In 1909, the Italian sociologist, Vilfredo Pareto, published his “Manuel D’ Economie Politique.” It was an attempt to separate equity from efficiency in an economy. Economics, being a branch of social sciences, tries to answer the questions of what, how, and for whom to produce in society. This task begs for allocation of often scarce state resources; the role of the state, therefore, is to allocate resources efficiently and not to squander them. Barring pre-election promises by politicians to win votes, and keeping those promises, the government of the day must make available some services to everybody and certain critical commodities to the generality of the people. One crucial product is petrol. With this in mind, the recurring headache of state subsidy of petrol is the theme of this write-up.
Pareto argued that allocation of resources will only be efficient, for a given set of consumer tastes, resources, technology, and now subsidy, if it is impossible to move to another allocation point which would make some people better off and nobody worse off. Making some people well off and nobody worse off demands a strategy; in most part, the government of the day can only make a balancing act based on a value judgment. This value judgment is made use of another branch of economics, known as welfare economics that deals with normative issues. Its purpose, unlike macroeconomics or microeconomics, is not to explain how an economy works, but to assess how well it works. Welfare economists usually use Pareto-efficiency as a tool for resource allocation.
It is indisputable that only a small number of Nigerians are well off while millions of Nigerians are worse off – that in itself is Pareto-inefficient. In any case, there are only two possible questions intelligent people should ask in Nigeria today. Are our allocation of resources efficient or are they being squandered? A large number of Nigerians, for instance, believes corruption is one of the factors that fuel the squandering of our resources. However, corruption is a form of cheating; even though it is undesirable, it is a function of self-interest. According to Adam Smith, the “Invincible Hand” of corruption ought to have led even the corrupt among us to do things in the interest of the society as a whole. That this has not happened in Nigeria, shows perhaps there is something fundamentally missing. The culprit could be the notorious CAPITAL FLIGHT.
Subsidy of any commodity, including the PMS, is an inefficient allocation of resources. However, petrol in Nigeria of today is a crucial commodity to the welfare of the vulnerable people in Nigeria. The ordinary Nigerians ride on gasoline-driven motorcycles, and gasoline-driven “danfo” or bus; their goods are moved on the petrol-driven truck; they generate most of their power from over 55 million petrol-driven generators, and they cannot afford anything else. Any adjustment will make millions worse off, and aside from being not compassionate to the poor, it is grossly Pareto-inefficient. In most capitalist economies, apart from the United States, the price of gasoline is market price-driven. The ordinary people in those economies are shielded away from the use of petrol. Nothing, however, stops even the well-offs in such economies to ride on mass transit if they so wish — it would improve the qualities of mass transits if the high-net-worths also patronise it.
Diesel engines are 40 per cent more efficient than gasoline engines. Powering mass transit of people and goods on diesel/electricity could mitigate the distortion in that market, which currently requires subsidy. A majority of the people in Europe ride on diesel-driven buses or trains, and electric trains; their goods are moved by diesel-driven trucks or trains; they do not produce their electricity as they are all connected to public utility electricity, which is good economies of scale for everybody. Even in the United States of America, with the short supply of mass transit, its citizens do not generate power with PMS-driven generators. Nigeria must rank as number one country in the world with the highest percentage of a petrol-driven source of energy. No nation can sustain these broad applications of the PMS as the primary source of energy.
What is the way forward? It is a “thousand-miles” journey, which must begin with a single step. The first step is to stop, as a matter of policy, new registrations of commercial vehicles that are powered by PMS, today. Then, allow those in existence to fade out through attrition during the renewal of the licence to operate. As for the over 55 million gasoline generators that litter the landscape of Nigeria, a policy of diverting grid power during specific periods of the day to domestic and light business users would reduce the consumption of PMS. If some industrial users are disconnected, in the interim, from the national grid, it will release more power to the domestic/light business sector of the economy. Those disconnected maximum-users could then have their diesel or gas bills subsidised from the savings of the removal of subsidy of PMS. The country would then be subsidising productions and not consumptions.
If Nigeria can diversify its energy sources, particularly the ones that power the energy needs of ordinary Nigerians, from the widespread use of petrol, then a fuel tax on PMS is possible to fund road maintenance and even subsidise the pump price of diesel and gas. One other advantage of this model (subsidy to some industries) is the opportunity to build the Nigerian product brands on global competitiveness and create jobs for Nigeria’s teeming youths. Corruption, of course, would rear its head in an arrangement where there is human interface; for example, those that would evaluate, how much of diesel or gas used for productions, who could easily be compromised. Those disconnected would need to procure the liquefied gas or diesel at the market price and only apply for a refund based on evidence of production and or job created and or employment sustained.
Caulcrick writes from Lagos
