Zimbabwe: Econ 101

by hilzoy

Every so often, I read an op-ed or blog post that informs me all I need to answer some complicated policy question is "Econ 101." I almost always think that a statement like that is not just wrong, but a sign that I don't really need to read further. When, for instance, someone tells me that "Econ 101" means that I should support the latest trade deal, I just get the giggles: having actually tried (and failed) to read CAFTA in its entirety, the very idea that "Econ 101" has anything to say about a document that complicated, with that many puzzling side deals on intellectual property, the proper fora for dispute resolution and appeal, etc., etc., etc., is just ludicrous. Likewise the idea that "Econ 101" tells us that raising the minimum wage increases unemployment: anyone who says that, imho, indicates that s/he has not thought about the assumptions built into the models used to get that conclusion in Econ 101, whether they obtain in the real world (no), and whether that significantly affects the arguments about the results of the minimum wage (yes.)

However, every so often I encounter a policy proposal that I really can evaluate using nothing more than Econ 101. (This is lucky, since Econ 101 was one of only two econ courses that I ever took, the other being a fascinating class with Burt Malkiel that involved reading a lot of fiction rather than straight economics.) This, for instance:

"President Robert Mugabe's government has ordered prices of basic goods and services be slashed by half to protect Zimbabweans battling with the world's highest inflation rate, official media reported on Tuesday.

"Government has directed manufacturers, retailers and wholesalers to reduce prices of basic commodities ... by up to 50 percent with immediate effect as it takes measures against the wave of unjustified price increases over the past few weeks," the Herald newspaper said. (...)

It is unclear whether Mugabe's latest bid to tame runaway inflation will have better results than in the past. Previous efforts to control prices have prompted manufacturers to cut production, resulting in shortages and a bigger black market."

On the contrary, I think that the only reason not to say that we know this won't work is that we cannot exclude the possibility of an unforeseen miracle. Maybe it would be like the temple lamp in the Hanukkah story -- the one that burned for eight days though it had only one day's supply of olive oil -- only for cash flow rather than olive oil; or maybe it would be like the miracle of the loaves and fishes. Absent something like this, however, Econ 101 tells us that this will be disastrous. There is no reason whatsoever to think that Zimbabwe's inflation is the result of excessive profit-taking by producers. If it is not, then asking them to cut prices by 50% will simply lead them at best to cut production, and at worst to stop it entirely or go out of business.

The only other reason to wonder how this will work out in practice is that prices (in currency) seem to be increasingly irrelevant in Zimbabwe:

"Zimbabweans are switching to barter, payment in kind and the use of foreign currencies, such as neighbouring South Africa's rand, instead of the local dollar to survive hyperinflation and the accelerating economic meltdown.

Zimbabwe's currency is still officially pegged at Z$250 to one US dollar; early last week the informal market price was about Z$100,000 to US$1, but by Monday 25 June it had crashed to Z$400,000 against the US dollar. In January this year US$1 was being traded for Z$3,000.

The country's inflation rate - the highest in the world - is officially at more than 3,700 percent, although independent economists believe the real rate of inflation is around 20,000 percent and could reach 1.5 million percent by the end of 2007."

Stop and think about that for a minute: inflation could reach 1.5 million percent by the end of the year. If my back-of-the-envelope calculations are correct, that means something that cost a dollar on Jan. 1 would cost $15,001 at the end of the year. No one can run a business under those conditions without switching to some other medium of exchange. This might work out well for those who have something other than Zimbabwe dollars to trade. Farmers might have food if the crop were not failing; the well-to-do might have access to hard currency. But what about those people who really only have access to the local currency? Apparently, they're just out of luck:

"THE unemployment rate must be edging closer to the 100% mark as increasingly more people are leaving work not because they no longer want to work, but because they can't afford to go to work. This should be a source of considerable worry for any government under normal circumstances.

Over the past two months workers throughout Zimbabwe have had to face the realities of the hardships the country is going through. Industries across the country are reporting rising numbers of their workers who are not reporting for work because their wages cannot cover their transport requirements. They are giving up with little or no prospects of providing adequately for their families."

Meanwhile, the government is proposing to extend its insane land expropriation policy to the rest of the economy:

"Zimbabwe will transfer control of all companies, including foreign-owned banks and mining operations, to locals if a planned empowerment bill is passed, a government minister said on Tuesday.

The move is likely to deepen the country's economic turmoil and could give President Robert Mugabe an opportunity to enrich his supporters and consolidate ranks ahead of general elections next year, analysts say.

"The bill refers to both public and private companies and yes, this includes mining companies and banks, which will be impacted like everyone else," Minister of State for Indigenisation and Empowerment Paul Mangwana told Reuters.(...)

Analysts said the new law was unlikely to have a major impact outside the mining sector, as most of Zimbabwe's economy was already in local hands and many foreign companies, which once operated in the country, have already left.

But they said the remaining foreign firms were instrumental in transferring new technology to Zimbabwe and had kept foreign currency trickling in from parent companies after donors such as the International Monetary Fund, stopped lending to Harare. (...)

The bill defines indigenous Zimbabweans as anyone who was disadvantaged by unfair discrimination on the grounds of race before the former white-ruled Rhodesia won independence in 1980."

That last bit, of course, means that companies owned by white, Indian, etc. citizens of Zimbabwe do not count as locally owned, and can be expropriated. Great.

Here's the advice a Zimbabwean MP is offering her constituents:

"We have to help each other and make contingency plans, to be as prepared as we can be for any emergency or unrest. We are not a country at war, but we are in the kind of situation prevailing in a country at war, and we need to realise this and plan accordingly.

At home, make sure you always have some water stored, some candles and matches, some emergency rations, etc. At neighbourhood level, see how you can help or get help with water, power, transport, emergency response -- e.g. one person with a vehicle could offer transport if another could provide some fuel and another repair the vehicle, etc.

If you can help the elderly, the sick, the vulnerable in your neighbourhood, so much the better! Families with members outside the country should alert those members that they may need assistance, and indicate what that assistance might be.

Do not leave your plans to the last minute hoping that maybe it won't be necessary. It probably will be necessary to react to various emergencies in the next few months, so be prepared! Remember that those who are prepared are always in the lead."

Comments

[Decided FenceSitter]

As someone who is effectively going through Econ 101 as foundation work for a MBA, let me tell you they do simply teach that, "raising the minimum wage increases unemployment" with any further statement. Straight from the text book.

I've spent a lot of my time rolling my eyes in this class.

As far as the actual piece, I didn't realize it could get worse without turning to actually armed combat in the street.

[Charles Bird]

Meltdown uninterrupted in Zimbabwe. Vegas should be taking bets on how much longer its failed president will stay in power. It looks like Mugabe bypassed Econ 101 in school and went straight to Advanced Socialist Command-and-Control Theory.

[togolosh]

Charles - Zimbabwe's problems are much deeper than socialism. Corruption, incompetence, tribalism, and simple viciousness are the underlying reasons for this mess. Government interference with the economy is the one of the mechanisms by which the root causes are expressed, but there are good reasons that Belgium (f'rex) isn't seeing the kind of inflation Zimbabwe is.

I'm beginning to think that the end of this crisis will only come with invasion by South Africa, which is seeing refugees pouring over the border. Mugabe will not leave on his own, and if he dies he'll be replaced by one of his cronies.

[von]

As someone who is effectively going through Econ 101 as foundation work for a MBA, let me tell you they do simply teach that, "raising the minimum wage increases unemployment" with any further statement. Straight from the text book.

I won't get dragged into an OT discussion on this point, but raising wages (P) does tend to decrease employment, because, among other things, higher wagers makes labor marginally more expensive than capital (production) and also makes the prices of goods more expensive (output) -- both of which may result in lower employment. We can talk about whether that this occurs at every wage level, the relative substitutability of capital v. labor (which various among industries and jobs within industries), and the price elasticity of demand -- all of which may lead to exceptions, modifications, and nuances in the general rule. But, as a beginning point, saying that a wage increase puts negative pressure on employment is absolutely correct.

Now, back on topic:

The problem with Hilzoy's broad point is the Econ 101 does explain a great deal of why particular policies are good or bad, in broad terms. But it does so only if you use Econ 101 to analyze each individual constituent part of a policy -- rather than the policy as a whole -- and do your analysis in a sophistocated way, and then carefully aggregate the results and account for how different constituent results affect other constituent results. Economic problems are not simple problems, because economic problems are human problems -- and human behavior is not simple either alone or in the aggregate.

I'm also a little disappointed that no one ever says that this problem is Econ 102. Why does macroeconomics get no love?

[von]

As someone who is effectively going through Econ 101 as foundation work for a MBA, let me tell you they do simply teach that, "raising the minimum wage increases unemployment" with any further statement. Straight from the text book.

I won't get dragged into an OT discussion on this point, but raising wages (P) does tend to decrease employment, because, among other things, higher wagers makes labor marginally more expensive than capital (production) and also makes the prices of goods more expensive (output) -- both of which may result in lower employment. We can talk about whether that this occurs at every wage level, the relative substitutability of capital v. labor (which various among industries and jobs within industries), and the price elasticity of demand -- all of which may lead to exceptions, modifications, and nuances in the general rule. But, as a beginning point, saying that a wage increase puts negative pressure on employment is absolutely correct.

Now, back on topic:

The problem with Hilzoy's broad point is the Econ 101 does explain a great deal of why particular policies are good or bad, in broad terms. But it does so only if you use Econ 101 to analyze each individual constituent part of a policy -- rather than the policy as a whole -- and do your analysis in a sophistocated way, and then carefully aggregate the results and account for how different constituent results affect other constituent results. Economic problems are not simple problems, because economic problems are human problems -- and human behavior is not simple either alone or in the aggregate.

I'm also a little disappointed that no one ever says that this problem is Econ 102. Why does macroeconomics get no love?

[Deschanel]

Look what happened when the white farmers -whose families had been in Rhodesia/Zimbabwe for over 150 years- were driven out and "the people" took over. Inexperience, ineptitude, carelessness and indolence: the crops are scorched and withered, the machinery broken down, crucial techniques of planting and reaping, learned over generations lost or ignored.

I don't mean to be too hard on the poor Zimbabweans- here's my somewhat wimpy liberal caveat- but the expulsion of the white Zimbabweans from their farms was a tragedy, and the disastrous results are now apparent.

It does nothing to right the wrongs that black Zimbabweans suffered over the years, and everything to ensure they are even worse off than before.

[Sebastian Holsclaw]

"Government interference with the economy is the one of the mechanisms by which the root causes are expressed, but there are good reasons that Belgium (f'rex) isn't seeing the kind of inflation Zimbabwe is."

I'm pretty sure that if Belgium took many of the most profitable businesses away from their owners and willy-nilly distributed them to people who had no idea what they were doing, that Belgium would have some serious economic problems too.

The problem with Zimbabwe is that its leader seems to have taken all of the worst lessons of the past and decided to prove why they were so bad. It isn't just seizure-based socialism or corruption or price controls. It is everything at once.

[P-boom-b]

Von, in the systems where I've been, Macro was 101 and Micro was 102. But I've seen other places with that reversed. So perhaps a problem with the terminology. It's hard to communicate when differnet people use the same terms to mean different things.

=)

[Bernard Yomtov]

Why does macroeconomics get no love?

Whether it's 101 or 102, the fact that when you print tons of money you get runaway inflation is pretty basic macroeconomics.

[Detlef]

Look what happened when the white farmers -whose families had been in Rhodesia/Zimbabwe for over 150 years- were driven out and "the people" took over. Inexperience, ineptitude, carelessness and indolence: the crops are scorched and withered, the machinery broken down, crucial techniques of planting and reaping, learned over generations lost or ignored.

You didn´t mention another probable fact.
The "people" didn´t take over, a lot of the farms became property of the new government elite.

The ordinary "black Zimbabweans" probably are totally innocent. Just trying to make a better live for themselves. The Zimbabwe government however...

I did read that a lot of their most important members "somehow" gained ownership of more than one farm for themselves.

I utterly fail to understand why the South African government fails to blast them them for their own enrichment.

[hilzoy]

von: I agree that econ 101 gives good general guidance. My quarrel was only with the idea that it settles questions about many actual policies.

Take raising the minimum wage (by some specific amount), for instance: while I completely agree that in a very general way, raising wages tends to lower employment, you can't answer any question about a specific proposal to raise the minimum wage using nothing but that fact.

In my Econ 101 (macro), we did not discuss such questions as: do employers exert monopsony power in labor markets? What effects, if any, does this have on wages? Under what conditions would a minimum wage raise wages in a monopsonistic labor market? Does the present proposal, in the present market, meet those conditions? And so on.

[Jacob Davies]

Not econ, but I have to say that I found that advice by the MP chilling. It's not often that you hear something like that, from someone in a society that still functions, if only just, but that stands on the brink of a terrible & unavoidable collapse. Something about that pragmatic tone in talking about how to deal with the total collapse in local civilization that you see coming.

[Oyster Tea]

Having just returned from Zimbabwe I can add a couple of observations. One of the strong cultural features of this country is the extended family concept. Several generations, aunts, uncles, cousins, etc. are all considered to be part of one's family. If any member of the extended family is doing OK, they feel compelled, culturally, to help out the rest of the family. Currently nearly every extended family in Zimbabwe has someone in diaspora. Those expatriated individuals are working in functioning economies and bringing or sending home enough for survival. It's the only way they can make it.

A teacher (as of last week) in Zimbabwe made one fourth the cost of a survival food basket for a family of four. They were in such short supply that they were being replaced by "Tutors" with less training and education who were making the equivalent of five cents per month. This is why teachers are going to South Africa to become waitpersons and supporting their entire family by doing so. Their once proud education system is obviously broken, too.

Another interesting observation is that two different people that I talked to in South Africa seemed to still believe that Tony Blair and/or the West, not Mugabe, is the problem. This, of course, has been Mugabe's mantra all along. My friend there, who was a teacher and is now a tour guide, says many, if not most rural Zimbabweans pretty much believe in Mugabe.

The most common attitude I heard was "No one lives forever".

South Africa's president has a vision of a "United States of Africa", which causes him to try very hard to maintain solidarity with the other African states. He seems very reluctant to criticize or take any action against Zimbabwe. Some think there is even a family or tribal tie between him and Mugabe. I was unable to confirm or refute that. Just a rumor there.

[Sebastian Holsclaw]

One of the many sad things (I was going to say the saddest, but it probably isn't) is that Zimbabwe was doing fairly well not so long ago. I'm not sure if it used to be a bona fide African success story, but it certainly wasn't one of the many very depressing countries. Just, sad.

[Charles Bird]

Charles - Zimbabwe's problems are much deeper than socialism.

Never said otherwise, tog. Mugabe has followed the well-worn path of despotism, taking along all the dysfunction that goes with it.