Workers and Unions Structural Adjustments
Workers and Unions Structural Adjustments
Workers and Unions Structural Adjustments
C S Venkata Ratnam
International Management Institute
CONTENTS
Preface Abbreviations and Acronyms 1. 2. 3. 4. 5. 6. Overview of Structural Adjustment Design and Implementation of Structural Adjustment Economic and Social Dimensions of Structural Adjustment Economic and Social Impact of Structural Adjustment Role of Trade Unions in Structural Adjustment Conclusion
CHAPTER 1
INTRODUCTION
As the II World War was ending, in 1944 the conference at Bretton Woods proposed to restructure the international economy and created international regimes for money and trade. This proposal gave birth to two institutions in Washington, D.C. (USA) - the World Bank and the International Monetary Fund (IMF) - popularly referred to as the Bretton Wood twins as lenders of last resort to nations in need. The World Bank is a development institution. Some prefer to call it the teaching bank rather than merely a lending bank because it is supposed to be a resource where policy makers round the world are expected to learn sound economic development policies. The primary function of the IMF is to maintain an orderly system of receipts and payments between nations. On the trade front, the General Agreement on Tariffs and Trade (GATT) was launched. Safeguards were also provided to protect workers from unfair practices and to assist those who were displaced. The post-war social contract for workers sought to ensure full employment and comprehensive social welfare. For a greater part of the 1950s and the 1960s the dominant belief in several industrialized countries was that macro-economic monetary and fiscal policy should be geared to secure full employment, while micro-economic policy is expected to regulate inflation. As the post-war recovery boom began to taper off and as the oil prices inflicted heavy blows on most industrial countries, the inadequacy of the Bretton Woods order began to become apparent. Since 1970s, the world economic scene became volatile and increasingly uncertain (Krugman, 1988; 54-6): The industrial countries experienced two major recessions since the 1930s. Sharp decline in commodity prices, with the exception of oil and some food items. Volatile exchange rates since the end of the Bretton Woods system of fixed exchange rates in 1973 (also see: IMF, 1996b). Dollar fell sharply against other industrial country currencies during the 1970s and rose equally sharply during the 1980s. Inflation in the industrial countries rose during the 1970s. Interest rates too rose, but less steeply. Inflation industrial countries decelerated, but not interest rates on a comparative scale. These changes caused external shocks to most developing countries. Krugman (1988;54-108) classifies them as following:
A. 1.
Shocks arising from the Goods Market (both exports and imports):
Export shocks: Recession in industrial countries had adverse impact on both the value (price) and the volume (quantity) of commodity exports from developing countries. Even the export of manufactured goods and services also suffered. Import shocks: Mainly countries importing oil and food suffered from steep rise in their prices. Oil and food exporting countries benefited. Exchange rates and trade: When the dollar rises, dollar import prices of developing countries seem to fall less than their export prices. The adverse export effect outweighs the favorable import effect. This is possibly because prices of commodities are relatively more flexible than the prices of manufacturers.
2. 3.
4.
The terms of trade: The terms of trade is defined as the ratio of the average price of a country's exports to the average price of its imports. When a given volume of exports pay for a smaller volume of imports the terms of trade for that country can be deemed to have declined.
B. 1.
Shocks originating in capital market due to cost (determined by rates of interest and inflation) and constraints on international borrowing:
Interest rates: When interest rate increases, cost of fresh borrowings increases. Existing debt also becomes costlier, if the interest rate is not fixed, but floating. Some debt agreements fixed definite interest till the maturity of debt. The maturity of debt refers to length of payment. In floating-rate loans, the interest rates vary with changes in world interest rates. Usually floating rate is specified as a premium over the London inter-bank offer rate (LIBOR). Official lenders (World Bank and IMF) usually lend at fixed rates of interest and for specific length of time to low income countries. Middle income countries usually borrow from private commercial banks which normally insist on floating rate and for short period of maturity. When interest rates increase, the additional burden of servicing the debt must be met from fresh borrowing, higher exports or reduced imports. Inflation and debt: The burden of debt depends not just on the money value of debt, but on the extra borrowing or exports or foregone imports required to generate foreign currency needed to repay it. When world inflation pushes the dollar prices of exports and imports, the decline, if any, in terms of trade, lands the indebted developing countries in double jeopardy. Real interest rate: Interest rate minus inflation rate is the real interest rate. During 1975-79, the average world inflation was 8.9% and LIBOR , the standard interest rate for international loans, 7.8%. It favored debtors because the real interest rate was negative. But this situation changed in the 1980s and led to dramatic rise in the real cost of debt. Constraints on borrowings: The availability of debt depends on the ability of the borrower to repay. Where confidence is lacking on the borrowers ability to pay, the lenders are likely to put additional conditions to safeguard the lenders' interests. Countries with huge debt, short period of maturity and low foreign exchange reserves suffer most when there is a crisis of confidence about their ability to repay debt.
2.
3.
4.
The three approaches are not mutually exclusive. C. Internal shocks and/or autonomous adjustment: Internal shocks may be due to variety of factors such as, for instance, economic effects of political changes, including revolution and excessive expansionary policy, financed by foreign borrowing. Some countries make adjustment autonomously, even if there is no external pressure. It is difficult, however, to distinguish between the effects of external adjustment and internal, autonomous adjustment.
In the short-term, stabilization policies are adopted to check the immediate negative consequences in business cycles. They are aimed at reductions in the current account deficits in the balance of payments and the fiscal deficits to sustainable levels. In the long-term, SAP focuses on strategies for balanced and sustained economic growth with due regard for equitable distribution of incomes and wealth through economic reforms. The economic dimensions of these reforms are briefly described later in this volume. Of late, even the IMF has begun to realize that the gigantic and complex problems of heavily indebted countries require much longer-term focus. Therefore, it too began to advocate longer-term measures on the lines of structural adjustment.
Apparently, SAPs are aimed at overcoming economic crises, and contribute to economic growth. More recently they have begun to show concern for social progress and human development. SAP is not a one time action or activity, but a continuous process. As we shall see later, when we discuss the content of SAP, bulk of its thrust is based on greater reliance to market forces for determining the outcomes of the economic process of production and distribution of goods and services both at the national and international levels. Thus, we see, SAP is causing a major shift in emphasis from the government sector as the engine of economic growth to the private sector as a dominant partner in achieving accelerate rate of economic growth.
Both these phases can be parallel or sequential. In prescribing policies and programs for structural adjustment the lending institutions were merely doing their duty: borrower must convince lender about the capacity and intention to pay. When the past record of macroeconomic management of a government was unsatisfactory, the World Bank and the IMF are merely dictating terms and conditions under which sovereign governments may borrow money from them. If a country does not borrow money, it is under no obligation to adhere to structural adjustment conditionalities. It must be added, though, that structural adjustment may become desirable and imperative even if a country does not want to borrow from the World Bank, the IMF or any other international or regional financial institution or some other source. The usual terms of structural adjustment loans encourage governments to move away from central planning and subject themselves to the discipline of the market forces, drastically reduce subsidies, shift production towards tradable goods, dismantle protection to domestic industry and pursue export-led growth strategies.
Over 80 percent of the conditions are described as "supply-side" and, in the view of the World Bank, "growthoriented." They deal with "structural causes" of macroeconomic imbalance, allocative efficiency, institutional capacity (in the public sector) and the mobilization of savings and investment. They focus on production, not distribution. The social side of adjustment gets a passing reference under "social sector reforms" It is not enough for trade unions to direct or deflect their ire against the World Bank and the IMF. Trade unions must accept the reality that when national governments borrow money from international sources, they lose their sovereignty. They must take the initiative in having a national dialogue to examine aspects relating to national economic policies and consider whether structural adjustment borrowing is really necessary. They should work out ways and means to balance the budgets domestically. Structural adjustment can be driven by strategy or led by crisis. A stitch in time is considered to save nine. Similarly, when structural adjustment takes place proactively, the country and its social partners will have choices and discretion. When structural adjustment is led by crisis, even the governments lose control over their national, domestic economic affairs. When the government is subject to discipline by multi or bilateral international lenders, it has to bow to the latter's wishes and agrees to certain terms and conditions imposed by them while releasing the loans. Since such terms and conditions are usually known to affect social and labour policies, they are duty bound to consult with social partners. When such policies are externally dictated, consultations with domestic social partners is usually on matters of implementation, not policy. Understandably trade unions and often, even some employers' organizations, may consider this as a fait accompli.
Figure 1
High
Neo-Populist
Export-led
Social Adjustment
Low
Agro-export
Import-substitution
High
There are critical moments in history in general and in several countries in particular. The same industrialization strategy may have different effects at different points of time in a country as well as in countries in different phases/circumstances of growth. Standing (1991) proposes five questions to find out whether adjustment brings economic and social benefits: 1. 2. 3. 4. Will the adjustment strategy boost economic growth and per capita income? What are the welfare consequences of such strategies, for poverty, income distribution and the level and type of employment and unemployment, both in the short- and medium-term? Are there better alternatives in terms of growth and distributional outcomes, for the type of economy under consideration? If the stabilization and structural adjustment policy urged on individual countries were to be adopted simultaneously by a large number of low-income countries, what would be the likely outcome for the average country involved? Is it possible that what might "work" in some sense if only one country adopted the strategy might have very different consequences if 20 or 30 others did the same?
5.
It appears in retrospect, that more-or-less standardized SAP formulae were imposed on countries which have had different levels of industrial development and, industrialization strategies and social circumstances. It does not require too much intelligence or imagination to underline the need for a case by case approach to suit a country's specific needs and circumstances.
quick results because prolonged contractionary monetary and fiscal policies can push rates of unemployment and poverty.
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Freedom of Association and Protection of Right to Organize Labour Clauses in Public Contracts Right to Organize and Collective Bargaining Equal Remuneration Abolition of Forced Labour Discrimination (Employment and Occupation) Minimum Age
1948
CONVENTIONS TO PROMOTE ECONOMIC AND SOCIAL RIGHTS 102 122 131 142 158 Social Security (Minimum standards) Employment Policy Minimum Wage Fixing Human Resource Development Termination of Employment at the Initiative of the Employer 1952 1964 1970 1975 1982
168
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Structural adjustment efforts involve the following five basic elements from an ILO standpoint (Plant, 1994; 49): 1. Encouraging the creation of the highest possible level of productive and freely-chosen employment, in conformity with the objectives of Convention No.122, through enterprise development, improved labour market functioning and skill development. Incorporating social dimensions, including social protection and strengthened institutional capacity, in the design stages of structural adjustment programs with a view to ensuring the structural adjustment is socially, as well as economically, sound. Mitigating the social costs of adjustment through poverty reduction measures, most notably by designing and broadening the coverage of social safety nets, while ensuring that such measures are consistent with long-term development objectives. Ensuring that structural adjustment programs are consistent with the provisions of basic ILO standards, particularly the human rights Conventions as well as other ILO standards that have special relevance to particular adjustment interventions.
2.
3.
4.
5. Actively promoting dialogue and involvement of the social partners in the design and implementation of structural adjustment programs and policies with a view to achieving social consensus, while working to strengthen the capacity of workers' and employers' organizations to play an effective role in the structural adjustment activity.
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The World Bank devoted its 1995 issue of the World Development Report to discuss the challenges facing workers in an integrating world (World Bank, 1995). the IMF adopted a declaration on Cooperation to Strengthen the Global Expansion in 1994 (IMF, 1994; x) which was revised at the 47th meeting of the Interim Committee of its Board of Governors and adopted a new declaration called the, Partnership for Sustainable Global Growth (Box...). The 1996 declaration calls for employment oriented labour market policies, recognises the role of human resource development, investments in social sectors and provision of well targeted and affordable social security nets. Both the institutions began to incorporate social concerns into their programs and create new measures such as extended structural adjustment facility (ESAF), social development funds (SDF), debt reduction/ restructuring/rescheduling. The last mentioned aspect is discussed in detail in the next chapter. Clearly, what was accomplished so far in sensitizing the international community and the myriad other stake holders, including the trade union activists and union members about structural adjustment and its impact is not enough.
12
CHAPTER 2
13
If the government it self does not have choice and discretion, how can it provide these to the other social partners? Often, when the government signs agreements on dotted lines to save itself of embarrassment of defaulting loan or arranging resources to pay for critical (and sometimes even non-critical imports?) Therefore, while ideally social partners should be consulted in formulating the strategy of structural adjustment, often it takes place at the implementation stage. Trade unions and other social partners who object to external conditionalities of SAP have a major responsibility in taking keen interest in the management of their economy to ensure that the country manages its affairs within its own means. When the situation goes out of control and if the intention is to bring it back to normal, if external financing is considerable undesirable, trade unions should work with their national governments in bringing about adjustment to expenditure cuts or switches or capital market adjustments. In other words, trade unions can object structural adjustment loans and some of the attendant conditionalities, but not structural adjustment per se. When structural adjustment takes place with external borrowing, the decision-making power, to an extent, extends beyond the borders of a country. When structural adjustment can be accomplished without external borrowing, a country retain its sovereignty. But in an increasingly interdependent unequal world, it is doubtful whether any developing country can survive with a strategy of isolation, absolute self reliance or sheer import substitution. How will the process of negotiation of SAL begin? A country may respond to the problem and go for a loan. Alternatively, lenders can exert pressure on a country in the event of an imminent default. Once it is clear that the immediate solution of the problem requires external borrowing, assessment is made, conditionalities mentioned as part of the loan package, and after negotiations between the government and the lending institutions agreement is made. The program goals are reviewed against actual performance and the lending institutions make their own audit, look for gaps, if any, between what was agreed and what was accomplished. Since disbursements are phased, actual disbursements are usually contingent on actual performance. When mid-term evaluations bring additional insights, program objectives may be modified or as it happened over the years, additional thrust is placed on the social side of adjustment. Where inevitable, as per guidelines on debt reduction/rescheduling or restructuring, debt or debt service burden is reduced.
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India: Tripartite consultations began in India in 1944, but remained inactive from the early 1970s until recently. The implementation of an adjustment programme since 1990 revived the participation of social partners, without lending a serious dislocation of the program. The mood of confrontation changed to one of greater acceptance of the inevitability of structural adjustment. In addition to normal tripartite consultation mechanisms, a special tripartite committee was set up to oversee structural adjustment related matters and another six industrial tripartite committees were revived to focus on sectors where the incidence of sickness was considered rampant. The discussions are leading to evolving a national minimum wage and the evolution of broad principles on the approaches to dealing with sick units in both the public and the private industries. Special attention was focused in examining each case of sickness in about 58 out of 240 central public sector undertakings. Workers and employers representatives arrived at an agreement on the reasons for non-performance in loss-making enterprises and in textiles, steel and pharmaceutical, tripartite agreements were reached on revival of sick units. A special fund, called, the National Renewal Fund (NRF), was established with representation for both workers and employers representatives. The NRF is supposed to fund voluntary separations of surplus labour in sick units, assist their retraining and redeployment and contribute to the regeneration and rejuvenation in industrial areas in decline. Mexico: Mexico too has a long-tradition of tripartite consultation where the bargaining power of the different social partners had been quite uneven. In 1987, when the government introduced a major change in the adjustment policies it was pursuing since 1982, a tripartite Social Pact, called Pacto, was signed. It is revised and renewed periodically. This Social Pact seem to have contributed to the recovery of first stability and later growth, taking the country out of its economic crisis and enabling implementation of a more effective adjustment program that involved greater sacrifices from workers.. But, the unanticipated and unprepared 1994 crisis puts a question mark on the intrinsic value of such consultations. Philippines: In Philippines too there is along tradition of tripartite consultations. Given the political polarisation, tripartite meetings create opportunities to share views than generate consensus. They have also provided opportunities to arrive at some principles or guidelines on wages and related issues. When there is a deadlock, the government made final decisions. Zambia: The transition from one-party rule to democracy paved the way for consultation with social partners on structural adjustment and related issues. Tripartite agreements have had considerable impact in the areas of labour law reform and labour market policy through the Tripartite Consultative Labour Council. The Government is well aware of the establishing influence that opposition to structural adjustment had on the previous regime, and is hopeful that greater participation by the social partners will make painful structural adjustment measures easier to accept. However, the limited experience permits only tentative inferences, not firm conclusions.
When one is considering international experiences, it is useful to learn not just about the mechanisms or fora for consultation and the declarations or statements or agreements reached at such fora, but go deep into actual implementation of the agreements and the underlying difficulties, if any. Structural adjustment measures pose deep dilemmas both for unions and employers. Competition, privatization, technological change, mergers, acquisitions and various forms of adjustment and/or restructuring bring about changes in the dynamics of unions and industrial relations at the enterprise level. They also impact and impinge on diverse groups of workforce in diverse ways. The resulting divisive influence may pit one group of workers against the other and one union against the other. Certain groups of workers and certain unions may lose and others may benefit. For instance, certain adjustment measures may have adverse affects on unskilled workers while skilled workers may benefit. In cases where both groups of workers are represented by different unions, the impact of such adjustment would be perceived differently by both the unions. Similarly employers also face dilemmas. Take for instance devaluation. Those manufacturers who produce goods with a high import content and who cater mainly to the domestic demand usually oppose it since it would push up their costs. But the predominantly export-oriented manufacturing units and a section of those who deal in foreign trade welcome it. When it comes to liberalization, local employers typically prefer domestic liberalization to occur first and globalization or competition across borders to be allowed only after some time so that the intervening time can provide opportunity for preparing a level playing field. SAP usually entails major paradigm shifts in the governance of the economy, management of enterprises and policies concerning labour, labour markets and labour market institutions. Resistance to the reforms needed for adjustment is common in most, if not all the countries. The only way the resistance can be dealt with in a sustainable manner is by caring for the concerns of all those involved and /or affected by the changes. Change
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should be seen as beneficial and worthwhile by all the social partners rather than by one more groups only. This requires consultation and cooperation within and among groups at each constituency (i.e., labour/unions, management/employers and government, at bipartite and tripartite levels). Adjustment programmes also involve huge political risks for political leadership. Broad-based political support and coalitions need to be worked out. Generally employers have been more supportive of the reforms than trade unions (Venkata-Ratnam, 1993). But in many cases, even such employers organisations who initially endorsed SAP began to circumspect as they began to experience some of the adverse effects of adjustment. Political support for SAP is possible when all concerned see the gains outweigh the pains during the transition and within the shortterm itself. Economic crisis and other pressures for restructuring at enterprise level is resulting in greater consultations at enterprise level with a view to develop cooperative attitudes and approaches. What Fashoyin (1990) wrote about the developments in Nigeria in this regard is applicable to other developing countries as well: The current level of cooperation between unions and management (cooperation which has developed for the most part outside the established consultative machinery) is no doubt a transient phase, not destined to lead to an end to adversarial relations. On the other hand, the introduction of fundamental economic restructuring will emphasize the competitiveness of industry through deregulation and privatization and thus increase the need for labour-management cooperation to improve the efficiency of enterprises. In the final analysis, the question then seems to revolve around the fact of economic recovery and growth and genuineness of both parties commitment to security of employment as a joint union-management objective.
MONITORING ADJUSTMENT
Trade unions should look at the following documents relating to their country if they want to understand the relevant issues relating to SAP in their own country, the policy framework/prescription, the criteria for measuring outcomes and the perception of constraints as between the Brettonwood twins and the national government: Country Assistance Strategy (CAS) Country Economic Memorandum (CEM) Policy Framework Paper (PFP) Performance Audit Reports (PAR) Project Completion Report (PCR) Staff Appraisal Reports (SAR), etc. These documents contain basic information, assessment of lending institutions, policy prescriptions, performance audit, evaluation of constraints, and responses and commitments made by borrowing country at various stages. Often they contain more information than is generally made public either in the formal channels or through discussions in parliament, media and other channels. These are documents released for official use only. But trade unions as social partners representing the working class in national economic and labour institutions can ask for copies either from the World Bank and the IMF direct or obtain them direct through the concerned ministry in the national government. In addition to the above, the World Bank has created Adjustment Lending Conditionality Implementation Data Base (ALCID) at its headquarters in Washington, D.C. which provides comprehensive global picture about the conditions imposed on each of the countries undergoing SAP and the extent of their compliance. For independent assessments, they would also benefit from looking at country reports published by such agencies like the Economic Intelligence Unit of the Economist and the (London), debt tables and world development report issued annually by the World Bank. The World Employment Report (first of which was published in 1995) and the World Labour Report published by the ILO and the Human Development Report published by the UNDP also provide useful comparative pictures on several social trends in different countries. The Staff Working papers
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published by the IMF and the World Bank, the monographs and reports on sub-regional and regional conferences and the governing body of the ILO and other UN agencies also contain a gold mine of information. The following issues deserve special attention in examining the modus operandi for monitoring the impact of adjustment. 1. It is important to design monitoring system such that the causal relation between various components of adjustment policies and measured outcomes can be clearly established. It is equally important to look for direct and indirect impacts, short-term and long-term effects and intended and unintended consequences. The lending agencies would focus on monitoring with reference to their policy objectives. They compare planned policy changes with actual policy changes and actual changes in macroeconomic indicators with projected figures. They are likely to focus on macroeconomic variables such as the following: Fiscal indicators (% of GDP) Government savings - central, state, total Debt services/tax revenues - central, state, total Investment (% of GDP) Public Private Public Enterprise (PE) Reform PE profit/losses Rates of return to capital Other Efficiency Indicators Risk Assessment Political stability (consistency) Social and political reaction to adjustment (commitment risk) Continuity in policies (credibility) Slow supply response risk (lukewarm private investment and import shortages) Unforeseen exogenous shocks (slow growth of world trade, inadequate balance of payments support, etc.) Labour Market Indicators Productivity Public sector employment In addition, from borrowers' point of view, the following indicators also are important: Total External Debt Volume of debt External debt as % of GNP External debt as % of export of goods and services Debt service as % of exports of goods and services Ratio of present value to nominal value of debt (%) 3. In addition to macroeconomic variables, the social trends also should be monitored. The UNDP Human Development Report has, over the years, developed several measures including the following: Basic Indicators Average annual growth of population (%) % population in labour force (sector and gender-wise)
2.
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GNP per capita (US$) and percentage share of income or consumption (Gini index, lowest 10% onwards) Purchase power parity per capita (US$) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Prevalence of malnutrition (% under 5 years) Adult illiteracy (%) Other Key Socio-economic Indicators Measure of poverty (defined income/consumption level) Poverty (% poor to total population) Inflation Unemployment (open unemployment, disguised employment and underemployment Employment in formal sector (% of the total workforce) Trends in nominal and real wages Minimum wages Access to education, health, housing and social security The problem with social indicators is that usually the project documents do not provide targets or quantitative framework for assessing the social dimensions of adjustment. Also data is dated, hard to find and often unreliable. Many performance audit reports of the World Bank often confess that in the absence of firm data, definite answers about the nature and extent of social impact of reforms are not possible. 4. Monitoring through projections based on past experience is inappropriate to gauge the impact of SAP. When structural changes take place through adjustment, past assumptions become irrelevant. For example, when technological change has diminished employment intensity in manufacturing, we can project employment generation potential of fresh investments, foreign or otherwise, based on earlier assumptions. Therefore there is a need for a review. There should be multiple channels or sources of information and feedback. Exclusive reliance on surveys and statements prepared by those who have responsibility for implementation should be avoided. A combination of quantitative and qualitative, perceptual (questionnaire surveys) and factual, official and nongovernmental (for instance, community monitoring) inputs should be built into the monitoring system. van der Hoeven (1991) gives the example of nutrition project in Iringa, Tanzania, where communities were empowered to monitor and indicate nutrition problems. Community participation in monitoring social progress is one of the most effective ways. At least, community inputs should figure prominently in the feedback system. Monitoring should provide for some form of early warning system for social indicators so that preventive and proactive steps can be initiated well in time to ward off potential social crises. While the Social Dimensions of Adjustment Program (SDA) in Africa funded by the UNDP and the World Bank have improvement of statistical data collection and analysis as one of the objects, it is often found that in some countries the capacity and willingness to generate and make available timely, systematic, valid and reliable data and information leave much to be desired. Social partners - particularly trade unions - should take active interest to study such inadequacies and initiate action to overcome such limitations..
5.
6. 7.
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MACROECONOMIC POLICY
Fiscal policy has four broad goals: (b) show fiscal prudence; (b) check inflation; (b) maintain a stable real exchange rate; and, (d) let capital market function efficiently.
Fiscal prudence. Whether it is an individual, enterprise or a nation, it is preferable to live within ones means. Budget deficit per se may not be too bad, but the limits to its size depend on how it is financed: increase taxes, print more money, borrow in domestic markets, foreign sources, or both. There is a limit to taxation. Higher taxes may bring down compliance levels and fail to get more revenue. Printing money beyond a point can be inflationary. Money borrowed has to be repaid with interest, defaults, carry premium on servicing the debt. It is also important to consider where the money is going and why? Fiscal prudence is therefore considered necessary.
The indicators of fiscal prudence include: (a) level of taxes; (b) size of money supply; (c) debt and deficits; (d) increases in government spending. When there is abnormal increase in government spending, analyse sources and uses of government funds. If too much money is spent on non-productive purposes, be sure that there is an impending crisis.
Inflation. Inflation is bad and therefore must be checked. But sometimes moderate inflation does more good than bad, particularly if it augments output and facilitates job creation. In inflation is due to non-productive expenditure where too much money chases too few goods, it can have a bad effect. Tolerance to moderate inflation can be contagious and therefore it is preferable to avoid.
Indicators of inflation could be based on targets of inflation. If inflation moves from single digit to double digit, it can be presumed that it is no longer moderate and sustainable.
Exchange rates. Real exchange rate is the ratio between price of home goods and the price of traded goods. Much has been said and written about exchange rates. Devaluation may boost exports and make imports costlier. But under certain circumstances devaluation may cause domestic prices to rise when resources are channelled to export areas make domestic supply scarce. Pegging the exchange rate at levels where imports become cheap may drain foreign exchange resources and force external borrowing which too has its own limits. When external sources of funds dry up, the resulting foreign exchange crisis may lead to a massive devaluation. When the dominant strategy is import-substitution, devaluation may have adverse impact on domestic manufacturers. Also, as we will discuss later, exchange rates are influenced often by external factors as well. But that is not an excuse for a country not to do what is in its best interests. Mistakes in exchange rate policy can be costly. The policy should aim at sustained
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efforts to secure competitive and stable real exchange rate. Whether, when and how much should a country devaluate? What are the effects of devaluation on different sectors of an economy? There is no one answer to this question. It should be examined based on a detailed analysis of the country situation and range of options at the time of decision. What should be the approach in the management of a sound exchange rate policy? It can be fixed or floating. It can be linked to a foreign currency. Usually when a smaller country has a dominant trading partner, the tendency to peg the currency of the smaller country with that of its major or dominant trading partner. Some Latin American countries peg their currency with the US dollar and several French speaking African countries to French franc. As of now, interestingly no Asian developing country pegged its currency with the Japanese yen. Exchange rate fluctuations affect capital flows, trade and domestic inflation. Therefore, all countries, both developed and developing, intervene in exchange rate management. The Bretton Woods system of fixed exchange rates died in early 1970s, the European countries have set up the European Monetary System (EMS) to minimise exchange rate fluctuations. Developing countries have fewer options to immunise their currencies from external shocks. The least they can do is to see that internal shocks do not add to their woes. The following provide warning signals on the state of a countrys exchange rate: (a) Large current account balance; (b) falling foreign exchange reserves; and, (c) increase in domestic cost relative to foreign cost. Under these circumstances, devaluation becomes imminent to induce a reduction in imports and increase in exports. The alternatives to devaluation include : (a) import quotas; (b) exchange controls; and, (c) export subsidies. But in the context of todays managed free trade, such policies - particularly quotas and subsidies - from developing countries will be viewed as restrictive and unacceptable by the industrial countries. Usually, the political pressure is higher for overvaluation of currency, particularly in import-substitution countries. Rarely does a country undervalue deliberately and that too in the event it relies heavily on export led domestic growth.
Capital markets. Savings and investment hold the key to growth. The policies should be conducive to encourage savings and investment. Well functioning capital markets facilitate mobilization and allocation of savings for productive and competing uses.
Developing countries should have appropriate institutions, including stock markets. In addition to commercial banks, other financial institutions should also be well developed. Property rights, prudent regulatory framework, transparent transactions and proper systems of accountability and monitoring of financial institutions are necessary for the proper and efficient functioning of capital markets. Indicators of capital markets: Size of capital flows. If the rate of private capital flows is abnormal, it may signal that the economy is getting overheated. When there are external economic and internal political and economic shocks, capital market trends require close monitoring. THE THREE PILLARS OF STABILIZATION: The stabilization measures through macroeconomic policy reforms focus on the following three measures: internal balance, current account balance and external balance.
Internal balance and fiscal restraint. The prescription in such cases is fiscal tightening which calls for reducing government spending in order to cut the budget deficit and reduce the rate of inflation. Reducing government spending is politically unpopular and may result in contraction of economic activity, reduction in employment, increase in poverty cascading inequity and mounting social unrest. Sometimes fiscal restraint may cause supply shocks and increase prices and thus push the rate of inflation instead of bringing it down. Resource balance and the exchange rate. Exchange rates are sought to be adjusted to secure current account balance. This is normally done through devaluation. Countries which rely on essential imports may suffer due to devaluation if the value of foreign exchange flows from increase exports is less than proportionate to the value of imports. Also, in many cases, exports pick up in terms of volume, but fall, in relative terms, in terms of value. The reverse may happen in regard to imports. Volumes may fall, but value may increase. Over all, if terms of trade are unfavourable, as it has been generally the case in most developing countries, except in the case of east and southeast Asia, the net result resembles the case of remedy being worse than the disease.
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Monetary policy and external balance. External balance or foreign exchange reserves are assets - gold, SDRs and foreign exchange holdings - that the central bank of a country possess to absorb deficit in balance of payments. The central bank accumulates reserves when its receipts of foreign exchange exceed payments and uses them when the situation is reversed. The level of reserves a country must have depends on a variety of factors including prices of countrys exports and other determinants of terms of trade, capital flows, normal level of domestic output, etc. External reserves provide a cushion against possible recession of temporary decline in the export prices of major products/commodities, and ensure uninterrupted supply of essential imports even if there are temporary shortfalls in export earnings.
The external balance targets for a country depend on the degree of vulnerability to exchange shocks, the consequences of depleted reserves (such as for uninterrupted import of, say, fuel or food items), cost of holding reserves, and the scope and potential for quick and reliable adjustment. Stabilization must precede adjustment. It can, to an extent parallel, but not follow adjustment.
Simultaneous changes in taxes on income and consumption and tariff duties often require conceptual, legal and regulatory efforts to undertake which many governments usually lack administrative capacity and political willingness. Also, the time targets for designing and implementing tax reforms and the assumptions about anticipated improvements in tax revenue are generally found to be a little too optimistic. The impact of tax reforms in low-income and middle-income developing countries may not be the same because the nature of the problem may not be similar.
Reduce/modify expenditure Invariably SAP seeks cuts in government expenditure. Cuts in subsidies are recommended inevitably. Ultimately, however, in several countries, some subsidies are allowed to be retained, after considerable restructuring and refocusing for sharper targeting of the intended beneficiaries. Reduction of subsidies, where desirable, may have to be phased over a period, rather than introduced in one stroke suddenly. Civil service pay and employment reductions were introduced with some speed in Africa, but in recent years, the pace of such reforms seems to have slackened.
The adjustment experience of the World Bank on microeconomic aspects of fiscal reforms brought into sharp focus the following critical questions that need to be addressed at the design stage itself (World Bank, 1995b; p.138139): Whether reduction in the fiscal deficit is predominantly a revenue or an expenditure problem? What , if any, are the implications of alternative revenue sources or expenditure cuts, or both, on the revenue losses deriving from the net effect of eliminating quantitative restrictions and lowering tariff duties? Can equity be built into tax through ad hoc rates of VAT on luxury consumer goods?
What can be the expected pace of tax reforms? Exercise caution in dealing with operating and maintenance expenditure across sectors and in considering social expenditures critical to long-term human capital formation and for low-income groups?
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The implementation of the conditions relating to expenditure reforms were rated by the World Bank (1995b; 139140) a poor in 50 per cent and fair to poor in another 20 per cent cases. It noted that, In particular, the problem arises in connection with the agreed expenditure policy, in terms of both levels and consumption. One main factor explaining recurrent slippages with respect to the above is that the Letter of Development Policy committing the government to, among other things, a given expenditure program, is a point of arrival for the Bank, but for the government it remains a point of departure in terms of negotiating the specific components of the program with the various technical ministers, and other pressure groups for such areas as subsidies. These negotiations are often very difficult and offer great resistance in accepting the program. Therefore, the Bank should, to the extent possible, make sure that the Letter of Development Policy reflects the agreement of the government, not just of the signing minister. Alternatively, the Bank will have to take a tough stance at the time of tranche releases, at the cost of their suspension if the situation warrants it.
LIBERALIZATION
It is doubtful whether there is any truly open or completely liberal economy in the world. Free trade may still be managed and not so free or fair. Be that as it may, SAP calls for liberalization and privatization. If we consider privatization separately, liberalization under SAP has three important components: trade, financial and infrastructure sectors.
Trade liberalization. The removal of quantitative restrictions on imports, the unification of import tariffs and export subsidies, and the gradual or speedy elimination of tariffs constitute the opening up of the real side of the economy. The opening up raises the efficiency with which labor and physical capital are allocated among productive sectors (Bruno, 1992; 224).
A countrys debt and exchange problems are inherited from the past, and acquired by the omissions and commissions of the current regimes. But, to an extent they may well have been imposed by other countries, wilynilly. A countrys actions in economic and other spheres may have both intended and unintended consequences for others. The more powerful a country is economically, the greater its impact on other countries. Today, three countries - the USA, Japan and Germany account for greater share in world output and world trade than the cumulative share of over 140 developing countries (World Bank, 1996a). 54 per cent of total official holdings of international reserves were, on average, denominated in dollars, with another 15 per cent and 8 per cent respectively in deutsche mark and Japanese yen. 23 countries peg their currencies to the US dollar and 14 African countries to French franc (IMF, 1996b). Little wonder then that the volatile exchange rates of the dollar in particular and that of a few other industrial country currencies in general have had tremendous impact on the exchange rates and external balances a host of developing countries. What has been and what can be done to contain such imbalance, volatility and vulnerability? Since the fall and the decline of the fixed exchange rate mechanism of the Bretton Woods system in the 1970s, the exchange rate mechanism (ERM) of the European Monetary System (EMS) was initiated to reduce the volatility among the European currencies and eventually become an integral part of the strategy towards the Economic and Monetary Union (EMU) within Europe. But this takes care of the interests of Europe, not so much the rest of the world. Given the dominance of dollar and the resurgence of yen, the developing world still remains extremely vulnerable. Borrower ownership of the program design supported by political consensus among social partners in civil society. The interests of employers, unions and workers, and the public at large should be taken into account. Able and willing political and administrative leadership committed to good governance in the larger cause of the nation than for parochial sectional and selfish considerations. Humanitarian approach of the multi- and bi-lateral lending and other institutions which avowedly support the cause of adjustment in developing countries.
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1. Resolving the debt and exchange crises. Have the developing countries been able to resolve these twin crises? 2. To put the countries back on the path to recovery and growth. Did the developing economies grow and have they have been able to attract increased investments? 3. Promoting economic growth consistent with human development. How have the developing countries fared with regard to human development? 4. Promoting equitable growth where poverty and unemployment are reduced and living standards of its people, including the working class, are improved? Have the rates of poverty and unemployment come down? Have the real wages improved?
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Table...Change in external debt for all developing countries, 1993-95 US$ billions -------------------------------------------------------------------------------------------------------------------Category 1993 1994 1995 -------------------------------------------------------------------------------------------------------------------Net flows on debt 96.8 86.0 133.1 Cross-currency valuation effect 1.2 51.5 13.3 Voluntary debt reduction -8.6 -18.4 -8.5 Net increase in interest arrears -3.7 - 2.9 -0.6 Capitalized interest 16.0 15.0 9.0 Unidentified changes 7.1 14.6 0 Net change in debt stock 108.8 145.8 146.6 -----------------------------------------------------------------------------------------------------------------Source: World Bank (1996;31)
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Growth and Investment -----------------------------------------------------------------------------------------------------Region Real GDP growth Investment ratio -----------------------------------------------------1965-88 1980-88 1965-88 1980-88 -----------------------------------------------------------------------------------------------------Sub-Saharan Africa 3.3 0.5 17.6 15.9 Asia 6.3 7.4 27.7 31.1 Europe/Middle East/ North America 4.6 2.8 28.4 27.3 Latin America and Caribbean 4.5 1.6 19.7 17.9 -----------------------------------------------------------------------------------------------------Source: Reproduced from Serven and Solimano (International Monetary Fund, 1989, Table 15) Macroeconomic stability and policy credibility are considered crucial to achieve strong investment response. Uncertainty and inconsistency serve as disincentives for investment. Inadequate, weak or unreliable infrastructure (energy, roads, transport and communication facilities) also makes investment unattractive. What investors are looking for most, in recent times is not cheap labour, but quality infrastructure. When investment response is slow and low, rate of growth may slower to put an economy on the path to recovery and transitional problems persist and compound. Growth and investment should be high enough in areas where fresh employment generation exceeds job losses due to adjustment during the period of transition itself. Otherwise, more people begin to suffer due to adjustment and political support for adjustment will be weakened. When economic difficulties mount, social tensions escalate and together they increase political risks and affect consistency and certainty in the policies a country pursues. It thus becomes a vicious circle.
RISE IN POVERTY
The received wisdom about the adverse social effects of stabilization measures is well documented (for instance, see: Cornia, et. al. 1987 and 1992; Hoeven, 1991 and 1996; Khan, 1993; Rao and Liennman, 1996 and UNDP, 1996). Hoeven s(1996) study emphatically corroborated the findings of Khan (1993) indicating that: The claim that an average official adjustment programme under the auspices of the World Bank and the IMF has performed well, not only by the conventional standards of promoting adjustment and preserving growth but also in terms of protecting the poor is very hard to substantiate convincingly. Even the World Bank (1990; 103) admitted it: Many countries experienced macroeconomic difficulties in the 1980s as the debt crisis and international recession brought structural weaknesses into the open. But when structural adjustment issues came to the fore, little attention was paid to the effects on the poor. Microeconomic issues seemed more pressing and many expected that there would be a rapid transition to the new growth paths. As the decade continued, it became clear that macroeconomic recovery and structural change were slow in coming. Evidence of declines in incomes and cutbacks in social services began to mount. Many observers called attention to the situation, but it was the UNICEF that first brought the issues into the centre of the debate on the design and effects of adjustment. By the end of the decade, the issue had become important for all agencies, and it is now reviewed in all adjustment programs financed by the World Bank. As UNICEF advocated, attention is focused both on how adjustment policies affect the poor and on the specific measures that can be taken to cushion the short-term costs.
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countries like Mexico or United Republic of Tanzania) but no increase and actually falls in employment. In striking contrast, in Asia (particularly in the East Asian NICs) both real wages and employment have continued to increase significantly during this decade. The situation in different countries within a region (for instance, sub-Saharan Africa) being so diverse, whatever one says about the link between wages and employment in one country, the opposite can be equally true in another country in the same region. There is a need to be careful when people with different persuasions bring out selectively data to suit their arguments. Freeman (1993) found little evidence to support the distortionist view that labour market interventions represent major impediments to resource allocation, structural adjustment or stabilization program. He also observed that there is no convincing evidence to support the view of the institutionalists who consider wage bargaining and other related consultative mechanisms lead to better performance. The World Bank is associated with the distortionist view and the ILO with the institutionalists.
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In contrast, the political and economic circumstances in Chile were different when the country undertook SAP in 1973 and 1981. Its macroeconomic instability was essentially triggered by internal factors and therefore, unlike Indonesia, it tried to contain nominal wage increases that fuel domestic inflation. Toye (1995;52) lists three policy errors in respect of Chilean reform: "The first was the immediate and total replacement of the existing institutions of wage-bargaining by a government-imposed system of wage indexation to past levels of inflation. This method of "disciplining labour" in order to reduce inflation introduced an unnecessary rigidity into the labour market, and left the government to look to exchange rate management to control the inflation rate to which wage levels automatically adjusted ex post. The freezing of the exchange rate in 1979 to eliminate inflation via the working of expectations and the "law of one price" was the second mistake. This permitted a 30 per cent real revaluation of the peso which went unnoticed by the authorities, the effect of which was a widening trade deficit financed by volatile foreign private capital inflows. An import-led boom in the non-tradables' sector generated fast economic growth, but this was unsustainable. The third mistake was failure to regulate a stock market boom that was engineered by large conglomerate firms getting preferential credit from banks which they owned in order to bid up their own share prices. This boom also inevitably came to bust. MEXICO (World Bank, 1996a): Mexicos stabilization and structural reform program was considered very successful in early 1990s since it could bring down inflation from 165% in 1987 and an average of 65% during 1987-90 to single digit in early 1990s. The "reforms" also boosted the investment climate in Mexico and led to the conclusion of a Brady deal (1990) and the North American Free Trade Agreement (NAFTA). Capital inflows during 1990-93 was of the order of US$91 billion. But the bubble burst: During 1990-93, while productivity grew at 20%, exchange rate appreciated by 30%. This made imports cheaper and rendered exports less competitive. Rate of savings and investment declined. Output grew at an average rate of 2%. There was a flight of capital. By 1994 Mexico had serious liquidity crisis as it could not generate earnings to match the increase in the external liabilities. The response to the crisis deepened the crisis. The government had to eventually float the exchange rate and to accept large adjustments in interest rates and the exchange rate. A rescue package, mainly from the US and the IMF aided slow recovery from 1995, though fragile banking system and fluid political situation continue to mar the prospects of a steady recovery. The IMF offers three possible explanations, which, in its opinion, are not mutually competitive (IMF, 1995; 90-87): Adverse shocks: Mexico suffered adverse shocks due to domestic political (assassination of two prominent political leaders), and external economic (persistent rise in foreign interest rates, shocks. Unsustainable external position (current account deficit). Policy slippages such as dollar indexation of short-term debt, liberalisation of financial markets, without institutional reform that promotes public accountability and transparency. Each of these aspects may generate points and counterpoints for purposes of arguments. The fact, nevertheless, is that either the depth of the crisis was not anticipated inspite of warnings by the IMF in mid-1994 or that when there is a confidence crisis to due to a combination of internal political and external economic factors, it is beyond a sovereign nation to deal with it adequately. When the demand for investment picked up in industrial countries, the private, foreign portfolio investors in Mexico reassessed their investments and withdraw investments from Mexico for investments abroad. It is a case of failure of success in that the apparently successful adjustment programme brought huge inflows of money which the country was ill-equipped to handle, particularly in situations when it goes as rapidly as it came. The Mexico crisis sent, rightly, alarm bells, across the world, both in developing and industrial countries. It also serves as a pointer to the spill over effects of developments in one part over the other parts of the world.
etc.)
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In many countries, as a result of adjustment, the level of guarantees and security in employment related matters is on the decline. One development which trade unions need to pay attention concerns the shifting emphasis from job security to income security. Labour laws in several countries are being revised to take away mandatory administrative clearances of the government. At the same time, the quantum of retrenchment compensation is being increased. In some cases retrenchment compensation is not paid as lumpsum, but arrangements exist for depositing the entitlements in an interest yielding account and pay monthly annuities as substitute income for the earnings from the job that the person loses, voluntarily or otherwise. According to a Chinese proverb, if you give a person a fish, he/she will have food for a day. If you teach the person how to fish, he/she can have food for life. Therefore, many countries are trying to focus attention on education and skills development so that technological obsolescence does not automatically lead to human obsolescence and in the belief that life-time employability can be sustained better even if life-time employment systems are crumbling. Education and skills are among the best forms of social protection. Some South-east Asian countries, notably Singapore and Malaysia, have levied human development cess as a percentage of wage bill and using it to augment and upgrade skills through training and retraining. Employers who invest in skills development can recover more than what they contribute to the fund. To provide for unemployment assistance for short-periods, governments, employers and workers in some countries are asked to make contributions as a form of insurance against the risk of unemployment. Those who do not face the risk do not get back anything. But those who do, get assistance from the fund on a tapering off basis: In the first year after the loss of job, a person may get 75 per cent of the salary last drawn, in the second year, 50 per cent and in the third year 25 per cent. By the end of the third year, the person should be self-dependent. The Textile Workers Rehabilitation Fund (TWRF) in India is one such example. The immediate need is to improve the efficiency and equity of the existing social security systems. In the years to come developing countries will need to strive creatively for innovative social security systems that provide basic cover for the population as whole, taking into account their special circumstances and needs. Collective bargaining at enterprise level on aspects like skills development, pension, post-retirement health care, etc., is likely to play a major role in complementing the macro level initiatives in social security provisions.
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Debt: Debt relief measures improved after 1990. Yet, total debt of the LDCs increased from $114 in 1990 to $127 in 1997.
ILO-WORLD BANK-IMF DIALOGUE The ultimate goal of structural adjustment is both economic growth and social progress. The latter is possible when living standards of all strata of people improves. It is a paradox if structural adjustment policies advocate downward harmonization of standards and the erosion of workers' rights even as economic liberalization and free trade regime gives the clarion call for linking social clause in international trade agreements. The United Nations Social Summit at Copenhagen in 1995 marks the watershed in the growing consensus among the world community towards promoting "people-centered sustainable development." The Summit's Declaration and Program of Action show the commitment of the international community to recognizing and promoting the core ILO labour standards as a basic social framework for sustainable development. As the ICFTU (1995;4) recognizes, "In recent years, the IMF and the World Bank have begun to incorporate social objectives into stabilization/adjustment programmes, including social safety nets to target the poor and vulnerable groups, as well as severance benefits and retraining in the context of retrenchment of workers. There is a need for a far more vigorous and consistent approach in this direction to include targeted employment-generating measures, active labour market policies and the involvement of stakeholders in the planning process and in project implementation." The World Bank and the IMF have been having, in recent, a series of consultations not only with the ILO but also with trade unions, non-government organizations and other important organs of civil society. The IMF appreciates the right and the duty of trade unions to advocate their views on labour and social issues and called for an effective tripartite dialogue between the central government, business and labour. The World Bank devoted its 1995 World Development Report to discuss the challenges facing workers' in an integrating world. The 1995 World Bank report, however, argues the case for restricting the role of trade unions to enterprise level. This negates the spirit in which the Managing Director the IMF argued the case for trade unions role in macroeconomic issues. The UN
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Summit on Social Development also advocated the need to enable and encourage trade unions to participate in the planning and implementation of social development programs. The pious sentiments and noble thoughts concerning social development should translate themselves into action. Towards this end, the IMF and the World should begin to remind the national governments on the need to involve social partners in the design and implementation of adjustment programs. The trade unions and employers' organizations should be given necessary information in advance. Social partners should be included policy making in key social sectors like health, education, environment, labour and welfare. The impact of some components of structural adjustment package such as inflation control measures on employment and earnings should be measured and monitored to mitigate or avert possible negative consequences. Adherence to core ILO conventions should be made a condition while awarding public contracts in line with the aims of ILO Convention No. 94 covering Labour Clauses in Public Contracts. Such a step should mark the beginning of an active labour market policy component in the development lending approach of the IMF and the World Bank. More so since the World Bank (1995) acknowledged the threat to the international trading system posed by persistent abuse of workers' rights in some countries. Such concern should be reflected in the policies and work plans of both the IMF and the World Bank. It may be argued that the charters of IMF and the World Bank and their articles of agreement with borrowers do not provide for withdrawal of assistance in case of violation of human rights or workers' rights. The ICFTU (1995; 7) observes that, "The Social Charter of the European Union, the Generalized System of Preferences trade agreements of the United States and of the European Union and the NAFTA side agreements of the U.S.A. all provide examples of instruments which try to address - albeit in a sometimes limited way - the issue of worker rights in cooperation and trade agreements." The World Employment Report (ILO, 1995) suggested the need for a twin-track policy of improved coordination at national and international levels between governments, trade unions and employers involving the financial institutions and the ILO. This idea needs to be pursued earnestly.
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CHAPTER 4
TRIPARTITE CONSULTATIONS
In the context of Adjustment is a continuous process. If it is gradual, incremental and continuous the stakes are low and the consequences marginal. If it is sudden, radical and discontinuous the stakes are higher and the consequences profound. Trade unions should have a say in the design of structural adjustment programs. In the context of structural adjustment, governments are usually taking decisions first and consulting trade unions later in the matter of implementation. Trade unions have several options: oppose the program, be neutral, or support with or without bargaining for changes in the program. Often the need for adjustment can be regardless of an externally triggered structural adjustment program. Therefore, it is appropriate for trade unions to participate in the design and implementation of structural adjustment program and ensure that the interests of all constituents and stakeholders, particularly the workers and the community are safeguarded. Economic adjustment takes place in a given political and social context. Economic adjustment can not take place in isolation and the political processes and social linkages must also adjust to the new circumstances. There is a need for a re-evaluation of the entire institutional structure - political and social as well as economic - imposed, inherited or acquired from the colonial masters and subsequent regimes (Martens, 1994; 321).
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Box: Beyond ESAP: Zimbabwe Congress of Trade Union Seizes the Initiative As the first phase of the economic structural adjustment program (ESAP) drew to a close, the General council of the Zimbabwe Congress of Trade Unions (ZCTU) decided to set up a team of experts to work in conjunction with the unions and other civil society groups, to influence the second phase of ESAP. It conducted a pilot study and published a report in 1995. An interim report was prepared suggesting the need to design and implement an alternative development model to ESAP. While acknowledging that SAPs are necessary, the study showed that they are insufficient in fostering growth with equity. Zimbabwes economy is characterized by a number of structural rigidities such as unequal access to land and finance whilst a large proportion of its population is engaged in the informal sector. The study noted that reliance on market forces in such an economy may only serve to perpetuate such distortions. Therefore, instead of SAPs, the ZCTU report tried to redefine the role of the state in the agriculture, industry, trade, and financial sectors as well as on social and labour matters. Since market failures are rampant in Zimbabwe, as in several other developing countries, instead of rolling back the state sector the ZCTU reports calls for state intervention in factor markets, the in the development of industrial and technological capabilities in order to foster competitiveness, etc. and deal with market failures. The state highlights the mechanisms through which the state can effectively intervene in the different sectors and put the economy on a sustainable economic development path. ZCTU took the initiative in liaising with other social partners, the government and the employers and carried on intensive interactions with ILO, IMF, World Bank, UNDP, several prominent multi- and bi-later lenders as well as other interest groups in civil society such as non-governmental organizations. The report is widely circulated and discussed at a well attended conference before an alternative agenda was firmed up and presented to the nation. This experience of ZCTU is a unique one among developing countries where the national federation of a trade union seized the initiative, engaged other social partners into dialogue and provided an alternative agenda for action.
The components of SAP - trade liberalization, tax reform, public sector reform, elimination of price controls, wage restraints and employment flexibility, reduction in government spending, etc. - have a direct impact on the social partners. In many developing countries tripartism has long been atrophied due to one reason or the other. During the past one decade and over the world has witnessed serious economic disorder and major political upheavals. The SAP resulted in many countries loss of jobs, deterioration in living standards and increase in the incidence of poverty. Trade unions in the formal sector in several countries began to challenge the SAP and won concessions. To contain popular unrest that can potentially block the SAP, governments in several countries began to revive or take fresh initiatives to rope trade unions into a dialogue over SAP. The inadequacies of tripartite structures in Asia (APPOT, 1995; Venkata Ratnam, 1996), Francophone Africa (Martens, 1994), Latin America (Alvarez) and in different developed and developing countries (Trebilcock, et. al. 1994) is well documented. The role of trade unions in SAP is advisory, and not, usually, management. It is the obligation of the Government to create conditions for meaningful trade union participation. It is the responsibility of the trade unions to make effective use of such opportunities and challenges. To effectively participate in the design and implementation of SAP, trade unions need to have relevant information and skills. Often the data base in developing countries is dated, inadequate and unreliable. Given the general absence of information rights, often trade unions are denied access to even existing information. Trade unions can use the network of local and international organizations to gather, analyze and interpret the data and information as also to vet the data and information available from other sources, including government, employers and their organizations and academic/research institutions and the media. Federations of trade unions at national and sectoral levels should have research capacity and information and data bases to both influence proactively and also to respond to initiatives on social, labour and economic policies at different levels. Trade unions need training to develop broad understanding of the new knowledge and developments due to interaction of various forces and institutions. Such training should also provided broad perspectives on new advances in technologies, computer literacy and presentation skills.
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Apart from the human dimension which should receive due consideration, trade unions should also pay attention to issues concerning democracy and accountability. Fresh thinking and reorientation from custodial behavior on the part of government to a participatory approach are needed in the process of transition and transformation. This calls for open policies, universal education, respect for freedom of association and trade union rights, free press, and an independent judiciary. Trade union action should cover these spheres too.
PRIVATIZATION
Trade unions should pay attention to the following in the context of adjustment programs which contemplate privatization: 1. Assessing the privatization decision. Privatization refers not merely to transfer of ownership of public assets into private hands, but also means private provision of goods and services which were hitherto provided by the state/public sector. Would public interest be better served with private provision of public goods and services? What checks and balances are retained or created to ensure that public goods and services are provided adequately and without interruption at a cost that is reasonable and quality that is desirable. What changes occur in work organization? Any adjustment and changes in work organization may require retraining and redeployment? How are these organized? How will the rights of employees be protected with regard to, particularly, job and income security and continuation of benefits and guarantees? If retrenchment is inevitable to improve competitiveness and viability of privatized enterprises, what steps are taken to mitigate or avert them? Whether and how compensation for retrenchment or voluntary separation be improved? Changes in ownership may bring not only changes in work organization and employment, but also changes in trade union organization and trade union dynamics. How will the changes affect them and what options do trade unions have to deal with them?
2.
3.
4.
5.
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6.
Privatization may worsen existing pension provisions and other retirement benefits? What safeguards need to be worked out to avert or minimize such negative consequences? There have been various types of new, innovative or model arrangements to deal with several aspects of privatization. These include: making workers owners as in Egypt, for instance, through employee stock option schemes. There have been several cases where workers are granted shares or issued vouchers with which they can own shares in privatized companies. negotiating higher compensation for voluntary separations as in Pakistan where such compensation is five months pay for every year of service as against fifteen days. wages retrenchment compensation for each year of completed service. safeguarding accrued interests of employees. In Malaysia, for instance, employees can remain in government service, even after the organization where they were working was privatized. This was, however, possible in Malaysia because the public sector was any way expanding. enacting minimum protective legislative measures to ensure that transferred public sector employees receive similar protection as is provided in public sector or for private sector employees in large enterprises. setting up further employment-generating programs and assistance to provide income relief, job search, counseling and retraining facilities for relocation. developing proposals and facilitating the setting up of new safety nets or improving the existing ones to mitigate or avert adverse affects on jobs and incomes, in line with the provisions in ILO Convention No. 162 dealing with termination of employer at the initiative of employer.
7.
STRATEGIC CHOICES
Trade unions can be reactive or proactive in their approaches. If they chose to be reactive they can block, be neutral, passively support or even yield to people, issues, events and circumstances, both internal and external. In such a situation, they would not set the agenda, but follow it. Instead, if trade unions wish to be proactive, they can set the agenda and influence the direction of change. For this, they need to constantly evaluate and selectively support the challenges and opportunities thrown up by the environment, and where appropriate, even extend full cooperation. To proactively influence changes through planned interventions trade unions need to study and evaluate the strengths, weaknesses, opportunities and threats. They should not merely oppose what is proposed by other social partners, but effectively present a set of alternatives and pursue them vigorously. There is a lot to learn in this regard from the German, Scandinavian and the Japanese auto workers unions (Ozaki, et. all. 1992). There are several approaches such as the following to formulate strategies and develop strategic alternatives (Weil, 1994): 1.
Environmentally driven priorities: priorities that arise from the opportunities and obstacles presented by the environment. Member-driven priorities: priorities directly related to current and prospective membership needs and expectations. Institutionally driven priorities: priorities arising from a union's institutional history and present ideology.
2.
3.
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4.
Politically driven priorities: priorities arising from the democratic basis of unions, and linked to the effort of leadership to retain or attain elected office.
Trade unions would do well to combine environmentally driven priorities with member-driven priorities. In order that they adapt themselves to changing environment, institutional priorities may need to be reviewed from time to time to check whether they should reformulate goals and adjust themselves to meet their members' expectations. Politically driven priorities need to be recast in view of cataclysmic changes that occurred in the world economy since late 1980s. Trade unions should transform themselves into learning organizations (Weil, 1994). Towards this end, strategic planning within unions should take them from: 1. 2. A focus on one's position in an organization to taking responsibility for achieving results. Thinking the enemy is out there to seeing the whole system; that the inside of the organization and the outside of the organization are related. Reactiveness to seeing how we contribute to our own problems. Reacting to crisis to understanding that most threats come from slow, gradual, almost invisible process. Thinking that they need to bargaining only with employers to understanding the difference that competitors, substitute products/services, suppliers, and customers can make influence the balance of power between unions and management. Taking experience as one's guide to recognizing that often the consequences of important decisions are never directly experienced by those who make them.
3. 4. 5.
6.
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CHAPTER 5
CONCLUSION
This concluding chapter attempts to sum up the nature of challenges confronting social partners in adopting and implementing SAP for long term development objectives. It also aims to infuse unions with a new lease of life towards tripartism and discuss relevant issues such as relative strength of social partners, representative nature of workers organizations, their local structures, leadership and their capacity for effective participation in tripartite discussions. Structural adjustment per se is not bad. The idea that a nation should live within its means and find resources for the things it buys from other countries is something that can not be disputed. Structural adjustment is desirable. Trade unions must support structural adjustment. Try to understand the costs of non-adjustment and see whether they overweigh the costs of adjustment. A stitch in time saves nine. What matters is not structural adjustment program, but the content of the program. Unfortunately, hitherto structural adjustment packages tended to be substantially uniform, notwithstanding the phases, stages and circumstances of development and development strategies. Unbundle the package. Look at elements which are positive and need reinforcement. Look at elements which are most likely to have negative and disintegrative social impact. The six areas identified by the South Centre, which is an inter-governmental organisation that has the support of the Non Aligned Movement and the Group of 77, in reviewing the policies and practice of the Bretton Woods institutions (South Centre, 1996; 178-197): 1. The supply of international liquidity. The present rate of supply of international liquidity comprising gold, foreign exchange reserves (currencies and government securities) and allocations of SDRs is somewhat haphazard. In 1994, SDRs account for less than 3 per cent of the reserves, gold sales fluctuate and therefore international liquidity is determined mainly by a limited number reserve currency countries, particularly the dollar. Today 18 developing countries hold 90 per cent of the total international liquidity. The remaining 10 per cent reserves are held by some 138 countries. These low-income countries have little access to international financial markets for secondary sources of finance (Buira, 1994; 37). When reserves are scarce and external sources of funds dry up, low-income countries have to limit the level of imports and suffer adverse impact on the economy and employment. The volume of SDRs as a percentage of international reserves declined from over 8 per cent in 1972 to less than 3 per cent in 1994. The SDRs were established by the IMF in the early 1970s to remedy the short of international liquidity. When the size of SDRs is being reviewed, developing countries special needs should be taken into account. In the wake of the Mexico crisis, the G-7 countries agreed to establish a new IMF emergency finance mechanism to assist countries experiencing unusual capital outflow. The economic instability of developing countries and capital outflows from them are not necessarily due to their own shortcomings, but also, and quite significantly, by conditions prevailing in the industrialized world (Calvo, 1994; 70). Therefore, such a facility to assist developing countries should be free from political and economic conditionalities. The IMF Compensatory Financing facility for export short falls should be restored, widened and made available to countries which experience such shortfalls due to factors beyond their control such as increases in real interest rates or cost of imports due to exchange rate fluctuations of industrial countries. Initially the World Bank and the IMF were expected to provide long-term stabilization loans to poor countries or countries under reconstruction. At the inaugural meeting of the IMF and the World Bank, the latter was authorized to this effect. But this authority was never used.
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Presently, the IMF provides short-term loans for stabilization and balance of payments equilibrium while the World Bank and other multilateral development banks provide long-term loans to finance growth. Both of these do not provide for a countrys foreign exchange needs. This problem needs to be addressed. 2. The supply of development finance. Multilateral concessional assistance and low cost of finance is declining. In recent years, the net transfers from the World Bank to the developing countries has been negative. The net transfer in favour of developing countries dropped from about US$ 3 billion in 1984 to a negative of US$ 8.4 billion in 1994. The net transfers from the IDA has been raising and stood at US$ 4.6 billion in 1994. But with changing attitudes and difficulties of industrial countries, there is a great deal of uncertainty in mobilising replenishments for IDA funds. Official assistance is declining. Dependence on private flows - foreign direct investment, portfolio investment in stocks and shares and funds raised by sale of government in Euromoney markets, etc. - is increasing. But private flows have been usually moving into a few - about 30 out of 180 countries - countries, which are in the middle income range. Also, private capital flows, as we have seen in the case of Mexico can not be a substitute to concessional assistance and excessive dependence on private flows brings greater uncertainty due to perceptions about political and economic shocks. There is a need for stepping up IDA /SDR link to step up development finance. 3. The debt problem. Debt levels of some developing countries have reached unsustainable levels. The present arrangements for debt forgiveness and other related policies seem inadequate to mitigate the debt burden. There is a need to consider ways and means to deal with multilateral debt with a sense of urgency. 4. Conditionality. The Articles of Agreement of the IMF and the World Bank mention the need for prudent use of borrowed funds, but not to conditionalities. To ensure prudent use, conditionalities came to be imposed which go beyond the financial matters strictly related to loan repayments and surveillance mechanisms are pressed into service. The conditionalities not only compromise sovereign decision-making but also reflect a lack of sensitivity to appropriateness of various restraints, tightness, timing, extent, speed and sequencing in terms of ground realities concerned elements of policy.
NEW OPPORTUNITIES
In most developing countries the formal sector is very small and unionization has covered, largely only a fraction of the formal sector. During the period of SAP, the already thin formal sector shrunk further in several countries. Unions will have a bright future, it they choose to tap the vast untapped potential that exists in the informal sector even as they renew their efforts to build up their base in the organized sector.
NEW WORKFORCE
Times are changing and trade unions, like other social institutions, have to find ways and means of coping with the demands such changes make. Changes affect trade union dynamics, but not make trade unions and their role redundant as such. Structural shifts in employment patterns and changing workforce demographics may cause changes in union movement. Three major shifts are discernible: Within the organized sector, structural shifts in employment may cause union growth will move away from blue collarisation to white collarisation. In the initial stages of a shift towards service economy unionization rates in the formal sector may fall, particularly in high-tech, service firms which are usually small sized resulting in a usual lack of critical mass in most enterprises. The new human resources policies such firms may initially adopt reduce incentives for unionization. But, the absence of a countervailing power is likely to make employers complacent which makes conditions for unionization in such enterprises ripe. The third shift concerns the changing demographics at the work place. The new educated workforce comprises an increasing proportion of women. The aspirations of the new generation of workers and the special needs of women workers, particularly workers with family responsibilities, etc., deserve attention. The new workforce also may include those in atypical employment terms such as part-time workers, home-workers, etc., whose needs and requirements could be different and organizing whom could be difficult. Trade unions should not neglect these sections of workforce (Veneziana, 1993).
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Severely indebted countries: where present value of debt service to GNP (PV/GNP) is higher than 80 percent or present value of debt service to exports (of goods and services) (PV/XGS) is higher than 220.
GLOSSARY
This glossary comprises, in most cases, verbatim reproduction of selected definitions of terms used in the following publications: ILO's workers education manuals (particular the one on Economics) and various reports of the IMF, UNDP and World Bank. Some of the complex technical terms are explained in simplified manner.
BALANCE OF PAYMENTS. The income or expenditure of a country, in respect of its dealings with other countries. If the country earns less through trade and services than it pays to other countries, it has a deficit. BUDGET. In the context of a country, budget refers to plans for national income and expenditure over a customary period such as one year. DEBT SERVICE. The sum of principal repayments and interest payments on total external debt. DEBT STOCK (also, total debt stocks). The sum of public and publicly guaranteed long-term debt, private nonguaranteed long-term debt, the use of IMF credit, and short-term debt. DEFLATION. A fall in the level of prices. DISBURSEMENT. The release of funds to, or the purchase of goods or services for, a recipient; by extension, the amount thus spent. Disbursements record the actual international transfer of financial resources, or of goods or services valued at the cost to the donor. DOLLAR. Refers to US dollar, unless otherwise specified. FISCAL POLICY. Government policies that deal with taxation and government revenue. GINI COEFFICIENTS. They are a standard measure of inequality of income distribution, calculated with reference to the departure of an actual distribution from a state of perfect income equality. GOVERNMENT CONSUMPTION. Includes all current expenditure for purchases of goods and services by all levels of government. Capital expenditure on national defense and security is regarded as consumption expenditure. GROSS DOMESTIC PRODUCT (GDP). The total output of goods and services for final use produced by an economy, by both residents and non-residents, regardless of the allocation to domestic and foreign claims. It does not include deductions for depreciation of physical capital or depletion and degradation of natural resources GROSS NATIONAL PRODUCT (GNP). Comprises GDP plus net factor income from abroad, which is the income residents receive from abroad for factor services (labour and capital), less similar payments made to nonresidents who contribute to the domestic economy. INCOMEs POLICY. Government policy designed to align increases in income with productivity, control inflation and/or prevent widening disparities. INFLATION. Rise in prices, reflecting fall in the value of money. INTERNATIONAL RESERVES (gross). Holdings of monetary gold, Special Drawing Rights (SDRs), the reserve positions of members in the IMF and holdings of foreign exchange under the control of monetary authorities expressed in terms of the number of months of imports of goods and services these could pay for at the current level of imports. LIBERALIZATION. It refers, except where stated otherwise, to economic liberalization. It denotes the loosening or elimination of government restrictions on domestic transactions, prices, and markets; on external transactions and
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the free exchange of domestic currency for foreign and vice versa (convertibility); or on free entry of firms into domestic markets. MARKET ECONOMY. A situation where the government owns and controls only a small part of the means of production and trade and where prices are determined by supply and demand. MARKET FAILURE. It refers to any situation in which the presence of insurance or the expectation of compensating policy weakness or distorts incentives to prudent behavior. NET TRANSFERS ON DEBT. Net flows minus interest payments (or disbursements minus total debt service payments). PRIVATIZATION. In the strict sense it refers to divestiture by state of enterprises, land, or other assets. PUBLIC DEBT. It is an external obligation of a public debtor, including the national government and its agencies/subdivisions including autonomous public bodies. PUBLICLY GUARANTEED DEBT. External obligation of a private debtor that is guaranteed for repayment by a public entity. PURCHASE POWER PARITY (PPP$). The purchasing power of a countrys currency: the number of units of that currency required to purchase the same (or similar) representative basket of goods and services that a US dollar (the reference currency) would buy in the USA. REAL WAGES. Money wages deflated by cost of living index and reflect the purchasing power of money. STABILIZATION. It refers to macroeconomic stabilization, or the control and reduction of inflation and the containing of economy-wide imbalances, such as fiscal deficits, and of external imbalances, such as fiscal deficits, and of external imbalances, such as current account deficits. TERMS OF TRADE. The ratio of a country's index of average export prices to its index of average import prices. TOTAL EXTERNAL DEBT. The sum of public, publicly guaranteed and private non-guaranteed long-term external obligations, short-term debt and use of IMF credit. USE OF IMF CREDIT. It denotes repurchase obligations to the IMF with respect to all uses of IMF resources. These include purchases outstanding under the credit tranches, trust fund loans, and operations under SAP and ESAF.
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