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Alternatives to the Unilateral Wage Freeze The Fiji Times, 1 February 1985

15/03/2012
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The Government’s position on the Freeze[1]

There is little doubt that an honest appraisal of economic trends indicates that there is some substance to the Government’s arguments for the necessity of some type of incomes policy.

However, there must be serious questions about the blanket wages and salaries freeze imposed unilaterally by the Government.

The people being asked to make the most heavy sacrifices in the public interest are the people who can least afford to – and vice versa.

And if the Government’s major reason for the freeze is to make funds available for investment, there are fairer methods of doing so, in the context of Government’s own Development Plan objectives.

The Government claims that the freeze will

(a) save the government $36 million which will be available for development expenditure

(b) make available savings to the private which will reinvest for growth

(c) make the exporters more competitive

(d) help the country’s balance of payments by reducing imports.

What further investment?

Note that unlike employees, employers will not be losing, but gaining through higher profits and higher dividends in the future.  Regardless of their investment plans.  In other words the wages freeze will make the poor poorer and the rich richer.

In fact the wealthy are not being asked to make any sacrifices at all.

In the meantime, prices will continue to rise, as a large part of workers’ consumption is imported. And even most of locally manufactured goods have a high import content.  Hence higher prices of imports will continue to feed into inflation, reducing the real incomes of workers whose nominal wages are frozen.  While profits keep rising.

This can been seen from the CPI whose rate of increase was the same for the month after the wage freeze as before the wage freeze.

Alternative source for funds

An obvious and better way of making available more funds for development is to increase the FNPF contributions, by both employers and employees.

Those who could afford to pay more would pay more; the employees would add security to their future in proportion to the sacrifices they make today; and if the FNPF loans were developmental than the economy would gain; and not only would wage and salary earners incomes and consumption be reduced by the relevant amounts, but so also would employers incomes and consumption.

Government could also investigate options for employers to distribute shares to the employees instead of wage and salary increases, with many advantages: workers would share in the profits they help create; they would be tied in a more responsible way to the success of their industry; and the probability of disputes lessened and efficiency increased.

Importantly, funds would become available to employers for reinvestment and expansion, without an unfair sacrifice from workers.

Government itself could issue promissory notes to employees, in lieu of wage increases – effectively borrowing from the employees.

The saving of foreign exchange argument

Government argues that if workers incomes are reduced by $36 millions, than a half of that if spent would have gone on imports.  Government argues that the wage freeze therefore helps the balance of payments by that amount.

But why does the Government not just cut the unnecessary imports?   For instance reduced imports of new cars would not only save large amounts of foreign exchange but also give a boost to the local repair industry, helping increase domestic employment.

Surely the ultimate objective of foreign exchange policy is to help improve our ordinary people’s welfare.  It is absurd to restrict people’s incomes and worsen their standards of living in order to save foreign  exchange.  Why kill the patient in order to cure some disease?

It should be noted that the lower income people tend to spend more on local products, thus their spending has a higher multiplier effect.

If the objective is to save foreign exchange, it makes more sense to restrict the wealthier peoples’ incomes, which have a higher marginal propensity to consumer imports.

Make exports more competitive?

Few of our products compete internationally.   And it would be extremely doubtful ifFijicould reduce its wages to the poverty stricken levels ofIndiaandBrazil.

As the Employment Mission Report points out, in many of these countries, wages have fallen to levels where further reductions would actually increase unit costs as losses in efficiency outweighed the savings in wage costs.

 

IMF advice?

The IMF has apparently advised thatFiji’s wages are 15% too high.  Butone looks in vain for any explanation as to whyFiji’s wages came to be 15% too high.  Two questions arise:

(a) too high relative to which wages?

(b) how could wages be uniformly higher by 15% across such diverse areas as the garments industry (with its sweated labour), the brewery, the banking industry, the Permanent Secretaries, the typists, the mine workers?

(c) if wages and salaries are too high by 15% should not the same statement be made about profits?

There is a lot of basis for Government’s belief that the IMF medicine of trade liberalisation leads to the death of local industries or to their being taken over by foreign capital.  But two question arise.

Is the IMF prescription correct and therefore should be followed in any case?  Or is it that Government believes their advice to be incorrect but does not wish to fall in their clutches anyway.

Free market strategies

It seems obvious from the manner in which Government gives financial incentives and protection to local industries, against cheaper imports, that it does not believe in the free market doctrine.

It is clear from the deterioration in the world market price of sugar and the improbability, barring some crisis in the major sugar-producing countries of the world, of any long term future improvement.

There is some validity in Government’s logic that some sort of national incomes policy is called for.

But it makes no sense to apply a blanket wage freeze policy across such diverse industries as banking, insurance, brewery, wholesalers and distributors, and the protected industies;  with all their widely differing levels of profitability, ownership, and pressures from the current recession.

Nor does it make sense to apply an incomes freeze across all income levels.

For instance, from the national point of view, if the wage freeze leads to a foreign firm or even local firms exporting (legally or illegally) their increased profits,Fijiwill be a net loser with no gain to show for the sacrifice by the workers.

And even if the increased profits were to be re-invested inFiji, it would merely improve the welfare of the wealthy, while reducing that of the workers.

Whatever incomes policy is adopted should be compatible with and complementary to the broad objectives of social justice, concern for low income people, and reduction of income and wealth differentials.  These are the objectives enunciated in our Development Plan.

Undoubtedly, Government’s aim to reduce the gap between the rural unorganised people and the urban workers is desirable.  But this may be addressed without sacrificing broader development goals for the poorer urban workers.

Specifically the burden should be lifted from those who can least afford it, and be placed on the relatively well-off, from whom a greater commitment to our country’s development can be called for.

Some positive strategies

1.  All three parties return to the Tripartite Forum according to the agreement signed in June 1984.

2.  The unions and employers accept that to cope with the current crisis, there must be sacrifices made by all economic agent, with the over-riding principle being that those who have more, bear a heavier proportion of the sacrifice.

3.  The Tripartite Forum examine the possibility

(a) of both employers and employees increasing  the proportions paid to the FNPF, in lieu of wage and salary increases.

(b) employers and employees negotiate the issue of promissory notes to employees, in lieu of wage and salary increases due.

(c) private sector employers grant wage/salary increases if having the ability to pay; or grant equity shares in company if unable to pay;

(d) if all else fails and an incomes freeze has to be applied, then

(i) this must be applied on a graduated scale so that the lowest income people get their full cost of living adjustment, with the full freeze coming in at some hgher level; and

(ii) there must simultaneously be a profits freeze, with any extra profits over previous year’s levels to be paid to government as a “super-tax” or shared with the employees.

Government should also give some substance to its concern for the poor by

(a) giving tax relief to the hard-hit cane farmers

(b) increase the real value of destitute allowances (which have been severely eroded in real terms in recent years)

(c)  eliminate the costly inefficiency and corruption which seems to have been revealed by audits of government accounts.

[This is an edited version of a longer article which was extracted from a keynote address given to The Fiji Trade Unions’ Biennial Conference in 1984, which led to the formation of the Fiji Labour Party].


[1] For this very first media contribution, I received valuable editing advice from Vimal Madhavan, then Sub-Editor at The Fiji Times.  He made me realise how much more difficult it was to write for the ordinary public, than writing for academics.

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