Eni n’wa ifa n’wa ofo; a Yoruba saying that means no free lunch in Freetown.
It is interesting to find out that some economic truths are locked in traditional wisdom as revealed in Nigerian proverbs and in other oral African traditions. I’m looking forward to the day when we can through these proverbs fashion out economic thinking that will resonate with Africa and will not be considered as imposed western traditions.
I digress, today’s submission is to take stock of our country’s subsidy of some goods and services offered to Nigerians by the government. Subsidy can be defined as direct or indirect payments by the government to firms or individuals, by way of direct cash payments or tax cuts. Its Intended purposes are to reduce some of the economic cost to the citizenry, stimulate a sector in the economy and often times protect local industries from external competitors.
While subsidies are used to initiate desired industries such as those that combat climate change, it is also used to correct market failures in extant sectors of the economy. Austrian school economics abhor subsidies while socialist leaning Keynesian economics find them desirable. Most countries, including proponents of free markets, now embrace subsidies more so that it has vote catching political undertones. Therefore there is no wishing away in subsidies. In Nigeria, what is required is a more sensible application based on learning from our experiences in subsidising goods and services.
From attaining limited self government in 1953, we have had a long relationship with subsidising for the populace with some good, some bad and some outright ugly experiences. In truth, subsidy began at the birth of the country in 1914. The basis for the amalgamation of both protectorates was rather than the mother country running the Northern territories at a loss, the burden on profit making was put on the Southern Protectorate. The Southern Protectorate was subsidising the Northern protectorate.
Economists have made a valid case for applying subsidies strategically to extract some benefits. One that readily comes to mind is the subsidy that American and Europe an farmers have enjoyed for eons. This has delivered food security for the United States and European citizens. Another is export subsidies Asian companies have enjoyed since the end of the 2nd World War. Countries subsidise education for their citizens as well but make foreign students pay a premium. These have delivered on the objectives set forth. American farmers over supply grains to the world, Asian countries have wrestled global market share away from the West in global supply chains. By subsidising education in Nigeria, our citizens have attained heights in prestigious American and European universities and hospitals.
At home we have a highly indigenous professional class. On the other hand, subsidising electricity to the nation has left us with no power. Subsidising petroleum products has left us with shortages and importation. Subsidising fertiliser was in effect subsidising the middle men and not the farmers. Subsidies that succeeded in other climes have failed woefully in Nigeria. We have to fathom out why this is.
A broad brush applied to explain the problems that arise from subsidy is one that says we subsidise consumption rather than production. Another is that by our exchange rate regime, we subsidise imports and tax our exports. Our pricing regime for electricity consumption was put in place with little regard for recovering economic cost; it was for making home consumption cheap to power air conditioners and watch AfricanMagic. Premium Motor Spirit was subsidised with its own twist of having the same pump price across the country by further subsidising haulage cost. Diesel has in turn suffered while fuel use by rich V8 engine vehicle owners is subsidised. However it is not clear where the PMS subsidy falls. Is it a consumption subsidy or production subsidy or both? This is so with the failure of the national grid, small and medium scale enterprises rely on PMS to fuel their generators and keep themselves in business.
Other factors in play have weighed the balance against subsidising electricity and PMS. These factors come under what has been termed the Nigerian Factor, our propensity towards corrupting institutions, systems and monetary affairs. One reason some economists have argued against subsidies is its tendencies to distort markets in various ways, leading to poor allocation of resources. We have seen subsidies leading to overproduction by American farmers, leading to dumping into the oceans or dumping in third world countries; thereby affecting African farmers negatively.
Another reason some economists are anti-subsidy is because it becomes near impossible to exit it. They reason it is better not to go the subsidy route in the first instance. Some countries have learnt this lesson in implementing subsidies for the growth of Electric Vehicles. In subsidising the cost of EVs, the US government has a get out from prison clause. When sales get to a figure the subsidy lapses. Nigeria has to learn to have sunset clauses in some legislation that impinge on economic issues.
We have witnessed how subsidy and government heavy presence in the refined petroleum sector stalled private sector investment despite over twenty five companies showing interest by way of obtaining licenses to build refineries. They kept asking that subsidy be removed. This is a practical way we see subsidies affecting resource allocation.
To address how not to use subsidies, we will take a look at countries where subsidies work, including consumption subsidies which are less favoured. To encourage the switch to EVs and use of solar panels, some Western governments introduced incentives and subsidies to reduce prices in these areas, drive demand and finally encourage production. In these countries, close to a hundred per cent of the ways and means of producing the EVs and photovoltaic panels with other accessories are domiciled in the countries. This is not the case in Nigeria where there are very few things we produce with a high percentage of materials being within the country. A case in point is imported fertiliser being subsidised for farmers. The same had cascaded into PMS.
Subsidy is much more salutory to an economy that has in-country technology incubation, not one that has to perpetually import intellectual property and technology. A definite sector that, in spite of all these, needs subsidy is the non-oil export sector. This can be achieved by weakening the naira which can result in our non-oil exports becoming attractive in the international market. Another government action akin to subsidy but not really so is reducing import tariffs, excise duties and selective tax reduction targeting desirable sectors like renewable power sector to encourage the use of solar panels and their accessories since the national power grid has failed us.
Looking backwards, we see that Nigeria has introduced subsidies based on empathy rather than economic sense and deeper assessments. We are yet to learn the right lessons when we consider that we are currently subsidising fares on the new rail network between Lagos and Ibadan, Abuja and Kaduna. How do we repair the mental damage done to the citizenry who think it a right that the government must always provide below economic recovery cost services? Getting Nigerians out of this mindset is a must for moving the nation forward.
Olugbenga Jaiyesimi
jerry3jaiye@gmail.com
