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Govt a Stimulus for Growth

ACCORDING to the United Nations working papers, Zimbabwe’s unemployment rate has breached the unprecedented 94% level.

This is only natural given that production capacity in the industry has continued to plummet with the manufacturing sector recording18, 3% capacity in 2007 but estimated to be below 10% towards end of 2008.

For the economy to recover there is therefore need for the government to come up with a stimulus package that will drive the supply side and increase economic activity in the country. This paper seeks to assess the recent Budget and see how far it goes as a stimulus for growth.

There is serious justification and indeed need for the government to show initiative in creating jobs and encouraging growth through productive employment. Full employment (or reduced unemployment) is a goal any serious and modern government must aim to achieve.

The intellectual justification for gearing government budgetary and monetary policies towards fine-tuning the economy (and, in particular, towards generating more employment) was provided by John Maynard Keynes  (1936) in The General Theory of Employment, Interest, and Money.

Any level of unemployment beyond the natural rate is most likely due to insufficient demand in the overall economy. During a recession, aggregate expenditure is deficient, causing the underutilisation of inputs (including labour).

Aggregate expenditure can be increased, according to Keynes, by increasing consumption spending, investment spending and government spending, or increasing the net of exports minus imports.

The trick, wherein government deliverers growth, is not new. After World War II Italy went on to pave its streets and parks in cobblestones as a way of introducing growth. In the 1950s President Eisenhower embarked on the massive building of interstate roads and bridges to create employment.

Thanks to this initiative, most of the big roads in the USA can be traced back to this era even today. More recently, in fact as I write, President Barack Obama is trying to kick-start the economy through a trillion-dollar injection with a significant portion going towards infrastructure development.

Infrastructure development has an amazing leverage effect on the economy over recurrent expenditure. For starters, employment levels are immediately improved. This reduces idleness and hence crime.

The multiplier effect on the economy is also quite exciting. As more people work, they now have more capacity to consume which also then raises demand, which in turn creates a pull effect on the manufacturing sector to supply and so on.

What is also undeniable is the fact that as we invest more into infrastructure such as our roads and communication, we actually fasten the speed of economic activity which enhances chances for even more growth.

There is a catch though in the government-led demand stimulus. For it to be useful, it is important that it be productive! Any expenditure which does not result in improved production of goods is lost. On budgeting, there is therefore need for a bias towards creation of productive jobs.

Private sector stimulus

In addition to the government directly contracting and building roads, it can also create innovative funding structures that encourage long-term savers such as pension funds and insurance companies to channel money towards infrastructure.

This can be achieved by way of according tax rebates for this purpose or giving prescribed status to developments that will deliver national long-term assets for public use.

Unfortunately with recurrent expenditure of 76% against only 24% in capital expenditure, the budget can be considered to be more consumptive. We cannot therefore expect to consume where there is no production.

There is need over time to swap these ratios around such that more money goes towards capital expenditure and hence employment creation.

As we collectively rebuild the country, the government needs to be biased towards infrastructure development so as to create more jobs immediately, but also to set the stage for faster recovery in the long term.

With innovative taxation policies and creative financing structures, the good thing is government may not even need to use its own money. With the right returns and creative structuring, there are enough resources locally and globally such that the government does not even have to use its own resources!

There is need to realise that infrastructure investment should be more about creating future growth as opposed to being a result of growth. Such creative investment is the father to growth, not its offspring.
=Kenias Mafukidze is chief execuive officer of KM Financial Solutions and former president of the Zimbabwe Economic Society. Email:keniasm@mweb.co.zw


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