ECONOMIC THEORY VERSUS REALITY II

By DARLINGTON CHILUBA

A FREE economy does not penalise entrepreneurship. A free or mixed economy enables both entrepreneurship and guarantees social protection.
A mixed or decentralised economy thrives on consultative intellect to ensure that there is no market failure and by extension, that the safety net does not collapse. In other words, the financial services sector must be buoyant, efficient and safe.
Market failure essentially means the erosion of financial value which could either be a failure of businesses to repay loans to banks, or shortfall of cash within an economy resultant of government policies.
In the first example, two scenarios suffice: the subprime housing crisis in the United States of 2007-10 that resulted in a collapse of the mortgage market and borrowers failed to repay loans to the banks thereby causing a toxic absence of cash in the financial sector.
The second is Malaysia 1997/8 when the housing market also collapsed and caused investors to withdraw cash from that country. The remedies for both scenarios took various forms of ensuring the availability of cash in incremental phases.

While the actions were complex, the ultimate result was to ensure that liquidity was injected into the economy through the banking and financial system.
These actions took stages so that inflation did not erode the value of the funds.  
Entrepreneurship thrives when there is affordable finance to support business growth. In the liberalised economy such as Zambia introduced in 1991, making money affordable meant creating multiple sources of financing available to private players and government. Thus was born the financial services sector in its current form as direct beneficiaries of the liberalisation policies of the 1990s.
It took over five years for inflation to fall from the highs of 300 percent in the late 1980s to double digits of around 20 percent around 1995.
The twin challenges of creating the revenue authority in 1994 and successfully qualifying for the Heavily Indebted Poor Countries Initiative in 1996 were done in the country’s interest and not for political mileage or expedience. Posterity will attest on the merit of these two.

The fall in inflation meant that the value of goods and services (such as finance) had some of their value restored.
Because of the solid foundation laid in the 90s, Zambia became a rated economy, the $7.9 billion debt overhung of the 1970s and 80s was resolved via the policies of the 1990s.
However, in a reverse twist, the country again borrowed more than its revenues could handle and went back to debt negotiations with international lenders.
One of the things Zambia did well was to keep the domestic economy thriving. In other words, domestic capital was available to market players so that the financial services sector was one of the best performing sectors in 2020-21.

Even though the country’s finances were strained, the government made sure capital was available domestically for common citizens to access.
The increase of the Statutory Reserve Ratio to 26 percent has somewhat diluted the organic growth of the domestic economy. What this simply means is that for every K100 a bank has, K26 has to be placed with the Bank of Zambia and, therefore, outside commercial circulation and further restricting money supply.
Unintentional or not, the result has caused scarcity of liquidity. This is an example of a policy that restrains economic growth.
The theory might inspire positive results, but in this case the evidence points in the opposite direction in the sense that it is beginning to hurt economic recovery and growth.