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Big business concentration and its effect on labor market reform policies in Egypt and Mexico

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Big business concentration and its effect on labor market reform policies in Egypt and Mexico

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Content INFORMATION TO USERS This manuscript has been reproduced from the microfilm master. UM I films the text directly from the original or copy submitted. Thus, some thesis and dissertation copies are in typewriter face, while others may be from any type of computer printer. The quality of this reproduction is dependent upon the quality of the copy submitted. Broken or indistinct print, colored or poor quality illustrations and photographs, print bleedthrough, substandard margins, and improper alignment can adversely affect reproduction. In the unlikely event that the author did not send UM I a complete manuscript and there are missing pages, these w ill be noted. Also, if unauthorized copyright material had to be removed, a note w ill indicate the deletion. Oversize materials (e.g., maps, drawings, charts) are reproduced by sectioning the original, beginning at the upper left-hand corner and continuing from left to right in equal sections with small overlaps. ProQuest Information and Learning 300 North Zeeb Road, Ann Arbor, M l 48106-1346 USA 800-521-0600 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. BIG BUSINESS CONCENTRATION AND ITS EFFECT ON LABOR MARKET REFORM POLICIES IN EGYPT AND MEXICO ©2001 by Samira Salem A Thesis Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment o f the Requirements for the Degree MASTER OF ARTS (ECONOMICS) December 2001 Samira Salem Reproduced with permission of the copyright owner. Further reproduction prohibited w ithout permission. UMI Number: 1411037 Copyright 2001 by Salem, Samira Hamdy Ail rights reserved. ___ ® UMI UMI Microform 1411037 Copyright 2002 by ProQuest Information and Learning Company. All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code. ProQuest Information and Learning Company 300 North Zeeb Road P.O. Box 1346 Ann Arbor, Ml 48106-1346 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. UNIVERSITY O F S O U T H E R N CALIFO RN IA TH E G R AD U A TE SCHOOL. U N IV E R SIT Y PARK LOS A N G ELES. C A L IF O R N IA S0007 This thesis, written by S d m iV C L S a Ifryn___________ under the direction of hS.(l.....The sis Committee, and approved by all its members, has been pre sented to and accepted by the Dean of The Graduate School, in partial fulfillment of the requirements for the degree of __________________ Dtma D ate December 17. 2001 THESIS COMMITTEE ___ Chairman Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. D e d i c a t i o n To my mother Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. A c k n o w l e d g e m e n t s I would like to gratefully acknowledge the Chair o f my thesis committee. Professor Robert Kalaba, for his guidance and support. I would also like to thank Professor Nake Kamrany and Professor Roderick Mckenzie for their support. Special thanks go to Dr. Farideh Motamedi for her support and encouragement. I would like to extend my gratitude to my friends and family. I wish to thank each o f you for your friendship, love, and support. I especially wish to thank my mother, Sally Salem and my brother, Tarek Salem for their love and support. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. iv T a b l e o f C o n t e n t s D e d ic a t io n .................................................................................................................................. ii A c k n o w l e d g m e n t s ............................................................................................................... iii L ist o f Ta b l e s ........................................................................................................................... v L ist o f F i g u r e s ........................................................................................................................ vi A b s t r a c t ..................................................................................................................................... vii C hapter 1. In t r o d u c t io n ......................................................................................................... 1 2. L i t e r a t u r e R e v i e w ........................................................................................... 17 3. A Q u a n tita tiv e E x a m in a t io n o f th e E f f e c t o f B ig B usiness C o n c e n t r a t io n o n La b o r M a r k e t R e f o r m in Eg y pt a n d M e x i c o .......................................................................................................... 26 4. C o n c l u s io n ................................................................................................................ 51 R e f e r e n c e s ................................................................................................................................ 55 A p p e n d i x ..................................................................................................................................... 65 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. V L is t o f Ta b l e s Table Page 1. The Similarities in the Political Economy o f Egypt and Mexico Pre-Reform.................................................................................... 7 2. The Distinct Paths o f Labor Market Policy in the Context of Economics Reform in Egypt and M exico................................. 16 3. Variables, Measures and Definitions................................................. 41 4. The Independent and Control Variables and Their Expected Correlation with the Dependent Variable................................. 43 5. Time-Series Regression Results for E gypt....................................... 46 6. Time-Series Regression Results for Mexico..................................... 47 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. vi L is t o f F ig u r e s Figure Page 1. Mexico: Social Security and Welfare Expenditure (as % of Total Government Spending)............................................................. 13 2. Egypt: Social Security and Welfare Expenditure (as a % of Total Government Spending).............................................. 14 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. vii A b st r a c t B ig B u s in e s s C o n c e n t r a t io n a n d It s E f f e c t o n L a b o r M a r k e t P o l ic y R e f o r m in E g y p t a n d M e x ic o The political economy o f Egypt and Mexico displayed striking similarities pre-reform, yet they have pursued divergent paths of labor market reform. The objective of this thesis is to explain this divergence in policy. This study contends that the differential strength of Egyptian and Mexican business is a factor that should be considered in the explanation of their divergent policy trajectories. This thesis develops a proxy for business strength, namely, big business concentration that captures the ability of business to influence labor market policies. Using time-series regression analysis, this thesis tests and confirms the hypothesis that the more concentrated big business, the more likely it will successfully influence labor market policy in its favor. The difference in the level of big business concentration in Egypt and Mexico thus helps explain their divergent labor market reform policies. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. C h a p t e r 1 I n t r o d u c t io n Why do the labor market reform policies of countries with similar political economies diverge? Despite the remarkable similarities in the political economies of Egypt and Mexico pre-reform, they have pursued distinct paths of labor market reform: benefits to labor in Egypt have remained relatively constant over the last two decades, whereas benefits to labor in Mexico have clearly decreased.1 The primary objective of this study is to determine why the labor market reform choices o f the governments o f Egypt and Mexico have varied so drastically. This study hypothesizes that the differential influence o f Mexican and Egyptian business on labor market policies is a factor that should be considered in the explanation o f their divergent policies. This analysis employs time-series regressions to investigate the impact o f business on labor market reform in Egypt and Mexico. 1 For the purpose of this analysis, labor benefits refer mainly to social security and welfare expenditures by government. The objectives introduced in the International Labor Organization’s (ILO) Convention No. 102 (1952) of the international labor standards, state that social security and welfare expenditures in developing countries “should be extended to the large majority of workers and their families”(Gillion 1994, 24). Organized labor is thus the main recipient of these transfers (Guhan 1994). Further, social security and welfare expenditures are commonly considered a “nonwage labor cost” or “social wage” (Agenor 1996; Kenworthy 1999; World Bank 1999). Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. While the two domestic social actors that are directly affected by labor market reform are labor and business, those studies that have examined labor market reform have tended to focus solely on the impact o f labor on the reform have tended to focus solely on the impact of labor on these reforms (de la Garza Toledo 1994; Rudra2001; Pripstein Posusney 1997; Tuman 1999). The existing literature has virtually ignored the influence of business on labor market reform (World Bank 1999). This study focuses on the impact of business on labor market reform for the following three reasons. First, because recent research on the broader process of economic liberalization in East Asia and Latin America has concluded that the business-govemment relationship is key in explaining economic policy choice, and economic performance (Johnson Ceva 1998; Evans 1995; Doner and Hawes 1995; Durand 1994; Kim 1997; MacIntyre 1994; Maxfield 1990; Puga 1993; Schneider 1997; Silva 1993, 1997). Second, since the process of economic liberalization cedes significant control over critical economic activities such as investment and production to business, state elites may be more attentive to business demands (Silva 1993, 556). Consequently, it is important to consider whether and how business affects labor market reform. Third, given the similarities o f the labor- govemment relationship and the nature and structure of society and economy in both Egypt and Mexico, an explanation of labor market reform that relies solely on labor is deficient in the cases o f Egypt and Mexico. This analysis, therefore, Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 3 examines the role that the business plays in determining the direction o f labor market reform in historically populist and labor-oriented states. In examining the influence of business on labor market policy, this analysis seeks to accomplish three things. First, it seeks to address the following question: Under what conditions can business overcome its collective action problems and influence the labor market policies of liberalizing governments? Second, it highlights the need to examine the impact o f social actors, other than labor, on labor market policy. Finally, this analysis develops a new variable that captures the ability of business, in particular business institutional strength, to influence state policies in the context of labor market reform. The first chapter of this thesis presents a broad comparison of the Egyptian and Mexican cases. This chapter is intended to demonstrate the historical similarities in the political economy (particularly, state-labor relations) o f Egypt and Mexico pre-reform and to show that Egypt and Mexico have since taken distinct paths with regard to labor market reform. The theoretical rationale for the model that is developed in this study and the proposed hypothesis are presented in the second chapter. In the third chapter, the empirical model is presented. The fourth chapter presents the regression results and their interpretation. The final chapter will summarize the findings and draw some conclusions. Reproduced with permission of the copyright owner. Further reproduction prohibited w ithout permission. 4 B a c k g r o u n d THE EGYPTIAN AND MEXICAN CASES PRE-FORM Prior to undertaking economic restructuring, Egypt and Mexico possessed similar political economies.2 Both possessed stable, single-party authoritarian regimes where power was highly concentrated in the executive. They followed an import-substitution industrialization (ISI) economic model characterized by an inward-oriented focus and reliance on extensive state intervention in the economy. The ISI strategy produced a similar strategic coalition in Egypt and Mexico composed of organized labor and the popular sector (Bienen and Waterbury 1989).3 Both the emphasis on social welfare objectives as well as the populist policies that emerged in Egypt and Mexico in the pre-reform period are understandable given that the legitimacy of both states was based on their ties to labor and the popular sector (Collier 1991, Pripstein Posusney 1997). The political systems of Egypt and Mexico were characterized by corporatism, whereby different social groups, labor prominent among them, were : The choice o f the Egyptian and Mexican cases was made using Mill’s method of difference (Mill 1888 [1970]). This method specifies that if two cases are characterized by similar circumstances, yet produce different outcomes, “the cause, or an indispensable part o f the cause” is that circumstance that does not occur in both. 3 The military, civil servants and petty bourgeoisie were also included in the populist coalition in Egypt. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 5 integrated into the political system.4 Indeed, organized labor was formally incorporated into the political system o f both these states via corporatism. The corporatist system of state-labor relations that emerged served two purposes: first, it provided the government with a needed base of political support; and second, it provided the government with a channel by which to control a potentially powerful social group, labor (Collier 1991, 11). The corporatist system o f state-labor relations in Egypt and Mexico was cemented through a social contract. The social contract provided labor’s political support and its full participation in the ISI development project in return for social welfare guarantees such as employment, job security, social insurance, consumer subsidies, indexed wages, profit-sharing for public sector employees and health services, inter alia. In so far as it tied labor to the state through the social contract, corporatism also facilitated the state’s ability to control labor. In particular, the state exerted control over organized labor through its selection of labor leaders, its power to recognize unions and its capacity to dispense the political appointments 4 Following Schmitter’s (1974) classic work on corporatism, corporatism is understood here as a system o f interest representation where the state organizes the main sectoral interests in society, grants them quasi-monopolistic power and also provides them with various legal, material and political privileges aimed at maintaining their monopolistic position. Rather than remaining separated from the state as in a pluralist system, these societal interests are integrated into the state. The state ultimately controls the leadership of these societal groups, the formula tion and expression of their interests as well as their participation in the political process. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 6 and material rewards upon which the union leaders depended to maintain control of the rank-and-file.5 One of the principal ways that the corporatist relationship manifested itself in the Mexican case was in the strong ties of the main union confederations, especially the dominant Confederation of Mexican Workers (CTM), to the ruling Institutional Revolutionary Party (PRI) (De la Garza Toledo 1994). Under Sadat, a similar relationship developed between the labor confederation, the Egyptian Trade Union Federation (ETUF) and the ruling party, the National Democratic Party (Pripstein Posusney 1997) (Table l).6 REFORM Significantly, economic reform, which was undertaken by Mexico in the early 1980s and in Egypt in the mid-late 1980s, threatened the social protection 5While corporatism is often perceived as a mechanism for state control over labor because the state effectively chooses union leadership and often cultivates a union culture that relies on patronage flowing from the state level down to the rank- and-file. In addition, union leaders are expected to ensure labor’s loyalty to the state by delivering labor’s vote to the ruling party and maintaining industrial peace. However, some scholars reject the claim that state corporatism uniformly weakens labor and instead maintain that despite corporatist controls labor has been effective in influencing economic policy and obtaining concessions from the state (Brachet- Marquez 1994; Pripstein Posusney 1997). Pripstein Posusney specifically argues that corporatism requires highly developed institutions to maintain it and thus provides labor with access to resources that it has used to make demands and to veto unacceptable policies. Thus, state corporatism can serve to reinforce labor’s independence. See also Brachet-Marquez (1994). She comes to a similar conclusion regarding state corporatism in her study of Mexico. 6 The ETUF is the sole legally recognized labor federation in Egypt. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 7 Table 1 The Similarities in the Political Economy of Egypt and Mexico Pre-reform Political Economy Egypt Mexico Single-party authoritarian regime ✓ ✓ Power highly concentrated in the executive V ISI development strategy ✓ S Development strategy stressed social welfare objectives ✓ S Heavy state intervention in economy ✓ V Legitimacy of the state based on ties to labor and popular sector ✓ S Labor prominent member of strategic coalition V ✓ Labor incorporated into the political sphere via corporatism V V Social contract between the state and labor V S Social protection model of labor legislation S S Labor legislation among most pro-worker in the world V V model o f labor relations that had been institutionalized in Egypt and Mexico. The “Washington consensus” brand of economic reform that was being implemented sought to transform these economies into market-based capitalist economies. In particular, it aimed at reforming the structure of the targeted economies and thereby Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 8 increasing their efficiency. Labor market restructuring and privatization were central elements o f these reforms (Karshenas 1999, 3). Economic reform directly threatened the system of state-labor relations in Egypt and Mexico because it called for a flexible model of labor relations and promoted privatization. Increasing flexibility in the labor market entailed simplifying hiring and firing, eliminating job security, making wage levels more flexible through, for example, greater contractual freedom and decentralized collective bargaining (Karshenas 1999; World Bank 1999). Achieving greater flexibility in the labor market also involved eliminating non-wage costs such as social security and “other legal remuneration” (i.e., paid vacations, year-end bonuses). Government expenditures on benefits to labor in the form of social security and welfare are among the non-wage costs that advocates of neoliberal economic reform target for elimination. Thus, labor’s wages, job security, as well as its non-wage benefits were in danger. Privatization of state-owned enterprises (SOEs) further threatened labor because of the high number o f redundant workers in the state owned enterprises (SOEs) that could potentially lose their jobs as a direct consequence o f privatization. Clearly, labor market reform posed a threat to the social contract, the state- labor relationship in Egypt and Mexico and thus the legitimacy o f the state. Maintaining stability and legitimacy was o f paramount importance to both liberalizing governments. Due to labor’s critical political position and its history of Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 9 militancy in both countries, the governments of Egypt and Mexico had to carefully consider how to approach neoliberal labor market reform. Yet, despite the fact that the character of state-labor relations and labor market policies in Egypt and Mexico were undeniably similar pre-reform, Egyptian and Mexican labor market reform policies have differed substantially. For example, the pace of privatization has been substantially slower in Egypt than in Mexico. By 1986, less than four years after economic reform was initiated in Mexico, 36 percent of the 1155 Mexican SOEs that had been scheduled to be privatized were, in fact, privatized (Valdes Ugalde 1994, 226). In contrast, by 1995 the Egyptian government had privatized a paltry seven percent of the 314 Egyptian SOEs slated for privatization. It was not until 1999 that Egypt could claim to have privatized a third of the SOEs scheduled for privatization (IBTCI 1999). The pace of privatization is clearly influenced by a variety o f factors, such as the capacity of the private sector to absorb the SOEs and the amount o f time that it takes to appraise the SOEs and prepare them for sale. In addition, political factors also influence the pace o f privatization (Pripstein Posusney 1997). In particular, the Egyptian government’s, “fear of losing their presumed and proclaimed mass legitimacy” by antagonizing labor on a national scale resulted in the slow pace o f privatization (Pripstein Posusney 1997, 165). Indeed, it appears that political concerns were in the forefront of the formulation of the policy of Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 10 privatization (Assaad 1997).7 By contrast, despite the fact that the Mexican government had traditionally claimed legitimacy based in large part on its ties to labor, the relatively swift pace of privatization in Mexico suggests that the labor problem was not as great a concern to them as it was in Egypt.8 Also, unlike Egypt, massive layoffs and firings have been a regular part of the reform process in Mexico since the mid-1980s (Kaufman 1990, Brachet- Marquez 1995, Teichman 1996). Law 203 o f 1991, which paved the way for the Egyptian SOEs to be privatized, stated that “existing national labor legislation with its protections against arbitrary firings and mass layoffs and for health and accident insurance pensions would continue to apply unless and until overwritten by a new law (Pripstein Posusney 1997, 214). In addition, Egyptian President Hosni Mubarak publicly stated that not a single Egyptian would lose his/her job because 7 This point was also communicated to me in an interview o f a project manager who had worked with USAID’s Partnership for Development Project on privatizion in Egypt (August 10, 2000). 8 It should be noted that labor in Mexico was not passive with respect to labor market reforms. Organized labor did not support privatization and was quite vocal about its disapproval o f the policy. Indeed, Mexican labor reacted to these tough measures by publicly criticizing government policies, holding strikes, and defecting from the PRI. While the official union confederation, the CTM, was unable to break with the PRI, by 1985, it did begin to express sharp and public criticism o f the reforms (Kaufman 1990). According to de la Garza Toledo, the number o f labor strikes in the 1980s peaked in 1982 and 1986 and violence on the part o f labor peaked between 1986 and 1988. Teichman (1996) reports that government frequently declared these strikes illegal or nonexistent in an attempt to cripple the movement. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 11 o f privatization (EIU 1996, Pripstein Posusney 1997). This promise was backed by the government’s insistence that sales contracts for privatized enterprises contain a clause prohibiting the layoff o f any employee for a period of three years after the date o f purchase (Pripstein Posusney 1995, 1997). While mass layoffs and firings have not been a part of the reform process in Egypt, the process of streamlining the SOEs in order to prepare them for privatiza tion has had an impact on labor, albeit minimal. In some SOEs a number o f full time employees lost their supplementary wages because they were classified as redundant. In addition, in some loss-making plants there were efforts to cut wages, benefits and “reduce the workforce through attrition and dismissal of temporary employees”(Pripstein Posusney 1997, 233).9 These measures are mild in comparison to what has occurred in Mexico, where massive layoffs and dismissals are common. Indeed, between 1983 and 1993 more than 400,000 jobs were eliminated (Goodman 1997, 160, Middlebrook 1995, 297). Furthermore, in contrast to Mexico, these actions do not appear to have been part of a systematic policy sanctioned by the Egyptian government. Instead o f dismissing the redundant SOE workforce indiscriminately, the Egyptian government in conjunction with the Social Fund for Development 9 Italics mine. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 12 developed an early retirement scheme to encourage workers to voluntarily retire.1 0 According to the minister o f public enterprise, by 1997 close to 80,000 SOE workers had applied for early retirement (Pratt 1998). The Egyptian government has also been collaborating with the Social Fund for Development to provide re training to former SOE employees. Additionally, the Egyptian government encourages employee share ownership by reserving ten percent of the shares of privatized companies for purchase by the employees of those companies.11 No such programs exist in Mexico. There are those who argue that these protections have not gone far enough. Nonetheless, by insisting on these protections, the Egyptian government has shown a level o f sensitivity to the labor problem unparalleled by Mexico. Empirical evidence from the International Monetary Fund’s Government Finance Statistics (1998) highlights the fact that there is a decreasing trend in social security and welfare expenditures as a percentage o f government spending Mexico. In particular, social security and welfare expenditures decreased from 25 in 1 0 The Social Fund for Development was conceived o f in 1991 as a program whose goals are to both cushion the social dislocation that is produced by privatization and economic reform in general and provide a social safety net for the poor. It is funded by 18 donors, which include the World Bank, the World Bank, the United Nations Development Program, the European Union, and the Arab Fund for Economic and Social Development. 1 1 These share are offered to the employees o f state-owned enterprises at reduced prices. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. percent o f Mexican government spending in 1975, to a low of seven percent of government spending in 1987 and they have not returned to their 1970s level.1 2 See Figure 1.1 for social security and welfare expenditures in Mexico between 1975 and 1995. r > « ; • _ c a 25 a. & Ov3 G & -Mexico •Linear Year Figure 1. Social Security and Welfare Expenditures (as % o f Total Government Spending Source: IMF. (1990-1998). Government Finance Statistics. 1 2 It must be noted that NAFTA cannot explain the trend in government spending over the 1975-1995 period. Mexican President Salinas began negotiating NAFTA in 1990, well after the steepest decline in government spending on labor benefits in Mexico (see Figure 1). This is not to say that NAFTA did not play a role in later declines in labor expenditures, but it certainly does not explain the trend over the period considered in this study. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 14 As previously mentioned previously, social security and welfare benefits are an indicator o f “non-wage labor costs” (Agenor 1996; World Bank 1999). These benefits constitute a fundamental element in the package o f labor benefits granted to labor by the Egyptian and Mexican states. By contrast, in Egypt the trend in social security and welfare spending from 1975 to 1995 was relatively constant, remaining around 10 percent of government spending. See Figure 2 for government social security and welfare expenditures in Egypt between 1975-1995. 40 35 30 25 20 c 0 u 0 Q . & ■Egypt ■Linear Year Figure 2. Social Security and Welfare Expenditures (as % o f Total Government Spending) Source: IMF. Government Finance Statistics (1990-1998). Analysts o f Mexican labor argue that increasing labor market flexibility has been an explicit goal o f the Mexican government’s economic reform plan Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 15 (Teichman 1996). Consequently, many scholars argue that the Mexican labor market has indeed become substantially more flexible (Collier 1991; Cook 1998; de la Garza Toledo 1994; Patroni 1998). Specifically, de la Garza Toledo, in his convincing study on changing state-labor relations in Mexico, states “labor organizations have seen their participation in the political system, their control over the labor force and their role in shaping economic policy and arbitrating disputes significantly reduced” (198). Moreover, he claims: Over the last ten years, the negotiation or re-negotiation of collective bargaining agreements in Mexico has been governed by the concept of increased flexibility. More over, policies adopted both by management and state labor authorities have encouraged a more flexible use o f the labor force. (209) By contrast, by 1995 the Egyptian government had not specified increased labor market flexibility as a policy goal. Consequently, policymakers and investors still complained about the rigidities present in the Egyptian labor market (EIU 1994; Pripstein Posusney 1997). Despite the fact that the nature of state-labor relations, the level o f labor power vis-a-vis the state and the constraints that emerged from the long-standing populist policies were similar in Egypt and Mexico pre-reform, these countries have reacted differently to the challenge of labor market reform. Indeed, labor market reform in Mexico has been swift and radical, while in Egypt there has been little labor market reform of which to speak. Clearly, as highlighted by Table 2, Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 16 Table 2 The Distinct Paths of Labor Market Policy in the Context o f Economic Reform in Egypt and Mexico Egypt Mexico Decreased social security and welfare benefits No Yes Increased flexibility in the labor market No Yes Egyptian and Mexican government policies regarding labor market reform have taken distinct paths. This study examines why. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 17 C h a p t e r 2 L it e r a t u r e R e v ie w T h e o r e t ic a l C o n t e x t BRINGING SOCIETY BACK IN In positing that domestic politics is a significant factor that must be included in explanations o f economic policymaking in general and labor market reform in particular, this analysis moves beyond the neoclassical paradigm, which asserts that is economic policy primarily determined by economic conditions. For example, according to neoclassical logic, phenomena such as economic crises drive policy reform (Bresser Periera 1993, 7). While an economic crisis may in part trigger changes in economic policy, the mere fact that a crisis occurs cannot explain the specific policy choices made by policy makers. Moreover, there are scholars such as Schneider (1997) who, while accepting that economic crises may provide an impetus to policy change, point out that economic crises affect economic policy precisely because they make the state more dependent on the private sector. Thus, while it cannot be denied that economic conditions affect policy, privileging economic factors obscures the fact that governments are intrinsically political entities and consequently the process of economic policymaking is highly political (Hall 1986). By ignoring the political and related social factors in explanations of economic policymaking, neoclassical theory presents an incomplete explanation of the dynamics that drive the economic policy choices o f governments. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 18 Neo-institutional economics (NIE) has emerged as a corrective to the rigid neoclassical assumptions, which maintain that economic activity is best character ized as taking place among rational individual maximizers operating in perfect markets and constrained only by the availability o f resources. While there are different variants within the NIE paradigm, the common point o f departure is a belief that the choices of individuals in the market are constrained by imperfect information, bounded rationality, and the existence o f opportunism.1 3 In contrast to neoclassical economics, which declares non-standard or unfamiliar market practices to be market failures, NIE maintains that non-standard market practices can be explained by the need to minimize the transaction costs associated with imperfect markets. In so doing, NIE moves beyond traditional neoclassical analysis, which focuses on questions o f resource allocation and distribution, and instead privileges institutional analysis. 1 3 In contrast to the neoclassical paradigm that assumes that individuals are selfish, NIE assumes that individuals are opportunistic. The difference begin that opportunism is selfish behavior that is concealed or “self-interest seeking with guile” (Williamson 1985). Manipulation o f information in the market is a form of opportunism. The Neoclassical paradigm ignores opportunism because it assumes that opportunistic individuals will be driven out o f the market. As NIE assumes bounded rationality, it follows that opportunistic behavior may not be detectable. Consequently, individuals that engage in this type o f behavior are not automatically driven out of the market. Indeed, proponents o f NIE argue institutions such as comprehensive contracts have developed to mitigate the costs associated with opportunism. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 19 Like the neoclassical perspective, NIE perceives the state’s presence in the market as corrupting, resulting in inefficient outcomes and rent seeking (Bhagwati 1982; Krueger 1974). The rent seeking literature in particular holds that profit- maximizing individuals will attempt to capture rents created by market distorting state intervention in the economy. It is argued that both the creation and the pursuit of these rents have a deleterious effect on an economy. The prescription that is therefore forwarded by this literature is that state intervention in the economy should be minimized. The primary contributions of this literature are a means by which to analyze corruption, self-interested behavior and to explain why states create rent-seeking opportunities (Evans 1995). In contrast to the general NIE literature that gives sparse attention to the state, the rent-seeking vein of the literature draws attention to the relationship between the state and the interest groups, or what Olson (1982) refers to as “distributional coalitions,” who attempt to capture rents. Theories o f rent seeking and distributional coalitions, understand business to be a monolithic group that profits from the status quo and therefore attempts to block economic reform. Ultimately, the nexus of sociopolitical forces is inevitably seen by this approach as having a corrupting effect on economic behavior. What has emerged from this body of literature is a monocausal ahistorical theory, whose assumptions about actors (both social actors and the state) are flawed. Consequently, it is able to explain why states will engage in policy reforms that eliminate rent-seeking Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 20 opportunities or why governments facing similar economic pressures and possessing similar institutions will choose different economic policies. In contrast to the NIE literature, which views domestic economic policy as being affected, albeit negatively, by the collusive relationship between state and society, a prominent strand of political science analysis privileges the state in explanations of economic policymaking. This statist approach eschews Marxist and pluralist models, which posit that policy is primarily influenced by the demands of societal actors. In place o f the neutral-arbiter type state of pluralist theories and the captured (or relatively autonomous) state of Marxist (and Marxist- inspired) theories, this approach claims that the state is an entity that possesses and pursues its own interests. Consequently, the statist approach offers an alternative understanding of the role of the state. Moreover, this approach maintains that the interests o f the state are the primary determinants of economic policy. The statist approach posits that variables such as state autonomy, the state’s capacity to implement policy and the degree o f insulation of technocrats from societal pressures explain governments’ economic policy choices and policy implementation (Callaghy 1989; Haggard 1990; Haggard and Kaufman 1992; Nelson 1990; Waterbury 1993). State strength, defined by a high level of state autonomy and state capacity (Doner 1994), is deemed critical for effective policy formulation and implementation. In essence, the structural variables used in this approach eliminate the influence of social actors from the realm o f policymaking. Reproduced with permission of the copyright owner. Further reproduction prohibited w ithout permission. 21 However, excluding the influence o f societal actors on economic policy making is problematic because as Silva (1993) points out “state structure cannot explain the content of policy” (529). Silva (1993) further argues that governments get their cues from the social forces to which they must appeal for support. The cooperation o f key social groups is therefore critical to effective policy formulation. Schneider (1997) concurs with Silva about the limitations surrounding the use of state structure as an explanatory variable. More specifically, Schneider argues that state-centric analyses are misguided in attributing causal characteristics to the state autonomy variable. Instead, he argues that state autonomy may at most act as “a permissive variable.” Additionally, Biddle and Milor (1997) point out that contrary to the logic o f state-centric scholarship, state autonomy may not produce effective policies, but may, in fact, result in “too much bureaucratic isolation from real world issues” (280) which, in turn, may produce ineffective policies. According to them, if policy is to be relevant and effective it must emerge from a combination o f societal and state concerns. A significant shortcoming o f the statist approach, therefore, is that it ignores the impact o f social actors on economic policy choice. The result is incomplete and unrealistic theories that gloss over variations in outcomes that arise because of societal agency. Like NIE, the institutional approach in political science asks some o f the same questions regarding the efficiency of the state-society relationship, and more specifically the state-business relationship. However, the institutional approach Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 22 distinguishes itself from that of NIE in that it tends to focus on political institutions as opposed to market-based institutions. According to Hall (1986), the institutional approach “emphasizes the institutional relationships, both formal and conventional, that bind the components of the state together and structure its relations with society” (19). Institutions in this analysis are seen as mechanisms that structure the interactions of individuals. They may take the form o f norms, formalized rules and/or laws, standard operating procedures (Hall, 19). Institutions are significant because they determine the interests o f different actors (whether societal or state), whether collective action will result and if it does how it will translate into policy outcomes. Policy-making is therefore understood by the institutional approach as more than a result of pluralist politics. A significant strand of this literature challenges the NIE conclusion that state-business relations are necessarily inefficient and corrupting (Biddle and Milor 1997; Fields 1997; Maxfield and Schneider 1997). Indeed, contributors to the institutionalist literature such as Evans (1995), Maxfield and Schneider (1997), and Shafer (1997), are interested in specifying the conditions under which business- govemment relations lead to developmental or growth-enhancing outcomes. More specifically, they argue that the nature o f domestic political institutions mediates the outcome of this relationship. Their findings suggest that the existence o f an embedded Weberian bureaucracy (i.e., an insulated, meritocratic bureaucracy that is immersed in the surrounding social structure) is the first defense against Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 23 corruption (Evans 1995). In its absence, hard budget constraints and/or encompassing peak business associations are the key conditions needed for business-govemment relations to result in developmental outcomes. Unlike both the NIE literature and the institutionalist literature, the international political economy (IPE) literature does not focus on the question o f the efficiency o f state-society relations. Instead, it asks the more general question o f what forces determine economic policy. Specifically, this body of literature has generated models that investigate the effects o f global forces, in the form o f capital flows, trade and foreign direct investment, on domestic economic policy in industrialized nations (Garrett 1998, Rodrik 1997). A strand of this literature rejects recent arguments that claim that global forces trump domestic forces in the determination o f economic policy (Garrett 1998). Instead, it seems to concur with the institutionalist literature’s argument that domestic politics is the primary determinant o f economic policy. Like the IPE literature, the current analysis focuses on the question o f the determinants of economic policymaking and more specifically, labor market policy. Consequently, this work does not explicitly enter the NIE-institutionalist debate regarding the efficiency of business-govemment relations. While this study is not directly interested in the primary question posed by the institutionalist body o f literature, an historical-institutionalist lens that considers the domestic political constraints imposed by historical legacies on economic policy choice is employed. Reproduced with permission of the copyright owner. Further reproduction prohibited w ithout permission. 24 Finally, this study is influenced by recent comparative work of scholars like Beilin (2000), Maxfield (1990), Pripstein Posusney (1997), and Silva (1993). These scholars attempt to correct for the overly statist approach of earlier work by emphasizing the importance o f social forces in shaping economic reform, related policy choice, and both economic and political development. This study follows this line o f theorizing and aspires to move away from either exclusive reliance on the state or exclusion o f the state, to an examination of the state-society nexus within the context of historical institutional constraints. More specifically, it will investigate the role that business-govemment relations play in determining labor market policy. ECONOMIC POLICYMAKING AND BUSINESS-GOVERNMENT RELATIONS As previously discussed, much o f the work that considers the politics of economic policymaking has emerged from the state-centered approach. Schamis (1999) argues that this approach conceives of societal actors as threatening forces whose influence must be avoided. It therefore leads one to theorize about how to neutralize those societal forces that pose the largest threat to economic reform: the losers (Waterbury 1989). Specifically, this approach argues that because the losers are directly threatened by reforms, they have an immediate incentive to engage in collective action opposing reform. On the other hand, the gains from economic reform are not as immediate, nor as certain, so the incentive to engage in collective action in support of reform is not as strong for the winners (Bienen and Waterbury Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 25 1989). Consequently, the focus o f this literature has been on how labor and other members o f those groups that are threatened by economic reform have affected the reform process. The conclusion that emerges from this literature is that the losers (generally, organized labor) are weak and have therefore not had a significant impact on policy formulation, implementation or outcome (Nelson 1990, Waterbury 1993). While this conclusion is challenged by scholars such as Pripstein Posusney (1997), the focus o f the current study is not on how the losers affect the reform process, but instead on the impact of the winners (in this case business) on labor market policy reform.1 4 Schamis (1999) points out that this is an undertheorized area. Furthermore, he argues that it is significant to focus on the winners because “the lack o f a conception of positive power and the neglect o f proactive collective action overlooks a most crucial aspect o f the reform process: how , in support o f liberalization” (1999, 237). 1 4 See Pripstein Posusney (1997) who argues that labor’s actions have, in fact, slowed the process of privatization in Egypt. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 26 C h a p t e r 3 A Q u a n t it a t iv e In v e s t ig a t io n o f t h e E ff e c t s o f B ig B usiness C o n c e n t r a t io n o n L a b o r M a r k e t R e f o r m in E g y p t a n d M ex ic o THEORETICAL RATIONALE AND HYPOTHESES The nature o f the private sector appears to play a role in explaining why labor market reform in Egypt and Mexico has differed. Business, like labor, is directly affected by labor market reform. Consequently, business has an incentive to attempt to influence policy in its favor. This analysis assumes that business will tend to favor neoliberal labor market reform. Given this assumption, we can expect that the more business stands to gain from labor market reform, the more it will act in favor of it. The question that logically emerges is how do we know which businesses will tend to benefit the most from labor market reform? The existing literature cannot answer this question. In fact, a significant shortcoming o f the traditional literature on business-govemment relations is the tendency to treat business as a monolithic group. Clearly, however, the private sector is not monolithic.1 5 While a growing body of literature has begun to disaggregate private sector interests in the context of neoliberal economic reform, it still cannot answer the question of which businesses stand to gain the most. 1 5 For the purposes of this analysis, the terms “private sector” and “business*1 are used interchangeably. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 27 Those scholars that espouse the sectoral approach conceptualize the private sector as being divided into pro-reform and antireform sectors. Frieden (1991) uses asset-specificity to differentiate between competing sectors. He argues that holders of liquid assets favor economic reform while holders o f fixed assets (or highly specific assets) prefer policies that favor their particular sector. Gourevitch’s analysis (1986) distinguishes between sectors according to whether production is for the domestic or international markets. He specifically argues that the domestic- oriented sector favors continued protections, whereas the sector that has to compete in international markets favors economic reform. Finally, Shafer’s (1994) sectoral argument divides sectors based on their ability to respond to economic signals. The argument he makes is that sectors that are rigid, capital-intensive and large-scale resist reforms because they are not able to adjust to the changing market environment. On the other hand, he contends that sectors that are able to easily adapt to the changes brought by economic reform accept it. The most significant problem with applying the traditional sectoral approaches to the analysis o f labor market reform is that they conceptualize business as being composed o f two competing sectors (i.e., pro-reform and anti reform sectors). While this may be the case in other aspects o f neoliberal economic reform, business interests are not divided into antagonistic pro-reform and anti reform sectors in the context o f labor market reform. As indicated earlier, when it Reproduced with permission of the copyright owner. Further reproduction prohibited w ithout permission. 28 comes to labor market reform business tends to favor reform. Consequently, the politics of labor market reform cannot be analyzed with the same tools that are used to analyze other aspects o f economic reform. This analysis contends that the magnitude of the incentive to engage in collective action can be determined by an examination of firm size.1 6 Indeed, this analysis proposes that in the context o f labor market reform, business interests are most meaningfully disaggregated based on firm size.1 7 In other words, instead of defining sectors by economic activity (e.g. export-oriented or manufacturing), as do the traditional sectoral approaches, this analysis argues that sectors should be defined by firm size (i.e. small business sector vs. large business sector). Specifically, this analysis posits that firm size is positively correlated with the incentive to engage in collective action. The larger the firm, the more it has at stake and therefore the larger the incentive to engage in collective action to influence policy. In particular, large businesses stand to benefit substantially in such areas as labor cost and international competitiveness. It is also reasonable to argue that the incentive o f large firms to engage in collective action in favor of 1 6 The number of workers employed in a firm defines firm size. This is a commonly used definition in both the academic literature and policy circles see, for example, Peres and Stumpo 2000 and World Bank 1994. 1 7 While the term sector will be used to differentiate firms based on size and thus propensity to engage in collective action, the use of this term by no means implies that there is a competitive relationship between the sectors. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 29 labor market reform is higher than that of small- and medium-size firms because larger firms tend to comply with labor regulations more frequently than small- and medium-size firms. This is because non-compliance by large firms is more easily detected (Assaad 1995; Galal 1996; Pripstein Posusney 1997). Small- and medium-size businesses, on the other hand, because they have a smaller workforce and tend not to comply with labor regulations as frequently as large businesses (Pripstein Posusney 1997), have less to gain from lobbying government in favor of labor market reform. Not only do large firms have more o f an incentive to engage in collective action; the large business sector tends to be highly concentrated relative to small- and medium-size business sectors. The literature generally defines business “concentration” as the share of large enterprises in production (Soliman 1999, 28). However, this data was not available for the case of Egypt. Thus, this analysis uses a different definition o f concentration. By high concentration o f the big business sector, I mean that relative to the total number o f businesses in the economy, the number of large businesses is small. Two benefits of using such a measure of concentration are that it allows for cross-country comparisons to be made and it takes into account the fact that the larger the economy, the higher the cost of providing the collective good. Olson’s theory o f collective action (1965) provides some insight into whether the higher incentive to engage in collective action actually translates into Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 30 collective action. Indeed, following the logic of O lson’s theory, one would expect that the large business sector, as it tends to be more concentrated relative to small- and medium-size business sectors, is more likely to engage in collective action in support of labor market reform. This study thus proposes to examine the following hypothesis: the more concentrated the big business sector, the fewer benefits labor will receive from the government. ECONOMIC ROLE AND CHARACTERISTICS OF BIG BUSINESS IN POST-REVOLUTIONARY EGYPT AND MEXICO The quasi-socialist policies promoted by Gamal Abdel Nasser’s government (1952-1970) in the 1960s resulted in the marginalization o f the private sector in the • o Egyptian economy. In particular, the infamous Socialist Decrees issued in 1961 established a centralized, state-led economy that left little room for the private sector in the economic sphere. That same year the government expanded its nationalization policy to include enterprises owned by Egypt’s elite capitalist class. The nationalizations were not restricted to large enterprises; small and medium enterprises were also affected, albeit to a lesser extent. Indeed, “[the] massive nationalizations produced an economy in which the state controlled all significant means of production” (Waterbury 1993,61). “Clearly the state intended not only to control the “heights” o f the economy, but also wished to prevent the creation o f 1 8 The post-revolutionary period began in 1917 in Mexico and 1952 in Egypt. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 31 strong private enterprises o f any sort” (Ibrahim 1994, 29). The combination of the Socialist Decrees and the expanded policy of nationalization resulted in the economic and political destruction of the private sector. The growth of Egyptian government’s involvement in the economy is evident by the fact that by the early 1960s the public sector had more than tripled its contribution to gross capital formation, it accounted for 75 percent o f industrial output and 90 percent o f all new investments (Harik 1997; Zaki 1999). What remained of the private sector was mainly restricted to small-scale production. Thus by the early 1960s, the Egyptian state had consolidated its control over the economy and had replaced the private sector as the primary agent o f economic development (Harik 1997; Zaki 1999). Instead of open hostility toward the private sector displayed by the Nasser government, Sadat’s government encouraged the private sector to play a role in the Egyptian economy. Indeed, shortly after his 1971 inauguration, the Sadat government began to take steps that simultaneously suggested an interest in reconciliation with the private sector and foreshadowed a shift in economic policy toward liberalization (Zaki, 1999). In particular, the government returned property that had been sequestered, removed barriers to the political activity o f the private sector, and forbade arbitrary nationalization and sequestration o f properties (Zaki 1999). Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 32 In 1974, the regime initiated the famous policy o f infitah (open door policy). The infitah signaled a qualitative shift toward a more liberal economy with an increased role for the private sector (Hinnebusch 1985; Ibrahim 1994). The primary economic goals of the infitah were to attract badly needed foreign investment, promote Egyptian exports, stimulate the private sector and strengthen the public enterprise sector (Waterbury 1985; Zaki 1999). Infitah also included limited trade reform that allowed the private sector to import certain categories of consumer items and other goods (Hinnebusch 1985; Zaki 1999). Law 43 of 1974, which represented the cornerstone o f this policy, provided a broad range o f generous privileges and incentives to foreign investors (Ibrahim 1994).1 9 These same privileges were denied to local investors, thereby leaving in question what role the regime envisioned for them. However, due in part to the disappointing response of foreign investors to infitah, by the latter half o f the 1970s the bias against Egyptian investors was removed (Gillespie 1984, Zaki 1999). It is important to note that the incentives were designed for big enterprises (Soliman 1998, 30). Indeed, only large projects were granted Law 43 status (Soliman 1998, 30). 1 9 Among the privileges granted to Law 43 firms, was the reduction in the percentage o f profits that these firms were required to share with their labor force and a reduction in the number of workers that were represented on the management boards. Finally, the variety of subjects that the workers on the management boards were allowed to discuss was reduced (Pripstein Posusney 1997, 288 fn. 110). Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 33 Big business responded to these incentives by increasing its share o f gross fixed investment from ten percent in the late 1960s and early 1970s to 19 percent in the late 1970s-early 1980s and by increasing its share o f industrial production from 23 percent in 1974 to 32 percent in 1982 (Handoussa 1990; Waterbury 1985). Furthermore, the number of large local firms expanded significantly under Sadat. Serious foreign investment, however, did not materialize. In fact, between 1974 and 1978 the total foreign capital invested in Egypt amounted to less than U.S. S300 million (Zaki 1999, 83). Consequently, the bulk o f this growth in private sector activity came from local investors. The Mubarak government (1980-present) has largely maintained the policy of economic opening initiated by Sadat.2 0 Early on, the government expressed its commitment to a prominent role for the private sector in the economy. Unlike the private sector in post revolutionary Egypt, the private sector was never marginalized in the economic sphere in post revolutionary Mexico. Indeed, for most o f this period a cooperative business-govemment relationship labeled the “alliance for profits” existed (Johnson Ceva 1998, 96). This economic “alliance” was based on an implicit agreement between business and government in which the government would provide a propitious investment climate in exchange for the private sector’s commitment to refrain from participating in partisan politics. This :o Mubarak was president of Egypt at the time this study was completed May 2001. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 34 arrangement allowed the Mexican private sector to develop into a strong, well- organized and well-financed sector. By contrast to Egypt, Mexican capital is characterized by relatively high concentration. That is, “it is dominated by a small number o f large financial- industrial-commercial conglomerates” (Maxfield 1990, 48). In the Mexican context these diversified business organizations, are referred to as grupos. Grupos “consist of industrial firms (often vertically integrated), commercial houses, financial institutions (in many cases integrated into powerful “financial groups”), and sometimes, transportation firms, mines or other economic firms, which are related through common ownership and interlocking directorates” (Hamilton 1982, 33). Unlike Egypt, grupos have historically played an important role in the Mexican economy. During the Salinas government (1988-1994) the groupos may have fortified their dominant in the Mexican economy. Significantly, the heads of these businesses held key decision-making positions in the country’s most prominent business associations (Valdes Ugalde 1994, 234). “Altogether there are some 121 individuals who control the principal representational channels within the private sector, as well as this sector’s capacity to negotiate with the government and with other social groups” (Valdes Ugalde 1994, 234). Clearly, business pow'er in Mexico is concentrated in the hands of a limited group o f business elites. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 35 T h e M odel THE VARIABLES Time-series regressions are used to test whether the level of big business concentration has a significant effect on the labor market reform policies o f the Egyptian and Mexican governments.2 1 ' 2 2 In addition, alternative hypotheses suggested by the literature are tested. The model thus includes economic, political, institutional and demographic control variables. The variables are as follows: DEPENDENT VARIABLE Social Security and Welfare. The dependent variable is government social security and welfare expenditures as a percentage of total government spending. As previously mentioned, social security and welfare expenditures are commonly considered “non-wage labor costs" (Agenor 1996, Kenworthy 1999; World Bank 1999). As social security and welfare are taken as a percentage of government spending they serves as an indicator of government’s commitment to labor (Kenworthy 1999, Rudra 2001). \bencj\ INDEPENDENT VARIABLE Concentration o f Big Business. This is the explanatory variable o f interest in this study. Concentration is calculated as follows: 2 1 See Appendix for data sources and calculations. 2 2 This study focuses exclusively on private business in the manufacturing sector. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 36 1 - (# Big/Total) where cone=t he concentration o f big business sector. #big=the number o f large manufacturing firms in the economy. 2 3 total=the total number o f manufacturing firms in the economy. The larger cone, the more concentrated the big business sector. This variable is expected to be negatively correlated with the dependent variable. In other words, if cone is large, the concentration o f the big business sector is high, and labor benefits will be low. Cone is thus an indicator of business strength in the context of neoliberal labor market reform. [cone] CONTROL VARIABLES Pressure by international financial institutions. Nelson’s (1990) influential study on policy choice in the context of crisis and structural adjustment suggests that the role of external actors such as the IMF and World Bank in influencing policy choice should be considered. This model thus includes a control variable that tests whether using external pressure placed on the governments of Egypt and 2 3 According to the Secretaria de Comercio y Fomento Industrial (SECOFI) as well as the Instituto Nacional de Estadistica Geografia E Informatica (INEGI), firms employing over 250 employees are considered ‘'large.” The World Bank (1994) considers Egyptian firms employing over 100 employees to be “large.” Due to the limitations of the data, it was impossible to construct business size classifications that were consistent across both Egypt and Mexico. Indeed, the definition of what constitutes a “large” business varies from Egypt to Mexico. Had the data been available, however, it is not entirely certain that constructing a uniform classification scheme would have been an improvement. Indeed, it appears that any relevant classification scheme should take into account the economic context in which the firms operate. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 37 Mexico by the IMF aids in explaining the variance in the labor market policies o f Egypt and Mexico. IMF credits are used as an indicator of the level of pressure placed upon Egypt and Mexico by international institutions. This variable is expected to be negatively correlated with the dependent variable. [imf\ Debt. As debt service increases, it is reasonable to assume that government expenditures on labor benefits will decrease. Bresser Periera (1993) argues that debt is one of the main elements o f the fiscal crisis o f the state in Latin America in the 1980s. Debt is therefore used as a proxy for crisis. Total debt service is the sum of principal repayments and interest paid in foreign currency, goods or services on long-term debt and interest payments only on short-term debt. The relationship between debt and the dependent variable is expected to be negative. [debt] Labor power. The model tests whether labor in Egypt and Mexico has had an impact on labor market policy. The variable that is used was developed by (2001) as an indicator of labor power and is calculated as the ratio o f skilled labor to unskilled labor multiplied by the level of surplus labor.2 4 Simply put, Rudra 2 4 Union density is traditionally used as a measure of the strength of organized labor. It is problematic to use this measure in countries like Egypt and Mexico where the pattern o f state-labor relations is characterized by corporatism. This is because in such countries union membership is generally compulsory. Union concentration rates are also used as indicators o f labor power in studies that developed country cases. See for example, Geoffrey Garrett (1995). According to Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 38 argues that the more unskilled labor there is in the economy, the more difficult it is for labor to engage in collective action, as unskilled labor is notoriously more difficult to organize. Additionally, she argues that if the percentage o f surplus labor is high, that further exacerbates the collective action problems faced by labor. This variable is expected to be positively correlated with the labor benefits. [labpow] Globalization. Trade flows is a variable that is traditionally used as an indicator of globalization. As such, this study uses trade flows as a proxy for globalization.2 5 Conventional wisdom argues that economic globalization results in decreased government expenditures on social policies because of the pressures to increase efficiency and thus be more competitive in the global market (Gill 1995; Kothari 1997; Ruggie 1994). This perspective thus holds that trade is negatively correlated with government expenditure on labor benefits. Trade flows are calculated as the sum o f exports and imports divided by gross domestic product. It Garrett, two measures o f union concentration exist: “the percentage o f all unionized workers who are members of the largest confederation in the country and the number of unions affiliated with that confederation” (667). Again, these measures may not capture labor strength in countries like Egypt and Mexico, where the government largely determines the structure o f trade unions. Consequently, the union concentration rates reveal little about the level o f labor power that exists in these countries. 2 5 One of the benefits of using trade flows as a proxy for globalization is that the effects of trade agreements, such as NAFTA, are taken into account. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 39 is expected that trade flows will be negatively correlated with government expenditures labor benefits, [trade] Democracy. This model tests whether democracy has an impact on policy choice. The impact of democracy on economic policy seems to be more problematic as there are two schools of thought on this issue. First, conventional wisdom maintains that the more authoritarian a regime, the less accountable it is to its citizens and therefore the more likely it is to undertake economic policy reform. More recent work by scholars like Karen Remmer (1990) have challenged this conclusion, arguing that authoritarian governments are, in fact, not more inclined to undertake economic reforms than democratic governments. These studies conclude that regime type is of no consequence when it comes to policy choice. Thus, whether democracy affects economic policy choice is an empirical question. Conventional wisdom will be validated if the democracy variable is positively correlated with the dependent variable. [democ] Economic Growth. Economic growth is calculated as the growth rate of gross domestic product. As economic growth increases the size o f the economic pie, governments will have more resources to spend on such things as labor benefits. Thus, the relationship between growth and the dependent variable is expected to be positive, [growth] Reproduced with permission of the copyright owner. Further reproduction prohibited w ithout permission. 40 Age dependency ratio. The literature on determinants of social security expenditure emphasizes the role of demographic factors (Esping-Anderson 1996; World Bank 1994). The age dependency ratio is the ratio o f the number cf dependents to the working-age population—those aged 15 to 64. As this ratio increases the demands for social security and welfare benefits should increase. The age dependency ratio is expected to be positively correlated with the dependent variable, [depend] Urbanization level. This variable represents the percentage of the total population that lives in areas defined as urban. Increasing urbanization levels should result in a larger labor force and thus demands for labor benefits should subsequently increase. The relationship between the urbanization level and the dependent variable is expected to be positive (Table 3). [urban] Table 4 summarizes the expected relationships between the independent variable and the dependent variable as well as the control variables and the dependent variable. T he M o d el The following time-series equation is estimated for Egypt and Mexico separately: Y, = a + p,lnC6WC, + p2lnLABPOW, + p3 lnDebt, + p4ln77MD£, + fc[nGROWTH<+ p6lg IMF,.,+ p7lnDEMOC, + p8 ln URBAN, + falnDEPEND, + ( 1) Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 41 Table 3 Variables, Measurements and Definitions 1 'ariables Measurements Definition/Interpretation Social Security and Welfare Government social security and welfare expenditures as a percentage o f total government spending [benefj Social security consists o f income transfers, providing benefits in cash o f in kind for old age, invalidity or death, survivors, sickness and m aternity, work injury, unemployment, family allowance and healthcare. W elfare is defined as assistance delivered to clients such as the young, the old or the handicapped (IMF, various years). Domestic social actors Concentration o f Big business: Concentration = 1 - # big businesses/total num beroof businesses [conc]\ “ Bargaining power o f labor” is the ratio o f the number o f em ployed in labor- intensive m anufacturing industries relative to numbers employed in skill-intensive manufacturing industries multiplied by the level o f surplus labor, [labpow] The ”#Big” refers to the num ber o f big businesses in the economy. “Total” refers to the total number o f businesses in the econom y. The larger cone, the more concentrated the big business sector (i.e., the sm aller the num ber o f big business relative to the total num ber o f businesses); "U nskilled” labor refers to those workers who have up to a primary or secondary education and are usually em ployed in low-skill manufacturing industries. By contrast, “ skilled” labor refers to those w orkers with more than a basic education who are usually em ployed in high-skill m anufacturing industries. “ Surplus labor” is the total labor force divided by the am ount o f arable land (Rudra 2001). International actors Pressure by international financial institutions [imf] " im f refers to IMF credits extended to Egypt and Mexico. M ore specifically, this variable represents repurchase obligations to the IM F for all uses o f IM F resources. It includes enlarged access to resources, trust fund loans and operations under structural adjustment facilities (W orld Bank 1998). Globalization Trade flowers [trade] trade = exports + imports/GDP Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 42 Table 3--continued Variables Measurements Definition/Interpretation Economic development G D P growth [growth] growth = the percentage change in GDP Crisis Total debit service [debt] Sum o f the principal repayments and interest paid in foreign currency, goods or services on long-term debt and interest paym ents only on short-term debt (W orld Bank 1998). Demographic variable Age dependency ral\m[depend]'. Urbanization level [urban] The “age dependency ratio” refers to the ratio o f the num ber o f dependents to the w orking age population— those between the ages o f 15 and 64. The "urbanization level" is calculated as the percentage o f the total population living in areas defined as urban (W orld Bank). Political development Democracy [democ] Follow ing the tradition in numerous quantitative studies, the democracy variable is constructed from Freedom H ouse’s data set entitled Freedom in the World. This annual survey provides ratings o f nations on two dimensions o f dem ocracy. The first, “political rights,” assesses such things as the right to organize politically, the existence o f opposition parties, the right to vote, m ultiparty systems, and government independence frcm foreign or military control. The second “civil liberties,” evaluates freedoms o f speech, assembly, religion, econom ic rights, the rule o f law, and hum an rights. After first reversing their coded order, to simplify readability, the average o f these two ratings was used to construct the democracy variable in this study. This yielded a 7-point scale, ordered from a low o f 1 to a high o f 7. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 43 Table 4 The Independent and Control Variables and Their Expected Correlation with the Dependent Variable Expected Correlation with Variables Dependent Variable Independent Variable Big business concentration [cone] Control Variables Pressure by international financial institutions [imj] Debt [debt] Labor Power [labpow] Globalization [trade] Democracy [democ] Economic growth [growth] Age dependency ratio [depend] Urbanization level [urban] In this equation, the P’s are parameter estimates. Y is the level of social security and welfare benefits (as a percentage of government spending) to labor for Egypt and Mexico respectively from 1975-1995. Cone assesses the level of big Negative Negative Negative Positive Negative Positive Positive Positive Positive Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 44 business concentration. This analysis proposes that the concentration level of large business determines the amount of collective action in support of labor market reform that big business engages in. The remaining variables are the control variables mentioned in the previous section and e is the error term.2 6 D a t a a n d M e t h o d This study covers the 1975-1995 period. Because of data limitations, it was not possible to extend the analysis any further. The I970s-early 1980s represents the period in which the social contract between labor and the state was upheld and consequently the benefits to labor were higher during this period than in subsequent years. By the mid- to late 1980s, however, the social contract in Egypt and Mexico was threatened by the increasingly pervasive neoliberal prescriptions for economic reform. The governments of Egypt and Mexico responded differently to the threat as is apparent by the trend in benefits to labor spanning the period from 1975 to 1995. The estimation procedure that is used is generalized least square regression. Autocorrelation in the data is corrected for by the use of the Yule-Walker estimation procedure. In addition to adjusting for autocorrelation, this procedure is 2 6 Note that the IMF variable is lagged. This is because fiscal reform of the type analyzed here (i.e., social security and welfare expenditures) as well as labor market reform, in general, are medium- term policies. In other words, there is a definite time lag between the disbursement o f credits and the actual policy change. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 45 beneficial because it considers secular trends and is efficient when the number of observations is small (SAS). T he R e s u l t s a n d In t e r p r e t a t io n The generalized least square results for Egypt are reported in Table 5. As expected, the concentration of the big business sector was highly significant and negatively correlated with labor benefits. With the exception of debt and urban, all parameters carried the predicted signs. A possible explanation for debt's being significant and positively correlated with labor benefits is that as the total debt service increased, the Egyptian government elected to maintain expenditures on labor benefits in an effort to preserve its legitimacy vis-a-vis labor. The negative correlation between urban and labor benefits may be explained by the fact that as the rate o f urbanization increases pressure on the urban infrastructure also increases (Richards and Waterbury 1998). Consequently, governments may shift their expenditures away from labor benefits and towards maintenance of basic infrastructure. Finally, it should be noted that labor power was significant and positively correlated with government expenditures on labor benefits. Thus, labor continues to play a role, albeit a relatively small one (as evidenced by the parameter estimate), in determining labor market policies in Egypt (Table 5). The generalized least square results for Mexico are reported in Table 6. The variable that captures the big business sector’s concentration is highly significant Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 46 Table 5 Time-Series Regression Results for Egypt* Independent Variable Parameter Estimate Lncone -77.64*** (13 46) Ln labpow .34* (.16) Ln debt .78*** (.11) Ln trade .27 (.15) Lngrowth -.004 (.04) Lg im f -.37*** (.07) Lnurban -21.22** (6.97) R2 .87 N 20 Note: Time-series regression estimates. Figures in parentheses represent standard errors. * The variable In depend was dropped from the equation because it was highly correlated with and consistently less significant than In urban. The most insignificant variable (in this case Indemoc) was excluded from the regression equation because the goodness-of-fit of the model (as measured by the adjusted R') tended to improve when it was dropped. ***p <0.01; **.01 < p <0.05; *0.05<p< 0.10. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 47 Table 6 Time-Series Regression Results for Mexico+ Independent Variable Parameter Estimate Lnconc -126.37*** (9.64) Ln labpow 1.25*** (.25) Ln debt -.44*** (.09) Ln trade -1.11** (.25) Lg im f -.17*** (.03) Lndemoc .69 (.36) Lngrowth .13* (.05) R2 .99 N 20.00 Note. Time-series regression estimates. Figures in parentheses represent standard errors. + The variable ln urban was dropped from the model because it was found to be highly correlated with ln depend and it was also consistently insignificant. In addition, the most insignificant variable (in this case In depend) was excluded from the regression equation because the goodness-of-fit of the model (as measured by the adjusted R~) tended to improve when it was dropped. * * * E < 0.01; **.01 < ,el< 0.05; *0.05 < ,p <0.10. Reproduced with permission of the copyright owner. Further reproduction prohibited w ithout permission. 48 and negatively correlated with labor benefits, thereby lending support to the proposed hypothesis. In the case of Mexico, labor benefits displayed a decreasing trend. These results thus suggest that an increasing concentration o f Mexican big business is associated with decreasing labor benefits. All of the variables carried their expected signs. As in the case of Egypt, labor power was significant and positive. Furthermore, while trade in Mexico was significant and negatively correlated with labor benefits, in Egypt it was insignificant and positively related to labor benefits. This may simply be explained by the fact that the economy is not as globalized as the Mexican and thus the pressures that are associated with economic opening are still not large enough to have a negative impact on the government's expenditure on labor benefits. Finally, it is interesting to observe that in both cases, democ was found to be insignificant. Thereby, lending support to Remmer’s 1990) contention that regime type is o f no consequence when it comes to policy choice. In both cases, the regression results lend strong support to the proposed hypothesis. Big business concentration was found to have a profound effect on labor benefits. In the case o f Egypt, the trend o f government expenditures on labor benefits over 1975-1995 was relatively constant. The highly significant negative relationship that was found to exist between cone and labor benefits suggests that big business in Egypt was not sufficiently concentrated to engage in collective action in support o f labor market reforms. By contrast, the trend o f government expenditures on labor benefits over the same period is declining. The highly Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 49 significant and negative relationship between cone and labor benefits found in the Mexican case suggest that unlike the Egyptian case, the big business sector in Mexico was sufficiently concentrated to lobby for labor market reforms. Interestingly, unlike Mexico, where debt was highly significant and negatively correlated with labor benefits as expected, debt in the Egyptian case was highly significant and positively correlated with the dependent variable. The fact that the government did not cut its expenditures on labor benefits, despite increasing debt service obligations suggests that maintaining legitimacy vis-a-vis labor is a central concern to the government.2 7 While this may be inefficient according to neoliberal standards, the Egyptian government may be constrained by the fact that its legitimacy is derived in large part from its ability to provide continuing protections to labor (Ayubi 1992; Brumberg 1992; Pripstein Posusney 1997). It appears that the Egyptian government continued to rely largely on labor and the popular sectors for support because, unlike Mexico, where business was strong and thus able to replace labor as a strategic political ally, the private sector in Egypt was not sufficiently strong to play such a role. The following statement by Yousef Boutros-Ghali, the Egyptian minister of state for economic affairs, 2 7 Note that unlike the Egyptian case, where contrary to expectations, debt was positively correlated with dependent variable; debt was negatively correlated with the dependent variable in the case of Mexico. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 50 regarding the dangers of privatization demonstrates that the government was aware that it did not have an alternative base of support: [Privatization] is not the innocuous exercise the interna tional institutions make it out to be. We have to address entrenched interests and I have to make sure that I have the constituency to back me when I do so. (Album 1995, 29) Clearly, until 1995, the Egyptian government was still concerned about its legitimacy and aware o f the fact that it could not count on business as an alternative base of support to bring into governing coalition. On the other hand, specialists on labor in Mexico argue that after economic reform was initiated, a shift occurred in the governing coalition away from labor and toward business (Collier 1991; Gibson 1997; Kaufman 1990; Middlebrook 1995; Valdes Ugalde 1994). As the legitimacy of the Mexican government was no longer exclusively tied to labor and the popular sectors, it was no longer obliged to maintain social welfare expenditures that it could not afford. Consequently, it responded to increases in debt service obligations, by decreasing its spending on labor benefits. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 51 C h a p t e r 4 C o n c l u s io n This analysis sought to explain the variance in labor market policy reform in Egypt and Mexico. The findings suggest that big business concentration has a significant influence on labor market policy reform in Egypt and Mexico. More specifically, the following hypothesis was tested and confirmed: the higher the concentration of big business, the lower the benefits to labor. The regression results found that the negative relationship between business concentration and benefits to labor held across both Egypt and Mexico. The results strongly suggest that if the big business sector is highly concentrated, it is able to affect labor market policy. In particular, the decreasing trend in labor benefits over 1975-1995 in Mexico was associated with a high concentration o f the big business sector and the relatively constant trend o f labor benefits in Egypt during the same period was associated with a more diffuse big business sector. These findings thus help explain the divergent paths o f labor market reform taken by Egypt and Mexico. This analysis has demonstrated that in order to fully understand labor market reform, the role of domestic social actors and domestic politics in general must be considered. More specifically, this study has shown that in the era of economic liberalization, business interests may play a considerable role in influencing policy decisions regarding the labor market. This is understandable given the increasingly prominent role that the private sector is called upon to play Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 52 in the economy because of economic liberalization. In some countries, the private sector is prepared to play a more dominant role in the political economy; however, in others it is not. In the latter case, governments, like that of Egypt, are in a quandary, attempting to liberalize without a sufficiently strong constituency to back them. Consequently, the pace of economic liberalization is much more gradual and may be plagued with reversals and policy choices that seem irrational from a neoliberal perspective. It must be noted that the cases of Egypt and Mexico are by no means exceptional. Many governments in Africa, the Middle East and Latin America are facing similar choices and have to varying degrees similar domestic political constraints that they must negotiate. Co n t r ib u t io n t o t h e L it e r a t u r e This thesis makes an important contribution to several bodies of literature: the politics of economic policy, comparative politics and business-govemment relations. Each o f these bodies of literature stand to benefit from the quantitative analysis generated by this study. This study offers significant insight into labor market reform, by expanding the boundaries o f existing conceptual and empirical work on the politics of labor market reform. It makes three contributions to this literature. First, this study sheds light on the importance of examining two previously overlooked variables: labor market reform and business-govemment relations. Although the process of structural reform has been widely studied, labor market reform has received considerably less attention. Nonetheless, it is an Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 53 integral aspect of economic restructuring programs that are being applied in LDCs. It is also a highly political issue because it directly targets labor and to the extent that a government relies on labor as base of support, reform of the labor market may be difficult and highly contentious. Furthermore, those studies that have examined labor market reform have tended to focus solely on the impact o f labor on these reforms, virtually ignoring the influence of business, the other domestic actor directly affected by labor market reform. This study thus fills in the gaps in the literature, by investigating whether and how business-govemment relations impact labor market reform. Second, this analysis argues that labor market reform should be disaggregated from other aspects of economic reform. This study found that the assumptions in the existing literature (especially the sectoral vein of the literature) regarding business interests did not apply in the context o f labor market reform. Thus, the tools developed to analyze reform and in particular, reform of trade and financial markets, could not be applied in the labor market. Third, this thesis developed a proxy that captures the ability of business to influence government policies through collective action. This variable will be useful in future studies as a measure of business strength. While many comparative studies on policy reform rely on single cases, there are a growing number of studies that compare policy reform in Latin America and East Asia. This cross-regional study succeeds in crossing the borders o f the Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 54 existing literature by including the Middle East. A significant benefit of such a cross-regional study is that it has the advantage o f being able to test hypotheses across cases. Finally, while much has been written regarding business-govemment relations and how it affects industrialization in the developed world, empirical research on business in developing countries lags behind. This study provides the context of liberalization, specifically labor market reform, instead of industrialization and focuses on developing countries. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 55 R e f e r e n c e s Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 56 R e f e r e n c e s Agenor, Pierre Richard. 1996. “The Labor Market and Economic Adjustment.” IMF Staff Papers 43 no. 2 (June): 261-325. 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Creator Salem, Samira Hamdy (author)

Core Title Big business concentration and its effect on labor market reform policies in Egypt and Mexico

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Advisor Kalaba, Robert E. (committee chair), Kamrany, Nake (committee member), McKenzie, Roderick (committee member)

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