Reviving Liberia’s economy, which is still enduring lot of postwar socioeconomic challenges, and most recently the twin shocks of ebola and commodity decline, called for intense pragmatism. It is evidently glaring that the momentum of the economic impact is too severe to get the country at pre-war levels within the span of two decades. Few of our economic policies (especially those related to wages and allowances adjustment) often appeared biased towards political sentiments, which potentially risk the achievability of critical development agenda. Every public worker supports better incentive. In developing countries, there is often trade-off between high monetary incentives and financing of development agenda. I guess the wage burden on the government, which has been added year after year, is too huge to fully assume responsibilities left by donors and also settle the high wage bill.
Recent policy decision by President Weah regarding wage adjustment to mitigate the short to medium term economic stress motivates this thinking. Moreover, the thought of this article is driven by continued desire for salary increment without thoroughly predicting the economic risks of sustaining a high wage bill. One does not require a sophisticated modelling to detect the problem of how productivity in most of our public institutions lagged behind high wages in such a fragile economy. Since 2010, I pre-empted imminent built up of fiscal pressures from ‘high wages’, because the economic fundamentals aimed at propelling a sustainable economic take-off are not strong enough. I catalogued those issues in one of my commentaries title: Liberia’s economic nationalism: Be wary of Salary Increment.
The simple economics is that any small adjustment in salary impacts taxes (prices) and the expenditure pattern of economic agents (employees), although not necessarily proportionate to the rate of salary adjustment. Thus, the recent intention to cut current (aggregate) wages is welcome, but a better approach is to rationalize the current (aggregate wages) and avoid explicit upward adjustment in ‘current (aggregate) wages’ in the medium term. Decision to adjust wages downward is contravention to the theoretical proposition of Keynesian wage theory. Public workers plan their expenditures on expected disposable income (and other benefits), suggesting here that downward adjustment in expected wage could undermine the government intention by reducing productivity and possibly inducing rent-seeking. On the macroeconomic perspective, increased incentive for public workers indirectly reflects a rise in money supply growth, which could adversely affect the economy if productivity does not exceed the growth in money. This is precisely the picture of Liberia where minimum component of the money growth is usually directed to the production of quality output (capital goods) to ease high cost of living, or influence production, except for road reconstruction.
Interestingly, any decision to adjust wages cannot be divorced from the country’s economic performance to sustain the high wage bill. The country’s current GDP of about 2.3 billion USD is amongst the lowest compared to other countries with almost similar population size (See Trinidad and Tobago,
Botswana, Panama, Mauritius, etc). The external reserves remain low (inadequate to address macroeconomic shock) while the national budget is almost two thirds the size of GDP. The real sector remains underdeveloped with heavy reliance on exports of primary products (iron ore and rubber). Inflation hovered around double digit, albeit at heavy cost to the monetary authority. Foreign aid (budget support) as a proportion of GDP remains low. HIPC initiative was timely, significantly eroded foreign debt and created more fiscal space for increased public investments. Over the years, the country however focused heavily on upward salary adjustments, which is gradually becoming an unmanageable burden.
The statistics implicitly reflects the huge uphill challenge of resuscitating Liberia’s struggling economy. Compounding the problem, public workers still regard increasing incentive (salary) as the sole solution of strengthening productivity, instead of economic agents (government and employees) recognizing that productivity cannot outpace its full capacity limit in the absence of strong socioeconomic fundamentals (education, housing, transportation, energy, health) at affordable costs.
I am in concurrence with the theoretical precept that attractive salaries enhance employees’ happiness, accelerate productivity and minimize rent seeking, but not under weak economic fundamentals evidently visible in Liberia. The two components (attractive incentives and better livelihood) are inevitably integrated. A sound policy strategy for a fragile economy such as Liberia is to intensify development of socioeconomic fundamentals, which would enormously lessen the purchasing pressures on economic agents (especially employed household) and implicitly increase wages. This strategy could mean taking the direction I call ‘implicit salary’ adjustment. Implicit salary describes the phenomenon of making quality services available (especially in public institutions) at low cost so that economic agents can enjoy wide ‘budget space’ to seek better welfare (directly or indirectly) domestically.
It is absurd to hike emolument of economic agents (public employees) when good proportion of salary is spent on services (i.e education or health mainly from private sources) and food (money illusion). Amazingly, every employed Liberian (especially public employees, ministers, parliamentarians, etc) persistently seeks for higher salary/incentive. Less emphasis has always been put on implicit wage increment, which has greater welfare implications.
The prevailing economic stress on the government provides a good inference about the curse from high wages. Demand for wage increments could mean higher taxes or increased prices, and possibly reduced employment, which does not assure permanent happiness (money illusion). This shows that the country’s economy will continually be susceptible to macroeconomic threats (fiscal deficits, inflation, current account deficits, high unemployment, etc).
However, Liberia can still reverse the problem. First, Ad hoc Salary Review and Allocation Commission (Constituting professionals from civil society, religious body and former statesmen who understand the mechanism of government, economics and management) should be set up to review and determine wages for all government workers, including executive (president) and legislators. This Commission could reduce the political motive often associated with salary increment and employment.
Economic agents should embrace implicit wage increment as basis for permanent productivity through low cost ‘quality’ socio-economic services. Quality social infrastructure would implicitly boost wages via cost reduction on household to acquire quality education, medical treatment, housing and transportation.
Those in the helm of public leadership should exhibit nationalism in the management of state resources. Workers should avoid strikes, because it only exacerbates the problem of increased economic uncertainty, whilst fixed resources (money) are available for government to pay workers.
More income should be generated domestically through sustainable investments for the wage growth to be sustained. The country should identify a specific threshold (hypothetically: 0.5% or 0.6% increase in salary after every three, four or five years) for future salary increment, but economic pre-conditions (hypothetically: increase in real GDP averaging 5-8% in every 4 years) for the increment should be clearly defined.
About the Author: Dr. Dukuly works as principal economist at the West African Monetary Agency (WAMA) based in Freetown. The views expressed in this commentary do not represent WAMA. Email: firstname.lastname@example.org
By Musa Dukuly (PhD)