No More Fuel Subsidy, Now What?

The Problems with the Proposed Solutions

Jun 16, 2023

This the first part of a two-part article, addressing the suggestions people have offered as solutions to the increased cost of fuel, transportation, and other commodities, as a result of the removal of the subsidy previously paid by the government. This part address the problems with the suggestions, the second part offers proper solutions.

Preface

The purpose of this article is not to denigrate those whose suggestion(s) I address in this article. My purpose is to point out the flaws in the ideas, and to stir readers up to have respectful dialogue, and perhaps come up with solutions that will help improve Nigeria.

Introduction

On the 29^th of May 2023, Bola Ahmed Tinubu was sworn in as the president of the Federal Republic of Nigeria. In his inaugural speech, he announced he was going to put an end to the subsidy payments made on refined petroleum products. His announcement caused the prices of fuel at the pump to nearly triple, the very next day.

Let me first point out, that the decision to end subsidy payments for refined petrol is a commendable one, and I hope the government keeps its word, and is not pressured by activists groups into going back on the decision.

There is, however, the problem of more expensive petrol. Transportation costs have doubled over some distances, and along with it, the prices of the commodities being transported across different locations. To say that this has not been hard on the population would be disingenuous. This sudden increase in hardship has triggered labour unions and activist groups to call for the government to change their minds and keep the subsidy payments; but it has also caused a lot of people in academia, politics, the media, the government, opposition etc, to offer up solutions to help with the sudden rise in fuel and other commodity prices. The solutions I have heard them offer thus far are as follow:

Raise the minimum wage, so that workers can have more money to afford the new increased commodity prices.
Create some sort of welfare scheme to help the poor
Build roads and rail lines, and subsidize buses and trains to make transport costs go down for the people.

I will address why these suggestions – and others like them – are all wrong, and will do more harm than good, and then proceed to offer what I believe to be the best way out of this government created problem.

Raising the Minimum Wage

As earlier stated, those who advocate this policy, hope that an increase in the minimum wage would put more money in the hands of workers, money that would help alleviate the suffering of increased transport and other commodity costs.

This suggestion is bad, because it will not only not achieve the intended goal, but it will even make things worse for workers, and the general population by creating even higher commodity prices and more unemployment

Imagine a bakery with the following employees, and their monthly salaries as presented below:

Cleaner - ₦30,000
Security guard - ₦50,000
Salesperson- ₦75,000
Chef - ₦100,000
Manager - ₦120,000

This means the labour cost for the owner of the bakery is ₦375,000 per month. If the government raises the minimum wage to ₦50,000, from ₦30,000, then the new salary structure might come to look as follows:

Cleaner - ₦50,000
Security guard - ₦75,000
Salesperson- ₦100,000
Chef - ₦120,000
Manager - ₦150,000

This would mean the owner would have to spend an extra ₦120,000 on labour than before the minimum wage increase. As his production costs rise, he now has a couple of options, if he intends to stay in business. Here is what can do the following to reduce his new government imposed costs, and the implications;

§ Raise the price of his bread: This will cause his sales volume to drop as fewer consumers will have the means to pay for the more expensive bread. This might cause him to go out of business in future, and then all his staff would be out of a job (i.e., unemployment)

§ Reduce the quality of ingredients used in making the bread: This will also cause many of his consumers to consume less of his bread, as it would not be as tasty, or as nutritious as it used to be. This too in the long run can lead to him going out of business.

§ Lay off some workers: He might decide to lay off the employee(s) he values least (i.e., the cleaner), and this will in turn lead to the doubling of the workload of the security guard or clerk. This is a particularly worse form of evil, as it not only causes more unemployment, but it also greatly increases the labour of the remaining workers.

§ Some combination of the above three cost saving mechanisms: Depending on how much the minimum wage increase eats into the profits he requires to stay in business, the entrepreneur could decide to raise bread prices, reduce the quality of ingredients, and lay off some workers. This combination is the least desirable outcome that would not have existed if the government did not meddle by trying to fix a minimum price for labour.

Another unseen effect of this disastrous policy is that the government will also have to raise the minimum wage for its workers too. Anyone who knows the nature of government, knows that they are not in the habit of reducing spending. The obviously smart thing for the government to do would be to cut over bloated salaries of their workers, or abandon wasteful projects, so as to have some money to repurpose to the payment of higher wages for lower level workers. However, rather than take the smart approach, the government will much rather borrow, tax, or inflate the currency to pay its workers higher wages. All three of these horrors mean future hardships in form of high prices and taxes for the population.

Please note, that this minimum wage scheme is not intended to favour the rich in society, but is meant to ease suffering for the low earning workers in society. Ironically, the minimum wage laws do the exact opposite, by raising the wages of the higher earners, and leaving the lower earners unemployed. It harms the economy as a whole, but specifically hurts those it sets out to help.

Certainly, a minimum wage increase is not what is required to alleviate the suffering brought on by the cessation of the fuel subsidy payments.

Creating Welfare Programmes

There are many ways to implement welfare programs, and they go by many different names, and have various government institutions set up to carry them out, but a welfare programme is simply the government giving out free stuff to people. Whether it is called a palliative programmes, a safety net, or transfer payments, it still is the same thing at its root. The government takes money from the population, and distributes to certain groups of people.

Although they may not know it, the intention of those who suggest welfare schemes is identical to those who advocate for price controls on labour (i.e., minimum wage laws). Their goal is to put more money in the hands of poor people, to alleviate the suffering brought on by high fuel price. Just like with the minimum wage, this will also lead to more harm than good.

There are more problems with welfare programmes than I wish to get into in this article, so I will focus a just two problems, the source of funding for the scheme, and the effects on the economy.

The Source of Funds

Simply put, the government is not a productive institution. Unlike businesses and individuals, the government is not in the business of turning a profit, not only because it does not want to, but because it cannot. Unless they are in some form of partnership with the voluntary sector (which comes with its own set of future horrors), government businesses and services such as schools, hospitals, law enforcement etc all run at a loss. Therefore, the government can only raise funding for welfare projects through:

§ Borrowing from other countries: which will have to be paid back in future taxes

§ Taxes: which limits productivity, and

§ Inflation: which causes high prices across the economy, and causes all kinds of economic, political, and social problems.

No matter how the government funds its welfare programmes, it will only lead to less productivity, more job loss, and higher overall costs, all because it wishes to alleviate the suffering of certain people. Suffering it created with one such welfare programmes in the first place (i.e., fuel subsidy payments).

Negative Effects of Welfare Programmes

Here are some negativities that occur while setting up welfare programmes, and some negative results of the programmes themselves.

Corruption

When the government allocates resources to any redistributive welfare scheme, it is not uncommon to see the following:
§ Corrupt officials devoting themselves to lining their pockets and that of their loved ones, rather than the pockets of the intended recipients of the welfare scheme (i.e., those really in need). This is not an uncommon occurrence in Nigeria.
§ Officials asking the people for bribes to distribute what was allocated to them. This happens to be one of Nigeria’s worst kept secrets.
§ There is also the problem of holding back the welfare items for political reasons like:
o   Not wanting the intended recipients to think the governor or president who signed off on the welfare programme was doing a good job – as was the case in 2020, when relief materials were withheld by Democratic party officials, because they did not want the Puerto Ricans to think Donald Trump (a Republican president) cared about their pain.[1]
o   Saving the relief items to be distributed during election time, and not when they are needed, as happened in Nigeria in 2020, with the CoViD19 relief materials
o   In multicultural societies, relief materials can also be held back from certain ethnic or religious groups, or one group could be favoured over another.

Waste

A lot of money allocated to welfare programmes goes into the administrative costs of the officials in the redistribution chain. A large portion of the money intended for welfare for the poor, will certainly end up as administrative costs that go into the hands of the officials responsible for handing them out, instead of going to the poor.

No New Wealth is Created

Simply put, welfare schemes are wealth transfer scams. They take money from the productive members of society, and redistribute it to the favoured group du jour. This group unfortunately just happens to be the poor at this time. There is no new wealth that is created by welfare schemes, and being unproductive is not doing Nigeria any favours.

Potential Wealth is Destroyed

It is easy to see who benefits from the welfare programmes, however, what is not seen, is of far more importance than what is seen. As said earlier, the source of funding for welfare programmes can only come from taxation, borrowing, and inflation. Taxation means that money that could have been used by producers to create more wealth, or consumers that could have used their money to demand the creation of future wealth through consumption and savings, is now taken by the government and redistributed to unproductive consumption. What is seen is the relief materials enjoyed by the poor (and the government officials who help themselves to taxpayer money), what is not seen is the thousands of factories that could have been built, the people who could have been employed, the millions of commodities that would have been created, adding to the nation’s commodity stock, and driving down commodity prices etc.

I say emphatically, that in this case, what is seen (i.e., the welfare) is infinitesimal, compared to what is not seen (i.e., the wealth that did not come into existence because of the welfare programme). If the duty of government is to provide for the majority – as they claim – then certainly, the nation would have been much better off without the welfare programme.

Investments in Infrastructure and Transportation subsidies

The last of the three kinds of suggestions I have heard to solve the issue of high prices that came as a result of the removal of the subsidy payment for fuel go thus, “the government should not have removed the subsidy without making provision for buses, trains good roads etc” or, “now that the fuel subsidy is gone, the government should spend the money previously used to subsidize fuel to build roads, rail, and subsidize road and rail transport”.

The Irony of Transport Subsidies

There is an obvious flaw in these kinds of statements that is sadly lost on many. How is it, that people are calling for the same government that squanders billions of US Dollars on fuel subsidies to subsidize transportation? How do they not see the irony, in calling the people who have mismanaged subsidy in one area to handle the subsidy in another area? Do they think the infrastructure sector, or the transportation sector are impervious to the kind of corruption that plagued the fuel sector? What is it about transportation or infrastructure that makes them believe the subsidies would be better used there? By the way, the same reasoning applies to those who say the money should be spent on education or healthcare, or any other sector of the economy. Wherever the money goes, exploitation led by, and only made possible by government is sure to follow.

Why this (regardless of nation) is the nature of government – albeit to varying degrees – is not the subject of this article. The point is that it is a staple of governments the world over, and not just Nigeria. People are just blinded to it in other countries, because of their inability to see beyond what is happening in Nigeria, and perhaps, the fact that other countries seem to have systems that work better than ours. These do not alter the reality, that it is the nature of government to breed such corruption.

Crowding Out

One of the first and most important lessons in economics is scarcity. All goods are scarce, and must be efficiently allocated to their most productive uses. Governments (the coercive and involuntary sector) and the voluntary (private) sector, both draw from the same pool of scarce resources. Any resources used up by the government cannot – by definition – be used by the voluntary sector. The government, through legalized extortion, extracts taxes from businesses and individuals, can – despite the wishes of its people – borrow on their behalf (leaving future generations with the debt), and can legally counterfeit currency, to fund its projects. Businesses can only earn money by deferring consumption (saving out of their earnings). If governments were to compete with the voluntary sector for resources, they voluntary sector businessmen would be at a disadvantage. This means, the government would most likely get the resources that the voluntary sector is much more efficient at allocating, resulting in waste by the government, and fewer produced goods by the private sector. This is what is known as “Crowding Out” in economics. Spending on rail, roads, buses, etc, will leave fewer labourers, cement, computers, and other resources for the more efficient businessmen to use to produce. This will lead to more expensive cost of production for businesses, which will in turn lead to more unemployment, and costlier products for the population.

Summary

All the suggestions of experts I have seen on this issue intend to provide relief for the population, but will lead to the following horrors, without even solving the problems they are suggested to address:

· Higher commodity prices

· Poorer product quality

· Low productivity

· Unemployment

· Higher taxes

Among other negative consequences.

Conclusion

There is no action of government suggested by our experts in Nigeria, that will not lead to worse outcomes for the general population. In the follow-up to this article, I will explain what needs to be done to put an end to this problem, with minimal cost to the government, and with negligible negative impact to all Nigerians.

Thank you for your time.

Click here to read the Part Two

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