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The essay is about the impact of the strike embarked by Transnet workers and the subsequent wage increases on the South African economy using the AD-AS framework. The AD/AS model is used to illustrate the Keynesian model of theÂ business cycle. Movements of the two curves can be used to predict the effects that variousÂ exogenousÂ events will have on two variables: realÂ GDPÂ and theÂ price level. Furthermore, the model can be incorporated as a component in any of a variety of dynamic models (models of how variables like the price level and others evolve over time). The AD-AS model can be related to theÂ Phillips curveÂ model of wage or price inflation and unemployment. (http://en.wikipedia.org/wiki/AD-AS_model) Inflation is the overall general upward price movement of goods and services in an economy(often caused by an increase in the supply of money), usually as measured by the Consumer Price Index and the Producer Price Index (investor words; 2010). Two labour unions representing 85% of Transnet's workforce insisted on a 15% rise which is well above inflation of 5.1%.
Transnet is the largest and most crucial part of the freight logistics chain that delivers goods to each and every South African. Every day Transnet delivers thousands of tons of goods around South Africa, through its pipelines and both to and from its ports ( http://www.transnet.co.za/). Port and railway infrastructure and services are very significant from an economic point of view. Such infrastructure and services facilitate the movement of goods and services and labour, i.e., it allows trade to occur. It would be very difficult for trade, both from a domestic and international point of view, to occur without port and railway infrastructure and services. Port and railway infrastructure and services are therefore a significant economic enabler (COETZEE; 2010)
Johan Botha, an economist at Johannesburg-based Standard Bank Group Ltd stated that South Africa's economy may lose "billions of rand" if a strike that has shut ports and rail lines and slashed exports of metals, wine and fruit to Europe and Asia, isn't resolved. Economist Mike Schussler said: "The Transnet strike probably cost the economy R300 million to R500 million a day. We do not have exact figures, but that is what we think the impact is." Various other economists have predicted that South Africa could lose as much as R15 billion because of the strike and, couple this with the estimated R30 million's worth of damages caused by strikers, and it's quite clear that the cost of a strike is incredibly pricey.
The strike affected harbours and caused the following:
A "build up" of vessels
Decrease in handling containers
On-loading of, for example, citrus fruit and wine has stopped completely
Off-loading of soccer world cup related imports only
The above have the following direct consequences:
Products ready for exporting must be stored. Non-delivery leading to contracts being terminated.
Increased costs of storage.
Loss of revenue implications for cash-flow.
Products needed in the production process not available and thus production "stops", for example the motor industry
Transporting of goods has "stopped". Transport companies incurring significant costs because of the delays and loosing revenue because of lack of business.
Severe cash flow implications.
The above focuses on actual GDP. Potential GDP is also negatively affected, for example:
Loss of domestic business confidence
Loss of international confidence in SA
Loss of competitiveness in the domestic economy
Increase in country risk
The long-term consequences of the above include the following:
Loss of domestic and international investment in SA
Loss of business with SA, i.e., cancellation or non-renewing of contracts, etc.
Increase in cost of borrowing money from international institutions
The impact and consequences in the beginning are not very significant, but as time progresses the impact and consequences increase at an accelerating pace. This is obviously a very dangerous situation because the social and economic loss increases exponentially. The graph below illustrates this phenomenon.
Minimum wage have a measurable effect on the rest of the economy, including the issue of inflation but a rise in theÂ inflation rateÂ is not necessarily attributed directly to a rise in the minimum wage. If Transnet was to increase the wages of its workers to 15% which is twice as high as current inflation (5.1%), it would run counter to South Africa's aim of lowering the cost of doing business. Transnet would have to either increase tariffs to customers or cut jobs, but in either case, it is a poor trade-off. If Transnet accedes to union demands, we will not only jeopardise the sustainability of the business, but also be accused of being irresponsible to the economy by establishing a benchmark for wage increases that could have a substantial knock-on effect on overall inflation rates this year. The Transnet offer is more than fair. It is generous given the state of the economy and the challenges that lie ahead of us (Maharaj; 2010)
South Africa has very high unemployment. Depending on the definition used, the latest national unemployment rate is 31% or 42% (StatsSA, 2003). This may well be the result of a rapidly growing labour force, on the one hand, and declining formal employment, on the other: the labour market may lack the flexibility to cope with this divergence (Lewis, 2002; Moll, 1993; Boccara and Moll, 1997; Fallon and Lucas, 1998). Trade unions play a role in wage determination in South Africa. Their impact was recently explored by Schultz and Mwabu (1998) using the 1993 data set and by Butcher and Rouse (2001) using 1995 October Household Survey data. In both these studies, African unionized workers received a wage about 18-20% higher than that received by African non-union workers with the same observed characteristics. This is unfair to non-union African workers and unjustified. According to me, in this situation, rich people become richer and poor people stay poor and in a country where unemployment rates are very high this is not good for the economy.