Economics and Business Forum

The burden of inflation

Four economic aggregates burden a country and its people. They are inflation, high interest rates, unemployment and recession or depression. We will dwell on inflation in this article leaving the other phenomena to other dates and articles.

Inflation is a general and continuous rise of prices in an economy. When the inflation is single digit, it is usual to refer to it as creeping. When it is double digit and grows rapidly, it is said to be galloping. Beyond this, it is hyper-inflation which is like the insanity of human being.

The Governor of the Reserve Bank of Malawi (RBM) was quoted in The Nation recently as saying lack of fiscal discipline is hurting the country’s efforts to curb inflation and reduce interest rates. These and other remarks that he made before the Parliament’s Budget and Finance Committee were timely and germane. On the economic and social problems of the country, opinions of technocrats ought to be heeded.

But what are the basic causes of inflation which are apparently aggravated by fiscal indiscipline on the part of the government, and why are government officials concerned ignoring the discipline? We must answer the first question at length before coming to the second.

Economists often distinguish between two basic types of inflation that which originates with buyers called demand pull inflation and that which originates with suppliers called cost push inflation.

Demand pull inflation arises when there is too much liquidity or money to spend in the economy. Hence, it is also expressed as too much money chasing too few goods.

Demand pull inflation occurs when an economy is operating at full capacity. In this condition, not only is total aggregate demand for goods and services high, but the capacity of the economy in the short run to cope with the demand is inadequate.

Contributors to the aggregate demand are consumers, business investors, government spending and net exports which is the money that enters the economy from abroad.

Cost-push inflation is a rise in the general level resulting from a general increase in the cost of production. The increase in the costs of production may be started by powerful trade unions that succeed in compelling employees to pay them higher wages. Having conceded to the higher wages employers raise prices of their products and services, customers of these firms upon finding that the products and services they buy now cost more also raise prices of their own products and services. The rise in prices then spread throughout the economy.

Cost-push inflation may start with imported petroleum when the exporters into the market have raised their prices or the government of the importing country has devalued its currency.

Inflation has several consequences. It hurts the poor more than the wealthy. It brings uncertainty to business contracts. Those who earn salaries, rents or interest find that with their incomes, they can longer buy the quantity of goods and services they have been buying before the inflation started. Insurance endowments, pensions and interests on savings lose purchasing power. Hyper inflation such as occurred in Germany soon after World War one destroys an economy.

Faced with the burden of paying Great War Reparations, the Germany government of the Weimar Republic had to print heaps of money which caused prices to rise by 35 000 percent per month. The bank notes were so worthless that in some households they were used to kindle fire. Recently, this kind of hyper inflation happened in Zimbabwe which made the Zim dollar so useless that it ceased to be legal tender. The government and people of Zimbabwe had to substitute their currency by the US dollar and the South African rand.

Hyper inflation results from a government decision to increase the quantity of money in the economy. The decision is a result of pressure from certain lobbies in the society. This is where our own government needs to be cautioned.

In the news items to which I have alluded, the Minister of Finance, Economic Planning and Development is quoted as decrying the huge debt burden. The last paragraph reads “The problem was that the budget we passed in June last year stipulated that government was not going to borrow but it has not been case,” he said.

Certain things are easier said than done because of the inability to stand up to highly organised groups. Right now, the civil service union is continuously reminding the DPP government of its pledge to increase civil servant salaries. Usually in companies, salaries are increased out of higher sales and profits. If you increase wages and salaries in the year the company has performed poorly, it might become insolvent.

In the civil service, it is difficult but worth the attempt to try to persuade civil servants not to press for over board increase until the gross domestic product (GDP) growth rates have improved and donor aid has started flowing in.

In his autobiography ‘From third world to first’ Lee Kuan Yew, ex-prime minister of Singapore tells us he had to persuade trade union leaders not to engage in adversarial tactics while the country was still too poor. The leaders and the workers cooperated. Singapore went ahead to become one of the wealthiest countries in the world paying employees’ salaries that are higher than in some developed countries.

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