Government Interventions Are Unlikely to Help Because They Don't Address Monopolies
The Decline of Real Wages in the Arab World
This article appears here with the permission of its author. It originally appeared in arabnews.com
by Abdelmenem Jamil AddasJEDDAH, 8 November 2004 - The basic dilemma of all Arab countries is how to solve the so-called "problem of scarcity". They pay little attention to "a fair distribution of wealth", and this must be the basic principle that underlies the production and distribution of wealth in Arab society.
The cause that increases poverty in the Arab world -- besides unemployment -- is evidently the relentless efforts on part of government and the private sector to keep wages to a minimum. This is the primary cause of corruption with all its varieties, amongst laborers in all sectors.
The term labor includes all human contribution in the production of wealth, and wages, being that part of the produce which goes to labor, includes all reward for such activity.
Wages means the return received for the efforts of labor, as distinguished from the return received for the use of capital, and the return received by the landholder for the use of land. The term wages has no distinction as to the kind of labor, or as to whether its reward is received through an employer or not. The primary reason given to the freeze of those wages is that wages are fixed by the ratio between the number of laborers and the amount of capital (as budgeted) [in a theoretical 'wage fund'] devoted to the employment of labor; and, because the increase in the number of Arab (plus the Asian labor force) laborers tends naturally to follow and overtake any increase in capital, wages constantly tend to the lowest amount on which laborers are able to live.
But the 'Wage Fund' Theory is False
The truth is that wages, instead of being drawn from capital, are in reality drawn from the product of the labor for which they are paid. In other words, labor is paid from their efforts (productivity) that add value to the product or services rendered. Thus, one can already identify the problem of Arab produce: Besides oil, it is does not add any value to the already competitive world trade. It is evident that the injustice of Arab society toward its labor is the cause of the want and misery.
Land, labor and capital are the factors of production. The term land includes all natural opportunities and forces; the term labor, all human physical and mental efforts in business; and the term capital, all wealth used to produce more wealth. In returns to these three factors is the whole produce distributed. Another Arab dilemma is the poor productivity of Arab laborers.
The persistence of the problem of scarcity means that even in the Arab oil producing countries, decisions have to be made regarding how the various scarce resources should be directed to the satisfaction of all of its society's members. Look over the Arab world today. You will find distress among the working-classes because the limited resources are monopolized and opportunities are available to very few. Look over the world today, comparing different countries with each other, and you will see that it is not the abundance of capital that makes wages high or low, but the extent to which the monopolizers of resources have control in their respective society. Let us take the case of Saudi Arabia -- the Saudi government is now awash in revenue, owing to the high oil prices. Saudi's hidden taxes are more costly to many citizens and residents than an average Western income tax. Between the payroll taxes (10 percent) that go to GOSI (General Organization for Social Insurance), the very high electricity and telecommunication costs, import tariffs, various government restrictions on the business community, the potential of VAT, and let us not forget the Saudization campaign [programs to train Saudi nationals to build their skills and enable less reliance on foreign labor], Saudis are far more highly taxed than it would first appear.
Free Enterprise, Not Force
Why is that wrong? In a free enterprise system, people are supposed to decide for themselves whether to consume, save, or invest; they can't depend on a fixed portion of peoples' income via government. A new forced saving program such as GOSI's will compete with existing voluntary savings, and ironically reduce the amount people put away for retirement. Moreover, when government is involved in the process, it also influences the direction of market competition. Bureaucrats, not private investors, end up picking the corporate beneficiaries and, therefore, corporate losers. No firewall between the pension manager and the government is thick enough to forestall that unhappy fate. For the past 25 years, Saudi Arabia has imported almost all its laborers from Asia, who have contributed toward the development of our country and are major contributors in our economy today.
The forced imposition of Saudization on Saudi and foreign companies are but a hidden tax which will be added to the cost of the final product, and is by all means another form of "protectionism" while the rest of the world is moving toward free trade. Again there has been talk of introducing "minimum wage" in Saudi Arabia; it will only increase unemployment, especially among the poor, by making work illegal. Introducing minimum wage will hurt many workers, who are thereby priced out of the market. But among those who keep their jobs, their wages will increase but they will pay more in taxes to the government (GOSI).
Like inflation, introduction of the minimum wage is another form of taxation as well. It will provide billions in new revenues to GOSI.
If Saudization leads to higher wages this will also mean that workers will be required to be more productive. Employers make tradeoffs to accommodate the change. They will reduce the quality of working conditions and/or pass their added costs to us, the consumers. The government should not intervene in the business community, our society and country are supposedly based on "free market economy" and the "ultimate sovereignty to all producers and consumers".
The government wants to interfere in order to force businessmen to conduct their affairs in a different way than they would have chosen if they had obeyed only the consumers. Thus, all the measures of interventionism by the government are directed toward restricting the supremacy of consumers. The government wants to arrogate to itself the power, or at least a part of the power, which, in the free market economy, is in the hands of the consumers. After all, "that government is best, which govern the least".
Abdelmenem Jamil Addas is a professor of financial markets, at the College of Business Administration. He is based in Jeddah, Saudi Arabia.
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