Interest, investment and employment

Whenever Parliament has completed deliberations on the budget and the budget statement is issued, non- governmental organisations (NGOs) invariably complain that the fiscal plan is not pro-poor. Championing the underdogs is seen as the raison d’être of an NGO.

But do we all understand what it takes to serve interests of the poor? By no means is there natural antagonism between the rich and the poor. The rich start businesses and demand the labour of the poor. In creating jobs, the rich alleviate the problems of poverty.

The question facing us all is why do rich people not create enough jobs through investment to absorb all the poor or most of them? In other words, why is investment neither at the optimum nor the maximum?

One culprit in the eyes of many is the interest rate and the tight fists of those institutions which are in the money or financial market. A foreigner visiting this country for the first time would be shocked at the level of interest rates. We seldom read in developed countries that interest rates are as high as five percent whereas with us they sometimes they shoot up to 40 percent.

To borrow capital and pay interest rates at 30 or 40 percent would necessitate grossing at least 70 or 100 percent to remain in business. This is because out of the gross earnings, you must pay rent, wages and insurance etc.

Economists have often debated the extent to which the level of interest rates is a deterrent or inducement to investment. In Malawi context, is investment below what is required because the cost of borrowing capital known by the name of interest is too high? If interest rates were lowered would businesspeople borrow more, expand their factories, build new factories and venture into other forms of business? Only by doing so can the economy expand, employ more people who upon earning incomes would be less poor even if not well-to-do.

A country produces goods at home and sells them in foreign markets to earn the foreign reserves (money) with which to pay for imports of goods that it does not make or manufacture.

While in case of tobacco, foreign markets do not absorb all our output, there are certain commodities and products which it seems we are not exporting enough. About such products, we can say the problem is not on the demand but on the supply side. We are not producing enough and perhaps not of the requisite quality. Hence, we fail to meet the demand for imports from this country. Instead we have an insatiable appetite for foreign goods thereby importing more than we export and incurring imbalances of trade and payment deficits.

Interest rates serve two basic purposes. When they are at appropriate levels, for 30 people they induce them to deposit their money in financial institutions such as banks. Reasonably high interest rates lead to increases in national savings ceteris paribus. That is if other factors are in place such as safety and security. People will not deposit their money with a financial institution whose performance is uncertain.

Interest rates are also tools of monetary policy to combat inflation and deflation or recession. When prices are continuously rising it may be because too much money is circulating in the economy. Interest rates may be raised to curb credit and make it expensive for those who are inclined to use loans for mere speculation. But in using interest rates to combat inflation, the money authorities may aggravate unemployment in the economy.

In the short-term, lowering a rate of interest may have positive psychological effects. Businessperson may borrow capital to invest in projects with a short gestation period such as importing goods which they can easily sell or export those they make for profitable market.

In deciding whether to borrow capital from banks, a businessperson prefers an extended payment period whereas a bank only prefers a shorter period. Hence, a businessperson must take into account not only the rate of interest but also the date the banker will want his capital back plus interest.

 

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