In The Long Run, We Are All Dead

It was John Maynard Keynes, the British economist who, in his 1923 publication, ‘A Tract on Monetary Reform’, famously said: “But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task, if in the tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.”

 

While the length of what constitutes the ‘long run’ will remain contentious, to say that the impact of an economic policy will be beneficial “in the long run”, presupposes that enduring current hardship is a necessary condition for the promised prosperity to occur. It also assumes that the sustenance of those policies and maintaining every other factor in the equation constant until the ‘long run’ is reached are necessary conditions for the supposed benefits of those policies to crystallize. Economists call this ‘ceteris paribus’ (all things being equal). The problem here is not just that all things are rarely equal but also that many people may not survive what is supposed to be the short term adverse impacts of those policies.

President Tinubu’s declaration on the day of his inauguration that “subsidy is gone” has been widely held as a bold initiative by many analysts. However, it remains debatable whether the manner in which the fuel subsidy was removed was the best for the economy. Again, owing largely to a belief that the fuel subsidy regime was mired in unbridled corruption, there seems to be an uncritical consensus that fuel subsidy must go in its entirety. The three leading Presidential candidates in the 25 February 2023 presidential election –  Tinubu, Atiku and Obi –  promised to remove the subsidy.

Several arguments have been advanced on why the fuel subsidy must go:

One, is that fuel subsidy benefits primarily (if not exclusively) the rich who, we are told, maintain a retinue of SUVs and other fuel-guzzling vehicles. The truth is that in our generator dependent economy, those likely to be most adversely affected by the removal of fuel subsidies are not the very poor but business owners (who run their businesses mostly on generators and create most of the jobs in the economy) as well as the employed members of the Middle Class (who are the most productive segment of the society and who necessarily need to commute to their places of work and maintain their Middle class life style in the face of galloping inflation). Also to be severely affected are those in the informal sectors of the economy either as petty business people or as artisans. It can be argued that in Nigeria the very poor are mostly subsistent farmers who live in the rural areas. While they will also certainly be impacted negatively by the removal of subsidy on Premium Motor Spirits, it can be argued that since they do not rely substantially on public transportation to go to their farms or on purchases from the markets for their social reproduction, the impact of removing subsidies on them may not be as harsh as it is on other segments of the population.

 

Two, following the wrong assumption that those defined as the poor would be the most adversely affected by the impact of removing fuel subsidy is an equally misleading belief that the impact of removal of fuel subsidy can be ameliorated through targeted cash transfers of $800m loan from the World Bank to the very poor. We are told that under the proposed cash transfer scheme, the ‘poorest households’ will each receive the sum of N5000 per month over six months. Experiences from the Buhari government’s cash transfer schemes (including its ‘Trader moni’) however show that such alleged cash transfers were largely a scam. Apart from the fact that it is often an opportunity for the administrators of such schemes to populate the lists with ghost people or favoured names from politicians, even if the very poor are well targeted and located, there is the question of what difference a paltry sum of N5000 per month can make to a household’s standard of living, given the galloping inflation.

 

Besides, there is the related question of what happens to those households after the six-months the targeted transfers are supposed to last. Would such households be automatically lifted from poverty or will the sudden withdrawal of the monthly N5000 stipend (which they will have become used to) actually worsen their standard of living beyond what it was before the start of the cash transfer? I believe the proposed $800m World Bank loan to be used for such targeted cash transfer would be more impactful if they are geared at producing at least 1000 viable small businesses in each of the 36 states of the federation as well as in supporting existing businesses and providing public transportation systems across the country. The country needs to evolve a sustainable welfare programme for the poor and the aged instead of using them as pawns to make us feel good and empathetic.

Three, it is unfortunate that an uncritical consensus seems to have been built around the very fallacious notion that subsidies are bad and distorts everything in the economy. The truth is that virtually all successful economies in the world today, even the most capitalistic and free market-oriented, employ various forms of subsidies to support segments of their society. For instance, figures from Hinrich Foundation, an Asia-based philanthropic organization that works to advance sustainable global trade, show that 54 OECD countries and 12 emerging economies provide over US$700 billion each year in some form of support to their agricultural sector alone.  In 2020, for example the USA federal government made $45.7 billion direct payments to farmers—a record-high amount due to pandemic assistance.  During the same pandemic, other subsidies (or palliatives) were provided to both citizens and businesses. In the United Kingdom, grants statistics showed that around £258bn was spent on subsidies in 2020/21, representing about 23 percent of all spending. In 2021/22, the country provided the sum of £1.65bn as direct subsidies to farmers in line with the figures set out in the country’s Agricultural Transition Plan. In China, estimates by South China Morning Post showed that more than 3,000 listed Chinese companies received the government’s industrial subsidies in 2020 which had a combined value of 22.6 billion yuan (US$3.5 billion). The government needs to maintain a level of sustainable subsidy on both fuel and fertilizer because their benefits will cascade throughout the country’s entire value chain.

 

Four, as the Tinubu government is hailed by the World Bank and several analysts for its supposed bold economic reforms, we should be careful that we are not being railroaded to our past of the IMF/World Bank-supported structural adjustment policies of the 1980s and 1990s which completely emasculated the country’s middle class and destroyed businesses. We must ask ourselves critical questions as we march forward to that inglorious past: How many African countries actually prospered from the ubiquitous structural adjustment policies of the 1980s and 1990s which were hailed by the two Bretton Woods institutions as the magic elixir that would solve all of the continent’s development challenges? The prescriptions of the two Bretton Woods’ then as of now remain unchanged – remove subsidies, liberalize trade, devalue (or float your currency) and generally roll back the state so that market forces will be the ultimate determinant of how values are allocated. Remarkably after these policies failed, the same institutions shifted support to other mantras – ‘bringing back the state’ (read: ‘good governance’), then to ‘build strong institutions, not strong men’ and promoting ‘democracy’ and other mantras. Typically, when these policies fail – as they often do – the same institutions will blame it either on non-sustainability of its recommended policies or at best start promoting a new mantra.