Zim’s policy framework: Keynesian or monetarist?

By Admire Mavolwane



IN every sphere of human endeavour there are those among us who make it to the top. Most of them become legends, some in their lifetime, and others a

fter death. These people are normally — particularly in the local media — referred to as heroes. Given our inclination to the economics we will restrict the nomination to the hall of fame in this area. Great economic minds include Adam Smith, whose 1776 book, An Inquiry into the Wealth of Nations, is considered to be the foundation of economics as an academic discipline.


The next, and probably second ranked economics luminary, certainly in the first half of the 20th century, is John Maynard Keynes, whose book The General Theory of Employment, Interest and Money published in 1936, led to a split within the economists’ fraternity into Keynesians, the section of those who thought they were of like mind with the great man and the anti or non-Keynesians. In the Great Depression of the 1930s, governments around the world hastened to adopt “Keynesian policies,” though many an economist — both Keynesians and anti-Keynesians — regarded some of the policies, particularly when they led to inflation, as, at best, “bastard Keynesianism”. Keynes himself died in 1946 but his postulates continued to supposedly shape government policy, including even to a small extent Zimbabwe, right into the new millennium.


The central tenet in Keynesian economics is the managing of aggregate demand for goods as the driving factor of the economy, especially in periods of downturn. Keynesian economics suggested that there was a trade off between inflation and unemployment. He thus proposed for active government involvement in the economy, urging demand management to solve short-term problems rather than waiting for market forces to do it, because in the long-run we are all dead. In essence, expansionary policies, he reckoned, were an appropriate response to recessions and external shocks.


The next in the line of recent great economics thinkers is Milton Friedman who died on November 16 2006 aged 94. He is regarded as the foremost advocate of free markets. He rejected the use of fiscal policy as a tool of demand management, and held that the government’s role in the guidance of the economy and markets should be severely restricted. Friedman also revolutionalised the way modern governments and central banks had come to view money and inflation, and is in a big way the “Godfather” of the monetarist school of thought. He maintained that there is a close and stable link between inflation and money supply and that the phenomenon of inflation is to be regulated by controlling the amount of money poured into the economy.


He was of the view that central banks should limit inflation by targeting the rate of growth of money supply. Aiming for inflation directly was a mistake because central banks could control money supply more easily than prices. To underline this, he is on record as saying; “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output… A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society.”


Friedman’s ideas began to be widely adopted and influence government policy following disillusionment with the failure of Keynesian prescriptions in taming raging inflation following the 1973 Opec oil crisis. The most dramatic evidence of the disenchantment came from James Callaghan, a former Labour Party prime minister of the UK — the party and the country that had gone farthest in embracing and adopting Keynesian policies. In 1976 he said;


“We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you, in all candour, that option no longer exists; and that insofar as it ever did exist, it only worked by injecting bigger doses of inflation into the economy followed by higher levels of unemployment as the next step.”


Friedman’s writings and views greatly influenced the tight monetary stance adopted by the Federal Reserve in 1979 in its bid to fight inflation. The same was ratified by Ronald Reagan when he came to power in 1981. Margaret Thatcher and her government 1980s policies bore a distinct monetarist stance. The same prescriptions of freer markets, less government interventions and money supply targeting are the ones always recommended by the World Bank and International Monetary Fund.


We did not mean to provide an obituary for the late and much lamented Milton Friedman, but in the light of the recently announced 2007 budget proposals we thought that the contrast between monetarism and Keynesian policies could provide a framework for analysing the document. In one vein, the Minister of Finance seems to be pushing for the adoption of a targeted rather than an eclectic, monetary policy framework.

He insinuates that the ministry, together with the central bank, has agreed on a monetary targeting framework, revolving around a target for annual money supply growth which should, by December 2007, see annual broad money supply growth restricted to between 415% and 500% per annum. This would be a steep decline from the 1 430% by August 2006, which in itself is a huge jump from the 862,6% of July. He further indicated that the central bank would hence and forthwith cease any quasi-fiscal expenditures which as at November 30 amounted to $372,9 billion, $304,1 billion of which was spent this year alone. Reading through the document and reconciling it with activities on the ground, it appears that the overall stance is more Keynesian than monetarist.