South Africa's civil service strike has crippled state institutions and may cost the economy billions of rands, while the impact of higher wages could push up inflation and interest rates.
The strike, which has closed schools and caused chaos at state hospitals for more than two weeks, has highlighted the ideological divide between the business-friendly policies of the African National Congress government, and its labour allies.
Economists say it is difficult to count the cost in lost productivity, but some estimate it may be as high at 3 billion rand ($418.1 million). The impact on investor confidence, too, was hard to quantify.
More worrying, they say, was the effect high wage demands will have on inflation and, ultimately, monetary policy.
"Inflationary expectations and wage demands right across the economy may have gathered momentum (so) actual inflation may be higher than previously anticipated, and then interest rates may have to go up," Econometrix economist Azar Jammine said.
"That is far more damaging for the economy ... it will depress economic activity in the longer term."
Powerful trade union federation, and ANC ally, COSATU and other unions are demanding a 10 percent pay hike for civil servants. The government has upped its offer to 7.25 percent, although some employees, such as nurses and teachers, will get as much as 50 percent more when medical and housing benefits are included.
Should the unions, which collectively represent about 60 percent of the country's nearly 1 million public servants, accept the state's offer the pay rise will still outstrip the central bank's 3 to 6 percent inflation target. This would heighten rising inflationary pressures.
SNOWBALL EFFECT:
South Africa's Reserve Bank raised its repo interest rate by 50 basis points to 9.5 percent earlier this month to tame price pressures sparked by higher oil and food costs.
Adding the 200 basis point increases of the second half of last year, the upward rates cycle is bound to knock annual economic growth off the average 5 percent achieved over the past three years.
Central bank Governor Tito Mboweni has repeatedly warned that excessive wage hikes will fan inflation, and may force interest rates even higher. The strike kicks off traditional winter salary talks, with other private sector unions eagerly watching the pay outcome.
"To put it simply, that will create the benchmark and other sectors and industries will demand higher wages ... it's like a snowball effect," Jammine said.
Political analysts say the strike, which began on June 1, has turned into a demonstration of workers' power, pitting labour against President Thabo Mbeki's market-friendly economic policies.
It comes just weeks ahead of a crucial ANC policy meeting that will set the agenda for discussions at the 5-yearly conference of the ruling party in December - when the ANC will also choose a leader to succeed Mbeki.
The new leader of the party is a shoo-in for the presidency of the country when Mbeki's second term ends in 2009 due to the ANC's overwhelming electoral support.
Union leaders, therefore, are unlikely to be easily persuaded. "The unions think they have the government over a barrel because the elections are so near," Kristin Lindow, South African analyst for international ratings agency Moody's, said.
"I think the government will hold the line but there are a lot of people that don't expect they will be able to," she said.
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