Has the IMF gone soft and fuzzy on Trade Unions ?

Has the IMF  gone soft and fuzzy on Trade Unions?

For years you could take it for granted that if anything were ever said by the International Monetary Fund about trade unions it would be wholly negative. Like its next door neighbour, the World Bank  the consensus of what passed for economic thinking over the last thirty years was that no good would come from unions or the minimum wage. Of course little was ever said as the IMF was about Macroeconomic stability and balance in the global economy. Unions were a domestic matter for countries to address but if you were to have the misfortune of sitting down with an IMF economist for dinner you would almost certainly receive a  long and tedious lecture on the sins of the minimum wage and the evils of trade unions. It was simple enough both raised wages above market levels and therefore decreased the level of employment. But in a stunning turnaround the IMF has produced a research paper by two of its research economists Ms Florence Jaumotte and Carolina Buitron, writing in the March issues of the IMF’s publication  Finance and Development, argue how important the demise of trade unions is in explaining the growth of income inequality in  the developed countries.

Such a conclusion is hardly astounding but what is stunning is that it was said at all. To ever imagine that the IMF would say something positive about trade unions is, to those familiar with it, almost in the domain of economic science fiction. But suddenly the rise of massive income inequality over the last thirty years all over the world and the threat that it poses to both political and economic stability has now been seen by many economists as a real impediment to economic growth and stability in the global economy.   Concentrating too much wealth in the hand of the very rich has now become a real impediment to growth and political and economic stability.

The demise of unions in developed countries is seen by most as a direct result of globalization and de-industrialization. Trade unions in developed countries used to be largely concentrated in the manufacturing and industrial sectors and not in government as is more common in many developing countries. These have declined massively as a result of globalization and technical change. For example, and the US is not particularly exceptional,  in 1950 one third of the non-farm workers in the USA or 15 million workers were in the relatively highly unionised areas such as manufacturing.  The numbers of workers in the traditionally unionized blue collar sectors declined massively over the last sixty years. Employment in manufacturing in the USA was decimated between 2000 and 2010 with employment in the sector falling  from 17 million at the beginning  to 11  at the end of the period. The causes are fairly well known- increased technical efficiency and automation along with globalization and the shift of production China and Mexico along with the devastating effects of the global economic crisis which began in 2008. With manufacturing employment in decline and with a host of anti-labour governments from Reagan (who was pro-labour in Poland but viciously anti-labour at home) to Bush junior unionisation rates in the USA have fallen from 20% of the labour force in the USA at the beginning of the Reagan era in 1982 to 11% in 2014.  After 30 years of conservative anti-labour policy in the USA, the effects of globalization of markets and automation have put US trade unions in the manufacturing sector on the endangered species list.

The consequence of this is that unions, which were traditionally an important political force in society to speak for the  direct commercial  interests of workers no longer have the numbers, the resources and the political pull to do so. What the IMF researchers have shown is that even correcting for the technological and globalization changes about half of the increase in the wealth of the  richest 10% of the global population can be explained by the demise of unions and the decrease in the their power and influence in developed countries. Unions have first and foremost helped to push up wages of their members as well as those on minimum wage levels. But perhaps just as importantly unions always had a countervailing effect on  the political classes because of their ability to oppose self interested polices of wealthy national elites.

What is just as interesting is what is driving this apparent change in the IMF? Has the Fund suddenly, under the leadership of Christine Legard,  gone  soft and fuzzy? Hardly! In the Greek bailout negotiations the IMF has been as brutal as ever to the interests of workers. The world has changed since the period of high-globalization which peaked in 1995 with the signing of the Uruguay Round trade agreements and the creation of the World Trade Organization. The change in many of the organizations is more than just cosmetic because the changed circumstances of the global economy post-2008 require a more nuanced approach to economic management. But no-one should be confused as these institutions have not in essence changed. The IMF is there to protect the international monetary system as it stands now and there is not a market that they have found that they do not love desperately.    

These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he is affiliated.

 

 

 

SACU Costs South Africa Rand 30 Billion per year

SACU Costs South Africa Rand 30 Billion per year

 

In a recent  commentary submitted regarding tax proposals for the 2015 South African budget the accounting firm Price-Waterhouse-Coopers (Pwc) it has slammed the SACU agreement’s revenue sharing formula arguing that   ‘…., a more equitable sharing of the customs revenue pool would see South Africa entitled to at least 80% of the pool. The cost to South Africa is therefore at least R30 billion.’

 

An accountant’s view

 

The 105 year old customs union agreement between South Africa and the so- called neighbouring BLNS states (Botswana, Lesotho , Namibia and Swaziland) distributes revenue collected on import duties and excise based on a number of  criteria. The import duty revenue is collected on all imports coming into the customs union from outside. Excise duties are distributed by country based on the share of the GDP of the countries involved. The excise revenue goes mostly to South Africa which is by far the largest economy and GDP but import duties are the problem, being distributed based on a formula where  each country gets its share based on its share of intra-SACU imports. This results in the vast bulk of the revenues going to the four BLNS countries because they export almost nothing to South Africa and import almost everything from South Africa. In 2014, South Africa  exported R132 billion to the 4 SACU countries , while it imported only R28 billion. So the R104 surplus formed the basis for what is in effect a massive export subsidy to the BLNS.   

 

According to PWC if the revenue share were based on share of trade then 80% of the customs revenue would go to South Africa and the balance to the BNS and not the other way around. Thus the current loss to South Africa is approximately  R30 billion from this  system. For several years now the members of SACU have been quietly negotiating to achieve a new formula that would  be fairer but agreement has been hard to achieve. The reason is very simple. The four BLNS countries have over the years become desperately dependent upon the revenue flows from Pretoria and rather than treat them as transitory with all of them treating them as permanent spending them every year. While some like Botswana and Lesotho have generated what appears to be a budget surplus their position, like the other countries is completely unsustainable.

 

 An Economists perspective

 

Since the apartheid era there have been massive transfers from Pretoria to the BLNS states. The end of apartheid changed nothing about this relationship even after the 2002 renegotiations and arguably the BLNS dependence has only become worse over time.  What South Africans do not generally know is that there was a deal made in 1967 renegotiations, commonly known as the ‘secret protocol’ because it only became  known after the end of apartheid in 1994. Under the provisions no BLS state ( no Namibia) could ask Pretoria to use the external tariff for protecting a local industry if that industry could  not produce 60% of SACU production. For the tiny BLS states this was impossible and hence the Faustian bargain made with the apartheid regime was- you give us revenue and we will agree not to develop competitive industries. Despite the post-apartheid renegotiations of SACU the relationship between Pretoria and the BLNS did not really change, in fact the dependence worsened. After 2002 the BLNS were supposed to form a Tariff board where all countries would, in theory all as equals,  together set the tariffs for SACU. But the BLNS know perfectly well that if they try to interfere with South Africa’s monopoly on tariff policy the  South African government will consider it a step too far and tear up SACU. So instead the BLNS still sit in an apartheid era time warp where tariffs are unilaterally set by Pretoria and the BLNS are rewarded with stagnant economies but bloated budgets.

 

Put another way the BLNS get a major subsidy, equivalent to 30% of net exports from South Africa. So South Africans get the jobs and the BLNS get the revenue or put alternatively the BLNS are paid a subsidy whenever they create jobs in South African by importing South African  products. At the same time are being subsidized to keep their own children unemployed. From a revenue standpoint the SACU revenue sharing formula is a heaven sent for the BLNS but from a developmental standpoint it is simply disastrous.

 

A cesspit of Economic Distortion

 

Almost every sector you look at in the BLNS is distorted by SACU and its revenue implications. The BLNS all import electricity from Eskom and yet South Africa does not have enough for itself. The reason is that Botswana at least pays for a small portion on contract but the bulk is now imported at spot market prices which are according to engineers  in Gaborone at astronomic levels. Eskom would be in an even worse financial hole without the huge prices paid by Botswana.  But Botswana is subsidized under the revenue sharing formula for every rand of electricity it buys from South Africa.

 

South Africa can unilaterally raise the subsidies it pays to its automobile producers at will because it knows that the subsidies are based on customs duty rebates, 83% of which is paid by the BLNS states.  Botswana signs an agreement with De Beers to relocate diamond aggregation to Gaborone  from London and that means that the diamonds from South Africa Namibia and some Lesotho from are sold to Botswana and as its imports rise then the level of South African revenue transfers increase. The list goes on and on.

 

But by far the worst distortion is that the BLNS cannot possibly maintain their living standards and balance their budgets without SACU transfers from Pretoria and will do whatever it takes to defend these transfers.  Botswana now earns more government revenue from SACU than from diamonds.

 

The biggest distortion is the effect SACU revenue sharing has on African development. In 2011 SADC was supposed to form a customs union as well. You can only have one external tariff and one customs union and so the SADC negotiations  collapsed because all the BLNS, which are also members of SADC, were opposed because they knew that they would lose revenue if it were shared with all SADC members. As a result the famous SADC time lines receded into oblivion and we are now left with a tripartite free trade area instead. Everyone is kicking SADC integration can further down the road so as not deal with an intractable problem. But the consequence is that a larger SADC economy cannot develop  because the SACU revenue sharing formula stands in the way. Yet the real economic future of the smaller states lies in deeper integration with  a large region which would eliminate the problem of  tiny local markets for businessmen.  And so Zimbabwe and Mozambique could not join SACU and SADC cannot become a customs union.

 

Comrade Davies leads the way!  

 

The South African Trade Minister Cde Rob Davies has time and again proposed a ‘development SACU’ where the funds from SACU are used for regional integration and development rather than funding public budgets. This makes infinitely more sense than what is being done now under SACU. He would help his cause along if he could get the South African government  not to suggest that this could be done as part of ‘South African aid’. The idea that Pretoria would dole out aid money instead of revenue from SACU which is seen as a legal entitlement has absolutely no appeal to the BLNS.

 

SACU is an excellent building block for the southern African region but the revenue sharing formula is simply an economic disaster with continental consequences. It retards African integration and continues an apartheid era relationship that should have ended two decades ago. While  R30 billion is a lot of money it is peanuts to a South African government that has tax  revenues of R  1.1 trillion in 2015 and needs no more Zimbabwean style basket cases on its border. South Africa will bear the cost of SACU revenue sharing because removing it would result in an economic catastrophe for its neighbours. The SACU revenue sharing formula will only really be reformed when South Africa can no longer afford the luxury.

Source pwc

 

These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he is affiliated.

Will Government Allow the Diamond Cutting Industry to Perish?

Will Government Allow the Diamond Cutting Industry to Perish?  

 ‘Diarough which owns Teemane in Serowe, will continue to operate its Bhopal factory in India as well as its factory in Thailand and neither they nor De Beers  will suffer the consequences of the job losses in Botswana.’

For the diamond cutting industry the news last week could hardly have been much worse. In January the press reported that MotiGanz and Leo Schachter had laid off 150 workers. Then last week a bombshell was dropped at Teemane Manufacturing Company  owned by Diarough would close with the loss of some 320 jobs in Serowe. This is the bigesst employer in the village of Serowe and the consequences  will be felt for years to come and for what are probably around 2,000 people who are dependents of those employed in the industry. With a total reported employment in the diamond cutting and polishing industry of 3,750 in 2014 this was a massive retrenchment and will cause real pain to many thousands of low income Batswana. This is a time of great sorrow and pain in many households in Botswana. 

Low Productivity and High Costs

In 2013 Botswana is reported to have exported P6.6 billion of polished diamonds making  it by far the biggest manufacturing exporter in the country. Two reasons are commonly given for the sudden rash of closures in Botswana’s diamond sector. The  first is quite correctly a structural one- Botswana, like Namibia and South Africa, is simply not competitive in comparison to low cost and high productivity locations like Surat and Mumbai where most of the world’s diamonds are cut. The second is the squeezed margins. Wages in Botswana are about the same as they are in India but the differences are in the  productivity. Indian cutters will produce 2-3 times as much as those in Botswana.  This is correct but not new and it has been well known since before the establishment of the industry in the 1990’s. The table below presents the costs cutting and polishing a rough diamond in various locations.  Botswana has become more competitive over time but it just cannot compete with India yet but it is a more competitive location than either South Africa or Namibia.

Cost of Processing in Botswana Compared to Other Diamond Cutting Centres

	Approximate Cutting and Polishing Costs (USD/crt)		Approximate Total Cutting and Polishing Jobs		Comment
	2008	2013	2008	2013
Canada	125	140(NWT)	300	50-80
		180(Ontario)
Botswana	45-125	60-120	2200	3750	Diamond producing countries gaining market on the back of
Namibia	45-125	60-140	1500	970	government policy, despite higher costs than traditional manufacturing locations
Belgium	120	150+	1000	150-200	Old cutting locations have lost share of manufacturing following
US	110	300	100	80-100	migration first low cost locations
South Africa	60-100	130-150	1800	1000	and subsequently to producer
Israel	47->55	140-->300	2000	400	countries
Far East	15-35	20-50	29,000	10,000	The trend of growth in low-cost
India	6-50	10-50	850,000	800,000	locations has recently started to reverse

Source: De Beers   2014 ‘Diamond Insight Report’ page 40    

 

Decreasing Rough-Polished margins

This structural lack of competitiveness of Botswana and the rest of southern Africa has meant that, despite growth in employment in Botswana over  the last few years,  they are now all ‘going  south’ in terms of employment in the industry. But what has changed to make it necessary to close so many factories and to lay off thousands of workers across the continent? As can be seen from the chart below since about July 2012 the margins between the price of rough diamonds and 0.5 carat polished diamonds have been narrowing. Even in good times it is said that Botswana’s diamond manufacturers are not  able to make a profit on diamonds that are much smaller than half a  carat polished. 

This narrowing of margins has given rise to some increasingly bad tempered exchanges between Mr Philippe Mellier, the CEO of the De Beers Group and the head of the International Diamond Manufacturers’ Association, Maxim Shkadov, who in January this year claimed that the margins of his members are close to zero. The diamond cutting industry has also fallen victim world wide to a limiting of bank credit to the industry which has made it even more difficult to operate.

…and a bad deal for Botswana and southern Africa

So gross margins are falling in the cutting industry and diamond manufacturers are closing their highest cost operations in Southern Africa. No surprises in any of this except for the fact that the deal that the Government of Botswana made with De Beers in 2004 and revised in 2011 specifically required diamantaire who were DTC (Botswana) sightholders to cut and polish in Botswana. Under this deal these sightholders would eventually get $800 million worth of rough to process here in Botswana. But these sightholders are not fools, they knew at the time that Botswana is a high cost  location, so why did they set up here ? Industry sources have claimed that in the past the DTCB sightholders would get thrown a ‘special stone’ by De Beers occasionally to compensate them for locating in Botswana.  These stones are multi-million dollar diamonds and the profits from one is often enough to compensate producers for low productivity in Botswana. De Beers strongly denied this at the time but now this practice has certainly come to an end. In 2012, the last year before diamond exports figures became confused with re-exports associated with aggregation, Botswana exported some $4 billion of diamonds.

If $800 million or so goes to DTCB sightholders what happens to the other $3 billion that Botswana produces? Well De Beers has many sightholders, 84 according to its web site of which some 21are in manufacturing in Botswana. The rest take their diamonds in what is one of the other four boxes i.e. Namibia, South Africa and Canada where some of these De Beers sightholders have beneficiation obligations. But a large chunk of all the diamonds produced in southern Africa go into what used to be called the  ‘London box’ which,  since the move to Gaborone is called,  an ‘international sight’. Therefore sightholders may get up to 5 boxes of diamonds  at the  Gaborone sights every 10 weeks. But the  so-called London or international  box can be sent anywhere for processing and so in a bear market for polished diamonds, such as is presently the case, the local manufacturers, many of whom have access to a London box, can simply close their factories in Botswana, lose access to their Botswana box but still continue production in India or China.

As Chaim Even Zohar, the guru of the diamond industry, pointed out in a recent statement on the 2004 agreement ‘There were penalties to be paid if the targets (of beneficiation) were not reached. In the current (2011) contract, I understand, the US$ value of local rough sales are still contractually agreed, but there is no agreed minimum employment level’. This was done to allow the companies to use highly automated machinery but will have effect of allowing these sightholders and De Beers to get off without the sorts of  fines in the earlier agreement.

Time to renegotiate the 2004 and  2011 agreement with De Beers?

What has happened to the diamond cutting industry is what economists call ‘regulatory failure’. The closure of the factories in Botswana would probably never have occurred if our agreement with De Beers had said that firms that do not beneficiate a portion of their sites in Southern Africa cannot have access to southern African diamonds … full stop. But instead we have created a complex marketing formula which made the cost of exiting Botswana in the current bear market very low indeed. The firms that closed their doors will continue to have access to Botswana’s diamonds. Thus in a sense the situation where De Beers was claimed to have ‘subsidized rough with rough’ has now been reversed … Botswana provides rough for Indian industry at the cost of our evaporating polished diamond industry. If we had an arrangements which said that only those firms operating plants in Botswana, Namibia and South Africa can have access to De Beers African diamonds the plant in Serowe would probably be open today.

Diarough which owns Teemane Manufacturing Company in Serowe, will continue to operate its Bhopal factory in India as well as its factory in Thailand and they nor De Beers will suffer the consequences of the job losses. Was this foreseen at the time the agreement with De Beers was signed in 2011? Almost certainly not – it was what economists call an ‘unintended consequence’ of the negotiated marketing system.  

Similarly Botswana has imposed beneficiation obligations on De Beers but at the same time we are exempting state owned companies like Okavanago or private ones like Lucara and Gem Diamonds from the same obligations. The buyers from these companies can take their stones and cut in India and so it is becoming easier and easier to get Botswana diamonds without any beneficiation. In this way government policy encourages diamond  trading but undermines our beneficiation efforts.

Policy Failure- Infant industries and Delinquent parents

Most of humanity enjoys making babies… or at least trying. The unfortunate consequence of success is some 20 years of nurturing an infant until it has reached a level of maturity and effectiveness in the world where it can stand on its own feet. That is the minimal definition of a good and fit parent. A delinquent parent abandons the infant at birth without paying the bills, taking the responsibility for proper nurture and assuring proper discipline and gets on with making even more infants. This is an unfortunate but nonetheless good metaphor for the history of industrial policy in Botswana and much of the region. Over 35 years Botswana has created many ‘infant industries’ as they are known in economics and they have almost all been abandoned at birth without the requisite hard work and money to make them work. What we know from the Asian experience of industrialization is that setting up the ‘infant industry’ is the sexy part of policy- but the expensive, boring and very unsexy part is spending the huge amount of money, effort and time and imposing the discipline to make your infant an effective and competitive adult. Most countries fail and that is why they do not develop.

I was reminded by a colleague that some eighteen months ago we attended a meeting between government, the diamond manufacturers association and the other stakeholders who met to form a diamond industry ‘cluster’. We talked about the need to improve productivity but  to the best of our knowledge, nothing ever happened. If Botswana continues to conduct industrial policy towards the diamond cutting and polishing industry in this manner then it will go the same way as the clothing industry and the automobile industry. We need to work with the private sector, the unions and spend what it takes to assure that our workers are effective and competitive. Industrial policy, like raising children, is not a free lunch. In the end diamond cutting must occur here in Botswana because it is a great place to do business but that is not today but may be the product of 20 years of hard work to create a developed competitive and vibrant industry.

In the meantime it is certainly time for Botswana, Namibia and South Africa to reconsider their agreements with De Beers and see  what can be done to assure that diamond beneficiation in Southern Africa occurs in the way it was intended. 

These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he is affiliated.