The Impact of Privatisation The Impact of Privatisation on Labouron Labour

John NellisJohn NellisCenter for Global DevelopmentCenter for Global Development

USAUSAOECD/Republic of TurkeyOECD/Republic of Turkey

Conference on “Privatisation, Employment Conference on “Privatisation, Employment & Employees”& Employees”

Istanbul, October 2002Istanbul, October 2002

Privatisation…..

• Improves operating & financial performance

• Positive macroeconomic impact • Signals markets of extent & credibility

of reform But:• Complex, contentious, highly politicized

action Why?

The privatisation dilemmaThe privatisation dilemma

• Direct benefits to fewDirect benefits to few• Mass benefits diffused, medium termMass benefits diffused, medium term• Direct costs concentrated, short termDirect costs concentrated, short term• Winners dispersed, silent & Winners dispersed, silent &

unorganizedunorganized• Losers visible, vocal, intense & well-Losers visible, vocal, intense & well-

organizedorganized• Politics focus on latterPolitics focus on latter

0%

10%

20%

30%

40%

50%

60%

70%

Argentina Bolivia Mexico

percent who disagree or disagree strongly that privatization has been beneficial

1998

2000

Sri Lanka:Sri Lanka:Attitudes Towards Attitudes Towards

Privatization (2000):Privatization (2000):

Sri Lanka:Sri Lanka:Attitudes Towards Attitudes Towards

Privatization (2000):Privatization (2000):

0 20 40 60 80 100

Standard of Living

Poverty Level

Cost of Living

Economic Stability

Social Life

Improved

Worsened

IN RUSSIA, 2/3 IN RUSSIA, 2/3 INTERVIEWED SAID THEY INTERVIEWED SAID THEY LOST MORE THAN GAINED LOST MORE THAN GAINED FROM PRIVATIZATION FROM PRIVATIZATION

2001; 1600 respondents; only 5 % said opposite2001; 1600 respondents; only 5 % said opposite

Labour’s view of privatisation

• Hurts workers, benefits local elite & foreigners

• Imposed by IFIs• SOEs could be profitable (prices, mngt.)• Few jobs outside public sector• Pay & terms much worse• Severance payments wasted • Money better spent on reviving SOEs

PROPOSITION #1PROPOSITION #1

SOE reform, prior to or instead SOE reform, prior to or instead of privatisation, likely reduces of privatisation, likely reduces jobs jobs

Examples:Examples:

• Argentina RR: from 92K to 18.6K before privatisation

• Brazil RR: from 160K to 42K before privatisation

• Korea Tobacco: from 12.3K to 8.6K

• Sydney Water Corp.: from 12.7K to 6.7K

Implication:Implication:

SOEs overstaffed; any serious SOEs overstaffed; any serious reform, not just privatisation, reform, not just privatisation, likely to decrease employee #slikely to decrease employee #s

Overstaffing: Sri Lanka-1992Overstaffing: Sri Lanka-1992Company %

Electricity Board 51

Railways 48

Sugar Corp. 86

Petroleum 40

Cement 1 46

Cement 2 63

Shipping 43

Average 53 %

PROPOSITION # 2PROPOSITION # 2

Privatisation often followed by Privatisation often followed by additional----over & above pre-additional----over & above pre-sale layoffs----reductions of sale layoffs----reductions of workforceworkforce

Examples:Examples:

In 27 empirical studies (ILO):In 27 empirical studies (ILO):

– 14: 14: post-sale job losses post-sale job losses

(averaging 27%)(averaging 27%)

– 2: 2: significant increasessignificant increases

– 11: 11: little or no changelittle or no change

More examplesMore examples

Additional 17 cases:Additional 17 cases:

– Losses post-sale in seven, average Losses post-sale in seven, average 44.6%44.6%

– Gains post-sale in four, average Gains post-sale in four, average 23%23%

– No numbers or no change in rest

PROPOSITION # 3PROPOSITION # 3

Layoffs highest in areas of declining demand, world oversupply & where technology shifts increase competition without boosting core business

ExamplesExamples

• RailwaysRailways

• Mines, especially coal mines Mines, especially coal mines

• Steel Steel

Conversely, large unsatisfied Conversely, large unsatisfied demand can lead to job gains demand can lead to job gains

in post-sale period; e.g., in post-sale period; e.g., telecommunicationstelecommunications

Impact can be Impact can be hugehuge…...…...

Brazil RRBrazil RR: 42,000 at start of priv. : 42,000 at start of priv. process to 24,000 at moment of sale, process to 24,000 at moment of sale, to 9,700 24 months after sale------94 to 9,700 24 months after sale------94 % decrease from pre-sale peak of % decrease from pre-sale peak of 160 K160 K

PROPOSITION # 4PROPOSITION # 4

Employment losses significantly Employment losses significantly greater than gainsgreater than gains

(some exceptions: Chile, Nepal, Cote (some exceptions: Chile, Nepal, Cote d’Ivoire)d’Ivoire)

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Privatisation: Simple AnalyticsPrivatisation: Simple Analytics

ARGENTINA:ARGENTINA:

•LABOR FELL BY 150k IN 7 LABOR FELL BY 150k IN 7 PRIVATIZED UTILTIESPRIVATIZED UTILTIES

•150k = 3.6% LABOR in BA150k = 3.6% LABOR in BA•150k = .03%150k = .03% TOTAL LABOR TOTAL LABOR

FORCE FORCE but…. but….

•GENERAL UNEMPLOY GENERAL UNEMPLOY ^ ^ 6% — 1990 TO 14.3% — 19976% — 1990 TO 14.3% — 1997

MEXICO:MEXICO:

• General decrease in # of workersGeneral decrease in # of workers

• Reductions still small in #Reductions still small in #

• Reductions small relative to overall Reductions small relative to overall workforce (SOEs = 2% of workers)workforce (SOEs = 2% of workers)

• 55% of dismissed found formal 55% of dismissed found formal sector jobs within 1 yr.sector jobs within 1 yr.

BOLIVIA:BOLIVIA:

• Reduction in employment “associated Reduction in employment “associated with” capitalizationwith” capitalization

• Again, absolute numbers small &Again, absolute numbers small &

• Small in relation to workforce sizeSmall in relation to workforce size

• Conclusion: capitalization does Conclusion: capitalization does notnot account for substantial general rise in account for substantial general rise in unemployment starting in 1998unemployment starting in 1998

PROPOSITION # 5PROPOSITION # 5

Transition economies a special Transition economies a special case of enormous job losses case of enormous job losses before & after privatisationbefore & after privatisation

ExamplesExamples

• DDR: 3.5 mn workers in 8 K DDR: 3.5 mn workers in 8 K companies in 7/1990companies in 7/1990

• Down to 1.5 mn by 1995-96Down to 1.5 mn by 1995-96

PROPOSITION # 6PROPOSITION # 6

Severance payments & other Severance payments & other enticements to leave (early enticements to leave (early retirement, share ownership) retirement, share ownership) tend to be more generous than tend to be more generous than law requireslaw requires

Expensive severance packagesExpensive severance packages

• Argentina RR workers----average Argentina RR workers----average payout $12,000 U.S.payout $12,000 U.S.

• Sri Lanka---from 17 to 53 Sri Lanka---from 17 to 53 months months salary (last for 40 yr.. old with 20 salary (last for 40 yr.. old with 20 yrs. service)yrs. service)

PROPOSITION # 7PROPOSITION # 7

Workers in privatized firms: Workers in privatized firms: Generous terms & salaries, position Generous terms & salaries, position guarantees, guarantees of fringe guarantees, guarantees of fringe benefits----benefits----but,but, longer hours, longer hours, decreased job security & union decreased job security & union powerpower

PROPOSITION # 8PROPOSITION # 8

Mid-management #s down Mid-management #s down sharply post-sale; % loss higher sharply post-sale; % loss higher than for blue collar workersthan for blue collar workers

EXAMPLESEXAMPLES

• Mexico, Pakistan, several transition Mexico, Pakistan, several transition economies, Sri Lanka, Nepal & sub-economies, Sri Lanka, Nepal & sub-Saharan AfricaSaharan Africa

• Decreases due to higher costs & Decreases due to higher costs & politicized nature of past managerial politicized nature of past managerial appointments?appointments?

PROPOSITION # 9PROPOSITION # 9

Approached openly & in advance of Approached openly & in advance of transaction, by authorities willing to transaction, by authorities willing to bargain, workers will participate bargain, workers will participate constructively in the process--- & constructively in the process--- & even large reductions can be even large reductions can be achieved peacefullyachieved peacefully

PROPOSITION # 10PROPOSITION # 10

Overstaffing and worker Overstaffing and worker opposition need not be an opposition need not be an absolute obstacle to a sound absolute obstacle to a sound transactiontransaction

Brazil RRBrazil RRBrazil RRBrazil RR

• 1995, 42,000 workers• Govt./WB program reduces to 23,712• 2/3 by voluntary retirement• Pension supplements & severance (av.

Cash value $8,000)• Training & placement program not used

much• 1998 survey, only 10% still unemployed• 53% earning < RR; 27% >; 20% same

• 1995, 42,000 workers• Govt./WB program reduces to 23,712• 2/3 by voluntary retirement• Pension supplements & severance (av.

Cash value $8,000)• Training & placement program not used

much• 1998 survey, only 10% still unemployed• 53% earning < RR; 27% >; 20% same