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It is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” – Abraham Maslow
The Nigerian policy-maker is yet to meet an economic problem that a subsidy or ban cannot fix. When external competition threatens an uncompetitive local industry, the call is not for reform and development, but for embargoes on imports. And as the crash in oil prices pressured the naira post-2014, the Central Bank of Nigeria (CBN) dug its heels in to defend the currency, and in the process, restricted foreign currency access for products like toothpicks and cement while subsidising others like petrol and raw materials for industry.
It is not that subsidies or embargoes are bad, but that they are sometimes blunt instruments for addressing economic challenges. The economic policy toolkit is considerably more diverse.
Standing as one of the most ambitious economic experiments in modern times, it is no surprise that the European Union (EU) has been notably bolder in choosing policy instruments. Sometimes, this has been accidental. Recent experience on the continent showed that although an expanded EU had to deal with issues around social inclusion and congestion in infrastructure due to the free movement of labour, it turned out to be an effective way of tackling regional poverty. Other inspired policy choices have been more intentional. The shift from regulation to carbon taxes in dealing with corporate carbon emissions had raised revenue without really tackling energy efficiency. The EU then set up the Emissions-Trading Scheme, a platform that assigns emission quotas to firms and allows them to trade the permits among themselves. The scheme has proven successful in ensuring that those who pollute the most also pay the most, and in encouraging innovation in clean technology, a prerequisite for driving long-term energy efficiency.
In Nigeria, our policy choices are less inspired.We have stuck with distortionary and corruptible subsidies in order to artificially depress the national price of petrol when we could simply use subsidy funds to provide handouts – cash or fuel vouchers – to low-income earners.Meanwhile, even as a new (and higher) national minimum wage creeps towards implementation, it remains a puzzle how the country survives without a proper social safety net for job-seekers.Safety nets such as unemployment benefits would be more effective than, or at least complement, minimum wage hikes when it comes to boosting wages. Note a common theme between the cash/petrol handout and unemployment benefits options: both avoid direct market intervention and instead empower consumers/workers to make better choices.
Today, Nigeria faces a raft of pressing economic challenges: limited access to credit, low government non-oil revenue, a sizable infrastructure deficit, etc. To fix these, we must select the most appropriate policy tools from the available options. For example, there are many ways of driving credit to agriculture: direct CBN lending, setting lending quotas for commercial banks, addressing information gaps in the economy, developing funding instruments such as agri-bonds, etc.
The choice of policy tool is important because our chosen policy will create winners and losers even when it raises overall welfare. Thus, selecting policy isn’t only about maximising efficiency, but determining where to allocate costs and responsibility. This plays out in the economy every day. National Bureau of Statistics data shows that subsidies do not keep actual petrol prices low, a reality many would agree with. Instead, the primary beneficiaries are those that can benefit from the arbitrage. The choice of policy tool also determines the price we pay for progress. Direct CBN lending to farmers may boost credit to agriculture but comes at the expense of a bloated central bank balance sheet and increased credit risk exposure in the apex bank. And some costs are indirect; setting up bad banks such as AMCON to address non-performing loans in the banking sector may instantly clean up the industry but could also create moral hazard where banks are inclined to make riskier bets in the future, knowing others will clean up their mess.
Thankfully, policy tools will usually not be mutually exclusive, and some may even work best in tandem. For example, initiatives to address information asymmetry – perhaps by strengthening credit bureaus and ratings agencies –are probably a necessary element of a broader package to stimulate credit to the real economy, whether through commercial banks, development banks, or capital markets. Policy-makers must just become more sensitive to options available. The proposed Special Economic Zones would be an excellent place to practice – incentives alone have not worked in the country, and adequate regional infrastructure and institutions would be needed too. We can also learn from abroad; from success stories like the EU to train-wrecks like India’s recent attempt to tackle financial crime by scrapping high-denomination bills.In the last decade alone, governments have unearthed new ways of tackling old problems, from quantitative easing as a monetary policy response to the last financial crisis, to the use of behavioural insights to “nudge” citizens to act in a desired way.
Once we begin to utilisea broader spectrum of policy instruments, we are likely to encounter an uncomfortable reality: policy choice is not only subject to welfare and equity considerations but also to legal and political constraints. For example, Scotland recently implemented a price floor on alcohol prices mainly because only the central UK government is legally empowered to change excise duties. Closer to home, critics of the government’s pioneer tax incentive scheme have pointed to incidental abuse of the policy as an indication that it has largelybeen used for political favouritism.In some ways, this is an inevitable feature of operating a democratic political economy,and the responsibility lies with citizens to hold policy-makers to account.
Economic policy should remember the idiom that advises there are “many ways to skin a cat” and move towards bolder, more creative policy solutions. This means unshackling ourselves from our usual remedies; subsidies will not save Nigeria, and there are no prizes for policy favourites.In the words of China’s reformist leader, Deng Xiaoping, “It doesn’t matter whether a cat is black or white, as long as it catches mice.”
*The views expressed in this article are personal to the author and may not reflect the opinion of Vetiva Capital Management Limited or any its affiliates.
Michael Famoroti
