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Economic Policy U-turns – A story of the country’s economic journey in the wilderness (Part 2 of 2)

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President Edgar Chagwa Lungu Being Sworn by Her ladyship Mrs Irene C Mambili Chief Justice of Zambia at Inauguration ceremony at Heroes Stadium in Lusaka

Last Month in Part 1 we discussed the various economic policy U-turns that the country has experienced in the recent past and how these u-turns came about. We also pointed out that most of the economic policy u-turns were centered around the mining industry and we outlined the various dilemmas successive
governments faced when it comes to taxation of mines. How these economic u-turns that keep reoccurring among successive governments can be partially explained through one famous game theory; the prisoners’ dilemma . This theory helps us understand what governs the balance between cooperation and competition in business, politics,and social environments.

The prisoner’s dilemma theory was conceptualized by Merrill Flood and Melvin Dresher in
1950, and later formalized and named by Albert William Tucker. The basic principle behind this theory is that two individuals acting to fulfill their own best interest when making decision over a matter in which both have an interest will make a decision that has the intent to disadvantage the other person. The dilemma comes in because both individuals are aware that each one will try to take a position that disadvantages the other person because it is in their best interest to do so. However the other person is also plotting the same. When both individuals act in their own best interest, instead of yielding the best returns from their actions, they end up with worse returns because each took actions meant to maximize their own individual outcome. The returns however could have been maximized if both individuals coordinated their decision making.

The choice confronting successive governments when it comes to mining taxation and policy is analogous to the choice facing the prisoners in the prisoner’s dilemma theory. Successive governments, whether coming from the same or different political parties would be better off if they coordinated with each other by making decisions that keep corporate income tax rates sufficient and policies consistent. This approach promises to yield better results for all stakeholders involved, including the citizens.

Why policy u-turns are bad for long term economic growth

The government is run on an annual budget financed through domestic revenues, grants from cooperating partners, and through debt financing from domestic and external sources. A u-turn on most of these policies usually results in tax collection loses. The structure and financing of a tax change is critical to achieving long-term economic growth. Tax rate cuts may encourage companies and individuals to save and invest, but if the tax cuts are not financed by immediate spending cuts by the government they will most likely result in an increased budget deficit due to increased borrowing by the government. The long-term effect is a reduction in national savings and a rise in interest rates. The historical evidence and simulation analyses suggest that tax cuts that are financed by debt for an extended period of time may have little positive impact on long-term economic growth.

Furthermore, the economic policy U-turns have the potential to deflect investors. It is challenging for many investors to establish a risk profile of their potential investment over a period of time when they are not sure of what policies may be implemented or revoked. The uncertainty in policies may also attract speculators, which has the potential to worsen an already acute situation through increased capital flight. Lastly, the economic policy u-turns make it difficult for existing firms to plan efficiently.

For example, a maize exporting firm may plan to earn a specified amount of revenue to finance a project by exporting a certain amount of grain. If the government announces a 10%
tax on exports, the firm will have to adjust the revenue estimates downwards by 10%. The firm will then have to make plans to finance the 10% shortfall by other means such as borrowing. When it borrows, the firm will need to pay interest on the loan. Now suppose the government decides to reverse this policy a week after the firm has borrowed; the firm will have no choice but to service interest on a loan that is no longer useful. This is a waste of resources that would have otherwise been directed towards more productive projects.

Conclusion

Many economies, just like human beings, are resistant to change. Resistance to a given policy is normally proportional to the perceived magnitude of change that the policy intends to drive. It is therefore, not unusual that the radical the policy, the greater the resistance. The current trend is such that at their longest life span, some policies
are tied to the term of office of the political party in power. The premature deaths of many of these policies make it difficult to evaluate exactly what the long-term effects of those policies would have been if they were allowed to run the course. It is important that politics are not allowed to continue prevailing over policies. Sadly, most of the u-turns
have had more to do with politics than the negatives of the policy itself. A lot of spending liabilities are accrued on the campaign trail via pledges. The need to fulfill these campaign pledges often leads to the government borrowing and U-turning on certain policies to serve a short term need at the expense of long term economic growth.

Successive governments also need to embrace continuity of good policies and especially those related to key sectors such as mining. Lastly, corruption needs to be addressed extensively in order to improve government spending efficiency, which in turn may assist to strengthen its fiscal position. Without a proper fiscal position, it is very difficult for the government to implement and stick to many policies. The economic policy u-turns have taken the country down a meandering path in the economic policy wilderness, and until there is a resolve to have and stick to consistent economic policies, the journey to the promised land may be longer than most anticipate.

By DR. CALEB FUNDANGA
IFE ZAMBIA PRESIDENT

17 COMMENTS

  1. Juliaf
    This is why a good education makes it possible to have citizens make better and informed decisions and understand this complex world we live in. Any government basing on its popularity among illiterates is like riding a truck into the ditch because the ignorance factor would hinder its journey to successfully develop the country.
  2. Roll paper Stand
    This is the kind of information we need has a country....Not mare politicking .Please caleb,hold a workshop for our able leaders in government today.let us grow the economy together us One Zambia One Nation.
  3. Dumdum
    So what he is saying is simple. We have a chipantepante bunch of clueless PF clowns that have no idea on how to run the economy! As juliaf says above, ... these PF "illiterates is like riding a truck into the ditch because the ignorance factor" !!! Result - POVERTY for the majority of Zambians coming soon!
  4. Uncle Charles
    I would have read it if he was Bank of Zambia Governor. It is sad that these people never talk when they are in government but as soon as they are kicked out they start saying the same things that everyone else knew except them when they were on the other side.
  5. RaiseTheFlag
    One of the worst things in life is hypocrisy. Caleb was self-centred, a tribalist and ego-centric during his time at the Central Bank. He is probably one of the most wasteful and extravagant governor ever. We didn't see any consistency in the way he applied bank policies. He would always bend policies when it suited him. During campaigns he massively abused Bank resources including talking a bullion to Luapula for his wife's campaign. Everyone at the Bank was happy to see his back when he was kicked out by Sata. If his name was not included in the article we may have probably taken note.
  6. Senior Engineeer RTD
    Economics does not deserve to be called a science because no two economists can agree on any topic. We engineers argue on the basis of numbers. For example Donald Trump is talking about tax cuts but at the same time he is talking about infrastructure development. Where is the money going to come from if you are going to cut taxes. Ati the money will come from the growth in the economy at more than 3% GDP stimulated by the tax cuts. Really? A lot of voodoo economics!
  7. Umodzi Kumawa
    What do you expect when failed lawyers run the country. These riff raffs are good at nothing but borrowing and blowing the money.
  8. Sharon
    The current government is developing Zambia at a fast rate than at any point in our history. Their policies are working and people with "PHDs" Pull him down - typical of African style are trying to discourage the government! Mr. President and Mutati, you are doing fine! Someone must be jealous and wants to be remembered! Thank you for your time you saved, Sir, but let them work! "Point where they are working!" By the end of your tenure, they will remember that you will go in history as one of the greatest presidents of Zambia.

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