Salary Adjustment In Liberia: Does It Drive Permanent Productivity?


By Dr. Musa Dukuly



The Perspective
Atlanta, Georgia
July 19, 2015

                  



 
 
 
 
Ellen Johnson Sirleaf

Reviving Liberia’s economy, which is still enduring lot of postwar socioeconomic challenges, and most recently the shock of health crisis, calls 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 appear biased towards political sentiments, which potentially risk the achievability of critical development agenda. Every public worker supports better incentive that the current government is somehow commendable for upgrading. I guess the burden on the government, added year by year, is too huge to fully assume responsibilities left by donors and also settle the high wage bill.

Recent policy decision of government 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 maintain the current (aggregate wages) and avoid explicit upward adjustment in ‘current (aggregate) wages’ in the medium term. This latest decision simply contravenes theoretical view 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 this money growth is usually directed at 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 GDP of 2 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 reserve remains lower than GDP (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 single 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.  It appears that the country however focused heavily on upward salary adjustments over the years.

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 postwar 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 benefits.

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.

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 senior economist at the West African Monetary Agency (WAMA) based in
Freetown. The views expressed in this commentary do not represent WAMA. Email:  suawantiwar@yahoo.com

Efessayf
The tragedy of the commons is basically a dilemma between doing what’s good for you as an individual versus doing what’s best for the group”. “Now it stands to reason that people behave selfishly. But if too many people behave selfishly, the group will suffer…and then everyone in the group individually will suffer.”
The dilemma was actually written about in a psych journal 25 years ago, and points to a concept called the tragedy of the commons.

– Professor Dylan Selterman, PhD, Lecturer in the Department of Psychology at Maryland.

Efessayf at 09:26AM, 2015/07/19.
Sylvester Moses
Nepotism, graft, corruption, waste, and the resistance to be held accountable are the main obstacles to reviving the Liberian economy, thus the quest for excuses to explain away the sorry state of the nation's economic health is futile.
Sylvester Moses at 05:27AM, 2015/07/20.
sylvester moses
EFESAYF,the postulation in “Tragedy of the commons” isn’t applicable to Liberia unless one equates “selfishness” with ceaseless stealing from state coffers.
sylvester moses at 02:15PM, 2015/07/20.
Ansu Dualu
Dr. Dukuly, you made some great points especially the setting up of a commission to review salaries across the govt. I have been calling for this since 2010 - Read "The Modernization Guide for Liberia". However, your argument that the reduction in salaries could stifle economic activities does not make sense neither does it subscribe to the Keynesian wage theory for three principle reasons: 1. 95% of those targeted to get reduced wages do not spend the bulk of their wages in Liberia - it has little to no impact on local economy; 2. higher wages in the case of Liberia does not translate into higher performance simply because the society/established laws do not demand it; 3. the group targeted for reduction is very small when compared to the larger population! Although in theory your suggestions carry a lot of weight in this particular case; in practice, it has little validity.
Ansu Dualu at 09:34AM, 2015/07/28.
Musa Dukuly
Thanks Mr. Dualu.

My arguments are made in the context of economics. Reducing the wage of any worker would induce different behavioral attitude towards the job. if you read the historical argument between Keynes and A.C Pigou, you would note that the former dissented on the latter's view about cutting wage to increase employment. Here is the reason ' 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. 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 other hand, I argue about the potential impact of high wage lagging behind productivity. This is true for Liberia. Cases in point refer to UL (not effectively functional), Ministry of Education (struggling to takeoff again), General Auditing Commissioner (performance declining), etc. The net effect is more money chasing few goods---inflationary emanating from possible fiscal pressure to support the high wage.

Lastly, I argue that lack of basic social services inevitably transferred high cost on all income earners (public or private). Increasing or cutting the wage does not mean that anyone of those in the wage category would enjoy better welfare, in absence of quality social services.

I agree with you tha the 5% of the public workforce(President, Parliamentarians, Ministers, etc) who you think are likely to be affected control good chunk of the budget. The policy, other incentives, travel etc of the 95% are managed and controlled by the 5%, indicating that trickle down of any adjusted wage policy could inevitably impact on the 95%.
Musa Dukuly at 04:54AM, 2015/08/10.
sylvester krah
Dr. Dukuly let me first of all express my gratitude to you for such a brilliant and practical economic analysis.
Due to the high level of unemployment and very low incentive rate in the Liberian economy, it will be very difficult for people to realistically visualize the economic reality of your article.

Given the high cost of living and low disposable income of employees,the greatest anticipation of every Liberian employee is increase in income.

I understand the core objective of your article to be the relationship B/W socioeconomic fundamentals and the proposed increase in disposable income.

From my understanding you are not against any form of propose increase in salary but rather supporting the concept of government providing more socioeconomic fundamentals such as hospitals, school etc that will help reduce the consumption cost of the very employees.

Rudimentary economic will clearly tell you that it makes no economic sense if you increase a man disposable income from 100 to 150 when the cost of education is 225.

The actual economic comfort is not merely found in salary increase but rather the consumer ability to purchase at affordable cost it what matters. socioeconomic fundamentals must be provided by government and affordable.

Increment in salary does not require an abrupt approach because government is going to assume a permanent wage liability.
It is ardent hope that the Liberian government will take this article very seriously.

Sentimental appeasement must never overshadow critical economic reality because there will certainly be an economic shocks.
sylvester krah at 09:47AM, 2015/08/26.
Musa dukuly
Thanks for compliments and accept my apologies for the belated clarification on your comments.

This article is policy driven for principal stakeholders in major policy oriented institutions of government as well as Liberian intelligentsia such as you.

It is because of the high cost of living that the article advocates for implicit salary increment. It makes no sense to offer me an explicit increment in disposable income from 150usd to 1000usd when I eventually have to seek medical treatment in Ghana or another foreign country as well as spend bulk of the income to pay school fees.

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