Single minded policy interventions do not work

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Chris Chenga
There is a theory of a multiplier effect, where policy interventions have respective levels of reverberating influence across an economy. Policy interventions can be varied. Commonly, a multiplier effect was often in reference to the increase in aggregate demand arising from any new injection of spending into an economy. This can be attributed to monetary or fiscal expansion that places more spending power into consumers’ or businesses’ hands. More modern economic perspectives have gone on to identify diverse multiplier effects that are in correspondence to other particular policy interventions.

For instance, a fiscal multiplier is a more precise manner of calculating the effect of fiscal budget adjustments on different macro-economic outcomes.

This help in times when governments have to make a choice between two policy interventions, and so they have to weigh the reverberating effects of both interventions against each other. It is understood that in such adjustments for example, focusing on finding more revenue generating activities is more potent than cutting spending from fiscal budgets.

Thus, greater emphasis should be placed on generating more revenues for tax collection than simply cutting spending. The tie breaker of the two policy alternatives is the more positive multiplier effect of revenue generation than spending cuts.

Unfortunately, there is a complacency that comes along with single minded multiplier effects. There is a misconception that single interventions suffice to achieve their purpose. Frequently when a policy is made, judgment is passed on merely expecting an impressive multiplier effect from that one policy. So policy makers and citizens alike end up having unreasonable expectations in what single policies can achieve for their interests.

The best policy makers, however, understand that interventions must be a series of conforming policies that support one another and that the multiplier effect can be seen in another sector or outcome within the economy.

To a lesser degree of accountability, market participants in various sectors and citizens alike must understand their role in enabling policy interventions to work.

Thus, for market participants, realisation should be that certain policies do not work if participants do not subsequently carry out desirable actions to see the policy to success. So for multiplier effects to have a potent effect on the economy, policy makers and market participants must position their responses accordingly to carry through a sequence of cohesive policies.

Let’s look at a case study from real occurrences in our economy. Consider the consistent hopes in Zimbabwe on single monetary and fiscal policy interventions to take a positive widespread effect. Recurrent bond note injections are often expected to have potent effect on a cash crisis.

But, just like a human being has to take medicine and still also have to eat healthy, policy interventions have to corroborate. Therefore the monetary and fiscal expansion of recent years has to be accompanied by supportive productivity.

Many stakeholders seem to wait on this premise, especially policymakers themselves. There is little supportive industrial policy to push through the productivity imperative, and it seems respective ministries do not stand up to accountability in this context, rather shying away from the cause altogether. Also, whether justifiable or not, market participants themselves also then act in a manner that decreases the potential gains of monetary and fiscal expansion, particularly capitalizing on monetary trading which has mere short-term dividends for a very few in the economy.

So as many observers still see long queues and cash burdened citizens, they often query the multiplier effect of monetary and fiscal expansion. But, as a country we seldom ask what is stalling such multiplier effects to come around, and instead we focus on attacking the perceived impotence of fiscal and monetary policy.

National conversation then should neither be rigid along why aren’t monetary and fiscal expansion working as initially purported, nor should it be focused on consistent criticism and alarmism of the monetary and fiscal risk.

There is significant nuance to appreciate here. In our economic circumstances, there is only one direction to go, and that is that is monetary and fiscal expansion. Both monetary and fiscal expansion we never wrong, they have just hardly been supported in action. Both mechanisms have already been put into place, largely as they should.

However, the focus now should be to enjoy the benevolent multiplier effects of those policies, what other interventions should corroborate these efforts, and what should respective stakeholders act like in accordance to desirable outcomes.

Furthermore, it was really progressive to see recent stakeholder such as Confederation for Zimbabwe Industries and the Reserve Bank of Zimbabwe exchange sound bites on the correct metrics to trace policy potency; for instance, the debate over capacity utilisation or a Producer Price Index.

Often a mistake in many developing economies is the misinterpretation of actual multiplier effects. Often this is a derivative of referencing benchmarks that are inherited for elsewhere, or computations conducted under vastly dissimilar developed world scenarios. This is true for both economic and societal metrics. It should be encouraged then to have a set of precise metrics that can be assessed seasonally to trace the potency or policies.

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