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Lessons from the Great Depression

WITH unemployment hovering above 70% and surging ahead, the way forward for Zimbabwe and economic growth seems to be hazy.


The recent mid-term fiscal policy revie

w came and went with major surprises that left a lot of people wondering whether the crisis could be contained or not.


This has been augmented by the RBZ’s thrust to crush inflation which has of late been on an upward trend – the recent figure being 254,8%.


The three lessons learnt from the United States were to impose large increases in taxes in the midst of a severe recession, tariff increases which retarded trade, and drastic reductions of money supply during 1930/33 which led to a reduction in aggregate demand and real output.


These errors on the part of the powers-that-be in the United States seem to have been made by our fiscal and monetary authorities in their efforts to stem the downward thrust of the economy.


What this effectively entails is that “we” or “they” have unknowingly or knowingly struck a self-destruct button.


The Ministry of Finance in its efforts to raise revenues has looked at every possible way to fund what it deems inescapable expenditure. This is the same mistake made by the Republican Hoover administration in 1932 to raise peace-time marginal tax rates from 1,5 to 4% while tax rates were raised from 25 to 63%.


The impact of these measures led to a reduction in real GDP by 13,3% and unemployment rose from 15,9 to 23,6%.


What comes to mind is the proper number one enemy; is it inflation or unemployment and the resultant inflation I believe inflation handiro dambudziko anamukoma! (is not the problem).


Toll gate taxes/fees will lead to an increase in the cost of production, which in essence will lead to cost-push inflation and quarterly levies/taxes on commuter omnibus operators. Taxes will in the end be passed on to the commuting public. In the end, real demand will slump and recession will continue. Let’s be realistic. Without fuel, these taxes will force transporters out of business.


Getting back to the good governor, experience tells us that whatever sentiment is sent by the governor, the public will assume it’s worse.


The statement “asset management (firms) are an accident in waiting” made in the maiden monetary policy not only killed confidence in the sector but even in the ones that were later on licenced.


No wonder why very few of them have managed to attract enough deposits. In addition, the American experience during the Great Depression tells us that a sudden shift to a restrictive monetary policy will reduce both aggregate demand and real output.


One can start by allowing banks to play their role in the creation of money, the punitive measures of mopping liquidity not only destroys the banks but the capacity of the economic system to create positive economic growth.


If we concentrate on increasing the number of players in our economy, allowing informal traders to trade and encouraging them to pay “reasonable” taxes such as the withholding tax already in place, the revenues will improve with the recovery of the economy.


Let’s not punish those that have remained in operation, lest they decide to run away with their means of production, and we will be left with unemployed people, further increasing unemployment.


By concentrating on increasing the productive capacity of our economy, revenues will accrue to the treasury without destroying the entrepreneurship that is left.


There are other costs to contend with such as the proposed electricity hikes, further devaluations as a result of inflation (using the purchasing power parity principle), high costs of borrowing, salary and wage hikes, yet some of the products have price ceilings.


I might be getting all my facts wrong, but what is happening is typical of fire-fighting and not economic management. Monitor the economy at the end of the year and the years to come; as long as we have this kind of economic thinking,we will continue on this downward trend.


The Americans for years thought they had it but recent evidence proves them wrong. Maybe the economic advisers are 75 years behind in economic knowledge.


Tinashe Gondokondo,

Harare.

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