Economic Liberalization and Labor Markets. – Review – book review

Horst Brand

Economic Liberalization and Labor Markets. Edited by Parvis Dabir-Alai and Mehmet Odekon. Westport, CT, Greenwood Press, 1999, 274 pp. $65.

The argument conveyed by the authors of the 12 essays presented in this book may be summarized as follows: The labor markets of the countries and regions discussed have been subjected to the often severe deregulatory pressures that have been characteristic of economic liberalization; and in fact, labor market deregulation is inseparable from it. Functionally, economic liberalization seeks to ensure that the market, under the compulsion of (necessarily global) competition, allocate resources on the basis of price. Labor markets are to be governed by the same criterion, that is, of price (wages being prices of labor) as the fundamental allocative mechanism. Whatever “distorts” this mechanism-such as industrywide collective bargaining, difficulty of worker dismissals, severance expense–is, in principle, subject to being dismantled.

Economic liberalization is based on the view that the free market, in combination with anti-inflationary policies, will spur economic development and raise living standards. It involves privatization of state-run enterprises (which invariably entails substantial job loss); removal (or lowering) of trade barriers; decontrol of financial flows; equal treatment of foreign investors; and the pegging of exchange rates to make exports globally competitive. The import-substituting industrial strategies of many developing countries of the earlier post-war period had become unsustainable.

While stabilization of major macroeconomic variables has been a focal concern of governments and international financial institutions, economic liberalization, as the authors’ argument implies, has spelled the destabilization of large numbers of working people in terms of recurrent, and at times large-scale, unemployment and underemployment, job tenure insecurity, the weakening of collective bargaining processes, and the political strength of worker organizations. Income distribution has been progressively skewed in favor of the well-to-do and professional and technical employees. Real wages have slowly (if at all) recovered their 1960s levels. A tendency toward capital-intensive investment has contributed to the displacement of less skilled (and unskilled) workers, while the gradual shrinkage of labor-intensive production methods has likewise disfavored their employment at wages that allow customary living standards.

It is evident that the social protection against such untoward market forces as business cycle swings, technological job displacement, and foreign competition, and for which worker organizations had successfully struggled over many decades, has been eroded, if not eliminated, by economic liberalization.

None of the authors discusses the period that preceded economic liberalization in detail. As indicated, that period, which for some Latin American countries began in the 1930s or 1940s and for some African ones after they became independent, was marked by an import-substituting industrialization strategy–the creation of domestic industries, especially capital and consumer goods. The strategy indeed achieved economic growth but became “exhausted” in recent decades. Economies of scale could not be adequately attained within national markets. Vested interests clustered to ensure protective measures. Currencies tended to be overvalued, foreign indebtedness soared as exports lagged, and raw materials and fuel prices climbed. Labor did benefit from the strategy. In Argentina, for example, unemployment remained low into the 1960s, worker benefits generous, and trade unions strong. But the “redistributionist” and developmental policies of the Peron regime and its military and democratic successors could not be pursued without some hyperinflationary results and deep budgetary deficits. Interest rates reached levels that contributed to steep declines in industrial production and real wages. The Menem administration, beginning in late 1989, instituted a radical program of structural adjustment, which not only contained inflation but diminished public subsidies, lifted restrictions on foreign investment, and privatized an array of state enterprises. It also froze wages and salaries. Human resource services were cut back. Real wages plunged, so that on average they bought but 72-29 percent of the minimal basket of essential goods and services (in 1990). “The transfer of income from the low- and middle-income groups” created a new stratum of pauperized, formerly middle- and working-class families. Labor was further weakened by the introduction of flexible work rules, and the shifting of collective bargaining to individual firms, thus wage changes were more closely aligned with productivity.

In some respects, Argentina’s economic liberalization parallels that of Chile, the underlying rationale being as noted, that the allocative function of price be ensured, and that the labor market be “flexibilized.” In Chile, as later in Argentina, this exacted a high cost in workers’ income, security, and trade unions protection–union impotence, to some extent, assured by legislation. Income distribution worsened and poverty spread, although by the early 1990s, poverty had declined to 26 percent from 40 percent in the earlier years as real wages recovered. Privatization of state enterprises signaled, as it did in Argentina and elsewhere, favorable opportunities for foreign investors.

Economic liberalization in Mexico was, to an extent, compelled by the debt crisis of the 1980s. More fundamentally, it was adopted because the country’s import-substituting industrial strategy could no longer be sustained–even though this strategy had produced high growth rates between 1965 and 1980. The adoption of the North American Free Trade Agreement (NAFTA) in 1993 must of course be regarded as part of the liberalization policy. The author of the relevant chapter concedes the advantages this policy brought, but writes that “although liberalization has improved the performance of the Mexican economy in a variety of ways, the lot of the Mexican worker deteriorated….”

In the face of perennially high unemployment and underemployment (Mexico has a large informal sector where incomes often run at or below minimal subsistence needs), labor demand has shrunk (at least up to the time the chapter was written). The role of the state has diminished, meaning that government employment has declined, and that privatization (together with the competitive threat it posed to state-run enterprises) has led to job cuts. Productivity in manufacturing has indeed risen, but faster than output, leading to worker displacement. Moreover, American firms investing in Mexico often introduce capital–rather than labor-intensive production techniques–thus limiting labor demand. It is true that Maquiladoras have evidenced vigorous growth in output and employment, but real wages have continued to decline. Furthermore, even though a quarter of Mexico’s workforce is in agriculture, the requirement under NAFTA that Mexico’s agricultural tariffs must be eliminated over the next several years threatens hundreds of thousands of campesionos with destitution, compelling them to migrate to urban centers in search of new livelihoods.

An important chapter of the book deals with African countries, although its author does not focus on any particular one, and possibly over generalizes at times. Many of these countries, like their Latin American counterparts, adopted import-substituting industrial strategies as they became independent during the post-World War II period. However, the development of their internal markets was thwarted by low incomes, a factor which was evidently aggravated by government exploitation of peasantry to accumulate the capital needed for the strategy. The need to import raw materials also eventually caused indebtedness to rise, such that up to 50 percent of export earnings had (and has) to be used to pay off debt. Agriculture was neglected; taxes on agricultural products have constituted up to 70 percent of peasants’ revenue, collected by state commodity boards, which then presumably guided (all or part of) the proceeds to industrialization and infrastructure schemes. A result has been increased rural-urban migration, which contributes to employment problems and deterioration of urban centers.

However, the author notes that tax cuts instituted in more recent years in some African countries, and ending the practice of farm product sales to commodity boards, has helped expand rural self-employment, as have devaluations that made these products competitive with cheap imports.

Yet the economic development of African countries remains stymied by the large military expenditures and bureaucracies of their governments, often at the expense of adequate infrastructure. The needs for reform evidently cannot be met by economic liberalization alone; the reform of governance itself remains the problem.

The book is quite instructive about the relationship of economic liberalization and labor markets. But considering the book’s scope of vast human problems implicit in its discussions, it is surprising that the editors fail to present a concluding essay that comes to grips with these problems more broadly. The employment problem, once discussed only within the frame of the industrial countries, has widened to global scope. Can economic liberalization resolve it? The book’s message does not allow much optimism about the answer. One misses some further, deeper probing of this question.

–Horst Brand

Economist, formerly with the Bureau of Labor Statistics

COPYRIGHT 2001 U.S. Bureau of Labor Statistics

COPYRIGHT 2004 Gale Group

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