Namibia's Solidarity Tax

The Namibian Solidarity Tax

Almost every quarter that goes by in Namibia the issue of the country’s income inequality comeshome to haunt the government in one form or another. Whether it is the land issue and Affirmative Repositioning Movement last year, or the ‘Struggle kids’ now, Namibia’s  unfairdistribution of income undermines the peace and stability of the nation and the government wants to address the issue. Namibia has the world’s second worst distribution of income- yes based on the so-called Gini co-efficient which economists use to measure income inequality (zero for complete equality and 1 for complete inequality) we have the amongst highest in the worldwith a Gini co-efficient at 0.6.

In terms of inequality, the country at the very top of the world’s inequality ladder is South Africa,with a Gini co-efficient of 0.69 in 2011. This is of course no coincidence as both countries suffered under apartheid and worse still Namibia, wasa colony of apartheid South Africa. This apartheid/colonialism narrative has been the basis for explaining Namibia’s current situation. In part this is correct but it runs head long into some really uncomfortable facts. The firstfact is that South Africa despite a long period of rapid economic growth and enormous amounts of money spent on social spending over the last twenty years such as income support for the poor, RDPhousing, health and education expenditure has, much to the horror of the ANC government, actually witnessed a worsening of its distribution of income since the end of apartheid. In Namibia the two estimates that have been made of Gini co-efficients show precious little downward movement as well. The reason is straight forward –  despite the very rapid economic growth up to 2009, which is supposed to decrease inequality,  and the very large amounts spent on social programs in South Africa and Namibia the rich have gotten richer as fast as the government has increased subsidies to the poor and sowhile poverty may in part be alleviated income inequality is not effected. Poverty alleviation and income redistribution are not the same thing, they are related but almost invariably confused in public discussion.

The second really uncomfortable fact in terms of Namibia’s colonialism/apartheid narrative is the existence of Botswana. Botswana was never colonized – it was a British Protectorate and was so poor and miserable that the British did not even bother building a capital  choosingrather to administer it form Mafeking in South Africa until just before independence. Botswana had no apartheid, no colonialism and very few white settlersand yet its Gini co-efficient is not that much lower that of Namibia. Now that is a problem if you believe that the only cause of Namibia’s inequality of income is its historic legacy.

The country with one of the worst distributions of income in Asia is Papua New Guinea and what all these four countries have in common is mining. The existence of mining and petroleum puts huge amounts of wealth in the hands of mine owners and the government. The former is not inclined to lose its income and in the case of the latter, most governments are incapable of developing the fine and delicate sort of policies which really alleviate poverty effectively.

Namibia’s Minister of Finance MrCalleSchlettwein, last year suggested the implementation of a new Solidarity Tax. He has said he will raise some $600 million in extra taxes on upper income individuals. Given the personal company and withholding tax revenue of the country was $14 billion in 2013/14 this tax measure constitutes an increase of some 4% of tax burden.  While details are scarce the tax will presumably be implemented through the income tax system though some flat rate taxes on corporations are also expected. This is a good proposal, which I as an economist and one of its intended victims fully support, but the devil will be not in the detail but what the minister actually intends to do with the money.What would make the new tax more convincing to a skeptical public is the creation of a fund that would ring fence this money specifically for poverty alleviation measures. That way the public would know that existing poverty alleviation measures would continue and that this tax would actually be over and above what is already being implemented.

The best means of poverty alleviation is to give money directly to the mothers as the Brazilian ‘bolsafamilia’ fund. In order to receive money women must assure that their children are regularly inoculated against diseases and attend school so they get a monthly lump sum payment. No bureaucrats stand in between the government and the beneficiary. The money goes straight to the bank accounts of the mothers. It is enormously empowering to otherwise impoverished women and children. No system has as yet been so cost effective in alleviating the poverty of so many and redistributing income in a country also known for its inequality. Under former Brazilian President Luiz Inácio Lula da Silva poverty was decreased by approximately 30% in three years from 2003 -2006 in large part because of the program. It is widely acclaimed across the political spectrum as an excellent way of dealing with poverty and variants should be considered here in Namibia.

But in making this proposal for a Solidarity Tax Minister Schlettwein has violated one of the cardinal rules of tax policy. If you are going to hit people with a new taxes the first thing you are supposed to do, even before the tax, is to tell them all the good things you are going to do with their money. This decreases resistance to tax increases. Otherwise the taxpayer may think that, because all money is fungible, the new tax is merely a way of soaking the taxpayer to pay for the widening and unsustainable government budget deficit. Minister Schlettwein knows full well the adage that labor has legs and capital has wings and so he must finely balance tax increases in Namibia against the risk that capital will fly if he pushes tax solution too hard. But he is caught between a global economic system that creates inequality, a middle class that is myopic and hates the proposed tax, and a large and restive poor that will mean continual instability if the issue of inequality is ignored.There are no easy and painless solutions to this, most vexing of Namibia’s long term economic problems.

How Namibia Subsidizes Botswna's Diamond Beneficiation

How Namibia subsidizes Botswana’s Diamond Beneficiation

If you were to ask most Namibians what is the main source of government revenue they would tell you that it is the profits and taxes on the diamond industry. They would be wrong. Many would also tell you that that the main source of revenue is actually import duty revenue from the Southern African Customs Union (SACU) which is only partially right. By 2014 SACU revenues derived by the government of Namibia was estimated at 37% of total government revenue. This is down from the peak of 47% of Namibian government revenue in 2007.

            But the problem is that most of that money is not from customs duties raised on imports coming into Namibia from outside the customs unions. A customs union like SACU exists when several countries get together and decide to set one common rate of tariff on all goods coming in from outside the member states. They then pool the tariff revenue on goods coming in from say the USA, the EU  or China and the normal way to distribute this revenue it in a customs union is based on what is called the ‘destination principle’. If 5% of total SACU imports went to Namibia then Namibia would get 5% of revenues. But SACU is special and has one of the strangest revenue sharing formulas of any customs union in the world. Under the SACU revenue sharing formula tariff revenues are distributed amongst the five members based on the share of intra-SACU imports. At the end of each year the five SACU members get together and decide what was imported the previous year and then share it out based on a formula that means that the four BLNS states (Botswana, Lesotho, Namibia and Swaziland) get the vast bulk of the revenue because they import almost everything from South Africa and South Africa imports very little from the four BLNS states. And so, depending on the year, some 80% of SACU customs revenue go to the four small BLNS and  South Africa which has 53 million people and imports the vast bulk of SACU’s foreign imports but gets less than 20% of revenue. To say the least the South African treasury, unions and much of civil society hate this arrangement which has remained more or less in tact since the apartheid era,  because they are in effect transferring about ZAR 20 billion a year to treasuries of the four BLNS states with Botswana, in particular,  having a higher GDP/capita than South Africa.

Looking at from Namibian perspective we are subsidized to import and not to produce. And on this basis SACU is extremely successful because Namibia and the other BLNS states have bloated governments but produce nothing while the allowing South Africa to produce virtually everything that is consumed in the region. The only things produced for export  in the BLNS states are minerals that generate  what economists call high ‘economic rents’ and  preference dependent products like sugar, clothing, beef,fish, grapes etc.

But suddenly something very new has happened in Namibia’s trade. From being a very minor trading partner where a few consumer goods came in from Botswana , it has suddenly become Namibia’s biggest destination market for its exports at somewhere close to $N11 billion in 2014. Those exports are almost entirely Namibia’s diamonds. In the past diamonds from Namibia used to go to De Beers head office at Charterhouse in London and sold to De Beers sightholders. But in the 2011 Marketing Agreement between De Beers and Botswana,  Botswana finally got from De Beers precisely what they had been asking for a very long time and De Beers moved its sites from London to Gaborone. Diamonds produced in the ‘De Beers zone’ i.e Botswana Namibia, South Africa and Canada would be traded out of Gaborone. For Botswana this agreement was the crowning glory of its diamond beneficiation policy. At last Botswana is the ‘go to’ place if you want mined diamonds and Batswana are rightly proud  of this development. This is certainly Botswana’s rightful place as the world’s largestmined diamond producer.

Namibia as a good neighbor, that also seeks to beneficiate its diamonds, should rightfully support Botswana’s beneficiation efforts. But right now Namibia and the other SACU members are paying a subsidy to Botswana for every dollar of Namibian, South African and Lesotho diamonds that areexported to Botswana because of the way in which the revenue sharing formula is written. The subsidy stems not from a commercial trade relationship where the parties are trading with Botswana because they wish to but as a result of an agreement between De Beers and Botswana. It is symptomatic of everything that is wrong with the SACU revenue sharing formula. Rather than encouraging intra-regional trade the SACU formula creates perverse distortions and incentives in behavior. From the perspective of the government revenue Namibia should be opposed to any exports to its SACU neighbors – whether it is weaners to South Africa or diamonds because this decreases Namibia’s SACU revenue.

One way to deal with this is simply by modifying the SACU revenue sharing formula. Gaborone should not expect a subsidy by virtue of its agreement with De Beers and should agree at SACU to a modification of revenue sharing that excludes the intra-SACU diamond trade. According to normally well informed sources, the agreement with De Beers and Botswana allows De Beers to walk out of the arrangement if other countries object and that would be a far worse outcome for Botswana than a slight modification in revenue sharing. SACU members spend much of their time trying to agree on what imports actually were in any given year and the value of diamonds would only complicate matters. But diamonds are merely the tip of the iceberg when it comes to distortions of the economy caused by SACU.

Namibians are as rich and as comfortable as they are only because South Africa subsidizes Namibians to import goods from them. In other words the Namibian government is paid a substantial subsidy by Pretoria to keep Namibia’s children unemployed. Every time a Namibian farmer exports a weaner to South Africa or a Namdebexports  a diamond to Botswana the Namibian treasury gets less money. This is what economists correctly call a ‘perverse incentive’ and it surely must come to an end.

These are the views of Professor Roman Grynberg and not necessarily those of the University of Namibia where he is employed. Next week- how to reform SACU and survive.

Nexit - Will Namibia be able to Sustain Rand Parity?

Nexit  – Will Namibia be able to Sustain Rand Parity?

Since 1993 when Namibia formally exited the Rand Monetary Areaand created the Namibian dollar the country has maintained  a policy of strategic parity between the Namibian dollar and the Rand. This was done for a number of reasons but principally to reassure business at the time of independence that the conduct of policy in Namibia was in safe hands and that when they invested in the country they could take out their profits at a fixed exchange rate. For over twenty years this has been at heart of macroeconomic and exchange rate policy in Namibia but now it looks increasingly under pressure.

On June the 17^th the Bank of Namibia  announced that the nation’s foreign exchange reserves had fallen to $N12.1 down from $15.7 just two months earlier. With its regular but increasingly perfunctory comments the Bank of Namibia’s Monetary Policy Committee  (MPC) added  its usual caveat that the reserves remain sufficient to sustain Rand parity. But are they? Certainly Namibia has enough foreign exchange reserves to cover imports for a period of approximately 7 weeks  given the most recent decline but it is certainly moving in wrong  direction. In 2012 Namibia foreign exchange holdings was enough to cover 4 months of imports. By international standards anything above three months is considered to be reasonably healthy. But by the end of last year the import cover had fallen to two months and the rapid decline of reserves in 2015 should be a wakeup call to policy makers that the country is on anunsustainable path of importing far more than it is exporting and that this will eventually lead toa foreign exchange crisis.

From the 1990’s up until the economic crisis of 2008 Namibia’s balance of trade was in balance with exports and imports of goods growing in tandem. Then with the beginning of the global economic crisis in 2008 imports started to balloon and while export growth has been adequate, especially in 2014 when diamond prices and returns, have been high it has not been enough to pay for the country’s growing appetite for imports. The Bank of Namibia’s MPC puts the blame squarely on the country’s appetite for imported luxury goods, in particular expensive cars. The data on imports of motor vehicles does show a rapid rise over the last few years but the figures are probably vastly underestimated given the growth of normally under-valued second hand cars. In 2014 Namibia is said to have imported someN$12.4 billion up by N$3 or 37.4% from the year before. Cars are by far the biggest import in Namibia and this figure probably massively undervalues second hand imports.

None of the options for  addressingthe trade imbalance are pleasant for the government or for the Namibian people. The politically safe approach to an impending balance of payments crisis in most countries is to use monetary policy to restrict access to credit i.e. a credit squeeze. This puts less blame directly on government and shifts it the Bank of Namibia. But a credit squeeze is a dull instrument that can often lead to the destruction of many an otherwise sound business..A similarly blunt instrument that the government has to restrict spending is the use of its fiscal policy to cut government spending and raise taxes. To say the least this a very unpopular approach to dealing with deficit problems- just ask the Greeks how much the people like this sort of approach.

So how should  the government react?If the Bank of Namibia is correct in its assertion that the purchase of luxury automobiles lies at the heart of the import surge a number of more focused monetary policies to push the banks to limit access to credit in these sectors is in order. But there are too many ways around credit restrictions to one sector or another. The other option is to impose a new series of taxes on automobiles coming into the country, especially the larger and more expensive ones. It is not possible to impose import duties on vehicles made in SACU Customs union but it is certainly possible to impose higher excise tax and a large scrappage or environmental fee on all new and second hand cars. With luxury new cars running from $N800,000 to well over a million many Namibians are moving to second hand imports. Many of these, especially the older vehicles coming from Botswana, are massively undervalued and the government needs to stop the process of VAT collection based on fictitious valuations. Instead taxes need to be imposed based on international ‘Blue Book’ values of cars.

Irrespective of what policy measures the government chooses to impose to deal with the unsustainable trade imbalance, it is running out of both foreign exchange reserves and time. The time for government to act is now before the reserves fall to what is often seen as a critical minimum i.e. approximately 4 weeks import cover. While 4 weeks is enough to cover imports it is commonly seen as the  point at which  investors will see the writing on wall for Namibian dollar – rand parity and start to move ever more foreign exchange out of the country. This will hasten a crisis. It is time to act before ‘Nexit’- an exit from Namibian dollar parity with Rand becomes inevitable and the currency has to be devalued. The immediate rise in prices of imported goods would not only lower living standards but in the long term it would weaken Namibia’s reputation as a safe place to invest.

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

Will the extra 600 Mcts at Jwaneng and Orapa save Botswana?

Will the extra 600 Mcts at Jwaneng and Orapa save Botswana?

Up until about June of last year everyone believed that Botswana was going to fall off a fiscal cliff after 2029. This was at the heart of the economic thinking in the country’s 10^th National Development Plan.  When BIDPA presented the results of an analysis of Botswana after diamonds in November we were happily told that we were wrong and that diamond mining  would go on to 2050. According to the geologists there is enough diamonds at  Jwaneng and Orapa for these mines to continue for decades.

Few people seem to comprehend how far reaching the new deposits of diamonds announced by HE the president in his state of the Nation Address after the elections. He said quite clearly that the country will remain a major producer of diamonds until 2050. But what does that actually mean?  HE gave no figures and there is no way that Anglo-American or De beers will say until they have completed a bankable feasibility study that is compliant with its obligations to the stock exchange. Anglo cannot just bandy around numbers- they have to be technically verifiable. But this number is the most important one in Botswana. Fortunately, though Mr Masire of the Diamond hub indicated, in Zimbabwe late last year that Botswana will be producing at about the current level to 2050. That means around 24 Mcts per annum. That means that the current resource assessment will mean that we have an extra 600MCT more than we thought we had. What difference will 600Mcts really make to Botswana’s future and  most importantly the government’s finances which are reliant upon on the taxes and profits made by De beers and Debswana?

What is known in the quasi- public domain about these new reserves? The most important fact was stated quite clearly and publicly by the Debswana CEO at the National Business Conference in Maun last November. He made it quite clear that it will require massive investments to extract these resources from Jwaneng and Orapa. How much is the question and I am reasonably confident that as yet De Beers has not yet  done the technical studies for this expansion  but the answer is in tens of billions over  a very long period.  Cut 8 which will not deliver anything near 600 Mcts cost about P28 billion.

Given that we are not going to know for a while, if ever, what these resources are  it is vital for those considering the future of Botswana to model what will happen with the extra diamond reserves that we know are there. It has been said that there is one extra fact about the new reserves. Orapa has always been a more prolific mine than Jwaneng but the value of Orapa’s diamonds are low because most are  low quality industrial diamonds with only approximately 40%  being of gem quality.  Not only are there extra diamonds the expansion at Orapa will transform that  mine from one which produces 60/40 industrial diamonds to one that, at least for several years will be producing much more high value gem diamonds similar to those produced at the much richer mine at Jwaneng. Again how big and how much is not in the public domain.

The Orapa and Jwaneng mines are clearly nowhere near their end of mine life and no-one should be surprised if they continue to help the nation  for up to 100 years as was the case with other  giant Kimberly mine in South Africa. But how long these mines last  also depends on the value of diamonds. The bigger the hole you have to build the larger the capital cost in digging it and the higher the operating cost of extracting a carat of diamonds from the many tonne of ore.

If synthetic diamonds, which are better quality than the real thing and undistinguishable to the naked eye from the real thing penetrate the jewellery market, the fundamental economics of diamonds will change. Diamonds maintain their long term value because they are considered to be scarce. If they cease to be considered a rarity and become as cheap as bricks, being produced in some Chinese factory then there is no way Botswana’s diamond mines or its prosperity can be guaranteed.  

Right now the big diamond miners including Al Rosa, De Beers and Rio Tinto are discussing ways in which they can protect their mining assets. They are moving towards developing a new ISO standard for diamonds that may be able to protect the diamonds value changing from the illegal penetration by synthetics but unless this has the teeth of a legal process like the Kimberly process it will remain voluntary and ineffective.

What do you do when you are an economist and you do not know how much something is going to cost? The answer is simple enough- get rid of your problem by simply making  an assumption! Economists are infamous for their assumptions and when it comes to something like mine costs at such an early point they are no different. I, along with other economists did some analysis of what is likely to happen to government revenues as a result of these extra deposits.

I assumed that the  new 600 Mcts could not be extracted without a capital investment  equivalent in real terms to the equivalent of three Cut 8s i.e. about  100 billion real pula over and above what investment was likely to be in early resource assessment until the end of the mine in 2050. Even if you assumed that the quality of the Orapa diamonds would increase for a number of years the surprising result is that the revenue projection for Botswana is not that much different than that  which existed without these discoveries. There is still a decline in government revenue over the next  35 years but not a fiscal cliff.

This of course makes perfect sense if you understand the logic of mining. Operating costs and Capital expenditure (capex) is going to rise as the mine gets bigger and deeper. Under the 25 year contractual agreement between the Government and De Beers in 2004  the government of Botswana gets 81% of what is called ‘free cash flow’. Free cash flow is the operating profit minus the capital expenditure or Capex. So as the costs rise as the hole gets bigger government will get less revenue. One day even Jwaneng and Orapa will close and unless we have diversified the economy or created a Fund for Future Generation like the Norwegians and the Qataris then Botswana’s children could well be much poorer than they are today. But there is no fund for future generations and that is why economic diversification is so important. Unfortunately after 35 years of trying the government has not succeeded in diversifying the economic base of the country. Botswana is now as dependent, if not more,  on diamond exports than it was 30 years ago.  

The extra 600Mcts of diamonds will not save Botswana, they will increase revenues by several tens of billion pula over what we could have otherwise expected but it is unlikely to make that much difference. In my estimates the extra revenues are equal to approximately of P42 billion over 35 years. If the capital cost of  expanding Orapa and Jwaneng is significantly lower (50%) then the benefit of the extra diamonds will be a more significant at some P80 billion over 35 years and while it is a significant increase in revenue it is still not enough to turn the country around.

As much as those economists in the government enclave would like to avoid what so many of them say is the impossible problem of Botswana’s economic diversification they cannot because the increasing numbers of unemployed youth will find a way of reminding them. In the end the obligation of those who govern must be to diversify the economy is the one thing that will provide jobs and along with it the peace and stability of the nation.

These are the view of Professor Roman Grynberg and not necessarily any institution with which he may be affiliated.    

The State of the Botswana’s Minimum Wage and the Working Poor

The State of the Botswana’s Minimum Wage and the Working Poor

A very wise economist once taught me that if all that it took to eliminate poverty amongst working people was to pass good laws then they would have been passed by good men and women a long time ago. If we want to raise the standard of living of those at the very bottom of the nation’s wage structure then the solution lies is simply raising their wages and their poverty would go away. Right? Well many economists would argue that if you raise the minimum wage significantly then workers will be simply be laid off and replaced by machines or the businesses would simply close. In some cases this is absolutely true. In many businesses the cost of wages paid to workers on or close to the minimum wage is such a low proportion of total cost that it frankly almost does not matter. But an increase in minimum wages will also results in what economists call changes in wage relativities ie. the wage of the person at the bottom compared to those above that really is the main effect of raising minimum wages.   

Falling Real Minimum wages

Why do countries like Botswana have a minimum wage? It is for reasons of fairness and justice. As those at the bottom of the wage structure usually have no unions and no economic power to negotiate a living wage with their employers the only institution that can protect them from an exploitative wage is the state. While there is a conflict between the competing pressures on government of protecting the poor from exploitation and not leaving business uncompetitive Botswana has done poorly in terms of protecting the wages of  the weakest workers. Between 1993 and 2014 the minimum wage went up for most of the categories ( excluding agricultural workers , domestic workers etc) from P1.25 to P4.50/hr. If however, you are a domestic service worker the minimum wage in 2014 was  P2.5/ hr or P20 per day. This is slightly higher than the global level of absolute poverty of $1.25 (P12.5) per day but not by much.  But when you look at what has happened to  the minimum wage after you take into account inflation, the so-called ‘real minimum wage’ then the worker at the bottom is much worse than in 1993 and he or she can buy much less. It would take an increase of approximately P1.40 per hour just to get the people on minimum wages back to where they were 20 years ago. The whole world has become more unfair and more unjust than twenty years ago and Botswana is certainly no exception.

When I spoke to one senior government economist about this he said the reason is that during the recession that started in 2008 the government did not want to see more people lose their jobs so it capped minimum wages right up until 2012 when it began to note the obvious fact minimum wages had fallen massively in real terms after the 7-10%  inflation of this period . This meant a very substantial fall in real living standards of the poor during this time was evident. The real minim wage in 2013 was some 28% below the 1993 level after taking into account inflation. If the low minimum wage policy had been associated with a period of rapid employment growth then the policy may be understandable and perhaps forgivable but this has certainly not been the case. Employment has been pretty much stagnant between 2009 and the end of 2013 with 390,00 employed at the beginning of the period  and 399,000 at the end.  Economists who defend the low minimum wage policy argue that the results would have been worse if they had allowed minimum wage to rise.

Nominal and Real Minimum Wages in Botswana

Increased Wage Inequality

But how does the person on minimum wage actually compare with the average Motswana? It would not be quite so bad if everyone were suffering and all earnings were falling after taking into account inflation. But this is not the case. The average Motswana who is in paid employment was 34% better off in 2013 than in 1993 in terms of real cash earnings after taking into account inflation. So in other words while the average Motswana was better off over 20 years the people at the bottom of the wage scale became considerably worse off. What this means is the ratio  of the minimum wage ( when multiplied by a hypothetical 176hours of work per month) to the average monthly income  has been falling dramatically and so Botswana is becoming much more unequal. In 1993 the minimum wage would have given you a monthly  pay packet of P220 whereas the average citizen was making P740 in terms of average monthly earnings. In other words the minimum wage was some 30% of the average. Fast forward to 2013 and the minimum wage would have earned you a monthly pay packet of approximately of P792 as compared to the average citizen who was making cash earnings of P5,009. In other words by 2013 the minimum wage had fallen to16% of the average or just over half what it was in 1993. By this standard  Botswana has become much more unfair and this really needs to be resolved for the most important economic reason.

By any international standards Botswana has one of the lowest minimum wages in the world when compared to the average income. When comparing the minimum wage as a percentage of GDP/capita, a common measure of average income, Botswana comes out as one of the lowest  amongst the 192 members of the to that of other countries. (http://en.wikipedia.org/wiki/List_of_minimum_wages_by_country). Only four or five countries like Kuwait where the minimum wage only applies to foreigners or Uganda which is a least developed country have a lower ratio of minimum wage to average income than Botswana.

What sort of minimum wage policy in Botswana ?

Some economists will tell you that you will get rich if you work hard and save and yes while it is important the most important factor in assuring the prosperity of a nation is peace, order and good government so that the citizen and business can thrive. This sort of policy induced inequality harms Botswana because it undermines the basis of social cohesion and undermines the stability of the nation. To its credit the government has already started moving in the right direction slowly by raising minimum wages since 2012 but this is just not enough. If government is modest in its objectives a P1.40 increase in minimum wages is needed just to return the poorest workers to the 1993 levels of purchasing power. If the government wanted to maintain the same ratio of the minimum to average earnings as existed in 1993 the minimum wage would have to increase to about P9/hour.

Clearly these sorts of increases in one shot would result in unemployment. They need to be introduced with time to allow the private sector to adjust where the sector uses large numbers of unskilled workers who are paid wages that are close to the minimum wage. But the government equally must be seen to recognize that we have a problem that undermines social cohesion and  the peace of the nation. This it must do publicly.

In those industries where there are many workers who are close to the minimum wage and would be effected by an increase such as in diamond cutting which competes directly with India  the government needs to help the union and the employers introduce productivity bargaining and move the entire sector to a tax free export processing zone as is the case in Namibia. (Almost no diamond cutting firms pay corporate taxes so little would be lost in terms of government revenue).

Neither  charity nor good minimum wages … just good jobs!

In the end though the condition of the poor in the country can only be alleviated by sustained economic growth. Minimum wages must protect the weakest in society and the evidence is that they have failed to do so in Botswana which, according to international measures ranks amongst the most unequal nations on earth. In the end though, neither acts of charity nor good minimum wage will help the poor. Workers the world over know that it is good, productive and well paid jobs  that is the only thing that will eventually drag them out of poverty. And in this we have failed the most.

These are the views of Professor Roman Grynberg and not necessarily those of any institution to which he may be affiliated.

 

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.