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| Columns |
| Economic nad Business Forum |
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by
D D Phiri, 14 July 2006
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06:34:13
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Economic hard choices
About every step to attain a certain economic goal exposes one to a dilemma. There are at least two desirable goals. To reach one you have to sacrifice another. Attaining the maximum of both is almost impossible. In macroeconomics, some members of society prefer one goal, others prefer another. What the state does depends on which of the rival group interests exerts the most influence.
When there is a shortage of cereals such as maize prices shoot up, sometimes to dizzying heights. There is wailing among people with low earnings. They cannot afford the essential commodities. But among traders, those who happen to have in stock ample cereals, this is the time to make a killing. The prices bring with them wide a margin of profit. This is the reason the Nobel Prize laureate in economics Amartya Sea says under undemocratic governments famines are seldom tackled wholeheartedly. The ruling clique has its hands on the scarce product. Relatives of the clique do not suffer the agonies of starvation but benefit from selling the scarce commodity at inflated prices.
To ensure a better harvest the state may provide farmers with fertiliser subsidies. When you subsidise agriculture you are taking away money from another sector of the economy. Usually you tax secondary industries and in so doing you do deprive such industries of the profits that could be invested in the same industries for expansion.
When the government receives free maize from donors some farmers grumble that this free maize is spoiling their market. Such donations, if made regularly and frequently, are said to harm the agricultural sector in the recipient country. The interests of the consumer who is grateful to receive free or subsidised food are at cross purpose with the interests of the farmer.
The rains are over. The bumper harvest has been achieved. The astronomical prices have tumbled. The consumer is rejoicing but the farmer is waiting. He says the low prices make it impossible for him to recover the costs of inputs that he has incurred let alone make a tidy profit. He now thinks of reducing the hectarage he will allocate to cereals during next season and allocate some of it to cash crops like tobacco which he thinks will fetch better prices.
When a country’s exports are performing poorly, very little foreign exchange (foreign money) is received. The country’s currency weakens vis-a-vis the currencies of the main trading currencies such as dollar, Euros, pounds or yens. A weak currency makes imports expensive. Importers have now to pay for a dollar more kwachas or whatever currency they were using. Key imports like petroleum products are brought into the country at higher prices. Those who make use of this source of energy on a large scale now adjust prices upwards. Throughout the economy prices may give rise to cost push inflation which hurts all those with fixed incomes.
If the economy recovered as is the case in Chile and Zambia, with better prices for copper and South Africa with better prices for a variety of commodities, a country’s currency gains strength. Imports become cheaper, they enter the country and undercut competing products. A strong currency makes a country’s exports dearer and uncompetitive. Thus we see that neither a weak nor a strong national currency benefits all stakeholders equally.
One way of solving recurrent famines occasioned by droughts is to build reservoirs for irrigation. This may solve the famine problem, but it could introduce a health hazard if dams become breeding grounds of myriad mosquitoes as has been experienced elsewhere. Thus, we have to be careful that we do not solve the hunger problem at the expense of people’s health.
In some countries, trade unions are so powerful that they have successfully persuaded governments to enact legislation that has weakened the employers’ discretion to hire and fire. An employee may not be easily dismissed even if he proves non-productive. The employer is required to provide a variety of social benefits. For example, a pregnant woman may be given six months paid leave once she has delivered to nurse her baby.
In certain industries, governments at the behest of trade unions, have prescribed minimum wages which some employers find to be too high and they cry for liberalisation of the labour market meanwhile. The employers refrain from recruiting more workers because of the burdens they are required to bear including the legal difficulties they face when they want to dismiss unsatisfactory employees. Hence legislation which was intended to benefit the workers may contribute to the unemployment of some of them.
When we tackle an economic problem we must constantly bear in mind both the nominal (money) and opportunity costs. |
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