Economics, Literature and Scepticism

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I am a PhD student in Economics. I am originally from South Africa and plan to return there after my PhD. I completed my M. Comm in Economics and my MA In Creative Writing (Poetry) at the University of Cape Town, where I worked as a lecturer before starting my PhD.

Friday, August 08, 2008

'Government must do something'

Posted by Simon Halliday | Friday, August 08, 2008 | Category: |

COSATU marches struck Cape Town, Johannesburg and Durban this week, the motivation for these protests was the 'rising high food prices and electricity rates'. See articles from the Sowetan, The Times and The Guardian.

Demands by the unions include:
  1. Government investment in infrastructure
  2. Government subsidies for essential commodities
  3. Higher wages for workers
  4. The resignation of ministers if workers lose their jobs
I think that the first is a valid appeal and one that would be supported by most South Africans. I don't believe however that most of the people who were striking were actually using that as a motivation for the strike. Maybe I'm just a bit cynical about strikers' self-interest. So, point 1 clear and we understand that everyone in SA, if not globally, thinks that's probably a good idea.

Cash Transfer ProjectsNow consider 2, 3 and 4. Let's look at 2 first: 'government needs to subsidise commodities for workers'. I would like to see a detailed plan as to how COSATU wants this to work. Subsidies, or let's call them transfers, either in the form of cash or vouchers to workers is probably not a bad idea. However, there is strong evidence that cash transfers have better results when they a) are conditional, and b) go to females in the household rather than males (there seems to be a pattern of increased spending on alcohol and tobacco for transfers to male household heads). Hence, if workers want government to be paternalistic, how paternalistic do they want government to be? Moreover, many conditional cash grants go to the poorest of the poor, not those people with jobs. Are COSATU members going to be happy if they see their unemployed, yet poorer, neighbour get a cash/voucher transfer from government, or do they, the employed individual (you need to be employed to be a member of COSATU), want money for themselves and not the unemployed poor? Notwithstanding these nuances, we also have the problem of where the money comes from... Do we tax businesses? If so, do we expect these businesses to maintain their current levels of employment while being taxed higher than previously? If workers lose their jobs from this application of a 'demand' should ministers lose their jobs? Do we expect businesses, facing a higher corporate tax, to want to come and invest in South Africa when there are demands for higher worker wages (3) and therefore higher labour costs too?

Which brings us duly on to 3. Similar to my point for 2 above on costs, who is meant to pay for the higher wages? Let's assume that you want to have increased wages for most of the 2 million members of COSATU, but the problem is that higher wages won't only be for them, but for members of other unions too. Ok, so many millions of workers want higher wages. If we use classic supply-demand, then a higher wage would imply a lower total number of workers employed. Yes, this is somewhat simplistic.

But the simplicity is still useful. Let's take a look at 3 scenarios, which could be implemented independently or together:Hillbrow tower, Johannesburg
  1. businesses have higher wage bill and fire workers
  2. businesses have higher wage bill; take a hit to profit and keep on some workers
  3. businesses have higher wage bill: increase prices and keep on some workers, transferring the costs of higher wages to the consumer
Moreover, the firm could do 2 in the short run, but implement 3 in the longer run. What does this mean? Let's say prices of firms occur on average, this acts as a driver for inflation and inflationary expectations, i.e. there will be higher prices on average. What's that you say, "higher prices"? Let's strike!

Alrighty then... So people could lose jobs from the application of either of, or both 2 and 3. What happens then is that (some) confused unionists (could) say, "Ahah! People lost jobs! The ministers must GO! Phantsi ministers! Phantsi!" This would be confusing the issue a bit. Just a bit... those ministers who implemented the policies that the unions wanted having their jobs demanded by those same unions for the consequences that could be directly seen as consequences of the application of policies demanded by the unions. Sadly, this is something that I believe could occur in South Africa in the current climate of mass action and disregard for how economies work.

Anyway, I couldn't find any documents on the COSATU website relating to what they are demanding, nor could I find a copy of Vavi's speech. The most recent speech on the website is from June - not particularly helpful.

Now let me be clear about my position on unions. I support their existence. I think that there are many situations in which workers require protection from firms, specifically when it comes to working conditions, wage increases in line with inflation, firing disputes and such. Workers require some form of representation. I am probably of a similar opinion as Mark Thoma on this one - unions are flawed, so are firms, but workers need something to balance the power of firms.

However, I do not believe that the current action in South Africa is in any way cognizant of the dynamics in the current world economy. Higher fuel and food prices are being driven by factors outside the locus of control of the South African government. The ANC government cannot do anything about fuel and food prices that will not, in all likelihood, have unexpected consequences.

food-crisis-2.jpgWhere, therefore, can they legitimately intervene? They can improve their investment in energy in order to have decreases in energy costs in the long run. This is not going to happen overnight. They could investigate improved social welfare and conditional cash grant/voucher systems. They could look at policies to increase employment generally. This does not mean that a family in a township is going to be able to better afford its meals over the next year. That requires other interventions that are more nuanced and require greater consideration than what COSATU proposes. I really wish that they and their members understood this. COSATU desperately needs to educate its members on the basics of economics. I rarely see evidence of this all that I see instead is evidence of communist rhetoric and arguments for government planning (see Vavi's speeches on this for his opinions on the 'barbarity of capitalism'). Our union movement could be better.

My last point is that I did not consider transfers of government spending within the budget from some projects to others. This is obviously a possible source of funding for projects such as conditional cash grants. Moreover, having more efficient revenue services can allow for increased tax revenues from businesses and from individuals which provides for more funds to implement these kinds of projects. These are considerations that could be looked at, but are not, I believe in the current ambit of what was being demanded by COSATU.

Currently have 2 comments:

  1. Hi Simon, well done! Beautifully presented with useful content. For me one of the major challenges of this new means of communication is succintness - how to stimulate readership and hold attention without diluting the 'message'. You have my support - keep at it; we are watching! PS have a look at