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Public servant salaries

Anis Chowdhury
*** A comprehensive incomes policy is needed to ensure that wage increases are linked to productivity growth, and to check unscrupulous profiting by business. In the absence of a comprehensive incomes policy, wage adjustments for inflation would be a knee-jerk policy response. ***
PUBLIC servants' salaries are in the news. The government is apparently considering raising the salaries of government servants in view of the recent rise in inflation, but many arc concerned about the inflationary impact of salary adjustment. The Daily Star in its editorial (March 20) has rightly highlighted the folly of such a policy response, which may end up in the vicious circle of a wageprice spiral.
In my column on "The Inflation Worry" (The Daily Star, January 28), I argued that "... (the govern ment) must not cave in to the demand to raise wages of public servants. This will be most dangerous, as it will add fuel to the inflationfire."
Once the wage-price spiral takes hold, the government will eventually be forced to act with contractionary macroeconomic policies, which is likely to harm the economy. We are likely to see increased business closures due to credit squeeze, and cuts in government development expenditure, both causing a rise in unemployment and declines in long-term economic potential.
Thus, the anticipated policy response will be counterproductive in the long run.
There can be many reasons for adjusting civil servants' salaries. First, this should be part of civil service reforms aimed at making service more efficient and creating disincentives for corruption. Therefore, the rationale for a civil service salary hike should not be based solely on the inflationary adjustment argument.
Real wages must be maintained, but extreme care is needed to prevent the wage-price spiral. This is possible only through a comprehensive wages and prices policy, referred to as "incomes policy.” Such a policy is required to prevent aggressive behaviour from both business and labour in the catching up race, which results in the passing of wage rises to prices.
A comprehensive incomes policy is needed to ensure that wage increases are linked to productivity growth, and to check unscrupulous profiting by business. In the absence of a comprehensive incomes policy, wage adjustments for inflation would be a knee-jerk policy response.
In my earlier column. I suggested non-inflationary ways of adjusting public servant salaries. They can be adjusted upward by paying with savings certificates, or by making increased contributions to their pension funds.
The government can also consider expanding the housing scheme for public servants to lessen pressure on their living expenses. It is reported that the government is likely to revise the budget for the current fiscal year by downsizing the development budget and expanding the revenue budget (The Daily Star, March 10). The government's planned increase of public servant salaries may be linked to the reported readjustment of revenue and development budgets.
If that is the case, then it would be the most irresponsible policy response. While reduction in the development budget will damage the long-term potential of the economy, hence the supply of goods and services, increased salary will simply add to demand, causing prices to rise at a faster rate.
If the government decides to expand the housing scheme for public servants as compensation for higher living expenses, then the development budget should rise. Even though it may have to be financed through budget deficits, which can be inflationary in the short-run. it is unlikely to create the vicious circle of a wage-price spiral. Furthermore, such a program will create jobs and. hence, create income for the poor.
The government can also compensate the public servants by subsidising high quality health services for their families and education for their children. This will be less inflationary in the long run, even though it needs to be financed through a deficit.
If the reported increase in revenue budget is for such a program then there should not be any concerns, but that does not have to be matched by a reduction in the development budget in order to maintain an overall balanced budget or a moderate level of deficit. This kind of program adds to long-term potential, hence dampening effects of inflation.
The private sector can also consider such programs. Professor Salim Rashid of the University of Illinois at Urbana-Champaign has floated the idea of a compact village. Large private sector employers, such as owners of large garment factories, can build multi-storied accommodation facilities with well-serviced schools, health-clinics and recreational facilities for their workers as part of their employee compensation package. This will not only reduce industrial unrest, but also enhance productivity and, most importantly, international image in a world which is becoming increasingly concerned with labour rights.
We can expect the private sector to act if the government leads by example. If the government raises the civil servant salaries to adjust for inflation then workers in the private sector will demand the same. This will lead to increased industrial unrest, loss of output, and, if there is an eventual cavc-in, the economy will plunge into the devastating wage-price spiral.
Anis Chowdhury is Professor of Economics, University of Western Sydney. Australia, and Member Economic Research Group. Dhaka