Economies move in cycles, as basic economic theories have shown. They rise and change the economic status of people. That is, the continuous rise in the economy increases spending behavior by consumers, businesses, or the government, or increases net exports. Consequently, when demand exceeds supply, the excess demand puts upward pressure on prices across a broad range of products and services, resulting in inflation. This is so because most economies are built on finite resources, thus proving economics as the trade between infinite human wants and finite resources. So price becomes the countermeasure of controlling the access to economic resources. This is how economically developed countries explain their inflation.
Malawi is a relatively small country, and our production scale is supposed to be operating at its economic potential output or capacity. That is, operating in balance, with respect to the factor of demand and supply. This would maintain the levels of inflation. So what then explains the double-digit increase in inflation we are facing now in this nation? Why the skyrocketing prices of goods and services? Why the seemingly lack of control over the macroeconomic variables and indicators, inflation included?
Ours is a developing country, and with that comes an advantage that we have low chances of running into inflation on the basis of high production. Yet, though developing, our markets are heavily fragmented, causing our production capacity to reach an economic bottleneck, which has been a leading cause of inflation. How so?
Given the system of the Malawian economy, it is in part designed to react to the law of supply and demand. This means that increased production will automatically increase supply. Consequently, this will lower the price of products on the market. However, with our markets heavily fragmented, on the production side, the cost of domestic or imported inputs will not directly react to the changes in supply of the said products due to lack of input buying power. This means that even though the market price of products will be low, the cost of producing those products will still be relatively high. This is what is termed as the Economic Bottleneck, which is inflation based on an increase in the price of domestic or imported inputs that pushes up the production cost.
In this case, due to the cost of production, the aggregate supply lowers, with demand fixed or relatively growing. This exerts upward pressure on the price, hence inflation. So we are a small nation disadvantaged by inflation simply because we cannot control the cost of production, both of domestic and imported inputs. In such an economy, profit margins will still favor those banking on producing a lot of goods at once, economically defined as economies of scale, which is here put as the Market Buying Power. It is the only way to override production cost. This is exactly why the amwenye (Asians) and other foreign investors have an advantage that most of our local entrepreneurs don’t. It is that advantage that shields them from production cost on the input side and gives them leverage over cost of production.
It will take a combined effort of our fragmented markets for us to balance new inventions and commercialize whatever comes from that. Otherwise, the seemingly high morale our emerging entrepreneurs have will lack economic incentives due to an unyielding rate of return, or Return on Investment (ROI). And that is where, in a mixed economy, the government jumps in. But how much of the government is supposed to intervene to address this bottleneck? What economic controls can give our entrepreneurs and innovators buying power? This still brings us to the conflicting trade-off between sound macroeconomic management and economic freedom.
It is the same concept that explains why forex is floating highly in black markets as compared to our financial institutions. It all rests on the idea of either being a de facto pegged exchange rate regime or a flexible exchange rate regime. This answers the question: how much control should the government have on the Kwacha against the U.S. Dollar rating? By extension, should the market be purely self-governed? The trade-off between these expansionary fiscal and monetary policies result in dropping in official reserves and weakens the Kwacha’s position, which directly led to periods of foreign exchange shortages and rationing, and private import arrears, which substantially foster black market foreign exchange trade. This is exactly why banks don’t have foreign currency as compared to the black market. At its apex, this affects the domestic production capacity.
Migrating from poverty to prosperity has to be intentional. It has to be rigorous. It must be systemic. In as much as we put sole emphasis on start-ups as an entrepreneurial and innovative intervention to curb our economic challenges, it will take us decades for entrepreneurship in this fragmented market to yield sound economic returns. Our buying power can be engineered. Our economic bottleneck can be overridden. Let’s think start-ups, but also, let’s think mergers and acquisitions. Let’s think market integration.
I would have straight out recommended advancement on the initiative of cooperatives without question. If truly, cooperatives deliver, they would by now have delivered the best in this our agro-based economy. Where then are cooperatives missing it? In my opinion, it’s because they are only concentrated on the production end. Cooperatives only speak of production, leaving the rest of the value chain to other independent players. Integration that delivers for economic growth must cut across the entire value chain.
Casting on the agenda 2063, comes with the obligation of agricultural productivity and commercialization, industrialization and urbanization. The integration of the market should go beyond the production line alone if we are to commercialize. Should we do that, then this journey to being a wealthy and self-reliant industrialized upper middle-income economy will be a journey endued with results. And the macroeconomic variables of inflation, unemployment rate, GDP, and national income will be within control.
The government’s role is to ensure that an environment is created by adopting sound policies that push towards market integration, which is our buying power. Our economic liberation won’t be achieved if our entrepreneurs act in solitary. Let’s turn things around, we cannot live by the begging bowl. Sound macroeconomic management, economic freedom, and pro-poor and pro-rural public spending, will bring before this generation that which was economically inconceivable.
