adminWhen an economy faces critical challenges such as those faced by Zimbabwe, key questions have to be asked in terms of resource allocation.
This helps look at areas which should have higher priority and which ones can be shelved or delayed. Undesirable situations that exist in the macro economy, largely because one or more of the macroeconomic goals are not satisfactorily attained. The primary problems are unemployment, rapid de-industrialisation and stagnant growth.
Macroeconomic theories are designed to explain why these challenges arise and to recommend practical and realistic corrective policies. The primary purpose of economic activity is the production of goods and services to satisfy our changing needs and wants.
The basic economic problem is about scarcity and choice. Every sovereign state has to decide: What goods and services to produce: Does the economy use its resources to operate more libraries, hospitals or hotels? More cinemas or more schools. Do we need more highways or dams? How best to produce goods and services: What is the best use of our limited and scarce resources?
Should open spaces and school playing fields be sold off to provide more land for cheap urban housing for co-operatives? Who qualifies to receive goods and services and at what price: Who will get expensive hospital treatment – and who not? Should there be a minimum wage for civil servants or every worker in the economy? If so, at what level should it be set?
When an economy is highly informalised like Zimbabwe, does normal economic theories apply and if not how does the country move forward in the absence of historical precedence?
In attempting to answer some of these questions it becomes clear that economic policy must be clear, credible and take a multiple stakeholder approach and seek buy-in from all the stakeholders who are expected to support it. It also follows that the policy must be well publicised to such an extent that it becomes a common understanding for the society in which it has been developed.
The public should generally understand the long-term economic vision of the country. What does Zimbabwe seek to be in five, 10, 20 or 50 years to come? As an example Zimbabwe can aim to be the world’s number one producer of platinum or gold or diamonds in 10 years time. Or to be Africa’s leading tourist destination by the year 2020 or become the continents biggest producer of tobacco. This should be very clear and ingrained in the national programmes such that any other policy formulation should always be guided by those goals.
Human beings continually uncover new wants and needs which entrepreneurs attempt to supply by employing factors of production. For a perspective on the achievements of countries in meeting people’s basic needs, the Human Development Index produced by the United Nations very informative.
When making a choice normally involves a trade-off – this means that choosing more of one thing can only be achieved by giving up something else in exchange. Every purchase is a trade-off, of course.
If you decide to spend US$10 000 on a new car, you’re saying that’s worth more to you than 10 motorcycles or three holidays to the Caribbean or the down payment on a house or full payment of buying a residential stand in the high-density areas of Harare. Every choice involves opportunity costs; when you choose one thing, you’re giving up others.
What makes individuals happy and content? Why despite several decades of rising living standards, surveys of happiness suggest that people are not noticeably happier than previous generations? Typically we tend to assume that, when making decisions people aim to maximise their welfare. They have a limited income and they seek to allocate their money in a way that improves their standard of living.
When economic choices are made it’s relevant to consider behaviour as defined under behavioural economics.
Behavioural economics is the name given to the discipline that tries to mix insights from psychology with economics, and looks at economic problems through the eye of a “human”, rather than an “econ”.
Behavioural economics uses insights from psychology to explain why people make apparently irrational decisions such as why people eat too much and do not save enough for retirement while they may spend too much on beer, women, recreational drugs or other vices that are clearly not beneficial to their retirement.
There is a well-known saying in economics that “there is no such thing as a free lunch!” This means that, even if we are not asked to pay money for something, scarce resources are used up in the production of it and there is an opportunity cost involved.
Opportunity cost measures the cost of any choice in terms of the next best alternative foregone. Work-leisure choices: The opportunity cost of deciding not to work an extra 10 hours a week is the lost wages foregone. If you are being paid US$6 per hour to work at the local supermarket, if you take a day off from work you might lose US$48 of income.
Investing today for consumption tomorrow: The opportunity cost of an economy investing resources in capital goods is the production of consumer goods given up. Making use of scarce farming land: The opportunity cost of using farmland to grow maize for bio-fuel means that there is less wheat available for food production. However the bio-fuel availability may mean less foreign currency is spent on importing crude oil and other petroleum products, such is the production possibility frontier curve whereby trade-offs are regularly required to reach the optimal choice and decision.
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