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Botswana’s New Economics – Salary Hikes Won’t Cause Inflation

It’s always interesting to find new economic theories so here’s one from Botswana. Government hiking civil servant’s wages won’t lead to inflation. Weeeelll, yeeees, maybe. But that’s not the way to bet to be honest. Because we shouldn’t be looking just at the addition to demand such salary hikes will cause. There’s rather more to it than just that:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]The recent 10 percent salary hikes announced by President Mokgweetsi Masisi for civil servants, including disciplined forces, will not be inflationary.[/perfectpullquote]


[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Despite this, Sebabole feels the modification is not enough to create demand uptake, further explaining he does not foresee much change to the current status quo. “The increase is not going to make people rich but will certainly give them breathing space,” predicted Sebabole, adding he assumes workers will use this disposable income to either pay off their debts or to acquire more credit. The economist believes the adjustment has come at an ideal time, following the countless hikes in fuel prices and utilities experienced in the country. [/perfectpullquote]

So, we’re in an inflationary environment already. That’s what all that talk of multiple price rises is. And that inflation rate is about 3.3% or so.

The thing is though, how is government going to pay for these wage rises? There’s no mention of higher taxes to do so. So, they must either be borrowing to cover it or simply printing more money. Either of which is in itself inflationary, the second rather more than the first. If the government is borrowing more to spend then that is an addition to aggregate demand and in the absence of an increase in production that’s just inflationary. Doing it by printing is monetisation of fiscal policy and that’s even more inflationary.

So, perhaps the just simple raising of civil servant salaries in Botswana won’t cause inflation but the way the government pays for it probably will.

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