Will Keynesian economic policy do for Malawi

Behind any economic system, there is an economic theory explicit or implicit, so long as things seem to be working reasonably well suggestions for doing them differently are seldom made by the theoreticians and if they are made, no attention is paid to them.

In the progress of economic science, just as in any other filed, necessity is the mother of invention. The mercantile system was adhered to religiously until it started creating problems within itself and between countries. The determination to implement it to the letter contributed to the rebellion of the British American colonies in 1776. Then Adam Smith produced his epoch making work, The Wealth of Nations in which he advocated less State involvement in the economy. He was for a system that in France was called laissez faire. The Industrial Revolution gathered momentum.

When in the mid of plenty there developed gross economic and political inequalities, some thinkers saw in bridled capitalism as wicked. They advocated state ownership of the means of production. In other words, they wanted major industries to be owned and managed by the state for the welfare of the majority of the people instead of the profit of a few. This was the advent of socialism epitomised by the writings of Karl Marx the prophet of communism.

Though in the course of time there were modifications to the free market economic system says Law guided economists and policy makers.

According to this law, supply creates its own demand. It was argued that in an economy with flexible prices and wages factors of production could always find employment and goods could always be sold, for example, suppose you launch a project on which you have employed a hundred labourers paying them a total wage bill of K100 000, you have automatically created a purchasing power. Those workers will spend their earnings either on the products of the project they have worked on or other projects.

The expenditures of some people becomes the incomes of other people and the economy moves on.

When there is an economic depression prices and wages would fall, making it cheaper for factory owners to hire more labour while the employees though paid lower wages could afford to pay the goods whose prices had also declined.

This sounds reasonable until the occurrence of the Great Depression at the beginning of the 1930s. There were no signs that the Great Depression was capable of curing itself. It was in those circumstances that John Maynard Keynes wrote his epoch making book. The General Theory of Employment Interest and Money in which he pointed out that these were rigidities of prices and wages. During a depression prices and wages do not necessarily fall. It was necessary for the state to intervene both when there is a depression and when there is a threat of hyperinflation.

During the depression a government should reduce taxes and increase expenditure. Reduced taxes would act as incentives to business while deficit spending would create demand for the products that are currently being put on the market.

When the economy is overheated and there is galloping inflation the government should impose high taxes and curtail public spending. Inflation would then take a downturn, becausewages and prices would stop rising.

Keynesian teachings were eagerly implemented by governments of the United States and Britain until about the 1970s when a new economic bugbear reared its head called stagflation. During this period, stagnation and inflation were seen to co-exist.

Critics of Keynes said he had not taken into account th behavior of politicians. While during a recession or depression, they would welcome tax cuts and deficit financing during a heated economy they would not welcome tax hikes and reduced expenditure especially if they are about to campaign for parliamentary elections, Keynesian economics was seen as conducive to perpetual inflation.

What is the position in Malawi now? There are both unemployment and inflation problems but which deserves priority attention.

The macro-economic theories of Keynes can work for Malawi but only if the politics and bureaucracy is alright. These must be given priority. In old democracies when there is a threatening situation political leaders put aside their ideological differences, close ranks and confront the situation with one mind, the patriotic mind.

Generally with the approach of a general election the party in power tends to borrow heavily from the central bank and use the money for campaigns, general prices shoot up. This must be avoided.

Certain quarters of our society talk of launching demonstrations. This is a luxury the country cannot afford at this time. Once the world at large sees Malawi as politically unstable, mob-ridden Foreign Direct Investment will be scared away. This coming as a corollary of the loss of donor support will aggravate the situation. Sound politics lead to a sound economics.