Index wages basing on rate of inflation, growth

Source: Index wages basing on rate of inflation, growth | The Herald 15 JAN, 2020

Index wages basing on rate of inflation, growthForeign currency

Zimbabweans have an obsession with foreign currency exchange rates that will startle the rest of the world where the two critical indices are the rate of inflation and the rate of real economic growth.

This is why trade unions across the planet, or at least outside Zimbabwe, put a lot of effort into ensuring salaries, wages and allowances track inflation, to the extent that British civil service trade unions even managed to get their pensions “index linked” to the rate of inflation.

The rate of real economic growth is considered a crucial index in trade union land, because when an economy is growing in real terms, it can be argued that this is a result of rising productivity and that means workers are more efficient and so pay rises can do better than just match inflation, they can actually move further.

Companies across the globe also find their employees take a serious interest in their employers’ profit and loss accounts, and when profits are rising, employers find their well-informed unions are there with figures arguing for the percentage of costs devoted to staff pay and benefits to be kept the same, a rise in profits means a rise in pay.

Bad times mean that unions have to draw in their horns a bit, but that usually means that pay increases beyond the rate of inflation have to be deferred and that even temporary slowdowns in wage increments might have to be accepted, or a justified pay rise delayed for a short while, but with the emphasis on the words “temporary” and “delayed” and both terms defined as the minimum possible period of time.

All this arises from the relentless increase in global productivity since the advent of the industrial revolution three centuries ago.

As countries become richer, there is a strong belief that this extra wealth should be shared, with the main arguments being how fair is the sharing, not on the fundamental point that increasing wealth should be shared in some way.

With its latest offer to civil servants, basically a doubling of remuneration, the Government is showing commitment to its announced goal of trying to track civil service pay against inflation, with the proviso that it is not going to plunge into debt to borrow money to pay civil servants.

To a certain extent, the Government’s position is easier than for many private employers since its tax revenue in nominal terms is largely a measure of both inflation and of economic growth or economic retraction.

As prices rise, consumption taxes — VAT, transfer tax, excise duties and customs duties — also rise.

In a growing economy they would probably rise as fast, although Zimbabwe’s economy has been contracting slightly recently and the huge switch in consumption patterns away from imported luxuries to home produced, or at least home packed, products seeing customs duties rising far more slowly than inflation.

But the general principle still stands and the Government is at least being fair in offering its workers their share of the rising tax revenue.

However, there are large groups of civil servants, and this was the problem in the doctors’ job action, who want their pay pegged in US dollars and converted at the prevailing interbank rate on pay day, regardless of how much money there is in the Government’s tax account, where the money for salaries comes from.

Government raises the overwhelming bulk of its revenue in Zimbabwe dollars and uses those to pay its bills.

When it tries to do anything else, we get the sort of cyclic mess we lived through during the First Republic with almost zero long-term economic growth, closing industries and a large national internal and external debt.

We cannot borrow and spend our way to wealth. We have to produce our way to wealth, just like everyone else has done before us.

Of course, there are disagreements over the inflation rate.

For most of the past year, we have been using just monthly inflation, because we switched currencies from the US dollar to the Zimbabwe dollar and it was nonsensical to compare prices in different currencies.

This ends next month when we go back to annual inflation rates as well as monthly rates.

Secondly, we have a very vocal group which trashed everything local and insisted on filling shopping trolleys with 100 percent imports.

That this closed local industries, threw tens of thousands out of work and stopped economic growth for a decade was besides the point.

Well, people are entitled to spend their money how they like, but they should not expect the rest of us to subsidise them while they consume imports by creating an artificial exchange rate.

The cost of living has been rising a lot faster than that of the rest of us who are happy to buy local so long as quality and cost match. But the lifestyle of the inhabitants of Borrowdale Brooke should not set our inflation rate.

ZimStat follows international standards in creating its basket of goods and goes to extreme lengths to get the real data, such as walking around supermarkets and markets, rather than relying on people submitting lies.

Admittedly, the inflation statistics do not track the prices of Gucci bags and Scotch whisky, but they do track just about everything that ordinary people use and buy.

We need to remember that as part of the reforms of the Second Republic, the Government allows national accounts and national statistics to be, in effect, audited. They are not hiding stuff any more.

Using exchange rates is daft. Now that we are stabilising our own currency, we are becoming normal.

If we look at a country most of us know, South Africa, where there is a fairly volatile exchange rate, you do not find unions demanding pay cuts when the rand strengthens or pay rises when it weakens.

But the very powerful South African trade unions are there with full brief cases of papers on inflation rates, profit margins and the like when they go head-to-head with employers.

So we encourage unions and workers to follow international practices.

They need to lean on employers so their pay maintains purchasing power by tracking inflation.

They need to push for their share of increased profits, or if civil servants increased tax revenues. And that means employers have to present accurate figures.

And as Zimbabwe switches from consumption to production, it needs a general consensus that everyone will share in the fruits of that production and its associated rising wealth.

That is where the real pay rises are, the ones that beat inflation because as a nation we are earning more.