Ray Kroc, the founder of the Hamburger chain of industries was quoted as saying: “When as a businessperson you are green, you are growing. When you are ripe, you start rotting.”
In other words, Kroc is encouraging us to keep on tackling new challenges instead of resting on our achievements.
This point was overlooked by Malawians when they heard that Malawiâ€™s economy was registering growth rates of seven or eight percent. They began campaigning for a new flag.
They said the flag must reflect that it is no longer dawn in Malawi, but noon.
I remember advising them through this column to find other reasons for changing the flag instead of prematurely celebrating Malawiâ€™s apparent success.
I pointed out that countries of the Far East, including China, registered higher growth rates for at least 20 years non-stop before they emerged out of the Third World economic groups.
This was just three years ago. What is now the economic situation in Malawi?
Malawi, which was on the world map as an achiever in food self-sufficiency and from which other African countries used to draw some lessons, has now 1.6 million people facing hunger.
Malawi is now short not only of petrol, but also of food. What happened to its green revolution initiative?
Malawi is groaning under inflation. This was predictable because it was clear that the kwacha would be devalued.
It was also obvious that prices of commodities would go up after the devaluation.
But the prices are now inflated by food shortages. Behind any inflation is shortage of food. When demand is higher than supply, prices rise. This is elementary economics.
There are three types of inflation. We call the first one low or creeping inflation. In this case, prices annually rise by three or five percent. People expect this sort of inflation and adapt to it easily. The value of money is almost stable and people trust it.
The second type is called galloping inflation which is double digit. At its worst, it may be treble digit. It is referred to as very high inflation. Money loses value. Those who enter into contracts with each other usually index the amounts to a foreign more stable currency such as the dollar.
People hold only minimum cash. Some buy properties, others convert their money into stable currencies and make deposits abroad.
Galloping inflation is common in countries with weak governments.
The worst form of inflation is called hyper inflation. Prices rise by 1 000 percent or more annually. Money becomes worthless.
What effect does inflation have on the wealth of households? The great John Maynard Keynes has been quoted as saying: “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, government can confiscate part of the wealth of their citizens.”
The Malawi economy has entered the galloping stage of inflation which deserves management by the central bank.
To reduce inflation, it is not enough to know its magnitude but its causes as well. The causes are many, but they are generally grouped into two: demand-pull inflation and cost push inflation.
Demand-pull inflation occurs when aggregate demand rises more rapidly than the economy. The most notorious cause is budget deficit, when governments borrow money from their central banks to make up for the shortfall in tax earnings. Borrowing, in this case, is just a euphemism for directing the central bank to print more notes. The result is that there is more money chasing few goods.
Cost-push inflation is also known as supply shock inflation. This comes about because of increases in costs rather than demand. Powerful trade union may force wages up and a cartel may keep prices at a higher level than justified by demand and supply.
Historically, recent cost-push inflation was ignited by oil prices in 1973, 1978 and 1999.
There were great shortages of oil. The inflated prices of oil were reflected in the costs of transporting goods or manufacturing products.
Reducing demand-pull inflation creates dilemmas. A central bank raises interest rates to discourage borrowing and contain the quantity of money circulating in the economy.
But raising the bank rates makes borrowing by business expensive. Because of shortage of working capital, businesses layoff workers.
The ideal situation is where both inflation and unemployment are low, but the ideal is not easily attained.
The Malawi economy is suffering from stagnation. This is a situation where the economy is virtually stagnant and yet inflation is rising.
The remedy for this will be found in supply side of economics. If we can reap bumper harvest next season, inflation will drop.