HAVE you ever been amazed by how confusing matters of economics can be? For example in a recession, factories lie idle while people lament over a lack of jobs. Graduates become experts in animal husbandry even though they have a completely different skillset.
Common sense would dictate that the unemployed should just man the idle machines and kick-start production again — but things are not this simple. It is amazing that in almost every country during an election the political candidates debate about how to ̒fix̓ the economy. Why can we never have a situation where everything works in the way it is supposed to?
I have always maintained that one of the easiest fields to obtain a Nobel Prize is that of economics. It is quite possible for one to win a Nobel Prize in economics today for putting forward an impressive theory and five years down the line another person wins the same Nobel Prize for stating the exact opposite of the initial theory. Two schools of thought stand out in economics. There are those who believe in minimal intervention by central banks and governments into the functioning of the economy and those who believe that desired results can only be attained after a calculated intervention by the government.
Both camps have valid justifications and I truly believe that they are equally true. For example, the advocates for a hands free approach to managing an economy argue that the forces of supply and demand are purely sufficient to price goods and services in an economy. If interest rates are generally high in the economy, these invisible forces of supply and demand, if allowed to operate will lead to an increase in deposits and capital inflows which will act to reduce interest rates back to their optimal levels. This of course can only happen if the high interest rates are allowed to be enjoyed by the depositors meaning that the role of the government will be to ensure that this is the case, rather than try to control the interest rates themselves. The only question that remains unanswered is how long does the economy take to correct itself without someone in government tinkering with it?
Those who believe in intervention argue that left to its own devices, the economy can never correct itself to achieve any desired optimal outcome — at least while we are still alive.
To this end, they believe in the use of a raft of monetary and fiscal policies to try and quickly reach the desired outcome. The problem with this approach is that no one knows how much intervention is necessary. For example, what level of tax break or decline in interest rates do you think is needed to boost investment: Two percent, three percent or 10 percent? There always lies the risk that too much intervention is exercised thereby resulting in the creation of an opposing problem to the initial one.
There have been reports stating that when Zimbabwe switched to a multi-currency regime, we failed to fix our high cost structures and today the economy is running out of steam. Since virtually nothing was done to try and correct this problem, we see that the economy is now trying to adjust itself by way of deflation.
Prices are going down by themselves and this is a painful predicament as no one knows when the invisible forces will equalise. Those who believe in intervention have called for all of us to perform what they call internal devaluation. This is basically a call to reduce wages and related costs across the economy.
The same outcome could have been achieved if only the central bank had the capacity to print money. It would do so and we would have more money in our pockets but the money would be worth less than before — this is normal devaluation.
The only problem is that no one wants to start this game of reducing prices with the private sector calling for government to lead the way by reducing taxes.
If ever the government makes New Year resolutions, it’s safe to say that the resolution to control its wage bill has been renewed for quite some time now. It now resembles the situation of that friend who always promises to lose weight every year but seems to be getting fatter by the day.
Either way you look at it, the deflation looks like it’s here to stay. If for arguments sake, prices need to be cut by 20 percent across the economy, it appears like we have the choice to either weather a 10-year negative two percent annual deflation in the form of an economic depression or just decide to lower our cost base by 20 percent all at once. This somehow brings a new meaning to the phrase ̒killing me softly.’ Regardless of which economic school of thought is best, difficult decisions need to be made to solve our economic woes. It’s a question of doing what the people need versus what they want.
I am not an economist and believe I have found my calling in the hard sciences such as statistics and mathematics.
However, matters of economics not only in Zimbabwe but in the global fraternity such as in Greece never cease to intrigue me. I somehow feel like each economy is like an airplane and we are all asking ourselves who is piloting it.
Thomas Sithole is an actuarial analyst and the head of Enterprise Risk Management Solutions at Bluecroft Actuarial Solutions. He is a columnist on the Financial Gazette’s website. If you have any comments or questions concerning any of the matters discussed on this platform, please do contact him on email@example.com or his twitter handle @ZimboActuary.
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