How not to further deregulate

Subsidy! This is arguably the most ubiquitous word in our local use of the English language. It is perhaps for this reason, the most abused, and misused too. The point has often been made that amongst a good many countries that have had the nerve to insist on the removal of subsidies in this country as part of the needed reforms to the domestic economy, we find many whose use of subsidies in support of one or the other sectors of their economies borders on the obscene. In addition, there has been much back and forth movement over the fine distinction between a “subsidy” properly described, and the “opportunity cost” of certain choices, which this commonwealth has had to make between competing options.

Anecdotal evidence has it that subsidies have been at the heart of the current crisis in the downstream sector of the petroleum industry. Stripped to its bare bones government’s decision to deregulate the downstream sector of the oil industry is a poorly disguised grab for the sums it has spent to keep pump-station prices of petrol “affordable”. Because the N65/litre that motorists in the country pay for petrol covers only 65% of the cost of importing this fuel, government spent about US$4 billion in 2007 alone on keeping domestic prices stable. Could this sum have been better spent on something else? Yes, without question. Often times, commentators in support of the subsidy removal have adverted attention to the infrastructure needs of the economy, and how far US$4 billion could go towards alleviating this particular burden.

A question of a different order is however raised by a related worry over a quite different subsidy. Apparently, the federal government spent N177 billion last year on ensuring that electricity tariffs in the country are affordable. As with the fuel subsidy bit, it is only proper to ask whether this sum could not have been used to improve electricity generation? Obviously, it could have. But the more proper question is whether this would then qualify as a better use. Management in whatever sector of an economy involves constantly having to choose between competing options, in the light of relatively scarce resources. The better manager is able to agree options that deliver more bang for the resources deployed than the more ordinary type of manager. And I guess the best managers get this equation right all the time.

On this supposition, the subsidy is not necessarily a bad thing. It is the use to which it is put that is the problem. In our own case, the underlying argument is that all our subsidy programmes have become subject to capture. Although originally intended (and at this point it is only proper that we include the “federal character” requirement in our list of subsidies) to help the poor and the vulnerable, almost all domestic subsidies have transformed into entitlement programmes for the middle class. Now, there is an interesting logic to this. Unfortunately, I’m unable to acknowledge the source here, but a friend of mine sufficiently in the know describes the subsidy capture as the result of our own social contract. The way it is argued, is that at a point, the Nigerian middle class agreed to refrain from enquiring into the use to which oil revenues are put so long as government refrained from taxing it. As the oil revenue take got bigger, officialdom was minded to keep its most dangerous segment at bay by lavishing on it part of the oil loot. And so the subsidy creep arose!

However, the biggest danger from the end-of-subsidy debate is that it mixes up two important worries. One of these threats is readily met. Already, the middle class is arguing its corner veritably. Ultimately, this should result in a re-write of the existing contract, up to the point where we begin to witness an improvement in government’s accountability. By far more worrisome is that we haven’t argued the case for subsidy removal in such a way that we promptly put mitigants in place for its certain consequences on the poor and the vulnerable.