• Friday, March 29, 2024
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Why it is difficult to backtrack on bad policy?

Bad policy

Policies can be good or bad, or sometimes somewhere in between but we will focus on the extremes for today. We all love policy that makes a difference and delivers on the impact that we want. We tend not care about good policy as we envision it as mission accomplished. If we wanted to, we could keep the policy going forever or at least as long as we intended it to. But what about bad policy? – Policy that did not meet its objectives and maybe even resulted in some undesirable side-effects. Somehow it always seems like bad policy tends to stick around just as long as good policy. If we know that such a policy is bad then why do policy makers find it difficult to backtrack?

Think about the automotive policy we implemented in 2012 for instance. The summary of the policy was to increase tariffs and duties on new vehicles to a combined 70 percent with reduced tariffs on semi and completely knocked down vehicles. The objective was to stimulate local assembly of new vehicles. Of course, as many wrote at the time, the policy was misguided and failed spectacularly. People allegedly routed their new cars to some unnamed countries where they removed the tires and headlights to “reassemble” in Nigeria.

Those who could not be bothered just smuggled their cars in through our now infamous land borders. To be fair some businesses set up “assembly” plants, but the costs of the policy were far greater. The transport and logistics sectors, where vehicles are technically a raw material, were all weighed down by the policy. In the end growth in the motor vehicles sector slowed to less than it was before the policy, recession notwithstanding. The hard facts were that the Nigerian economy did not have sufficient demand for new cars and there was no plan for exports. Almost everyone now accepts that the policy was a failure yet as I write this, seven years later, the policy is still there.

What about the famous fuel subsidy? Once upon a time some may have argued that it had its uses. Since the fuel subsidy protest fiasco in 2012 most would agree that maintaining a fuel subsidy like we do is bad policy. There are much better ways to target subsidies to the poor and to more productive activities. That is even before we get to the drain on an almost bankrupt government. Yet, despite knowing that fuel subsidies need to removed and fuel prices need to increase, they haven’t. The talk before elections was that it couldn’t be done before elections. Yet eight months after elections there has been no change. The policy remains.

So, why? Why do we see bad policy remain even when there is a consensus that such policies are bad? The short answer is politics.

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You see, when a government implements policy people back them. Even if the policy is bad, people invest some money and time in supporting the policy. Ban rice to stimulate local rice production? Bad policy but some will still build a rice mill or two. Add a 70 percent tariff on cars? Bad policy but someone will announce an “assembly” plant or two. And typically, the people who invest in trying to take advantage of bad policy are the wealthy and or politically connected. Sometimes they make money too.

What happens, when the policy starts to fail and the government wants to backtrack? Well, those who supported the policy see that they stand to lose their investments. That rice mill that cannot compete on price with foreign competitors will probably shut down if the government backtracks. That assembly plant will probably turn back into a warehouse. Jobs associated with that misadventure will be lost. And if those people have agency and political power then you can see the stumbling block to reversal.

This is not a Nigerian thing by the way. Many countries go down bad policy paths and get stuck there, unable to change course because of the costs of reversal. The morale of this story is therefore clear. Think about policy well before you do it. Think about the implications properly. Because once you do it, changing course or backtracking will be difficult. Think before you shoot.

NONSO OBIKILI

Dr. Obikili is chief economist at Business Day