03-14-17 by Spotlight Zimbabwe

The flaws in Zimbabwe’s economy

NEWS24 recently published this:

Edward C D Ingram

On Monday, government buckled under pressure and resolved to pay 2016 bonuses to the civil servants and avert a brewing industrial action. Finance minister Patrick Chinamasa said Treasury would look for the funds.

The move comes at a time when government has been charming the international community with promises of reforms to get lines of credit required to reboot the economy.

Analysts told NewsDay the payment of bonuses was driven by populism ahead of the 2018 elections.

“It’s a reflection of both fiscal indiscipline and desperation especially with an election looming. Government is quite vulnerable,” economist, Godfrey Kanyenze said.

“It means you have to find money somewhere and that somewhere is difficult to figure out.”

Government has been borrowing from the domestic market to finance the budget deficit, thereby crowding out the private sector.

What a shame.

Avoid borrowing

The government, like most economists, does not understand that they should hesitate before  borrowing money. There are alternatives.

HERE IS WHY:

When the government borrows, it issues government stock – bonds/treasuries; there are various names given for this.

Doing that changes the shape of the savings industry and takes money out of circulation – which is the intention. The intention is to enlarge the government sector and reduce private sector spending. It also crowds out the means for businesses to borrow by using the same method – so investment in business suffers.

The standard alternative for expanding the government sector is for the central bank to create more money for government to spend, and to raise taxes to mop up the extra money coming into circulation.

ZIMBABWE’S REAL PROBLEM is that the government cannot create US dollars to spend. It does not have its own currency.

When a nation has its own currency, it has to behave itself by not creating too much of it. But without its own currency a nation can actually go bankrupt. It has to buy or borrow all of the money it spends – and pay interest. WHICH KIND OF MESS DO YOU LIKE?

A government can make just as much mess from doing that as it can by having its own currency and creating hyper-inflation.

It is a question of which kind of mess you want.

1. A slow downwards spiral as people spend hours queuing to get the spending money they need and with a currency value which can ruin businesses and does not serve its purpose

or

2. A high level of inflation which does all kinds of damage.

FIRST THINGS FIRST

Either way, to resolve this problem the government first has to decide how big a spender it needs to be.

Once that is decided, it can create all the money it needs to spend.

Then it can ensure that the private sector has enough money to spend.

This is what should happen.

There is no way to avoid deciding how big a spender the government needs to be. That comes first.

HOW MONETARY POLICY WORKS

Check this out.

FIG  1 – An imaginary economy where everyone puts everyone else to work

All incomes spent            on all outputs              provide all incomes (and full employment)

Let your eyes go around that circuit a couple of times. What one person spends is another person’s income. If that person does not spend, there is a shortage of spending and a shortage of incomes.

The reality is that all incomes do not get spent. Some part of all incomes gets saved, and some gets diverted to imports, and some is just put on standby in case of need.

There are two ways for money to be created and which can enable additional spending to fill the gap when not all of everyone’s income gets spent:

1. The banks can create money and lend it. Zimbabwe’s banks need lower interest rates to do that.*

2. The government can create money and give it to the people to spend. This is what the Positive Money group in the UK is shouting about. It makes sense.

But they need to understand a few more things before that will work as they hope it will.*

* There is no space to go into all that. Maybe next time…

Edward C D Ingram is the founder of the Ingram School of Economics, a school which is growing in influence. He is also provider of the world’s first ever certified course in the subject, starting in May 2017, at NUST’s Centre for Continuing Education under the title Macro-economic Design and Management. www.nustcce.com. Contact him on Skype at edwarding2.

Posted in:

Join the discussion

Your email address will not be published.

Start a discussion

write a comment