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Weak Regulators and Inefficient Markets

Proshare

Saturday, 05 November 2016 2.19PM / By Temitope Oshikoya**   
 

At a time when efforts should be focused on strengthening the public sector and effective regulatory process, we are being bombarded with headlines of strong regulators versus market efficiency that seem to create a wedge between public sector regulators and private sector operators.  

Global comparative data from institutions including the World Bank’s Governance Indicators and the World Economic Forum’s Global Competitiveness Report clearly suggest that Nigeria’s economic malaise is rooted in the combination of both market failures and government failures, weak regulators and inefficient markets putting a drag on competitiveness and productivity over the years. 

The best way to examine both weak regulators and inefficient markets in Nigeria’s economy is to compare our standing with other nations and how far we are in terms of economic distance from the frontier economies with best practices. For the sake of simplicity, we take the USA with relatively more market-oriented economy as the global frontier and South Africa as Africa’s frontier. In between these two frontiers, we include the other BRIC countries, mostly mixed economies; Ethiopia, a rapidly growing economy in Africa with a state-led development model, Algeria an oil-producing country, and Indonesia with a large population in Asia. 

By most measures, Nigeria ranks below its comparators. Chart 1 clearly indicates that Nigeria’s regulatory quality is far from both the global frontier, USA and the Africa frontier, South Africa as well as the other BRIC countries. Regulators in the USA can be best described as strong regulators with very high regulatory quality of more than 90 percent rank. With a rank of about 20 percent, it is therefore puzzling where the idea of strong regulators for Nigeria is coming from.  

This observation is further corroborated by Nigeria’s ranking on institutional quality in the Global Competitiveness Report, where it ranks below all the comparators including Ethiopia, Algeria, and Indonesia. We also note that although Ethiopia Airline has public sector ownership, it ranks as a leading airline in Africa and it is well-managed and regulated compared to Nigeria’s largely private sector-owned airlines that are mostly on the verge bankruptcies.   
 

Chart 1: Regulatory Quality: Percent rank (0-100) 

 

Source: World Bank 

How efficient are Nigeria’s product, labour, and financial markets? Using global comparative data, not by much. Nigeria’s rank in the goods market efficiency category is 98 compared to South Africa’s 28 according Global Competitiveness Report 2016-2017. By sub-Sahara African standard, Nigeria’s goods market efficiency is simply around the median level according to Chart 2. In the financial market, it ranks 89 versus 11 for South Africa.   
 

Nigeria ranks (37) very well compared to South Africa (97) in terms of labour market efficiency due to better co-operation in labour-firm relations and flexibility in hiring and firing practices.

Chart 2: GCI’s Score Range Across 12 Pillars in Sub-Sahara Africa

 

Source: Global Competitiveness Report 2016-2017   
 

In contrast to the epistle of strong regulators and the efficiency of Nigeria’s products, labour, and financial markets, what we need are to remove the inefficiencies in our various markets by fostering domestic competition and anti-monopoly and oligopoly policies and to strengthen the public sector to overcome weak regulatory practices and regulatory capture. Let us encourage both the private sector and the public sector to move in this right direction by working together to overcome their respective weaknesses instead of creating a wedge between the two sectors.   

About the Author 

Dr. Temitope Oshikoya, an economist and a chartered banker, is CEO of @Nextnomics 

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