How can the government protect consumers while encouraging innovation?

If you're ever looking for good news about the Nigerian economy, a good place to start would be the numbers in the Nigerian tech sector. 

In the first quarter of this year, the African tech ecosystem announced that it received funding of about $1.8 billion, more than double the amount raised around the same period last year. Nigeria alone was responsible for $600 million of the total. The inflow of funds is particularly important, given the declining levels of more traditional forms of capital flows into the country such as Foreign Direct Investment.

While all the funding activity is exciting, one key thing to remember is that while money might solve many problems, it doesn't necessarily solve all problems. At this point, I am thinking about the other factors (besides funding) that high-growth companies will need to succeed, such as an enabling environment. Creating such an environment is something that governments have control over. As we have argued previously, one of the critical jobs of any government is to aid the private sector. In a general sense, this means ensuring the private sector operates in the kind of the environment it needs to thrive.

These policies are laws that don't even have to be targeted at any sector in particular; the focus can be on improving the ease of doing business. A recent survey revealed that complex laws and regulations are one of the top two barriers to growth identified by African founders.

Rwanda is a case in point to show how to take this seriously. The country is currently the second most accessible country to do business in Africa and the 38th world. The government does not require a minimum capital requirement upon entry into the country, offers tax holidays to new companies, and allows repatriation of funds. Also, in Kigali, it takes as little as six hours to register your company. By contrast, that will take at least a week in Lagos. 

But while the government is expected to create an enabling environment for business, it must not forget that, to a large extent, the majority of these firms are inherently capitalist, and their actions might end up prioritising growth at the expense of consumers. Therefore, the government's goal, especially in Nigeria, where the digital ecosystem is still in its early stages, must find the right balance between inducing growth and protecting consumers. 
 

Finding the right balance

This isn't the first time the Nigerian government has had to balance consumer protection with a conducive business environment. In the early 2000s, the government approved the National Policy on Telecommunications, which focused on providing privatised and affordable telecommunications services by facilitating private sector investment. This deliberate move to liberalise the sector and allow it to thrive is responsible for the growth the sector has experienced over the years. Although data on the growth of the sector since inception is sparse, recent data paint a vivid picture of the growth of the sector. Between 2017 and now, the ICT and Telecoms sector has increased by 54% while Nigeria’s overall GDP has increased by only 6%. 

However, the sector is still largely oligopolistic, with four prominent players constantly competing to win customers. In 2012, MTN controlled over 60% of the telecoms market simply because it took advantage of the instability of its competitor, which changed from V-Mobile to Centel to Zain in four years. While the regulator has not been directly opposed to the company's growth, it has had to step in a couple of times when that growth has been detrimental to the customers' well-being. 

An example of this was when the NCC fined MTN $5.2 billion for failing to disconnect the 5.2 million sim cards that were not registered. The sim registration exercise aimed to update the national telecoms database to help curb the rising rate of kidnapping and crime in the country.  

Therefore, while it might be more economically rational to give the private sector free rein to do its thing, the regulator has an important job to step in when it senses that customers are being exploited or not protected. However, this balance came without necessarily stifling the sector.  

And so, as our ecosystem continues to evolve, regulatory convergence is important, and the government’s focus should be aimed at encouraging growth while protecting consumers.

So, how exactly does the Nigerian government create a healthy balance between the two?

Let’s look at how other countries have handled this issue.
 

Put your money where growth is

One good place to start is the digital ecosystem model of the world: Silicon Valley (SV), which has been responsible for birthing many of the largest big tech companies globally—Google, Meta, and Twitter. 

After the Second World War, one key area the US government focused on to rebuild its economy was Research and Development (R & D). The US government provided research grants focused on science and technology to universities; Stanford University, the birthplace of many Silicon Valley companies, was a key beneficiary of this funding. 

The government saw R&D as a public good and sponsored it as such. Public goods are non-rivalrous—which means that providing them to one person does not prevent the other person from benefiting from them, and non-excludable—because people don't need to pay to use the good. Due to their unique characteristics, public goods tend to be underprovided, even when they are good for society. The resulting market failure is why direct intervention from the government is required.

So, by identifying R & D as a public good, the US government understood that while this activity might help the economy by creating jobs and driving innovation, it cannot happen at the revolutionary scale required without the government leading from the front. Innovations like the touch screen and the GPS—key components of tech products like Apple’s iPhone—would not have existed today.

Replicating the funding model in Nigeria would not be as straightforward as it was in the US because of the quality of Nigeria's education. Nigeria would require the right schools with the right technology to take on the research and development needed to build new technology/for innovation to happen. It would also require some accountability to ensure that money budgeted or allocated for funding is appropriately used. 

There's also the downside of continuity. The US government gives out most of the money in grants, which means it does not require any form of returns. However, this can be detrimental to the continuity of the program, especially considering that the money is gotten from taxpayers who are still required to pay to use the output of the research carried out. 

But like I said earlier, funding is not everything. 

As the US tech ecosystem continued to evolve, one of the success signals was the growth of many of its companies to what we now know as Big Tech. The rise of Big Tech companies meant that, like the oligopolistic nature of the Nigerian telecoms sector, the companies like Facebook and Amazon have an unfair advantage that prevents competition from entering the sector, leaving consumers with few options to choose from. Think of it this way; competition drives innovation because all the parties in the sector are trying to win customers over; where there are only a few players, there's little innovation in the sector. Or the innovation is only aimed at improving the company's bottom line rather than the benefit of the customers. 

For example, after Quidsi—a diaper company that launched diapers.com—rejected Amazon's offer to buy the company, Amazon started offering huge discounts on its diapers and even started an Amazon Mom program where it provided discounts to mums. This move threatened Quidsi's business so much that it eventually sold to Amazon, and shortly after, Amazon scrapped its discounts. 

Such exploitative moves are why the government steps in sometimes to reduce the stronghold big tech have on the market. 

Therefore, US regulators have had to make tradeoffs between enabling growth in the sector and protecting the consumers. Sometimes it's hard to do both simultaneously, but choosing when to do is critical for the success of the sector. At the early stages of the business, the government provides grants and financial support, and when the company or sector becomes large enough to stand on its own, the government creates laws that protect the people. 
 

Signalling 

Regulators will always face these tradeoffs, but finding the right balance looks different in different situations. Ultimately, the government must ensure that it does not overregulate, thereby creating more harm than good in the sector. 

Take the rise of cryptocurrency as an example. The government has been hostile towards cryptocurrencies, and with good reason. One of the government's responsibilities is to ensure the country's financial stability through the Central Bank of Nigeria (CBN). The CBN does this mainly through monetary policy. Where monetary policy moves are being threatened by the migration of legal tender from the Naira to other forms of money like the dollar and cryptocurrency can endanger the efficacy of the monetary policy. There's also the risk of people conducting illegal financial transactions using cryptocurrency. Despite these reasons, cryptocurrency has its benefits, especially to Nigerians, as it provides people with faster transaction speed and options to store the value of their money. 

Therefore, the policy moves that regulators make are highly dependent on their will or their priorities at the time. When the innovation is contrary to the government's preferences, it will reflect in its policies. Still, when it's in line with the government's priorities, even if the government does not explicitly throw its weight behind the innovation by funding it, it reflects in its policies, no matter how subtle. 

This explains Dubai's response to cryptocurrency. 

In April 2018, the UAE introduced the Emirates Blockchain Strategy 2021, where it announced that it would migrate 50% of its government transactions into a blockchain platform by 2021. For crypto users, this was a nod from the government that it planned to experiment with the policy, even if it chose to regulate it later. It is signalling that even though the blockchain is new and the government is still trying to understand it, it plans to learn by doing. 

This is a kind of sandbox where people can run experiments or test their products in a controlled environment. The CBN has a similar sandbox for fintech products where financial institutions can experiment with transactions that might fall under the CBN's purview. 

In March 2022, the Dubai Virtual Assets Regulation Law passed a new virtual assets regulation with a regulatory authority, the Virtual Assets Regulation Authority (VARA).

Just like the US, these moves made by the Dubai government were informed by the government's priorities. Remember that the US government was focused on establishing groundbreaking innovations in science and technology after the war. Likewise, Dubai aims to be a global leader in smart technology, which is why it has taken the risk of implementing blockchain technology. 

As a result, several blockchain companies like Binance and Crypto.com have moved their headquarters to Dubai, making it the haven for crypto companies. Binance, which is the world's largest crypto exchange by trading value, mentioned that it moved its headquarters to Dubai because of the country's openness to such transactions. 

Again, we see how a government can create a balance between openness for business and protecting the customers. Without the right kind of regulation, crypto users in Dubai might be at risk, but the government signals openness while creating laws that inform consumer protection. 

These are the two roles of regulation in any ecosystem; one goal is to ensure the businesses thrive. As we've seen in the Nigerian ecosystem (and Dubai's), they are critical for foreign investment in the country. While encouraging growth might be good, the larger businesses get, the more eager they are to expand, even though it puts the customers at risk. 

We see from the various examples that there's hardly a one-size-fits-all approach to balancing these tradeoffs. While sanctions might have been adequate in protecting customers in the telecoms sector in Nigeria, imposing sanctions in the Amazon-Quidsi situation might not have been sufficient to prevent Amazon's anti-competitive moves. So, the sector's stage is vital, and the kind of business it is also matters.