eBusiness Weekly
Joseph Mverecha
“For my people have committed two sins (commissions) — they have forsaken me the fountain of living waters and have hewn out broken cisterns that cannot hold water” Jeremiah 2 vs 13.
These were the iconic words of the Prophet Jeremiah in respect of the spiritual condition of Jerusalem and Judah, at least six centuries before Christ and against the backdrop of the approaching hoof beats of the Babylonian captivity.
If Jeremiah was speaking in similar prophetic terms about our situation, he would probably double the number of our commissions. At least four of our many commissions, stand out distinctly and prominently, as below.
First: The myth of money and the growth of the economy. No doubt, money is very important for business expansion, employment and growth.
Money virtually oils the economy and liquidity is at the heart of financial intermediation and positive asset transformation, critical for economic growth.
No wonder all the major world recessions have been associated with sustained monetary contraction, including the most recent 2008/09 global financial crisis. As an engine without sufficient oil can hardly function, so is an economy without adequate money.
Importantly however, there are limits to what money can do for the economy, in particular local currency or local dollars. It is a timeless principle in monetary economics that money, like wine is good in moderation, and only for as long as it remains scarce.
Since time immemorial and since records on money and the economy have been kept, no country has ever solved its economic or structural problems by printing more.
This is true even for the largest economies such as the US, China, Japan and Germany, though for these economies, some of the downside effects of the money they push through the economy, (through quantitative easing), are absorbed by the global economy, in particular the US, whose US dollar is an international reserve currency.
Unfortunately for small open economies like Zimbabwe, (whose GDP is less than 0,01 percent of world output), the full effects of money are absorbed by the domestic economy, as our share of international trade is of no consequence at the world stage, where we are also price takers.
We are beholden to the vagaries and vicissitudes of global economic trends whose determinants are completely beyond our control. We can only navigate. Agility and flexibility becomes critical for all small economies.
In similitude, that is how the Russian T34 tanks and Allied Cromwell and Sherman tanks could even take a stand in the raging Second World War battlefields against the fearsome German Tiger tanks — a 57-tonne behemoth. But even then, they needed to be a 100 Shermans against 10 tigers.
Depending on the magnitude of the interventions, the difference between a small open economy and a large economy such as the US, can be thought of and illustrated by examining what could be the likely outcomes of throwing a boulder in my backyard swimming pool vis a vis throwing a house into the Kariba dam.
The consequences and outcomes are different. For my backyard swimming pool, it may be its Waterloo, whereas the Kariba dam can easily absorb the full shock and survive to tell its story, another day.
Incredibly, we seem to have an entrenched belief that more money — specifically more local currency is inherently good for the economy, especially if such money is directed towards production.
As long as the money is deployed for production, necessarily this must be good for the economy, so goes the summation. Could this be so?
Echoes of days gone by. Not exactly, but even the slightest inclination would probably reignite considerable apprehension regarding the capacity of monetary stimulus to sustain economic growth.
To be sure, we are nowhere near 2007/8 and no need to draw parallels. During that unfortunate episode, etched indelibly in the memory of every Zimbabwean, the monetary train had assumed a life of its own. Even when a few voices within the Reserve Bank of Zimbabwe and outside cautioned on the dangers of excessive money growth — these were silenced, effusively and extravagantly by a compensatory standard cryptic response, “we do not listen to 18th century economic theories . . . and yet further “tinoita zvinobatika”.
Literally translated, “we focus on what is seen”. In any case the money was being directed towards production? Ironically as more money was pumped relentlessly into the economy, more mines were closing and being waterlogged, industry capacity utilisation nosedived and foreign currency challenges persisted, even escalated.
But the panoply accelerated inexorably, all through to 2007 — subsequently evolving into all sorts of quasi-fiscal interventions including scotch carts, grinding mills, farm implements, big and small items, — an endless listing, with the Central Bank eventually becoming the defacto financier of nearly all government operations, foreign and domestic.
Then came 2007/08 — the complete decimation of a currency, completely without precedent — a primer in monetary economics 101 that money is good only in moderation.
The central bank governor deserves commendation for valiantly making efforts to keep the economy going, against all odds.
However, perhaps, the time has come for us as Zimbabweans to ingrain within the national belief system and in particular future generations, the truth that the central bank is not necessarily the solution to all the macro, micro and structural challenges confronting the economy.
That the more its functions are narrowly defined — codified narrowly to deliver only on price and financial stability — that if this is achieved, this still remains the greatest contribution a Central Bank can make towards long term economic growth, stability and welfare enhancement for the people.
My little write up here is nowhere near Monetary Economics 101 but for the avoidance of any doubt, there are limits to what local money can achieve for the economy. At the micro or household/individual level money works wonders, even miracles.
For this reason, young upwardly mobile entrepreneurs, nay “tenderpreneurs” loaded with money can literally adopt a moon walk and even afford the eccentricity of abandoning their original names (names such as Garanowako Gayihayi) for some spicy, Sir something or the other.
But at the macro level or in aggregate, money is only good as a residual, that is when monetary authorities supply money in response to rising demand for money which is a function of rising aggregate demand, itself a function of growing economic activity or real GDP growth.
We may ask — What are the chances of money engineering economic activity and growth? The answer is, unfortunately, not much, even where there is such growth; this is for a limited duration, known in macro-economic parlance as the near term growth prospects.
One might say, but there are companies in Zimbabwe that have increased capacity utilisation, production, employment, and output — and the impact of that is known in terms of output and even exports. Well and Good.
There would be need to unpack the second of the four commissions, which the Prophet Jeremiah would have observed and digest a few insights into the way monetary policy works, over different time horizons (the short run and the long run).
Further, what we do not observe (in the real exchange rate) — has far reaching implications for the economy.
Second: The long run and the short run interposition. The economy functions over different time horizons — the short run, the medium and long run.
Over the shorter horizon, it is possible for money to stimulate aggregate demand and therefore economic activity, growth and employment — and only over the short run. This is the basis of Keynesian type interventions in the economy over the near term, as happened across the globe following the 2008/09 global financial crisis. This is only true if this important condition is satisfied — that inflation expectations are significantly way below natural rate level, i.e. the economy is characterized by low or non-existent inflation expectations.
For a small open economy, like Zimbabwe, a further condition is that the economy must have access to foreign exchange at non-inflating prices.
Unless foreign exchange is available to satisfy the increased demand, then the near term implications of stimulus measures is a surge in parallel market premiums, leading to escalation in prices which is certain to affect all sectors of the economy, with implications for output and employment.
This is because of the difference in the pace of price adjustments in financial market prices (which is instant) and real sector prices (subject to distributed lags). If the above conditions are satisfied, authorities can engineer a temporary increase in aggregate demand (and therefore growth) in the economy towards full potential output level in the short run.
In the long-run, the economy’s capacity to produce goods and services is only a function of supply side factors — our investment in capital, technology and labour and the efficiency with which these factors are combined in the production process.
This is the equivalent of money neutrality — or simply that “money has no impact on growth in the long run.” If this were not the case — all countries would postpone the hard decisions and painful structural reforms and just print money to engineer growth. Achieving and sustaining economic growth is no easy walk in the park. We must not take the easy road of thinking that money can substitute for or be in place of all the hard choices on structural reforms that are necessary for the economy.
Third: The Allure of Partial Equilibrium Analysis. This is yet another of the great challenges we face as far as policy analysis is concerned. The economy is by design an integrated system of multi-layered and multiple interactions.
A single policy inception will trigger multiple or ripple interactions not totally dissimilar from what happens when a pebble/stone is thrown in a pool — the stone typically triggers a concentric spiral of tidal waves in all directions from the centre i.e. inception point. The only difference is that in the real economy the nature of the interactions will be diverse — some in the direction of policy, other interactions will be in the opposite direction or countercyclical.
There is rarely a one directional process. Yet this is how we evaluate economic policy most of the time. A good example is the celebrated Si 64 (modified recently to Si122). Everywhere, policy makers and industrialists have not missed opportunity to extol the virtues of the Si64, and how this measure has had spectacular results for Industry!. Maybe we should celebrate.
However, should we not have a complete evaluation, an all-round evaluation of the pros and cons of the policy in entirety, also to include the calculation of the fiscal revenue loss arising from the widespread smuggling of goods under Si64? So that, at least the analysis is complete.
A comprehensive analysis and interrogation is required, for instance, if Si64 is really as glorious as we make it to be, why is it that capacity growth in the manufacturing sector has been most pronounced in those sectors not protected by Si64? This may be for another discussion.
The point is that we must not make a bee — line for overly simplified conclusions, on the basis, of linear one directional analysis when in reality, the economy is significantly much more complex than what meets the eye.
Fourth: What we do not see is not important: It seems that by far and away the greatest albatross we carry subconsciously is this silent, yet deterministic frame of reference — “what we do not see is not very important”. Unfortunately, for Economic Policy what we do not see is significantly much more important than what we observe on a daily basis. Equivalently, what is unobserved presents more dangers to policy effectiveness than what we often see. Usually policy makers are privileged to have access to a battery of information indicators rarely available to the rest of the country.
Nonetheless, they should always ask themselves the important question —“what else am I not seeing about the economy?”
The economy is characterised by millions of daily decisions undertaken by millions of economic agents, households, firms and the Government in different markets. Among them, the goods, financial, foreign exchange, labour and capital markets.
These decisions give rise to demand and supply of various goods and services, capital goods and labour, hence determining prices and quantities. For the most part, we observe the nominal prices — nominal interest rates, nominal wages, nominal exchange rates – among others.
Beneath these nominal variables, however lies, with deadly potency, even more deterministic variables that affect the economy, such as the real exchange rate, the real wage and the real interest rate.
These real variables largely determine equilibrium conditions in the economy, they determine the magnitude of imbalances and they determine how the economy allocates resources. For instance, whenever there is a surge in imports of non-business vehicles (e.g. household or personal vehicles) year after year — it is usually a first sign that the real exchange is, appreciated or an indication of an asset bubble, usually a first cousin of an appreciated exchange rate.
Economic agents therefore respond by abandoning production in preference for trading, reducing large swathes of the economy to briefcase enterprises. The real variables are the key determinants of economic activity.
For as long as the real exchange rate is appreciated, (in real terms), no amount of local currency interventions will sustain production or competitive advantage beyond the near term. They are important but they represent a band aid, beneath the wound may continue to fester imponderably. This is not to say such interventions do not assist, but that they are essentially short-term measures to salve what is a widening equilibrium chasm beneath the labyrinth.
Sooner, rather than later, the real underlying imbalances will manifest. It is not too late for us, collectively, as a nation return to the “old cisterns” of monetary prudence and revere the awesome power of money both, to build and to destroy, more potent than a summer veld fire. Money is probably the last thing the economy requires, not necessarily always the first.
Joseph Mverecha is an Economist with a Local Commercial Bank. The views expressed in this article are entirely his personal reflections.
