The Salaries Freeze

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.