Issues in prices and incomes policy in Zambia

34078 Issues in Prices and Incomes Policy in Zambia by mark Leiserson David Lindauer oey Astra Meesook Parita Suebsaeng The World Bank February 1984  Contents Page I. Introduction. ............................................... 1 I.1 The Background of the Prices and Incomes Commission... 1 I.2 Prices and Incomes Policy: Rationale and Objectives 3 II. wage Guidelines and Controls . .. .................. . 6 II.1 Government Objectives and Wage Guidelines ........... 7 II.2 Collective Bargaining Settlements .................. 11 II.3 Government Wage Decisions .......................... 14 II,4 Nonunionized Wages and Salaries ....o ................ 18 III. Price Controls: when Good Intentions Backfire .............. 22 II1.1 Agricultural Producer Prices ................... ... 23 II1.2 Prices of Essential Commoditiesn...*...o ts............ 25 III.3 Prices of Parastatal Products ...-o ucts............... 29 II1.4 New Directions ................ ....... . .......... .... 31 IV. The Role and Operational Responsibilities of the Prices and Incomes Commission.m.m..i ..... . .... 35 V. Wage Administration and Employment Policies in the Public Sector: Suggestions for a Collaborative Work Program..............o 41 Annex I: Wage Trends After Independence.................... 48 Annex II: Data Requirements. ..... o.................. . ........ 57 Appendix .....o. .................68  S 4 Issues in Prices and Incomes Policy in Zambia I. Introduction this paper presents some preliminary findings and views on wage and price policy issues facing the Prices and Incomes Commission (PIC). Following indications by the Chairman of the PIC that he would welcome assistance from the World Bank, a mission visited Zambia in May - June 1983. 1/ This paper is intended for circulation and discussion in the PIC, the Ministry of Finance and others in the Zambian government to broaden the awareness of the types of issues which will have to be dealt with by the PIC and the importance of coordination among the various policy-making units within the government. It is not a formal World Bank report; rather, it should be seen as an informal paper which raises a large number of issues and opens up more areas for investigation than the PIC is likely to be able to carry out. The intention is to present the views of World Bank staff on the areas which should be given priority by the PIC and to propose a work program for collaboration between the PIC and the World Bank in one of these areas, namely public sector pay policy. I.1 The Background of the Prices and Incomes Commission Following the recommendations of the TUrner report, the Prices and Incomes Commission Act of 1981 established the Prices and Incomes Commission -/ The mission consisted of Mark Leiserson and Oey Astra Meesook. A memorandum (dated June 9, 1983) was given to the Chairman of the PIC at the end of the mission summarizing our initial findings.  -2- and provided it with a very broad general mandate along with some quite specific responsibilities and powers. Formally its principal functions are to recommend policy actions to the government and to report on their implement- ation. However, in the case of collectively-negotiated wages, the PIC has been empowered by a 1983 amendment to the Industrial Relations Act to disapprove of or amend any agreement which does not conform to the government's wage guidelines. The ratification of collective agreements had previously been the responsibility of the Industrial Court. A "statutory instrument" to give the PIC similar authority over wages and salaries for nonunionized categories of employees is expected to be issued shortly. With these broad legal powers over wage and salary adjustments, the PIC is faced with the task of how they are, in fact, to be exercised and administered. The position of the PIC with regard to price regulation and control is both more complex and less clear. Under its legislative authority the PIC is responsible for making general recommendations on price policy; making specific recommendations for price levels of any "controlled" good or service; and investigating and reporting to the government on the implementation of price control. With the general decontrol of prices in early 1983, it is not clear precisely where or how government influence over price developments is being exercised. The basic price control legislation has not been repealed and the government still maintains close control over the pricing of agricultural output and a selected number of commodities by the parastatals. Since overall pricing policies in Zambia are undergoing fundamental reform, the PIC will need to anticipate how its role in pricing decisions should evolve.  -3- 1.2 Prices and Incomes Policy: Rationale and Objectives Price and wage policies are properly viewed as integral parts of any system of national economic management. Decisions taken with respect to different economic sectors in the process of carrying out development policy have implications for the levels and movements of prices and wages and, con- versely, direct decisions concerning prices and wages will have repercussions on the levels of production in different sectors of the economy and on the level and pattern of consumption. The formulation of a comprehensive prices and incomes policy necessarily implies that the interrelationships between wages, prices and other economic variables are explicitly and simultaneously examined within a context and forum in which the interests of different parties can be weighed against one another, including those of unorganized groups whose well-being may otherwise be slighted in general policy discussion. Thus, the objectives of prices and incomes policy are those shared with other areas of economic and social policy. They include the achievement and maintenance of internal and external financial stability; the fostering of economic growth and full employment; the efficient use of natural, human and capital resources; the reduction of wage and income inequities; and the protection and enhancement of basic living standards. A number of special economic and institutional features provide further rationale for a comprehensive prices and incomes policy in Zambia. First, the country is heavily dependent on foreign trade, with a concentration of exports in copper and other metals. This situation entails both great potential benefits and substantial vulnerability to international economic fluctuations. Given the recent deterioration in the external terms of trade facing Zambia, a critical question is how government actions, market forces  -4- and institutional arrangements determine who will absorb the resulting income losses. Second, the Zambian domestic market is small and many industries are characterized by monopolistic situations. The government may therefore have a role through pricing policies to intervene in an attempt to protect consumers from the higher prices and lower output levels monopolies tend to offer. Third, because of the dominance of the government and parastatal sectors in the formal sector labor market, government decisions concerning public employment and wages have a major effect on the formal sector as a whole, as well as on the government budget. Rather than being able to use private sector wage levels as a yardstick, the government finds itself having a major impact on wages and salaries throughout the formal sector whenever it takes action concerning wages or employment of its own civil servants. This fact needs to be taken into account by the government in the formulation of an overall prices and incomes policy. Finally, given the size and strength of the trade unions in Zambia, the formulation of wage and price policies may provide the opportunity for government, management and labor to reach a consensus on wage and price adjustments. Without some such mechanism for reaching a consensus, the resolution of competing interests may prove to be more difficult. Against this background, the policy concerns which can be considered to come under the purview of the Prices and Incomes Commission and for which the Commission would want to take some responsibility include short- run stabilization and inflation control; market structure issues of efficiency and equity; the management of the public sector, that is to say employment and wage issues in the government and parastatals; poverty alleviation and distributive issues; and industrial relations and dispute settlement. The  -5- Commission will of course have to define its role in terms of policy analysis and to select which issues it needs to focus on, subject to its functions as set out in the legislation. In its deliberations and operations the Prices and Incomes Commission will need to distinguish between short-run problems, which have to be dealt with as part of the country's macro-economic management, and the longer-term issues of structural changes. In the short-run, the PIC can be expected to be consulted on wage and price issues which arise in connection with, for example, exchange rate adjustments, fluctuating external terms of trade, government expenditure management and inflation control. It is in this context that the PIC became involved in the issuance of guidelines for, and administration of, the 10% wage ceiling imposed in connection with the recent standby agreement with the IMF. However, it is also crucial that the PIC give due consideration to the question of the longer-term development of the Zambian economy. Among the specific policy instruments for which advice and recommen- dations by the Prices and Incomes Commission should be most influential are wage-price guidelines, price control levels and pricing regulations, wage con- trols and labor market regulations, government wage levels and wage structure, and parastatal pricing and wage decisions. In the next two sections, we discuss a number of specific issues related to wage and price policy formulation and implementation.  -6- II. Wage Guidelines and Controls Until the recent establishment of the Prices and Incomes Commission, Zambia had no central agency which was charged with the responsibility for formulating an overall prices and incomes policy. A number of institutions, for example the Office of the Price Controller in the Ministry of Commerce, were in place for regulating the levels of key prices and their rates of increase, whereas attempts to influence the rates of increase in wages and salaries were neither comprehensive in coverage nor systematically applied. Nevertheless, the government has had a great deal of influence over rates of nominal wage increases in the formal sector. First, it is respon- sible for setting the salary scales in the civil service which alone accounts for over one-third of total wage employment. Second, it has in the past attempted to influence wage decisions in the parastatal sector from time to time in individual cases. Eventually, the frustration of the competition offered by the parastatal sector and the perceived need for the public sector to catch up with it periodically were behind the government's decision to forge a unified salary scale for the public and parastatal sectors in the late 1970's. Finally, the government has attempted to influence the wages of unionized workers through the issuance of wage guidelines. However, without clearly-defined objectives with regard to overall wage policy and without direct means of enforcing wage guidelines, the government has not until recently been in a position to influence the rates of increase in the wages of unionized workers in any systematic fashion. Now that the Prices and Incomes Commission has been given legal authority to ratify, modify or reject collective agreements, it could become a powerful instrument for ensuring compliance of government wage guidelines for the vast  -7- majority of the formal sector work force. Since a 'statutory instrument' to give the Prices and Incomes Commission similar authority over the wages and salaries of nonunionized employees is expected to be issued shortly, the potential degree of government control over wage decisions in the formal sector will be quite far-reaching. In the following sections, we shall deal separately with issues of government objectives and wage guidelines, collective bargaining settlements, government wage decisions, and nonunionized wages and incomes. II.1 Government Objectives and Wage Guidelines Table 1 summarizes government attempts to set general wage guide- lines, government wage decisions regarding the civil service, and key wage settlements in the mining sector over the past two decades or so. Although government preoccupation in the area of wage policy has been increasingly with wage restraint, this has not always been the case. The wage scales for Afri- cans and non-Africans were completely distinct up to 1961, while the period 1961-1967 saw a gradual movement towards a unified nonracial pay scale which was marked by large pay increases in all sectors, the unification taking the form of a rise in African wages to meet those of non-Africans. The impetus to this development came from the unification of pay scales in the mining sector following the recommendation of the Brown Commission in 1966 to raise the wages of Africans by 22%. Thus the objective of reducing the gap between the levels of pay for Africans and non-Africans was achieved largely through wage increases. A somewhat different official wage policy started to emerge after the first Turner report in 1969. Since then government wage policy has  . 'Ia e Oa *l a : t * 1 -- *5 N jJ a.e _ c O4 n al a. C C n 4 V i = - B * C'. a