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All the President’s men and their equation

Opinion & Analysis
“Sectors such as agriculture, mining, manufacturing and tourism are reeling under considerable financial distress, which remains the single biggest challenge towards the sustainable growth of the economy.

“Sectors such as agriculture, mining, manufacturing and tourism are reeling under considerable financial distress, which remains the single biggest challenge towards the sustainable growth of the economy. (This includes) a cocktail of debilitating challenges facing the entire economy (such as) high cost of short-term funding, (absence of long-term funding,) high utility costs, (unreliable utility services,) old equipment, (diseconomies of scale,) high labour costs, (bloated overheads and poor productivity,) external competition, shortages of (locally produced) raw materials, low (local and international) demand and poor export performance continue to affect growth.”

Report by Tapiwa Nyandoro

So read Confederation of Zimbabwe Industry (CZI)’s concerns presented at a meeting called by the President’s Office according to recent Press reports.

In short, the economy is in bad shape.

Where and how to begin remedial action is the challenge.

In general the task of economic stabilisation, which has been under way in Zimbabwe for the past four-and-half years, involves the use of wide-range fiscal and monetary instruments and sometimes more direct controls, in order to influence both consumption and investment.

With the local currency having been “burnt out” at the beginning of the era in 2009, monetary instruments have all been but dead, making the government’s task a lot harder.

It is heartening, however, that the need to stabilise and grow the economy is receiving attention from the highest office in the land and now, rather auspiciously, in the Sadc region.

An operative from the President’s Office, most likely from the economic desk, the ones with the license to think and not the 007 variety, chaired the aforementioned meeting with the CZI and other private sector organisations.

He must have been taken aback at the enormity of the challenge ahead.

To grow the gross domestic product (GDP), the new Zanu PF government needs to grow consumer consumption, investment, government purchases of goods and services plus exports while reducing, by comparison, imports.

Thus, as per finance and development issue of June 2009, the President and his good men, are faced with the equation: “GDP = C + I + G + NX where GDP is the value of final goods and services produced in the economy, with the right side of the equation the sources of aggregate spending or demand: private consumption (C), private investment (I), purchases of goods and services by government (G) and exports minus imports (net exports – NX)”.

Away from the political campaigns; safe for a while from the madding crowd, relieved from the well-earned taunts of the vessels of wrath by the 2013 electoral results, the equation lays bare to his Excellency the way forward.

It may be important to note there is no Indigenisation or empowerment in the equation, unless in a way they may positively influence consumption, though likely to negatively influence investment.

The equation makes it evident that governments affect economic activity — GDP by controlling G directly and influencing C, I and NX indirectly through changes in taxes, transfers and spending.

With widespread poverty, low demand and a huge public debt burden, local private consumption and investment are virtually at a standstill if not regressing.

The story is the same with G-government spending and NX.

That leaves foreign direct investment to boost C, I and NX, the latter courtesy of the nation’s resource endowments in the medium to long-term.

In the short-term, with no room to cut taxes, a stimulus, via a bail out of some, is needed to stabilise the economy, by providing liquidity, fresh capital and debt relief to central and local government, households and key institutions, besides lower interest rates going forward, amongst other instruments.

Borrowing from history, Derek Aldcroft, in his book The European Economy 1914 – 1970, noted that Western Europe’s successful post Second World War economic performance can be attributed to a number of factors including higher rates of input of capital (investment) and labour (consumption), rapid technical progress (increased productivity as a product of investment) and a high level of demand, as G and NX rises — such as a greater integration of Sadc will provide.

He thus also noted that “the greater degree of international economic co-operation and better macro-economic policies had a favourable impact on growth generally, but especially on demand (exports)”Recently, China has excelled in using the same equation.

Investment and net exports have been the key drivers for raising its GDP over the past three decades.

In turn, it provided cheap labour and a vast growing demand, thus making the relationship a symbiotic.

It owes most of its phenomenal growth to international economic co-operation.

With a strong base thus laid, China is now shifting to services and consumption (C) to keep its economy growing. Sadc can do the same.

As deputy head of Sadc and still smarting from his 2008 near political death experience, President Robert Mugabe should make the most of his new position.

His secretary-general, from the more vibrant East African community should be of great assistance.

Equation in one hand and a moral compass in the other, let the nation see some transformative leadership going forward.

Mending fences with Botswana and South Africa in Malawi recently was a good beginning.

Doing the same with Whitehall and the Whitehouse could unlock the stimulus that is so urgently needed.

As Aldcroft observed, countries with higher rates of factor inputs also reaped large productivity gains and exported more.

Once bitten, (hopefully) twice shy.

nyandoro.osbert1@gmail.com or feedback@newsday.co.zw