Haunted by misery

Tafara Mtutu

SINCE the beginning of 2019, the well-being of the average Zimbabwean has deteriorated. A potent combination of poor job prospects, high inflation, inconsistent power supply, and volatile policies among other socio-economic issues have drawn Zimbabweans to voice their grievances time and again.

The economic well-being of a country can be summarised by Okun’s Misery Index and its variations since its inception. The misery index is premised on the basic underlying assumptions that better economies tend to exhibit lower inflation and unemployment rates.

These two variables are assumed to aptly act as proxies for the quality of life in any country. Higher inflation rates tend to erode disposable incomes and higher unemployment rates limit economic productivity which ripples into the consumer’s disposable income.

Under Okun’s Misery Index, a country’s score is simply the sum of the inflation and unemployment rates. Economies with lower scores are regarded as better off than those with higher scores. Based on official data, Zimbabwe reached a 10-year record high of 562,9% on the misery index in 2020 following its prodigious return to the Zimbabwean dollar in 2019.

However, the central bank’s stronghold on inflation since mid-2020 has warranted expectations of significantly lower inflation rates in 2021 and, subsequently, the country’s misery score.

Despite the improvement in Zimbabwe’s misery score, the country is still a far cry away from ideal scores on the index. According to economists, an ideal score is achieved when a country is at its Non-Accelerating Inflation Rate of Unemployment (NAIRU). The NAIRU is the level of unemployment at which the inflation rate is stable. A NAIRU ranging between 4% and 5% is typically optimal, and a year-on-year inflation rate between 3% and 6% is usually acceptable.

This indicates an ideal misery score ranging between 7% and 11%. The US’ misery score is currently at 10.3% (unemployment rate of 6,1% and inflation rate of 4,2%), up a few percentage points from 7,7% in January 2021 because of inflation rising faster than the decline in the unemployment rate. Closer to home is South Africa whose misery score of 37,8% is driven by the high unemployment rate of 32,6% vis-a-viz an inflation rate of 5,2%.

Based on latest inflation data, we estimate that Zimbabwe’s Y-o-Y inflation rate is likely to recede to 58,1% in July 2021 and further to 49,2% in December 2021 resulting in an average inflation rate of 138,7% for the year.

Given the marginal changes to the official unemployment rate to 6%, we anticipate a year-end misery score of 144,7% which is 418 percentage points lower than the 2020 misery score. While this is a welcome improvement, we maintain that the country is not yet out of the woods as it remains the index’s most miserable country on the continent.

There are several other variations of Okun’s Misery Index that also concur with the original misery index. Economist Robert Barro created the Barro Misery Index (BMI) which incorporates changes in interest rates and the deviation of the real GDP growth rate from a long-term average growth rate in addition to inflation and unemployment rates.

Zimbabwe’s misery score on the BMI is marginally lower than the original score given that the Reserve Bank of Zimbabwe maintained the policy rate at 40% in their last Monetary Policy Committee meeting. Many countries have also kept their policy rates unchanged, save a few commodity-driven economies who have increased their interest rates in a bid to contain the impact of the commodity super cycle.  The deviation of Professor Mthuli Ncube’s latest real GDP growth rate estimate of 7,8% from a 60-year average growth rate of 2,8% only lowers the original score by 5 percentage points to give a BMI score of 139,7%.

Another variation of the misery index was also developed by outspoken economist Steve Hanke. Hanke’s misery index is simply the sum of the unemployment rate, inflation rate, lending rates, minus the year-over-year percentage change in per-capita GDP growth.

Zimbabwe’s score from Hanke’s misery index is higher at 184,5% because of the policy rate of 40% and an expected negligible increase in the country’s GDP per capita of 0,2% in 2021. Regardless of the index in use, the conclusion is all the same because all variations incorporate the inflation rate which accounts for over 75% of Zimbabwe’s misery scores.

The misery index, in all its variations, is not without limitations, and these shortfalls have underpinned its light use in discussions pertaining to economic policies.

Firstly, the unemployment rate only measures the working population that is actively seeking for a job and does not include those that are not actively seeking employment. This is quite material in Zimbabwe’s case considering that the country’s shadow economy is among the largest in the world.

Secondly, deflation is often associated with lower misery scores, and incorrectly concludes that countries with deflation are better off than those with positive inflation rates. This is usually not the case because deflation is typically experienced during recessions.  Also, the unemployment rate is generally regarded as a lagging figure that reflects the past state of an economy’s well-being, unlike leading indicators that foreshadow the state of an economy’s well-being. This inadvertently results in a misery score that is not reflective of the current economic environment especially after shocks such as black swan events.

  • Mtutu is a research analyst at Morgan & Co. He can be reached on +263 774 795 854 or tafara@morganzim.com