Competitiveness and labour costs in Zim

There has been a lot of emotional debate on the issue of labour market flexibility and on the role of labour costs.

By Prosper Chitambara

File photo: A closer look at companies’ balance sheets shows that directors’ emoluments account for the lion’s share of the total expenditure for salaries and wages in most organisations.
File photo: A closer look at companies’ balance sheets shows that directors’ emoluments account for the lion’s share of the total expenditure for salaries and wages in most organisations.

This article seeks to disabuse the reader of a number of assumptions and myths that are not borne out of reality.

The first of these assumptions is that the cost of doing business in Zimbabwe is high because of high labour costs.

The second is that Zimbabwe is not competitive because of rigid labour markets. Finally, it is important to distinguish between the components of total factor productivity (TFP). Granted, Zimbabwe has serious competitiveness deficits and a high cost of doing business environment. However, both of these factors are not as a result of high labour costs or labour market rigidities.

Wage developments can have an impact on employment, prices and competitiveness. An explanation often given as a cause of inadequate employment growth is that excessive labour costs are discouraging businesses from hiring more workers. It is argued that excessive labour costs arise when total compensation for workers is out of line with productivity. The excessive labour costs can also be as a result of rigidities in the legal and institutional environment which prevent compensation and productivity from matching.

On the other hand, wages play a fundamental role in the distribution of income and reduction of poverty and economic growth. Falling labour earnings produce a host of problems: growing inequality, social exclusion, a rise in crime or even social and political unrest.

The high cost of doing business is being driven by a number of factors which have nothing to do with labour. The first is the liquidity crunch which has resulted in the cost of borrowing being very high. In fact, Zimbabwe has the highest borrowing rates in the whole world, with rates averaging 20% per annum against average return on capital/investment of less than 10%.

For instance, a producer in Zimbabwe pays US$0,12 for every dollar they borrow while in some countries like Japan it is free and the highest in Africa is US$0,05 per dollar. Another contributor to unit costs is the high risk premium which makes it very expensive to borrow offshore.

There is also low aggregate demand in the economy which has thrown it into a deflation. The prevailing high debt levels have also made it more expensive and difficult for local businesses to borrow offshore. Zimbabwe is also among countries with the highest taxation levels which increases the cost of doing business without any shadow of doubt. The lack of a good infrastructure network also increases the cost of doing business. All these factors mentioned above conspire to render the economy uncompetitive.

Another driver of unit costs is the high utility charges that are currently being charged by most parastatals. The charges do not reflect the service provision. This is worsened by the erratic and unreliable supply in the provision of utilities such as energy and water. This represents a double cost to local producers. Some have had to buy generators as a backup which also increases costs.

While wages and salaries constitute a significant proportion of the total expenditure in many organisations a closer analysis of these organisations’ balance sheets will reveal that it is actually directors’ emoluments (and benefits) that are accounting for the lion’s share of the total expenditure for salaries and wages. This is particularly more pronounced and stark in parastatals.

According to the Global Competitiveness Report 2014/15, the top five most problematic factors for doing business are: access to financing; policy instability; inadequate supply of infrastructure; inefficient government bureaucracy; and corruption.

These findings are also corroborated by the CZI Manufacturing Survey sector surveys. According to the World Bank’s enterprise survey, what hinders firms most is not the regulatory environment, but competition from informal firms, high tax rates, limitations in infrastructure, access and cost of finance, and government behaviour (corruption). Labour regulations rank lowly relative to all other constraints, according to firms.

Interestingly, the ranking of obstacles tends to be similar across the continent. More importantly, while it may be argued that labour unions may constitute a significant source of labour market rigidities in Zimbabwe, evidence suggests that, as with the regulations on hiring, firing, and hours, this is unlikely to be a significant barrier to the expansion of decent employment. If for no other reason, this is because unions represent a small and diminishing portion of Zimbabwe’s labour force. Union membership in the private formal sector is less than 20% of total employment.

Labour is, of course, not the only input into production. Capital is the other major input. Labour productivity (total output divided by total hours worked) and capital productivity (which measures the increase in output per dollar spent on capital expenditure) combine to produce the overall productivity measure known as TFP.

While Zimbabwe’s TFP has fallen over the past decade, during that same time labour productivity has continued to rise, while capital productivity has fallen. And yet it is the labour side that gets the attention and criticism.

Capacity utilisation has remained constrained owing to erratic power supplies, lack of capital, higher input costs, obsolete machinery and infrastructure deficiencies. Consequently, Zimbabwe’s manufactured products have failed to compete both locally and internationally.

Capital investment, technical and technological innovation are the best ways to improve productivity. Zimbabwe has scientific and research capabilities through good universities and institutions such as the Scientific and Industrial Research Development Corporation.

Innovative industrialists should be harnessing this natural competitive advantage to make their production facilities state of the art and efficient. Moreover, Zimbabwe is blessed with natural resources, in particular those staples of manufacturing, iron ore and coal, as well as textiles such as cotton and wool, which should make the production of Zimbabwean goods cheaper than it would be for those countries that need to freight in those commodities.

Zimbabwe can compete, instead, through technological innovation and by using the locally produced commodities and resources Zimbabwe has in abundance. We have set our sights too low — we can create more than merely a quarry economy by value-adding at the source.

Trying to increase productivity through “flexibility” is unwise — all it is likely to deliver is poorer quality of life, more latch-key children and, inevitably, social unrest. This is the sort of thinking that led businesses to stop calling employees “workers”, but rather to dehumanise and commodify them as so-called “human resources”.

More importantly, an increase in output per worker (labour productivity) does not necessarily result in firm revenue increasing. If demand for the industry’s product is decreasing, the price that can be charged for that product will also be decreasing. Hence, even if output per worker rises, revenue per worker may fall.

Furthermore, when output per worker increases, the industry will have to sell additional units of output; that is, industry supply will rise. But, by the laws of supply and demand, when supply increases, prices decrease. That is, the increase in worker productivity may cause a decrease in prices.

The United Kingdom, Netherlands, Denmark and Sweden all have similar rates of labour force participation but only the UK is closer to being defined as a flexible labour market.

Nordic countries and Holland have higher or similar rates of labour force participation to the United States despite the supposed inflexibilities of the former. The UK and the US governments have higher minimum wages and standard employment rights have been extended to part-time workers.

The relative success of the Nordic countries, the Netherlands and Austria in keeping unemployment low is inexplicable when viewed through the standard neo-liberal lens. All these countries have higher taxes than the US and the UK, larger states, more extensive welfare systems, strong trade unions, tough employment laws and extensive coverage of collective bargaining and social dialogue. The Nordic model has a strong emphasis on collective bargaining and social dialogue.

To be continued next week

Chitambara, holds a PhD in Economics from Wits University and is senior economist with the Labour, Economic Development & Research Institute of Zimbabwe and member of the Zimbabwe Economics Society (ZES). These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the ZES. E-mail: kadenge.zes@gmail.com, cell +263 772 382 852