How Wealth Actually Trickles Down And The Six Channels Nigeria Broke

On May 29, 2023, President Bola Tinubu removed the fuel subsidy, thereby saving an estimated N4 trillion. Subsequently, the naira was floated, and over the past three years, Nigeria’s Gross Domestic Product (GDP) growth rate has climbed back to the 4.3–4.4 percent range, its highest level in ten years. Similarly, banks declared profits of N6.7 trillion in 2024, also the highest in our history. Yet, in the same year, 133 million Nigerians sank deeper into multidimensional poverty, according to a recent World Bank survey. This poverty is reflected in the daily lives of Nigerians. For instance, the cost of transportation from Oshodi to CMS in Lagos has quadrupled, rising from N300 to N1,200, while the price of a basket of tomatoes has increased from N15,000 to N60,000. Although the high cost of tomatoes and other foodstuffs is also attributable to insecurity, which has spread across the hinterland, farmers in Bauchi, Benue and Plateau states—areas renowned for their contribution to Nigeria’s food supply—are increasingly afraid of being kidnapped for ransom or killed. As farmers are displaced by bandits and forced to relocate to Internally Displaced Persons (IDP) camps, their inability to continue farming has contributed to food insecurity. This is compounded by the reality that the high cost of transportation arising from petrol subsidy removal can account for up to 40 percent of the value of food transported from the hinterland. This underscores the pivotal role transportation plays, particularly in Nigeria, where road transport remains the dominant mode of mobility. In contrast, rail and water transport infrastructure, which form the backbone of transportation in industrialised and advanced economies, are either lacking or poorly developed in our country. The scenario painted above amounts to a double jeopardy for Nigerians, as insecurity and the removal of the fuel subsidy have combined to compound the hardship endured by the long-suffering masses. It is therefore understandable that the European Union (EU) representative in Nigeria, Ambassador Gautier Mignot, in a recent media statement, referred to our country as probably the poverty capital of the world. The situation described above illustrates the paradox I referred to as the Macro-Micro Disconnect in my intervention in this column last week. The economy grew, but the well-being of the masses declined. Against this backdrop, the question is not whether the plethora of reforms undertaken by the Tinubu administration across multiple sectors of Nigeria’s socioeconomic life was necessary. They were. The question is: How does wealth in a nation actually trickle down from the macro level to the micro level, and why has it failed to do so in Nigeria? Economics textbooks often assume that wealth trickles down automatically. This appears to be the approach and expectation of the incumbent administration. The reality, however, is that the process must be deliberately facilitated or triggered. If you like, you could say that the micro level must be artificially inseminated to enable it to grow faster and converge with the benefits trickling down from the macro level. Without deliberate intervention, this process takes much longer—a lag universally acknowledged by economists, as I noted in my article last week. In that earlier essay, I argued that President Tinubu ended the petrol subsidy regime, which was consumption-driven, on May 29, 2023, without replacing it with an alternative underpinned by production. I am not unaware of the US$1 billion earmarked for the adoption of compressed natural gas (CNG). However, much of this investment has focused on mobility solutions for approximately one percent of Nigerians, particularly civil and public servants and others living in urban centres. This has largely neglected the masses, especially farmers and those engaged in micro, small and medium-sized enterprises (MSMEs), who reside predominantly in rural areas and constitute roughly 70 percent of Nigeria’s population. These are the people who should be driving economic growth in our country. The reality outlined above suggests that there is a problem with providing CNG conversion kits primarily for mass-transit buses and vehicles used by urban dwellers, while leaving rural residents behind. Unlike city dwellers, many rural residents do not commute by buses and cars but rely on kekes and okadas for mobility. Worse still, the CNG pathway risks promoting the export of capital from Nigeria because the conversion kits are imported from India. Consequently, a significant portion of the US$1 billion being invested in the CNG initiative flows out of Nigeria and into India. This effectively means that Nigeria is exporting capital instead of attracting it into the domestic economy. The priority should be to ensure that investments of this magnitude stimulate domestic economic activity, allowing the funds to percolate down to the micro level and generate wealth among the masses at the grassroots of our socioeconomic ecosystem. By the same token, Nigeria has been exporting jobs to India and other countries from which it imports CNG conversion kits. This is because manufacturing the kits in India creates jobs there, while a growing number of unemployed Nigerians are denied employment opportunities that could arise if such production activities were undertaken locally. Beyond the challenge of manufacturing CNG conversion kits, which may currently exceed Nigeria’s demonstrated industrial capacity, concentrating mobility solutions on urban centres also means neglecting the large number of unemployed Nigerians who could earn a living by operating kekes and okadas. These operators could provide essential transport services to help evacuate food from rural areas to the cities, where it is needed most. Consequently, the development that has accrued at the macroeconomic level, which I discussed extensively last week, has continued to elude people at the microeconomic level. The benefits have failed to trickle down quickly enough to prevent those at the lower rungs of the societal ladder from becoming increasingly frustrated, a situation that is understandably irksome to President Tinubu and the ruling All Progressives Congress (APC). A possible remedy to this predicament, which I might describe as a form of prickly heat, is needed to ease the pressure the APC is currently facing from opposition politicians calling for a return to the petrol subsidy regime. The intensity of this pressure appears to have caused some panic within the administration. Hence, Finance Minister Taiwo Oyedele announced on October 8 a petrol pump-price discount and modulation mechanism intended to peg the price of petrol at N1,350 per litre. However, the initiative has complicated the petrol subsidy removal debate because of the complexity of the process. The tinkering with the petrol subsidy removal policy, which many Nigerians believed was a concluded matter, has effectively reopened the debate. This has made the APC appear vulnerable, particularly as the 2027 general elections draw nearer. There is, however, an alternative pathway to providing faster financial relief to Nigerians being crushed by the global energy crisis. I pointed it out in this column last week but did not elaborate on it. I intend to do so in this intervention by highlighting the channels through which wealth can cascade more rapidly from the macroeconomic level to the microeconomic level. The absence or weakness of these channels explains why the pain of reform is still being felt at the base of the economic pyramid, also known as the grassroots. Below are the six channels through which wealth should trickle down but which Nigeria has either neglected or failed to make sufficiently effective. (1) The Wage Channel — Profits Did Not Become Pay In a functioning economy, corporate profits translate into higher wages and more employment. Companies make money, hire more workers, increase salaries, and, in the process, contribute to a more prosperous society. Curiously, however, Nigeria’s banks recorded a post-reform profit of N6.7 trillion, yet youth unemployment remained above 40 percent. Much of the profit was distributed as dividends to the tiny proportion of Nigerians who own bank shares, rather than being translated into higher wages and broader employment opportunities for the majority. Economists describe such growth without commensurate job creation as extraction rather than development. (2) The Price Channel — Macroeconomic Savings Became Microeconomic Inflation In theory, fuel subsidy removal should improve economic efficiency and eventually help bring inflation down. In practice, however, removing the fuel subsidy increased the cost of virtually everything that moves—and, in Nigeria, almost everything moves by road rather than by waterways or rail, which can offer cheaper alternatives where adequate infrastructure exists. Consequently, the N4 trillion the government saved was, in effect, collected back from citizens through higher transportation costs, amounting to a form of N4 trillion transport tax. Put succinctly, we privatised the fiscal deficit: the government balanced its books by unbalancing household budgets and increasing the cost of living. Critics have consequently argued that the government has robbed Peter—the people—to pay Paul—the government, particularly at the subnational level, where state governments are currently benefiting from increased allocations. (3) The Employment Multiplier — One Job Did Not Create Five One factory job in Aba, Lagos or Port Harcourt should generate several additional jobs for others, including drivers, food vendors and fabric sellers. This is the employment multiplier effect. Unfortunately, Nigeria did not channel its subsidy savings sufficiently into building factories and expanding productive capacity. Instead, some of the resources have gone towards servicing debt and funding CNG-powered buses and related infrastructure under a programme reportedly costing US$1 billion, primarily serving an estimated one to two percent of commuters. The multiplier effect has therefore remained limited because the productive base needed to generate it has not been adequately developed. (4) The Fiscal Transfer Channel — The Broken Bridge This is arguably the most important channel because it provides the bridge between macroeconomic gains and microeconomic welfare. Countries undertaking serious reforms, including Indonesia and India, have used various mechanisms to cushion the immediate impact of fuel subsidy reforms. These have included cash transfers, student financing and healthcare support. The precise mix of interventions differs from country to country, but the underlying principle is the same: savings from subsidy reform must translate into tangible benefits for citizens. Nigeria, however, removed a consumption subsidy without replacing it with a sufficiently effective alternative that ordinary citizens could feel. Worse still, some of the palliatives introduced failed to reach their intended beneficiaries adequately. Although conditional cash transfers have reportedly improved, with a recent survey indicating that they have reached approximately 10 million vulnerable members of society and the Nigerian Education Loan Fund (NELFUND) has disbursed at least N350 billion benefiting roughly 1.6 million students, these interventions have yet to make the necessary impact at the scale required. My argument has always been simple: the developmental value of subsidy removal lies not in the removal itself, but in what replaces it. Remove consumption subsidies and replace them with production subsidies. Fuel is a consumption subsidy: it is burned in a relatively short time, leaves no lasting productive asset, and disproportionately benefits those who consume more fuel, including affluent car owners. By contrast, a NELFUND student loan is a form of investment in productive capacity. It can create an asset in the form of an educated and skilled individual whose contribution to the economy may span 40 years. It also expands opportunities for people from less privileged backgrounds, with the revolving loan mechanism allowing repayments to support future beneficiaries. Similarly, a keke acquired through a lease-to-own arrangement can create an entrepreneur-owner who earns a living and supports a family over many years. (5) The Infrastructure Channel — Europe’s Rail System Versus Nigeria’s Roads In London, government support for public transportation helps reduce the fares passengers pay. Commuters may not always see the subsidy directly, but they experience its benefits through more affordable mobility. This is one way wealth is redistributed in Europe: through support for public transportation and the reduction of commuting costs. In Nigeria, we subsidised fuel, which made it possible for vehicles to move, but we did not adequately subsidise mobility itself. The average Lagos worker may spend as much as 40 percent of daily earnings on transportation. No nation can prosper sustainably when its workers have to spend such a substantial proportion of their income simply getting to work. My proposal to deploy 500,000 electric kekes through a lease-to-own arrangement, using the same US$1 billion being spent on CNG buses, is therefore not merely about providing vehicles. It is about recreating the benefits of affordable mobility by subsidising movement rather than fuel. Reducing the cost of getting to work would increase disposable income and improve productivity. (6) The Credit Channel — Reverse Trickle-Down Macroeconomic growth should strengthen banks’ deposit base and enable them to lend to small businesses at affordable interest rates. Nigeria has, however, experienced the reverse. With the Monetary Policy Rate (MPR) at 27.5 percent at the time, banks could take deposits from market women at interest rates of about five percent and lend to the government at yields approaching 25 percent. Instead of wealth trickling down from the macroeconomic level to small businesses, it flows upwards from the microeconomic level to the macroeconomic level. Although the Central Bank of Nigeria (CBN) has recently reduced the benchmark interest rate to 23 percent, the period since the reduction has been too short to determine whether it will meaningfully reactivate manufacturing, the powerhouse of sustainable economic growth. A comparison with Indonesia is instructive. Indonesia boasts an economy worth approximately US$1.1 trillion, with manufacturing contributing roughly a quarter of its economic output. By contrast, Nigeria’s manufacturing sector contributes only about eight percent of GDP, while the country’s economy remains below US$500 billion in size. Until a trader in Onitsha, Kano, Abuja, Ibadan or Maiduguri can borrow at an affordable rate comparable to the approximately nine percent available to a counterpart in Kigali, Rwanda, Nigeria will continue to experience trickle-up rather than trickle-down economics. In conclusion: wealth does not trickle down by gravity; it trickles down by design. A robust framework for ensuring that wealth trickles down has yet to be put in place in Nigeria. The CNG pathway is only a small part of the solution. Even then, it has yet to be deployed in ways that adequately benefit the approximately 70 percent of Nigerians who live in rural areas, where support for productive activity is most urgently needed. This can be addressed by deploying the unspent portion of the US$1 billion allocated to the CNG initiative to support okadas, kekes, fishing boats, tractors and harvesters in rural communities where farming and other productive activities continue. Such investments would help improve mobility, expand agricultural productivity and facilitate the transportation of food from rural areas to urban markets. For two years, we have behaved as though reform itself was the destination. The reality, however, is that reform is only the beginning. Removing the fuel subsidy created fiscal space. What we have done with that space has defined the results of the reform so far. We must now adopt a simple national rule: Every naira saved from consumption subsidies should be reinvested in production subsidies such as aiding the existing automobile assembly plants to divert their production plants into producing more electric keke and okada which is more or less our mass transit system equivalent to the train system in the advanced economies. That was the case I made in this column last week, and I am reiterating it this week. Not palliatives. Not handouts. But production. This means student loans, electric kekes, solar-powered cold rooms for preserving farm produce, and low-interest loans for a tailor in Aba, Kaduna or Gwagwalada to stimulate growth from bottom up instead of just waiting for trickle down. That is how wealth cascades down: not merely and inly through speeches about GDP growth and intended to restore hope, but through practical interventions that reduce the cost of living and increase people’s capacity to earn a living, as outlined in the preceding paragraphs. Subsidise production, not consumption. That is the bridge from macro to micro and path Nigeria’s policy make must follow for meaningful alleviation of poverty. Some Nigerians labour under the illusion that, because Nigeria is richly endowed with natural resources such as crude oil, they are entitled to enjoy low petrol prices. This partly explains the pervasive sense of entitlement and persistent resistance to petrol subsidy removal. In my view, those who hold this position overlook a fundamental reality: for many years, Nigeria failed to refine much of its crude oil domestically. Instead, we exported crude oil and imported refined petroleum products at considerable expense. In effect, we exported our God-given wealth cheaply and imported petroleum products at exorbitant costs. That is the focus of my forthcoming book: ‘Africa Exporting Wealth, Importing Poverty’. This failure of enterprise and domestic productive capacity resulted in our country exporting wealth while importing poverty which was earlier stated is a central theme of my forthcoming book, ‘Africa: Importing Wealth, Importing Poverty’ to be publicly unveiled at African Union meeting coming up early next year. Next week, I will examine how a lack of enterprise has contributed to Nigeria becoming one of the countries with the world’s highest levels of poverty—a position historically associated with India, which has since emerged as one of the world’s fastest-growing major economies following bold reforms. Nigeria must learn from such experiences and build on the bold reform initiatives of the Tinubu administration, adapting them to reverse the country’s poverty trajectory and ensure that macroeconomic gains translate into tangible improvements in the lives of ordinary Nigerians. Our growing local automobile manufacturing sector – Innosson, Nord, etc has to be encouraged to start producing electric okadas and kekes which are fast proving to be our equivalent of mass transit platforms in the advanced world. The United States of America, USA, gave Americans 7.5% rebate to purchase Electric Vehicles, EV, when it was decided that a transition from fossil vehicles to EVs had to be made. During the World War, it converted car factories into arms and ammunition manufacturing concerns for the military to prosecute the war successfully. Nigeria is in a war against poverty, it must introduce revolutionary policies to triumph over poverty.

Save my name, email, and website in this browser for the next time I comment.

Independent Newspapers Limited, registered on July 17, 2001 (RC No: 419927), commenced publication on October 1, 2001. With registered office at 15b, Daranijo Street, off Odusami street, off Wemco road, Ogba, Ikeja