Don’t yawn!
It turns out that we all depend upon money and therefore have an interest in economics. It just depends how it is explained.
Take, for example, the theory of ‘supply and demand’. We all understand the basic principle: if lots of people want a rare commodity, the price will increase. Ebay shows us that, as we watch bids exceed our spending limit when we know that the item is unique. Demand outstrips supply: prices increase. In contrast, when there is plenty of product the price decreases… such as with apples in my garden at the moment (they’re free to anyone who wants them: I cannot eat that many!)
This basic to- and fro- of pricing simply escalates as the catchment grows. Micro-economics can have one pull while macro-economics has another, though the bigger the pool the more likely that politics leaps in to skew the figures.
One of the problems with living abroad is the confusion of currencies and exchange rates: the ultimate macro-economic demonstration of supply-and-demand. Zambia’s currency is the Kwacha. When we arrived there were approximately 7500K to £1. (It should be noted that during President Sata’s term of office he revalued the kwacha by knocking ‘000 off the end, so that is equivalent to a current exchange rate of 7.5K to £1.) Not only did we have to get used to that exchange rate, but many items were quoted for and sold in US dollars, so we had to know the exchange rate US$:£ and Kwacha:US$. In theory this was a perfect triangle…
One of the most astonishing things about living there for a long time was how easy it became to think in different currencies and switch between them. I began to understand that a 2,500,000K sofa was a good price but a $600 one was not. (Well, that depended on the quality of sofa, of course…)
In Beware the Falling Avocados I try to explain some of this confusion, and how inflation and exchange rates varied and could cause problems. The kwacha gradually fell in value (increasing the exchange rate) and then – suddenly – it appreciated, throwing everyone into confusion.
For the past couple of years it has remained fairly steady around 10K to £1. This has a great benefit to British expatriates and holiday makers as it is easy to divide by ten. Some countries should promote their tourist trade on that fact alone!
But world economics does not allow countries to support their non-mathematically oriented tourist. Instead it thinks: Oh, copper prices are too high. Or: China has over-inflated its economic strength. Or: There is a downturn and we must cut jobs.
A triple whammy for Zambia, as copper prices fell. Copper is Zambia’s biggest export and the industry is the second largest employer after the government. China has a big investment in Zambia (and increasingly across Africa) and the weakening of its economy and financial structures during the summer months had a knock-on effect. With the fall of copper prices, international mining companies re-thought their structures and decided to reduce production, and thus cut jobs.
A perfect storm? Maybe. As Zambia’s main export weakened, so did its currency. Simplistically, during September this year it fell from 10K:£1 to 20K:£1 – half its value. This, in turn, pushes up prices, as it is costing Zambians more to import goods; and we all saw what happened in Zimbabwe when hyper-inflation took hold.
Various solutions have been put in place which have at least steadied the kwacha over the past couple of weeks (at the time of writing it is hovering around 18K:£1). Fascinatingly, this Sunday 18 October the President has declared a Day of Prayer and Fasting for the Economy. President Edgar Lungu has requested ‘a day of forgiveness and reconciliation to be observed to help combat the economic problems facing the country’. It will be interesting to see what the exchange rates are like on Monday 19 October.
Far more learned people than me understand the implications of currency exchange rates, inflation, supply and demand, and can write far more eloquently about them. But if you have a moment, do remember the people of nations like Zambia that are at the mercies of big government and whose lives depend upon these seemingly academic, mathematical exercises. The grandmother supporting half a dozen of her orphaned grandchildren will find food prices higher and thus have less food to feed them, and the drugs necessary to keep an HIV-positive person alive will have doubled in price. What may seem like a minor tweak in a mathematical formula can drastically change the economics that affect real people with real lives around the globe.