How trade balance has manifested in our economy

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David Autor

Future payments, wages are still due for past balance

Chris Chenga
One of the main ailments of the Zimbabwean economy is that it had become marginally uncompetitive in production. That means that in a comparative context of cost increments in a production value chain, industry had turned into a being trading economy by the margin instead of committing to production.

For instance, if an automobile assembler in an economy cannot find production components such as nuts and bolts at a marginal cost within the final product’s pricing benchmark, it will be forced into either outsourcing operations to an entity or it will outright import cheaper nuts and bolts from a more efficient producer outside of that economy. This is what has been going on in Zimbabwe.

Consistent to this observation, it is very difficult to find any product on the market that has a complete value chain of production that is entirely satisfied within the economy.

Massachusetts Institute of Technology economist, David Autor, took this occurrence and presented in a provocative perspective. He argued that a trade deficit for an economy can be representative of future payments that are accruing to trade counterparts.

When countries study their trade balance they must be cognisant that certain imports, though they may present a nominal figure captured in the national statistics, are receipts of longer term obligations.

For instance, Zimbabwe has been importing motor vehicles for years. When analysing that specific product’s impact on the trade balance, nominal figures of purchase value are included into the statistics.

However, David Autor’s proposition suggests that as the nation has been importing motor vehicles it has also been accruing future payments for the components that will be incurred as service costs, and other constant maintenance bills that come with a motor vehicle.

When a citizen buys a Toyota Hilux from South Africa, included in that transaction’s impact on the nation’s trade balance is the future obligations for components that are part of servicing and maintenance of that product’s life span.

Otherwise, the balance of payment surplus or deficit is deceptive if not taken in its proper context. So when we read Zimbabwe’s nominal trade deficit to have been averaging $256 million from 1991 until 2017, we have to consider that a real value calculation would include the future value of payments for those imports into the future.

Now, a lot of products in Zimbabwe are assets that have relatively long- term life span, whether capital equipment for factories or capital assets for consumer utility.

Accordingly, when governmental institutions such as the Ministry of Industry and Commerce are preparing a trade agenda, or industrialisation strategy, they must incorporate this within their analytical approaches to trade.

David Autor’s proposition then goes on to suggest that through every trade transaction, there is value given or taken by either trade partner that resembles what is then considered the trade balance between the two nations.

In more developed economies, trade transactions may be settled through the exchange of a nation’s securities or other financial assets for whatever product may be acquired, for instance an EU or US trade deficit can be sustained by the government issuing treasury bills to the country it is buying products from.

But, typically for developing economies such as Zimbabwe — further augmented by our lack of local currency — we have been conducting trade giving up the monetary value of hard US dollars.

Indeed this is why we find ourselves in the current scenario of a liquidity squeeze that without improving the trade balance, we cannot sustain. Thus, the Zimbabwe’s only economy is to find import substitution responses that turn the tide of the trade balance.

A further narrative to consider in Autor’s trade balance perspective is that of the impact of trade balances on local wages. While many Zimbabweans still perceive their wage demands on an industrial comparative manner; for example, Accountants in South Africa may be paid a certain amount, so as a Zimbabwean I should be paid similar in parity to exchange rates. That is not the case.

If South Africa exports accounting or financial services to other countries and has a trade surplus in this particular sector, the continued demand for these services means that South African accounting and financial professionals will have higher real wages that their trade peers in this sector.

That is how real wages are actually determined. The simple premise is that sectorial trade balances are a more accurate determinant of wages than, say, exchange rates between trade counterparts.

Indeed this explains the real wage imbalance that Zimbabwe has been going through since dollarisation. We have been expectant of a scenario where wages are benchmarked by exchange rate when in fact the economy cannot sustain such real wages as determined by the trade balance we have developed over that time span with our trade partners.

David Autor’s propositions, though still argued within economist circles, seem to give precise explanation into Zimbabwe’s economic outlook.

If we are to abide by his perspective, then it is imperative that Zimbabwe reduces its trade deficit in a strategic manner where future obligations are reduced; that means import substitution should strategically target capital goods that may require future servicing and maintenance costs that are not reflected in nominal purchase prices.

Furthermore, if the local labour force intends to yield growing real wages, let alone competitive wages across economies, then the trade balance must reflect greater productivity towards trade counterparts having a demand to increase our wages as we furnish them with goods.

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