eBusiness Weekly
Luke W. Gumbo
There are decades when nothing happens, then there are weeks when decades happen. The statement attributed to Vladimir Ilyich Lenin in 1918 rings true long after his remains turned to dust. It has been over a year since the Government of President Emmerson Mnangagwa was issued with a fresh five-year mandate with which to steer the country’s economy and with it ordinary people’s lives into an era of prosperity.
In the space of a year much has transpired in the monetary and fiscal space where Professor Mthuli Ncube appointed as Finance and Economic Development Minister, just a little under a year ago, is the organising authority.
Upon his assumption of the Finance and Economic Development portfolio, the youthful looking minister cast a figure breaming with confidence, as backed by an illustrious academic and business career he waxed lyrical about how he would surgically attend to a stricken economy with a cocktail of measures that following a period of harsh medicine would soon see the patient positively respond to treatment.
Like any highly accomplished man, he was not shy to share his opinion. A little under a year on, missed forecasts, a number of pivots behind him on August 1, 2019, he appeared less convicted about his overriding philosophy and more concerned with the nuts and bolts of his task.
Some have averred that the numerous pivots that have so far characterised his tenure are evidence of a flailing mission that has confounded even one of the country’s most astute economic minds.
The final outcome remains to be determined, however, pivoting is not evidence of compass failure but is an essential part of the transition to an inclusive growth driven economy. The trouble with economic policy is questions and their proffered solutions have traditionally been posed as once-and-for-all choices of economic policy instruments or policy rules.
The positive policy problem amounts to asking how the private sector responds to alternative policy choices by the policymaker. And the normative problem amounts to asking which particular policy choice gives the best outcome, from the viewpoint of a hypothetical enlightened social.
But this approach squares poorly with the way most economic policy decisions are carried out in practice. Actual policy-making is better described as an ongoing process, where policymakers set and revise policy instruments sequentially, than as once-and-for-all choices of policy instrument or policy rules.
It would be safe to opine that the Professor could not have been prepared to deal with the numerous contending interests and their promoters.
Actual policymakers are realistically described as politically appointed agents, whose choices are coloured by political ambitions and responsibilities, than as enlightened social planners. It is often the flaw in our analysis of the minister’s work that we assume our best desired outcomes correlate to the minister’s path to those outcomes.
If one takes these aspects of actual policy-making seriously, a logical next step is to go further in the positive analysis and treat policy, not as an exogenous set of parameters, but as an endogenous equilibrium outcome of the policy-formation process.
Such an extension also changes the focus of the normative analysis. If equilibrium policy depends on the institutions in the policy-making process, some institutions may be more conducive to good social outcomes than others. To understand this process it is better to appreciate his pronouncements.
Speak to any random individual about the economy’s condition and the word confidence will populate the conversation with the same frequency of an amen or hallelujah at your nearest Pentecostal church gathering.
The confidence deficit blunts policy instruments at the disposal of authorities. In a normative setting, authorities deploy equilibrium monetary or fiscal policies that are chosen to maximise a given objective function subject to well-defined constraints.
Some of the constraints are traditional and obvious, private actors must act optimally (in their self interest), and conventional conditions for market equilibrium must be satisfied. But what makes the analysis rich and interesting are the additional constraints that reflect the specific nature of the policy-making process.
The behaviours of all actors informed by past conditions and their outcome feed into the incentive constraints that emanate from the sequential nature of policy-making, particularly from the possibility to deviate from earlier plans or announced policy rules.
Once private agents recognise that policymakers have clear incentives in this direction, they may start to base their current behaviour on expectations that deviations may occur. This can drive policies with desirable long-run properties into serious credibility problems.
Indeed previous excesses in the fiscal space and the ensuing hyperinflationary episode have engendered an almost contentious interaction between private actors and authorities whereas in a normative setting the interaction is within the opposite spectrum of co-ordinated and suspicious.
It is this element of the minister’s work and the depth of the contention that has resulted in the numerous pivots and recasting of the path to the original outcome.
The credibility problem
How do credibility problems in macroeconomic policy arise? Consider a policy-maker who wants to design an optimal policy rule or a plan for future policy at some arbitrary point in time t. In doing so, the policy-maker maximises some objective function in this case a low inflationary environment primed to grow at sustainably high rates.
One important consideration when selecting his policy for some future date, t+s, will be how the expected policy at t+s affects private agents’ economic decisions in the time interval from t to t+s.
Now consider the policy-maker’s incentives once date t+s arrives. Will the ex ante optimal plan that is, the plan which was optimal given the date t events still be optimal ex post that is, given the date t+s events? The answer is, typically not!
This is because the private economic decisions between t and t+s are in the past at t+s, so that policy can no longer influence them. In other words, the policy-maker faces different events ex post than he did ex ante and this makes him prefer a different policy, the original plan is then said to be inconsistent with the expected outcome. Such inconsistency turns out to characterise a wide range of economic policy problems.
Miscommunicated in a discretionary policy environment, in which sequential decision making is the norm and revisions of policy decisions are feasible and common, only a suboptimal outcome is achieved. In this framework, private agents will anticipate the future incentive to abandon the ex ante optimal policy.
They will instead expect the ex post optimal policy to be implemented. These additional events in the policy problem typically worsen the equilibrium outcome from the viewpoint of the policy-maker.
They are thus not credible and not implementable in equilibrium. To put it bluntly, the policy-maker’s ambition to move the economy from a second best towards the first best makes the equilibrium outcome third best. It is here where we find ourselves.
With annual inflation at 176 percent for June, while the July month-on- month inflation is 24, exchange rate though steady is nervously anchored at 11 for buyers, one can make a case for an economy in the woods.
I am no fan of surpluses in the face of evident Government shortcomings in proper service delivery. Budget deficits in relatively undiversifed economies such as this one too often have a inflationary effect as opposed to an income effect.
Rather, I would counsel the authorities pivot to balancing the budget but with greater emphasis on allocative efficiency. But my own assessment of the transitions, a year in is that he is a surgeon who upon operating on the patient discovered on the operating table other conditions that were not apparent going in. A high level of improvisation is necessary. Will he succeed? We will just have to wait and see how the patient will respond to treatment.
Luke W Gumbo is an economic and financial analyst. His views are personal and in no way represent any of the institutions he is associated with.
