By Abdulrauf Aliyu
One particular economic lesson sticks not because it appeared on an exam, but because years later it starts explaining the country around you. For me, that lesson came through Robert H. Frank’s “Microeconomics and Behavior”, a compulsory reading in my 300-level microeconomics course taught by Professor Abdulganiyu Garba more than 2 decades ago. Frank’s great contribution is not simply that he teaches demand, supply, opportunity cost, marginal analysis or incentives; it is that he teaches one to look at ordinary behaviour and ask the economist’s irritating question: WHAT ARE PEOPLE RESPONDING TO? Once you acquire that habit, Nigeria begins to look different. The traffic jam, the generator, the queue at a hospital, the civil servant who arrives late, the trader who changes prices, and the politician who announces a subsidy are no longer isolated events. They are responses to incentives. And two policies have come to define the Nigerian economic experience in recent years: fuel-subsidy removal and foreign-exchange reform. Both are attempts to correct distorted prices. Both are economically defensible in important respects. And both expose the difference between getting the price right and getting the policy right.
Frank’s most useful intellectual weapon is the concept of “opportunity cost”: the real cost of choosing something is the value of the best alternative you give up. Nigeria has historically behaved as though public resources have no alternative use. Petrol could be subsidised, electricity could be subsidised, foreign exchange could be allocated cheaply, government agencies could multiply, and public borrowing could finance the gap – as though every naira had only one possible destination. But every subsidised litre of petrol has an opportunity cost. Every dollar sold below its market-clearing value has an opportunity cost. Every naira spent defending an unsustainable price is a naira that cannot simultaneously build a road, equip a hospital, improve a school or reduce debt. The fuel subsidy therefore was never truly “free petrol.” It was petrol purchased partly by sacrificing other public goods. The important economic question was not simply, “What does petrol cost Nigerians at the pump?” It was, “What else could Nigeria have purchased with the resources used to keep that price artificially low?”
This is where the economics becomes politically uncomfortable. In May 2023, President Bola Tinubu announced the end of the petrol subsidy, and the government has since defended the reform as a way of creating fiscal space and redirecting resources toward infrastructure, health, education and social protection. The economic intuition is straightforward: when a government artificially suppresses a price, it changes behaviour. Cheap petrol encourages consumption, discourages conservation, creates opportunities for arbitrage and makes the government absorb part of the cost. Remove the subsidy and the price signal changes. Suddenly, fuel efficiency matters more. Transport costs matter more. Alternative energy becomes more attractive. But this is where a textbook economist must become a political economist. The marginal cost to government is not the marginal cost to a poor household. A reform can improve allocative efficiency while simultaneously worsening welfare for people with little capacity to absorb the adjustment. Efficiency and equity are not synonyms.
Consider the Nigerian family that lives far from work, sends two children to school and buys food that has travelled hundreds of kilometres before reaching the market. When petrol rises sharply, the household does not merely pay more for fuel. It pays more for transport, food, school runs, logistics and virtually every good whose production or distribution depends on energy. This is the “multiplier effect of a price shock” at the household level. The government may see a subsidy bill disappearing from the budget; the household sees its budget constraint becoming painfully tight. That distinction matters. Frank’s framework teaches us to think at the margin: what happens to the next trip, the next meal, the next school fee, the next business decision? The wealthy household may reduce leisure driving. The poor household may remove meat from dinner. The small business may shorten operating hours. The student may stop attending a distant school. The policy therefore does not merely change prices; it changes choices. That is why a reform can be economically necessary and still be badly designed if compensation arrives late, is poorly targeted or is swallowed by inflation.
The second defining policy is foreign-exchange reform. For years, Nigeria attempted to manage scarcity in dollars through multiple exchange rates, administrative allocation and various forms of official intervention. But a foreign-exchange market is still a market. If the official price of dollars is significantly different from the price at which dollars can actually be obtained, an arbitrage opportunity appears. And where there is arbitrage, people will respond. Frank’s economics repeatedly reminds us that people do not need to be told to exploit profitable opportunities; incentives do the talking. If one person can obtain dollars cheaply through one channel and sell them more expensively elsewhere, the difference itself becomes a reward. The system can therefore produce rent-seeking behaviour not because Nigerians are uniquely corrupt, but because policymakers have created a “rent” worth pursuing. When the rules create a gap, someone will build a business around the gap.
This is one of the most important lessons Nigeria should learn about corruption: sometimes corruption is not merely a moral disease; it is an economic equilibrium. If government creates a scarce resource and allocates it at a price below its market value, access becomes valuable. People then spend time, connections, influence and money trying to obtain it. That expenditure is a form of “rent-seeking” – resources devoted not to producing more wealth but to capturing existing economic privileges. The same principle applies beyond foreign exchange. A government licence, import quota, subsidised loan, public contract or artificially cheap commodity can become a prize. Once the prize is sufficiently large, people will compete for it. The moral sermon may change behaviour at the margins, but changing the payoff structure can change behaviour at scale.
Yet here is where I would depart from the simplistic reformist argument that says, “Let the market work,” and then goes home. Markets are powerful information systems, but markets do not automatically produce justice. A market price tells us something about scarcity; it does not tell us what society “ought” to do about the people priced out by that scarcity. If the naira depreciates and imported medicines become more expensive, the market is sending a signal – but a child with malaria does not experience that signal as an abstract lesson in price discovery. If a university student’s transport fare doubles, her demand for education may become more elastic than the policymaker expected. If a small manufacturer cannot afford imported machinery, the exchange-rate correction may eventually improve resource allocation while destroying firms in the short run. The market can be right about the price and wrong about the timing of the pain. Good public policy must therefore distinguish between correcting a distortion and abandoning citizens to the adjustment.
Frank’s discussion of “marginal analysis” is especially useful here. Policymakers frequently argue in totals: “We saved trillions.” But citizens live at the margin. The relevant question for a mother is not how many trillions government saved; it is whether the next increase in transport fare means her child misses school. For a manufacturer, it is whether the next depreciation makes the next shipment unprofitable. For a hospital, it is whether the next batch of imported drugs becomes unaffordable. Policy should therefore compare “marginal benefit with marginal cost”, not merely celebrate aggregate savings. If removing a subsidy produces ₦1 of fiscal savings but imposes ₦1.20 of social damage on a vulnerable household because compensation is absent, the design is incomplete. The answer is not necessarily to restore the subsidy; it may be to transfer part of the savings directly to those bearing the adjustment. That is the logic behind targeted cash transfers, public transport, school feeding, healthcare subsidies and other forms of social protection: preserve the efficiency of the price signal while cushioning its distributional consequences.
There is also a lesson here about “sunk costs”, another of Frank’s important decision-making ideas. Nigeria has spent decades building institutions, habits and political expectations around cheap petrol, controlled exchange rates and government intervention. But the money already spent is gone. The fact that a policy existed for twenty years does not make it economically rational today. A government that refuses to reform a bad policy because “we have always done it” is committing the sunk-cost fallacy at national scale. But the opposite error is equally dangerous: believing that because the old system was inefficient, every painful consequence of dismantling it is acceptable. Reform should be judged by the future benefits and future costs, not by nostalgia for the past or pride in having announced change. A reform is not successful because it is difficult; it is successful because the new equilibrium is better than the old one.
This brings us to the political economy of reform. Nigerians are often told to endure today because prosperity is coming tomorrow. But trust is itself an economic asset. If citizens cannot see where the savings go, they discount government promises heavily. In economic language, the government’s “credibility constraint” becomes binding. A household will accept sacrifice more readily when it believes the sacrifice is temporary, fairly distributed and connected to a visible return. This is why transparency is not public relations; it is part of policy design. If subsidy savings are supposed to finance hospitals, Nigerians should be able to trace the money. If exchange-rate reform is supposed to improve investment, government should explain the transmission mechanism. If tax reform is supposed to expand the fiscal base, citizens should see the public goods produced by that revenue. A government cannot continuously ask citizens to pay the opportunity cost of reform while refusing to disclose the opportunity gained.
Ultimately, Nigeria does not suffer from a shortage of economists, policies or economic vocabulary. We suffer from a shortage of “incentive-compatible institutions”. We design policies as though announcing an intention is enough to produce a behaviour. Frank’s great lesson is more modest and more profound: people respond to constraints, prices, rewards, penalties, expectations and the behaviour of others. Policy therefore works best when private incentives and public objectives point in the same direction. Fuel subsidy removal should make energy markets more rational without making survival irrational for the poor. Foreign-exchange reform should eliminate arbitrage without turning productive businesses into casualties of adjustment. And government should stop treating citizens as obstacles to reform and start treating them as economic agents whose behaviour is part of the reform itself. The ultimate test of Nigerian economic policy is not whether the minister can defend it at a press conference or whether an economist can defend it on a blackboard. It is whether, when millions of ordinary Nigerians respond to the new incentives, they collectively produce the prosperous, productive and equitable economy the policy was supposed to create.
