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Sunday, 9 February 2014

Lesson Learnt

Finance Minister Alexander Chikwanda recently announced that no money has been saved from the removal of fuel and maize subsidies. There has been calls on government to explain how much it has saved from the removal of subsidies and where that money is being spent.

Chikwanda says what GRZ has done is merely prevent expenditure on further subsidies. And by doing so it has increased expenditure "on other developmental projects which could have suffered if such funds were still being allocated to subsidies...". He did not say what amount and where the money has gone precisely.

The money on subsidies could only have been "saved" in a real sense if it resulted in a reduced budget deficit and government debt. But both of these things have ballooned. The money "saved" from fuel and maize subsidies went on funding the large unprecedented increase in public sector wage bill.

In short, money intended for the poor went on larger salaries for the employed. The idea of removing subsidies in hindsight turns out to be the most retrogressive policy undertaken in recent times. Why? Because it took money from the poorest people and gave it to workers with jobs already. As my wife likes to ask when she sees something bizarre, "who does that?"

The idea of removing subsidies is sound in principle provided money is given back to the poor in form of income transfers or even invested in alternative energy like biofuels. Instead what happened was the large wage increases. The government did something very immoral.

One of my regrets is that those of us who were strong supporters of the removal of subsidies failed to live up to our responsibilities to first defend and protect the poor with tangible calls for policies before supporting the proposal. We were too simple in our analysis. Too theoretical! Too trusting of those in charge of policy! I certainly was!

Yes, the economic theory made sense. The policy was correct, all things being equal. But all things were not equal! We supported a policy which had no public support and had not been publicly consulted on. We supported a policy without sufficient attention to the people and institutions executing it. We too readily decoupled policy from its environment. That is not only bad morally it is also not sound economics in the end. It is the same mistake foreign donors repeatedly make.

Our support was based on blind trust that no one would be foolish enough to take money from the poor and spend it on wages and by-elections. Now looking back and seeing how many mistakes are being made in the policy terrain, one can only ask, how did we not see that the money would be wasted?

As a young economist starting over 12 years ago, I had a plaque on my desk with a quote from Alfred Marshall : "If the economist reasons rapidly and with a light heart, he is apt to make bad mistakes at every turn of his work". It is a lesson easily forgotten! Economics that add values starts with correct judgements about the limits of prevailing economic theory and pays attention to the depravity of the human heart, especially of politicians.

We cannot afford to merely "assume" that our leaders have our best interests at heart. We cannot sacrifice process for assumed outcomes. Most importantly it is vital to learn to reason slowly before jumping to support any policy! Every policy must ask - will this make the poor better or worse off? It is a lesson I need to keep re-learning. It is also a lesson I commend to every young economist.

Chola Mukanga | Economist
Copyright © Zambian Economist 2013


  1. Hi Cho,

    The problem isn't with individual moral failings, the problem is that the very neoliberal free trade, deregulation mindset, that maintains that you have to give to the rich and take from the poor, because the rich 'will know what to do with money, and the poor are poor because they don't'.

    Neoliberalism is hostile to the support of demand for goods and services. Therefore, they will undermine everything that has to do with the economic empowerment of the middle class and the poor.

    It is a mindset that builds on the idea of Zambia's economy as an economy that is led by two or three giant corporations, instead of a million small businesses.

    Also, there is a culture of secrecy about public policy, including economic policy. It is within this secrecy, that 'corruption' thrives. Even the last minister of economics that we could trust, Ng'andu Magande, was working within the framework of the corrupt MMD. Great idea to introduce the windfall tax, however they couldn't hold on to it, and the program was eliminated by the highly corrupt and extremely arrogant Situmbeko Musokotwane.

    The reason I was against eliminating meagre subsidies for small farmers, is because it does exactly what the neoliberal mindset doesn't want to happen - it enables poor/working people to stepping up their operations, and produce more, while increasing their own purchasing power through higher incomes.

    The answer may well be through collective action, at the SADC level, to ensure that mineral wealth does not disappear out of the country.

    I would like to see a situation where all natural resources are sold to the state at cost only, and sold by the state at the highest international prices only.

    And that would be a lot easier without the presence and machinations of the wealthiest elites, like the Rockefellers, among others.

    1. Who would sell these natural resouces to the state.


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