Cash transfers and the Abacha loot

The return of what may be the last tranche of the Abacha loot and the decision of the federal government to distribute that loot directly to 302,000 poor households kicked off a bit of furore last week. Some question the legality of the decision based on the argument that the federal government cannot unilaterally appropriate those funds. Others question the economics of the decision, wondering if distributing the returned loot to the poor is the best thing to do. I cannot speak on the legality of the decision, but I can say something on the economics of it. But first a short note about insurance.

Insurance is a risk management tool that has become a significant part of modern economies. The logic of insurance is very simple. Consider this example. 50 ships sail from Lagos to London every year, but the ocean can be a very dangerous place and occasionally, the weather gets bad and a ship sinks, and the goods on that ship get destroyed. Imagine you were the businessman who had your goods on that ship that sunk. That is a catastrophic event. If on average, one of the 50 ships sink every year then you have a catastrophic event every year. And since you don’t know which ship will sink then that leaves all businesses on the edge, fearing this could be the year they lose it all.

What if someone offered you a service where you pay a small amount to guarantee that, no matter what happens, you get the value of your goods on the ship. Even if the ship with your goods sink, you will still be paid. It’s typically a good deal because as a business you guarantee that even if your ship sinks, your business can continue. What about the person offering the service? Well, if they know that, on average, only one ship sinks in year, then they know that if they offer the service to all 50 ships then they will have enough money to pay for the one ship that sinks, and probably still have money left in the bank. They can do this business forever and ever as long as the probability of ships sinking remains the same. This is the basics of insurance.

The same idea works with social policy too. Imagine you are in an economy where unemployment typically hovers at around five per cent; that is 95 per cent of the labour force is always working. Then you can ease the life of that unemployed five percent by collecting a small tax from the 95 per cent and distributing it to the five percent. You can think of social safety nets, like cash transfer schemes, in the same light. If you have a poverty rate of about 10 percent, then you can collect a small tax from the other 90 percent who are not poor and distribute it. This is the basics of social insurance. In summary, if the thing being insured is a low probability event, or the fraction of people in the insured outcome is small, then insurance can be viable.

But what happens if things change? What happens to ship insurance if 35 of the 50 ships sink in one year? Insurance breaks down. The 15 cannot carry the 35. What happens if unemployment goes up to 50 per cent? Unemployment insurance breaks down. The working 50 per cent cannot carry the unemployed 50 per cent. What happens if 70 per cent of the population is poor?

The reality of the Nigerian situation is that we have a very high poverty rate. Too high for social insurance to be a sustainable strategy. As at the last time we measured poverty in 2010 we had a poverty rate of just above 60 per cent. Unofficial reports say we are now the poverty capital of the world, i.e. the country with the largest amount of poor people. As an example, if the government was able to collect five per cent of GDP in taxes and distribute to the sixty per cent of the population that is poor, each poor person would only get about N5,000 per month. Given that the federal government only manages to collect taxes of about 6 per cent of GDP in total then you can guess how sustainable such a program will be.

To be clear, there is a lot of evidence that giving money to the poor does improve their lives. It is also not difficult to think of worse ways the returned Abacha loot could be spent given what we know about our politicians. Regardless, the social transfer programme is not going to be sustainable. What happens when there is no Abacha loot or when the generous World Bank grants stop? As we should have learned from past experiences, it is very easy to start giving money, but it is more difficult to stop.Dr. Nonso Obikili is an economist currently roaming somewhere between Nigeria and South Africa. The opinions expressed in this article are the author’s and do not reflect the views of his employers.