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Eric Bloch Column

Critical need for a social contract


t least five years there has been discussion in Zimbabwe, on an intermittent and spasmodic basis, that a social contract must be concluded as a key element of measures to achieve economic recovery and growth.

That a social contract be negotiated and agreed upon, and then implemented, has been a recommendation of numerous economists, of representative bodies of most economic sectors, of major organisations such as the International Monetary Fund and many others.

Even the government of Zimbabwe, which usually suffers from the “not invented here” disease which motivates rejection unilaterally of the ideas of others, has on several occasions advocated a social contract and, to that end, brought the Tripartite Negotiating Forum (TNF) into being.

Oft-asked questions are: “What is a social contract?” and “Why do we need a social contract?”

Essentially, a social contract is one wherein the government, labour and the private sector agree on a total, or near total, freeze on taxes and all other governmental charges, wages and salaries and prices. The contract endures for a period of time while appropriate remedial actions are implemented to restore economic wellbeing.

The freeze ensures that rising costs and imports should not be the catalyst of further inflation. Usually, when the negotiating parties enter into a social contract, they agree that the only permissible increases during the continuance of the contract are to the extent that circumstances and prices beyond the country’s borders impact upon the economy as, for example, the recent upsurge in world oil prices.

As a general rule, the only perceived alternative to a social contract as can address pronounced inflation, or hyperinflation, is for government-imposed price controls. But although organisations such as the Consumer Council of Zimbabwe recurrently call for a reintroduction in Zimbabwe of price controls, doing so will not contain inflation without very severely damaging the already gravely distressed economy yet further, while at the same time expected benefits for the consumer do not materialise.

Whensoever Zimbabwe has resorted to price controls, intensified inflation has arisen. That this should be so is difficult to comprehend for, if prices remain constant, how can inflation be sustained?

The answer lies very simply in the fact that invariably commerce and industry cannot meet all operating costs and service borrowings if their selling prices remain fixed. This is so because, unless a social contract exists, salaries and wages continue to rise, although possibly to a lesser extent than if price controls did not exist, in order to keep pace with inflation, even if that inflation is slowed down.

It is also so because there is generally continuing movement in foreign currency exchange rates, impacting upon the costs of imports.

As a result, many manufacturers have to discontinue production of those commodities as, in consequence of price controls, can only be sold at a loss. Similarly, many of those in commerce, be they wholesalers or retailers, have to discontinue selling products if the permitted prices only yield losses.

These circumstances result in pronounced shortages, and those shortages create opportunities for black marketeers. They exploit consumer desperation to access goods in demand but in short supply by making those goods available at greatly inflated prices.

That causes yet further inflation. Thus, the consumer suffers from non-availability of essential or desired products, or from continuing inflation.

However, if a social contract exists, such a situation does not occur. As the manufacturer, wholesaler or retailer does not sustain increases in operating costs, all of which are frozen unless they are imported, he has no need to increase his prices.

Similarly, the stability within the private sector which emanates from implementation of the social contract should enable spending stability in the public sector, which in turn enables the government to have a freeze on the rates applicable to its taxes and charges for services.

If all prices remain constant, and no greater amounts are payable to the government, labour can afford not to receive increments for an agreed period of time, although the consequence is that labour cannot enjoy any improvement in living standards during that period, save in instances where labour’s income is increased through promotion to higher-paid job functions.

But succeeding in reaching agreement of a social contract is only possible if all parties negotiate in utmost good faith. There has to be genuine dialogue between the participants in the negotiations.

Those negotiations have to be conducted with absolute transparency and with a real intent of all to arrive at a workable, constructive agreement. That agreement has to include a fixed period of time, whereafter there must be review and, if necessary, modification.

The agreement must be explicit as to the nature and extent of the freezes of prices, wages, salaries, taxes and governmental service charges. It must be precise as to when any increases during the agreed period may be effected, the circumstances as must prevail to enable such increases to be effected, and the basis of determining the amounts of the increases. It must also prescribe the extent, if any, of reciprocal increases as may then be implemented by the other parties.

To create an environment which would make it possible for agreement to be reached, the negotiations must be devoid of political considerations. Irrespective of whether it is the government, labour or other elements of the private sector, if a genuine desire exists to conclude a social contract, all political considerations must be put aside.

The negotiations must be driven exclusively by a mutuality of intent that inflation be brought firmly under control, that the continuing decline of the economy be halted, and that instead the economy be set upon a steady path of restoration, followed by growth.

Ideally, all sessions of the negotiations should be chaired by a wholly independent, but suitably knowledgeable person who is totally detached from Zimbabwean politics, from Zimbabwean trade union issues and conflicts and from Zimbabwe’s private sector vested interests.

That chairman must also be able to instil in the negotiating parties a sense of great urgency, and a realisation of the magnitude of the responsibility of each of them to bring the negotiations to a successful conclusion, in the best interests of the Zimbabwean populace, present and future.

In view of the government being the party to the negotiations that, first and foremost, is responsible for Zimbabwean wellbeing, an essential element of which is a sound, stable and growing economy, it must set the example, even before the negotiations are completed. In doing so, it would demonstrate its good faith which, heretofore, has been doubted by the other parties and by a great number of Zimbabweans. It would be establishing examples to be followed by the others.

Thus, for example, it should establish policy consistency. How can it justify sourcing of its foreign currency requirements by persisting in demanding of the Reserve Bank of Zimbabwe that it force exporters to surrender 25% of export earnings at a spurious, grossly sub-economic exchange rate of $824 to US$1, while at the same time it exacts customs duties and value-added tax from importers at the weighted average auction exchange rate, which is six times the rate at which it sources its currency. Clearly that which is sauce for the goose is not sauce for the gander!

Similarly, to cite a second example, how does the government conceivably justify increases in charges by the Registrar of Companies for the incorporation of companies and for the registration of mandatory company returns when the magnitude of the increases generally ranges from 1 000% to 2 000%?

In other words, the increases are far beyond actual inflation, and are totally unrelated to the costs of providing the Registrar of Companies’ services. Moreover, the increases are of such a magnitude as to create a major hurdle to the creation of new enterprises, which is key to economic empowerment.

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