During May 2010, more than half of Transnet’s 54000 employees embarked on a two and a half week labour strike to demand a 15% wage increase, three times the current 5.1% inflation rate. The strike had a major negative impact on the country’s public railway transport, coal and iron ore exports, car manufacturing imports and exports, shipping operations and schedules, and the global perishable foods market (Flak & Kumwenda, 2010). This essay will deal with the negative impacts of the Transnet strike on the economy in terms of international trade, foreign investment and employment. In doing this, the primary terms, such as inflation, imports, exports, investment and a broad overview of Transnet will be explained. To emphasize the extent of economic damage, the Aggregate Demand (AD) and Aggregate Supply (AS) frameworks, extending into the Aggregate Expenditure (AE) model, will be used to provide explanations on the impacts on the abovementioned variables and how these, directly or indirectly, impacts future inflation and the unemployment rate.
Explanations of Primary Terms
Inflation can be defined as “a positive rate of growth of the general price level” (Lipsey & Chrystal, 2007: 642). Inflation, at a national level, is measured using the Consumer Price Index (CPI), which is an average of prices paid by consumers on a constant basket of national goods and services consumed (Parkin, Kohler & Lakay, 2010: 504).
The national balance of trade comprises of net exports, which represents the difference between the balance of domestic exports to international markets and international imports into our domestic markets (Lipsey & Chrystal, 2007: 387).
Within the circular flow of goods and services, investment from foreign and private, domestic entities is considered an injection into the national economy, eventually leading to an overall increase in the country’s Gross Domestic Product (GDP). A formal definition of investment is “the act of producing or purchasing goods that is not for immediate consumption” (Lipsey & Chrystal, 2007: 642).
Transnet is a wholly-owned government public company which has established itself as an important component within the South African logistics industry. It operates the nation’s primary metal and goods transportation lines, and pipelines which transport the majority of Johannesburg’s fuel supply (Cohen & Wild, 2010). Everyday Transnet is responsible for distributing goods throughout South Africa and to its ports, where it is responsible for loading export goods containers onto ships and offloading imported goods into storage and for distribution (Transnet, 2010).
Negative Impacts of Strike
As a result of the strike, Transnet will be faced with major costs relating to delivery backlogs, additional port charges and a loss of export opportunities, which will directly affect productivity and international trade within the economy. The fruit industry suffered a loss of R1billion due to export backlogs, car manufacturers, such as BMW, was forced to pause their manufacturing line as imports of vehicle parts were not received on time, while Riaan Kruger, the Chief Executive of the SA Liquor Brandowners Association, reported that the liquor industry lost over R3million as wine exports to Europe were delayed (Speckman, 2010). Both export and import clients will be required to bear these costs. As a result, the costs of exports will be forced to rise making South African exports more competitive on the international market, eventually leading to a decrease in the demand for exports. This will cause the country’s net exports to decrease causing aggregate expenditure in the economy to fall. This, in turn, causes aggregate demand to fall, decreasing the nation’s overall GDP (Lipsey & Chrystal, 2007: 386 – 409). From the aggregate supply aspect, as input prices of imports of raw materials begin to increase, in the short run supply will decrease, again causing a fall in GDP but a corresponding rise in prices (Lipsey & Chrystal, 2007: 409 – 411).
One volatile component of the South African economy is foreign investment, on which the Transnet strike has had a threatening effect. The vehicle manufacturing industry in South Africa is ultimately dependent on the nation’s logistics operations for continuous production of their finished products. The volatile behavior of the domestic industrial sector deters much needed foreign investment as standstill production lines and delayed exports of vehicle components is counter-productive to sustaining profitability margins and investor trust (NAAMSA, 2010). Pradeep Maharaj, Transnet’s Chief of Human Resources, admits that the strike was a last resort for employees and employers alike, which also illustrates a lack of leadership on Transnet’s part. The detrimental effects of the strike could leave foreign countries concerned over being so dependent on having South Africa as a trading partner (Maharaj, 2010). It is fair to assume that investors depend on political and economical stability when making investment decisions and the impacts of the strike has caused some grave concerns. Potential and current investors may be reluctant to invest in the economy causing the investment component of the economy to decrease. As a result, overall aggregate expenditure will fall, causing a decrease in aggregate demand. This, in turn, decreases the GDP of the nation creating an even larger recessionary gap (Lipsey & Chrystal, 2007: 369 – 409).
In order for Transnet to cover the wage demands of 15%, they will have to either increase their tariffs, eventually leading to an increase in companies’ operational costs which might impact on price and wage inflation, or Transnet will have to decrease their labour force, increasing South Africa’s already high unemployment rate (Institute of Commercial Management, 2010). Recently, wages have experienced a gradual increase and Transnet is wary of being responsible of establishing a benchmark of high wage increases, which would indirectly affect overall inflation through increases in industry operational costs (Maharaj, 2010). As South Africa is in the process of emerging from a recession, these increases in input prices will cause the economy’s short run aggregate supply to fall resulting in a fall in GDP, further away from the nation’s potential GDP, increasing prices and unemployment as the recessionary gap widens (Lipsey & Crystal, 2007: 423 – 432). This reinforces that trade unions are not necessarily justified in seeking higher wage increases as industries are less willing to employ more workers, or even maintain current employment levels as the cost of employment is too high. With South Africa’s export industry suffering losses, further job losses could also be expected, which is the opposite reaction to trade union’s intentions (Flak & Kumwenda, 2010).
In conclusion, it is clear that the Transnet strike had more negative impacts on the economy than what was initially expected, due to the duration of the strike by indirectly affecting international trade, foreign investment and employment. It could also be assumed that the trend of wage inflation has intensified and even though trade unions achieved their intended goal, the backlash could be counter-productive to their initial purpose.