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Remarkable
economic growth in the past few years means a lot
more disposable income in the pockets of many
Ethiopians. This is good news and must be
perpetuated through prudent management of the
economy. The ways in which this money is spent,
though, will dictate whether this stage of
development is simply good times for many or the
beginnings of sustained increases in per capita
income that benefits the masses.
Determining the extent to which the increases in
gross domestic product (GDP) translate into the
foundations for more of the same hinges, in a large
part, on the percentage that is saved and reinvested
into productive entrepreneurial projects.
Unfortunately, the tendency of many, for reasons of
both social systems and economic incentives, seems
to be to spend while the pockets are saturated
without much of a view to the future.
At a macroeconomic level, the motivations to put
money aside for tomorrow that may circulate back
through the financial system are seriously lacking.
Weighing the current inflation levels against
interest rates of four per cent (a negative real
interest rate) provides ample reason for the
consumer to spend as fast as possible before the
buying power of money further deteriorates.
Monetary policy, often a potent tool to pull the
reigns on overactive lending and subsequent
speculative investment, has not been used to the
extent it should. The central bank appears unwilling
to tighten the financial belt and subsequently
borrowers are enjoying cheap credit and adding to
the inflation.
Moreover, the options when choosing where to save
money are limited in a country with a government
overly suspicious of financial systems characterised
by equity markets. Although there are valid
arguments for the closed current account where money
must stay in the domestic system to prevent capital
flight, it further hampers efforts to seek higher
returns and diversify portfolios.
The traditional means for savings such as ekub and
idir provide some remedy, but are rather limited to
usefulness for temporary periods where large
purchases are necessary and do not accrue interest.
It is here, in consumption habits, that one may
anecdotally see a good portion of wealth being spent
lavishly. The status incurred from lavish spending
is tempting to individuals across the world and not
limited to Ethiopia or poor countries where a lucky
(or industrious) few have seen vast improvements in
their monetary status.
No doubt, the social economist who coined the term
'conspicuous consumption', Thorstein Veblen, in his
Theory of the Leisure Class came from an American
society that had been experiencing the benefits of
consumer culture from the beginnings of
industrialisation beginning some 50 years before his
1898 work. He critiqued the nouveau riche for
creating latent social spending competition,
squandering vast sums on material goods to impress.
Spending for show is apparent in the choices of
people who utilise money for more visible products
that will be flaunted in public or at least clearly
apparent to the social circles an individual is
inserted into. The outlandishly expensive cars and
houses sprouting up are prime examples of the
displays put on by the wealthy.
Where Veblen stopped in his analysis of the
phenomenon was a description of the effects of this
type of consumption on the economy. What it
represents on the whole is a valuation of immediate
gratification over gambling on future prospects.
Though behavioural economists, working with
psychologists, have presented convincing arguments
that provide the rationale in terms of the human
mind's traits for this occurrence, it does not mean
that it is beneficial for the economy as a whole.
In the case of imported goods such as cars,
electronics and other consumables, the benefits of
this consumption to the local economy are limited
mainly to the traders and transporters, not to
mention the government who collects the taxes from
high duty rates.
As Ethiopia is a predominately agrarian society, it
will be a long time, if ever, before the
manufacturing base is developed such that these
factory created items create wealth and jobs for
citizens here. One of the dangers of remaining
agrarian, unless exports of primary goods are
successful, is that the people can only consume a
limited amount of food and thus the growth potential
in terms of volume for food production is small.
Tendencies to value imports over domestic products,
for quality or for status reasons, will also be a
drain on the tiny foreign currency reserves of this
developing nation.
Here the government comes in to provide the
incentives through structuring the economy so that
individuals will behave to the advantage of society
as a whole. Allowing for more financial instruments
to develop in the country, as well as working to
close the gap between inflation rates and savings
rates will work to the benefit of the economy when
individuals realise the benefits to delayed
gratification and savings.
These factors are tried and true economic tenets
that provide for policy measures to impact saving.
Dynamics that are more Ethiopian involve a high and
rising Gini Coefficient (a measure of income
inequality) where new wealth winds up in the hands
of the few and disappointing future discounting
trends showing that Ethiopians value future outcomes
vastly less than current ones, even compared to
other poor nations.
This means that choices where the extraordinarily
wealthy few may put their wealth is limited to
endeavours that will have few benefits to the
majority. Lavish social ceremonies are more or less
hedonistic. Moreover, the limited preference for
putting money away for the future instead of
spending today found in comparative surveys shows
limitations in policies to promote a saving culture.
It is, however, imperative that savings rates are
addressed. This is especially true when so much of
the consumption filters through a large informal
economy that evades regulation as well as the
benefits stemming from capturing money in formalised
markets.
While rising education levels have been shown to
correlate to higher savings rates, it is more
critical that better options are provided to savers.
Incentive systems are always the most powerful. |
