Coping with austerity measures

Congratulations to President Barack Obama on being re-elected to serve a second term.

In conditions where people are subjected to austerity measures because of bad economic state of affairs, they usually vote out an incumbent president and his government.

They are easily taken in by opponents who wave before them a magic wand to prosperity.

As a result of the 2007-2008 financial meltdown, most governments in Europe and North America have instituted austerity measures to reduce budgetary deficits.

This has entailed raising taxes and cutting public expenditure. Raised taxes cause grumbling when individuals are deprived of their disposable incomes by a percentage they are unwilling to bear.

Corporations do not like to forgo too much of their profits and they transfer their business to countries with low corporate taxes.

When a government reduces public expenditure two things happens. Firstly, it dispenses with some of its employees. Secondly, it cancels some social projects such as school projects and road repairs. Because of this, people’s welfare is compromised.

Why do governments institute austerity measures while knowing that they might hurt the people? This is where knowledge of macroeconomic helps.

In macroeconomics, we study economic growth, employment and unemployment, inflation and stagnation.

When inflation seems to be the problem, people grumble most about a government to take measures to reduce or combat it.

If the cause of the inflation is excess liquidity—too much money in circulation in that country—the government through its central bank will try to take out the excess money or prevent an increase of money by raising the central bank lending rate.

This is the rate a central bank charges commercial banks which come to it to borrow money.

Once a commercial bank has paid a higher interest rate to the central bank, it also charges its customers higher interest rates.

When the central bank lending rate does not quite succeed in squeezing credit or discouraging banks from extending loans to all sorts of applications, it may raise the minimum deposit that commercial banks are required to keep with it.

This action reduces the amount available to commercial banks to lend to its own customers.

There is a risk that in the course of combating inflation, recession may rear up its ugly head. Would it not be better to combat inflation in such a way that recession does not take place and the economy generates more and more job opportunities?

This is the dream of everyone concerned with managing an economy. But no one has found an easy way out. When you want to generate more employment, inflation steps in as well. When you want to combat  inflation, the measures you adopt tend to slow down growth of the GDP.

I have previously suggested that economics should be included in the Malawi Schools Certificate of Education (MSCE) curriculum to correspond with GCE O-Level. More people should be exposed to the truths of economics since they express their views and make suggestions on economic issues without background knowledge of economics.

It is true that business studies is already on the  MSCE syllabus. But business studies is branch of applied economics rather than principles of economics.

Equipped with the theory of economics we may find it easier to adopt stoical attitude of situations like the present. Some people are almost hysterical about the hardships we are going through because they think people high up are deliberately refraining from conducting the Economic Recovery Plan without causing pain. The truth is that economies are subjected to natural laws which cannot be repealed by the Legislative.

Let us learn to endure while working hard on  the supply side of the economy. Handle the Farm Input Subsidy Programme during the coming rainy season better than last time.

We might have better yields. Let  us learn to adjust our consumption to the economic  environment in which we are. If we usually take two bottles of beer a day, let us adjust to one bottle. Let us postpone buying that new skirt or shirt until better economic conditions come around.