Realist, not conformist analysis of the latest financial, business and political news

The New Zim $ Doesn’t Cut Worker’s Wages – It Recognises Past Cuts

It’s terribly important to understand the difference between nominal and real prices changes – as here with Zimbabwe’s new currency system. When expressed in US dollars local incomes – like those of the workers – have of course changed in nominal terms. But as you never could exchange RTGS and bond notes for US $ at the listed exchange rate this hasn’t changed local real wages in the slightest.

There might well be reasons why local wages should rise and so on, but this change in the exchange rate system just isn’t one of them:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]The government’s decision to dump the United States dollar and adopt some form of local currency will hit workers the hardest as their incomes have been eroded with the floating of the exchange rate, experts have warned.[/perfectpullquote]

Another way for us to make much the same point is that the new system won’t decrease wages at all. It’s the past changes which have already reduced wages.

Just to give the quick overview. Zimbabwe was on a multicurrency system for some years after Mugabe’s lot had destroyed the local currency. Pretty much anything that could be usefully used was allowed – euro, dollars, rand, if people will use it then why not? This changed a couple of years back with the introduction of bond notes – effectively just locally printed notes – and RTGS – effectively immediate bank transfers through the central bank system. These two were, nominally at least, worth one to one with the US $.

Well, yes. Except of course the local government was terribly excited at being able to print money again and they printed lots of it. Back last month they’d done so much of this that 1 nominal dollar as a bond note or RTGS was worth perhaps 25 to 30 cents US. Which is pretty good debauching of a currency in only a couple of years.

So, just recently they decided to accept defeat. RTGS and bond notes are now worth, officially, whatever they’re worth. We’re back to a market exchange rate, not a fixed one.

OK, so that’s the background. And the workers aren’t happy ’bout their wages:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] However, labour expert Abraham Kavalanjila described the RBZ measures as daylight robbery against workers, as they eroded the value of salaries paid in local currency. “This is daylight robbery against workers,” he said. “In my view, the workers’ salaries need to be reviewed in line with what the unions were demanding. [/perfectpullquote]

Well, no. Because what is it that eroded the workers’ salaries? That’s the past decline in the value of the RTGS and bond notes. You already couldn’t buy much with them and the not much you can’t buy with them hasn’t changed this past week. The real wage, the real value of those salaries, hasn’t changed, only the nominal. Or rather, the change in the exchange rate system hasn’t changed them, it’s the previous inflation which did.

Moving to proper market prices doesn’t change anyone’s income or wage in the slightest. It only recognises what was already happening.

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