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Home Columns Economics and Business Forum

Supply side economics first

by Staff Writer
17/08/2012
in Economics and Business Forum
4 min read
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Everybody wants to be rich, but many people ignore principles that lead to affluent life both at national and individual levels.

Benjamin Franklin, the self-made American millionaire had this to say: “The way to wealth, if you want it, is as clear as the way to the market. It consists of two words: industry and frugality.”

The word industry here means industriousness or hardworking while frugality means avoiding wastefulness and luxury.

First make money before you decide what to do with it.

In Malawi the prevailing ethos is that you become prosperous by extracting a lot from your employers regardless of the conditions of their businesses or finances. This is dangerous thinking.

It is only in a growing economy that people’s conditions change for the better. An economy grows if the elements of supply economics are taken care of. To these elements, we must now turn.

Supply side economics arose after demand side economics based on Keynesian economics in which you use monetary and fiscal policies to revive an economy had begun to falter and fail.

In the supply economics, we deal with elements that would increase the production not only of factories which are now operating below capacity, but also of new strategies which should be taken to extend the production frontiers of an economy. We discuss the introduction of new industries, services, research and development and so on.

The nature of supply side economics will depend on whether an economy is underdeveloped and poor as most developing countries are; undeveloped but wealthy like those with a lot of oil such as Saudi Arabia, Kuwait, Angola and so on.

Of course, there is supply side economics for developed countries.

In a developing country such as Malawi, the first condition for development is law and order.

There must be laws protecting people crime as well as their property from criminals.

It is in such situations that people with capital and skills to run businesses want or can attract foreigners to take part in supply activities.

There must also be entrepreneurship. These are businesses that create wealth in primary, secondary and tertiary sectors of the economy. These businesses are made up of two categories: entrepreneurs who bear the risk of starting new enterprises and managers who run businesses.

There are schools and colleges training managers, but for entrepreneurs not much is being done. What the ministries concerned with economic matters should be doing is to encourage emergence of an indigenous elite of entrepreneurs.

The encouragement should involve provision of venture capital. Some industries should be launched by the State and then sold to the private sector.

Without an adequate existence of entrepreneurs and technocrats there will not be enough supply of goods and services.

In an economy where there is deficient supply of goods and services whatever is done on the demand side will not improve the living standards. Real wealth is made up of goods and services not bundles of banknotes.

Apart from law and order, the State must provide services which no businessperson would be willing to provide. These are called public goods such as health, physical infrastructures [roads and bridges] and utilities like water and electricity, social conservation and education.

The presence of these facilities encourages enterprises or business activities. This is supply side economics.

Enhanced savings and investment is essential. Countries of the Far East save at least 20 percent of their incomes. This has been made possible because there is an element of compulsion in the savings process.

When the Agriculture Development and Marketing Corporation (Admarc) was a monopoly (monopolistic buyer) in respect of smallholder production in that the producers were paid less than free market prices, Admarc accumulated a lot of savings which it invested in a number of companies which were either founded or bought by the now defunct Malawi Development Corporation (MDC). An arrangement of that sort ought to be re-examined. The propensity to consume is too high in Malawi as a result the economy suffers from perpetual shortage of savings.

Where people save a good deal, there is capital for investment in agriculture, industries and tourism. This is how economies grow.

While workers have a right to go on strike for better pay and conditions, employers also have the right to withdraw payment for the days their employees are on strike.

This principle must be affirmed through legislation. It will discourage laissez faire in employer-employee relationships. Where there is no discipline supply side economics fail.

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