Open Economy: An urgent matter to be dealt with

08 Nov, 2015 - 00:11 0 Views
Open Economy: An urgent matter to be dealt with Sunday Mail

The Sunday Mail

In economic theory, the importance of specialisation and the division of labour has been well versed.
In terms of productivity, David Ricardo has retained fame for over two centuries for his theory of specialisation based on comparative advantage.
In terms of efficiency, Frederick Taylor remains revered for his industrial application of Adam Smith’s principles on the division of labour.
The notions of specialisation and the division of labour manage efficient and productive outcomes by concentrating the efforts of professionals on the tasks at which they are best trained and most capable to undertake.
These theories also provide a backdrop to what I believe is Zimbabwe’s greatest economic challenge, dealing with labour market distortions.
Labour market distortions can be loosely defined as variances in what is perceived as the market rate of wages and what wages actually are within a specialized profession.
For the better part of thirty five years, we have consistently carried on our economy with labour market distortions.
In the 1990s, persistent ideological friction between the ideas of market determined wages versus institutionally determined wages by government and unions meant that we hardly sustained an economy where wages found consensus on respective professions’ standard of living.
In the 2000s, years of hyperinflationary shock and momentary currency conversions disturbed any sustained acceptance that a certain wage levels corresponds to respective professions.
In contrast, for the last ten years in South Africa an entry level accountant’s salary has consistently ranged from R450,000 to R500,000. Likewise, over the last decade,entry level accounting salaries in the UK have ranged from 24,000 pounds to 30,000 pounds. Zimbabwe has never had such continuity in wage structures. As a result, our economic history has left us being a society without any experienced persuasion that professional specialisation through the division of labour can actually work to provide a reliable living, let alone be viewed as being desirable for the economy.
It is an untimely situation then that we now find ourselves today with an economy where there is a structural mismatch between the skills that workers can offer and the incentivised opportunities to specialize in those professional skills. This only exacerbates our dilemma.
Let’s consider a short case study. In the formal workforce doctor’s wages are uncompetitive. Doctors are paid a higher hourly rate in other economies than they are in Zimbabwe.
Our unsatisfied doctors then venture into side-businesses like poultry farming which don’t fully utilise their medical competence. So, if a doctor in Harare can see ten patients in a morning but he has to drive to Marondera to take care of his farming business, what happens then is he can only see six patients that particular morning.
The inefficiency caused at his surgery creates a backlog of four patients.
These four patients then interrupt the ones meant to be served the next day. Assuming that the doctor frequently attends to farming emergencies, the backlog keeps accumulating.
If all the medical patients who go to this doctor are employed, then their respective companies adopt work delays from rescheduled appointments or prolonged sick employees.
This chain of events shows a contagion of inefficiency and overall decline in productivity. It must also be mentioned that the doctor himself is vulnerable to inefficiencies not only at his surgery, but because he does not specialise in poultry farming, his farming business is bound to be inefficient too.
Thus, an overall decline in productivity occurs within the medical and agricultural sectors. This is the consequence of an economy that does not abide to specialisation and division of labour.
A more desirable situation would be if the doctor was to specialise in his profession. Patients would be served much quicker and with the doctor’s full diligence, making his surgery more productive. Likewise, if the doctor hired a poultry specialist, the farm business would be managed much more efficiently and productivity would rise.
This case study is widely pervasive in Zimbabwe. We all seem to have side-businesses and commit our time to ventures outside of our trained professions. It has become almost cultural that one cannot live by just their profession, and homestead economics abide to this mindset.
However, on the other hand, theory shows that this economic and cultural circumstance is actually contributing to our macro-economic slowdown.
The theory of specialisation and division of labour clearly traces our declining wealth, efficiency, and productivity in Zimbabwe. So the question that must be posed is what should Zimbabweans do?
Even though theoretically the economic returns promised by division of labour should encourage our professionals to specialise in their crafts, the necessary motivation to drive that behaviour is contested by the expedient economic pressures faced by professionals in the short term.
In the aforementioned case, the doctor, like many of us doing side-businesses, is well justified to extend himself into the farming business as he is likely to earn more income doing both.
So our labour market is caught within a peculiar scenario where the normative benefit (what ought to be) derived by the sum of all economic agents specialising, seems outweighed by the positive benefit (what really is) derived by the individual economic agents multi-tasking.
Rational behaviour is tipped towards individuals engaging in multiple professional ventures to acquire more income.
Just as at the macro-level nations do not abide to David Ricardo’s specialisation in comparative advantage, perceived and somewhat justifiable individual short term gain is the greatest contestant to specialised division of labour at the micro-level.
Wages and income are arguably the greatest incentives to motivate economic growth. Thus, we should be uncomfortable with this current situation where labour force efficiency and productivity are not aligned with wages and incomes. Evidently, there is need for much deliberation on how to solve our labour market distortions.

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