The management of a structured economy depends, to a great extent, on the ability of both the administration and the central bank to formulate policies that affect unemployment, inflation, and and growth. In this short discussion, by unemployment I am referring to the proportion of the labor force that is unemployed. And for simplicity sake, inflation here means the increase in the general price level. As for growth, I have adopted the textbook definition of GDP which is the value of all finish products produced in a given year within an economy. I am not going to waste time discussing GNP for reason that will soon become apparent.
To influence the rate of unemployment which is normally caused by factors such as fluctuation of business cycle (cyclical), people changing jobs (frictional), pool of skilled manpower not keeping up with the demand for new skills in the labor market (structural)both the administration and the Central bank have to have mechanisms which only they can manipulate. For instance the administration can pour money into the economy through implementation of planned infrastructural development projects. The central bank would augment the administration's effort by lowering interest rates so business can borrow to purchase equipment, expand their production capacity. These two efforts if implemented in a measured and coordinated way, can create new jobs and lower the rate of unemployment.
Let's not forget that the secondary effects of these actions is the powerful undercurrent of the multiplier effect. They cause ripple effects as funds cycle through the markets creation of more money.
I have no doubt in my mind that the Zambian administration does pour huge funds into the infrastructural development projects. The question I have is, how does it measure the impact of its actions? How does it know that the rate of unemployment is being impacted by it actions and to what extent?
These are simple questions but they can be difficult to provide good responses to when the administration does not have a decent mechanism in place to associate facts together. The administration needs to know the baseline rate of unemployment first and then measure the change immediately the project has commenced.
To influence the rate of inflation, the administration can work together with the the central bank to reduce the volume of cash in circulation. This can be accomplished by selling financial instruments issued by the government. The central bank can do even more by increasing the interest rates. Both the selling of financial instruments and increasing premium rates give an incentive for people and businesses to put their money in the bank. However, such an approach would work well when the population has a culture of saving. Zambia has instead a consuming culture. In addition, the interest rates are always high. There may be a good reason for high loan rates and I intend to explore that in another piece. What is of interest at this time is to identify the mechanism the administration uses to influence inflation and how it measure the impact.
Again there is no doubt in my mind that the government sells bonds. The question is, to whom? Another pertinent question at this point would be, does the central bank have the power to increase or lower interest rates? If it does, how does it exercise that power?
Economic growth can benefit from all the above actions, assuming all the actions are done in a thoughtful, intentional and coordinated manner. However, institutional mechanisms have to be in place. The administration can augment the efforts by acting as a consumer in the products market. we all know that the government consumes just about anything one can think of. And once it does, it stimulates a chain of activities in the economy which has a positive effect on unemployment.
In view of the interdependence of the factors at the disposal of the central bank and the administration, measuring the effects of each action and predicting the extent of the impact on the fringes of the economy makes it look complex but in actual fact its very easy. The complexity is diminishes with the clear definition of and institutionalization of the mechanisms that the administration and the central bank can use.
When both the administration and the central bank begin to describe an increase in the production of raw copper and high corn harvest as increase in GDP, one wonders whether the country has the right set of eyes reading the economic indicators. I should not have to say it but copper cathodes and corn are intermediate products. In fact in the strictest of sense, they are raw materials. In their state, they should be excluded from GDP computation.
Excluding copper and corn from computation of GDP leaves us with absolutely no fundamentals to work with to determine the performance of the Zambian economy at any one given point. I think this is true because, as difficult as it is for the government to measure unemployment and the effects of its attempts to reduce the rate, it is even more difficult for the government to measure the incomes that were earned by households in the resource market. Assuming a close, two sector economy, the value incomes earned should give a suggestion of the value of all finished products produced in the Zambian economy in a given year which was bought by the Zambian consumers. Does Zambia have the mechanism in place to monitor retail sales? Who is capturing these data and how are they stored?
If it hard to compute GDP using such simplified approach, it is even harder to compute GNP. To start with, most of the manufacturing industries in Zambia are owned by foreigners. The proportion of what they produce has to be subtracted from the computation as we add the production of assets owned by Zambians abroad. I would be hard pressed to find Zambian nationals with assets worth writing home about reporting their earning to Zambia Revenue Authority on a regular basis. Or are there?
How then do we know the status and condition of the Zambian economy when there are no formal mechanisms in place to collect reliable data? Are these mechanism important? Howe difficult are they to set up?
Of course I am assuming that they are absent. If anyone knows better, please educate me.
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