HomeAnalysisEconomy facing a ‘low animal spirit’

Economy facing a ‘low animal spirit’

THE price for cash has gone up, with mobile money agents charging rates for cash as high as 40%, following the government’s decision to widen Intermediated Money Transfer Tax (IMTT 2% tax) base in the supplementary budget.

The central bank had made good strides in making Zimbabwe a cashless economy, but the government’s austere taxes are eroding the gains. There is now high demand for cash, given the high taxes and charges on electronic transactional platforms. This is all a result of the rapid implementation of market reforms in the economy.

The push towards a more neoliberal economy is sparking resistance from people of all walks of life. Businesses, from small to big, employees, trade unions, daily wage earners, teachers, agriculturalists, industrialists, industrial workers, everyone seems to be agitating against the current prescriptions of high taxes and increases in fuel and electrify prices, giving rise to unprecedented inflation in the country.

At the moment, the economy is facing a “low animal spirit”, a term used by prominent British economist John Maynard Keynes to explain a situation where investors and consumers are unwilling to invest and spend respectively in the market due to uncertainty. This “low animal spirit” situation ultimately leads to stagflation, high inflation, high unemployment and stagnant growth. To avoid this situation, Keynes supported deficit financing and suggested that the government should borrow and pump more money into the market to restore the confidence of both investors and consumers to put the economy back on the rails.

Ironically, instead of adopting this approach to address the low animal spirit of the market, the government has adopted neoliberal solutions to the economy, consisting of contractionary measures such as increasing the interest rate (50%), increasing taxes and focussing more on keeping government spending low. This is bound to suffocate the already ailing economy and reduce investment, increase the already high unemployment and create more social and political unrest in the country which is already replete with challenges. Although through the supplementary budget the government increased the wage bill by 35%, factoring in inflation which is around 200% implies that wages are falling in real terms. The focus on cuts in public-sector spending is described by political economist Susan Strange in her book, A Fate Worse Than Debt, as bad economics.

No doubt, the government has to play an important role in such conditions to overcome the market deficits and boost businesses through economic stimulus packages to address the “low animal spirit” prevailing in the market. Instead of squeezing business and constraining aggregate demand which has fallen by as much as 47%, the government should work on addressing the inefficiencies of the state which are creating economic problems. These inefficiencies are all a result of weak institutions.

In any economy, the government has to perform three key functions. First, it has to generate revenues. Second, it has to make those revenues available to those who can potentially and productively utilise them (businesses and entrepreneurs). Third, it has to build strong institutions to address issues such as inequalities, poverty, unemployment and economic conflicts between the haves and have-nots associated with growth and wealth generation. The government, however, has miserably failed in all the three core functions.

Austerity measures cause a lot pain and suffering and in most cases fail to achieve the intended results. Austerity policies have sparked resistance in countries such as Indonesia, Mexico, Argentina, Brazil, Bolivia, Columbia, Costa Rica, Honduras, and Kenya.

The government should focus on reforming institutions and adopting prudent economic policies to boost business, and protect workers and the common man. Further, it should work out a strategy to develop consensus on economic policies by taking all the stakeholders on board. A solo fight will land the government nowhere, but in hot waters.

Tinashe Kaduwo is a researcher and economist. — kaduwot@gmail.com

Recent Posts

Stories you will enjoy

Recommended reading