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International Labour Office

Regional Office for the Americas

The Labour Agenda in Globalization:

Economic efficiency with social progress

Viña del Mar, ChileOctober 1998

Foreword

The globalization of Latin American and Caribbean economies, is underway in a context of both economic integration strategies and multilateral agreed upon openness. The process is running parallel to structural adjustments that were implemented to correct existing imbalances and to adapt to the new conditions in a changing world. Two additional processes, privatization and deregulation, have been introduced together with globalization, in a framework where macroeconomic adjustments also play an important role.

Contrary to what is said on occasion, the process of adjustments in general and macroeconomic adjustments in particular, is not over yet. It is still going through several phases, with recurrent external restrictions making it necessary to continuously apply new adjustments, therefore converting it into an ongoing process.

In this context, the labour issue emerges in two dimensions. The first dimension is an outcome of the globalization and adjustment processes which affect employment, wages, labour relations and the coverage of social protection systems negatively in the short term. This obliges labour policy proposals to compensate the most vulnerable groups to the adjustment and create a new balance between economic efficacy and social progress. The second dimension surfaces as an important part of accommodating to the new conditions brought on by globalization, which demand greater flexibility of the labour market performance.

In this Region, labour reforms and policies that address this two-dimension challenge, have intensified. The need exists, as in the framework of the adjustment in general, to establish whether the labour reform process finishes when reforms have been implemented or if, on the contrary, in the light of the side-effects and continuous changes observed in the international experience, it would be necessary to embark on a second wave of labour reforms.

The objective of this working paper is to contribute to the debate. To begin, the main characteristics of globalization and adjustments are described. This is then followed by a discussion of their effects on labour in recent years. Following this assessment of effects, the main emerging labour challenges are put forward. To conclude, the outline of a Labour Agenda is presented. This agenda is intended to overcome the existing problems and challenges, as well as to contribute, from the labour perspective, to achieve sustainable economic growth with social progress.

This document has been prepared by Daniel Martinez, Senior Economic Advisor of the Regional Office of the ILO in Lima and the undersigned, to be presented to the Ministers of Labour of the continent who are participating in the XI Inter-American Conference of OAS Labour Ministers, at Viña del Mar, Chile on 20 and 21 October, 1998.

Victor E. TokmanAssistant Director General

Contents

I. Globalization and adjustments in Latin America 1

1. Economic openness and integration 1

2. Structural adjustments 2

II. The principal labour and social effects from globalizationand adjustments 3

III. The challenges in the wake of the new labour conditionsemerging from globalization and adjustments 7

1. Globalization and basic labour rights of workers 8

2. Employment and wage policies in more intertwined economies 11

3. Labour costs, labour stability, productivity and competitiveness 11

4. Employability in a setting of greater occupational instability 14

5. International mobility without discrimination 15

6. Adaptation of the Labour Administration and Labour Ministriesto the new scenario of economic globalization 16

IV. The post-reform labour agenda 18

1. Strengthen democracy in open economies 18

2. Human resource and labour relation development as a source forgrowth and productivity 21

3. Reduce labour instability and ensure minimum levels ofsocial protection 27

4. Modernize the Labour Administration and Ministries of Labour 31 Bibliography 34


I. Globalization and structural adjustments in Latin America

The Latin American and Caribbean countries are in the midst of two processes that are exceedingly influencing not only the performance of their economies but also the composition of the productive structure. They are, on the one hand, the opening up of the markets and greater global economic integration and on the other, the adjustment process which was essential in order to recover and sustain the macro-economic balance and adapt to the variations in international economies. The process of economic globalization and integration was accompanied in most countries by two additional processes, privatization and the deregulation of the markets.

1. Economic openness and integration

The accelerated integration of the Latin American countries to the current world economy in the present decade has been accomplished in mainly four ways. The first is multilateral, as the Latin American countries have all, without exception, adhered to the results of the Uruguay Round of GATT and the majority have ratified their incorporation into the World Trade Organization. They have, in doing so, committed themselves to the objective of promoting free trade, with less barriers and easier access to world markets.

The second way, perhaps less publicized but of equal importance, consists of the unilateral reduction of tariffs, that has no precedent in the economic history of this century. Taking as an example the larger economies of Latin America, from the onset of economic openness, to date, the average tariff has dropped to levels equivalent to between half and a tenth of the levels existing at the commencement of trade liberalization. Likewise, tariff ranges have shrunk to a minimum of 1 in the case of Chile and a maximum of 7 in Brazil, while when the markets first began to open, the range fluctuated between a minimum of 10 in Mexico and a maximum of 57 and 56 in Chile and Peru respectively. This reduction of effective protection levels is even greater if one takes into consideration the currency overvaluation in most of the countries during the adjustment period.

The third route to integration lies in the growing amount of bilateral agreements on free trade. By the end of 1994 no less than 30 free trade agreements had been signed between countries in the Region. Said agreements are for temporary tariff reductions, usually for a period of between two and five years and renewable. Even though tariffs have not been completely eliminated, the tariff cut is significant on a high percentage of the goods that are traded among the countries.

Finally, the fourth and one of the most dynamic ways, are multi-country integration agreements. Previous integration schemes have been reactivated, such as the Andean Pact, the Central-American Common Market and CARICOM, while new arrangements as NAFTA and MERCOSUR have appeared, establishing a trade liberalization programme which by December 31, 1994 eliminated duties and other restrictions applied to reciprocal trade, except for a list of goods for which the deadline was extended to December 31, 1995. MERCOSUR has, furthermore, established a low common tariff with third countries, including less dispersion (between 0% and 20%, with 11 tariff rates and a list of exceptions). The Central-

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The Labour Agenda in Globalization: Economic efficacy accompanied by social progress

American Common Market, for its part, has established an external common tariff of 5% minimum and 20% maximum. Likewise, the Andean Community has set the same minimum and maximum tariffs as the Central-American Common Market, however, with a list of products that are not subject to any tariff levies (Decision 370), such as the generation and distribution of electric power, health, education, mass media, fishing and maritime transport.

Currently, a novel multi-country scheme "Free Trade Zone of the Americas" is being developed. This scheme, which embraces the whole Region, was approved in the Presidential Summit in Miami in December 1994, ratified in the Second Presidential Summit in Santiago in 1998 and is expected to be in place before 2005.

Several elements explain this drive towards dynamic integration in Latin America. At least three specific factors can be added to world globalization. First, greater homogeneity exists among the countries, not only from a political point of view -practically all the countries in the Region are under democratic rule- but also as regards the management of economic policies. Most countries have achieved certain macroeconomic stability in the short term, allowing them to turn their focus on growth. This, however, requires market expansion, which is the second factor that makes integration more attractive. Economic reactivation has been insubstantial and their is concern in the different countries about how to sustain it. Certainly, expanding the markets by way of trade is an important manner in which to reach this objective. Lastly, worth pointing out, is the world trend of forming trading blocks, which in the case of the Region was politically endorsed with the Initiative of the Americas, legitimating a trend followed in other parts of the world.

2. Structural adjustments

As mentioned before, in almost all the countries this process of integration and globalization has been accompanied by a process of structural adjustment, oriented to stabilize domestic prices and restructure the national productive system. Thus, the adjustment has focused on three areas. First, the recovery of price stability by restricting the expansion of domestic demand; restrictions put into operation by means of wage, fiscal and monetary policies. Second, the deregulation of the goods and services markets, as well as capital and labour markets. To this end measures have been applied to reduce tariffs, eliminate import quotas, guarantee foreign investments and the repatriation of profits and flex labour standards, especially as regards individual labour relations. Third, the reorganization of the structure and activities of the State mainly by means of privatizing state-owned enterprises and services and in some countries, a sharp reduction of employment in the institutions of the central government.

Both processes (trade openness and structural adjustment), although they use specific policies in each area, they also make use of the same economic policy instruments. Therefore, it is not always possible to distinguish the impact on the labour market of each process separately. Nonetheless, trade and financial liberalization triggers an influx of foreign capital. The increased reserves that are derived from this capital inflow, together with greater competition stemming from this liberalization, allows for the currency exchange rate to be used to anchor local

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prices and in this manner to curtail inflation. In all cases one effect of this policy has been a significant currency overvaluation.

Currency overvaluation and less protection favour importation and this spurs an increase in the trade deficit and the current account deficit. Should the flow of foreign capital dwindle, the external restrictions that were present at the onset of the crisis would reappear. In order to prevent recurrent external restrictions, some countries have adopted policies to either devaluate their currencies, contract wages or reduce the level of employment and even, in some cases, introduce protective measures (although not to the extent of those prior to the market liberalization), against the grain of the globalization strategy.

II. The principal labour and social effects from globalization and structural adjustments

As pointed out, it is no easy task to distinguish the effects from the processes of globalization and that of structural adjustments on the labour market and society at large. Moreover, in large countries such as Brazil the specific weight of the internal market is such that its incidence on the behaviour of the labour market dilutes in part the effects from economic openness. Nevertheless, in continuation an attempt is made to try to distinguish the main labour and social effects from both processes.

The reduction or elimination of tariff and non-tariff barriers on imported goods should, in each country, produce a relative drop in the prices of imported goods. On the side of production this would lead to a reallocation of factors towards the exporting sectors and on the side of the consumer, would reorient their purchasing towards imported goods that would be cheaper than before the opening of the markets as a result of the tax relief produced in the country. Consequently, the increase of exports should have a positive impact on labour, while a drop in the prices of imported goods should boost the buying power of the population.

Another foreseen outcome from trade liberalization is that it should generate an increase in the demand for relatively cheaper goods produced by unskilled and intensive labour in developing countries. This in turn would give rise to a higher relative demand for these workers. This argument is based on the fact that developing countries export to the developed countries goods produced by unskilled-intensive labour (more abundant factor) while they import goods produced by skilled-intensive labour (scarcer). Thus, with the liberalization of trade, the demand for unskilled labour in the developing countries would increase while that of skilled labour would diminish, both in relative terms, and the wage gap between both kinds of workers should narrow down.

However, in the short term, the escalation of employment spurred by the expansion of export activities could be offset by a decline of employment in the sectors that produce goods that are exposed to competition from imported goods. Competing in a less protected domestic market calls for better productivity. This is mainly achieved, at least initially, by reducing employment. The net impact of open markets on employment would depend, on the one hand, on the extent of the demand for labour in tradeables in both sectors (exporters and those competing with imports)

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and in non tradeables (construction and services) and on the other hand, on the dynamics of labour supply.

The economic adjustment also has an impact on employment. An enormous drop in public employment is foreseen, particularly due to the privatization of state owned enterprises. However, this reduction in public employment will not necessarily lead to a negative repercussion on total employment -public and private- if the privatized enterprises keep the same amount of workers as prior to the privatization, whether contracted directly or whether through subcontracting.

Similarly, more flexible labour standards on individual labour relations, as a means to free the functioning of the labour market, should induce a relatively greater demand for fixed-term contracted workers and less for workers with indefinite contracts, with the ensuing changes in the composition of wage earning jobs.

This heterogeneous evolution of labour demand both between sectors (tradeable and non tradeable, public and private) and between levels of qualifications and types of contracts, will without a doubt impact the behaviour of the average wages in each one of the mentioned sectors, levels and contracts and consequently the wage differentials between them.

Given that export oriented sectors are compelled to offer better quality products, it is expected that free trade will produce a differential in the price of goods that are exported and those that are destined for the local market, which would be accompanied by relatively higher wages in the exporting sector than in other sectors. As it is in the exporting sector where there will be a greater demand for unskilled labour, it is here where wages will increase more than those corresponding to workers who are skilled. As a result, in open markets there should be a tendency for the wage gap between sectors and levels of qualifications to become less notorious. Moreover, the greater demand for workers with fixed-term contracts should produce an increase in the wages related to these types of contracts, with a successive reduction in the wage differential as regards the workers with indefinite work contracts. This outcome would, thus, bring about a reduction in the wage differential between skilled and non-skilled workers, given that supposedly it would be the less skilled who are contracted for a precise period of time.

The curbing of inflation rates due to macroeconomic adjustments prompts an increase in aggregated consumption in two ways. The first by means of income being transferred to the social groups who are mostly affected by high inflation. The second is because of alterations in the relative prices of tradeable and non tradeable goods; a change that favours the mentioned social group. Both cases bring about a raise in income among the relatively poorer groups of the population.

Summarizing and considering all of the above, it is expected that the labour market will be impacted in mainly six ways as a result of trade openness and economic integration. First, a slash in public employment and the diminishing role of the State as an employer of first resort. Second, an increase of private employment, especially in the non tradeable and exporting sectors, which will offset the possible decline of employment in the tradeable sectors that are competing with imported goods. Third, an increase of low-skilled private employment and temporary work

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contracts. Fourth, an improvement on real income and less wage differentials between skilled and non-skilled workers, between workers with fixed-term contracts and those with indefinite contracts and between workers in tradeable and non tradeable sectors. Fifth, an increase in productivity, principally in the sectors that supply tradeable goods and services. Finally, an alleviation of poverty and an improvement in the welfare of the population in general.

An analysis performed by the ILO on some countries in the Region1 regarding the evolution of employment, productivity and wages after the opening-up of economies, discloses that their markets show similar behavioural patterns.

Total employment (public and private) has expanded at a lower rate than that of the labour supply, with the resulting rise in unemployment. This affected the total urban EAP in the Region by 5.7% in 1990, escalating to 6.1% in 1993 and 7.2% in 1997.

A shrinkage public employment has been observed, particularly in non-Central-Government. During the 1990-1996 period, the participation of public employment in the total in the Region diminished from 15.3% in 1990 to 13% in 1996.

As regards private employment, it is evident that it has decreased in the sectors that provide tradeable goods and services that compete with imports and increased in non tradeables. However, this augmentation of employment in the non tradeable sectors was mainly based on new jobs of poor quality in the informal sector. Moreover, the drop of employment in the tradeable sectors competing with imports would have been greater if the falloff of employment in the medium and large-sized enterprises had not been partially compensated by an expansion of employment in the small and micro-enterprises.

Private employment, apart from having shrunk in the tradeable sectors, has also become more precarious, in both micro and small enterprises as well as in medium and large-sized businesses. Thus, taking into account total employment in industries, construction and services, the participation of wage earners without contracts in the total number of wage earners in these three sectors jumped 11 percentage points between 1990 and 1996 in Argentina, of which 6 points corresponded to micro-enterprises and 5 points to larger sized enterprises. Of the new wage earning jobs without contract, 47% were registered in large enterprises where proportionally there was a reduction of almost the same amount of workers with contracts. In Chile most of the increase of wage earners without contracts (roughly 1.5%) that augmented in the total of wage earners in the mentioned private sectors, corresponded to micro-enterprises. In Peru, the participation of wage earners without contracts in total wage earners in the same sectors expanded 11 percentage points, all corresponding to micro-enterprises. The contrary occurred in Colombia where the participation of wage earners without contract in the total wage earners in the private sector decreased 6.5 percentage points, of which two-thirds were owing to micro-enterprises. As to fixed-term wage earners, in Argentina as well as in Chile and Peru, the total net increase of wage earning

1 J. M. Camargo, E. Amadeo. P.G. Melo Filho, R. Frenkel, M. González Posada, E. Hernández-Laos. Apertura económica, productividad y mercado de trabajo. ILO, Lima 1998.

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employment with registered contracts between the different periods were of fixed-term employment and in Colombia the rate of increase of the latter was 1.3 times that of indefinite contracts. Considering both wage earners without contracts and those with fixed-term contracts, the percentage of the same jumped more that 12 percentage points in Argentina, 6.5 points in Chile and 23 points in Peru, while in Colombia it fell a little more than 5 percentage points.

Labour productivity has risen significantly in the tradeable sectors and less in the non tradeable. The improvement of productivity in the tradeable sectors is owing to the expansion of production as well as the cut of employment and the currency overvaluation.

In the area of wages, instead of wage differentials narrowing down, the gap has widened. This is as a result of the greater rise in real wages of the more qualified workers, especially in the tradeable sectors where the level of employment has diminished the most.

There are, nevertheless, also positive aspects which have been observed. The most outstanding is without a doubt the relative recovery of the population's purchasing power, resulting from curbed inflation, which, together with the rise in employment of low-skilled labour in the non tradeable sectors and exports, explains the alleviation of poverty in many countries of the Region.

Even so, the increase of unemployment as well as the significant expansion of poor quality employment and the precariousness of jobs, together with the negative behaviour of income differentials has generated a social situation in several countries that embodies three elements which are clearly negative and quite contrary to that which was expected. The first is recurrent unstable and insecure labour. At present, the majority of the workers are not sure how long they will be able to hold onto a job, how much time will elapse before finding a new job if they should lose their present job and should this occur, they do not know how they would support their families, given that in most of the countries there is no unemployment protection system with extended coverage.

The second element consists of the growing inequity among the working population in the areas of productivity, income, labour protection, social security and especially bargaining capacities. The expansion of informal jobs of extremely poor quality as well as precarious employment (wage earners with short-term contracts or no contracts), is also related to a weakened trade union organization, restricting, if not nullifying, the possibilities of a great amount of workers to participate and bargain in the ongoing process of liberalization.

Finally, the third element, brought on by the previous two, is growing social disparity, manifested by the high percentage of the population who are socially excluded, due to an erosion in their possibilities to access quality jobs, quality education, adequate health services, cultural development, the system of political and trade union representation etc.

This is, therefore, a paradoxical situation. While the macroeconomic and macro-social indicators demonstrate relatively high and positive economic growth

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Argentina Chile Colombia Peru

Countries

Figure 1Wage earners in the EAP who are unemployed or have precarious

labour relations

1990 1996

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rates, as well as significant increases in investment (internal and external), a recovery of foreign currency reserves, low inflation rates, modernization of public services, low levels of unemployment (with exceptions) and a modest recovery of wages, a vast section of the population feel more insecure about the future and perceive that social fissures have widened and that the situation of those who are socially excluded has deteriorated.

Overcoming this paradoxical situation does not imply backtracking to the policies of the past but rather to face the new objectives and challenges that are forthcoming not only from globalization and economic integration but also from the characteristics of the macroeconomic adjustments policies adopted, focusing on achieving greater human resource development.

III. The challenges in the wake of the new labour conditions emerging from globalization and structural adjustments

Without a doubt, the benefits of globalization and productive restructuring cannot be adequately translated into human resource development and social progress if the lingering problems of job insecurity, growing inequality and less social cohesion are not progressively stamped out. To ameliorate these problems, it is necessary on the one hand to boost productivity and the income of enterprises and workers as a way to generate quality employment and better quality life and on the other hand, develop -and in some cases initiate- systems that furnish the workers with labour security and social protection.

Uplifting productivity follows a process that has two clearly defined phases. In the first phase, enterprises, facing the need to adjust to the greater openness in the short term, augment productivity by cutting labour costs. This results in less employment, less wages and less social protection. The second phase, over the longer term, consists of implementing new and more modern technology for organizing labour and also processes and equipment. The successful implementation of the latter, would however require adequately paid workers, a certain level of stability and protection, labour incentives -especially as regards training- and with the possibilities of negotiating with the enterprise strategies on augmenting productivity and equitable distribution of the benefits derived from this.

Improvement of social protection systems would imply extending the coverage of the existing health and pension schemes as well as creating a system for unemployment protection, mainly for those workers affected by the process of restructuring or adapting the enterprise to the changing conditions of the market.

Achieving greater productivity without encumbering labour, as well as developing better and more extensive labour and social protection systems is, however, subject to the new labour conditions set by the process of globalization. Thus, the successful accomplishment of objectives brought on by these new conditions is itself a pre-condition to orient the benefits of growth towards human resource development and social progress.

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The contemporary conditions encircling the world of labour are basically the following six.

1. Globalization and basic labour rights of workers

At present there is a debate underway on the distribution of benefits derived from trade liberalization. Acknowledging that this is not an automatic process, the discussion is on whether the labour aspects that have an incidence on international trade should be regulated and how to go about it. This is the first challenge which has to be faced so that the expansion of trade goes hand in hand with social progress.

a) Labour dimensions of integration

Three mechanisms are being applied to establish a link between trade and labour issues. First, there is an existing mechanism in place in the framework of the Generalized System of Preferences (GSP), by which the United States can apply trade sanctions on countries, with preferential treatment, should certain basic labour principles not be complied with, after an investigation of the affected trading partner involved. This instrument is applied unilaterally and could lead to trade sanction. On the other extreme is the European Community Charter which is applied multilaterally and does not lead to trade sanctions. Moreover, a recent decision of the European Union allows for relations in an inverted manner, i.e. incentives of low tariffs for the trading partners who respect the fundamental rights of workers. In some way the idea of a social charter has also entered in the debate of MERCOSUR. Finally, there is also an intermediate option incorporated in NAFTA by means of a complimentary protocol on labour issues. Although this also includes sanctions, they can only be applied in very special cases and only after a co-operation process where the emphasis lies in resolving the problems through collaboration between the parties involved.

The European Community Charter endorsed in 1989 seeks social order. To this end, it includes programmes of co-operation and training to generate employment and to lessen regional differences. It facilitates the mobility of workers from one country to another and harmonizes labour relations, collective bargaining and job classifications. It covers twelve categories of rights; the basic five already included in the GSP and furthermore adds the free circulation of people, harmonization of working conditions, social protection in accordance to each country, safety and health protection, training for all, protection full integration of the disabled and consultation with the workers. It is basically a declaration with voluntary adhesion, without sanctions which sets guidelines of a general nature.

MERCOSUR is also moving in this direction. A sub-commission of Subgroup 11 examined the aspects of harmonizing labour, social security, wages and employment. The methodology adopted by said Group was to select 21 ILO Conventions and promote ratification of the same from the four member countries of MERCOSUR and thus beget a basic analogous doctrine. The list of conventions gathered those which in their majority have already been ratified. On the other hand, the workers in the MERCOSUR countries have proposed an extensive social charter, based on the European style, but to date it has not been accepted by the governments. In July of 1998, Subgroup 10 initiated a debate on a possible agreement on individual

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and collective rights of the workers in the sub-region which includes, in part, the contents of the charter put forward by the workers.

The complementary protocol (labour and environment) of NAFTA does not constitute part of the main agreement and emphasizes the mechanisms of consultation and cooperation between the contracting parties, under the assumption that there exists a shared objective of social progress and that this consensus on trade expansion would not be based on the exploitation of the workers. The other assumption, based on the reality, is that the fundamental principles are already included in the national legislation of the three countries, while the degree of compliance varies according to the level of development of the countries and is not due to deliberate action to evade them.

b) Debate in the multilateral framework

Debate in the framework of labour and trade was initiated at the end of the "Uruguay Round" of the GATT agreements. The topic, since its onset, was addressed by the ILO and later both the Social Summit in 1995 and the Meeting of Trade Ministers in 1996 advanced in ratifying the commitment to create employment in a framework of respecting the fundamental rights of workers and the mandate of the ILO in monitoring and promoting compliance with said obligations.

An analysis undertaken by the ILO also contributed to the advancement in the analysis of the topic and to reach consensus among the constituents of the Organisation. The first objective was to indefinitely postpone the broaching of a "social clause" issue that links trade sanctioning to the violation of labour rights. The second consisted of establishing two fundamental principles. One was the non-expansion of trade based on the violation of fundamental workers' rights and the other the non-equalization of both wages and labour conditions among countries that are at different stages of development.

After consensus was reached, progress was made to define with precision the fundamental workers' rights, this corresponding to the principles of freedom of association and collective bargaining, the prohibition of slavery-type work, the progressive elimination of child labour and non-discrimination, all of which are included in the basic ILO conventions. This identification was endorsed at the world level at the Social Summit and embraced as a universal commitment in the Action Plan approved by all the countries of the world.

For its part, the ILO, in compliance with its renewed mandate received from the Member States, strengthened its monitoring mechanisms so as to respond more effectively. The approach was twofold. First, a campaign was put into action to increase ratification of the fundamental conventions. The second consisted of acquiring solemn reaffirmation of the principles involved, even from countries that are not in a position to ratify the corresponding international conventions.

As a result, the ILO constituents adopted, during the International Labour Conference held in June, 1998, a "Declaration on fundamental principles and rights at the workplace and their monitoring".

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The objective of this Declaration is not to make the basic conventions that are not ratified applicable, but rather to reaffirm the logic of the commitment to the values and principles of those under consideration. This engenders a dual commitment, one from the Member States to promote the principles and the other from the ILO to assist them in this task by means of diverse methods, including technical co-operation. The rationale is to promote and evaluate the progress made in applying the fundamental principles and not to control that the law or observance to it is in conformity with the provisions of the respective conventions. Thus, an ad hoc mechanism will be designed to monitor the advances on complying with fundamental principles.

The universal ratification of the fundamental labour standards contained in the Declaration as well as the design and implementation of an appropriate " promotional monitoring" mechanism of the application of said standards, therefore constituting one of the challenges to face in ensuring that economic growth contributes to equity, social progress and the eradication of poverty.

2. Employment and wage policies in more intertwined economies

Integration to the world economy, due to its multifaceted nature, restricts the capacity of each country to implement economic policies in an autonomous fashion. External conditions become key factors in the design and application of economic policies. This is clearly so in relation to employment and wage policies. In the past, protected and closed economies enjoyed autonomy and employment depended mainly on the evolution of effective demand which in turn was susceptible to the management of monetary and fiscal policies. In a Keynesian context, employment could increase if economic activity is stimulated by greater public spending. This produced higher inflation rates, but they were processed internally through a redistribution between earnings and wages. Presently, price hikes encumber competitiveness and the possibility of growth. This directly exacerbates the creation of employment. A similar situation occurs with the setting of wages, as a transfer of wage increases to prices could produce changes in the demand. Currently, greater openness has introduced restrictions in making said transfer without thwarting competitiveness.

In this scenario, the second challenge consists of redesigning employment and wage policies, adapting them to the new structural context. The employment policy should recognize the limitations in expanding employment by means of a spurious increase in the demand and emphasize an expansion in the capacity to compete, which signifies boosting productivity and cutting the cost of production. An upturn in productivity requires investing in the development of human resources, restructuring production and conceiving long-term productivity strategies that surpass the short-term strategy that is based on slashing costs, principally by reducing employment.

The wage policies should find correlation between wage readjustments and the variations in productivity. This implies, in many cases, to revise the manners of collective bargaining, focusing on decentralization so as to allow for greater flexibility of the wage structure and not to undermine the bargaining power of the unions. Likewise, it is necessary to introduce aspects in collective bargaining, such as

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training, that are linked to boosting productivity and correlate remuneration to the results (profit sharing).

Due to the emphasis on increasing productivity in the more organized sectors and its closer linkage to remuneration, inequity is aggravated (as is currently occurring). The aim is, therefore, to conceive policies that convey the benefits to the rest of the population, fundamentally incorporating informal activities into the modernization process and furthermore, compensating those groups that are the most vulnerable and laggard during the process by way of the social policy.

3. Labour costs, labour stability, productivity and competitiveness

The third challenge entails aligning national costs with the performance of productivity so as to increase international competitiveness. As pointed out, the majority of the enterprises in the Region, in order to curb national costs have opted to cut labour costs. This is actually accomplished in two ways: by reducing the costs involved in job contracts, mainly the non-wage costs and secondly, by allowing for more flexibility in the work contracts and reasons for dismissal. The perception is that labour costs restrict the expansion of exports and thus, the generation of employment at the national level.

The flexibility of contracts has been oriented in two principal directions. The first is to offer alternatives to the indefinite work contract, introducing contracts that promote employment and training and that are fixed-term or part-time. The second is to facilitate layoffs and diminish the costs involved by eliminating the obligation of reinstating in the case of unjustified dismissal, reducing severance payments, facilitating layoffs for economic reasons and allowing for massive layoffs.

As mentioned in Section II, the first orientation has not only sparked a concentration of atypical contracts for the new jobs but also unregistered employment. This upsurge in the amount of wage earners with fixed-term contracts or no contracts at all, leads to precarious labour relations which in turn decreases protection, lack of incentives for investment in training and less commitment to increase productivity.

Existing evidence of low levels of wages and labour costs per hour worked (in relation to more developed countries) connotes that competitiveness is not influenced much by wages and labour costs, but rather by low productivity which certainly is linked, among other things, to the ascending labour precariousness. As to wage costs and total labour costs2, the following outcomes observed over the last years should be taken into consideration. First, minimum wages in Latin America are now at a lower level than they were 17 years ago, while industrial wages are practically at the same level as in 1980. Second, the absolute levels of wages per hour worked in the manufacturing industry in 1997 were below US$1.50 in countries such as Colombia, Mexico and Peru, US$2.50 in Chile, US$3.00 Brazil and a little over US$4.00 in Argentina. In Korea, a country usually associated to exports based on cheap labour, the hourly wage was almost US$7.00, while in the United States it was US$13.00 and in Germany US$15.00. In the countries of the Region, total labour costs per hour 2 Total labour costs is understood as the combination of wage costs and non-wage labour costs that the employer has to bear.

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worked, in the case of a worker who has an indefinite work contract, stayed in 1997 on somewhat more than US$6.00 in Argentina, US$5.40 in Brazil, US$3.50 in Chile and around US$2.00 in Colombia and Peru. These costs are even lower in the case of wage earners without contracts or fixed-term contracts (Figure 2). In the remainder of the sectors a similar performance could be observed.

In this scenario of low wages, the proposal to reduce labour costs have been focused on cutting non-wage labour costs, in particular the payroll taxes to finance low-budget housing (Peru) and training (Mexico and Brazil), as well as contributions to social security. This reduction in the costs is, furthermore, complemented with the introduction of more flexible labour contracts.

Regarding productivity, it is low and showing scant growth. It is, furthermore, spiked by macroeconomic adjustments whose characteristics are momentous determinants for competitiveness. Indeed, the evolution of competitiveness is as important to define as the development of labour costs. Labour costs, expressed in terms of purchasing power, i.e. in relation to what the worker can buy, has incremented less than productivity in all the countries except Chile. Whereas, should the costs which interest the producers be taken into consideration, i.e. in relation to the prices they obtain for their products, the growth of such labour costs exceed that of productivity. The same occurs should labour costs be calculated in dollars.

Therefore, these effects are also linked to the type of macroeconomic adjustments. Almost without exception, all the Latin American countries register currency overvaluations and this causes prices that are expressed in dollars to continue rising. Furthermore, at times of trade liberalization, local prices undergo an adjustment process. The prices to the producer drop quicker than prices to the consumer, giving rise to conflicting perceptions between workers and employers who legitimately defend consumption capacity (workers) and production capacity (employers).

The prior analysis should not lead to the conclusion that labour costs are not of importance, but rather that the issue is more complex than merely attributing the difficulties encountered in competing to high wages or to non-wage labour costs or to rigid labour contracts. There are channels to cut labour costs, as has been achieved in various countries, by means of reforming the social security system and mainly by reducing the costs that affect unskilled labour and where the greater potential for generating employment is embedded. Regardless, it should be kept in mind that the

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Argentina Brazil Chile Colombia Peru

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Figure 2Labour costs per hour and type of contract in the manufacturing sector,

1997

Indefinite Fixed-term No contract

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priority should also be to boost productivity and correct the undesired repercussions of the existing type of macroeconomic adjustment. The latter suggests opting for a novel way to raise productivity and employment; this pointing to the mentioned alternative of modernizing technology with improved labour relations and working conditions.

However, it is not only in the modern sector of the economy where the challenge arises to lift productivity and competitiveness, curbing precarious labour and unemployment. The challenge is even more intense in the case of the productive units in the informal sector of the economy. A notorious effect of the processes of opening-up the economies and globalization on the occupational structure has been the weaker participation of the modern sector in generating employment. Moderate, as well as unstable economic growth, coupled to the slash in public employment has, in most countries, driven the expansion of employment to be concentrated in informal activities (85 out of every 100 new jobs) where at present almost 56% of all the jobs in the Region are located.

Informal jobs correspond to activities that yield low productivity and income, if compared to the average and the level prevailing in the modern sectors. On average, the income level of informal workers is around 62% of those working in modern sectors. Moreover, in the majority of the countries the wage gap between both sectors has widened over the six years prior to 1997 (ILO 1997). Finally, as a result of the bloating informal sector the average productivity expansion has shrunk in the sectors producing both goods and services, encumbering productivity and consequently, the potential for future growth.

4. Employability in a setting of greater occupational instability

Intensifying international competition leads to the need to restructure production, so as to maintain competitive levels. This involves the expansion and contraction of sectors and enterprises, as well as the mobility of workers between them. Furthermore, to obtain more efficient production in a framework of more volatile demand, flexibility is required in production and essentially in the work process.

For the workers this new scenario signifies dramatic and costly changes. There has been a shift from focusing on one job "for life" to a situation where a change of occupation, enterprise and qualification requirements prevails. The cost involved in this process is high and for many it means unemployment (in many countries for long periods) and a loss of protection and productive capacity.

Regardless, this process is inevitable if the Region wants to partake dynamically in the new international economy. The challenge, therefore, is how to ensure that the workers are not inflicted and that they have the possibilities to adapt to the emerging conditions. The answer lies in enhancing employability; generating the sought after capacity so that workers are better prepared when responding to the new labour demands and at the same time, without forfeiting the levels of protection while the transition lasts.

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To confront this challenge, it is necessary to articulate labour policies that combine the active interventions with the new social protection schemes. The former should be directed at the retraining of workers for the emerging jobs, which increasingly demands less specialization but more creativity, initiative and versatility. In practice, this is leading to the strengthening of basic competence rather than skills, endowing the worker with knowledge that enables him/her to adapt to the demands. This in turn creates the challenge of linking education to the labour market and particularly to highlight the importance of uplifting the quality of education at the primary school level where basic abilities are formed. The fundamental component is definitely to invest in retraining and possibly in a different institutional framework.

Retraining has to be accompanied by maintaining social protection. This implies an adaptation of the current schemes to protect workers in a different situation in which they are more likely to change jobs. If not, the affected workers are penalised by a loss of protection and lack the incentive to voluntarily participate in the productive transformations. New systems in force in some countries (Brazil, Colombia and Peru) and proposed in others (Argentina and Chile), substitute severance pay provisions with individual funds which the workers may withdraw in the event of dismissal or resigning. The systems allow for continuous protection during the reinsertion period, without losing that which has been acquired. As an alternative or complement, it is necessary to introduce unemployment insurance, ensuring permanent access to a network that provides basic health, education and nutrition, independently of the condition of employment or whether unemployed.

To recap, the fourth challenge is to create employability, which entails combining the modernizing of training and education systems with ongoing protection in the framework of a situation with greater occupational mobility.

5. International mobility without discrimination

A more global and integrated world is producing greater mobility of people between countries. Communication has been facilitated and the flow of information is almost instant, generating a transfer of people, many of them searching for new job opportunities. This engenders a series of new social demands from workers that are aggregated to the existing traditional ones, thus creating new issues that need to be tackled.

For the purpose of the analysis a distinction has to be made between illegal and legitimate migration. Illegal migration has been on the rise, not only from the southern to the northern hemisphere, but also between countries in the southern hemisphere and not necessarily bordering countries. The increase of illegal migration creates a double problem. Illegal immigrants constitute an important part of the excluded, whether it is because their insertion into the labour market is in a precarious manner and without protection or whether it is because they have no guaranteed access to the minimum level of social services that are provided by the State for all its citizens. In addition, in some countries, illegal immigrants face personal and family insecurity as a result of police pursuit. Thus, there is a need to advance in regulating the migratory situation, as a first step to social and labour inclusion of the same. In addition, illegal immigrants start working without receiving the benefits of the labour laws and usually accepting lower wages than those prevailing.

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As to legal immigrants, who to a certain degree also find themselves in similar situations of exclusion, there are three issues that would need to be addressed. The first, of a general nature, refers to the change in the labour structure and particularly to the impact immigrants have on labour relations. The second, more specifically, is related to the acceptance of certified qualifications acquired abroad. The third concerns the need to ensure ongoing social security protection for the migrating workers.

Protecting migrants requires international co-ordination in the area of both the growing diversity of social security regimes between countries (an outcome of the recent reforms) and in the traditions and customs of a job position in the territory of a country. In the framework of greater occupational mobility, both within and between countries, the system does not accommodate but rather penalizes mobility.

The integration agreements that contemplate free circulation of workers make it necessary to harmonize social security policies, based on four fundamental principles: a) equal treatment of locals and foreigners as regards social security; b) formally determining the social security legislation that will be applied; c) conserving rights that have been acquired or in the process of being acquired; and d) the possibility to contribute to social security in a foreign country. Of these four basic principles, the first and third (equal treatment and conserving rights) refer to the central aspect of the problem, as the other two (applicable legislation and contribution procedures) depend to a great extent on how the previous two are handled.

6. Adaptation of the Labour Administration and Labour Ministries to the new scenario of economic globalization

The new conditions and challenges brought on by globalization and economic integration compels a revision and adaptation of the contents of the Labour Administration in the Region. New functions have emerged that are related to the need to harmonize the labour legislation of the countries; specifically aspects directly concerning integration, as in the case of labour migration, the equal certification of qualifications and social security. Several conventional functions have to be reoriented, as is occurring with bargaining which is no longer limited to the ambit of the enterprise or economic sector but taking place at the national level and moreover, not only confined to the area of labour (Social Dialogue). Labour inspection is also being reoriented, its functions undergoing a progressive transformation characterized by a change of approach from punitive to educational (preventive) action. In general terms, the challenge is to adapt the contents of the Labour Administration to the orientation of the labour policy, based on more auto-regulation on the part of the social actors and less regulatory intervention from the State.

This change in the contents of the Labour Administration sparks a double challenge for the Labour Ministries. On the one hand, there is a rising need to introduce reforms in order to adapt the activities related to labour that are conventionally attended by the ministries. This will imply redefining their manner of intervention, relinquishing some functions and assuming new ones. On the other hand, there is an emerging demand to cater to workers not incorporated into the modern sector, particularly informal workers and the unemployed. This new

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dimension, apart from being necessary, can contribute to legitimating socially the actions of the labour ministries and associating them to government social policies.

IV. The post reform labour agenda

An appropriate response to the challenges of restoring a certain degree of stability and labour protection as well as greater equity and social inclusion, without sacrificing the necessary adaptation so as to compete, conduces to updating the Labour Agenda for the Region. The Agenda requires more relevance than in the past to issues related to human resource development as a source for growth and increasing productivity, the reduction of labour instability and the expansion of social protection. The aforementioned is taking place in the framework of more open economies and a democratic environment. This in turn exacts modernizing the Labour Administration and Ministries of the sector.

1. Strengthen democracy in open economies

a) Labour aspects of globalization and regional integration

i) Respecting the fundamental rights of the worker

Even though globalization stimulates economic growth and growth is a pre-requisite for social progress, growth alone is not sufficient to guarantee said progress. Economic growth should be accompanied by a set of fundamental rules that are based on shared values, permitting those involved to be able to demand adequate participation in the wealth that they contributed to generate3.

The modernizing of individual or collective labour relations and in general, the changes in the labour policy, regardless of type, have to take into consideration the need to respect the basic rights contained in the international labour conventions of the ILO; to be more explicit, freedom of association (Convention 87) and collective bargaining (Convention 98), the prohibition of forced labour (Conventions 29 and 105), non discrimination as regards employment and occupation (Conventions 100 and 111) and the elimination of child labour (Convention 138). Concerning the latter, the International Labour Conference convoked for June 1998 in Geneva, examined a preliminary proposal for a future Convention and Recommendation for the elimination of the most extreme forms of child labour, which is expected to be adopted in the 1999 Conference.

These aforementioned rights cannot be reserved for one sector of society only. They are the key to full citizenship for all workers, independently of the sector or country in which they work. The State has the responsibility which cannot be delegated, to ensure that these fundamental principles are respected, as this paves the way to achieving economic development that is socially acceptable. Upholding the fundamental rights of workers is the most remarkable social commitment made by the Governments in the present century. This has, and today more than ever, should

3 Prologue of the ILO Director General to "Declaración sobre Principios y Derechos Fundamentales en el Trabajo y su Seguimiento". Geneva 1998.

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constitute the core of the labour policy4. Hereby, mobilizing national efforts so as to ensure that social progress accompanies economic progress would be harmonious with the need to respect the diversity of circumstances, possibilities and preferences of each country.

The World Summit on Social Development, at Copenhagen in 1995 endorsed these principles and included in the Action Plan the commitment to respect the basic rights of workers. In turn, the WTO at Singapore in 1996, apart from ratifying said commitment, concurred that the ILO is the competent body on this matter and reiterated the support for its promoting role.

The ILO for its part, will continue with the campaign to ratify and monitor the effective application of these basic conventions and provide adequate follow-up to the Declaration of the ILO related to "Principles and Fundamental Rights at the workplace and its Monitoring". The same constitutes a renewal of the commitment to advance in the observance of the principles related to the basic rights of workers that are included in the basic Conventions of the ILO, even in the countries where they have not been ratified. Said Declaration is of a promotional nature and has the full support of the ILO to co-operate with the Member States in eliminating the possible obstacles that could hinder them from reaching their objectives.

ii) Supervision at the national level

The commitment made by ratifying international conventions of the ILO related to fundamental rights of the workers entails putting in place mechanisms to monitor the adequate enforcement of the same. To this end, the ILO constituents, during the International Labour Conference of the current year, included in the Declaration related to principles and basic rights at the workplace a mechanism for "promotional supervision". The same is being initiated in MERCOSUR through Sub-group 10 debating the possible creation of a body to supervise and monitor a future instrument on individual and collective rights of the workers and employers.

This mechanism for promotional supervision may in some way substitute or compete with the national procedures of overseeing the correct enforcement of labour standards. However, international instruments would be difficult to implement should the national mechanisms and procedures not be effective.

Regarding the latter -efficacy of national supervision- practically all countries are aware that, without abandoning the ability to sanction, they have to move towards a methodology that is more educational and preventive so as to engender a change in attitude.

iii) Harmonizing the labour legislation in the framework of economic integration

Institutional culture and technological, social and economic conditions are quite different and heterogeneous among the countries. Also, decisions related to the evolution, nature and effects of the legislation in each one of them are normally the 4 Speech of the ILO Director General at the tripartite meeting on "The new contents of the Labour Administration and the modernization of the Labour Ministries". San José, Costa Rica. May 1997.

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result of local processes and adjusted to the degree of development of each domestic situation, in order to ensure stability for said changes. The latter does not exclude, in a framework of the integration process to the global economy, the countries from agreeing to progressively harmonize national legislation on those labour obligations whose compliance or non observance could have an impact on greater or less competitiveness of the enterprises or the free circulation of the workers in the case of the integration processes that contemplate this issue. In particular, the latter refers to:

occupational safety and health conditions

social security (level of contribution in the various countries, pension payments in a country different to the one where contributions were made, multiple pensions in the case of contributions having been made in more than one country, etc.)

labour migration where the integration agreements consider the free circulation of workers

recognize equivalent qualifications of migrating workers

b) The renewal of dialogue in democratic societies

The return to democracy, being the prevailing political system in the Region since the latter part of the previous decade, opens new possibilities for social dialogue, which constitutes an instrument for the peaceful processing of differences and disputes, in this manner contributing to the consolidation of democracy.

It is important to underscore that social dialogue should not be confused with political dialogue. There is a thin line between both but they embody two different concepts. This does not imply that there is no relation between social dialogue and political dialogue or that the former cannot contribute to the latter. As occurred for example during the transition in Chile, social dialogue can also set the precedence that disputes can be resolved without confrontation and as a result strengthen democratic principles, but without replacing the bodies whose main responsibility it is to settle political conflicts.

Questions arise as to which are the most appropriate fora for dialogue, or rather, which are the new fora. Social dialogue is resurfacing at the national level in several countries and it is emerging very strongly at the enterprise level. The national level is important because it is here where the new agreements can be processed and it allows social actors to transmit to the rest of the population their support to basic principles, objectives and the rules of the game. At this level there have been relatively successful recent experiences with dialogue. Mexico, Chile and Colombia are countries where social dialogue has been taken first at the national level, serving to generate certain consensus that, although sectoral, has influenced the political field.

At the enterprise level momentous productive transformations are under way and it is here where new opportunities have appeared for dialogue that is more constructive and less antagonistic than in the past. The enterprise is becoming an arena for collaboration rather than for confrontation, due to both the will of the participating parties and because this is required in the new form of organization.

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Teamwork, together with greater creativity, responsibility and accountability from workers are all necessary elements to boost productivity. This in turn requires the cooperation of the unions and sufficient remuneration so as to motivate the workers to assume this greater responsibility. Collective bargaining in many countries is progressively addressing the issues of productivity and others that go beyond wage demands, which can be examined from a clearer perspective from within the same enterprise. What is sought after, basically, is to democratize labour relations within the enterprise by means of greater autoregulation of the same.

Dialogue and bargaining at the enterprise level does not, however, exclude collective bargaining at the level of the economic sector. In fact, recent trends observed in Latin America illustrate that although collective bargaining in most of the countries is taking place at the enterprise level, close connection is kept with bargaining at the economic sector level. This allows for harmonizing the objective of greater economic efficacy with the unions' bargaining capacity.

All these levels of dialogue need basic conditions in order to ensure balanced bargaining. This in turn, as mentioned previously, requires a minimum level of democratic guarantees which, as regards labour, are expressed in obsering the fundamental rights of the workers endorsed in the relevant ILO conventions.

2. Human resource and labour relation development as a source for growth and productivity

a) Growth, macroeconomic policy and employment

As regards labour, it is widely recognized in the Region that it is essential for the economy to grow in a sustained manner in order to tackle the problem of employment satisfactorily.

With the expansion of labour supply in the Region slightly higher than 3% annually, a similar increase of labour demand would be required so as to at least not aggravate the existing problem of unemployment further. The demand would have to be higher to curb unemployment and enhance the quality of existing jobs. However, given the employment-output elasticity over the past years, such increases in labour demand would only be possible if the economic growth is sustained at no less than 5% annually.

To obtain economic growth of this order and also sustainable, investment would basically have to reach a level equivalent to 30% of the GDP. This would call for an increment in both domestic and foreign savings, but especially domestic due to the volatility of short-term foreign capital flows. The boosting of savings should be based on mainly three pillars: increased savings from the public sector, greater institutional savings as in the case of pension funds in some countries and further savings at the enterprise level.

As mentioned previously, an improvement in savings and investment rates is not independent from the gradual elimination of current external restrictions, which implies, as far as the inflation background of a country permits, greater flexibility in the currency exchange rate policies.

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Notwithstanding, economic growth at the mentioned rates and furthermore, sustainable during the period of said growth, is a necessary condition but not sufficient to combat the current employment problem. This is because the effects on employment from economic expansion at around 5% or 6% annually are not the same in all countries. In some, the production of capital goods and consumer goods, which relies heavily on employment, has a great influence on the productive structure, while in others, this influence corresponds to the primary sectors, such as mining and fishing, where the employment demand is low.

This situation, verified by comparing the economic growth rate and employment generation in the various countries in the Region over the past eight years, leads to the issue of sectoral economic growth policies.

There is strong opposition from many sectors, especially from the governments, for the application of sectoral policies, as they revert to the old policies of protection which embraced high tariffs and differentiated currency exchange rates. Although the latter, to a great extent, paved the way for the creation of the present industrial structure, they also engendered spurious competitiveness that was impossible to maintain as time passed, given the internal and external imbalances brought on by these kinds of protection policies. Naturally, under the present circumstances where the currency exchange is used as a fundamental element to stabilize prices, along with lower tariffs and less dispersion which oblige local producers to raise competitiveness, sectoral protection policies applied in the same manner as in the past would not be feasible.

Nevertheless, this does not exclude the application of policies for credit promotion to certain sectors, the offering of tax incentives for the reinvestment of profits in the enterprises in these sectors, the promotion of sectoral exports and the support of the strategies that are applied to boost productivity.

In addition to the impact on employment from macroeconomic and sectoral policies, in most countries of the Region, if not all, the need has arisen for direct intervention from the State to generate employment that would benefit the most vulnerable groups of the population, given the obstacles they face in finding work. These groups include youths with a low level of education, the heads of families who are poverty stricken and indigenous populations. Even though great efforts have been and are being made as regards active policies for employment (1% of the GDP in 1995 in a sample of seven countries in the Region), they are still a long way off from reaching the performance of developed countries.

On the other hand, the promoting of "local productive systems" (Espina, 1996) is continuously gaining momentum. Here the objective is to face the challenge of leveraging the comparative advantages that certain zones and/or locations offer and to overcome the structural problems that existed at this level and explained the inequality that existed regarding the unemployment problem among the different zones of one country. In the case of Latin America, the greater relevance of what is local or regional is also presented as a way to progressively oust the economic informality.

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b) Productivity strategies and labour relations

During the transition from protected economies to open economies, the increment in productivity has mainly been sustained by lowering the level of employment and labour costs. Yet, the increase in productivity in the long term should be based on technological innovations and the modernizing of the production and labour organization. This has significant implications for the labour policy and more specifically, for labour relations and human resource development.

On the matter of labour relations, the focus should be on two areas. In the first place, individual labour relations have been characterized over the last years by a progressive increase in precariousness and less protection. As illustrated in a recent ILO study on a group of countries in the Region, the proportion of workers with fixed-term contracts and wage earners without any contracts has augmented. This situation is cause for concern, not only because of the impact it has on the conditions of security and personal development of the worker and his family but also because of the effects on the productivity potential development of these workers and even more so under circumstances where the possibilities for participation in labour training and retraining programmes and activities are limited.

The measures taken by some countries to progressively transcend this situation are worth examining, as they offer solutions that could be adapted to the reality of the countries in the Region. These measures basically consist of cutting back on the use of fixed-term contracts and incentives to stabilize employment by cutting the costs involved in contracts of a longer duration, keeping dismissal on the grounds of economic reasons and the creation of unemployment insurance combined with training programmes while receiving unemployment benefits; programmes that facilitate employability of the workers and implemented in such a manner that training would be compulsory while receiving the benefit of the insurance, discourages unemployment for long periods. The financing of said insurance should not burden non-wage labour costs, thus, it would be recommendable to restructure the existing labour costs.

Labour instability, for its part, does not contribute to increasing the investment in training. This holds true for both the worker who is not motivated to dedicate greater effort to learning and the employer who cannot visualize a return on the investment in the longer term. The effects on productivity of steadily ameliorating labour precariousness are evident in the case of countries where said policy has been adopted. A worker with less uncertainties about the future and better qualified would adopt an attitude of greater commitment to the objectives programmed by the enterprise.

The second area that should be focused on to raise productivity is that of collective labour relations, or more specifically collective bargaining. In the past collective bargaining was envisaged as a channel to prevent excessive exploitation of the workers and to achieve the labour tranquillity that the enterprise requires to be able to operate normally. Today collective bargaining should be seen, as is steadily happening with more frequency in enterprises and sectors, as a joint commitment from workers and employers alike to apply strategies that would lead to an upswing

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of productivity and an equitable distribution of the benefits derived from this achievement.

One of these strategies could be to link wages with productivity in such a manner that, setting a wage floor that would be determined by the so-called "wage level" prevailing at the time, all wages during an agreed period are raised in accordance with productivity increases, measuring the latter with formulas that are accepted by the parties.

The benefits, in the area of productivity, reaped from labour harmony resulting from collective bargaining are also evident, especially in those cases where strategies of worker participation in decision making related to productive processes and incentive systems linked to the spurring of productivity are negotiated and agreed upon.

c) Human resource development and investment in training

Human resource and qualification development has proven to be an increasingly more important factor that contributes not only to greater growth but also less inequality. This is evident among countries and within countries, as well as between different social groups. The more successful countries and with less inequality are those that have invested the most in developing their people. The social groups excluded from progress are those who have not had access to the opportunities to develop.

i) Productive heterogeneity and demand for qualifications

The challenge of achieving greater compatibility between training and the labour market cannot be unattached from the heterogeneity of the productive and enterprise structure as it is precisely this which determines the new demands for training and labour qualifications.

The development of new productive systems and labour organization in the enterprises with advanced technology and high productivity entails that qualifications demanded from workers as regards the traditional pattern are also modified. The type of worker who is specialized in performing a repetitive task that is very specific and autonomous from the other tasks performed by the rest of the workers involved in the same process, now becomes a worker who is specialized in the managing or operation of the entire system or a part thereof. This requires comprehension of the same, i.e. the capacity to understand the logic of the system and to be able to operate it.

The enterprises lacking technology but with high productivity (especially services and the production of capital goods) are not obliged to alter their products, at least not at the same speed as is needed in the enterprises that satisfy the end demand which is easily swayed. Here the need is for a type of worker who is highly qualified to perform an assigned task and who is not required to dominate the execution of each and every task that the process embodies but rather, only that which is under his responsibility.

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The requirements for training and qualifications in the small and micro-enterprises with mediocre technology and productivity, especially those offering subcontracted services to medium and larger firms, are characterized by a twofold demand. In the first place, qualifications have to be sufficiently high so that the workers can perform the productive task or tasks that the enterprise requires, efficiently. If the level of qualifications depends predominantly on the technology utilized in the enterprise, it is evident that the labour demand points towards a qualification level which would allow for the tasks which include using more advanced technology to be performed more efficiently. In the second place, these types of enterprises also require that the employers/workers are trained in management methods and enterprise development, as often time these are the areas that present the most critical shortcomings.

As in the case of highly specialized workers in the modern enterprises that introduce flexible organizational systems, the workers in small traditional enterprises and informal micro-enterprises are required to have basic knowledge and the ability to reason logically which is only possible to obtained through basic education. One cannot expect specialized and technical training during the work span to compensate education deficiencies during childhood. A worker with these shortcomings could become, if trained, a good worker, but not very likely a competitive worker.

That workers occupied in the production and service units with lagging technology or low productivity have the possibility of being employed in the formal sector should not be discarded. It is evident, though, that the scarce labour demand from a sector that is undergoing a process of transformation limits this option seriously, at least in the short and mid term. The objective therefore, would be to upgrade the skills of workers in said units so as to raise their productivity and income. However, while endeavouring to elevate their technical and managerial skills, it should not be forgotten that there is a close connection between informal activities and poverty and that these workers, together with the peasants, who are engaged in survival activities, constitute the social sector that have the lowest level of education, this being the case in all the countries of the Region. Therefore, providing basic quality education to the children coming from poor families engaged in informal activities is a prerequisite for later developing their professional abilities and labour skills which would facilitate them in generating or occupying jobs that yield higher productivity and income.

ii) Retraining and labour reinsertion

The privatization of state owned enterprises and the cutback on jobs in enterprises that have automated part of their production processes has increased the number of unemployed, many of them with average or high qualification levels and aged over 45 or 50. The labour reinsertion of these workers, both public and private, would require retraining for levels far superior to those commonly known.

This retraining would prepare them either for new jobs or for setting up their own businesses. In this sense, the retraining requirements for these workers could be covered by the conventional systems, based on available training services in predetermined skills.

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With reference to the demand for retraining so as to improve the productive capacity of the workers who have unstable contracts, this does not entail, as in the case of the workers who are affected by the privatization of state-owned enterprises and the restructuring of private enterprises, preparing them to perform other activities, but rather to improve the labour skills that they already possess, so that they may be in a position to find a new job when concluding their current labour relation. In this case, the problem that needs urgent attention is not so much the qualifications of the workers but rather the unprotected state in which they find themselves during the period of being unemployed.

iii) Adapting the training system

Dissimilar demands for skills, determined by the heterogeneity of the productive structure, call for diversification and adaptation of the sources providing skill preparation and vocational training.

In this framework, four main sources for preparation and training are needed to respond adequately to the expectations of such diversified demands as mentioned: the enterprises themselves, private training institutions at the sectoral level, special programmes financed by the State and executed by the same or the private sector and the general schooling system.

Thus, it is necessary to embark on profound institutional reforms in order to make it possible to diversify the sources for preparation and training, as well as the specializing of the same to attend the demands that are best suited to the characteristics and potential of each source. This implies that, in general terms, the training of workers in enterprises which have high productivity should progressively be assumed by the enterprises themselves or the private institutes of a sectoral nature; and that the training of workers in productive units with average or low productivity should be assumed by specialized public institutions themselves or indirectly through subcontracted private enterprises. It is these public institutions (Ministries of Labour or Education or Vocational Training Institutions), that would, furthermore, bear the responsibility of designing and managing the national policy on education and training.

3. Reduce labour instability and ensure minimum levels of social protection

a) Reduction in the labour precariousness of wage earners

It is necessary to prevent that contracts of a temporary nature inevitably lead to increased job precariousness. The greater expansion of these contracts contribute to having a more flexible labour market and it has not been in all cases accompanied, at least not in the law, by a decline in the labour obligations of the employers. The problems at present are related not only to the exaggerated use of fixed-term contract with a setback in the bargaining capacity of workers, but also to the greater difficulties encountered in supervising compliance with legal obligations.

Some tendencies have been observed regarding changes, which if effectively incorporated could contribute to ameliorating the effect of temporary contracts on

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precariousness. The first is related to limiting the use of fixed-term contracts and their ambit of application, not only by law but also, in certain cases, determined through collective bargaining. This limitation has been accompanied by a diminishing of costs in the indefinite contracts, especially related to severance pay provisions. A second trend is to incorporate these issues in the ambit of collective bargaining, which could induce the double effect of curbing the erosion of bargaining capacity of permanent workers and influencing the area of application of fixed-term contracts. Finally, there is a growing tendency, mainly with respect to the subcontracting of workers, to ensure further responsibility for compliance with labour obligations, whether by means of establishing guarantees on the part of the subcontractor or constituting shared responsibilities between the subcontractor and the subcontracted party. This would be in line with the spirit of the law i.e. greater flexibility without being detrimental to workers' protection or causing a deterioration in labour relations.

The first two mentioned tendencies are reflected in the recently approved Law in Argentina, as well as previously in the agreement on job security signed by Spanish employers and unions in April of 1997. These two reforms could, while respecting the particularities of each country, become paradigms to abate labour precariousness without impeding the capacity of the enterprises to adapt to the changes in the market.

b) Drawing the informal sector into the modernization process

More than half of the workers in the Latin American cities only have informal jobs, which yield low income, instability, lack of protection and limited hope for future labour progress. This situation is what influences people to consider employment as the fundamental problem in the Region. Moreover, there is growing awareness that the perception of decades ago that informality was a transitory phenomenon that would disappear when better job positions were generated in the large enterprises or in the government, is far form the reality. Eighty-five out of every hundred new jobs created over the last seventeen years are informal (ILO 1997).

As to the importance of this issue, no further elaboration is required, as it has been fully recognized as such, particularly by policy makers. In essence, the concern is how to facilitate the integration of informal workers into the current institutional framework. In the past, the strategies oscillated between hostility, assuming that the informal worker is the "violator of the system", or that of tolerance, resigned to accept his contribution to alleviate poverty or simply in recognition that no better alternative could be offered to the millions of people who are concentrated in this sector. Considering this issue, full integration is set as an objective, as this is the way to ensure that informal workers have the opportunity to follow the same path as the rest of the citizens and to narrow the gap which separates them, according to their possibilities. At present, the policies are partially focused on this same objective but they are fundamentally oriented to support informality as a social policy of poverty alleviation. Although successful, these policies do not solve the problem in the long term.

It should be pointed out that informality should not be confused with the illegality in the labour field of employing workers without contracts. The latter is what should be subject to supervision and sanction when they break the law that is in

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force, particularly when this occurs in large-sized enterprises. Only in the micro-enterprises unregistered work and informality are closely associated.

The question is how to incorporate the informal sector into the modernization process5. A primary issue of a general nature is if the regulatory system for incorporation should be the same as for the rest of the citizens, i.e. a single system or is it necessary to create parallel systems, in order to accommodate the characteristics and possibilities of the informal sector. The emerging preference is not to create parallel systems, especially in the ambit of labour, as this would mean accepting by law a different treatment of workers, depending on where they work and this would be unacceptable, especially as regards the basic rights of workers. However, forced labour, child labour, discrimination or hampering the right to unionize or to bargain, for example, independently of the type of enterprise involved, should not be tolerated. It can, nevertheless, be seen that progress in complying with other standards is associated to the development of the enterprise and to be tolerant would bring about gradual adaptation of the reality to the legal framework. The preference is for a single regime on the labour front and applicable for example in the area of taxes, but here a different treatment for the micro-enterprises by means of simplified regimes or differentiated rates can be recognized, as is in fact the case in various countries (ILO 1997).

Another alternative, which could facilitate the incorporation of the informal sector, is the reduction of legal costs derived from labour reforms which have been introduced in several countries and simplifying the bureaucratic procedures which only a few countries have adopted. Both reduce labour and procedure costs for everyone and should remove barriers to access formality.

A third, less utilized option, is to adapt the mechanisms for access to various ambits of legality and especially the adoption of a different approach as regards the objective for inclusion of the informal sector. This would specifically imply that as for example in the fiscal area, which at present does not include the majority of the informal activities, to obtain the inscription of tax payers and not so much the diminishing of tax evasion. The latter has proved to be not only difficult but also expensive. According to an available study from Peru, for each additional sol which is collected, 75 cents have to be spent on administrative costs. A reduction in tax evasion can be accomplished, as the mere fact of being registered as a tax payer brings about the introduction of an accounting system, which as simple as it may be (a mere notebook would serve), constitutes an indispensable requisite for the informal people to do business and calculate expenses and profits. This would enhance the capacity of the informal sector in doing business.

The same occurs in the area of labour, where at present 90% of the contracts in micro-enterprises are verbal, while the laws adopted to promote employment require written contracts which are registered in order to make use of the less costly contracts. In this case it would be sufficient to adapt the requirements and accept as sufficient proof of labour relations the presentation of a payroll, payment receipts or simply witnesses to the existing labour relation. With this the possibilities are open for the worker to be subject to labour protection, but just as important, the labour

5 See ILO/UNDP (1997).

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relation is formalized, which leads the entrepreneur to implement economic calculations, as he cannot base the livelihood of his business on workers who are either unprotected or subject to all types of arbitrary adjustments.

The proposed strategy is to begin by alleviating the costs of taxes and labour by means of simplifying administrative procedures and the introduction of promotional regimens in the fiscal area, although not in the area of labour, and generate the necessary legal and ownership security. All these reforms together would tend to generate a series of positive results, such as a fountain of financial information, the protection and development of labour relations, the introduction of investment incentives and a reduction in the costs of informality. Hereby entrepreneurial development would be promoted and access to credit would be facilitated, prerequisites for informal enterprises to be able to increase their income and to be included in the present institutional system. As a result, tax evasion could be reduced and protection augmented.

In conclusion, the endeavour is to basically ensure that economic and labour rights are exercised, for only in this manner appropriate conditions can be created so as to comply with related obligations. Economically speaking, citizens who can exercise their rights and comply with their obligations. To this end, we propose to secure the former, rather than begin, as is the norm, demanding compliance with the latter. The informal sector would, therefore, have the opportunity to advance, but furthermore, it would be they themselves who would be motivated to integrate into the present system. This is an indispensable prerequisite for policies to be successful.

c) Expansion of social protection

The conventional orientation of labour protection is changing. Presently there is consensus that the priority is to protect the workers more than their job position and in particular during the changeover between jobs, whether voluntary or forced, in such a manner that they are not doubly impacted by a loss of work and protection. To this end, what is emphasised is employability, defined as the ability of the workers to adapt their skills to the various jobs presented in the future without being negatively affected in the process and always having a certain minimum level of protection.

It is also very likely that in the future workers might occupy more than one job during their working career. In this context, the lack of protection for the worker who has to shift from one job to another implies that apart from being inflicted by unemployment, will forfeit the social benefits. There is consequently a debate emerging on the protection of the unemployed and on the handling of the labour market, to minimize the costs that befall those who have to change jobs.

The implementation of unemployment protection mechanisms should not, however, result in further labour costs, because an elevation of labour costs could exacerbate the competitiveness of enterprises. The endeavour is to rather finance said mechanisms by restructuring the labour costs existing at present.

Another priority is to spread social security (health and pensions) coverage, mainly to the lower income groups, given that in Latin America those benefiting from

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the pension systems, depending on the country in question, are only between 25% and 75% of the wage earners and between 15% and 50% of those holding down a job.

In the opinion of some sectors, the coverage of the social security system will spread as more and better jobs are created and the latter will take place if there is continuity in the current macroeconomic policies, as it is these policies that allow for an increase in the rate of savings and investments, a necessary condition to engender sufficient quality employment. Regardless, other sectors consider that this is not enough because leaving the expansion of social security coverage to the performance of well remunerated employment constitutes a strategy that will only give results in the very long term and moreover, of an unsure nature.

Without a doubt, it is essential to expand the coverage of Social Security (health and pension benefits). This will not be possible in the short term though, unless the informal sector formalizes and generates it own contributions and although the universal coverage of Social Security is recognized, there are financial restrictions involved that limit expansion without jeopardizing the viability of the system.

This being the situation, novel strategies have to be designed that offer other solutions, but without losing from sight a systemic perspective. In some countries they have embarked on debating proposals that stretch from strengthening the public health services to the creation of pension fund systems that are specifically oriented to the informal sector, as well as the development of protection mechanisms created by the organizations of the population who are not covered by Social Security. Perhaps some of these strategies are not very effective but even so, they connote the concern of the State and society and the need to find solutions to this dilemma.

4. Modernize the Labour Administration and Ministries of Labour6

i) The new functions

Putting into practice the above presented agenda requires a profound reorientation of the contents of the Labour Administration as well as the modernizing of the Ministries of the sector. The latter should not be limited to a mere administrative reshuffle. The new institutional design should respond to the additional functions which should be assumed as a result of the changes in the Labour Administration. In synthesis, the new functions of the Ministries of Labour could embrace the following:

Harmonize the labour legislation with those of other countries that are participating in the same process of economic and social integration.

0 Against the background of increased autonomy of social actors, typify the

minimum conditions empowering and accrediting social actors as the bargaining agents in each concrete area. In addition, promote procedures for collective bargaining, guaranteeing equality in bargaining conditions between agents.

0

6 This topic is widely covered in the working paper "Labour Administration and the Modernization of Labour Ministries in Latin America" (ILO, 1998) presented at the same Conference.

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Supervise compliance with labour standards, reorienting the conventional methodology of inspection.

0 Promote and assist in the observance of labour standards in the informal sector,

facilitating the simplification of administrative procedures which are required by the regulations.

0 Follow-up on the labour market performance and propose or adopt relevant

measures to generate good quality employment as well as design and implement compensation policies to benefit vulnerable groups.

0 Promote both social dialogue and the strengthening of the organizations of social

actors and in this framework, design policies on national employment, vocational training and social protection for the groups that are currently unprotected.

0 Design and when called for, execute the policies destined to expand the coverage

of social protection (including unemployment insurance if existing or create it) to impoverished groups such as peasants and the informal, who still do not enjoy the protection of the system.

In addition to these new functions, in several countries, the intervention of the labour ministries in the regulation of labour relations in the public sector, including (where national legislation permits) collective bargaining between public servants and the government, is gaining ground.

ii) Moving towards institutional modernization: new contents, technology, and administrative policy repositioning

The required modernizing of the Ministry of Labour so as to assume these new functions are envisaged in a triple dimension. The first is related to their functions, since the priorities singled out previously would give precedence to new forms of regulation and adaptation of standards to facilitate the adjusting of productive units. It is also important to give preference to the promotion of social dialogue and to official controls in order to guarantee that agreements between parties are complied with. Furthermore, it would be necessary to prioritize activities aimed at employment generation and protection of the most vulnerable groups. This calls for innovation in the design of promoting policies, introducing new instruments and in some cases, executing specifically targeted programmes.

The second component in the process of modernizing the ministries, is the need for more advanced technology. This would include the retraining of personnel to confront new tasks, acquiring adequate equipment and redesigning/simplifying administrative procedures. Given the insufficient budget allocation generally prevailing, additional resources would be a prerequisite.

Available human resources in the labour ministry (on occasion the worst paid workers from the public sector) have low professional qualifications, hence, they must be retrained to assume their new duties. It is evident that the "future" ministries of labour will employ less personnel, but with better preparation, a different type of education in order to interact with other disciplines and having access to information

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technology. Besides, the demand will arise to simplify and redesign administrative procedures to make them expeditious, transparent and effective. This would consequently represent lower costs for both the public and the government. Experience reveals that the process of modernization based only on retraining employees and acquiring new equipment, will be frustrated if obsolete administrative procedures are kept.

Finally, the third dimension in modernizing the labour ministries entails their political and administrative positioning in society and within the government.

The labour ministry, in many cases, is not engaged in the activities of the ministry of economy. The reason for this is that by keeping a distance from the economic policy permits them to have a certain advantage -although not very effective- to dialogue with those sectors opposing economic policies. The new ministries of labour should integrate more with other government bodies and furthermore, recover their position as the overseer of the labour policy. This would imply a different kind of relationships with sectors opposing the economic policies; but it could lead to greater influence and political efficacy on the part of the labour ministries with respect to social interlocutors and the rest of the government. Moreover, their function as interlocutors with organizations would be legitimate and their contribution to the formulation of national economic policies would be greater.

As they fully undertake functions to incorporate the most vulnerable groups, new opportunities for collaboration will arise in the context of national social policies and at the same time, their social legitimacy will strengthen as their actions will go beyond the organized sectors.

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