Application of Keynesian Ideology Suitable for Zimbabwe Economic Growth

The use of economic theories have been criticised by many as unrealistic, however for some nations the applicability of theories have made them go far. Zimbabwe is one nation that should tolerate some economic ideology. Since the inception of the GNU and the introduction of multi-currency after the failure of the Zimbabwean dollar, the economy has been slowly boosting. However, no one can be that patient as the rate of recovery is still low and cannot accommodate everyone. This leaves a gap for a more strong approach that lifts many economic sectors.

Encouraging the manufacturing sector as is emphasised by the authorities does not really work and its impact is insignificant. Why say so? Because the issue of financial capital remains a challenge. Where do companies get the capital? Bank loans are very expensive and many of them are offering short term loans which are not for investment in the longer period. Moreover the production cost is and will remain high, automatically implying higher selling prices for the output compare to other neighbouring countries. Given the purchasing power of Zimbabweans who are getting salaries below Poverty Datum Line, it makes them opt for cheap imports.

The approach of boosting the manufacturing sector can be equated to the common “Say’s law” that say “Supply creates its own demand.” The idea of current policies therefore means that if the manufacturing sector is boosted the economy will recover. Well the economic policy seems good, but as of current it’s a ‘blue print.’ It is difficult to produce goods that match the ability to pay of citizens and hence the setting up of a factory won’t bring profit unless heavily subsidised. Government would have to move mountains to create liquidity that would increase competition for those in need of funding.

To boost the economic recovery process, I recommend the interference of the demand side. That’s when the Keynesian ideology comes into play. Despite its criticism,I see it as the right time for its implementation. Some theories and policies do not get their full results just because of poor timing, inadequate support, and wrong application among other factors. The concept encourages that during economic recession, the government should demand manage the economy so that it moves out of the trench.

It is inspired by Keynesian macroeconomics, though today elements of it are part of the economic mainstream. The underlying idea is for the government to use tools like interest rates, taxation, and public expenditure to change key economic decisions like consumption, investment, the balance of trade, and public sector borrowing resulting in an 'evening out' of the business cycle. Demand management was widely adopted in the 1950s to 1970s, and was for a time successful. However, it is widely regarded as a force behind the stagflation of the 1970s, though the supply shock caused by the 1973 oil crisis could have also caused that.

Theoretical criticisms of demand management are that it relies on a long-run Phillips Curve for which there is no evidence, and that it produces dynamic inconsistency and can therefore be non-credible. Today, most governments relatively limit interventions in demand management to tackling short-term crises, and rely on policies like independent central banks and fiscal policy rules to prevent long-run economic disruption.

The two main types of demand management policies are the Monetary Policy and the Fiscal Policy. To some extent the exchange rate could be used to influence aggregate demand, but in practice it is rarely used as a tool to influence aggregate demand. Fiscal policy involves changing government spending and taxation. Therefore in a recession, the government could pursue expansionary fiscal policy and try to increase AD. For example, cutting income tax will give consumers more income and should lead to an increase in consumer spending. This should lead to an increase in AD and higher economic growth.

Monetary policy involves cutting or raising interest rates and to boost AD, the Central Bank (or government) will cut interest rates. Lower interest rates should make it cheaper to borrow leading to a boost in consumer spending and investment. In some cases, cutting interest rates may fail to boost spending. For example, in a liquidity trap banks may be unwilling to lend to consumers, therefore even though it is cheap to borrow – in practise firms and consumers can’t get access to finance. Therefore, in this case, lower interest rates is ineffective.

In support of the demand management policy, I would urge the government to raise the salaries of civil servants so that their ability to pay is raised. Raising their salaries will divert their spending behaviour of buying basic goods like food and clothing to purchasing durable goods like furniture and also raising their ability to save and invest. Current earnings of many people are just directed to school fees for their children and immediate consumption. You find long queues in supermarkets during pay days and even throughout the month and in hardware shops and other industries there are just few of them. Hence many cases of company closures in the manufacturing sector.

In conclusion, there is need for a sacrifice of boosting the demand side of the economy so that the supply side respond accordingly. It is well known that investors follow the needs of their clients, once the ability to pay has been raised and the demand pattern changes the factories shift to their demand needs. Therefore I urge a collective approach, that is, government should be more biased to the demand side than supply side to boost the economic recovery pace.