If the clear lesson from the president’s example is that market-based prices discipline the consumption of goods or services, we cannot ignore the fact that these prices also boost government revenues. Whether this happens when the subsidies that the government put in place to keep prices down are reduced or eliminated, or whether this occurs through an increase in the government’s tax revenue (from higher prices) is irrelevant. Overall, market-based prices improve an economy’s efficiency.
The Yorùbá have a catchy description for the fact that President Tinubu’s friend, who used to drive five Rolls Royces, has, on account of radically changing domestic economic conditions, resorted to using a Honda. “A pada bo s’ibú” translates loosely to “a return to ill.” I imagine that most other Nigerian languages have their version of this description. And that as with the Yorùbá, it is a regrettable state of affairs. We do not know how dire the president’s friend’s circumstances are. Did, he for example, have to sell his five Rolls Royces to buy the Honda – which would be equivalent to him scraping the bottom? Or do the Rolls Royces still adorn his garage – in which case his status is not that awful. Five Rolls Royces were always a matter of style over function. And the president’s friend’s need for conspicuous consumption is still amply met each time his visitors swoon over the luxury marques.
What is not in doubt is the economic implication of President Tinubu’s observation. This assumes that the luxury car owner’s predicament stems from the Federal Government’s recent decision to deregulate petrol prices at filling stations. When prices fully reflect the cost of getting goods and services to the consumer, they reward the factors of production, encourage entrepreneurial activity (larger capital infusions into the production process) and the growth of employment (the increased supply of workers across the talent spectrum). Price signals in a relatively free (and efficient) market for a good or service similarly stimulate innovation, as the supply side constantly seeks to reduce the production costs.
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No less important, where prevailing prices do not reflect an economy’s cost of producing goods and services — that is, when selling prices are lower than production costs, often because government intervention distorts the price mechanism — the loss to an economy is not only from a reduction in supply. Of course, unrewarded factors of production will not exert themselves as well as they should were prices more cost-reflective. Nor is the loss completely reflected in the queues that arise to balance the resulting supply shortfall, even as demand remains the same or even increases due to lower prices.
For a reforming government, the importance of this increase in efficiency cannot be overstated. This, alas, is where President Tinubu’s example needs strengthening. While evidence abounds of belt-tightening in the private sector following reforms recently implemented by his administration, redundancy and waste persist in the public sector. Overlapping ministries are indicative of this, as is the plethora of advisers on the presidency’s payroll.
Far more insidious for an economy’s performance is the resulting tendency on the part of those who gain access to the good or service at the discounted price, to use the goods and services most inefficiently. Waste is a clear consequence of prices being less than costs. Corruption, too, is. Were everyone in a society, where the scarcity of a good or service results from the price being lower than the production cost, subjected to the toll of the resulting queue, then the time spent on the queues would simply be a concealed cost of the inefficient process. In this circumstance, it is in the interest of economic entities with access to power to shunt these queues as well – further warping the efficiency of the economy’s allocative mechanisms.
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If the clear lesson from the president’s example is that market-based prices discipline the consumption of goods or services, we cannot ignore the fact that these prices also boost government revenues. Whether this happens when the subsidies that the government put in place to keep prices down are reduced or eliminated, or whether this occurs through an increase in the government’s tax revenue (from higher prices) is irrelevant. Overall, market-based prices improve an economy’s efficiency.
For a reforming government, the importance of this increase in efficiency cannot be overstated. This, alas, is where President Tinubu’s example needs strengthening. While evidence abounds of belt-tightening in the private sector following reforms recently implemented by his administration, redundancy and waste persist in the public sector. Overlapping ministries are indicative of this, as is the plethora of advisers on the presidency’s payroll. Over the Christmas holiday, the president’s travel convoy further underscored the fact that a key sector of the economy is still seemingly oblivious to the need for change. The lesson for every Nigerian today is that for our economy to move forward, our people must no longer live wastefully, nor should our leaders.
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
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