These Errconomists. You Can Change Mouth!!

That’s the reaction when economists discuss policy options and they modify the policies they advocate for with time or new events. Those that react this way fall into a serious fallacy — that the policy options always stay the same over time. But that is not how it works. Here’s why.

At each point, policy makers have a set of policy options with which they can act or react in order to frame outcomes. Once they make a policy choice however, the goalpost shifts. A new outcome is reached and the policy options at this new outcome are not always the same as those at the original point. And hence, economists advocate a new solution that might be different from their initial position and people say they have “changed mouth". The example that comes to mind is one that Nigerians are very passionate about — pump price of petroleum.

When there was a debilitating fuel scarcity at the start of the Buhari administration, it presented a crisis that the Buhari government had a couple of policy options to take

• Do nothing. The marketers will blink or Nigerians can start trekking.
• Increase the pump price of fuel above open market price but maintain price controls with the PPPRA template. As a sweetner, announce you have ended subsidy and hope that the actual price never rises above this new controlled price so you don’t have to pay subsidy again. Nigerians will have to adjust
• Liberalise and let the market determine the price and let marketers compete. Price will go up and Nigerians will have to adjust but you would have truly ended subsidy

Each policy option had potential political implications and Nigerians would have to endure some hardship whichever. Coupled with Buhari’s enormous goodwill at that time, it meant he could do something radical.

Unfortunately he chose the second policy option, the safest of the lot. Once he did that, the outcome achieved was that scarcity disappeared but people had to adjust their behaviour to the new reality of a higher fuel price and demand dropped by at least 30%. Once this outcome was achieved, life went on. But as events unfolded around FX issues, the policy options taken also had direct impact of fuel imports. With each cumulative policy option taken by the Buhari administration, the policy making space moved closer and closer to where we are. Now here is the current policy making space the president is facing

• Scarce FX
• Rising crude oil prices, meaning rise in landing cost of refined petrol
• Due to the above, expected open market price is higher than pump price hence marketers are demanding subsidy
• But government has already announced ending subsidy.
• We are in a recession and Nigerians have seen record inflation erode their purchasing power
• Nigerians have adjusted to a significant increase in fuel price once under Buhari when goodwill was high. Approval rating for Buhari then according to NOI polls was over 70%. Today it is 39%. Nigerians are unwilling to accept a new significant increase from government
• Fuel scarcity is looming.

So, the question is this. Are the policy options available to this government in this current policy space the same as was available 18months ago? What created this current tight policy space? Was it his government’s policy choices or there was really nothing they could have done about it?

Discuss here in the comments or on twitter. 😀