US Growth and Outlook Analysed by Kampamba Shula

The New Year was one with which the US entered with caution ,looming budget cuts, poor housing and manufacturing data, high unemployment, global uncertainty and growing disbelief that the Fed still kept rates that low where among the concerns.

Over the past three months, some threats to the global economic recovery have partly faded, sparking a tide of renewed optimism. Financial markets have seen tensions decrease to two-year lows, particularly in Europe, and almost all assets have benefited from this change in perception. Fading threats to the stability of the global economy have also boosted confidence among consumers and firms. Surging confidence has spread among regions with a few rare exceptions.

However, these market and confidence rebounds have not prompted any significant change in activity yet. According to BBVA estimates, global GDP in 2012 grew by 3.2%, down from 3.9% in 2011. The slowdown that the global economy underwent throughout 2012 came to an end in the fourth quarter, according to our global activity indicator (BBVA Research US Unit, 2013).

The Fiscal Cliff

The US Fiscal Cliff was the most imminent threat to growth coming into this New Year. But telling from the market’s reaction which anticipated the possible extended cuts, the markets did not go into a panic as some analysts predicted.

A last-minute deal averted a full dive off the fiscal cliff on January 1. Congress passed legislation that extended the Bush tax cuts for most, but raised rates for wealthier taxpayers (defined as individuals with income of US$400,000 or more and married couples with income of US$450,000 or more) and limited their exemptions and deductions. The package also included higher dividend and capital gains tax rates for higher-income earners, an Alternative Minimum Tax fix, a “doc fix” (avoiding a reduction in Medicare payments to doctors), a delay in scheduled budget sequestrations, and a continuation of extended unemployment benefits. The temporary payroll tax cut of the past two years was allowed to expire. Notably absent from the deal were any substantive spending cutbacks and/or entitlement reforms (Scherfke, 2013).

Markets welcomed the fiscal deal at the turn of the year that extended most of the 2001/2003/2010 tax cuts. The deal avoided a larger drag on the economy and helped to improve the sustainability of US public-debt. However, the expenditure sequester could be an additional drag on the economy of 0.8%of GDP. On the other hand, there was no permanent agreement on the debt ceiling, although a later deal suspended this ceiling until mid-May. Hence, in coming weeks, more negotiations will take place to avoid a sharp economic contraction in 2013 and contribute to fiscal sustainability. However, a grand bargain is unlikely as long as policymakers continue to kick the can and fail to make hard choices to reach a bipartisan compromise In September last year the Federal Reserve officials said economic growth will improve faster than they had earlier projected as they embarked on a third round of asset purchases aimed at spurring the expansion (BBVA Research US Unit, 2013).

The second clearest threat to US Economic prospects has to be the crisis in Europe. But given the strides made by the Eurozone and Troika to prevent Greece from spreading contagion to the rest of Europe’s periphery (apart from Cyprus which was inevitable given the proportion of Greek bonds it held).This is something for which we must commend the EU.

Europe did its part: advances in the banking-union process reinforce the commitment to preserve the euro. The deal on Greece has shown that Europe is committed to keep Greece in the Eurozone. European policy makers struck a deal with the Greek authorities on some details of the bail-out program that allowed the disbursement of its second tranche. 3 The second factor supporting the positive perception from Europe refers to the banking-union process due to advances made at the December EU summit. The process seems critical to breaking the vicious circle between government and banking finances, and also to stemming the tide of capital outflows besetting some countries in Europe’s periphery. Agreements reached at the December EU summit were not as ambitious as had first been hinted, but are still quite positive since they include a clear calendar for implementing a single supervision mechanism and initial steps towards a single resolution mechanism (BBVA Research US Unit, 2013).

European leaders also just recently struck a deal to treat Cyprus’s main two banks which were hit badly as they held a good portion of Greek bonds, which had been altered given the restructuring of Greek debt. This deal was just a recent reminder of the EU’s commitment to stabilizing the Eurozone.

Finally, the ECB’s OMT program seems to be having long-lasting effects as a real backstop to prevent financial tensions from escalating, even if neither Spain nor Italy (the natural candidates) have asked for its activation. That situation may continue because governments of core and peripheral countries lack incentives to undergo such a process. With Spain’s bonds yielding 5 – 5.5% and Italy’s at 4 – 4.5%, the financial situation of the sovereign can hardly be seen as unbearable, in particular considering the political costs of a bail out from the point of view of the politicians in charge. It is likely that those governments would only seek a bailout if their funding costs went well above those levels. Second, the OMT may well continue being seen as a real backstop if the ECB commitment to step in in case Spain or Italy asked for the bailout (which would surely result in yields dropping) is credible. Yet, it would also be necessary for the authorities’ commitments in asking for a bail out (if funding costs soared) to prove credible (BBVA Research US Unit, 2013).

First Quarter

The New Year is shaping up to be slightly stronger than many expected, at least throughout the first few months thus far. There were plenty of fiscal and economic concerns heading into 2013, but the most recent data have shown signs of underlying strength. The fiscal cliff debacle feels like ages ago now that the dust has settled, and Washington’s decision to delay deadlines had opened up some room for market relief throughout January and February. March 1st has come and gone without a political compromise on the sequester, and the next few months will be filled with questions about how, where, and when the spending cuts will begin to hit the real economy. On the bright side, most of the economic data leading up to the deadline has been mostly upbeat. In terms of GDP growth, the second estimate for 4Q12 showed a reversal to 0.1% following a slightly worrying negative figure in the advanced report. Government spending and private inventories had pushed down the advance figure and were revised down even further in the second release. This is not surprisingly given the uncertainty in anticipation of the fiscal cliff, and businesses have already started to rebuild inventories in 1Q13. In general, we expect to see only modest growth in 1H13 but then a pickup in activity later in the year once businesses and consumers adjust to new fiscal measures. If Congress does not find some way to reverse the automatic spending cuts, then we could a reduction in 2013 annual GDP growth by 0.5%-0.8%, with the biggest impact hitting in the second quarter. Considering our current forecast for 1.8% annual growth, the full sequester would not push us into recession. Our in-house indicators assessing the most recent economic data suggest that we will see relatively soft growth in the first half of 2013 as consumers adjust to the expiring payroll tax cut and uncertainty lingers as Washington deals again with budget issues (BBVA Research US Unit, 2013).

The latest economic indicators point to relatively healthy activity in 2013 thus far, though there are still glaring weaknesses. Consumer activity has faltered somewhat following the holiday shopping season, with retail sales up a modest 0.1% in January and personal consumption up only 0.2%. It is unclear how long consumers will need to adjust to the disposable income hit, and we may see somewhat of a lagged response as the rest of 1Q13 consumption data are released. The housing recovery has also been a bit choppy in recent months, but the continuous rise in home prices and the recent jump in new home sales suggest strength moving forward. Manufacturing conditions appear to have avoided a major impact from fiscal uncertainty, with the ISM hinting at a more optimistic outlook for the sector despite some declines in regional surveys. Inflationary pressures continue to be minimal and support the Federal Reserve’s decision to maintain low target rates for a prolonged period. However, energy prices have rebounded to start the New Year and will likely put upward pressure on headline inflation in the near term, though long-term inflation expectations remain stable. As we move forward into 2013, we expect core prices to remain relatively soft but with underlying pressure stemming from shelter prices. The employment report for January was enough to offset the disappointing GDP release and downplay the fiscal cliff’s impact on job growth, even with the uptick in the unemployment rate to 7.9%. Nonfarm payrolls increased 157K to start the year off on a strong foot, with 166K in private sector hiring. Consistent sub-200K gains are just enough to keep pace with a growing labor force and are therefore not likely to lead to genuine declines in the unemployment rate without some help from other factors. However, upward revisions to 2012 data helped bolster labor market sentiments: November’s gains were revised from 161K to 247K while December increased from 155K to 196K, in turn adding 127K to the two months leading up to 2013. Furthermore, according to new BLS calculations adjusted by tax records, the economy added an additional 424K jobs between April 2011 and March 2012. The BLS also adjusted the number of those counted in the labor force, which increased 136K and put upward pressure on the unemployment rate for the month. Looking back at the past 12 months, we see the strongest gains in health care and accommodation and food services, while retail trade, professional and technical, and administrative services also saw significant gains. Not surprisingly, government was the weakest sector by far, shedding more than 70K jobs throughout the past year, while the mining and utilities sectors were also lagging in employment growth (BBVA Research US Unit, 2013).

With inflation under control and employment growth seemingly moving in the right direction, attention is even more focused on the Federal Reserve for hints of backing down from its current monetary policy strategy. Clearly, the Fed remains worried about the sustainability of this improved economic activity. The latest FOMC meeting minutes confirmed the intense debate on how and when to end QE3. Most participants commented that the Committee’s asset purchases had been effective in easing financial conditions and helping stimulate economic activity, though many are concerned about rising potential costs and risks. The main concerns expressed by the participants were related to the possible complications during eventual withdrawal of policy accommodation, potential negative effects on financial markets, as well as a chance that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound. Ultimately, the staff was asked to prepare additional analysis ahead of future meetings to support the FOMC’s ongoing assessment of the asset purchase program. While the minutes revealed less clarity on the near-term future of monetary policy accommodation, our expectations remain unchanged.

The US Economy

Federal Open Market Committee participants upgraded their estimate for 2013 gross domestic product growth to 2.5 percent to 3 percent, compared with 2.2 percent to 2.8 percent in June. Estimates for 2014 are from 3 percent to 3.8 percent, versus 3 percent to 3.5 percent in the previous forecast, according to the central tendency forecasts, which exclude the three highest and three lowest of 19 projections (Kearns, 2012).

Among the improving fundamentals is the country’s growing fuel independence. The U.S. produced 84 percent of its own energy in 2012, the most since 1991, according to data from the Energy Information Administration, the statistical arm of the Energy Department. The measure of self-sufficiency rose to 88 percent in December, the highest since February 1987.

U.S. production of crude oil in the fourth quarter of this year will exceed imports for the first time since 1995, as extraction from shale rock formations in North Dakota and Texas put the nation on track to surpass record output, the EIA projected last month.

Low-cost energy has been a boon for U.S. refiners, who are processing cheaper domestic oil to make fuel to meet rising demand in countries such as Brazil, China and India. Shares of Marathon Petroleum Corp. and Phillips 66 hit records in January after earnings beat estimates. In the first week of March, U.S. exports of products such as gasoline and diesel rose to a record 3.2 million barrels a day, according to EIA data (Carlos Torres, 2013).

Housing and Consumers

Housing takes the baton. If this call is right, housing will take a leading role. In 2012 household formation began to pick up and inventories of unsold homes declined substantially. The result was a tighter demand/supply balance that spurred the first phase of a recovery in homebuilding and more gradual recovery in house prices. These influences will support further rapid gains in home building in 2013, and we anticipate that real residential investment will grow 22% this year, the fastest since the early 1980s. If this forecast is realized—and the recent housing data flow is consistent with this view—housing could add around 0.5%-pt. to overall economic growth in 2013 (Michael Feroli, January 7, 2013).

 In the end, we still think the fiscal drag in 2013 will be manageable, at about 1.5% of GDP. As a result of house price gains, households have enjoyed a nice boost to their net worth, which should cushion the negative impact of higher taxation. Household formation is still going strong in the US, and housing starts have just begun to normalize — reasons to believe the house price gains will be sustained (Scherfke, 2013).

Gains in housing and manufacturing propelled the U.S. economy over the winter, according to reports released recently, and analysts say they point to the resilience of consumers and businesses as government spending cuts kick in. U.S. home prices rose 8.1 percent in January, at the fastest annual rate since the peak of the housing boom in the summer of 2006. And demand for longer-lasting factory goods jumped 5.7 percent in February, the biggest increase in five months.

February new-home sales and March consumer confidence looked a little shakier but still underlined strength. “There is nothing in this data that says the economy is falling back,” said Joel Naroff, chief economist at Naroff Economic Advisors.

A recovery in housing has helped lift the economy this year and is finally restoring some of the wealth lost during the Great Recession. The strength in home prices has far from erased all the damage from the crisis. Home prices nationwide are still 29 percent below their peak reached in August 2006. Still, steady gains should encourage more people to buy and put their homes on the market, keeping the recovery going. And higher home prices make people feel wealthier, which leads consumers to spend more and drives more economic growth.

The Core Issues

To get right to the point the real issues which remain hanging over the US economy in the near future are the Federal reserve’s Monetary policy and the Fiscal policies.

It is hard to overlook not one but two elephants in the United States economy: the Federal Reserve’s highly accommodative monetary policy stance (near zero interest rates for the last four years with limited expectations for a rate hike within the next two years), and the ongoing fiscal policy negotiations that could have significant implications for both short-term and long-term activity. The future path of the very important but unobservable variable, potential GDP, is at the core of both the effectiveness of and the future commitment to the current highly accommodative monetary policy, as well as the long term effect of possible fiscal austerity on the US economic growth, measured by the government multiplier. The costs and benefits of the Fed’s quantitative easing strategy, as well as the size of the government multiplier, are tied to the assessment of how far actual output is from its potential level. The size and the speed of convergence of the output gap are relative to potential GDP and depend on the permanent changes in long-run potential growth. Nevertheless, due to the unobservable characteristics of potential GDP, the measurement of potential growth and the subsequent output gap can differ depending on the economic model employed (BBVA Research US Unit, 2013).

Possible factors contributing to the current low potential growth are the uncertainty around the future fiscal policy path and the residuals from the Great Recession in business attitude and credit environment. Nevertheless, changes in work force demographics, globalization, lack of progress in education attainment, as well as the overhang of consumer and government debt are potential headwinds causing the downward shift in longer-term growth (Gordon, 2012).

On Wednesday 10 April 2013, the Federal Reserve released the minutes of its latest Federal Open Markets Committee Meeting several hours earlier than planned. The minutes were inadvertently released to about 100 Congressional staffers and trade lobbyists shortly, according to a Federal Reserve spokesperson. Minutes from the most recent Fed meeting suggest that members have grown increasingly concerned that things could get messy if it continues its asset-purchasing and money-printing policies too far into the future. Among those concerns are instability to the financial system, a sudden rise in interest rates and inflation (CNBC, 2013).

Conclusions

The US Economy is expected to grow in the coming quarters on the back of better housing data which will empower consumer spending and absorb the tax implications of the cuts. Personally I attribute the great rebound in early 2013 to the Federal Reserve’s accommodating policy keeping rates so low. This significantly impacted unemployment bringing it down to the 7% levels from 8% late last year. Accompanied with greater energy independence, better numbers from the manufacturing especially the motor industry as well as better labor prospects, the US Economy is set to drive Global sentiments positively into the second quarter.

However, I do have a problem with two issues namely the fiscal position and the Federal Reserve’s accommodating policy and the US debt. But given the political entangle between democrats and republicans I shall not go into the debt ceiling here.

Anyone who knows me personally would know I am the biggest fan of Federal reserve Chairman Ben Bernanke’s policies. But I do not see the current Bond buying as sustainable.

The Fed's biggest weapon is to create money out of thin air and it's using that power. In September, it launched a third round of quantitative easing, in which it has bought $40 billion of mortgage-backed securities per month—primarily in mortgage-backed bonds. Now firstly, the truth is that the Federal Reserve is buying a bulk of the Bonds in the Market, this is good but it is also inherently a distortion in the Bond Market. This distortion creates a “false” equilibrium of the demand and supply of Bonds. This also gives markets a slightly incorrect picture of the reality.

Look at it this way, if the Federal Reserve is printing “counterfeit” money every month and pumping into the markets who in turn buy stocks, some of the rallies in the market would be erased as soon as the Federal Reserve pulled out. Without the Fed’s unconventional program, the 10-year Treasury would yield 3% or more, according to research published by Goldman Sachs.

Albert Einstein once said Reality is an illusion albeit a persistent one. The Federal Reserve is persisting here, but they can’t do it forever. Somewhere down the line they will have to reduce the asset purchases and eventually stop them. This brings in the question of when and how. Firstly they should keep the market informed out the cut back and the eventual stoppage. And furthermore it should be done slowly as reduce the upward inflationary pressures.

Employment numbers have improved, the outlook is better this year. My opinion is that by mid-year bond buying should reduce and eventually be stopped at the end of the year.

Bibliography

BBVA Research US Unit. (2013). US Economic Outlook First Quarter . Houston,Texas: BBVA Research USA.

Carlos Torres, C. S. (2013, April 12). Economy Bears Turn Bulls Seeing 3% GDP for U.S. Few Saw in 2012. Retrieved April 12, 2013, from Bloomberg: http://www.bloomberg.com/news/2013-04-11/economy-bears-turn-bulls-seeing-3-gdp-for-u-s-few-saw-in-2012.html

CNBC. (2013). Will the Federal Reserve End QE This Year? CNBC.

Gordon, R. (2012). “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds.”. NBER .

Kearns, J. (2012, September 13). Fed Officials Upgrade Economic Growth Outlook in 2013, 2014. Retrieved April 12, 2013, from Bloomberg: http://www.bloomberg.com/news/2012-09-13/fed-officials-upgrade-economic-growth-outlook-in-2013-2014.html

Michael Feroli, R. E. (January 7, 2013). The US economic outlook for 2013 JP Morgan Special Report. JP Morgan.

Scherfke, R. (2013). Global Economic Outlook. Wellington Managment.

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Mealie Meal Crisis Analysed by Kampamba Shula

The Cause of the Crisis

The roots of the current mealie-meal crisis lie in the seemingly insatiable demand for the commodity from neighbouring countries, particularly the Democratic Republic of Congo (as well as in the broader Great Lakes Region and beyond), which demand has been made even worse by last season’s poor harvest in the United States and Mexico. Here is a summary of the challenge: South Africa has produced about 12 million metric tonnes of maize this year and is able to supply mealie-meal to the Congo more cheaply than Zambia because of its efficient system of planting, harvest, storage, finance and generally well-supported agricultural sector. This year, however, South Africa is not exporting to the Congo because its exports are covering the shortfalls in the North American markets (which were a result of last year’s drought in that region). The massive vacuum in the Congo supply chain has created even greater pressure on Zambian maize. Due to the basic rules of supply and demand, Zambian maize has simply become hot property in the DRC and beyond, pushing up the local sale price to unprecedented levels.

When you add to the regional demand factor, the various problems resulting from (i) the Food Reserve Agency’s confusing role in the maize market (exporting maize when our markets are facing erratic supplies); (ii) infrastructure challenges preventing maize from being collected from rural areas when roads are impassable during the rains and there is no effective storage in these locations; (iii) long-term structural problems in maize marketing; (iv) delays in providing inputs and payments to farmers;

Structural problems from the FRA

Local traders have traditionally had mandates from mills to buy and stock maize for them for release later on in the year but this business has been obliterated by FRA. The reason is simple. If a trader is not sure whether the FRA will also begin releasing maize at a cheap price to millers in the middle of the year, that trader will not want to hold stock that he might have purchased at a high price. This is because even a small reduction in the FRA price to the market could bankrupt a miller that has pre-purchased maize stock for releasing later into the market.

Most millers rely on bank finance but the lack of clarity and planning on the part of FRA makes both the millers and the lending institutions nervous and therefore cautious. They have no certainty as to when the FRA will intervene in the market. The only solution is to focus on the export market or buy limited amounts of stock that they can quickly sell if the FRA drops the price of maize. The financial sector generally prefers to lend to FRA because such lending comes with a Government guarantee. Millers would therefore rather fill their storage sheds with only a few months of stock when FRA is not participating in the market between May and October (a restriction set by the Food Reserve Act).

Further, because not every miller is able to accesses cheaper FRA maize, there is a distortion in the market. A close look at production figures shows that the more efficient producers of maize – essentially the large scale farmers – have tended to diversify into other commodities such as soya beans and tobacco. FRA has therefore only served to promote inefficiency. Current maize yields in Zambia average about 2 tons per hectare when they are supposed to be 5-10 tons per hectare. With its 1.3 million small-scale farmers, Zambia can easily match the average annual South Africa production of 10-12 million tons of maize and feed the continent!

It is also important for Government to begin the exercise of re-thinking our dependence on maize as a staple food as part of a broader crop diversification programme. Consuming huge quantities of maize meal, particularly the refined breakfast meal contributes to the high rates of preventable illnesses – particularly diabetes.

It is important to recall that the private sector has been asking for the recognition of a Warehouse Receipt as a document of title from as far back as 2004. The MMD Government only moved on this in 2010 in an attempt to replace the Agricultural Credits Act. However, the 2012 Act remains unimplemented. This action should be delayed no further. Similarly, an Agricultural Marketing Bill went through stakeholders consultation in 2010 but it is not clear when it will be taken to Parliament despite a Parliamentary Committee report recommending the immediate presentation of the Bill to the National Assembly. It contains important provisions for the improving the sector and curtailing adverse political interference. A Commodity Exchange Bill also underwent stakeholder consultation in February 2010, although it is not clear what stage the Bill has reached.

Current Situation

THE Indaba Agricultural Policy Research Institute (IAPRI) has attributed the hike in mealie-meal prices to lack of competition among large scale millers accessing subsidized maize that have squeezed informal traders out of the market.

 Last month, Government allowed milliers to increase the wholesale price of 25 kilogramme bag of breakfast mealie-meal to KR55 (K55,000) to avoid continued shortages of the commodity on the market.

Making a presentation on Fundamental causes and costs of mealie-meal prices in Lusaka , IAPRI research associate Auckland Kuteya said there has been little benefits transmitted to consumers from the Food Reserve Agency (FRA)’s maize subisidies to millers.

“The question is who is capturing the maize subisidies from FRA…why are retailers or millers able to keep prices so high despite subsidies,” he wondered.

 Mr Kuteya said Government has created a problem where only a few retailers or millers are able to benefit from maize offloaded by FRA, which has squeezed out the informal milling sector.

 He said the millers that are not receiving subsidised maize cannot compete on the market.

 “The Government has brought this problem upon itself by buying most of the marketed maize grain through FRA and selling at too low a price to few millers. If the grains were readily available on the market, the informal milling system could be booming right now,” he said.

 Mr Kuteya said increased demand for Zambian maize in the region has exposed problems in the marketing system which has led to shortages and high prices of mealie-meal.

 He said during the 2010 and 2012 period, the national treasury lost about KR3.8 billion (K3.8 trillion) through FRA due to large scale wastage, transport costs, storage/handling costs and storage losses.

 “Millers are doing what any self-interested business man would do if they had the opportunity. Government can end this behaviour by stopping subsidised millers from operating. Millers should be weaned off the maize subsidies,” he said. He said cross-border traders, millers and traders are not fundamental causes, but the maize marketing system that is not functioning effectively.Mr Kuteya said FRA should concentrate only on strategic food reserves and allow the private sector to get involved in marketing. He acknowledged the difficulties involved in stopping informal cross- border traders from exporting maize or mealie-meal to the Democratic Republic of Congo (DRC) as it offers a good market.

 Speaking at the same function, IAPRI research director and country coordinator Nicholas Sitko said demand for Zambia’s maize and mealie- meal in DRC will always be there as people need food daily.

“If the demand is not met formally, this will create room for informal trade. If mealie-meal cannot be transported on a big truck, people will resort to bicycles and this will push the price of the commodity up as transport costs increase,” he said.

THE IMF says government’s recent increase of mealie-meal prices to cushion transport costs incurred by millers will help improve the availability of maize across the country.

Responding to a press query, International Monetary Fund country representative, Tobias Rasmussen, however said to fully capture the available potential, it would be important for the country to let market forces work.

 “In the present situation, mandated pricing and limits on exports have kept Zambian maize prices well below those in neighbouring countries. This has led to smuggling and is discouraging production. Fixed pricing has also impeded incentives to distribute maize to remote areas where transport costs are high,” Rasmussen said.

Conclusions

FRA should NOT market maize. FRA is like a fork, I am not saying it shouldn't be on the dining table, but you don’t use it to drink soup.

FRA still has a big role to play in the market but not as a marketer but as a store of strategic reserves. Zambia Agricultural and Commodities exchange (ZAMACE), the agricultural commodities exchange must come in to fill in the marketing role. ZAMACE using Options and Futures on Global market prices will be able to secure Farmers a steady market for their crop. Farmers will never be paid late because derivatives like Futures will allow farmers to even be paid up front for crop.

Next, the subsidies of Maize will inevitably have to be reduced and eventually stopped. It is unsustainable in the long run. Maize will need to be depoliticized as a crop; we can’t have the President dictating to Millers at how much they should sell their Maize, Business doesn’t work that way.

Sherlock Holmes (my Favorite fictional character) said that once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth. For Mealie meal prices the impossible is preventing market forces from operating, the improbable is that Zambian must consume less Mealie Meal.

Zambians must eat less Nshima and more cassava, millet or whatever. I know this may sound as disconcerting news but it’s true. Market prices are determined by Supply and Demand. Given that Supply is distorted by FRA and will require Political will to empower ZAMACE, demand is something that as a community and a nation we can begin to address on our own.

The Zambian Government cannot solve all the problems of the country, it is up to ordinary Zambians to stand up and be agents of Change. In this case we have to diversify the Food basket and include other variety of foods.

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Development by Romeo F Kasengele

By Romeo F Kasengele

Increased national wealth and wellbeing is the ultimate goal of any progressive state or society. Achieving this most noble of goals can however prove a great challenge. It necessitates the adoption of certain strategies which need to be employed consistently and vigorously if economic wellbeing is to be achieved in the shortest possible time. The strategies to be employed for this purpose include the strengthening and providing greater autonomy to a states institutions, the identification of goods and services the local economy can produce at a comparative advantage, the education of the workforce with a bias to courses that are directly linked to the production of these goods and services and encouraging the setting up of small businesses which are directly involved in the production of these goods and services.

Any society that wishes to be progressive and excel economically must have strong and effective public institutions .From the great civilizations of antiquity to today’s modern economic superpowers all of which achieved immense economic wealth and social order, strong, effective and efficient public institutions were and are the cornerstone of their prodigious success. The strength and independence of public institutions is positively correlated to the strength and wealth creation capacity of an economy in that public institutions provide the framework or foundation in which the economy and all economic agents operate. Hence a weak foundation or framework is likely to support only weak performances and results whilst a strong framework is as likely to support strong economic performances and results. Public institutions with regard to economic activity refer to all institutions that provide frameworks for economic transactions. From the legislature which creates laws which directly affect economic activity and wealth creation, the judiciary and courts which enforce these laws and settle any contractual disputes amongst economic agents to institutions which deal with business registration, revenue collection, labour regulation and compensation, price of capital, consumer protection, property rights e.t.c  The decaying of these public institutions through inefficient service delivery, corruption ,laziness and other immoral vices certainly leads to weal social and economic frame work within in which the economy operates and by extension weak economic growth and wealth creation capabilities.

Every civilization, state and society is endowed with a unique and abundant resource or resources of which if exploited efficiently and sustainably can result in accelerated economic development and social well being. The Japanese and German economies were in disarray after the Second World War but by identifying and concentrating on their most abundant resource available to them namely technological knowhow and ingenuity, they succeed in transforming their devastated economies into regional and world leaders. China also after decades of mediocre economic performances decided to exploit its most abundant economic resources, labour and succeeded in developing the fastest growing economy in the world. Exploiting a nation’s most abundant resource can accelerate development in two ways. Firstly, the production of goods and services that make use of a nation’s most abundant resource tend to have an increasing decrease in cost of production over the medium to long term than those that don’t.  That is goods and services produced from abundant resources are likely to achieve economies of scale faster than those produced from less abundant resources given that the resources are exploited correctly. An analogy of this is a nation with vast fertile land and a large unskilled labour force is likely to achieve economies of scale faster in the agriculture produce industry than in the electronics manufacturing industry. This is because agricultural production intensively uses the nation’s most abundant resource, fertile land and thus output is able to grow faster to achieve economies of scale as opposed to electronics manufacturing which relies on resources i.e. technological know how, not readily available in the economy. As a result of the economies of scale, production costs as well as the price of the final goods would decrease making them more competitive in the international markets. Secondly, production of goods and services that mostly utilize the nation’s abundant resources are likely to have a steeper learning curve. That is, due to these goods and services ability to achieve economies of scale, they are able to charge lower prices due to lower costs and hence generate higher demand.  Higher demand will necessitate higher production and this increased production will result in a downward movement along a steep learning curve. That is, the more of that particular good is produced, the more efficient its production becomes resulting in goods and services of lower cost and higher quality. Also the better a society becomes of these goods and services, the higher the possibilities of innovations with regards to the production processes both up and down stream yielding goods and services of even higher quality in the long run. This guarantees a better product for trade in the international markets.

To successfully take advantage of the most abundant resources available to a society, its labour force needs to be able to effectively exploit these resources. This can only be done by equipping the majority of the labourforce with the necessary skills and knowledge to effectively and sustainably exploit these resources. This can be done through educating the labour force in skills and knowledge which directly relates to the development of these resources. For instance, if a particular society’s abundant resource is financial knowhow and ingenuity, then education in this society should focus on courses of study that are financially inclined. Also, if a society’s abundant resource is fertile land or mineral wealth, then the society should focus its educational system in equipping its citizens in skills and knowledge specific to developing these resources from its raw material state up until the production of the finished unit. 

Given a strong institutional framework, identification of an abundant resource which can be developed and education of the labour force in skills and knowledge to successfully develop these resources until the resource is a finished product, it now becomes imperative to encourage the setting up of indigenous small business enterprises that will exploit the opportunities presented by the resources.  The involvement of small businesses in the development of a society’s resources is of vast importance if the society is to achieve any tangible and long lasting benefits. This is because small business, when encouraged, is capable of employing a vast majority of a society’s labour force and hence stimulates consumption and tax revenue. More than 80% of employment in the world’s most developed economies is accounted for by small businesses. Thus small business with its huge potential in generating employment when channeled to exploit opportunities in industries that utilize a society’s abundant resources, a society can not only create substantial employment and increased social and economic wellbeing but also high quality products at lower prices because of the competition prevalent within that industry. The huge employment potential of small businesses can be attributed to their huge potential for expansion. As the name implies, small businesses are business operations in relative infancy. As such they have great potential for growth. If managed correctly, small businesses will grow, expand operations and increase production. As the business and its output grow, the business will require more labour to participate in the production process. This increased demand for labour will compel businesses to recruit workers which will lead to an increase in the employment levels in the economy. Increased employment will result in a larger tax base from which government can derive revenue as well as increase consumption which will further stimulate production output in the economy. Hence as small businesses grow they increase output in the economy which leads to a decrease in unemployment. Another major reason why small businesses are able to generate such a huge percentage of employment is because they find is easier to hire as compared to large corporations. They find it easier to hire because of the lack of bureaucracy involved in the recruitment process as compared to large corporations. That is, the recruitment process in large organizations involves a number of departments and has to be approved by a number of individuals before an individual can be hired whilst in a small business this process is cut significantly because of the shorter chain of authority.

Economic progression, wealth creation, social order and well being are goals all societies aspire to. Achieving them can be arduous but with fortitude and discipline success is assured. Ensuring that a state’s institutions are autonomous, strong and efficient is the first and most important step in achieving the above objectives. This is because these institutions provide the framework within which the economy operates and hence a strong framework will be able to support a strong economy. Identification of an abundant resource which can be exploited for the production of goods and services will ensure that the society will swiftly move down the learning curve and economies of scale will be achieved rapidly. Educating the labour force in skills and knowledge that directly relate to the production of the goods and services derived from the abundant resource will ensure that the resource is exploited efficiently and sustainably whilst the setting up of indigenous small businesses which are directly involved in the production of these goods and services will ensure employment generation and greater economic wellbeing as these businesses grow.

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