QUESTION 1

a) The economic objectives of the Namibian government suggested in the case study and
where in the case study they are suggested.

Fiscal consolidation – This is suggested in the first paragraph aimed at correcting growing
imbalances from high public spending and falling revenues from the Southern African
Customs Union (SACU)

Inclusive and Sustainable growth – This is suggested in the fifth paragraph of the case stud.
This is to be achieved through the availability of institutional money that can finance high
return investments.

Inflation targeting – this is suggested in the 3rd paragraph as a projected target to be achieved
through an expansionary fiscal policy.
Expansionary monetary policy – This is suggested in the 3 rd paragraph as a measure to
support growth of the economy intended to occur under favourable inflation conditions.

Fiscal deficit reduction - This is suggested in paragraph 2 and it was financed by a

combination of domestic and foreign borrowings.

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b) Discuss how the coronavirus pandemic is affecting the various aspects of the Namibian
economy explained in the economic outlook.

Aspect: GDP
Lipsey and Ragan (2014) define Gross Domestic Product (GDP) as the total value of goods
and services produced in the economy during a given period. This definition has implications
on what the coronavirus pandemic has done to the Namibian economy. GDP requires that
there is production of goods and services. With the pandemic however, production had to
come to a standstill for several sectors of the economy. The national lockdown meant that no
production was taking place whereas consumption still has to continue because people are
still alive and there was still some form of movement despite the lockdown. It is therefore
quite clear that Namibia will face a massive contraction in output due to the pandemic.

Aspect: Aggregate demand

Aggregate demand is an economic measure defined as the total amount of demand for all
finished goods and services produced in an economy, (Arnold, 2015). Aggregate demand
consists of all consumer goods, capital goods (factories and equipment), exports, imports, and
government spending. It is therefore not surprising that coronavirus has sever effect on the
aggregate demand for the Namibian economy. By looking at the components of aggregate
demand separately, it can be clear how coronavirus affected the aggregate demand for the
economy.

Firstly, consumption expenditure includes expenditure on all goods and services sold to their
final users during the year. It includes services, such as haircuts, dental care, and legal advice;
non-durable goods, such as fresh vegetables, clothing, cut flowers, and fresh meat; and
durable goods, such as cars, TVs, and air conditioners. The coronavirus pandemic affected
the Namibians’ marginal propensity to consume because the lockdown resulted in pay-cuts
which meant disposable incomes went down. This shrinks consumption expenditure to
essentials. In addition, consumption for certain products or services became impossible due to
coronavirus. Take the consumption for sports entertainment, club or bar entertainment or any
consumption that involves groups gathering. These have been banned due to coronavirus and
therefore are impossible purchases further shrinking the consumption expenditure on them
and ultimately the aggregate demand for the Namibian economy.

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Secondly, investment expenditure which is expenditure on goods not for present
consumption, including inventories; capital goods, such as factories, machines, and
warehouses; and residential housing, (Lipsey and Ragan, 2015). With the coronavirus
pandemic still at large and with no cure in mind, the investor sentiment is very negative
hence there is relatively no investment expenditure. One could argue that there has been an
increase in investment in coronavirus related production. While the argument is sound on its
face, when you did deeper it turns out the production of masks by local companies does not
constitute new investment expenditure, merely the diversification of production from the
usual to opportunistic masks. In summary therefore, investment is likely to decrease, since
future uncertainty and poor expectation of future profitability discourages decision making on
investment. UNCTAD (2020) estimates that global Foreign direct Investment (FDI) flows
could fall by between 30% to 40% because of the spread of COVID-19 (Chidede, 2020).

A third component of aggregate expenditure is Government Purchases. When governments

provide goods and services that households want, such as street-cleaning and firefighting,
they are adding to the sum total of valuable output in the economy. The government
expenditures during the coronavirus pandemic are not as clear to assign to increase in
aggregate expenditure. The government of Namibia has spent hundreds of millions on
coronavirus related expenditure ranging from masks, quarantine equipment, testing
equipment and so forth. While all these constitute an increase in government expenditure, it
does not contribute to increased aggregate demand for a few reasons. Firstly, and obviously,
the expenditure is to fight disease not to improve or add to the wealth of the country.
Secondly, the goods and equipment is all imported hence a leakage in the economy. Thus
coronavirus has shifted this aspect of government expenditure from capital projects to
consumption purposes.

Aspect: Import growth

As mentioned in the case, import growth has direct effects on the Namibian economy’s trade
deficit and also GDP. A country’s national income is the total value of final goods produced
in that country. With government expenditure on coronavirus related prevention and testing
equipment being goods imported mainly from China, South Africa and other countries, there
has been a sharp rise in imports which results in outflows of cash to other countries.

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Aspect: SACU Revenues
SACU revenues are directly proportional to the size of the trade flows between the SACU
member states. During the time of the lockdown, business operations are halted and both
exports and imports of goods services are restricted. Imports of basic services have also
become expensive since the outbreak of the virus, emanating from volatile and depreciating
exchange rates. The Customs share of revenue is allocated on the basis of each country's
share of intra-SACU imports. The Excise revenue Component is allocated on the basis of
each country's share of GDP. Coronavirus has directly impacted on all the revenue bases for
SACU member states. The national lockdowns closed off trade between member states
therefore customs revenue from SACU is set to decline sharply so is the excise components
which will be a major hit on the Namibian economy whose government revenue accounted
for

Aspect: Fiscal deficit

The Namibian government’s fiscal deficit is the excess of expenditure over tax revenues in a
given year. It is also equal to the change in the stock of government debt during the year. The
coronavirus pandemic is set to increase the fiscal deficit as a result of a shrink in tax revenue
coupled by an increase in government expenditures. Namibia’s tax revenue is derived from
income and profits of companies, taxes on properties as well as taxes on goods and services.
The COVID-19 outbreak will have some undeniable impact on government tax revenue.
Generally, Namibia’s tax revenue mainly comes from, income tax on individuals and profits,
taxes on consumptions namely valued added tax (VAT) and taxes on international trade. The
closing of most shops that do not sell essential products such as clothing, automotive among
others due to the lockdown, implies a reduction in the total VAT that would have been
charged on the sales of goods, translating in less taxes paid to the government. This reduction
is exacerbated by a compulsory increase in government expenditure to contain and control
further spread of COVID19 hence the fiscal deficit is going to take a major increase.

Aspect: Domestic borrowing

Domestic borrowing is set to increase sharply as government finances its short term
expenditures. As of beginning of June 2020 government has issued bonds to the tune of
N$4billion in May 2020 alone, (BoN, 2020). All the bonds were subscribed to by local
institutional investors thus domestic borrowing is on the increasing end due to covid19.

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Aspect: Monetary Policy
As mentioned in the case, the monetary policy has important consequences to the economy of
Namibia. Covid19 has forced the monetary policy committee of the bank of Namibia to cut
the Repo rate by 100 basis points from 5.25 to 4.25%, (BoN, 2020). This will hopefully
support weak domestic economic activity and provide short-term relief. This stance is set to
maintain the Namibian dollar, to South African Rand peg.

Aspect: Mining growth

Mining growth is mentioned in the case as constrained by weak global diamond demand if
trade tensions shrink global growth. Owing to covid19 halted mining and quarrying
operations, with an exception of critical works such as “minimal operations and critical
maintenance” in line with the Namibia State of Emergency Regulations for COVID-19
(2020). A reduction in the contribution to GDP for this sector is expected for the reminder of
the year, thus a shock of -5% to -7%, (Julius, Nuugulu and Julius, 2020).

Aspect: Exports and imports

The case study shows the impact of exports and imports on trade deficit and hence the overall
economy. Net export is expected to decline owing to disruptions in the supply chains, border
closures and limited markets for exports due to weak global demand as well as the
depreciated Namibia dollar against foreign currencies. Namibian exports have been
traditionally from few industries like mining, and tourism hence the constriction of these
industries brings down exports but imports are expected to up slightly due to importation of
the needed supplies mainly in the health sector, food supply and inputs for the agricultural
sector.

Conclusion
Covi19 has brought operational challenges to the way an economy operates therefore its
effects will be devastating as the Namibian economy reacts to an unplanned and extremely
difficult set of challenges. All aspects of the economy will be facing a downward spiral as
production, flows and activity of each aspect described in the outlook declines.

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c) Suggest the possible policies the government must take to counteract the effects of the
coronavirus pandemic on the economy
Government policy to counteract covid19 effects should be categorised by sector and then
subdivided by intention/objective otherwise adopting one-size-fits-all policies will yield very
little effects if not losses further. In broad terms, the sectors to be targeted are tourism,
manufacturing, the informal business, financial markets, the external sector (trade), the
transport and logistics sectors, Agriculture, forestry and fishing, Real estate activities, health,
and education sectors. In each of these sectors, government should have policies to (1) stop
the further deterioration of the sector due to covid19, (2) restart and spur activity in the stated
sector. It goes without saying that fiscal stimulus is the overall policy to be adopted by the
government but it must end in using evidence-based automatic “triggers” to alter the course
of spending to deliver the stimulus to the economy. Such well-crafted macroeconomic
stabilizers are the best way to deliver fiscal stimulus in a timely, targeted, and temporary way
to improve macroeconomic outcomes of the country.

Tourism
The tourism sector by virtue of the nature of their business which requires movement of
people was the hardest hit sector of the economy by the covid19 pandemic. Government
intervention in this sector will require a very large outlay of capital to keep most tourist
businesses afloat but doing so just to save businesses from closure may result in even bigger
losses for the government. Therefore the suggestion is that as the country enters stage 3 of the
lockdown which has seen more relaxation of the restrictions, government subsidise tourism
products to encourage domestic tourism. Activities should resume as long as all
establishments can maintain strict testing and sanitation measures as those being observed in
retail shops. Subsidising tourism products and services by way of encouraging tourism
service providers to encourage visits and product and service purchases at significantly
reduced prices. With disposable incomes reduced for most Namibians, travel and tourism
becomes a significantly far-fetched luxury thus price elasticity and advertising elasticity can
be used to encourage locals to visit various parts of the country. In order to spur activity, the
domestic tourism promotion should become a national issue not an issue of individual
tourism service providers. A national domestic tourism promotion initiative should be

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launched which lays out the rebates and subsidies and other incentives for individuals,
groups, companies, churches among other to increase their propensity to travel.
The initiative must then promote tourist attractions in each region to encourage inter-regional
travel. As long as tourism marketing remains in the hands of individual service providers then
the perception will remain the same that tourism is for the rich and white foreigners. The
action required for recovering the tourism sector involves behaviour and perspective change
of the local Namibians. The national domestic tourism promotion can also set aside a
weekend every month or every quarter dedicated for those wishing to travel and take
advantage of the incentives. The Namibians propensity to travel is visible from simple
holidays like Easter, Independence Day and the like where people go to their various
respective home villages so by normalising travel in national policy, more visitors can be
diverted to other tourist attraction areas beyond their home towns.

Manufacturing
The manufacturing sector has long been a sector of great debate as policy makers aim to
improve it to the point of reduction or elimination of Chinese or South African based imports.
In response to this need, the government has several policies in place to make manufacturing
attractive to investors in that sector. The Namibian SME Policy document entitled: “Namibia:
Policy and Programme on Small Business Development” was formulated by the Ministry of
Trade and Industry in 1996 and was adopted by the Cabinet in 1997. This policy document
places an emphasis on the role of SME manufacturing and thus calls for the expansion and
diversification of the sector, (Kadhikwa and Ndalikokule, 2007). The Government of
Namibia introduced incentives for manufacturing enterprises in 1993. Tax and non-tax
incentives apply equally to local and foreign companies registered as manufacturers and are
provided for both existing and potential entrepreneurs operating in the manufacturing sector.
Despite all these policies in place manufacturing investment and growth remains low in the
country therefore government should adopt new measures despite the existence of Covid19
pandemic. We recommend targeted sector by sector needs analysis and enterprise
development based on real data thinking beyond current demand shrinkage due to covid19.
The strategy will stimulate production and create employment. The strategy will work as
follows:
1. The government should analyse annual trade data and make a list of all trade flows of
goods from various countries

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2. The database can then be categorised by sector into essential and non-essential goods. The
definition of essential here should be taken to mean goods that are critical for the survival of
the economy whereas non-essential are goods that the economy can do without.
3. From the essential list, a selection criteria based on value, required raw materials, difficulty
level of manufacturing, required investment, payback period and final contribution to GDP
when in full production.
4. Based on the scores of the various criteria, the goods are ranked then the highest ranked
goods get to be manufactured first in Namibia by developing a Public Private Partnership for
the manufacture of that product.
5. The product or enterprise will then get all the necessary infant industry protection and
related protection mechanisms to allow it to grow.
6. Based on the successes and lessons learned, more goods can be brought into production
from the ranking list and the manufacturing sector can grow systematically with the
combined efforts of government and private enterprise.

Information Technology
Expanding the Covid19 communication centre beyond being an information centre that just
hosts various people for discussion by adding a website platform to offer supplementary
services. The main purpose of the website will be to educate people about the importance of
not leaving home when they do not need it and to protect their own health and the health of
those around them, at the same time to provide easy access to digital services to meet the
daily needs of the population. Because the website is run nationally, it carries more credibility
with the Namibian population and may receive better user numbers. As it is known, amid
social isolation measures due to coronavirus, people’s demand for distance education, e-
health, online stores and cinemas, online ordering of goods and services has increased several
times. With this in view, the website should provide users with online services in the
categories of “education”, “delivery”, “medicine”, “food” and “entertainment”, as well as
makes available detailed information about the challenges and opportunities during the period
of coronavirus epidemic. The website must also provide online learning opportunities beyond
academic learning hence opportunities for online personal development, ways to build a
digital business without leaving home, as well as online business management methods.

Conclusion

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The government stimulus package is a step in the right direction to boost the economic
activity towards recovery. However, specific targeted uses of the funding provided through
the package is required in order to yield the desired results.

QUESTION 2
Discuss the usefulness of the concepts of elasticity such as price elasticity of demand, income
elasticity of demand, advertising elasticity of demand and cross-price elasticity of demand to
businesses in Namibia.

In economics, elasticity is the responsiveness of quantity demanded of a product to changes

in another factor that affects the demand of that product like the price of the product itself,
income levels of buyers, availability of substitute goods and the amount spent on advertising
the product. These “other” factors are the derivation of the various elasticity concepts like
price elasticity of demand, income elasticity of demand, advertising elasticity of demand and
cross-price elasticity of demand. This section therefore discusses the usefulness of these
concepts to businesses in Namibia.

Price elasticity of demand

The law of demand states that a fall in the price of a good raises the quantity demanded. The
price elasticity of demand measures how much the quantity demanded responds to a change
in price, (Ragan and Lipsey, 2015). The authors went on to summarise the relationship stating
that demand for a good is said to be elastic if the quantity demanded responds substantially to
changes in the price. Demand is said to be inelastic if the quantity demanded responds only
slightly to changes in the price, (Ragan and Lipsey, 2015).

The price elasticity of demand for any good measures how willing consumers are to buy less
of the good as its price rises or more of the good when price falls. In Namibia, the usefulness
of price elasticity is visible in several businesses like supermarkets, clothing stores,
electronics stores and fast food international businesses (Hungry lion, Chicken-Inn) but not
so common in small businesses. In supermarkets, there are constantly price specials showing
price reductions in their catalogues as well as large price reduction signs on the reduced
goods in-store. These signs not only work psychologically to inform customers about the
price reduction but also encourage customers to buy more of the product under the belief that
they are taking advantage of the price before it rises. This same method is used in shops like

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Game, Hi-fi Corporation and many clothing stores like Jet, Ackermans, and Pep Stores
among others. Clearly, these businesses understand the power of a price reduction to induce
higher quantities of purchases that’s why they continue doing it.
Fast food restaurants like Hungry Lion and Chicken-Inn also understand the usefulness of
price elasticity of demand as evidenced by their weekly double up promotions. Hungry Lion
has the Tuesday-two special similar to chicken inn’s Monday double special. Basically these
tactics induce customers by offering two of the same product at a slightly lower price than
normally charged individually. In this way consumers sense a bargain and hence buy more of
the product on the special days.

The Income Elasticity of Demand

The income elasticity of demand measures how the quantity demanded changes as consumer
income changes. Because quantity demanded and income move in the same direction, normal
goods have positive income elasticities. A few goods, known as inferior goods have a
negative income elasticity. Not a lot of Namibian business seem to show their appreciation
of the usefulness of income elasticity except for banking institutions. This maybe probably
because banks have better access to information pertaining to people’s incomes than any
other business. Banks use income elasticity by tailoring various financial products or
categorizing account types based on cash flow movements of the account holder. For
example FNB raises the clients from silver to gold to platinum account based on the level of
banking activity of your account. This means the banking account service is income elastic as
consumers prefer a higher level as their income grows in order to avail the benefits that
comes with the high tier banking service. Another business type in Namibia that seems to
have income elastic products is the furniture business from shops like Bears, House & Home
and HomeCorp. As client’s incomes increase, they ask or are provided higher credit lines and
true to behavioural expectations of income elasticity, they start shopping for more luxurious
and expensive purchases.

Cross price Elasticity

The cross-price elasticity of demand measures how the quantity demanded of one good
responds to a change in the price of another good, (Arnold, 2014). Whether the cross-price
elasticity is a positive or negative number depends on whether the two goods are substitutes
or complements. Substitutes are goods that are typically used in place of one another, such as
KF Chicken and Chicken Inn chicken and hungry Lion Chicken. An increase in KFC prices

10
induces people to Hungry Lion or Chicken Inn instead. Because the price of KFC and the
quantity of Hungry Lion or Chicken Inn demanded move in the same direction, the cross-
price elasticity is positive. Conversely, complements are goods that are typically used
together, such as computers and software. In this case, the cross-price elasticity is negative,
indicating that an increase in the price of computers reduces the quantity of software
demanded. The usefulness of cross price elasticity is visible in electronics shops like Game,
Hi-Fi Corp and Incredible Connections. Game actually uses the cross price elasticity as a
clever slogan stating that “We beat any price” suggesting that “If you've purchased any item
from Game and, within 21 days, find the identical product at a competitor for less, tell us and
we will refund MORE than the difference” as stated on the Game Stores website and all their
shops instore. This means they understand the power of substitution of goods. Game also uses
the concept of compliments in their advertising and merchandising as noticed in their shops
where products like laptops are paired with a printer and offered as a package at a reduced
price.

Advertising Elasticity
Advertising elasticity of demand (AED) is a useful measure of advertising effectiveness. It
measures the percentage change in demand for the product or service compared to the
percentage change in the level of advertising expenditure, (Triple A Learning, ND).
Advertising elasticity must however be used with caution because the purpose of a lot of
advertising may not be to directly boost demand, but to help with building a brand image or
brand loyalty - the AED value cannot show the effectiveness of this strategy. In Namibia,
MTC seems to have a good grasp of the AED concepts as shown by their relentless
advertising in all media from Street Billboards, television, Radio, newspaper and even shop
paintings. For other small businesses, advertising does not seem to offer the return on
investment to justify the continued financial commitment.

Conclusion
Businesses operating in Namibia seem to understand and appreciate the usefulness of the
elasticity concepts. Some may use one concept others use two or more elasticity concepts but
the use is prevalent to international businesses operating in Namibia and very few Namibian
owned businesses seem to use the elasticity concepts. Price elasticity of demand seem to be
more prevalent in use than any other elasticity concept available.

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12
QUESTION 3
Different economies use protectionist policies to protect domestic businesses from foreign
competition. Discuss if it is worth it to protect domestically owned Namibian businesses from
foreign competition.

The question of the worth of the protection of domestically owned Namibian business cannot
be answered by a straight forward argument in favour of protectionism but by weighing both
arguments for free trade against arguments for protectionism then drawing a well-informed
conclusion. This section therefore discusses the arguments for free trade and arguments for
protectionism and comments on whether it is worth it to protect domestically owned
Namibian businesses from foreign competition.

The case for FREE TRADE

Today, most governments accept the proposition that a relatively free flow of international
trade is desirable for the health of their individual economies, (Arnold, 2014). Free trade
provides several gains and comparative advantages arise whenever countries have different
opportunity costs. Ragan & Lipsey (2015) point out that free trade encourages all countries to
specialize in producing products in which they have a comparative advantage. This pattern of
specialization maximizes world production and hence maximizes average world living
standards (as measured by the world’s per capita GDP).

Free trade does not necessarily make everyone better off than they would be in its absence.
For example, reducing an existing tariff often results in individual groups receiving a smaller
share of a larger world output so that they lose even though the average person gains. This is
supported by Arnold (2014) argument that the larger total value of output that free trade
generates could, at least in principle, be divided up in such a way that every individual is
better off. However, he cautions, free trade does not always in practice, however, yield this
result.

Free trade encourages innovation and continuous product and service improvement. A
country’s products must stand up to international competition if they are to survive. Over
even as short a period as a few years, firms that do not develop new products and new
production methods fall seriously behind their foreign competitors. If one country protects its

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domestic firms by imposing protectionism techniques, those firms are likely to become
complacent about the need to adopt new technologies, and over time they will become less
competitive in global markets. Eventually, the technology gap between domestic and foreign
firms will widen and the protectionism may cease to provide any meaningful protection.

The case for Protectionism

For a very small country, specializing in the production of only a few products though
dictated by comparative advantage might involve risks that the country does not have an
appetite for. In this world of fast paced technological changes it may render its basic product
obsolete. Another risk, for Namibia specialized in producing a small range of export products
stemming from mining and fishing, the volatility in world prices lead to large swings in
national income. The pro-tariff argument is that the government can encourage a more
diversified economy by protecting domestic industries that otherwise could not compete with
their foreign rivals, (Wysocki, 2004).

Specialization according to comparative advantage will maximize average per capita GDP,
but this results in some specific groups getting higher incomes under protection than under
free trade. Protectionist policies may raise the incomes of unskilled Namibian workers, giving
them a larger share of a smaller total GDP. The conclusion is that trade restrictions can
improve the earnings of one group whenever the restrictions increase the demand for that
group’s services.

The oldest valid arguments for protection as a means of raising living standards concern
economies of scale or learning by doing. It is usually called the infant industry argument.
Namibia used protectionism for its poultry industry from infancy when there were still large
economies of scale or the scope for learning by doing, but costs were high when the industry
was small but fell as the industry grew. At the time, Namibian market was saturated by South
African imported poultry at lower prices than would have been sustainable for the new
poultry industry. A trade restriction therefore protected this industry from foreign competition
while they grew up.

Conclusion

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Based on the arguments presented above, I would conclude that protectionism should be
imposed for a period of time that allows the Namibian business to recoup its cost outlay
towards the start-up of the business being protected. Beyond that point, the business must
then compete with foreign businesses to help it to innovate and seek efficiencies. It is
therefore worth it to protect local Namibian businesses up to the payback period achievement
only at the expense of overall society benefit then return free trade to restore overall society
benefit that result from free competition as tariffs burden is lifted from the consumers.

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Arnold, R.A (2014). Economics. 8th Edition. New York: McGraw Hill.

MANCOSA (2012). Economics. Study Guide. Durban: Management College of Southern

Africa.

Kadhikwa, G and Ndalikokule, V. (2007). Assessing the potential of the manufacturing

sector in Namibia. Occasional Paper. Windhoek: Bank of Namibia.

McKibbin, W and Fernando, R (2020). The Global Macroeconomic Impacts of COVID-19:

Seven Scenarios. Retrieved, June 06 2020. From
https://www.brookings.edu/wpcontent/uploads/2020/03/20200302_COVID19.pdf

Ragan, C.T.S and Lipsey, R.G. (2015). Economics International edition. 12th Edition. Boston:
Cengage Learning.

Wysocki, R.K. (2004). Economics. Boston: Artech House.

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