PRIVATIZATION IN NACC COUNTRIES Defence Industry Experiences and Policies and Related Experiences in Other Fields COLLOQUIUM 1994 ********* COLLOQUE 1994 PRIVATISATION DANS LES PAYS DU CCNA Experiences et politiques des industries de defense et experiences comparables dans d'autres secteurs Colloquium 29-30 June, 1 July 1994 Brussels ------------------------------------------------------- EMPLOYMENT, PRIVATIZATION AND RESTRUCTURING IN CENTRAL AND EASTERN EUROPE Lajos Hethy Finding creative solutions to combat the increased job losses across Central and Eastern Europe will be one of the primary challenges for governments over the coming years, says Lajos HŽthy. Even in countries such as Poland, where economic decline has ceased, unemployment can still increase due to the privatization and restructuring processes which are currently underway. Perhaps the most innovative approach to date comes from the Czech Republic, which encourages the unemployed to become self-employed, by offering them considerable financial subsidies. Dr. Lajos Hethy is the Director of the Institute of Labour Research in Budapest. In Central-Eastern Europe the arrival of mass unemployment is a major shock: while in most of the region (registered) unemployment was unknown until the middle of 1990, its rate - after a sharp rise in 1991 - had gone up to around 15 % by the end of 1993 in some countries; it was 17,04 % in Bulgaria, 14.9 % in Poland, 14.4 % Slovakia, 14.4 in Slovenia, 12.1 % in Hungary. Having in mind that these countries (with the exception of Bulgaria) are the "early starters" of economic transformation, there is good reason to think that the "late starters" - Romania, Albania, the countries of the former Soviet Union - will follow up as economic reforms gain impetus (In Ukraine in 1993 the rate was still below the incredible 1%).1 There is also good reason to believe that mass unemployment - on a much higher rate than in Western Europe - will last for a long period of time. (The Czech Republic is, at least for the moment, a notable exception: in 1991 it had only 4.1 % and in 1992 - after a decline - only 2.8 % unemployment!) Mass unemployment, as it appears, is primarily linked with economic decline: radical drops have occurred both in GDP and in industrial output. In Western Europe stagnation, or 1-2 % decline in GDP, is interpreted as "recession": in Central-Eastern Europe there was a radical drop in the GDP; even in Hungary, in a relatively good situation, this index was about minus 20-25 %. The region has been faced with a situation which could be best compared with Europe's 1930 Great Depression. The enormous fall in GDP could be attributed to a considerable extent to the collapse of the internal (past COMECON) trade within the region, to the shrinking national markets coupled with the impacts of energy price rises as a result of the Gulf War and the recession in the Western industrialised market economies. In this context, it is noteworthy that drops in employment (i.e. the growth of unemployment) have not followed up the decline in GDP: i.e. productivity has deteriorated plunging to even lower levels than it had been before the change. (The first signs of GDP growth appeared in 1993 in Poland.) Economic decline has been closely related with macroeconomic stabilisation and economic restructuring; they have had their influence felt both over the general level and structural changes in employment: 1) privatization, which is given a great emphasis all over the region, has resulted in shifts between the state and private sectors: while the number of those employed in the private sector (and that of the self-employed) has kept growing, a large proportion of the labour force has been still in the state (or quasi-private) sector. 2) The predominance of the economies by large (state-owned) enterprises, concentrating large numbers of labour force has been weakening as a result of their collapse (or serious financial problems) and the mushroom growth of SMEs. (The partial survival of these big state enterprises has alleviated tensions in employment even if at the expense of productivity until now).2 3) Shifts have taken place, in most countries, from the artificially maintained "material production" to services, from heavy industry (as well as the military industry), manufacturing and agriculture to commerce and other services. While certain industries (such as metallurgy, arms industry) have been obviously collapsing, this trend has not been compensated, however, by dynamic growth in other ones. While we have reliable data on employment in the shrinking state sector, information about it in the private sector is unreliable and often based on estimates. According to a multinational study employment growth in private business in the period between the end of 1991 and 1992 was as follows: in Slovakia from 15,7 % to 17,2 %, in the Czech Republic from 17,6 % to 27,8 %, in Poland from 47,2 % to 58,4 %, in Hungary from 8-10 % (in 1989) to 38 %.3 The above figures, however are much debated: in Hungary e.g. some experts claim a 49 % share for the private sector in employment, while others refer to about 30 % share only.4 (The debates are rooted in the definition of "private sector": whether earlier state-owned enterprises transformed into share or limited companies with the maintenance of the majority - although indirect - ownership by the state belong to the private or to the state sector?) The impact of privatization on employment seems to be fairly complex, depending on what is meant by it: a) the new private sector is primarily constituted by small undertakings, involving self-employment; they suffer a shortage of capital and their capacity to create jobs is very much limited; they seem to function as a source of labour shedding as much as of employment.5 b) the establishment of new private firms of bigger size and relying on sufficient resources (such as "greenfield investments" by multinationals) tend to create new jobs but these are rather few; c) the privatisation of past state owned companies, at the same time, may involve considerable losses in jobs, as cutting production and costs includes reduction in the (redundant) labour force and the badly needed technological development (the substitution of the mostly obsolete old technology with "high tech") tends to be "labour saving" as well. Such consequences, however, are unlikely to occur right away after the (legal) ownership change but as a longer term outcome of the emerging new business strategies in a narrow market. They are also subject to the power-play of local and national industrial relations and political actors (unions, employers, government, political parties, legislation etc.). On the part of the labour unions it has been a general demand to build in guarantees for the maintenance of jobs into the process of privatization: such guarantees, however, tend to create difficulties for this troublesome process. In Central-Eastern Europe the labour market situation, while it differs from country to country, has the following major common features: 1) there is growing labour - market - related poverty: neither guaranteed minimum wages nor unemployment benefits are linked with minimum costs of living: minimum wages in general,6 unemployment benefits for most, are inferior to them. 2) unemployment seems to be regionally concentrated; there are regions (e.g. most capitals and their surroundings) which suffer from it much less and there are "crisis regions" (earlier dominated by such shrinking or collapsing branches as agriculture, metallurgy, mining or arms industry). 3) there exists a growing labour market segmentation: unemployment of (ethnic) minorities has arisen alarmingly (in Slovakia e.g. the official rate among Gipsies was over 30 %, in Bulgaria 50 % of the Turkish minority and 80 % of the Gipsies were jobless). Women, in several countries, have lost jobs in greater number than men (Germany, Russia, Bulgaria). 4) A vulnerable group facing difficulties in employment are young people (past Czechoslovakia, Poland).7 5) Long-term unemployment, especially for the most vulnerable groups, seems to be part of the gloomy perspectives of our days and the future. We de not have reliable empirical evidence for changes in employment in the arms industry of the region: this sector has been more strongly hit, probably, by losses in jobs than other fields, as the administered exchange (trade) of arms within the Warsaw Pact arrived at an end, production suffered a more radical drop than industrial output, military expenditure was cut all over the region etc. The geographical (regional) concentration of arms production and its collapse, there is good reason to think, is a major factor in the appearance of "crisis regions" in some countries (e.g. Slovakia). The context of enormous drops of the (depressed) GDP have created a "vicious circle" for employment: it is a major contributor to it (and its consequences are far from being fully felt as yet) and - at the same time - it has set close limits for the financial resources which could be mobilized for both restructuring and the alleviation of labour market tensions.8 A major challenge for governments is to pursue overall governmental programmes to deal with mass unemployment. Most experts seem to agree that results can be expected from coordinated measures in such seemingly distant and isolated policies and fields as price and wage liberalisation, promotion of exports and exchange rates, education, social security or even defence, having their impact felt on demand and supply in the labour market. The best employment policy, in this approach, is economic policy promoting growth and thus generating demand for labour. Such coordinated governmental policies are faced, however, with immense difficulties: 1) before economic restructuring has taken place, a switch back to growth risks with further imbalances in the economy (in the budget, in the balances of trade and payments etc) thus undermining the ongoing efforts of macroeconomic stabilisation. 2) the priority of reducing unemployment often collides with those of other policies (e.g. to reduce social costs e.g. by the extension of the age of pension, to reduce military costs by reducing the armed forces, to achieve rapid privatization etc.). 3) overexpenditure by the budget also sets close financial limits for such possible long-run strategic programmes that could serve both employment and economic growth (the development of infrastructure, education etc.).9 4) The international financial organisations (the World Bank, IMF) keep exercising permanent pressure on most governments to cut budgetary deficits. 5) There is a painful lack of coordination of governmental policies, their programmes are (as a necessity) dominated by fiscal approaches and priorities of employment (tacitly) are thrust into the background. Governmental efforts to fight unemployment, in this context, are limited to employment policies pursued by the isolated labour administration mostly left on its own. In addition liberal economic approaches, aimed at stabilisation tend to downgrade the problem of unemployment and look upon it as an issue of "social charity". While there can be little if any doubt that employment is heavily dependent on the economy, it can be much debated whether only social policies are sufficient to deal with the problem. Anyway: at present no effective overall governmental programmes to fight mass unemployment seem to exist in the region. Employment policies in the region rely on: a) legal protection against the termination of employment (with special respect for mass-layoffs): in case of layoffs severance payments are often more generous than in Western Europe although bankrupt companies often cannot afford to pay them. (In Hungary e.g. they may amount to six month earnings and collective or individual work contracts often include even more favourable terms from the point of view of workers). b) passive and active employment policy measures (such as unemployment benefits, job creation and public utility works, subsidies for enterpreuneurship, early retirement and shortened working hours, special programmes targeted at regional unemployment, young people, disabled people, long term unemployed etc.). c) a network of manpower services. The establishment of labour market institutions is under way. (The process started in Hungary as early as the end of the 1980s, in the rest the of the countries in the early 1990s.) The governments have introduced both active and passive labour market policy measures - following Western European examples - to deal with unemployment. Political commitments are related (and political lipservice paid) to active measures. There are however, disquieting open questions: to what extent can active measures can prove to be effective to promote success in the specific economic (and employment) situation of sharp GDP drop in the region? How can these (rather expensive) measures be financed in the tight budgetary and economic context? What one could witness in the region for the past few years is a double process: a) governmental efforts to divide the financial costs of employment policy measures (by imposing growing obligatory contributions to them on both employers and workers). b) to reduce social benefits offered for those unemployed. In spending there has been a shift from active to passive measures: in 1990 both Hungary and Poland spent considerable sums (30 % and 60 % of the employment budget) on active policy; as unemployment started to grow rapidly and more and more jobless people asked for benefits, in 1991 the share of active measures in spending declined (to 30% in Hungary, to 20 % in Poland) and this process continued in 1992. A notable exception was the Czech Republic - with the lowest unemployment rate - where an increased emphasis has been laid on reemployment. Financial resources spent on active measures were primarily concentrated on the support of training and retraining in Hungary, on job creation in Czechoslovakia and on retraining in Poland in 1991/92. Thus the major thrust of employment policies in 1991/92 in Czechoslovakia was the creation of new jobs and the promotion of self employment by considerable financial subsidies. These efforts were supported also by the tripartite General Agreements in 1991 and 1992.10 To limit overexpenditure by the budget (and overtaxation) unemployment benefits have been gradually cut all over the region in the past years. They are still relatively generous in Hungary (benefits are paid for a 12 month period at 75 and 60 % level of the earlier earnings) but much less so in other countries. The most radical cuts have taken place in the Czech Republic. Long term unemployed, after the expiration of benefits, may apply for social subsidies - which are, however, much more uncertain and fixed at much depressed levels. It should also be noted, that growing clandestine employment and invisible income, in several countries, have had a part in the subsistence of many jobless people. Clandestine employment is often related with the processes of (illegal) migration of labour from the economically most depressed countries (e.g. Romania, Ukraine) to those which are relatively well-off. (Hungary, Poland etc.) Without trying to diminish the importance of governmental policies one should be aware of the growing importance of the autonomous decisions of employers in this field, including such private employers in increasing numbers over which the state has no direct control any more. In this context labour relations - negotiations and agreements among employers, workers (unions) and the government - may become as strong an instrument in the maintenance or promotion of employment as governmental policies. In this respect two major issues have appeared: a) the trade unions' participation in the control of privatization. b) the trade unions' say in the formulation of employment policies. The labour organisations in a set of countries (e.g. Czechoslovakia, Hungary) have been excluded from the privatization process while national (tripartite) negotiations have mostly covered employment: the agreements achieved, however, have not resulted as yet in any solid guarantees against mass unemployment. (Labour unions, in general, exercise considerable pressure to achieve wage increases regardless of their possible consequences for jobs.)11 Employment prospects for the coming years are gloomy: even if the GDP drop arrives at a halt (as it did in 1993 in Poland) unemployment tends to grow further as other processes (privatization, restructuring) continue to generate it. One should not forget that labour hoarding around 1989/90 amounted to an estimated 15-30 % in the number of those employed at a higher level of both production and productivity. It is still an open question: whether and when will this redundant labour appear in its full dimension as jobless people in the labour market? It is a question which all of the countries in the region have to face in the future including those where unemployment presently is on a very low level in Western European standards. Footnotes: 1. The present paper draws upon the national contributions prepared for the Conference "Employment Policy and Programmes in CEE". (Budapest, June 2-3, 1994, ILO): Czech Republic (V. Uldrichova), Slovakia (P. Ochotnicky); Poland (M. G—ra); Slovenia (S. Drobnic), Romania (C. Zamfir); Ukraine (V. Yatsenko) and Hungary (M. Frey.) 2. HŽthy, L.: Enterprise Level Industrial Relations under Economic and Political Pressure. The Case of Past Big State Enterprises. WORC, Tilburg, March 1994. 3. Koltay, J.: MunkanolkŸlisag es foglalkoztat‡spolitika Kozep es Kelet Europaban. (Unemployment and employment policy in Central and Eastern Europe.) Kozgazdasagi Szemle, Budapest, No 2. 1993. p. 154. 4. Kolosi, T.: The poor and the rich in Hungary. Institute of Economics, Budapest, Transit Club Series. No 7. 1993. Laky, T.: A munkaeropiac keresletet es kin‡lat‡t alakito folyamatok (Processes shaping supply and demand in the labour market.) Institute of Labour Research, Budapest, 1993. p. 14. 5. Koltay, ibid. p. 154. 6. Vaughan-Whitehead, D.: Minimum Wage in Central and Eastern Europe: Slippage of the Anchor. ILO/CEET Reports No 4. Budapest, Oct. 1993. 7. Standing, G.: Labour Market Developments in Eastern and Central Europe. ILO/CEET Policy Papers, No 1. Budapest, Jan. 1993. Koltay, ibid. p. 157. 8. Before the drop Central-Eastern Europe already had depressed GDP levels. GDP/capita in 1990 (USA = 100%) was as follows: Hungary 29.1 %, Czechoslovakia 36.9 %, Poland 18.6 %, Romania 16 %. Calculations by E. Ehrlich. Ehrlich, E., Revesz, G.: A jelen es egy lehetseges jovo Magyarorszagon. 1985-2005. Budapest, 1993. p. 222-223. 9. Compare: A Programme for Full Employment in the 1990s. Report of the Kreisky Commission on Employment Issues in Europe. Pergamon Press, Oxford, 1989. 10. Koltay, ibid, p. 163. 11. Hethy, L.: Tripartism in Eastern Europe. In: (Ferner, A. - Hyman, R.: New Frontiers in European Industrial Relations. Blackwell, Oxford - Cambridge (Mass.) (forthcoming) --------------------------------------------------------- Copyright 1994 NATO All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic tape, mechanical, photocopying, recording or otherwise, without permission in writing from the copyright holders. Authorization may be requested for redistribution of the text on a non commercial base by research and educational services. Requests should be addressed to the Economics Directorate, NATO, via e-mail 'scheurweghs@hq.nato.int'. First edition 1994 ISBN 92-845-0079-6 This is the latest in a series bringing together papers presented at the NATO colloquia organised by the NATO Economics Directorate and Office of Information and Press on economic issues in the former USSR and Central and East European countries. For further information please write to the Director, Office of Information and Press, 1110 Brussels, Belgium. The articles contained in this volume represent the views of the authors and do not necessarily reflect the official opinion or policy of member governments or NATO.