Contact: Vituli Musukuma

Financial and Economic Analyst

Institute for Finance and Economics 39 Nalikwanda Road,
Email: info@ifezambia.org Woodlands,
: cfundanga@ifezambia.org Lusaka,
: vmusukuma@ifezambia.org Zambia 10101

Press Release
Economic Policy U-turns - A story of the country's economic journey in the
wilderness (Part 2 of 2)

Lusaka, July 29, 2017: Last Month we discussed the various economic policy U-turns that the country has
experienced in the recent past and how these u-turns came about. We also pointed out that most of the economic
policy u-turns were centered around the mining industry and we outlined the various dilemmas successive
governments faced when it comes to taxation of mines. How these economic u-turns keep reoccurring among
successive governments can be partially explained through one famous game theory; the prisoners dilemma . This
theory helps us understand what governs the balance between cooperation and competition in business, politics,
and social environments. The prisoner's dilemma theory was conceptualized by Merrill Flood and Melvin Dresher in
1950, and later formalized and named by Albert William Tucker. The basic principle behind this theory is that two
individuals acting to fulfill their own best interest when making decision over a matter in which both have an interest
will make a decision that has the intent to disadvantage the other person. The dilemma comes in because both
individuals are aware that each one will try to take a position that disadvantages the other person because it is in
their best interest to do so. However the other person is also plotting the same. When both individuals act in their
own best interest, instead of yielding the best returns from their actions, they end up with worse returns because
each took actions meant to maximize their own individual outcome. The returns however could have been
maximized if both individuals coordinated their decision making. The choice confronting successive governments
when it comes to mining taxation and policy is analogous to the choice facing the prisoners in the prisoner's dilemma
theory. Successive governments, whether coming from the same or different political parties would be better off if
they coordinated with each other by making decisions that keep corporate income tax rates sufficient and policies
consistent. This approach promises to yield better results for all stakeholders involved, including the citizens.

Why policy u-turns are bad for long term economic growth

The government is run on an annual budget financed through domestic revenues, grants from cooperating
partners, and through debt financing from domestic and external sources. A u-turn on most of these policies usually
results in tax collection loses. The structure and financing of a tax change is critical to achieving long-term
economic growth. Tax rate cuts may encourage companies and individuals to save and invest, but if the tax cuts
are not financed by immediate spending cuts by the government they will most likely result in an increased budget
deficit due to increased borrowing by the government. The long-term effect is a reduction in national savings and a
rise in interest rates. The historical evidence and simulation analyses suggest that tax cuts that are financed by
debt for an extended period of time may have little positive impact on long-term economic growth.
Furthermore, the economic policy U-turns have the potential to deflect investors. It is challenging for many investors
to establish a risk profile of their potential investment over a period of time when they are not sure of what policies
may be implemented or revoked. The uncertainty in policies may also attract speculators, which has the potential to
worsen an already acute situation through increased capital flight. Lastly, the economic policy u-turns make it
difficult for existing firms to plan efficiently. For example, a maize exporting firm may plan to earn a specified
amount of revenue to finance a project by exporting a certain amount of grain. If the government announces a 10%
tax on exports, the firm will have to adjust the revenue estimates downwards by 10%. The firm will then have to
make plans to finance the 10% shortfall by other means such as borrowing. When it borrows, the firm will need to
pay interest on the loan. Now suppose the government decides to reverse this policy a week after the firm has

Institute for Finance and Economics Press Release

 borrowed; the firm will have no choice but to service interest on a loan that is no longer useful. This is a waste of
resources that would have otherwise been directed towards more productive projects.

Conclusion

Many economies, just like human beings, are resistant to change. Resistance to a given policy is normally
proportional to the perceived magnitude of change that the policy intends to drive. It is therefore, not unusual that the
radical the policy, the greater the resistance. The current trend is such that at their longest life span, some policies
are tied to the term of office of the political party in power. The premature deaths of many of these policies make it
difficult to evaluate exactly what the long-term effects of those policies would have been if they were allowed to run
the course. It is important that politics are not allowed to continue prevailing over policies. Sadly, most of the u-turns
have had more to do with politics than the negatives of the policy itself. A lot of spending liabilities are accrued on the
campaign trail via pledges. The need to fulfill these campaign pledges often leads to the government borrowing and
U-turning on certain policies to serve a short term need at the expense of long term economic growth.
Successive governments also need to embrace continuity of good policies and especially those related to key
sectors such as mining. Lastly, corruption needs to be addressed extensively in order to improve government
spending efficiency, which in turn may assist to strengthen its fiscal position. Without a proper fiscal position, it is very
difficult for the government to implement and stick to many policies. The economic policy u-turns have taken the
country down a meandering path in the economic policy wilderness, and until there is a resolve to have and stick to
consistent economic policies, the journey to the promised land may be longer than most anticipate.

DR. CALEB FUNDANGA

IFE ZAMBIA PRESIDENT

For Release 9 a.m. CAT, July 29, 2017. Read more at www.ifezambia.org

Institute for Finance and Economics Press Release