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Simple but overlooked economic dilemmas

With DD Phiri:

The purpose of engaging in economic activities is to sustain our lives to better our conditions financially. But before we get what we want we must suffer discomfort. The great American Benjamin Franklin stated something like “No gain without pain”.

Suppose the government wants to put in place a major project such as reforestation or opening a mine. Before the fruits of the project are realised, someone or some people will have to be displaced. This is what happened in the early 1950s when the Chikangawa Forest was started in Mzimba District. On that land were many villages of the Kanyinji sub-clan of the Tumbuka tribe. They were ordered by the government to go and dwell elsewhere. I am not sure if they were given compensated.

Their staple food was kambala millet porridge. They were forced to relocate on pieces of land where soils were not so good for millet growing.

In Karonga District, the Kayerekera mine project also entailed displacing some people.

One group’s gain entails another’s loss. This happens in the export and import business, when the currency of a country changes its value, either because of appreciation and depreciation on the one hand or revaluation and devaluation on the other hand.

Appreciation is an automatic factor in a free market when the exports of a country become very popular. Foreigners bid for that country’s currency in order to have the means of paying for the much desired imports such as oil. Importers and buyers of the imports now find the imports cheaper. To such people, appreciation of the currency is beneficial

Appreciation of the currency, however, makes exports expensive. Exporters find their exports uncompetitive. To them, appreciation of the currency is inimical to their interests. Hence when you hear some people rejoicing that the currency is now stronger, you can rest assured that they are importers and buyers of imported goods.

Depreciation is the opposite of appreciation and is appreciated by exporters, to a competitive market because it makes exports cheaper than those of competitors, other things being equal.

Revaluation and devaluation are deliberate official decisions by the money authorities – the Central Bank and the Minister of Finance. In the export and import business, they have the same effect as appreciation and depreciation.

Inflation is the general rise of prices. According to the Chacago School of Monetarism, led by Professor Milton Friedman, inflation is exclusive due to excess money circulating in the economy system.

Other economists recognise the contribution of payment, that exceed productivity such as higher wages forced on an employer by trade unions that are above the percentage of sales of products. Quite often, inflation is fuelled by essential imports like petroleum when its price is raised by Opec.

Whatever has caused the inflation, it hurts creditors and benefits debtors. Creditors suffer because inflation reduces the purchasing power of the money they lent out. Debtors benefit because the money they have to pay is now less in purchasing power.

To combat inflation, the central bank may raise interest rates and use other means of credit squeeze. This makes it difficult for business people to borrow and fill the system with excess liquidity. That is too much money; when this is continued beyond a certain point, it brings about recession in the economy. Businesses, unable to obtain credit, close some branches and dismiss some of the workers. Thus in trying to reduce inflation (the general rise of prices), you may create unemployment.

There was a time when policy makers and economists used to say governments should live within their means, that they should not spend more than what they earn in taxes. This counsel of perfection is hardly possible these days. Most governments engage in deficit financing spending more than they raise in taxes in order to combat unemployment or pay debts.

A government that defaults on debt will find it difficult to borrow in future. It must be seen as reliable.

Raising minimum wages from time to time benefits those who retain their jobs. Some employers, upon finding the compulsory minimum wages too high, resort to the use of machines instead of human labour. Thus, if the minimum wage is too high, it can create or worsen unemployment.

There are many examples where what benefits one group may hurt another. A bumper harvest brings about reasonable prices for consumers but farmers grumble about low prices.

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