Daily Trust

Oil sub­sidy and eco­nomic growth: What does eco­nomic the­ory tell us?

- By Pro­fes­sor Ab­del­rasaq Na-Al­lah Overpopulation · Finance · Politics · Economics · Social Issues · Society · Business · Social Sciences · Tshwane University of Technology · Pretoria · South Africa · Africa · Adam Smith · Bretton Woods, NH

In the nearly two and half cen­turies of econ­o­mists’ at­tempts to un­der­stand the dy­nam­ics of growth the per­spec­tive in­spired by free mar­ket ide­ol­ogy is sem­i­nal and up till now rep­re­sents the most en­dur­ing con­tri­bu­tion to the field. It first emerged in the 18th cen­tury through the works of Adam Smith and later re­in­forced by other clas­si­cal and neo­clas­si­cal writ­ers in the 19th and 20th cen­turies.

To this tribe of schol­ars, growth is about max­imi­sa­tion and a faith­ful com­mit­ment to the tenet of free mar­ket where price is de­ter­mined by the twin forces of de­mand and sup­ply, is cel­e­brated as the best guar­an­tor of high pro­duc­tiv­ity rate and rapid growth. Any depar­ture is con­sid­ered sub op­ti­mal and car­ries the dan­ger of sti­fling or hurt­ing the growth process.

The in­tel­lec­tual bedrock of sub­sidy re­moval is firmly grounded in this phi­los­o­phy which has ex­erted a dom­i­neer­ing in­flu­ence on pol­icy dis­cus­sions for cen­turies. Per­haps the best re­cent ex­pres­sion of this in­flu­ence is the set of pol­icy pre­scrip­tions pop­u­larly re­ferred to as the ‘Wash­ing­ton Con­sen­sus’ (WC) that was vig­or­ously pro­moted in the 1980s by the Bret­ton Woods In­sti­tu­tions as a stan­dard re­form pack­age for the wors­en­ing eco­nomic prob­lems of the de­vel­op­ing coun­tries.

How­ever, as im­ple­men­ta­tion pro­gressed, dis­con­tent grew and one of the key rea­sons for this dis­sat­is­fac­tion is the re­al­i­sa­tion that growth in this ne­olib­eral tra­di­tion comes with neg­a­tive dis­tri­bu­tional con­se­quence. The ten­dency for mar­ket-ori­ented pol­icy to ben­e­fit a few, usu­ally the strong, and leave be­hind a large swathe of a coun­try’s pop­u­la­tion com­pris­ing mostly the weak, poor and other vul­ner­a­ble groups was high­lighted by a good num­ber of lit­er­a­ture. The pol­icy stood ac­cused of be­ing obliv­i­ous to the plight of the poor and con­tribut­ing to widen­ing the in­equal­ity gap in many of the re­form­ing coun­tries. In­equal­ity, as claimed, is toxic to any sys­tem as it breeds po­lit­i­cal and eco­nomic in­sta­bil­ity with po­ten­tial to im­mis­erise growth or in ex­treme cases lead to vi­o­lence, in­sur­gency, civil un­rest and ul­ti­mately war.

This among other un­set­tling con­cerns led to the re­mark­able fail­ure of WC and con­se­quently ended the hege­mony of mar­ket phi­los­o­phy. In its wake, a new set of the­o­ries with dis­tri­bu­tion con­scious­ness was in­spired and in­tro­duced to this old and un­end­ing but ex­cit­ing de­bate.

The in­tel­lec­tual thrust of the dis­tribu­tive con­cern is rooted in het­ero­dox macroe­co­nomic tra­di­tion and emerged in the late 1980s first through con­tri­bu­tions to the propoor growth lit­er­a­ture and later re­in­forced in the late 2000s by the the­ory of in­clu­sive growth (IG). Whereas the con­cern of tra­di­tional neo­clas­si­cal mar­ket frame­work is with pure growth and its max­imi­sa­tion the IG par­a­digm em­pha­sises the im­por­tance of growth with pos­i­tive dis­tri­bu­tional con­se­quence. The ex­clu­sive­ness and ‘win­ner takes all men­tal­ity’ of the mar­ket model is re­jected and dis­missed as un­sus­tain­able. To be sus­tain­able growth must carry a large num­ber of peo­ple along as par­tic­i­pants in its process and ben­e­fi­cia­ries of its out­come even if it would come at a cost to the ob­jec­tive of max­imi­sa­tion. In this re­gard, a growth rate of say 7 per cent which ben­e­fits about 90 per cent of the pop­u­la­tion is prefer­able in the IG frame­work to a 10 per cent rate that largely ben­e­fits only about 10 per cent of the pop­u­la­tion.

Be­yond en­rich­ing our un­der­stand­ing of the growth dy­namic, the IG frame­work also of­fers a new way of ad­dress­ing de­vel­op­ment chal­lenges such as the one pre­sented by the oil sub­sidy co­nun­drum.

It starts with as­sump­tion that for a given econ­omy nu­mer­ous dis­tor­tions ex­ist at any given time. In terms of growth ob­struc­tion, some of th­ese dis­tor­tions are more im­por­tant than oth­ers. One op­tion for pol­i­cy­mak­ers de­sirous of progress is to tar­get all for re­moval at the same time. But this would prac­ti­cally be in­fea­si­ble as ex­pe­ri­ence with the failed WC demon­strates. Elim­i­nat­ing some of them may also prove not to be wel­fare en­hanc­ing as the ones left be­hind may be the more po­tent hur­dle to growth per­for­mance. The way out, ac­cord­ing to this ar­gu­ment, is for pol­i­cy­mak­ers to fig­ure out the dis­tor­tion with the big­gest mul­ti­plier whose elim­i­na­tion would de­liver the largest wel­fare en­hanc­ing ef­fect and get rid of it.

The cur­rent Nige­rian econ­omy is rid­dled with many types of dis­tor­tions. If we de­fine dis­tor­tion to mean a sit­u­a­tion where prices are de­ter­mined by forces other than those of sup­ply and de­mand we would agree that be­sides the oil sub­sidy there are also cor­rup­tion re­lated dis­tor­tions as­so­ci­ated with wel­fare sub­sidy for the par­lia­men­tar­i­ans and other gov­ern­ment of­fi­cials. Lim­it­ing the ex­am­ples to th­ese two for the pur­pose of this anal­y­sis it would be in­ter­est­ing to ask: which of them con­sti­tutes the most bind­ing con­straint whose re­moval would have the great­est pos­i­tive wel­fare im­pact?

A fur­ther teach­ing of the IG per­spec­tive is on the virtue of ap­pro­pri­ate se­quenc­ing of re­forms. Some re­forms have com­pli­men­tary re­la­tion­ship sug­gest­ing more can be ac­com­plished by im­ple­ment­ing them to­gether. Oth­ers may ex­hibit de­pen­dent re­la­tion­ship im­ply­ing that suc­cess of one de­pends on hav­ing pre­vi­ously achieved rea­son­able suc­cess with im­ple­men­ta­tion of another. This would seem to be the case with re­forms tar­get­ing oil sub­sidy re­moval and cor­rup­tion in­duced wel­fare sub­si­dies.

With­out sig­nif­i­cantly re­duc­ing the level of cor­rup­tion it is highly un­likely that the an­tic­i­pated wel­fare gain from re­mov­ing sub­sidy on oil would be achieved. This is be­cause rather than com­mit­ting re­sources re­leased from block­ing the sub­sidy leak­age to de­vel­op­ment cause, chances are that the preda­tory pub­lic of­fi­cials who are still run­ning the show would end up us­ing them to sus­tain their ex­ist­ing cor­rupt prac­tises.

Pro­fes­sor Ab­del­rasaq Na-Al­lah is the Di­rec­tor of Cen­tre for In­no­va­tion & De­vel­op­ment, Fed­eral Uni­ver­sity Dutsin-Ma and Re­search As­so­ciate, Tsh­wane Uni­ver­sity of Tech­nol­ogy, Pre­to­ria, South Africa. He can be reached at ab­del­rasaq@ya­hoo.com

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