SA's wage rise a sneaky win for Zimbabwe

Published: 30 June 2014

After what seemed like a lifetime, South Africa's Association of Mine workers and Construction Unions successfully negotiated a settlement with employers promising to triple entry level mining wages over the next 3 years. On paper, the happy ending should boost household spending but the reality suggests otherwise.

The award is the making of an imperfect labour market. Salary shocks naturally imply a lower rate of return for investors prompting them to look elsewhere for profitable projects and South's Africa neighbours, including Zimbabwe, can take advantage of labour price inflexibility.

In the past, post the Second World War, a similar wage dispute scenario was observed in 1946. Capitalists (FDIs) scared by the possibility of high wages formed the basis of a massive outflow of capital as investors looked for alternative outlays away from the then Union of South Africa.

Interestingly, this action directly benefited Rhodesia. From about 1947, funds earmarked for SA were rechanneled to Zimbabwe. The upshot was a remarkable increase in the number of Zimbabweans in gainful employment.

Workers doubled within 10 years from 377,000 in 1947 to 676,300 by 1956.

Fast forward 2014, a matching scenario is developing. Notwithstanding the tragic events in Marikana and South Africa's ill-famed inequality rates, a 200% increase in remuneration has a negative impact not only on the mining sector but right through SA's labour market wage dynamics. It sets a toxic precedent; workers across all sectors will certainly be encouraged to make similar demands.

Key rating agencies S&P and Fitch subsequently downgraded South Africa's economic outlooks and credit worthiness following recent events. In the past, I made the same point on Zimbabwe's civil servant wage demands, highlighting the hazards of unsustainable pay demands.

Enter Zimbabwe; there is a real possibility of a future re-enactment of the above in regards to transferable events. Zimbabwe today is a different animal altogether but recent developments coupled with increasing beneficiation costs in South Africa - Zimbabwe's platinum reserves are closer to the surface, hence cheaper to mine - mean investors might be forced to revise portfolio allocations. The prevailing conditions could possibly alter credit flows towards Zimbabwe.

In light of this, the government should actively flash its natural resource cleavage to the highest bidder. Indigenisation has been effectively watered down into a public-private partnership. Investors will be allowed to recover their initial capital investment, an appropriate return on investment and operational costs before the sharing of production outputs or profits de-risking, to a degree, the nation's risk profile.

I am cheer-leading and encouraging more wage action preventing the efficient allocation of capital in South Africa for the sole reason that Zimbabwe will be the ultimate beneficiary.

Of the various factors of production, labour is the largest. The wage differential between the two countries within the mining sector is one that is to be fully exploited.

Apart from wages, additional extraction of wealth from the private sector would come in taxes and rents.

A competitive labour market, one that is self-regulating and free from excessive labour union distortions will drastically improve current liquidity challenges.

-------------
Bhekinkosi Ngubeni is qualified economist, email him on bheki213@yahoo.co.uk
- Bhekinkosi Ngubeni I NewZimbabwe