IN economic sphere, an act or a habit or an institution, or a law, produces not only one effect but a series of effects. Of those effects, the first alone is immediate. It appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen, we are fortunate if we foresee them.
There is only one difference between a bad economist and a good one; the bad economist confines himself to the visible effect, the good economist takes into account both the effect that can be seen and those effects that must be foreseen
These are the first two paragraphs from the famous article “WHAT IS SEEN AND WHAT IS NOT SEEN” by the early to mid 19th century economist and educator, Frederic Bastiat.
Bastiat’s economic exposition informs us of the true nature of economic policy- the rule of understanding causalities relating to social phenomena. That when the long-term effects of any economic action are overlooked, the intended consequences may be offset by the unseen effects.
There is no good example of this dilemma than how monetary authorities and political institutions deal with inflation by using “inflation targeting” policy. Perhaps, world over.
Inflation Targeting is a monetary policy approach on which a central bank anchors specific annual rate of inflation for a country’s economy. It allows the central banks to respond to domestic shocks given the domestic macro economic conditions.
LESSONS FROM NEW ZEALAND
Inflation targeting was born in New Zealand in 1989.
The long debate on how to shield the central bank from political influence led to an Act of Parliament- the Reserve Bank Act, 1989.
The act obliged the minister for finance and the central bank chief to come up with a formal inflation target to be achieved by the bank. But questions ensued;
What would the target be?, Zero or three percent? What would be the optimum point for escalation of cost of living?
Eventually, the chance remark settled the debate and the finance minister showed up on a TV interview in which he stated t he aimed at zero to one percent inflation. But for flexibility purposes, they later stated a range of zero to two percent.
Immediately after the pronouncement, labour unions started using two percent as inflation in their wage negotiations as trade unions used it as their price increase decisions.
Within a year, Newszeland inflation dropped from 7.6 percent to 2 percent. A new economic verse had been born in town. Indeed, it became popular with many countries.
OUR CONTEXT
With the vast swathes of Tanzanian population braving high cost of living, our monetary authorities have confined themselves to the visible effects as they have prescribed a bitter pill of high interest rates to curb inflation. Actually, to achieve the inflation target of 5 percent with a flexible margin of 2.5 percent on either side in the event of uncontrollable shocks.
However, with inflation targeting in place, the experience has not been of any good example.
The unseen effect is that the approach is intertwined with profligate fiscal policy. Through government debt, political actors seeking power have resorted to inflation as it has been a more palatable way than taxation to pay for new public investment programs regardless of the socio-economic outcome.
Secondly, at the behest of the only seen target of inflation, inflaters courtesy of counterfeiting get access to real resources at virtually zero cost.
All these are a manifestation of uncontrolled and ever expanding government expenditure.
To deal with the problem therefore, at least in the short term, the best policy proposal could be to limit government expenditure and controll public debt which is the touchstone of unseen inflationary pressures.
In these circumstances, inflation targeting is more of a coumaflage; a policy decoy masquerading as a policy stabilizer.
The sooner we revisit, the better.
