OPEN ECONOMY: Growth can’t happen without balance

25 Jan, 2015 - 00:01 0 Views

The Sunday Mail

For economic growth to happen, it is necessary to make a conscious effort to maintain parity between citizens’ standards of life (income levels) and the cost of living.

Moreover, it may be a valid case that the greatest determinant for sustained industrial productivity in an economy is how well a country maintains this parity.

One the greatest industrialists of all time, Henry Ford, was well aware of this when he insisted that his Ford Motor plants produce vehicles that were intentionally priced to be affordable to the lowest-ranked factory worker.

He was aware that for sustained productivity, pricing of goods has to be kept at a balance with most of the consumer market’s income levels.

Actually, notice the causes of the slowdown in the global economy. If the developed world is experiencing stagnation and inequality, this simply means that the reason for economic slowdown is that standard of life (income levels) have been surpassed by the cost of living, and that the disproportional distribution of income has made it unsustainable to incite further productivity.

It is not necessarily anyone’s incompetent fault.

Over the last 30 years or so, rapidly increasing globalisation has had the effect of distorting the parity between local standards of life in developed economies and their respective costs of living.

This is due to cross-border interaction of foreign cost structures, multinational supply chains and interconnected global financial instruments.

For instance, it is very hard to maintain local income levels when a country’s largest employers easily outsource work to low wage foreign countries.

So if Henry Ford were alive today, it would be much more difficult for him to keep that parity between the pricing of his cars to the wages of US factory workers because production of cars is now a cross-border process involving competitively lower foreign wage levels.

This is a pivotal explanation for the global economic slowdown.

Much of the global economy was driven by increased standards of living in developed nations, but this has stalled, causing problems for everyone.

Now, if you buy into this idea of maintaining parity between standards of life and the cost of living, at this point you are probably eager to find relevance to how this idea relates to Zimbabwe specifically.

Well, it doesn’t, and that is one of our greatest economic flaws.

We have seldom made it a point to consciously trace our standards of living (income levels) as they relate to our cost of living in Zimbabwe.

If we have, we have not given it the necessary precision of interpretation. In fact, we have keenly focused on other metrics like inflation, monetary policies and industrial productivity without understanding their implications on the notion of economic balance.

For example, do we interpret our high inflationary years as when the cost of living in Zimbabwe began to lose parity with our expected standard of living?

In other words, what we perceived as the expected standard of life for a professional with, say, ten years of work experience became unaffordable for that respective individual.

By adopting the multi-currency system, we have adopted monetary interpretation that does not match our expectations for standards of life.

In other words, under a Zimbabwean dollar the currency was precise to our interpretation of professional value.

Today, can we sincerely say that our wage levels in US dollars correspond with the standard of life that we believe should be at respective career points?

Also, when we say industry is at around 30 percent productive capacity, do we interpret this figure as that our affordable standard of life is now substantially less than the cost of living at 100 percent industrial productivity?

Yet we have not toned down our expectations for a standard of life that corresponds to the present productivity.

The fact is that we have distorted the parity between our standard of life and the cost of living in Zimbabwe.

This has led to inaccurate interpretations of our economic problems, which can be a predecessor to ineffective efforts in trying to fix the economy.

So I suggest we promptly do three things to guide our actions going forward.

First, we need to redefine our expected standards of life at different economic levels.

When we can scale our standards of life, then we can get a better idea of the income levels that we should aim to create for sustainable growth.

It is easiest to start scaling in our corporate structures. We are not an economy that can sustain remunerations of US$40 000 a month plus perks.

Our corporate balance sheets also cannot sustain these levels.

This shows that our corporate perspectives of expected standards of living do not match the real costs of living in Zimbabwe (in this case cost of debt and corporate overheads).

Our expected standards of life, especially in the corporate sector, need to be redefined.

Second, we need to stop pushing our pricing of products and services beyond affordable income levels.

Our costs of living are already high because of multi-currency system and financial restrictions, but our own profiteering and overpricing are exacerbating this to unsustainable levels. If the daily wage for general labour is US$3 a day and transport costs are at least US$1 a day, then clearly the economy is unsustainable.

Third, specifically to industrialists – if your industry is going to grow, it has to start being realistic about consumer demand; the affordable standard of life. It makes no business sense for products to be above sustainable consumer demand.

The reality is that this is a small consumer base for capital and durable goods in Zimbabwe. Not many people have such incomes or are on a positive wealth projectile to sustain that sector. Some policymakers deny the fact that consumer demand is falling, but that’s because they are looking at the wrong goods.

Consumables are the last category of goods to be sacrificed from a budget. Maybe these policymakers are waiting for standards of life to fall so low that even citizens stop buying basic essentials?

Anyhow, I advise industrialists to reflect on where the market is in terms of income levels and provide offerings that match that standard of life.

That will be the consumer base to sustain your business. If industrialists have a concern to play a part in wealth creation, then maybe start offering products with utility and value addition that add to customer’s quality of life.

Not only will you make money, but you will secure brand loyalty that will give long-term benefits when the economy and income levels grow. Conclusively, in essence, I hope that we can start being conscious to the idea that for economic growth, it is necessary to maintain parity between our affordable standard of life and the cost of living.

Share This:

Survey


We value your opinion! Take a moment to complete our survey

This will close in 20 seconds