Mthuli and The Law of Unintended Consequences
It was supposed to be a simple job. Raise taxes and cut government expenditure. Balance the budget and cure the economy of the monetary malaise that was being created by fiscal indiscipline.
Raising Taxes and Cutting down government expenditure is a contractionary policy. The result was a massive contraction in GDP. The aggregate demand curve shifted to the left in the consumption-based and government-centered economy. This was never his intention, his intentions were good.
The intention was to clean the monetary mess. When Mthuli took over as the Finance Minister of Zimbabwe, the problem was well known. It was excessive government expenditure, with huge budget deficits that were regularly monetized via the central bank, leading to a local-currency inflation crisis and USD liquidity crisis.
If excessive and perennial Budget Deficits were the problem then perennial Budget Surpluses were supposed to be the antidote. This gospel of a surplus has been preached by Mthuli incessantly at every given opportunity. It is almost like an obsession. That's his main KPI. He focuses on that metric piously. Unwavering Commitment. The budget surplus is all that matters. It has to be achieved at all costs. At any cost.
Whilst it is a given that a contractionary fiscal policy decreases the level of aggregate demand by decreasing consumption, investment, and government spending, it is never the intention of a contractionary fiscal policy to shrink GDP. The intention is to cool off an overheating economy, halt inflationary pressures, and stabilize the economy on a sustainable path. The unintended consequence is the shrinking of GDP.
Mthuli was kind of aware of the dangers, which is why he referred to the short-term process of stabilizing the fiscus as a time for austerity. The austerity was meant to be temporary, just a rough patch along the way to prosperity. However, the unintended consequence was the ensuing economic recession, or should we rather say a depression. A permanent displacement of GDP in real terms, not in the skyrocketing nominal figures.
Due to Mthuli’s suasion and interference at the Reserve Bank of Zimbabwe, the central bank hiked interest rates to as high as 50%. The intention was to mop-up excessive liquidity, shrink the monetary base, and fight-off inflation and currency depreciation. The unintended consequence was that “hiking interest rates” was “unfairly” misinterpreted by the market economy as a vote of no confidence in the local currency.
It's Fisher’s effect. Expectations matter. That is why confidence is a key ingredient in monetary affairs. Money is not real. Any form of money used to exchange goods and services is not real. Only the goods and services are real. Money is a concept. It is an accounting concept. It is an abstract idea physically manifested in notes and coins or in electronic bits. People have to believe in the idea. They have to have confidence in it. Confidence matters. Mthuli and those acting under his tutelage at the central bank did not fully take this into account.
So, inflation soared. Unabated. Because confidence and expectations matter, politics also matter since politics inform and drive confidence and expectations.
Of late, the local currency has somewhat stabilized in both the real economy and the rigged Fixed Exchange rate regime masquerading as a market-based auction system. Maybe the economy has reached an Inflection Point, where it cannot decline any further because it has paid for its past excesses and fiscal indiscipline. Maybe they have stopped printing. Maybe the economy has ground to a standstill because of COVID19 and the velocity of money has gone close to zero thus shrinking effective money supply. The currency stability we are witnessing is either the results of a well-executed plan or luck.
It is easy to make these kinds of judgment calls on Mthuli ex-post. If it were you in that position, what would you have done? If it were Tendai Biti, what would he have done? The answer usually depends on political allegiance but it ought not to be so.
The truth, however, is that any reasonable man would have done exactly what Mthuli did. Tendai Biti would have used the “we can only eat what we kill” mantra which is not any different from the “Budget Surplus” gospel preached by Mthuli. They both focus on avoiding budget deficits.
Viewing things from this angle, Mthuli Ncube, who is usually referred to as unreasonable, passes the Reasonable Man’s Test. This, by no means, does not venerate him for his nefarious association with, and involvement in, an autocratic and despotic junta regime. And this, by no means does not glorify the many instances that Mthuli has demonstrated his unreasonability. The test is only being applied on the broad orientation of his Fiscal Policy.
The cure to runaway monetary problems caused by budget deficits is balancing the budget. There is no other way. You cannot continue with budget deficits. That would be doing more of what has failed spectacularly. That the economy dived into a recession was an unintended consequence.