The best example of this conundrum manifests with the subsidization of fuel in over half of the sub-Saharan African countries. According to the World Bank, fuel subsidies consumed, on average, nearly 1.5 percent of GDP, and, similar to past years, the cost was generally higher in oil exporting countries than oil importing countries.

One argument for this consistency is the need by oil-exporting governments to maintain comparatively lower prices to the market for their citizenry to avoid squabbles or uprising over complaints of resource exploitation, yet this strategy only balloons the fiscal costs when oil prices are high. During one of the high periods in 2012, Nigerian officials eliminated the gasoline subsidy, which was around 4% of GDP, only to restore part of the subsidy to quell protests.At the centre of these pro-subsidy protests in Nigeria and other sub-Saharan African countries are the poor. But the true irony of the protests is that they are not the ones benefiting. By the nature of economic activity in these countries, the rich disproportionately benefit. Richer households generally own more vehicles and, consequently, spend a greater amount on gasoline.

In Mozambique, data shows that the top 20% quartile in income receives nearly double the benefit of the gasoline subsidy as compared to the bottom 20% quartile in income. Similar data has been observed in Nigeria and is equally drastic in Angola. Poor citizens squeeze into minivans as richer individuals navigate the cities by car, effectively characterizing the disparity. A switch from fuel subsidies to direct transfers, or possibly vouchers, could pay greater dividends. The best example of the transfer effectiveness comes from Indonesia in 2005 when the government reduced fuel subsidies by US$10 billion without social unrest, through cash transfer program. The idea does not necessarily garner support in many sub-Saharan African countries, particularly for two reasons: (1) the absence of bank accounts and, (2) the size of the informal economy and an inability to assess incomes.

The first reason has some validity to the extent that countries will not consider a mix of direct transfers and vouchers. Additionally, data suggest that less money would be claimed under a cash transfer/voucher system as many poorer individuals are not driving. A cruder argument has been made that it is more effective to subsidise minivan drivers in Accra and Lagos than it is to give cash transfers or vouchers to the general poor. There are clear complications in this crafty economic argument.

The second reason, associated with the ‘informality’ of a lot of African business, carries some weigh until you consider how strategically Asian governments in poorer countries have found ways to assess incomes and access information from informal environments. Sub-Saharan African governments have similar capabilities.

At the end of the day, subsidies prove to be costly and generally fail in poorer countries in deciphering between the rich and poor in distribution. Finding a more efficient way to target poorer individuals during the good times will pay greater dividends when sub-Saharan African growth slows (and the cost as a percentage of GDP rises again).

Kurt Davis Jr
Kurt Davis Jr. is an investor, advisor and consultant with experience in Africa, Asia, Europe and the United States. He is an avid traveler who has been to 70+ countries throughout the world in search of new investment opportunities, new people, and better understanding of the world. His international professional career includes positions with Schulze Global Investments, Kukula Capital, and African Development Bank, with experience covering the agribusiness, energy, fast-consumer moving goods (FMCG), infrastructure, manufacturing, natural resources, and real estate sectors.