Austerity vs stimulus . . .

Sometime in May 2010, the United States Secretary of the Treasury Timothy Geithner was talking to German Finance Minister Dr Wolfgang Schäuble.

They were debating on how to manage the raging financial crisis in Europe, particularly in Portugal, Ireland, Italy, Greece and Spain, otherwise referred to as PIIGS.

Borrowing Minister Mthuli Ncube’s medical imagery, PIIGS were in a very delicate position and in need of treatment. In the US, whatever Secretary Geithner had prescribed since 2008 seemed to be working.

The patient was responding well. The economy was restoring jobs.

That’s why the PIIGS had to be treated quickly otherwise the virus would cross the Atlantic and jeopardise a recovering patient.

Dr Schäuble wanted to stamp out “profligacy and mendacity”: PIIGS had to live within their means and while doing so, pay back what they owed.

Secretary Geithner then remarked to the veteran German politician: “You know, you sound a bit like Herbert Hoover in the 1930s. You need to be thinking about growth.

“Yes, the American also wanted Greece to pay back her debts but instead of a Shylock-like “pound of flesh” approach, he preferred letting the PIIGS have a bit of money in their wallets, just enough to pull themselves out of the mud.

Both leaders wanted the same outcome but differed on how it was to be achieved. Secretary Geithner confessed later that he and Dr Schäuble were “often far apart” on matters of substance. Theirs is a classic example of the austerity versus stimulus debate.

Minister Mthuli Ncube has prescribed austerity for Zimbabwe, a policy framework usually prescribed by the World Bank to similar economies. Arguably, “austerity” is the modern “Washington Consensus”, a term widely used in the 1980s and 1990s, the era of Structural Adjustment Programmes (SAPs).

SAPs were consistently falling short on delivering hope — for recoveries and in response, Washington would add more prescriptions for the sick client nation.

The prescriptions list kept growing eventually getting a nickname “the laundry list”. Professor Dani Rodrik’s paper titled “Goodbye Washington Consensus, Hello Washington Confusion?

A review of the World Bank’s Economic Growth in the 1990s” is a particularly interesting read in this regard. In the paper, he lists the ten original prescriptions along with another ten that were later additions.

The “laundry list” reads like President Mnangagwa’s administration economic recovery policies. It includes fiscal discipline, reorientation of public expenditures, tax reform, anti-corruption, independent central banks/inflation targeting, openness to FDI, secure property rights and so on.

So, will austerity work in Zimbabwe?

Will this race to outdo other countries in the rankings of the Ease of Doing Business, this all-countries-in race to attract FDI, this race against everyone else!

Can Zimbabwe win it and what would victory look like? In the early 2000s, the World Bank released a publication titled “The World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform” which is considered by many an admission of the institution’s misdiagnosis of patients in the preceding decades.

The cynicism by some on Zimbabwe’s economic recovery policies is therefore quite understandable given this background.
Economic policies that resuscitated the US in the 1930s are what stimulus is all about.

President Obama also adopted similar policies in 2008.

They injected a lot of money into the economy so that people could buy more things, so that industry could make more things and thus keep the economy going until such a point when businesses and households had enough strength to stand on their own.

That is what Secretary Geithner seemed to have in mind for the PIIGS. But where would the money come from? From a reduction in taxes which would mean that households and businesses have more to spend.

Of course, some of the money would be printed (euphemised in recent times in Europe as quantitative easing) to fund infrastructure projects and provide safety nets for the most vulnerable in society.

In stimulus policies, the national treasury deliberately runs fiscal deficit and, in so doing, implicitly bets that the collective citizenry can and will out-work economic challenges in hand.

It can be said that in the past two decades, desperate Zimbabwe has been dabbling with stimulus policies. Unfortunately, all that went up (and is going up!) was inflation.

The thing is, money pumped into the economy must be deployed to the most competent hands in the land, hands that would relentlessly improve production processes and productivity.

Only highly skilled hands must be funded — and it is widely believed that Zimbabwe has such hands in abundance here and definitely elsewhere.

The policy fails dismally when funds are deployed to opportunists or rent-seeking protégés.

Stimulus has worked in the so-called free world as seen in the US in various times. It has also worked in the not-so-free world.

Take for instance the energy sector policies of the sanctioned regimes of Rhodesia and apartheid South Africa — the ethanol plants and the technology of extracting oil from coal all driven by need to reduce the cost of imported fuel.

Amazing things happen when capital is entrusted to competent scientists.

It is indeed significant progress that Zimbabwe has adopted austerity policies because austerity resonates with the international community and the international community is an indispensable partner.

But back home, the economy needs stimulation.

At the end of the day, the battlefield is here not out there. Victory or failure will always be here. If a Government cannot bet on its own citizens, who will?

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