Economics does not lie

As an early student of economics in 1993 at Chipindura High School in Bindura, I was introduced to the concept of scarcity and choice and the laws of supply and demand by my teachers, Mr Kachinga and later on by the late Ngonidzaishe Murota, who then served as an economist at CBZ Bank. The concepts, which were competently covered in books written by Samuelson, Harrison, Beardshaw and Lipsey, amazingly, are as valid today as they were in those days and the days of the great Adam Smith, famed for The Wealth of Nations.

Daniel Ngwira,Chartered Accountant

The basic economic problem is that wants are unlimited yet resources are not. Human needs and wants are voracious; people desire everything that makes them happy and comfortable yet to have all one begs for takes an outflow of resources which must be accumulated in the first place. Economics is driven by wants. Needs are easier than wants. Shelter and food are examples of needs.

Once they have all this, the expectation is that they would desire no more, but they graduate and start wanting more.

Economics is therefore about wants. As wants are unlimited in the face of scarce resources, it entails that people have to make choices. When a country chooses to produce guns and deploys 100% of its resources to that venture, she risks starving as there would not be any resources to deploy towards food production. In a primitive world where there is no trade, the country would be forced to make a choice so that it produces both guns and food. That means resources will be shared between the production of guns and food.

Economists describe this predicament as the economic problem. Zimbabwe is at crossroads. The economy is failing. Jobs are scarce. The outlook is bleak. Leaders seem to have run out of ideas and that worries citizens because when there is a problem people look up to their leaders for guidance, but when the leaders are either clueless or seem not to have a sense of urgency, then that is a calamity.

At an individual level, people are faced with scarcity and choices to make. If one decides to devote all their time towards watching a movie, they will not have time to spare to study for a crucial exam. The country is facing unprecedented levels of unemployment, nearing 90%. While official statistics paint a brighter picture, reality on the ground is that one is lucky to find a job in Zimbabwe regardless of their qualifications and experience. It is now even difficult to secure attachment unless if one wants to work for free.

Zimbabwe will not get out of this economic conundrum through a miracle, but through competent decision-making. She must choose what is good for the country today and tomorrow. Despite that the economy is at its lowest ebb, policymakers continue to behave as though everything is fine. The opportunity cost of spending now as currently happening in government is too high; it costs citizens a future.

Policymakers must read carefully into what happened on September 23 when people decided to raid shops nearly empty using plastic money, mobile transfers, cash and other medium of exchange. This shows that there is very little confidence in the country. This lack of confidence is not without basis. The developments on the stock markets, while under normal circumstances they should be a joyous development, are worrying in that they symbolise a country which is adjusting prices due to inflationary pressures caused by a currency crisis and an economy which is expected to take a further nosedive reminiscent of that witnessed in the days of the quintillion — Foliwars (Foreign Currency Licenced Warehouses and Retail Shops), Felocs and (Foreign Exchange Licensed Oil Companies) and Felipads.

The currency crisis is being caused by the government’s failure to adopt and implement appropriate policies which can lift the country out of the current problems. Further to that, there is too much recycling of talent. If someone fails in one section of government they are re-deployed elsewhere to try their luck.

The reason why Zimbabwe is in this poor economic state is that it is a country where politics overrides everything. It is a country where leaders have an obsession of celebrating history at the expense of the future. A country where what matters is to have views that are aligned to those who have power despite that there appears to be an inverse relationship between increased power and wisdom.

The powerful people should draw expertise from their advisors and they should only use their power to expedite execution of agreed policies. This is not the case in our country. What is happening is that the advisors are now aligned to political views. Essentially, we have PhDs and other professionals who hanged their certificates on the wall for cosmetic reasons and not applying their knowledge for the good of the country. In fact, all these people who claim to be fundis in the various fields are now experts in one, politics of patronage.

Those who are calling on Reserve Bank of Zimbabwe governor John Mangudya to step down are missing the point. He is qualified for this job. The problem is the setting he is operating in. Mangudya can stand up and say he is independent of any political influence, but this is doubtful. Whoever is appointed governor of the central bank will still suffer the same fate as Mangudya for as long as the setting has not changed. It is a setting which is characterised by a huge import bill compared to the export proceeds. It is a setting characterised by political dominance, which refuses to accept expert advice regarding what should be done to grow the economy and to develop the country. It is an economy where bureaucrats will sit down and employ all tactics to fight business which pays their salaries and foreign travel bills yet do little to promote business and labour. It is an economy which continues to pay bonuses to corrupt bureaucrats who do not perform in the face of a non-performing economy; a setting where institutions are subordinate to towering individuals. It is an economy which continues to employ the magnitude it cannot pay. We call this the control environment. It is hard to change anything if the control environment does not permit.

To change the settings, there is need for open discourse where citizens drawn from all sections of the economy can have a say. What is now needed is an economic think-tank beyond any political structures. These people are called technical experts. They are key in turning around the economy.

No governor can easily deal with such a setting, especially as they seem to be coming from the same political background as that of the leaders. Radical changes can only come through an uncomfortable arrangement like the one where Tendai Biti was finance minister.

Costs are certain yet revenue is not. So the best way of solving one’s problem is to minimise their costs while implementing desired initiatives. Economists call this austerity. It is difficult to try to implement measures while government expenditure remains unsustainable; there will always be a hole.

Government should make a choice to reduce its costs today, suffer today for a better tomorrow. Civil servants should know that no one is ever guaranteed of a job. Even Steve Jobs was once fired from a company he founded. We are all out of employment from the private sector, but we are not dead. We adjusted. Government must learn to adjust so that it can create space for a development budget which will help the economy to grow and develop. This adjustment is the choice to solve the basic economic problem.

There is no need for Mangudya to say there are no shortages when we know there are shortages. The statement he issued in response to the panic buying sounded more like it was a politician than the chief economist of the country. He should simply address the fundamentals.

But there is one thing that he said which caught my ear. He said: “It is also important to appreciate that foreign exchange premiums are caused by the mismatch between the US dollar bank balances and the physical foreign currency available in the economy.” What is causing this mismatch? The only thing I can think of is that there is some money creation that is causing this mismatch.

Government needs to come clean as to how they are funding civil servants salaries when we do know that they were struggling to pay last year. No major improvements were made to the economy. While the growing budget deficit could be an answer, it now appears that RTGS is now being used as a silent printing press. Besides, if the governor is fully aware of this mismatch, then why is he insisting that the bond notes continue to be pegged at par to the greenback?

This takes us to the supply and demand concepts or market forces. When demand for a good outstrips supply, then the price of that good, which is enjoying excess demand, would rise to achieve what is known as allocation efficiency and a new equilibrium. Why is the central bank not coming up with an appropriate exchange rate that would address the market sentiments and changing market circumstances? With such a demand-supply imbalance, it is not possible for the bond note to trade at par with the dollar. If the central bank chief does not adjust the exchange rate to an appropriate level, then the market will do it for him.

We have walked this road before. When authorities could not come up with an appropriate and viable exchange rate or floating policy, the market decided to do the job for the government. When government resisted dollarising some years ago, the market decided to do so on behalf of government. When the market bypasses authorities, the result is a huge shock to both the authorities and the economy so it is better for government to do the necessary. The market always finds solutions to the problems, but they may not be what the authorities can handle considering their political interests.

Economics does not lie. For as long as the country is not producing and for as long as government expenditure exceeds revenues with the country importing everything from agri-products to groceries which can be made locally, the economy will falter. Currency shortages will drive the exchange rate wild while shortages will make the country an unattractive destination and amplify suffering. Above all, middle men will emerge.

Every Zimbabwean is a shareholder to this country and so policymakers should listen. When the RBZ chief decided to bond borrowed dollars into bond notes and assumed a backing of the notes with imaginary convertibility, essentially, he locked up the much-needed foreign currency. There is now need to seriously consider dismantling the “backed” bond notes with urgency.

The imminent introduction of more of them fuelled the panic the country is now in. To put this into perspective, one needs to imagine a picture of a parent who goes next door to borrow some money and decides to keep the money at the lender’s house, instead of bringing a token home to prove that they have some money somewhere. For the children to believe, in tough times, the parent must be able to bring the money home to solve some pressing issues otherwise they will flee from hunger.

When the country’s leadership lambasted the so-called “book economics”, the country adopted “junglenomics” and the result was hyperinflation and the local currency was thrown into mine dumps.

When the central bank defied the laws of demand and supply, pegging the exchange rate between the bond and the greenback without paying attention to market fundamentals, the result is what Mangudya calls “the exchange rate premium”; and when the bureaucrats decided to spend excessively on consumption and for themselves, the result is a huge budget deficit and higher levels of unemployment. And when confidence is at its lowest, there is panic buying which causes shortages and a black market arises.

Economic agents are rational. The bandwagon effect is an economic concept long scribed in economics texts. We saw it last weekend being at play and it changed the face of the market. The stampede that occurred last Saturday proves this even further.

Moral of the argument is: economics does not lie. The basics of economics do not change at elementary level and at PhD level. The basic economic problem will never change, it is scarcity and therefore choices have to be made within the production possibility frontier.

Ngwira is a chartered accountant, former bank treasurer and former university lecturer. He holds finance and business qualifications. — daniel.ngwira@gmail.com/ cell: +267 73 113 161.

One Response to Economics does not lie

  1. Chimedu October 6, 2017 at 2:41 pm #

    Well expressed Ngwira.If the powers that be can hire people like you we will gradually come out of this quagmire.

AMH logo

© 2017 The Zimind. All Rights reserved.