By
Toba Alabi
The recent increase in fuel prices in Nigeria has generated widespread debates on the economic philosophies guiding such decisions. The removal of fuel subsidies by the Tinubu administration in 2023 was aimed at addressing fiscal deficits and aligning with global economic trends. However, this decision has had profound implications on the economy, particularly on the cost of living for ordinary Nigerians. Two economic theories *—Keynesianism and* *neoliberalism* —offer distinct perspectives on such fiscal decisions and provide insights into the possible impacts and long-term outcomes of the current policies.
*Keynesianism and Fuel* *Price Hikes*
Keynesian economics, founded by John Maynard Keynes, advocates for government intervention in the economy to manage demand, especially during economic downturns. Keynesians argue that during periods of economic instability, government spending should increase to stimulate demand, promote employment, and support growth (Keynes, 1936). In the context of Nigeria’s fuel subsidies, Keynesians would argue that maintaining or moderately reducing subsidies could protect aggregate demand by keeping fuel prices low, thus preventing a sharp increase in inflation and the cost of goods and services.
For many years, Nigeria’s petrol subsidies functioned as a tool to shield consumers from volatile global oil prices and maintain economic stability. From a Keynesian viewpoint, a sudden removal of these subsidies could lead to a reduction in consumer purchasing power, higher inflation, and an overall contraction in economic activity, as households struggle with rising costs (Chijioke, 2022). Keynesians might recommend a gradual reduction in subsidies, coupled with government investment in infrastructure and social welfare programs to ease the transition and stimulate economic activity in other sectors (Akinwale, 2019).
*Neoliberalism and Fuel* *Price Hikes*
In contrast, neoliberalism
emphasizes free markets, deregulation, and a minimal role for government in economic affairs. Neoliberal economists argue that government interventions, such as subsidies, distort market prices, create inefficiencies, and encourage wasteful consumption. They advocate for reducing government involvement in the economy and letting market forces determine prices. In the Nigerian context, the removal of fuel subsidies aligns with neoliberal policies, aiming to reduce government spending and fiscal deficits, and to attract foreign investment by presenting a more market-friendly environment (Harvey, 2005).
From a neoliberal standpoint, removing subsidies allows the government to free up resources for more productive sectors of the economy, thereby improving overall efficiency. However, critics argue that neoliberal policies often prioritize economic efficiency over social welfare, leading to increased inequality and hardship, especially for low-income households (Friedman, 2002). In Nigeria, the sharp rise in fuel prices after subsidy removal has had immediate negative effects on the cost of living, transportation, and food prices, disproportionately impacting the poorest segments of society (Bello, 2020).
*Comparison and* *Contrast of* *Keynesianism and* *Neoliberalism*
*Government Role*
Keynesianism emphasizes a strong role for government in managing the economy, especially during periods of instability, while neoliberalism advocates for minimal government intervention, arguing that the market is the best allocator of resources.
*Focus on Demand vs.* *Efficiency* Keynesianism is concerned with maintaining aggregate demand, ensuring that consumers have enough purchasing power to drive economic growth. Neoliberalism, on the other hand, focuses on efficiency and reducing government-induced distortions, such as subsidies, which it views as counterproductive to long-term economic health.
*Social Welfare vs.* *Market Efficiency:* Keynesian policies often prioritize social welfare and economic stability, whereas neoliberal policies prioritize market efficiency, even if that comes at the expense of social equity.
While Keynesians would argue that government spending and intervention are necessary to protect consumers and stimulate growth, neoliberals would claim that allowing market forces to dictate fuel prices will ultimately benefit the economy by reducing fiscal deficits and encouraging private sector growth. However, the real-world implications of these policies suggest that neoliberal measures often result in immediate hardship for ordinary citizens, which may outweigh the theoretical long-term benefits (Emefiele, 2016).
*Recommendations for* *the Tinubu Government*
Given the contrasting approaches of Keynesianism and neoliberalism, the Tinubu administration must strike a balance between fiscal responsibility and social welfare.
Here are several recommendations based on both economic philosophies:
1. Gradual Subsidy Removal (Keynesian Approach): Instead of abrupt subsidy removal, the government should consider a phased approach. This would allow time to implement compensatory measures such as social welfare programs, job creation initiatives, and investments in public transportation to cushion the impact on low-income households (Chijioke, 2022).
2. Increase Investment in Infrastructure (Keynesian Approach): Redirecting funds saved from subsidy removal to infrastructure development, especially in transportation and energy, could stimulate economic growth and create jobs, reducing the reliance on fuel as a primary driver of household expenditures (Smith, 2021).
3. Market Reforms and Diversification (Neoliberal Approach): In line with neoliberal principles, the government should continue to implement market reforms aimed at diversifying the economy. By reducing dependence on oil and encouraging investment in sectors like agriculture, manufacturing, and technology, Nigeria can create a more resilient economy less vulnerable to global oil price fluctuations (Harvey, 2005).
4. Strengthen Social Safety Nets (Keynesian-Neoliberal Balance): To address the immediate hardship caused by rising fuel prices, the government should expand its social safety net programs, such as conditional cash transfers and subsidies for essential goods, to support the most vulnerable populations while market-driven reforms take effect (Friedman, 2002).
5. Encourage Private Sector Investment in Refineries (Neoliberal Approach): To address the structural issue of Nigeria’s dependency on imported refined petroleum, the government should create an enabling environment for private sector investment in domestic refineries. This could reduce Nigeria’s import dependency and stabilize domestic fuel prices in the long run (Bello, 2020).
*Conclusion*
The increase in fuel prices in Nigeria highlights the complexities of balancing fiscal responsibility with social welfare. While neoliberal policies promote market efficiency and fiscal discipline, the immediate social costs can be severe, especially in a country like Nigeria where poverty and inequality remain pressing concerns. On the other hand, Keynesian economics offers a more gradual and socially-conscious approach to economic reform, though it may be less efficient in the long term. The Tinubu administration should adopt a hybrid approach, combining the best elements of both theories to ensure that fiscal reforms do not come at the expense of social stability and economic inclusivity.
*References*
– *Akinwale, A. (2019).* Subsidy and fiscal policy in Nigeria: Impacts on development. Journal of African Economies.
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*Bello, W. (2020).* The IMF and World Bank in Africa: Neoliberalism Revisited. Monthly Review.
*Chijioke, O. (2022).* Economic impacts of fuel subsidy removal in Nigeria. African Review of Economics and Finance.
*Emefiele, G. (2016).* The role of the IMF in Nigeria’s economic reforms: A critical appraisal. Nigerian Economic Society.
*Friedman, M. (2002).* Capitalism and Freedom. University of Chicago Press.
*Harvey, D. (2005).* A Brief History of Neoliberalism. Oxford University Press.
*- Keynes, J. M.* *(1936).* The General Theory of Employment, Interest and Money. Palgrave Macmillan.
Smith, J. (2021). Keynesian approaches to fiscal policy in developing economies. World Development Studies.
Toba Alabi is Professor of Political Science and Defence Studies.
Culled from Econs 1997 set of ABU,Zaria.
