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Thinking Development

By Christopher Guta, PhD:

This column discusses development from a learning and innovation perspective. My belief is that Malawi’s development prospects rest on action to acquire new economically useful knowledge (learning) and applying it (innovation) to create new sources of income. Income growth will stimulate national development.

Today, I am discussing disposable income – the fifth issue I promised, prior to announcement of the election results, to flash out from the manifesto of whichever party would win national leadership at the polls. Until the challenge of presidential election results is resolved by the courts, constitutional order requires me to discuss the Democratic Progressive Party (DPP) manifesto.

Disposable income is seen at two levels. First is where income that remains after deducting statutory tax, either in the form of ‘Pay As You Earn’ or corporate tax, is counted. For individuals in formal employment, earnings are also subjected to pension deduction which is statutory.

A second level is where income remaining after deducting both statutory and expenditures for goods and services that are necessary to sustain a decent quality of life is counted. The additional deductions include, at the minimum, expenditures for food, clothing, housing and related utilities (water, electricity etc) where they are commercially provided. The cash that remains at this level is called discretionary income because individuals decide how much to spend on the necessary but discretionary items. I must add two other important items that determine discretionary incomes. These are savings and investments.

In rural settings, disposable incomes are cushioned by ‘free’ services households and individuals access including public health services and water. However, even in rural settings, incomes are eroded by other forms of taxation— notably, value added tax and duties. An important source of erosion of incomes, however, is inflation, which is driven by the quality of national economic management.

So, the DPP will impact on our disposable incomes in at least three ways. First is the policies the party will set regarding taxation. Second is how the economy will be managed so as to control levels of inflation. Right now, disposable incomes are already reeling from inflation triggered by depreciation of the Malawi kwacha against the United States dollar. Third is how the party will increase labour productivity. My take is that the third way, increasing labour productivity, is the most critical because, generally, disposable incomes increase when total incomes rise faster than inflation for a given level of statutory deductions.

In totality, the DPP manifesto addresses labour productivity improvement and, if the propositions made are implemented efficiently and effectively, disposable incomes may increase. One cross-cutting proposition that stands out is that of investing “close to 2.7 trillion kwacha in infrastructure alone in the period 2019 to 2024”. Our poor infrastructure increases the cost of doing business, which reduces earnings. For example, road access to the east bank of the Shire Valley, which has potential to produce a range of exportable commodities including rice, is a nightmare currently. Construction of national telecommunication infrastructure that lowers the cost of services to farmers will ease access to markets, thereby limiting produce waste while raising incomes. I, however, hope that the party will not compromise the quality of infrastructure it will construct in the next five years. A key strategy to this end is abatement of corruption by enforcing transparency and accountability in awarding contracts.

Labour productivity by the youth can also improve if skills development propositions in the manifesto are implemented. It would be beneficial if trades being taught under the Tevet system were diversified. No harm to learn from Tanzania where the Tevet system has a diversified curriculum and its graduates are providing goods and services that meet the needs of society.

Gains in disposable income from higher labour productivity may be lost if poor macro-economic management exists since the resultant high inflation will lead to price increases in goods and services. Currently, while food inflation is declining, non-food inflation is on an upward trend. Increasing public expenditure, as would arise from the larger Cabinet hired recently, can lead to higher levels of public debt, thereby crowding out the private sector which needs financial resources to generate wealth – a source of tax. Indeed, as the DPP administration seeks to “increase domestic resource mobilisation” to compensate for donor inflows, care is needed not to increase the tax burden. Macro-economic modelling of Malawi’s economy shows that a decrease in tax burden raises economic growth which stimulates national development.

Is the Malawi Economic Justice Network still alive and active? If yes, it needs to help us evaluate how DPP will work for the public good so that disposable incomes grow in the next five years.

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