Saturday, January 28, 2023
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Speak Your MindThe basics

The basics

The rule of demand and supply is the most fundamental concept you will learn in economics class. That is, as demand rises, prices rise, and when supply rises, prices fall. And the point where the demand and supply lines intersect determines the equilibrium price and quantity.

In Ethiopia, inflation does not appear to be abating. And, of course, the lower class of the economy suffers the most during this period, particularly those who are employed.

The unfortunate reality of being a salaried person is that while the costs of products and services grow, our salaries remain relatively unchanged, resulting in a squeezed income that becomes more unable to cover even the most basic necessities.

People who run their own firms are better equipped to deal with increased pricing because they may pass on higher input costs to their clients. This provides individuals with a considerably more steady net income than those who work for others.

We have seen time and again that increasing pay does not result in higher net income. Markets frequently respond to higher wage levels by raising the prices of goods and services. As a result, higher wages are ineffective in terms of raising salaried workers’ net incomes and improving their living conditions. My net income remains constant even if my salary and expenses both increase by 50 percent.

Often, there is a mismatch between the rate of inflation and the rate at which enterprises, whether government, non-government, or private, boost their wages.

Salary increases are frequently significantly lower than the actual rate of inflation, particularly the rate of inflation of food products, which, by the way, account for a large portion of our monthly spending. So, whether there is an increase in income or not, we are still left with a much-squeezed net income due to skyrocketing inflation rates.

I am not a sophisticated economist, but I believe that the major issue in this economy is a lack of supply. With a population of over 100 million people, I would not venture to claim that there is a lack of demand.

The issue is one of supply.

Simply put, we do not have enough production to meet the level of demand in the country and outside. But what factors influence our supply?

You could mention many things, such as the depreciation of the birr and the rise in the prices of imported materials, political instability, which impedes production, bureaucracies and a weak enforcement of the rule of law, a poor education system and a chronic shortage of skilled labor, poor infrastructure, uncompetitive export products, and so on. All of this adds up to a supply constraint at the end of the day.

Rumors of further birr depreciation are currently circulating. That seems like a terrifying rumor, doesn’t it? Why would it not be frightening when the majority of the commodities we consume are imported or rely on imported inputs?

It is commonly stated that the manufacturing sector is very weak in comparison to, say, the service industry. With Chinese and other products being thrown into this country and then whining about a lack of forex required to purchase them, we become trapped in a never-ending loop of more forex required for imports.

The government is constantly talking about increasing exports. “What is the major reason for boosting exports?” I usually wonder. Although I am a layperson, I strongly feel that import substitution should be prioritized.

In my perspective, the local manufacturing sector, which tries to replace imports, requires the most support if we are to deal with the constantly rising rate of inflation, which is primarily caused by chronic supply shortages!

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