Wage restraint not helpful to the economy

In a response to the 2013 International Monetary Fund (IMF) Article IV report, economists Keith Jefferis, Thabelo Nemaorani and Bogolo Kenewendo of Econsult said that it is better to have a smaller, properly remunerated and motivated public sector workforce. The report by the trio entitled  “E-consult review of the IMF 2013 Article IV report, was released last week.

The IMF has maintained its view that the size of Botswana’s public sector wage bill, which distorts the labour market, is unsustainably large and needs to be reduced.
Jefferis, Nemaorani and Kenewendo say that government, to some extent, shares the same views regarding the size of the public sector wage bill. However, the trio believes that the way pay restraint in the public sector is implemented is not helpful to the economy. The pay restraint policy being currently practiced by the government  is characterized by only minimal pay increases in public sector wages.

“Implementing a ‘wage squeeze’ that reduces wages in real terms (i.e., after inflation), while preserving the high level of employment in the public sector does nothing to raise productivity – if anything the opposite is achieved, due to the negative impact on morale and motivation that results from the lower real wages. And eventually, wages will have to be increased,” they said, further noting that in the long-term, there is no avoiding the fact that the public sector is too large and retrenchments are unavoidable.

“Better to have a smaller, properly remunerated and motivated public sector workforce than the current situation where government is, as the IMF says, ‘employer of last resort’. If done properly, reducing the size of government should have broader beneficial effects, as long as it is done by identifying the least productive and most wasteful areas of government activity, and closing them down,” they urge.
They concur with the IMF’s emphasis on the potential importance that service sectors can play in economic diversification; an area which they say has been sluggish especially in the form of employment-creating and export-led growth.

“Service sectors have grown relatively fast in recent years, although with the weakness that this has been driven by domestic consumption (and escalating consumer debt) rather than being export focused. But as the IMF points out, service sectors are subjected to excessive restriction and regulation, and a shortage of high-skilled workers. Enabling knowledge intensive services to play a more prominent role in growth requires improving the skills base of the labour force, liberalising services sectors, and reducing the domestic regulatory burden on firms,” the Econsult review says.

For such a strategy to work, the review says there also need to be significant improvements in Internet connectivity, to ensure that the investments that have been made to date actually deliver reliable, high quality and low-cost bandwidth – which is far from the case at present.

They further state that another point that needs to be addressed in respect of services trade is the need for improved data. “At present, the availability of data on services exports – such as financial services, transportation and tourism, is very limited and cannot be used to track changes in exports, or the effectiveness of policy. In our view this situation needs to be addressed urgently – policymaking without adequate data is like driving at night with no lights,” they say.