly gain of $200 million to the Nigerian Treasury.
iii
Nigerian customs actually record imports of many of the banned products.
iv
See http://www.wto.org/english/docs_e/legal_e/14-ag_02_e.htm#annV for details on the calculation method.
v
The EIU provides no information on the cost of living in Cotonou, which would have been a natural comparator for Lagos.
vi
As we are using the difference between Lagos and Nairobi prices after excluding systematic price differences (for other similar non banned items)
generated by trade costs and tariffs, the simulation implies that tariffs equivalent to those applied to similar but non-banned items would be applied
after the bans’ elimination.
vii
The only comparable (oil-producing) country in SSA with income-distribution data is the Republic of Congo, with a PHR of 54% at PPP. Congo
has a significantly higher per-capita GDP ($1’782 in 2003, the year of Nigeria’s household survey, against $502 for Nigeria).
