Will to survive, succeed vital
Wednesday, April 23, 2008
The high salaries and security of the public sector has made most Bruneians turn to the government for jobs and to generally shun the private sector. However, unlike the public sector, salaries and wages in the private sector are determined by performance and productivity. Businesses are underpinned by profitability and financial risk bedevils all of them. However, instead of being business-friendly, it is the bureaucratic red tape of the civil servants that is responsible for increasing the business profile risk. PEHIN DATO RAHMAN KARIM in this third of a four-part series explores this public/private sector dichotomy and argues against imposing a high wage policy on the private sector to entice the voluntarily unemployed.
THE proposal of an artificially high wage policy would in fact effectively vitiate the specific cost reduction intended by the recently announced (cautious) reduction of the company tax rate from 30 per cent to 27.5 per cent (The Brunei Times, March 7, 2008). We believe the reduction is to make Brunei Darussalam more competitive in terms of business profitability, especially to attract foreign direct investments.
This government cross-purpose could easily confuse people. It also poorly reflects the disjointed quality of national economic management.
This rekindles our amusing experience in 1972 in Japan when undergoing a United Nations Economic Development course. There were two Indian Government officials in the class. One from the south, the other from the north. They would regularly argue about their country's economic policies, rather than we had the opportunity to discuss and question their (Indian) economic policies. The daily exciting scene was that the Indian official from the north was always supported by the Pakistani official. We, the uninvolved , got confused, but amused! (Please refer also: "What's holding India back? Failure to reform a bloated civil service is putting the country's huge economic achievements at risk"- Editor, The Economist, March 8, 2008).
For a business (local and foreign owned) to survive and hopefully grow, the basic business economics is that it must consistently obtain net profits. But if merely to entice, cajole those voluntarily unemployed "to work" in the private sector, their salaries and wages are higher than the actual average productivity and market price of the product/service and the actual real market rate of the salaries/wages, then the artificially increased salaries/wages are in fact a Cash Surplus to those enticed, cajoled "employees". This Cash Surplus is in fact an Economic Rent to those "employees".
What had been efficiently done at the free market wage of, say $2,000 per month per employee is now being done by artificially raising the wage over and above that $2,000 per employee to $3,000 per month per employee. Hence inefficiency sets in. Thus the Economic Rent is $3,000-$2,000=$1,000 per employee per month!
This Economic Rent , the Cash Surplus, is equivalent to Cash Sedakah to those "employees".
The serious flaw of this artificially imposed high minimum salaries/wages on the private sector is in fact against the basic principle of equity in Islamic socio-economic-finance practice. Work diligently first and then you will get paid for the work done at the agreed wage, Insyallah. And that your rate of pay/wages is equal to your value of your work effort.
So regarding Cash Sedakah (alms) the Holy Quran clearly reminds as thus:
If a share of alms is given to them they are contented , but if they receive nothing, they grow resentful. (Surah Al-Tauba (9): Verse 58).
"Charity is not halal for the rich or the able-bodied," Hadith.
Thus, what would these "enticed employees" do if the business could not continue to pay their artificially imposed Economic Rent?
Another acute question is what is the "right" salary/wage increase that would be the tipping point for those unemployed to be effectively persuaded "to work" in the private sector?
Obviously the tipping point must be equal or higher than the salary structure of the civil servants with their financial perks and social status as orang kerajaan, who hold power, who decide your future.
In the private sector you don't have that "perception of power and authority". So to be at par, should we also create an artificial aura of "power and authority" for those "enticed employees" to work in the private sector by designing "suitable uniforms of authority" for them? Duduk sama rendah, berdiri sama tinggi. Gap, melangkah kanan, melangkah kiri. Mata melirik, dagu diangkat tinggi! Exuding the aura of authority!
Then there is this another sugar candy recommendation that "the public sector needs (the government) to set up a Fund for the private sector because the salary provision (in the private sector) is not attractive enough to lure local graduates". This is so simplistic a prescription to the extent that they forgot from where will the government obtain those "cash gifts" to pay for them? What would be the category of firms/SMEs that could be eligible? What workforce level would be eligible? How much per "enticed employee" would be the cash gift? Would the cash fund be used as pension or gratuity for payments?
The potential for abuses and mismanagement is so real, so numerous.
Recently the government has expressed its concern about the heavy costs of the subsidy on petrol. Now the government is asked to entice people to work by dishing out a special fund for them. We have been notoriously branded as a spoonfed society, now it is suggested that we should reinforce the image of crutch mentality.
They say too much sugar taken for a longer period will cause diabetes, particularly so if one is lazy to exert oneself by doing strenuous exercise.
The simplistic prescription of artificially increasing the salaries/wages to a higher imposed minimum rate implies that the private sector is at fault, exploitative.
Firms are now acutely conscious of their socio-economic responsibility; they contribute to socio-entrepreneurship; they willingly contribute when they can afford, not because they deliberately refuse to do so.
This is not a linear cause and effect situation, so mechanical. Kick on the accelerator that car will shoot to victory.
Then what about tyres, the condition of the roads, the weather, the safety of other road users, and the potential danger of accidents?
Business economics and finance are complex, delicate and easily misunderstood. It is not simply a case of you will know the answers if you ask the right questions.
They are the integral, inherent parts of human beings: their culture, attitude, upbringing , the environment, the social company are involves in, experience, feeling of responsibility and accountability even one's religion, personal preference, the will to survive and succeed and be a good asset to society, active, hardworking human capital.
The points expressed above can be visualised by using diagram C:
DL: Demand curve for labour in the private sector
SL: The total national labour supply curve.
OL2: The total stock of labour supply in the country.
OL1: The portion of the total labour supply OL2 that is willing to be employed at wage W0 = D0=D00
Out of OL1, only OL0 is lucky to get employed at wage W0=D0, at the actual labour demand curve DL
L0L1 is the pool of labour that is willing to work at wage W0=D00 but unable to get a job. Thus "involuntarily" unemployed.
L1L2 is the pool of graduates that is not willing to work at wage W0. They are "voluntarily" by choice prefer to be unemployed, (unemployment by choice). They will be willing to work only when the wage level is artificially raised well above W0, say, at W1, at W2, or at W3.
The situations being reflected in the diagram have an Islamic bearing. In Islamic perspective, no human resource should be sitting idle, voluntarily unemployed.
Allah (SWT) hates persons of sound body and mind who sit idle.
Also begging as a "profession" is prohibited and dependence on others (including on the government) is disliked.
Thus, merely to entice, to please the core of "voluntarily" unemployed L1L2 to work the actual demand curve DL is artificially pushed, shifted to (imaginarily) DDLG at the wage level W1, or to (imaginarily) DDDLG at the wage level W2. To completely absorb the "voluntarily" unemployed L1L2 the wage level is artificially pushed up to W3 at demand curve (imaginarily) DDDDLG.
But at the national level, the macroeconomic problem is that the state of the economic development of the country could only absorb a total job of OL0, that is, the total industries could only absorb OL0 at wage W0.
That is L0L1 and L1L2 would under normal circumstance could not be employed because the actual market demand is only DL, employing L0 at W0 = D0.
Persistent economic growth can shift DL to the right to absorb some L0L1, and/or some L1L2.
So for a firm being forced to raise wages from W0 = D0 to W1=D11, or to W2=D12, or to W3=D13 at L0=D0 employment level just to merely entice those voluntarily unemployed L1L2 to work would not only be financially corrosive to the private sector but macroeconomically insidious to the country.
Thus, another adverse side effect could be that with the sluggish national absorption capacity, any beneficial increase in the marginal productivity due to the enticed employment of L1L2 could not be absorbed by the existing sluggish market condition.
Therefore, the resultant increase in the total wage costs (caused by W1, or W2, or W3) would over time force the firm to retrench its original OL0 workers to L0LLD in order to absorb a portion of L1L2 at W1 = D1 on DL curve, or to make a further retrenchment to L0LDDD when the wage level is forced from W0 to W2 = D2. Or to make more further forced retrenchment L0DDL when the wage has been forced to W3 = D3, in order for the firm to survive.
Yang Dimuliakan Pehin Orang Kaya Lela Raja Dato Seri Laila Jasa Haji Awang Abdul Rahman bin Haji Abdul Karim DSLJ, PJK was formerly Permanent Secretary of the Ministry of Finance and the Ministry of Defence. The views expressed by Pehin Dato Rahman Karim are his own and do not necessarily reflect those of The Brunei Times.
THE proposal of an artificially high wage policy would in fact effectively vitiate the specific cost reduction intended by the recently announced (cautious) reduction of the company tax rate from 30 per cent to 27.5 per cent (The Brunei Times, March 7, 2008). We believe the reduction is to make Brunei Darussalam more competitive in terms of business profitability, especially to attract foreign direct investments.
This government cross-purpose could easily confuse people. It also poorly reflects the disjointed quality of national economic management.
This rekindles our amusing experience in 1972 in Japan when undergoing a United Nations Economic Development course. There were two Indian Government officials in the class. One from the south, the other from the north. They would regularly argue about their country's economic policies, rather than we had the opportunity to discuss and question their (Indian) economic policies. The daily exciting scene was that the Indian official from the north was always supported by the Pakistani official. We, the uninvolved , got confused, but amused! (Please refer also: "What's holding India back? Failure to reform a bloated civil service is putting the country's huge economic achievements at risk"- Editor, The Economist, March 8, 2008).
For a business (local and foreign owned) to survive and hopefully grow, the basic business economics is that it must consistently obtain net profits. But if merely to entice, cajole those voluntarily unemployed "to work" in the private sector, their salaries and wages are higher than the actual average productivity and market price of the product/service and the actual real market rate of the salaries/wages, then the artificially increased salaries/wages are in fact a Cash Surplus to those enticed, cajoled "employees". This Cash Surplus is in fact an Economic Rent to those "employees".
What had been efficiently done at the free market wage of, say $2,000 per month per employee is now being done by artificially raising the wage over and above that $2,000 per employee to $3,000 per month per employee. Hence inefficiency sets in. Thus the Economic Rent is $3,000-$2,000=$1,000 per employee per month!
This Economic Rent , the Cash Surplus, is equivalent to Cash Sedakah to those "employees".
The serious flaw of this artificially imposed high minimum salaries/wages on the private sector is in fact against the basic principle of equity in Islamic socio-economic-finance practice. Work diligently first and then you will get paid for the work done at the agreed wage, Insyallah. And that your rate of pay/wages is equal to your value of your work effort.
So regarding Cash Sedakah (alms) the Holy Quran clearly reminds as thus:
If a share of alms is given to them they are contented , but if they receive nothing, they grow resentful. (Surah Al-Tauba (9): Verse 58).
"Charity is not halal for the rich or the able-bodied," Hadith.
Thus, what would these "enticed employees" do if the business could not continue to pay their artificially imposed Economic Rent?
Another acute question is what is the "right" salary/wage increase that would be the tipping point for those unemployed to be effectively persuaded "to work" in the private sector?
Obviously the tipping point must be equal or higher than the salary structure of the civil servants with their financial perks and social status as orang kerajaan, who hold power, who decide your future.
In the private sector you don't have that "perception of power and authority". So to be at par, should we also create an artificial aura of "power and authority" for those "enticed employees" to work in the private sector by designing "suitable uniforms of authority" for them? Duduk sama rendah, berdiri sama tinggi. Gap, melangkah kanan, melangkah kiri. Mata melirik, dagu diangkat tinggi! Exuding the aura of authority!
Then there is this another sugar candy recommendation that "the public sector needs (the government) to set up a Fund for the private sector because the salary provision (in the private sector) is not attractive enough to lure local graduates". This is so simplistic a prescription to the extent that they forgot from where will the government obtain those "cash gifts" to pay for them? What would be the category of firms/SMEs that could be eligible? What workforce level would be eligible? How much per "enticed employee" would be the cash gift? Would the cash fund be used as pension or gratuity for payments?
The potential for abuses and mismanagement is so real, so numerous.
Recently the government has expressed its concern about the heavy costs of the subsidy on petrol. Now the government is asked to entice people to work by dishing out a special fund for them. We have been notoriously branded as a spoonfed society, now it is suggested that we should reinforce the image of crutch mentality.
They say too much sugar taken for a longer period will cause diabetes, particularly so if one is lazy to exert oneself by doing strenuous exercise.
The simplistic prescription of artificially increasing the salaries/wages to a higher imposed minimum rate implies that the private sector is at fault, exploitative.
Firms are now acutely conscious of their socio-economic responsibility; they contribute to socio-entrepreneurship; they willingly contribute when they can afford, not because they deliberately refuse to do so.
This is not a linear cause and effect situation, so mechanical. Kick on the accelerator that car will shoot to victory.
Then what about tyres, the condition of the roads, the weather, the safety of other road users, and the potential danger of accidents?
Business economics and finance are complex, delicate and easily misunderstood. It is not simply a case of you will know the answers if you ask the right questions.
They are the integral, inherent parts of human beings: their culture, attitude, upbringing , the environment, the social company are involves in, experience, feeling of responsibility and accountability even one's religion, personal preference, the will to survive and succeed and be a good asset to society, active, hardworking human capital.
The points expressed above can be visualised by using diagram C:
DL: Demand curve for labour in the private sector
SL: The total national labour supply curve.
OL2: The total stock of labour supply in the country.
OL1: The portion of the total labour supply OL2 that is willing to be employed at wage W0 = D0=D00
Out of OL1, only OL0 is lucky to get employed at wage W0=D0, at the actual labour demand curve DL
L0L1 is the pool of labour that is willing to work at wage W0=D00 but unable to get a job. Thus "involuntarily" unemployed.
L1L2 is the pool of graduates that is not willing to work at wage W0. They are "voluntarily" by choice prefer to be unemployed, (unemployment by choice). They will be willing to work only when the wage level is artificially raised well above W0, say, at W1, at W2, or at W3.
The situations being reflected in the diagram have an Islamic bearing. In Islamic perspective, no human resource should be sitting idle, voluntarily unemployed.
Allah (SWT) hates persons of sound body and mind who sit idle.
Also begging as a "profession" is prohibited and dependence on others (including on the government) is disliked.
Thus, merely to entice, to please the core of "voluntarily" unemployed L1L2 to work the actual demand curve DL is artificially pushed, shifted to (imaginarily) DDLG at the wage level W1, or to (imaginarily) DDDLG at the wage level W2. To completely absorb the "voluntarily" unemployed L1L2 the wage level is artificially pushed up to W3 at demand curve (imaginarily) DDDDLG.
But at the national level, the macroeconomic problem is that the state of the economic development of the country could only absorb a total job of OL0, that is, the total industries could only absorb OL0 at wage W0.
That is L0L1 and L1L2 would under normal circumstance could not be employed because the actual market demand is only DL, employing L0 at W0 = D0.
Persistent economic growth can shift DL to the right to absorb some L0L1, and/or some L1L2.
So for a firm being forced to raise wages from W0 = D0 to W1=D11, or to W2=D12, or to W3=D13 at L0=D0 employment level just to merely entice those voluntarily unemployed L1L2 to work would not only be financially corrosive to the private sector but macroeconomically insidious to the country.
Thus, another adverse side effect could be that with the sluggish national absorption capacity, any beneficial increase in the marginal productivity due to the enticed employment of L1L2 could not be absorbed by the existing sluggish market condition.
Therefore, the resultant increase in the total wage costs (caused by W1, or W2, or W3) would over time force the firm to retrench its original OL0 workers to L0LLD in order to absorb a portion of L1L2 at W1 = D1 on DL curve, or to make a further retrenchment to L0LDDD when the wage level is forced from W0 to W2 = D2. Or to make more further forced retrenchment L0DDL when the wage has been forced to W3 = D3, in order for the firm to survive.
Yang Dimuliakan Pehin Orang Kaya Lela Raja Dato Seri Laila Jasa Haji Awang Abdul Rahman bin Haji Abdul Karim DSLJ, PJK was formerly Permanent Secretary of the Ministry of Finance and the Ministry of Defence. The views expressed by Pehin Dato Rahman Karim are his own and do not necessarily reflect those of The Brunei Times.
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