Struggle is the meaning of life. When you try to solve one problem sometimes you complicate another problem. In the economic sphere, there are several examples of situations which create dilemmas.
When there is raging inflation, you may recall that inflation means there is too much money chasing few goods. For example, it is when there is shortage of maize in this country that the inflation rate shoots up. Economists then suggest to the central bank to reduce the quantity of money circulation to the level corresponding with the quantity of goods and services available in the economy. The central bank does this by raising interest rates thereby making it harder for businesses to raise working capital and invest in production capacity. Such action, if it does not create employment, at least makes it difficult for job opportunities to increase at the very time school and colleges give farewell to their final students wishing them success in finding jobs.
The only durable solution for both unemployment and inflation is investment in production capacity. Let agriculture produce more food and raw materials while investment takes place in other sectors of the economy. With the rise in gross domestic product (GDP), prices will fall at the very time that jobs have multiplied.
From time to time, trade unions press for revision upwards of minimum wages. This creates new problems depending on how big the revision is. If the change is as much as 50 or 100 percent, employers will respond in two ways: to meet the new wage bill they will raise prices of the goods and services they sell. This will aggravate cost push inflation, consumers or buyers will suffer. If the buyers are business people, they will raise prices of their products because inputs are now more expensive. If they do not raise prices, they will suffer losses.
With the increase in minimum wage, employers may not wish to raise prices of their products if competition in the market is too strong but they might cancel any plans they had of hiring additional workers. They might even declare redundancies. This is happening in the government service right now. Positions of principal secretaries have been drastically reduced while vacancies remain frozen elsewhere in the civil service.
In some countries, trade unions and employers associations try to reach compromises. Trade unions agree to accept lesser minimums on condition that employers do not dismiss some of their fellow workers.
In trying to industrialise a country, some governments resort to the infant industry principle. For a new industry to cope with imports, it must be protected until it has grown to the extent that it is strong enough to compete on equal terms. Hence, governments introduce very high tariffs to protect the domestic industry.
This may bring about unwelcome consequences. Imported goods will not cost much more thereby hurting consumers. At the same time, the domestic industry, shielded from completion, will be providing inferior products at high prices. Again this will hurt consumers. So what to do? People are exhorted to endure this because the domestic industry has created employment and it is to the advantage of the country that eventually it produces for itself what it has been importing, thereby saving on foreign reserves.
Devaluation and revaluation. Devaluation is the lowering of exchange rate of domestic currency vis-à-vis an international currency such as the dollar. Devaluation makes imports expensive. Those people whose businesses import raw materials and equipment will find importing these goods more difficult and the costs of manufacturing will rise. Ultimately, the final products will have to be priced higher.
Devaluation will make imports more competitive in foreign markets. They might sell in greater quantities if prices were the main deterrent before devaluation. Exporters will welcome devaluation at the very time that importers grumble.
The opposite of devaluation is revaluation. This means raising the exchange rate of a country’s currency vis-à-vis the dollar and other major currencies. Revaluation has opposite effects on internationally traded goods. Revaluating a country’s exports will now cost higher in foreign markets. Export earnings might therefore decline. Revaluation was a bone of contention between the United States and China for a long time. The US was asking China to revalue the Yuan because Chinese imports into the American market were undercutting local industries and creating unemployment.
In the end, dilemmas are politically settled. Which, for example, is our greater worry, unemployment or inflation? Action is then when to solve what is considered the more serious problem.