eBusiness Weekly
Chris Chenga
For years, there has been continuous debate in economic circles on the notions of supply side and demand side management. There is a quandary on how slumping economies should initiate growth strategies by leveraging on either one of the two.
Some argue that supply side interventions should precede demand side interventions, while others argue the opposite.
The difficulty especially for economies in prolonged slumps is that both supply side and demand side interventions do not easily work in tandem, hence the argument over which one to pursue first, but that premise may actually be merely myth and not empirically correct.
Consider Zimbabwe’s present economic outlook. A relatively low income base does not inspire demand side strategies, on the credible premise that citizens do not have significant incomes to drive potent demand (aggregate demand).
In the last quarter of 2015, the average Zimbabwean lived on $3,24 a day, according to national datum lines from ZimStat. Zimbabwe is classified as a low income country by the World Bank, and 72 percent of the population is said to live below universal poverty line. This is exacerbated by the fact that a prolonged economic slump limits the fiscal capacity of a government to pursue expansionary stimulus.
It is difficult for a government to pump up demand because it needs greater tax revenues, while simultaneously a widening budget deficit of $1,4 billion in the last year limits the proposition to add spending.
Conventionally, one would likely rule out demand side strategies for growth as being a viable option in Zimbabwe.
However, there is a case to be made that demand side strategies can still be pursued in low income countries.
What the aforementioned demand side facts should project is that in terms of attracting investment, government must be deliberate in pursuing the kind of investment targeted at low income countries. There is such an intentional strategy.
Agencies such as the International Development Research Centre (IDRC), has conducted research on how low income, middle income, and high income countries can pursue demand side stimulus through targeted investment structures.
This means that Zimbabwe should consciously inquire on what kind of investment is actually attracted to low income economies, and subsequently leverage on that investment as demand side stimulus.
Our demand side investment strategy cannot be the same as middle income and high income economies. Consider that an economy where the average citizen spends $3,24 a day is not a potential market for retail chains and direct sale producers; hence it is illiterate to expect an official ISUZU, Apple, Nike or IKEA store in Zimbabwe.
Such investment is illogical as very few people can afford those products at investment return volumes for such corporations. Such investment is more allured to demanding markets such as South Africa.
In other words, multinationals or transnational investors are not looking to set up shop where there are low income markets.
However, a demand strategy for investment is that foreign investors look particularly at sectors in low priced consumables and public goods.
For instance, investment in low income countries is largely into consumables that typically make up standardized basket of goods, for example soap, cooking oil, toothpaste, beer and other relatively low price items.
This is why the greatest investment flows into low income countries tend to be from entities such as Unilever, Dangote, and other companies involved in typical basket of goods at low prices.
The supply side boost in such investment is that investment into such sectors enhances efficiency and technology. Supply side strategies for growth involve the construction of plants and infrastructure that make it efficient to produce consumables.
There is therefore, a demand and supply side boost from an intentional investment attraction plan that caters to our income levels.
In terms of public services, low income countries tend to have huge unsatisfied demand for schools, clinics, and infrastructure.
There is an investment appeal in these sectors in low income countries. While these sectors are often perceived as merely donor dependent, there is a strong investment case within them that could result in demand and supply side stimulus for an ailing economy.
For instance, investment into public services stimulates wages in standardized professions such as nurses, teachers, and administrators.
By getting private investment into these professions, it is a subsidy to government spending which would otherwise take on all these professions. There is the self-perpetuation of growing incomes as targeted investment strategies bring about jobs for a larger group of citizens.
The myth that demand side and supply side interventions cannot be pursued simultaneously is flawed. The key is for policymakers to customize investment strategies that are crafted to respective economic and developmental outlooks.
Quite often, governments try to emulate strategies that are of unfitting structure and outlook; hence they do not yield specific results.
In Zimbabwe, we should take note of the economic structure we have, and the income level of the general citizenry.
After then crafting ideal investment strategies, income can rise to boost demand as supply side efficiencies and technology rise as well, making our industries competitive for the long term.
