A call on
the executives of the country by the President of South Africa, to freeze their
salaries in the interests of ‘reducing the gap between the rich and the poor’,
misses the point entirely. The problem
in South Africa
is not that the top executives of the country are earning too much – it is that
the workers and the unemployed are earning too little. Their earnings are probably above the
economic level at which they should be paid.
Before we
go into this, let us redefine some terms.
‘Earning’ means just that. It does not relate to the amount paid (which can be referred to as the
‘wage’ or ‘salary’), but much more to the input that the worker makes in order
to justify the amount paid. That, in the
long term, can only be determined by the market. If a worker increases the value of his or her
input to the enterprise, the amount paid for that input will increase, assuming
that the demand for that input is not limited in some way. Because of this reason, the amount paid to
top executives is high in comparison with that paid to other workers – ‘other’,
because contrary to political and labour union rhetoric, top executives also
work. They are not parasites on the
system, as the Union bosses seem to believe (consciously ignoring their own
participation in this capacity!). If a
particular contributor of labour is part of a scarce group, the payment for
that input will rise, and if the value of the input is high, the payment will
rise. On the other side of the coin, if
the supply of a particular category of labour is abundant, the payment for that
input will tend to be lower, and if the value of that input is low, the reward
will be low. That applies within an
economy, and between economies.
‘Competition’
is another term that needs to be understood.
It implies that there is a demand for a good or service that is supplied
to the market and purchased by the market.
In a free market, competition ensures that the good or service flows
from the most efficient producer or provider (read ‘lowest price or highest
utility’) to the user that is able to use it to the greatest benefit. Once the demand is satisfied, the price
settles at that level that will meet the needs of all who can use it at that
price. If the price increases, or the
utility decreases per unit of price, the off-take will reduce until a new point
of stability is achieved. If the price
is increased artificially (by factors that are not directly involved in the
supply-demand interaction, such as Government, Trade Union or similar) this
adjustment will take place. A perfect
example was the imposition of Rent Control on accommodation, with the objective
of ensuring that ‘affordable’ housing was made available to certain classes of
people. The move had the effect of
preventing the rental price of the affected properties from increasing. That was in the short term. In the longer term, however, the price able
to be demanded by the providers of capital was insufficient to attract new
capital to the construction of low-cost housing units. The move was self-defeating. The supply of rental housing plummeted and
the rental soared. Another example is
the increase in the cost of labour to the mines. As the cost went up, the numbers employed
(‘able to sell their labour units to the mines’) declined. An industry that previously employed
1 200 000 workers only a decade ago now employs only about
500 000! The drive to higher wages
(cost of labour) without a higher input value (productivity) at least
sufficient to compensate for the higher cost will inevitably result in a lower
demand for that labour. That is exactly
what has happened in the mining industry.
The same
applies to the cost of doing business in a country. If the total cost increases without a
comparable addition of utility, that country will fail to attract the capital
necessary for expansion of the activity base that provides the jobs. Jobs provide wages, wages provide economic
activity, and economic activity provides tax revenue on the one hand, and
reduction of Government support for unemployed people on the other. The textile industry in South Africa is
a good example of economics in action.
No amount of posturing or threatening by the Trade Unions and the
Government was able to do anything to save the jobs. Only lower wages could do that.
In a
country in which 6 000 000 taxpayers support a bloated and
inefficient Government, a huge corruption bill, and 16 000 000 people
on social support, one would be forgiven for assuming that the leaders of the
nation would be doing everything in their power to ensure that every job is
retained, that every cent of investment capital is attracted. Unfortunately, one would be incorrect in
making that assumption.
In an
industry in which there has been such a dramatic loss of jobs due entirely to
the effects of the demand-supply linkage as has taken place in the mining
industry, one could be forgiven for assuming that the Trade Unions would ensure
that their members understood the linkage, that they did whatever was necessary
to upgrade the skills and productivity of their members (increase the utility
of their contribution to at least match the increase in the cost of that
contribution), thereby protecting the interests of the workers, which, in the
long term, amounts to no more than them receiving a level of wage that
correctly compensates them for the value of their input. Again, sadly, that assumption would be far
from accurate.
It is a
fact that market forces always work to ensure that the supply-demand linkage in
the long term. Those market forces can
be ignored, or acted against in the short term, but they will always win. Even in the socialist ‘workers’ Paradises’
that appear to be the basis of so much of the thinking of our Government and
the Trades Unions, the supply-demand linkage operated, and the result of the
desire of those in power in those economies to ignore the linkage is clear to
see. Most of those countries no longer
exist, having collapsed ignominiously and catastrophically, leaving the rest of
the world to rescue the remnants, and those few that remain can certainly not
claim to be models of how any civilized nation would want to exist. The only one that might be argued to have
survived – China
– has done so only in a very mutated form, and with the virtual slave labour of
its multitudes of citizens who will certainly not continue to tolerate the
conditions under which they exist for many decades more.
The South
African Government and their close associates, COSATU and the South African
Communist Party, obviously believe that they are exempt from the laws of supply
and demand, and they appear to be intent on proving that, even though it must
be clear to even the most obtuse of them that they will bring down the country
in which they operate. They have failed
abjectly in doing what they claim to desire – creating more jobs – simply
because it is not possible to heap costs and taxes onto the employers without
ensuring that they value of what those employers receive in return is increased
commensurately. The signs have been
clear since 1997, when those in power decided that ‘South Africa belongs to
Africa’, when the lure of the vast amounts of wealth they were shuffling proved
to be too attractive to ignore, so turning the country into a kleptocracy to
rival any one of the newly-independent African States, when the harebrained
theories of Marx and Stalin were turned loose on a nation once powerful in
economic terms. Their efforts have now
succeeded in bringing South
Africa to its knees. The increasing wages of the workers are
beneficial to them only for the short time before they are eaten up by rampant
inflation they will cause.
The
financial power of the nation has been stolen and squandered to the extent that
the Ratings Agencies are downgrading the country. The previously dominant position of the
country in Africa is not only sliding, it is
collapsing at an ever-increasing pace.
The standard of education of its citizens is declining, both absolutely
and in relation to its African peers, while the Minister of Basic Education
declares that she ‘did nothing wrong!’
The Courts are increasingly being called upon to correct the actions of
the Government, or to force the Government to do what it is obliged in terms of
the Constitution to do. (Potential
investors from Germany, Britain and the USA constantly express amazement that
there is such a high incidence of Court intervention in forcing the Government
to obey the Constitution – they see it as a clear sign of the Wild West
thinking that characterises the activities of the Government.)
And through
it all, the Nero-surrogate, Jacob Zuma smirks as he fiddles while the country
burns, making one meaningless pronouncement after another. He calls on top executives in the country to
make salary and bonus sacrifices, while he arranges for another R258-million
rip off of State funds to pass into his hands.
He hints that, if those top executives do not play according to his
wishes, at best the country will fall apart and at worst his Government will
pass another law compelling it. This, of
course, continues to ignore the economic reality that any such process will
result in an acceleration of the brain drain at a time when South Africa can
least afford it. If a top manager can
earn R20 million per year in South Africa, there is at least a good chance that
he can earn R25 million per year elsewhere in the world, and particularly where
the Government understands the economic rules that say he is earning that, not simply being paid that. There is a difference!
If the ANC
continues to follow this line of economic insanity, by re-electing Jacob Zuma
as President, and by choosing (in a wholly undemocratic way) the same people to
set the policies for the country in the same way as they have so clearly
demonstrated in the past eighteen years, to be incapable of doing anything
other than continuing along the same route to total collapse, any sensible
investor, any top executive, any worker who has a skill that can be sold in a
country that values their contribution, will be well advised to seek their
fortune elsewhere before the stampede that is surely coming.
Let us hope
that this will not be the way to go.
No comments:
Post a Comment