Wage Strikes and Economic Sense

South Africa is presently deeply immersed in wage demands, supported by strikes.  The demands are generally for increases well above the rate of inflation, and are based on the ‘needs of the workers’.  In the short term, that is possibly justifiable in many ways.  However, in the longer term, the real world will come back to bite the workers.

Wages are one item of input cost, along with raw materials, fuel, electricity and numerous other items.  All of these items are subject to the constraints of the market, with the possible exception of electricity, where the cost is administered and simply imposed, regardless of the market.  However, even that cost factor is independent of the larger market only in the short to medium term.  The market will adjust to increases in a factor cost by replacing all or part of that factor with another factor which has a lower cost in total, either directly or by reducing the total cost of the output.  Thus, when mine labour costs increase, mine operators will look for ways to reduce that cost, probably by replacement of the labour input by machines or by means of seeking productivity increases to offset the increase in cost.  Either way, an increase in the cost of labour will ultimately lead to a reduction of the labour input, measured in terms of man-hours, to at least compensate for the higher cost per man-hour.  The problem with an extremely high labour cost increase demand is that it sets the investors’ thinking to ways of replacing the labour to a greater extent than is required to simply offset the increased cost.  An example of this was publicised this week, when a gold mine announced that the full mechanisation of its mine will result in the production of 700 000 ounces of gold using a labour force of only 5 000, against a traditional mine producing 1 000 000 ounces of gold using 32 000 workers.  Certainly, there are particular conditions enabling that sort of mining, but the picture remains very clear – a high and increasing cost of labour will act to reduce the demand for labour, often dramatically.  This is not an isolated example.  It is a picture of industry of all kinds the world over.  Extending that picture to South Africa in general, it is not unreasonable to project that the increasing cost of labour will result in at least half the number of jobs in the mining industry being lost over the next ten years.  And this will happen not only in mining.

To come back to the cost of electricity, it is worth considering that every input cost, including even those often not recognised as input, has an effect on the viability of all industries.  Eskom does not operate in a closed system.  One of the indicators of industrial activity is the quantity and cost of electricity.  Electricity is one of the drivers of industrial development.  When the cost of one of the major input elements into production of anything increases at a rate exceeding that of its competitors (in the broadest terms), that cost increase works to drive the industry, and the investor, to seek a replacement input.  Where that is not possible, as is usually the case with electricity, the investors in industry look elsewhere, to markets where the total package of costs is more favourable to the investment.  If you don’t believe that, look at the textile industry.  The countries that have captured the textile industry jobs are those that offer the most favourable package of costs.  It is worth noting that the same thinking applies to all elements of cost, including roads and rail transport.  The imposition of high and increasing road tolls has a marked effect on the cost of getting goods to market, whether it is by adding to the cost of labour in getting to work, by increasing the cost of delivering raw materials to the factory, or by delivering the finished product to the market, whether that is local or abroad.  Similarly, the high rate of increase in airport taxes as a result of the greed of the Airports Company has been one of the factors leading to a downturn in the tourism industry in South Africa.

Included in the broader cost of production of any item, whether it is an ounce of gold or an hour of consultancy, is every element that goes to reduce the net profit to the investor.  Where it is required that a proportion of the shareholding in a company be handed to a BEE partner on any terms other than an equal contribution of financing (including equity and creditworthiness for loan capital), that represents a reduction of the net income to the investor and so must be compensated for.  An investor requires a competitive return on his or her capital, which includes cash, creditworthiness, borrowing ability, risk, know-how and proprietary knowledge.  If that return is not available, all of those elements of capital will migrate to where it is available.  This is not a denial of human rights.  It is simple common sense.  This is why so many companies that might have invested in South Africa have decided to look elsewhere.  The total package of costs and risks in South Africa is becoming weighted against the owner of such capital, and, increasingly, he is looking for markets with a structure of costs matched to the risks and benefits available.

The Minister of Trade and Industry has gone on record as saying that South Africa is not losing investment from abroad, citing a few investments that are planned.  It is not possible for anyone to say how much investment is being lost, and any claim to be able to do so can only be seen as pandering to the public.  It has been clear to many companies involved in assisting foreigners to establish businesses in South Africa in the past twenty years that South Africa has slid dramatically down the ranks of attractive investment destinations.  Potential investors cite high costs of labour and electricity as being deterrents to investment.  They add the high risks of losing all or part of their businesses to Government regulations, such as those pertaining to BEE, and they fear that the country has started to move down the slippery slope to Zimbabweanisation.  I can say from personal experience that South Africa has lost at least a thousand jobs to these factors in the past two years.  The total number lost is probably in the hundreds of thousands of sustainable jobs.  And the worst is that the Government appears to have believed its own advertising.  There is no sign that the country is doing anything to overcome these problems, to break down these hurdles, and, as the talk in the circles of the Tri-Partite Alliance lurches ever more towards Marxist-Leninist socialism and Communism, so the country becomes less attractive to investors.  There is good reason why so many strong companies that, at one time, were largely South African in their orientation, have become less so.  Many major mining houses have effectively left the country, putting their investment funds, their expertise and their energy into more attractive markets.  They have been joined by banks, insurance companies, retailers, manufacturers and many more.  They have been joined in this flight by those carrying the most precious of economic assets, experience, technical knowledge and management ability.  Sooner or later, it will become clear to even the economically handicapped that the only reason for investment in the country will be to exploit the mineral deposits.  Unfortunately, even these deposits are declining in world importance, and many other countries with those resources are moving up to take advantage of the world need for those minerals in order to jump-start their economies.  No doubt, they will become subject to the same pressures on wages and social politics in due course, but, in the medium term, their gain will be our loss, and we, as a country, appear to be unable to understand that, as a Third World country in economic terms, we cannot afford to behave as a First World country on the social and political front.