The Proliferation of substandard import products: the lemon problem

I believe I grew up at a time that saw the last plenitude of quality products in Nigeria. I remember my brothers would jest: “revere that –Scanfrost– fridge before opening it, it’s older than you.” It was the same for the National TV, the SMC ceiling fan, the Kenwood turntable and other home appliances. These devices lasted over a decade without repairs. These products were from Europe and America. Chinese products were thought of as inferior. Then, few individuals could do importation businesses. Titles like “importer-exporter”, “general merchandise” and “international” connoted status in markets and social unions. All that soon changed.

Today, over 18.7% of imports are from China, and it is no coincident that a significant portion of import-goods are inferior products. In fact, in a regular shop, you are typically first offered a substandard item as nearly all original items have their substandard version in competition. Even pharmaceutical products are not spared. The dealers exploit the information asymmetry to create imminent Lemon problem in the import-goods market: fake products crowd-out original products. It is better to pay the minimum price and get the minimum quality than to pay the maximum price and get the minimum quality instead of the maximum quality. Interestingly, the dealers operate brazenly in most markets across the country, they are not in hiding. The war against piracy and watered quality seem to have eluded the regulatory agencies in their duplicative forms – Standard Organisation of Nigeria (SON), National Agency for Food and Drugs Administration and Control (NAFDAC) etcetera.

How did we get here?

  1. Historical coincidences

As population increased, it became insufficient for the few importers to meet the import demands of the entire country. At about the same time, the country was making huge petro-dollars in oil revenues. As these monies began trickling into the society, more individuals found it attractive to venture into import businesses. This time may have also coincided with indigenization decree of 1970s when Nigerians began to take positions in the shipping/cargo trades. By this time, China was building its economy towards industrialization, surplus production and export drive. Today, they are the largest economy in the world!

Chinese producers brought greater flexibility in terms of pricing and quality which made them more attractive to many new importers than their European and American counterparts. This price-quality compromise made Chinese imports to Nigeria cheaper relative to others – exploiting the price sensitivity of consumers.  This quality flexibility is most evident when one finds that an item produced in China for European or American markets tend to be more durable than those produced for Nigerian markets.

  1. Regulatory lapses

Another explanation for the proliferation of substandard items is weak import regulation amplified by poor border management – corrupt border agents. In Nigeria today, anyone can import almost any item in commercial quantities so long as it is not in the contraband list or the few special goods that require import license. Times changed, the sector evolved but the regulatory framework has not changed. Just anybody should not be able to import goods in commercial quantities: it does not only make regulatory administration difficult especially for a highly populated country where there is personnel shortfall; it makes import demand for foreign currency becomes uncontrollable with attendant depreciation pressure on the local currency. In 2017 alone, import demand was NGN1.79 trillion, dwarfing the NGN720 set aside for Naira/Yuan swap for three years. On the production side, it cripples domestic ability to produce, leading therefore to output decline and unemployment.

  1. eCommerce

One last factor was the internet and technology revolution. The development of internet technologies sparked irreversible revolution of trade through eCommerce, facilitating cross-border transactions such that everybody can buy virtually from any part of the world. This reduced the transport costs of business and eroded the market powers of the earlier importers. The importers market today, is purely competitive.

A simple way out

Admittedly, there have been major reforms to stem the tide such as anti-piracy technologies, raising penalties from 50,000 naira to 300,000 naira, and seeking collaborations with governments of trading nations. However, the fight must be strongest at home. It is therefore important to restrict commercial importing to registered importers and trading companies who meet certain criteria. These registration criteria need not be monetary payment but would include minimum capital requirements, loan credibility, storage/warehouse facilities, logistics ability and etcetera. The registration system would allow for efficient administration of regulatory checks on product quality and standards. The registered import businesses would be buoyant enough to issue product warranty and return guarantee should the product not satisfy the customer as against the current practice where consumers are ambushed by petty importers unable to give these assurances. So this would go a long way to ensure consumerism and consumer protection.

By way of trade protection, the registered importers would typically organize themselves into unions according to their respective trade lines and help combat substandard imports so as to protect their market profit and avoid regulators knocking their doors. The intuition is that these importers are better positioned to curb the menace of substandard items, and with the right incentives, would develop the internal interest to do so.

Regulatory agencies can then focus on design standards and compliance. Should any substandard product enter the local market, agencies would know where to begin their investigation. Inter-agency collaboration in order to avoid unhealthy rivalry and stakeholder engagement to bring about synergy in product tracking would help solve the lemons problem. As a final caveat, we are about signing the continental free trade agreement which opens our borders to a flood of importers from across Africa, if we cannot manage our own importers, what is to say we would be able to manage the multitude of African importers? Free trade does not mean dumping of substandard goods. We would more now than before, need a registry of importers.

(First Published: