Eric Bloch: Inflation, IMF gets it wrong

NO ONE can be right all the time, but the International Monetary Fund (IMF) has a remarkable record for accurate assessments of economies, their future, and for giving good and sound advice (albeit that the post-Independence Zimbabwe governments have almost always contended otherwise). 

However, some of its most recent evaluations of Zimbabwean economic circumstances, the causes of those circumstances and the consequential recommendations on future policies, are suspect or ill-considered.

In a recent report, IMF alleges that the primary cause of the resurgence of inflation in Zimbabwe is principally attributable to wage payments in general, and by government in particular.  This evaluation arises after Zimbabwe had achieved almost a year of continuous deflation after suffering prolonged hyperinflation, but in 2010 began to experience inflation once again. 

That resumption of inflation is necessarily of concern and needs to be addressed, but is not of such magnitude that over-reaction can be justified.  In contrast to the 10 and more digit inflation of 2008, current inflation is in low to medium single digit levels.  But it is specious in the extreme to attribute the recurrence of inflation to wages.  If wages have contributed to inflation, such contribution is minimal, as compared to other causes.

Whilst it must be acknowledged that government’s wage bill is excessive (to a major extent because of the undoubtedly vast number of “ghost workers” allegedly in the state’s employ), the reality is that because of the state’s impoverished circumstances, wage increments have been minimal and below rates of inflation. 

Similarly, in commerce and industry and other economic sectors, actual wage increments have been relatively small, notwithstanding vociferous demands from labour, and despite most wages being markedly below the Poverty Datum Line.  Admittedly, were employers to succumb to the wage demands of labour, inflation would soar upwards, in addition to massive increases in numbers as would become unemployed, and economic collapse would be assured, as distinct from the slow recovery otherwise attainable. 

The reality is that wage increments and payments have been so constrained that very few are able to fund anything but absolute bare essentials, and often not even that. 

Therefore, wages have not fuelled consumer purchasing power to any meaningful extent, and hence could not conceivably have been a major impact upon inflation, other than very indirectly so. 

The indirect effect has been, and continues to be, that as a result of the general inadequacy of wages in relation to workers’ essential needs, almost all workers are very demotivated and demoralised. 

In consequence, their productivity has increasingly declined, and the fall in productivity levels has contributed to inflation, for businesses have had to recover fixed costs and overheads from reduced volumes of production, with consequential increased charges per unit produced. 

This has also been compounded by the extent that there has been an intense upward surge in commodity thefts from employers by labourers resorting to crime in their struggles to survive. 
The key causes of resumed inflation are not wages, but:
Inadequacy of wages, with resultant worker disillusionment and an associated reduction of the work ethic, and consequentially reduced productivity and increasing recourse to theft and fraud;
Endless losses of production as a result of irregular and erratic energy and water supplies.
 Declining consumer demand for domestic products not only as a result of inadequate increases, but also because of intense competition (for that limited demand) from  imported products, yet further eroding production levels of domestic industry.  Most of those imported products are extensively lower priced because of the magnitude of export subsidies given by the supplier countries, and due to large-scale evasion of customs duties;
Unsustainably high finance costs borne by Zimbabwe’s highly undercapitilised enterprises, grievously inflating operational costs;
Charges by parastatals and local authorities being excessive in extent, vastly greater than prevailing elsewhere within the region.

Irrespective of wage movements, ongoing inflation is inevitable unless these key inflation-triggers are vigorously addressed.

The IMF has also recommended that Zimbabwe’s government not utilise the Special Drawing Rights (SDRs) accorded it by the IMF last year, but retain them as a boost to Zimbabwe’s international reserves. 

Whilst it is desirable and necessary that Zimbabwe progressively accumulate reserves, thereby restoring confidence in the minds of international financiers and suppliers, doing so is meaningless if, in the meanwhile, the economy wholly collapses. 

Those SDR funds could, to a small extent, enable economic recapitalisation and recovery which, in time, would yield far more substantive reserves, whereas ongoing economic collapse would render such minimal reserves meaningless.  It is a long-established maxim that it needs capital to generate capital, and those SDR resources could be a small contributor to that future capital generation, and to assuring the survival of presently endangered elements of the economy.

Yet another IMF recommendation is that the South African rand should be Zimbabwe’s principal currency.  Acceptance of this recommendation could be catastrophic.  Although doing so could marginally enhance currency in circulation, and especially so of currency of low denominations, including coins, the potential prejudices to Zimbabwe could be immense. 

The South African economy is sadly in grave risk of contraction in the forseeable future.  Excessive and unjustified expectations of the economic benefits of the Fifa World Cup 2010 precluded adequate attention to diverse needs of the South African economy.  Over the last year there has been a substantial increase in unemployment in South Africa, and especially so in the textile and clothing industries, and recently also in the construction sector.  As a result it is inevitable that South Africa will have to resort to economic recovery policies.  Those policies may be right for South Africa, but not necessarily so for Zimbabwe.

By being linked to a basket of international currencies, instead of just one currency, Zimbabwe minimises the risks of being negatively impacted upon by the monetary policies of any one of the countries whose currency is being used.  The multi-currency basket provides a hedge against negative impacts of monetary policies of any one of those countries.

Therefore, although so often right on so many issues, the IMF has apparently erred in those aspects of its recent advice to Zimbabwe, and on these issues it needs to think again.

NO ONE can be right all the time, but the International Monetary Fund (IMF) has a remarkable record for accurate assessments of economies, their future, and for giving good and sound advice (albeit that the post-Independence Zimbabwe governments have almost always contended otherwise).  However, some of its most recent evaluations of Zimbabwean economic circumstances, the causes of those circumstances and the consequential recommendations on future policies, are suspect or ill-considered.
In a recent report, IMF alleges that the primary cause of the resurgence of inflation in Zimbabwe is principally attributable to wage payments in general, and by government in particular.  This evaluation arises after Zimbabwe had achieved almost a year of continuous deflation after suffering prolonged hyperinflation, but in 2010 began to experience inflation once again.  That resumption of inflation is necessarily of concern and needs to be addressed, but is not of such magnitude that over-reaction can be justified.  In contrast to the 10 and more digit inflation of 2008, current inflation is in low to medium single digit levels.  But it is specious in the extreme to attribute the recurrence of inflation to wages.  If wages have contributed to inflation, such contribution is minimal, as compared to other causes.
Whilst it must be acknowledged that government’s wage bill is excessive (to a major extent because of the undoubtedly vast number of “ghost workers” allegedly in the state’s employ), the reality is that because of the state’s impoverished circumstances, wage increments have been minimal and below rates of inflation.  Similarly, in commerce and industry and other economic sectors, actual wage increments have been relatively small, notwithstanding vociferous demands from labour, and despite most wages being markedly below the Poverty Datum Line.  Admittedly, were employers to succumb to the wage demands of labour, inflation would soar upwards, in addition to massive increases in numbers as would become unemployed, and economic collapse would be assured, as distinct from the slow recovery otherwise attainable. 
The reality is that wage increments and payments have been so constrained that very few are able to fund anything but absolute bare essentials, and often not even that.  Therefore, wages have not fuelled consumer purchasing power to any meaningful extent, and hence could not conceivably have been a major impact upon inflation, other than very indirectly so.  The indirect effect has been, and continues to be, that as a result of the general inadequacy of wages in relation to workers’ essential needs, almost all workers are very demotivated and demoralised.  In consequence, their productivity has increasingly declined, and the fall in productivity levels has contributed to inflation, for businesses have had to recover fixed costs and overheads from reduced volumes of production, with consequential increased charges per unit produced.  This has also been compounded by the extent that there has been an intense upward surge in commodity thefts from employers by labourers resorting to crime in their struggles to survive. 
The key causes of resumed inflation are not wages, but:
Inadequacy of wages, with resultant worker disillusionment and an associated reduction of the work ethic, and consequentially reduced productivity and increasing recourse to theft and fraud;
Endless losses of production as a result of irregular and erratic energy and water supplies.
 Declining consumer demand for domestic products not only as a result of inadequate increases, but also because of intense competition (for that limited demand) from  imported products, yet further eroding production levels of domestic industry.  Most of those imported products are extensively lower priced because of the magnitude of export subsidies given by the supplier countries, and due to large-scale evasion of customs duties;
Unsustainably high finance costs borne by Zimbabwe’s highly undercapitilised enterprises, grievously inflating operational costs;
Charges by parastatals and local authorities being excessive in extent, vastly greater than prevailing elsewhere within the region.
Irrespective of wage movements, ongoing inflation is inevitable unless these key inflation-triggers are vigorously addressed.
The IMF has also recommended that Zimbabwe’s government not utilise the Special Drawing Rights (SDRs) accorded it by the IMF last year, but retain them as a boost to Zimbabwe’s international reserves.  Whilst it is desirable and necessary that Zimbabwe progressively accumulate reserves, thereby restoring confidence in the minds of international financiers and suppliers, doing so is meaningless if, in the meanwhile, the economy wholly collapses.  Those SDR funds could, to a small extent, enable economic recapitalisation and recovery which, in time, would yield far more substantive reserves, whereas ongoing economic collapse would render such minimal reserves meaningless.  It is a long-established maxim that it needs capital to generate capital, and those SDR resources could be a small contributor to that future capital generation, and to assuring the survival of presently endangered elements of the economy.

Yet another IMF recommendation is that the South African rand should be Zimbabwe’s principal currency.  Acceptance of this recommendation could be catastrophic.  Although doing so could marginally enhance currency in circulation, and especially so of currency of low denominations, including coins, the potential prejudices to Zimbabwe could be immense. 

The South African economy is sadly in grave risk of contraction in the forseeable future.  Excessive and unjustified expectations of the economic benefits of the Fifa World Cup 2010 precluded adequate attention to diverse needs of the South African economy.  Over the last year there has been a substantial increase in unemployment in South Africa, and especially so in the textile and clothing industries, and recently also in the construction sector.  As a result it is inevitable that South Africa will have to resort to economic recovery policies.  Those policies may be right for South Africa, but not necessarily so for Zimbabwe.

By being linked to a basket of international currencies, instead of just one currency, Zimbabwe minimises the risks of being negatively impacted upon by the monetary policies of any one of the countries whose currency is being used.  The multi-currency basket provides a hedge against negative impacts of monetary policies of any one of those countries.

Therefore, although so often right on so many issues, the IMF has apparently erred in those aspects of its recent advice to Zimbabwe, and on these issues it needs to think again.

By Eric Bloch