/ 11 December 2009

It’s the rigidities, stupid

A bit like Little Red Riding Hood I suppose; if I ever got to peek into the inflation basket, would I know what I was looking at? Would I, too, be seduced by the Big Bad Wolf to visit his lair, where he’d gobble me up?

I started wondering this on hearing that Bobby Godsell and Zwelinzima Vavi had called a press conference to recommend wage freezes, wage cuts, short time, delayed capital expenditure, cutting dividends and rethinking management bonuses in a bid to stem the jobs haemorrhage.

One million jobs have been lost already this year, so critics were quick to say they were closing the stable door after the horse had bolted. Godsell and Vavi know this. They co-chair the Millennium Labour Council, set up in 2000 to tackle unemployment. Apparently it has not succeeded.

The pair said every employed person supports up to five other people, meaning that perhaps six million people are affected by the loss of one million formal jobs.

If more proof of consumer distress was wanted, retail sales figures released this week show sales are down 6% on a year ago.

Vavi and Godsell’s suggestions, while sensible and practical, are intended to be voluntary, which is what they should be. There’s no need to exacerbate a bad situation by statute.

But the key question, of course, is why does it take the loss of a million jobs to get business and labour to call for measures to protect jobs?

The triumvirate of government, business and labour has been sitting on its hands during the crisis. A so-called framework agreement was reached by the three early in the year as a six-point plan to counter the recession. Much of the plan, though, was no more than requiring the competition, credit regulator and customs authorities to do their job. For the rest, the Industrial Development Corporation was to stump up R6-billion to support distressed industries, while government initiated a R2.9-billion layoff fund as an alternative to retrenchment.

Companies are meant to access the fund, but the inevitable bureaucracy has meant few workers, about 7000, are covered by this scheme to date.

Godsell is chairperson of Business Leadership South Africa (BLSA). It gave notice a few weeks back that it would enlarge its profile on policy issues. The BLSA, which speaks for 80 of the country’s biggest companies, is a member of the overall business umbrella, Business Unity SA, but Busa is seen to have been ineffective as a cohesive voice for business.

Under Thabo Mbeki’s rule big business had regular meetings with the president. This has lapsed under Jacob Zuma’s watch.

BLSA has its own issues. While it preaches efficiency, one of its most prominent members, Sasol, has been described by former Competition Tribunal chair David Lewis as a serial offender, while another heavyweight, Mittal, had a multimillion- rand fine imposed on it. This fine is now under review.

Vavi, wearing his Cosatu hat, wants lower interest rates to promote growth. So do a trio of economists, Carel van Aardt, Charlotte du Toit and Chris Harmse, from the universities of Pretoria, Unisa and a private company, Dynamic Wealth, respectively.

In research released last month they showed that only 48% of items in Stats SA’s basket, which it uses to determine consumer inflation, respond to interest rate hikes.

High interest rates do not directly moderate demand in the economy, they work only when people start losing their jobs, the researchers found. They blame structural inflation for this. This is caused by so-called “rigidities”, for instance the pricing behaviour of dominant firms which are able to put up their prices even as demand falls.

Sweetheart deals and other freebies would surely also fall into this category, for instance, the subsidised price mining conglomerate BHP Billiton pays.

We bleed jobs while it gets cheap electricity. So sensitive is BHP Billiton about this freebie that when Standard Bank’s Derek Cooper wondered aloud during the crisis in early 2008 about revisiting these contracts it threatened to pull its business from the bank.

BHP Billiton was capitalised this week at R508-billion but pulls cheap electricity from our government. You could think of this as a structural rigidity, but structural stupidity would be more apt.

Shortages of skills, technology and inputs such as electricity as well as regulatory costs and poor service delivery also contribute to an overly rigid inflation basket, according to the study.

We report in the Mail & Guardian this week that trade with China, now our largest trading partner, is 50% in the red. We send them raw materials. They send us the finished items.

This all means one thing. If the Big Bad Wolf ever shows me what’s in his basket, I’ll know that half the stuff has been subject to structural rigidities, meaning that we all are paying a very high price indeed.