The Largest Shadow Economy in Africa: Cotonou – Lagos Land Corridor

The Largest Shadow Economy in Africa –

The Cotonou (Benin Republic) – Lagos (Nigeria) Land Corridor

– Olusegun Ehinfun

Analysts of emerging and frontiers market economies have long noted that shadow economies do a lot of damage to the economies of nation-states big and small. In Africa, it is almost a norm that shadow economies exist and flourish. In West Africa, the king of Shadow economies is along the Benin Republic – Nigerian land border tract. Known by various appellations: ‘cash economy’, ‘informal economy’, ‘shadow economy’, ‘hidden economy’, ‘gray economy’, ‘lack economy’ and ‘black economy’. These sobriquets are sometimes, interchangeably known by varying names, as such activities encompass a sizeable, perhaps unknowable segment of a nation’s uncaptured gross domestic product (GDP). It consists of a universe of economic activities, pecuniary gains and withheld revenues, largely surreptitiously, hidden from governments, international regulatory bodies and transnational authorities either for institutional, monetary and regulatory reasons. Pecuniary reasons may include tax evasion, avoidance of social security (USA), National Insurance (U.K.) contributions. Commonly known regulatory reasons include, efforts at avoiding the burdens of onerous regulations frameworks and evading governmental bureaucracies and associated bottlenecks.

Difficulty of Measurement

According to Leandro Medina and Friedrich Schneider, in their International Monetary Fund (IMF) Working Paper titled: “Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?”. In their estimation, the largest shadow economies are in Zimbabwe and Bolivia. According to the authors, “The shadow economy, is by nature, difficult to measure, as agents engaged in shadow economy activities try to remain undetected. The request for information about the extent of the shadow economy and its developments over time is motivated by its political and economic relevance. Moreover, total economic activity, including official and unofficial production of goods and services is essential in the design of economic policies that respond to fluctuations and economic development, over time and across space.Furthermore, the size of the shadow economy is a core input to estimate the extent of tax evasion and thus for decisions on its adequate control.”

For their detailed studies and exhaustive research of 158 economies, Medina and Schneider’s narrow definition of a ‘shadow’ or ‘informal’ economy reflected only “mostly legal, economic and productive activities, that if recorded, would contribute to national GDP, therefore the definition of the shadow economy … tries to avoid illegal or criminal activities, do-it-yourself or other household activities.” This approach is understandable and germane to the activities of moderately, advanced and more developed economies. It would be somewhat misleading if wholly applied to, for instance, Less Developed Countries/ Economies (LDCs) like Benin Republic, Togo, Liberia and Sierra Leone. Moreso, for slightly more developed ones like the economies of emerging and frontiers markets like Ghana, Nigeria and Cameroon.

Shadow Economy Definition(s)

For less developed, frontiers and emerging market economies, the lifeblood of their economic systems, especially where most of the productive economic activities occur hitherto uncaptured by statutory data, is in its ‘informal’ or ‘gray’ economies. Consisting of millions of ‘do-it-yourself’, ‘mom-and-pop’, ‘household micro-businesses, Import- Export Small-scale entrepreneurs, and smuggling/criminal operations (the most pernicious of the shadow economy participants).This is why the estimation of ‘shadow economies’ globally is quite controversial (Compare the different opinions of Tanzi (1999), Thomas (1999), Giles 1999. An alternative and commonly used working definition is`: “all currently unregistered economic activities that contribute to the officially calculated (or observed) Gross National Product” (variously used by Feige (1989,1994), Schneider (1994a, 2003), Frey and Pommerehne (1984) and Lubell (1991),and For “Do-It-Yourself Activities” for Germany, see Karmann (1990). ²

Smith (1994, p.18) defines it as “market-based production of goods and services, whether legal or illegal that escapes detection in the official estimates of GDP”. However, one of the broadest definitions includes: “those economic activities and the income derived from them that circumvent or otherwise government regulation, taxation or observation” (Dell’ Anno 2003 and Feige 1989, Thomas, 1999, Fleming, Roman and Farrell (2000).

Table 2.1: A Taxonomy of Types of Underground Economic Activities²

Type of Activity

Monetary Transactions

Non-Monetary Transactions

Illegal Activities

Trade with stolen goods; drug dealing and manufacturing; prostitution; gambling; smuggling; fraud etc.

Barter of drugs, stolen goods, smuggling etc.

Produce or growing drugs for own use. Theft for own use.

Legal Activities

Tax Evasion

Tax Avoidance

Tax Evasion

Tax Avoidance

Unreported income from self -employment; Wages, Salaries and Assets from unreported work related to legal services and goods.

Employee discounts, fringe benefits

Barter of legal services and goods

All do-it-yourself work and neighbour help

Structure of the table is taken from Lippert and Walker (1997, p.5) with additional remarks.

Data Fail

In 2004, Schneider and Klinglmair estimated that the shadow economies in Zimbabwe, Tanzania and Nigeria were 59.4%, 58.3% and 57.9% respectively, having the largest shadow economies in the world. Typically, the extent, sizes and pervasiveness of African shadow economies are the largest (Schneider and Klinglmair, 2004). According to the duo: “Gathering statistics about who is engaged in underground activities, the frequencies with which these activities are occurring and the magnitude of them, is crucial for making effective and efficient decisions regarding the allocations of a country’s resources in this area. Unfortunately, it is very difficult to get accurate information about these underground (or as a subset shadow economy) activities on the goods and labour market, because all individuals engaged in these activities wish not to be identified. Hence, the estimation of the shadow economy activities can be considered as a scientific passion for knowing the unknown”.

It is in this writer’s estimation, that the breadth and extent of a shadow economy can only be judged (estimated) adequately in the notional sense: By economic output, size and volumes of activities, (albeit some illegal), undertaken within a frontiers, emerging markets and low-income developing economy. The fact that there exists a dearth of realistic and accurate statistics on most economies in sub-Saharan Africa (SSA), makes the work of policy planners and workers a tad difficult. To this end, the largest shadow economy in Africa arguably would – judging by the size of its economy and paucity of ‘informal’, ‘gray’ sector data- easily be Nigeria. However, this can only be notionally considered as such, because the volume and extent of underground economic activities (including shadow economic ones) are usually difficult to successfully estimate. Economists Leandro Medina and Friedrich Schneider refer to this, in their paper, as “fact of life”.

Successive governments of Benin Republic, Togo and especially Nigeria have all, in the past, tried to ‘stymie and control such illegal economic activities via measures like prison imprisonments, levies, fines, prosecutions, economic growth policies, citizen re-orientation and education. Especially, on the Benin Republic (Cotonou-Seme border – Lagos Axis, where various cross-border economic activities are carried out daily. This is because most national and international statisticians have been unable to accurately gauge the underlying scale, size and volume and cultural extent of the shadow economy. A parallel economy uncaptured by accurate statistics due to the illegal nature of activities, trades and business being executed, sometimes with the active connivance and participation of most border communities. This is the most productive economic activity and work that could be engaged in by some unemployed youths and legitimate businesses in the border regions.

Import Substitution and Policy Somersaults

In the past half century, many African governments have tried, mostly unsuccessfully to reduce their reliance on imports from more developed economies. The often-used policy of Import Substitution and Industrialisation (ISI) is usually aimed at trying to become self-sufficient in certain manufacturing sectors and industries. According to Dominik Langdale, “in an effort to decrease their dependence on developed countries, numerous African nations are employing a strategy of ‘Import Substitution Industrialisation’ to increase their self-sufficiency in the manufacturing industry and stimulate domestic production.³ “ He avers that because Africa is “commonly viewed as the last frontier offering generous yield opportunities, (Africa) finds itself at the centre of the developed world’s investment appetite. In recent years, the focus has shifted away from the continent’s abundance of natural resources and cast agriculture, technology, infrastructure and manufacturing into the spotlight. The advancement of these industries in unison will transform Africa into a continent of economic exports, meeting with the African Union’s (AU) ‘Agenda 2063’ to create a prosperous Africa based on inclusive growth and sustainable, people-driven development.”

Nigeria has been here before. Prior to the discovery of oil in Oloibiri, in present-day Rivers State, it earned much of its revenues from exporting primary agricultural produce to developed nations like its former colonial power (Britain), America, France and a few countries in Asia. Cotton, cocoa, groundnuts and palm produce were the mainstay of the largely agrarian and partially developed regional economies, in the Northern Western and Eastern regions of the economy. It rarely traded with its fellow African countries (in bulk) largely because they lacked the foreign exchange to pay and aggregate demand within such countries were too low to trade huge volumes. The consequence of this dependence on the international markets (mostly Western nations) was that its economy became captive to the vagaries of international commercial dynamics. Price instability in its produce commodities, fluctuations in its receipts of foreign exchange earnings. According to M.N. Ogbonna in his seminal paper titled ‘On Import Substitution in Nigeria’, he contends that: “this price instability is caused by ‘world cyclical movements and inter- country shifts in supply availabilities’, and produces adverse effects on the country’s payment position…”

His postulation then, still holds water today in this sense: “It is to reduce their dependence on external assistance and to remedy the vulnerability of their commodities to wide price swings that most developing primary producing countries try to diversify their economies to achieve some degree of self-sufficiency. In a world of economic interdependence, the idea of economic self-sufficiency is both elusive and unattainable. Nonetheless, it has become increasingly clear that because of international economic problems, some measure of industrialisation seems a logical step towards reducing the dependence of the developing countries on the industrial countries. It has therefore become imperative in recent decades for the governments of third world [economies] to ensure that in their policy action(s), that diversification does not only relate to primary production but also to some industrialisation via import substitution.” In plain English, import substitution is important, however it has to be backed up by a complement of a fully evolved and joined-up policy actions; including a slew of trade policies, decisive actions and needed institutional support. That which truly, and genuinely engenders and supports development and growth in the real sectors of the economy. Small businesses (import and export), Artisanal enterprises (‘mom and pop businesses’ that import source materials for uses in finished goods).

Protectionism & Blanket Importation Bans

In August 2019, the Muhammudu Buhari led Federal Government of Nigeria (FGN) implemented a ban on the importation of goods over land for an indeterminate period, according to the country’s customs chief. This blanket ban is a policy move that has been devastating for commerce and economic activities in the neighbouring state of Benin Republic. Hundreds of lorries have been stuck at the Seme-Krake border, in Southern Benin, for weeks, since the surprise announcement of the new policy. Businessmen and entrepreneurs who import hundreds of tonnes of rice imports from Asia lost millions of Euros due to the hold-up of their goods at the border. A rice entrepreneur, Landry Bonou, claims he lost upwards of Eur180 Million Euros since his consignments of rice were stopped at the border. The Cotonou port receives about 10million tones of merchandise annually, half of which are usually destined for Nigeria.

With the stoppage of free flow of goods and merchandise from the Cotonou port, in land, into Nigeria, and the accompanying goods also stuck at the Northern and Southern ends of Benin Republic borders. Thousands of Beninois port staff, employees of haulage firms and small-scale businesses (‘mom and pop shops’) are now (momentarily) out of work. As commerce and trade with Nigeria alone accounts for about 20-25% of the Beninois economy, it is being negatively impacted in ways which is detrimental to the overall well-being of its citizens. Most of whom are active participants in the shadow economy between the Cotonou (Benin Republic) – Lagos (Nigeria) Land Corridor. This protectionist policy by the FGN is supposedly geared at stimulating domestic demand and conserving precious foreign exchange reserves. It is also a bid to reduce the amount of rice and other staple foods and other household consumables being smuggled into the country. Businesses transporting Rice, Butter, Pasta, Spaghetti, Sugar at al.

This policy, which is anti- competitive and protectionist in essence, has been borne out in some areas. Evidenced by positive results in a few areas, towards engendering a measure of self – sufficiency within a few strategic sectors – farm produce, fast consumer moving goods (FCMG), manufacturing. Efforts aimed at curbing the challenge of undue reliance on imports, which undercuts the local production of such consumables. Recently, a new rice processing mill was commissioned in Igbari, Anambra East local government, in the Southeastern region of Nigeria⁵. The Anambra State Government (ASG), in partnership with the FGN, tries to encourage more rice production locally, in an effort at boosting food security. The 120,000 Metric Tonnes per annum capacity Plant is a project in partnership with the renowned Nigerian entrepreneur and Chairman of Coscharis Farms, Cosmas Maduka, with loan guarantees from the Central Bank of Nigeria (CBN). This is a laudable example of the required institutional support needed to head off the huge ‘shadow economy’, as yet unquantified (perhaps unquantifiable) in rice importation via the Benin Republic – Nigeria land border.

Over the years however, economic activities as a result of government ‘over-regulation’, has in large part, led to massive importation of cars via the Benin Republic Seme – Nigerian border. Importation of machinery, textiles, agricultural produce and source raw materials used in manufacturing. This is a consequence, mostly a result of policy upheavals – called ‘Policy Somersaults’ in Nigerian parlance. Usually occurs when the government – usually of various stripes and parties – come in with high hopes of stimulating growth in moribund local industries, only to fall short spectacularly. In their efforts to stimulate real growth in such economic sectors. In Nigeria, past governments have placed bans on the importation of household consumables: toothpicks, tomato puree/paste, tyres, generators, fruit drinks (juices), beer and spirits. This form of protectionist inclinations does a lot to foster illegal and illicit activities, thus engendering the inevitable growth and sustenance of shadow economies all along the Southern and Northern borders between Benin Republic and Nigeria.

Olusegun Ehinfun

Olusegun Ehinfun is a management consultant with Global Business Dynamics Consultancy and can be reached on @globalbizdynam1 and olusegunehinfun@globalbusinessdynamics.com

Sources:

IMF Working Paper- Shadow Economies Around the World: What Did We Learn Over the Last 20 Years? By Leandro Medina and Friedrich Schneider.
Shadow Economies Around the World: What Do We Know? Friedrich Schneider, Robert Klinglmair, March 2004. Institute for the Study of Labour, IZA DP No.1043

https: http://ftp.iza.org/dp1043.pdf