Coen Welsh | Nov 14, 2017 | 0
The end of stagflation is a collapse of the system
Against the background of commercial endeavour as reflected, for instance in the Windhoek Show, the business sector at large, is beset by a spate of unresolved labour crises, fuelled in no small measure by the continuous string of nasty, high profile strikes in neighbouring South Africa.
Looking at the series of actual strikes and brewing strikes, it is easy to fall in the trap of reducing this social phenomenon to a simple matter of income versus rising living costs. We, similar to many other places in the world, are caught in a classic stagflation situation. This convoluted word indicates the condition where prices continue to rise while incomes remain static or lag behind growth in living expenses.
There are many elements to the stagflation dynamic, some of them relating to the business environment and others stemming from social conditions. The complexity of the mix is further increased by a spectrum of expectations from employees as well as employers.
Where stagflation has taken root in an economy, companies see their profits shrinking despite all efforts to counter this. Mostly due to conditions outside their control, input costs keep rising while the ability of customers to absorb these higher costs, diminishes. In conventional economic jargon this is often described as “margins under pressure”, or even by the much simpler expression of reduced profitability. But this is not the exclusive domain of corporate entities.
Private households are just as much subjected to the same eroding principle of stagflation. Incomes, although steadily rising, simply do not keep up with the price rises of consumer goods. It is also not a novelty on the African continent. During the late seventies and early eighties, it was more the rule than the exception for most Africans in almost all the economies of southern Africa. But then the explanation was relatively simple. The world has just emerged from a major contraction that followed in the wake of excessively high oil prices. As far as I can remember, this is the only other period in recent history, where most of the world found itself in a synchronised downturn. For us in Africa it had disastrous effects and the majority of African debt crises had its origin in this period.
But for most of the young generation, this series of events is far removed from today’s life. It is something that happened ‘a long time ago’ never to be repeated again. That was until four years ago when exactly the same thing happened, only now it affected entire economies and entire populations.
I believe we are going to experience serious strikes for a number of years to come. In essence, these strikes, as manifested already in the current round of labour unrest, are not materially different from any other strike anywhere else in the world, except for one major distinction. Today’s strikes are driven by a psychology still based on the good times, where companies could be forced to pay higher wages based on the simple expectation that next year, turnover and profits, will be bigger.
As one of the consequences of the financial crisis, we are now living in a world where future prospects are generally less than what they were a few years ago. I think the best way to capture this in a concise formula is by stating that, for the next decade or perhaps longer, we shall live in a world of diminished returns. Not only is this demonstrated by the almost continuous strikes, but it will become more manifest as companies post smaller and smaller profits in relation to turnover, as we progress along this curve of slower growth in profits but faster growth in input costs.
The current condition of the economy is not one of simple inflation. In an inflationary environment, the purchasing power of money is eroded, but the cake as a whole keeps growing, and everything else with it. One can describe it almost as a simple bookkeeping exercise to keep adjusting the value of all items upwards. When stagflation hits, the dynamics change fundamentally.
It is marked by upheavals and an inability to adjust. The missing ingredient is the promised growth of the future. Eventually it leads to an exhaustion of resources, either of the companies or of their employees, or both, and the system collapses.
This is what we have to keep in mind whether we are union leaders or parastatal managers.