I realize most people even Economists don’t understand risk taking. This thread hopes to bring to fore risk taking in an enterprise.
I will illustrate with an example that is familiar with many of us in Zimbabwe. A diaspora investment
2/13
Imagine a Zimbabwean working in the City in London and earning £10k a month and living a very comfortable life. No serious worries except long hours at work & the occasion rant from the girlfriend.
3/13
They visit Zim one Christmas holiday and meet up with friends. As often happens in these meet up’s- ideas are exchanged and opportunities explored. One of which is a tomato drying factory. Seems like a good idea enough.
4/13
A friend, John, has worked for ten years at one such establishment at managerial level. He has the skill and passion. Trustworthy enough. The fancy cars in Harare give the imagine that money can be made.
5/13
Our Londoner goes back to the City & borrows £70k. As a ten year loan. That’s $100k. Enough to capitalize the factory. And enough working capital for a year- until all is set.
6/13
John, the entrepreneur is given 10% as sweat equity in the business. The Londoner gets 90%. John has set targets. Which if met, in five years he will get an extra 15% equity. All are happy.
7/13
Money hits the account. John signs a lease with a Warehouse owner for renting the space. Goes to China to buy the machinery, hires twenty general factory hands & a supervisor with experience.
8/13
Every month;
(i) Salaries/wages are paid in full
(ii) Rent is paid
(iii) Interest for the loan in London is paid by the Londoner.
9/13
John, a capable leader provides all comforts for workers. And a bonus scheme based on output. The landlord negotiates a minimal lease price plus a turnover based premium above the minimum.
Everyone is paid. Everyone is happy.
10/13
Exactly a year after. The factory is up and dry canned tomatoes are coming out of the factory.
As per projections the business is loss making for three years. Huge marketing costs & penetrative pricing to establish themselves.
11/13
After four years. Wages, rent and interest is being paid.
The Londoner uses his salary to service interest. The business cannot afford to pay interest.
12/13
Unfortunately after five years, the business is loss making. Year six, salaries are in arrears. So is the rent.
Creditors eventually foreclose on the business. Some of the creditors include workers and landlord. As well as John. Whose salary was in arrears as well.
13/13 The factory machinery is sold off and creditors are paid off. But $25k is still in arrears against the company. Creditors agree to write it off!
Workers complain about no retrenchment package which by law they’re entitled to. The landlord complains about loss of business.
13b/13
The business failed. Like 70% of businesses do. No fault of anyone.
Who took the risk in this business? Who bears the loss?
So swimmingly was the Auction system that “stability” became a catch phrase in describing the state of the economy. Business leaders & economic analysts told us the second half was going to be amazing.
So one must inquire. Why SI 127?
2/8 Accordingly we were sold the following:
(i) a good agricultural season
(ii)a fixed exchange rate for 10 months resulting in decrease in inflation
(iii) Fiscal prudence
(iv) Business tours by the President showcasing successful enterprise
(v) Zimra record breaking collections
3/8 When the reality was;
(i) RBZ quasi fiscal activities & debt of US$5bn
(ii) Unsustainable Afreximbank loan interest above 10% & heavy penalty for defaulting.
(iii) Money supply increase of 535% in Jan 2021.
(iv) Black market rate > 60%
(v) A kowtowing business class
In the last 2 parts we established;
(i)Trade is the movement of Capital. SA will be the oligopolist leader.
(ii) Zim’s comparative advantage is human capital. Technical skilled labour to be specific.
(iii) AfCFTA is NOT Free Movement of people
2/20
In Part 3 I wish to conclude that;
(i) Zim is not ready for free trade. Let alone one that’s oligopolistic
(ii) GOZ remains inward looking protecting a highly inefficient “local industry”. Reminiscent of UDI.
(iii) Diaspora population explosion will rescue Zim
3/20
While it is true that Comparative Advantage (CA) can lead to competitive advantage is worth considering comparative DISadvantages of a country.
This stark analysis can then help a country realize those things it does that are uncompetitive. And perhaps avoid.
If what Prof Mthuli says sounds familiar it’s because we have heard it before.
“the austerity measures being implemented on the fiscal &structural sides of the economy, inflation has been targeted to decline to 50-70% by end of 2006; &to single digit by March 2007.” Dr Gono
I’m a little obsessed with Dr Gono. He was more original rather than the current crop. We should spend time going through Dr Gono’s statements. They’re pure gems & help us understand fragile state economic propaganda.
For good measure here are a few quotes from Dr Gono:
“The following deliberate efforts currently underway to enhance productivity in agriculture expected to play a supportive role in increasing food production, boosting real GDP growth & hastening the disinflation process finalization &implementation of the 99-year lease framework;
1/10
This makes for the saddest reading this year. For a number of reasons which I will articulate;
(i) Politicization & weaponizing of statistics
(ii) Technocrats reduced to water carriers.
2/10
The herald editorial makes all sorts of claims, as does many analysts given the reduction in inflation from 837.5% to 194.7% in seven months.
The editorial is dangerous. As it removes economic statistics from the realm of economics to the realm of politics.
3/10
Having failed to economically change the structural issues in the economy it seems the new strategy is to fix the output numbers. So politicians can claim success of “single digit” inflation.
The veneer becomes the perfect. This is dangerous in Economics.
On this thread I will restrict the contents to understanding the economics of trade. Which is vastly different from the politics & law of trade.
What politicians think trade is has little relation with what trade is actually about.
2/23
For example politicians the world over will speak of trade deficit & surplus as bad or good thing. Directing policy for this intended good & away from the bad. Yet the economic truth is a deficit or surplus is a meaningless description of movement or goods & services
3/23
The consumers & economies of the deficits OR surplus are better off with the trade than without.
Without the trade, consumers won’t receive cheaper prices & capital won’t receive higher interest. But politics is the art of weaponizing ideas to get votes.