Labour Reforms in Brazil and Chile (a Comparative Study)
UNIVERSITY OF IBADAN DEPARTMENT OF SOCIOLOGY
COURSE
COMPARATIVE INDUSTRIAL RELATIONS (MIR 709)
TOPIC
LABOUR REFORMS IN BRAZIL AND CHILE
(A COMPARATIVE STUDY)
A PAPER SUBMITTED TO THE DEPT OF SOCIOLOGY
BY
GROUP 4
Adepoju Janet Oluwatosin 167455
Ayangbemi Olusola Temitope 166905
Dagunduro Adebukola Olufunke 167457
Ogunsemoyin Olubusayo B. 81014
LECTURER IN CHARGE: PROF. ONYEONORU P.I.
OCTOBER, 2012
INTRODUCTION
Labour laws is defined as the balance of power among government, employers, workers, and unions. The redrafting of a country’s labour laws typically reflects a shift in the power relations and may carry unfavourable consequences for a former beneficiaries. As the Colliers put it, “Labour law is a highly visible and concrete policy statement around which political battles are fought, won, and lost, and around which political support is attracted, granted, and withheld… labour law thus provides a valuable point of reference for analyzing the larger political context” (Collier and Collier 1979, 971).
The reform of national labour laws is one of the most widely implemented recent policy changes in the world. Since the early 1990s, Brazil as well as Chile have changed their labour laws. Labour reforms have also provoked massive protests, including general strikes. It can be understood that the changes in labour law occurring on a global scale are themselves a response to the pressure of globalization. In most nations of the world, labour legislation was originally made to reflect government-employer-worker relationships embedded in protected national economies. But in recent years, trade liberalization and greater global competitiveness have created new challenges for employers and workers. Pressures for legal and institutional change have naturally followed.
This study is all about comparative insights into labour reform processes at the end of the twentieth century of two Latin American countries, Brazil and Chile. Despite similar initial prescriptions for change in the direction of greater flexibility, the outcomes of labour reforms differed in the two countries. In the 1990s, moderate flexibility reforms were implemented in Brazil while in Chile, changes in labour law was extensive.
THE LATIN AMERICAN CONTEXT
The region followed a common import substituting industrialization (ISI) model in the post-war period. This development strategy reshaped the Latin American economies, societies and institutions. While traditional interest groups linked to the primary sectors reduced their political influence, new social groups with interests in the local industries gained social and political strength. After some time, this inward-oriented development strategy began to show clear signs of exhaustion. The performance of Latin American countries was not good enough compared with the South-East Asian countries that claimed to adopt an almost opposite economic model. The political support of the ISI model was gradually eroding in Latin America when the debt crisis unleashed in 1982 and the failure of early policies implemented by some countries to deal with it played an important role in reshaping policy views in the region.
Latin America of course is not homogeneous, but there are some structural characteristics common to most countries in the region that had a bearing on the reform process. The region’s competitive advantages are biased in favour of natural resources, and primary commodities explain a large share of exports: minerals and oil in Chile, Venezuela and Perú, agriculture in Argentina, Paraguay, and Uruguay; even in more industrialized Brazil and Mexico primary products are still relevant. This feature impinges on the region’s political economy via the so-called natural resource “curse”.
The distribution of income and assets in Latin America is highly unequal compared to other regions in the world. As the 2006 World Development Report of the World Bank suggests, income inequality of this magnitude is quite likely a signal of unequal opportunities (rather than of different choices) – World Bank (2005). Because of the structural lack of equity, many Latin Americans did not have the chance to take advantage of the opportunities open by reform; hence many opportunities at the individual level were lost. Besides, groups that were marginalized and segregated did not support reform and often opposed it actively, fearing that a more competitive environment would do them more harm than good.
In several of the countries, the so-called structural reforms came hand in hand with efforts at macroeconomic stabilization. There had been a long list of stabilization attempts before this period, but the macroeconomic stabilization programs that accompanied the structural reforms were usually deeper and lasted more than previous ones. The perception of greater deepness of these stabilization efforts was related to the simultaneous implementation of other components of the reform package.
Also, there have been important “contagion” effects across countries, that is, learning from the interpretation of the (successful and unsuccessful) experiences of other countries in the region. Having referred to many common factors, it is also important to stress that Latin American countries are quite different in many dimensions. Country size is obviously one of the dimensions in which the region is not homogeneous; a dimension that became particularly relevant for the fate of the inward oriented ISI model (think about the size of the domestic market in Brazil as compared for instance with Chile). Economic and social development show significant variation across countries as well. The historical starting points in terms of social and economic structure, as well as in the details of past policies, were also different in different countries when pro-market reforms began. Social indicators as literacy ratios, life expectancy and the like also show much variation. Even when most countries adopted a version of the ISI model in the post-war period, the progress they made in that direction varied considerably in terms, for instance, of the degree of industrialization they reached. This was partly dictated by the size of the domestic market and partly by policy options and political conditions.
In spite of some common institutional heritage from the colonial era, political and institutional history also shows significant variation across countries in Latin America. Most countries in the region experienced periods of dictatorship in the twentieth century, but while some spent most of the century under those conditions, others did it for relatively short periods. The quality of institutions and the incidence of corruption also varies, Kaufmann, D., A. Kraay and M. Mastruzzi (2003). The different starting points and idiosyncratic characteristics influenced the fate of the pro-market reform.
BRIEF HISTORICAL BACKGROUND
Brazil
The history of Brazil starts with Indigenous Peoples of the Americas, who arrived thousands of years ago by crossing the Bering land bridge into Alaska and then moving south. The first European to explore Brazil was Pedro Alvares Cabral on April 22, 1500 under the sponsorship of Portugal. From the 16th to the 19th centuries, Brazil was a colony of Portugal. On September 7, 1822, the country declared its independence from Portugal and became a constitutional monarchy, the Empire of Brazil. A military coup in 1889 established a republican government. The country has seen a dictatorship (1930–1934 and 1937–1945) and a period of military rule (1964–1985).
Brazil returned to democracy in 1985, after more than two decades of uninterrupted military governments. The first democratic government unsuccessfully tried to stabilize the economy and made little progress with reform, but since 1990, when Collor de Mello arrived to the presidency, the successive democratic governments carried on a series of market-oriented reforms.
It was argued that democratization facilitated the introduction of market oriented reforms in Brazil. While the military stayed in government, the protective mantle of “national security” and “key-sectors protection” became a standard speech, always blocking a deeper integration into the world economy. This ideological view was present not just at the top of the military regime but also inside the mid-level military officers who were commonly appointed to prominent positions in economic ministries and state enterprises. In the nineties, under democratic rule, a new breed of internationally-minded top civil servants replaced these officers.
Reform in Brazil followed a pragmatic way, meaning that it was gradual, piecemeal, and loosely coordinated. Fragmentation of the political system prevented any group from gaining dominance and forced a negotiated style, leading to gradualism. So, most policies took time, were negotiated, and had to go through multiple veto points. The informal institution of rather fluid ties among state elites and between them and business facilitated consensus building around reform policies, but they had to be negotiated. In this manner, the policy outcomes were unlikely to be extreme.
The actual social and economic outcomes have not been too spectacular, and some discontent against “the reforms” has breaded. Yet, the arrival to office in 2003 of a left-wing party, the PT, has not generated any reversal, suggesting that “pragmatism” is not likely to be displaced soon in Brazilian economic policy making.
Chile
The territory of Chile has been populated since at least 12,000 ago. By the 16th century, Spanish conquistadors began to subdue and colonize the region of present-day Chile, and the territory became a colony from 1540 to 1818, when it gained independence from Spain. The country's economic development was successively marked by the export of first agricultural produce, then saltpetre and later copper. The wealth of raw materials led to an economic upturn, but also led to dependency, and even wars with neighbouring states. The country was governed during most of its first 150 years of independent life by different forms of restricted government, where the electorate was carefully vetted and controlled by an elite.
Failure to address the economic and social disparities and increasing political awareness of the less-affluent population, as well as indirect intervention and economic funding to the main political groups by both the KGB and the CIA, as part of the Cold War, led to a political polarization under Socialist President Salvador Allende which in turn resulted in the 11 September 1973 coup and the military dictatorship of General Augusto Pinochet, whose 17- year regime was responsible for numerous human rights violations and deep market-oriented economic reforms. In 1990, Chile made a peaceful transition to democracy.
With ups and downs, Chile followed a basically inward-looking-state-centred development strategy from 1930 to 1973. It was not very different from the experience of other Latin American countries, save probably for the socialist period between 1971 and 1973. This period ended up with a severe socio-economic and political crisis that paved the road for a military coup that inaugurated a dictatorship that would last until the late eighties. The military government pushed a far reaching pro-market reform agenda. This experience is usually regarded as a leading case of market-friendly reforms, not only for the adoption of a shock therapy, but also for doing it well before most other countries in the region.
Beginning in late 1973, several structural reforms were implemented, including the liberalization of most prices, interest rates and wages; drastic reductions in tariffs and the elimination of non-tariff barriers to trade; the strengthening of fiscal and monetary policies; the privatization of more than 500 firms; the reform of the pension program; and the adoption of new policies of competition and regulation. In the early eighties, Chile, like other developing countries, underwent a deep economic and financial crisis. There was some reversal of reforms during this period, but the military government resumed the liberalizing reforms soon after it. Chile returned to democracy in 1990.
One of the most notable aspects of the Chilean process is that after the return to democracy in 1990, the centre-left coalition that has governed the country since, did not revert the market reform process. There were several peculiar factors leading the military dictatorship to follow the suggestions of a group of foreign-trained economists towards market liberalization (against the nationalistic tendencies of part of the military). Some possible sources of opposition (such as unions or left leaning parties) were silenced by the dictatorship. Business sectors were relatively grateful since firms were devolved to private owners after nationalization by the previous socialist government of Allende, so that they did not oppose trade liberalization.
The way the transition to democracy was instrumented in the late eighties was key for the consolidation of pro-market reforms in Chile. Consolidation was by no means granted by that time, for the parties that formed the winning coalition (named the Concertación) in the 1989 elections had opposed many of the reforms. Also, formerly repressed interest groups could take advantage of the new political environment to voice their demands, pushing the new government towards a less neutral and more lenient fiscal policy. According to Foguel, Miguel, Indermit Gill, Rosane Mendonca and Ricardo Paes de Barros, (1998), several factors contributed to the consolidation of the pro-market reform in the transition period: * the good performance of the economy in 1985-1989; * the concurrent fall of socialist regimes in Europe; * the economic failure of democratic transition in Argentina (that contributed to convince several left15 wing politicians of the risks of “heterodox” policies); * the intellectual renovation and internationalization of the circles around the Concertación, which lead to a “revaluation of continuity”; and * several institutional enclaves in the new constitution, increasing the veto power and political relevance of “the right”, which forced democratic presidents to follow consensual strategies on economic matters.
Chile seems to be in a path of institutional and policy consolidation. The democratic governments have maintained the core of the economic reforms undertaken during the dictatorship, while steadily (albeit slowly, according to some views) advancing on the social and democratic front. These steps have taken place according to a style of policymaking that is much more consensual and institutionalized than that of other Latin American countries. (IADB, 2005).
EVOLUTION OF LABOUR REFORM IN BRAZIL
The Consolidated Labour Code
The main body of the Brazilian labour legislation was introduced in the 1940s, and consolidated into the Consolidação das Leis do Trabalho (CLT) in 1943. The CLT is a large, often overlapping, set of rules which determines individual and collective rights and duties of the workers, unions and firms. The law determines that all workers must have a booklet where all individual labour contracts and its changes over time are registered by the employer. By definition, a formal worker has a booklet signed by his employer (“carteira assinada”)
Besides the obligation to sign the booklet, the law stipulates a set of minimum conditions any employment relationship must follow. The most important rules are: maximum hours of work per week; maximum extra-time working hours; minimum payment for extra-time work; minimum wage; pre-paid annual vacations; special protection clauses for women and children; the dismissal of pregnant women is forbidden; the right of paid vacation before and after childbirth, for the mother; special work conditions for night shifts; one month pre-notification of firing; and protection against unjustified dismissals.
There have been changes in the legislation since the creation of the CLT. In particular: In 1962, introduction of a one monthly wage annual bonus (“thirteenth salary”). In 1963, introduction of a family allowance. In 1965, introduction of a wage adjustment law which determined the minimum rate of wage adjustments of all workers in the economy.
In 1966, creation of a severance fund (Fundo de Garantia por Tempo de Serviço - FGTS) in place of a clause forbidding dismissal of workers with more than 10 years of tenure. In 1986, creation of an unemployment insurance program which today covers about 25% of the country’s labour force. In 1988, approval of a new Constitution with the introduction of new labour clauses.
Severance Rules and Unemployment Compensation
Until 1965, to fire a worker without a proper justification the employer had to pay one month’s wage for each year of work in the firm. The compensation was calculated on the basis of the higher wage received during the work contract. It was a duty of the employer to prove the dismissal was justified, and the conditions for justified dismissals were clearly defined in the law.
After 10 years in the same enterprise, dismissals were forbidden by law, except if properly justified. In 1966, this entire system of protection against non-justified dismissals was changed. A severance fund was created, called the Fundo de Garantia por Tempo de Serviço (FGTS). When hiring a worker, the firm had to open a banking account for the worker and deposit 8% of the value of the wage in the account. Today, Caixa Economica Federal, a government saving and loans institution, collects the FGTS levy and invests it primarily in urban housing projects giving workers a legally guaranteed minimum deposit rate.
When dismissed without a just cause (“sem justa causa”) the worker could draw this money and received a monetary compensation corresponding to a fine of 10% over the total amount of the fund. Like many other Latin American countries (see Loayza, 1998), dismissal for economic reasons is not considered a just cause. In 1988 the fine for unjust dismissal was increased to 40% of the worker’s FGTS account balance. Besides this fine, the employer has to notify the worker one month before he will be fired. This is the “aviso prévio” law, or previous notification of firing.
During the month the worker has received the previous notification of firing, he/she is allowed, according to the law, to take two hours a day to look for a new job. This implies a minimum cost of 25% of the worker's monthly wage. In fact the cost is usually higher since firms end up paying the notification fee to the worker and dismissing him immediately. Thus, the total cost of dismissal is 25% to 100% of the monthly wage plus 40% of the FGTS. The cost depends on the number of months the worker has worked for the firm.
Since 1986, when fired, besides the advance notice, access to the FGTS (and the 40% fine for unfair dismissal), the worker also has the right to an unemployment compensation benefits. The unemployment compensation program offers partial coverage for up to four months of unemployment (extended to five months after 1996). To become eligible to receive the benefit, the worker must meet the following criteria: * to have been dismissed without a just cause; * to have had a formal labour contract during the last six months or to have been legally self-employed for at least 15 months; * to be unemployed for at least seven days; * must not receive any other pension; * must not have any other type of income sufficient to guarantee his own subsistence and that of his family. The value of the benefit cannot be lower than the value of the minimum wage, is adjusted monthly for inflation, and is related to the average wage received by the worker in the last three months in the previous job.
Wage Laws
An important change in the CLT was the introduction of the Wage Adjustment Law in 1965. Before this date, wage adjustments were fixed through collective bargaining between workers and employers unions, at the settlement dates (“data base”), and through individual negotiations between one worker and his/her employer. Only the minimum wage was determined directly by the President of the Republic, although most of the time it incorporated automatically the prescriptions given by indexation clauses imbedded in the Law.
The Wage Adjustment Law gave the government the right to determine the minimum rate of adjustment of all wages in the formal sector of the economy. The first wage law stipulated that nominal wages should be adjusted once a year, at the settlement date of each occupation, following a formula which took the past and expected future rate of inflation and the growth rate in GDP per capita as the base for the adjustments. The specific formula and the adjustment period changed many times over the years, as the rate of inflation increased.
In 1995, one year after the introduction of the Real Plan, the Wage Law was abolished. Today, upward adjustment of wages is negotiated between employers and employees. But downward adjustment of wages is for all practical purposes prohibited by the Constitution: attempts to do so make employers open to lawsuits, which are generally resolved in favor of the worker. This was irrelevant during a time of high inflation, but now quite possibly adds to the rigidity of the labour market.
The Reforms of 1988
The main changes of labour legislation introduced in the Constitution of 1988 can be summarized as follows: * The maximum number of hours of work per week was reduced from 48 to 44 hours and the minimum payment for extra-time hours increased from 20% to 50% of the workers’ wages. * For continuous work shifts the maximum daily journey was reduced from eight to six hours. * A vacation bonus of one-third of the workers’ wages was created. * The childbirth leave for mothers was increased to 120 days and a five days childbirth leave for the father was introduced. * Firing costs for unjustified dismissals increased from 10% of the FGTS balance to 40%.
This is the list of the minimum individual rights for private sector and state enterprise workers. Working conditions can be improved through negotiations between the individual worker and the firm, or through collective bargaining. The Constitution of 1988 clearly mandated higher nonwage benefits and made dismissals costlier for employers.
Payroll Taxes and Mandatory Benefits after 1988
The CLT and the 1988 Constitution stipulate a very comprehensive set of minimum standards any individual contract must follow. The rules do not provide much space for negotiations between employers and workers. The result is a rigid set of minimum rules, which reduces the flexibility of the labour contract in face of changes in the economic environment. In addition to the costs imposed by this inflexibility, there are more direct and obvious non-wage costs due to payroll taxes and mandatory benefits required by the law.
The cost of labour can be decomposed into four parts: * The basic contractual wage. * Mandatory benefits which include the annual one month bonus (terceiro salário), the contribution to the FGTS, vacations and other benefits. * Contributions to the official training system (SENAI and SENAC), to finance an institution which assist small enterprises (SEBRAE) and a contribution paid by firms to finance an workers’ assistance service (SESI or SESC). * Contribution to the federal social security system (INSS) and to fund educational services salário educação) and an on-the-job accident insurance fee mandatory for all firms and proportional to the payroll.
In addition to these contributions based on payroll costs, employers are also charged levies on revenues to pay for additional INSS-related obligations (Cofins), to be raised in 1999 from 1 to 2 percent and PIS/PASEP, the contributions towards the Fundo de Aparelho de Trabalhadores (FAT) which fund unemployment compensation, job search assistance and active labour programs such as training and microenterprise support schemes. These labour related levies can add up to between 2 and 3 percent of employer revenues.
EVOLUTION OF LABOUR REFORM IN CHILE
Labour Code (1931-1965)
Initially, Chile’s labour market regulations is characterized with tripartite system of collective bargaining and conflict resolution.
1931 labour code focuses on conflict resolution. While the legislation favoured collective bargaining at the firm level, and this form of negotiations was dominant, the mechanisms of conflict resolution projected negotiations beyond the enterprise. With time, sector-wide negotiations spread throughout the economy. Dismissal without expression of cause with a month’s notice. Severance payment of a month’s wage per year of tenure for “white collar workers.
The main component of payroll taxes are social security contributions. Chile started a Social Security System in 1924, building from a set of privately established pensions systems that covered specific groups of workers or sectors of economic activity. These programs finance retirement, invalidity and family survivor benefits, a public health care system, the payment of family allowances, and an unemployment subsidy. In addition, there was a 1 % contribution to fund public training programs.
The Chile labour market reform has come a long way and in each stage undergone few reforms to meet the demand of the changing market conditions. After the deadly coup of 1973, several labour unions, labour institutions were dissolved. In October, 1973, the Chilean government introduced wage adjustments, which were linked to inflation rate. Chile labour market reform is significant because of the following reasons: * The country underwent a switch over from an economy, which was regulated to an economy, which is unregulated as well as open. This was brought about by the implementation of economic reforms pertaining to labour markets and pension system in the country. * The labour market in Chile has been over the years very unpredictable.
Labour market in Chile during the seventies:
During the middle seventies, the government in Chile launched the first structural reforms in Chile. Which in turn increased the unemployment rate. However, Chile experienced a healthy growth in the economy towards the end of seventies. Despite the speedy growth in economy, the labour market refused to recover from the high rate of unemployment.
Reverse to what it was during the seventies, the labour market in the eighties recuperated very fast even though the crisis was much more severe than the previous one. Even rate of growth in wages recovered comparatively fast. During this period, rate of unemployment reached 25%.
As part of Chile labour market reform, the proportional adjustments pertaining to lower wages was made more than the higher wages. The method of indexation that existed between 1973 to 1979 had many drawbacks. In order to overcome these drawbacks, Labour Plan of 1979, was implemented, which stated that adjustment of wages would be made at or above inflation rate. At regular intervals, as part of Chile labour market reform, the government carried on with the practice of increasing wages but not in accordance with the rising rate of inflation. However, during the 1990s, there was increase in wages higher than what was declared for the purpose of readjustments.
The Employment Security Law, states that if there is no valid cause for dismissing an employee, the worker could be re engaged in the job as per orders from a labour court. However, in the year 1978, this law was substituted by a method of "severance payment".
Chile labour market reform, Decree Law 2,200 stated that employers had the right to make changes in the contract between the employers as well as the employees and that they could fire an employee without giving any explanation to the employees. A "severance payment", which was minimum was also introduced.
Decree Law 2,200 as well as Chile labour market reform of 1979, led to the introduction of new techniques to supervise the activities of the labour unions. This was stated in Decree Law, 2,756. Collective bargaining was stated in Decree Law 2,758. Decree Law 2,756 and Decree Law 2,758 are collectively referred to as Labour Plan.
Decree Law 2,756 governs matters related to labour union. Whereas, Decree law, 2,758 governs the various norms adopted in the event of a strike. Labour reforms that took place in Chile is summarized below;
Phase I (1966-73)
Increased polarization of the labour movement Generalized use of wage indexation. Dismissals require expression of “just” cause, or severance payment of a month’s wage per year of tenure. In spite of very high nominal contribution rates, by 1970 the public sector spent 20.5 percent of its budget to cover the deficits in the health and pensions systems along with its own contributions.
Phase II (1974-79)
Economic Liberalization with a highly intervened labour market. Decree Law 670 of October 1974 substituted the earlier legislation that defined the tripartite commissions, giving them a consultative character. They were understood to be a transition mechanism, while a new policy towards the labour market was developed, and while union activities were banned.. Economy-wide wage adjustments imposed by decree. Dismissal without expression of cause reinstated in 1978 for all new hires. Employers pay a severance of a month’s wage per year of tenure to all dismissed workers, unless there is “just cause,” which includes “economic cause.” A number of partial changes brought down contributions from a 60 percent at their peak in 1974, to the order of 33 percent in 1980. Rates varied according to the specific plan at which an employee was affiliated, but all the plans were guaranteed by the state. For example, in 1976, the 1% contribution earmarked to fund training program was eliminated.
Phase III (1980-1990)
Union affiliation becomes voluntary. Decentralized collective bargaining. Labour negotiations opened to market forces. Strikes without job guarantees after sixty days. No intervention of the government in the affairs of unions or the collective bargaining process, except for a wage floor guaranteed by law. The wage floor was eliminated in 1982, and as a by-product, the necessary conditions to replace striking workers were eroded.
It also marked the era of minimum wage setting. Starting in 1981, dismissals of any worker, new or previously hired, can take place without expression of cause, and as long as severance is paid. Severance payments are open to negotiations. In the absence of an explicit agreement the minimum severance would be a month wages per year of tenure with a 5 months ceiling. A 1984 reform established that the minimum severance agreed by the parties could not be less than the severance established by law. Furthermore, “economic cause” for dismissal is not “just cause” anymore.
In 1980, a reform lowered social security contributions to just above 20 percent (10 % towards retirement, 7% towards health and about 3% towards disability). New entrants to the labour force would contribute to a new old-age program based on a mandated individualized savings plan, to be managed by private administrators (AFPs). Old contributors could to opt out of the traditional pay-as-you-go system. In the case of health care contributions, both old contributors and new entrants were given the choice to opt out of the public system (FONASA) and use the 7 percent towards a health care insurance policy provided by an authorized private health insurer (ISAPRES). A basic pension, the unemployment insurance, and the family allowances programs would be fully financed by the central government budget.
Phase IV (1991 till date)
This is the Consolidation of Labour Reforms. The new law eliminated the sixty days period for the legal strike, which allowed employers to dismiss striking workers without severance. The new law also reinstated stricter conditions for workers replacements in case of strike. Labour negotiations can take place at the sector level if both workers and employers agree to it.
Dismissals require an expression of “cause”. Severance of one month wages per year of tenure applies to dismissals with “economic cause.” Severance would be paid with a 20% surcharge if the employer cannot prove an alleged “economic cause.” No severance obligation in case of dismissals with “just cause.” Dismissal ceiling on severance payment raised to 11 month wages.
THEMES ON LABOUR REFORM DISCUSSION
The thematic elements under which labour reforms that occurred in the two Latin American countries under study will be discussed will focus on the labour’s strategic interest in labour law and its ability to pursue those interest during specific rounds of reform. These interests are derived from the legal and institutional framework of labour relations, which are often inherited from earlier period of legal and political incorporation of labour.
Secondly is the willingness of government to see reform through. Government resolve is shaped by the pressure for the reform that it faces from international actors or domestic constituencies.
Another thematic approach is the transition context for the reform. The nature of transitions as well as their timing affects the political environment for labour reform. Democratic transitions tend to favour rights-based reforms and strengthen unions, while market-oriented economic transitions tend to favour labour flexibility and weaken unions.
The Initiation of the Reforms
The crisis of the ISI model in the sixties and seventies left Latin American leaders searching for new paradigms. In this context, the pro-market reform agenda began to gain strength, initially pushed by groups of professional economists trained in the US, and reinforced later in the eighties and nineties by the IFIs. The experience of Thatcher in the UK and the fall of communism also contributed to create an environment favourable to pro-market reform. In some countries, these new ideas got through to the ruling army forces. Chile was the leading case, after a short socialist experience that ended with a military coup. Other countries only began the reform process in the early nineties, after suffering severe macroeconomic instability in the eighties. By that time, Chile had already become an example of a successful reformer that many wanted to reproduce. The debt crisis that blew up in the early eighties gave place to a decade characterized by severe macroeconomic instability in most countries in the region. There were several attempts at heterodox macroeconomic stabilization that failed completely. Brazil is probably one of the most distinctive cases. The pro-market structural reforms were out of the agenda in those years in most Latin American countries.
Even in Chile, the debt crisis caused a partial and temporary reversion of the pro-market labour reform. It was only after these policies ended up in hyperinflation that the idea of implementing more orthodox stabilization programs bundled with structural pro-market reforms made its way through in the region in the early nineties. In the 1980s and 1990s, several democratic political leaders who gained elections proposing leftwing platforms ended up adopting the market-friendly package. Some of these presidents were concerned by little more than their political survival in the midst of impending or ongoing macroeconomic crises, and were pretty much open to “anything” that might deliver some short-term economic results that could lead to favourable political results for them. They ended up convinced that some variant of the market-friendly package was the most sensible option they had.
Implementation
Recent literature on reform emphasizes the key role of appropriate implementation and enforcement capacity to determine the outcome of reform (Stein and Tommasi 2005; Rius and van de Walle, 2004; Fanelli and Popov, 2003). It is considered that while the best designed policy packages may generate bad outcomes if implementation fails, policies that are not first-best in terms of design may still render acceptable results if they are well implemented (IADB, 2005).
The quality of public policies in terms of enforcement and implementation varies considerably across the Latin American countries. Stein and Tommasi (2005) classified the Latin American countries in several key dimensions of their economic policies, one of them being the capacity to enforce and effectively implement the policies. Of the two Latin American countries considered in this paper, Chile appears as the one with quite high enforcement and implementation capacity; Brazil has intermediate capability with implementation quality.
The enforcement and implementation capacities are in turn related to the quality and independence of the bureaucracy, the quality and independence of the judiciary, and the capabilities of the Congress. Stein and Tommasi (2005) show that the index of enforcement and implementation capacity is positively correlated to indexes of congress capability, judicial independence and civil service development across these two Latin American countries. An independent and highly qualified judicial system is probably the most obvious enforcer of the laws. Delegating the implementation of policies to a professional and independent bureaucracy is also a good enforcement device.
Chumacero et al (2005) claim that the Chilean military government that initially pushed the pro-market reform replaced the existing bureaucracy with a strong technocracy that contributed to improve the implementation and enforcement capacities of the State. Brazil followed a different route in that reformers did not replace the existing bureaucracy, Castelar Pinheiro, A., R. Bonelli and B. Ross Schneider (2004). Nevertheless, Brazil already had a relatively good bureaucracy before the pro-market reform era. This allowed the government to delegate the implementation of trade liberalization and privatization to autonomous agencies, which according to Castelar Pinheiro et al (2004), was key for the advance of these reforms.
Stakeholders
The labour movement was more independent from the State and from the parties that ended up being reformist. In Brazil and Chile, trade unions would not favour pro-market reform, but they were forbidden in Chile when the reform began and relatively weak in Brazil (Castelar Pinheiro et al). Labour movements in Brazil retained some degree of organizational strength, mobilization capacity and political influence, and were therefore able to fight off some of the reforms that were aimed at expanding labour market flexibility. They fought hard against the loss of core organizational resources as well as legal provisions regarding union structure and collective bargaining.
In Chile, economic labour reforms occurred mostly under the dictatorship, along with labour code changes, the prospect for expanding labour rights under the democratic transition were limited. The issue of labour reform lies at the core of this disjuncture as it straddles major fault lines innate to the Chilean neoliberal project. On the one hand, cheap and flexible labour with few rights to collective action has formed a central axis of Chile’s economic model since Pinochet’s ruthless undermining of organised labour in the mid-1970s. This oppression was given a tangible legal form in the 1980 labour code that denied even the most basic of rights to the working population. Labour movements in Chile was pressured to moderate its demands during transition. Furthermore, labour ties to parties in power under the concertacion further constrained the movements ability to assert demands for reforms in the first-round democratic government.
In summary, in Brazil political stability is a contextual premium, a potential threat to that stability came from the labour movement. By contrast, in Chile, the prime concern was economic stability. Unfortunately, labour mobilization was constrained by political compromises and organizational factors. The economic elites were the ones to be appeased. Capitalist interests, institutionally represented by the Confederación de Producción y Commercio (CPC), have strongly opposed any substantive changes to the labour code. They argue that, by impinging on labour market flexibility, reforms to the labour code would undermine the foundations of domestic accumulation to the detriment of all Chileans
Inclusiveness of the Political Process behind the Reforms
In Brazil, President Fernando Henrique Cardoso negotiated the pro-market reform along several years, and there was no reversal, even after the opposition took office. Reform was very gradual and partial, mostly due to the effective inclusion of opposition parties and social groups in the negotiation of reform. This participation slowed down reform, but it can be argued that it also contributed to render the economic policy more predictable. Political participation might not only contribute to reform because it reduces resistance, but also because it promotes a more open society in which special interests find themselves more constrained.
Chile is a case in which the bulk of the reform process took place under the Pinochet dictatorship. Yet, the decision of the successive incoming democratic governments of sustaining the main aspects of the market-oriented reforms, together with the consensual and institutionalized policymaking style with which modifications and adjustments have proceeded, has tended to generate an increasingly virtuous circle between reforms, democratic participation, and transparency.
CONCLUDING REMARKS
This paper attempted to extract some lessons from the reform experiences of the selected Latin American countries, on the basis of underlying country studies. That exercise led, in its central section, to reflections on several key themes in the political economy of reform, reflections which themselves had some elements of “concluding remarks”. For that reason, this final section is relatively brief, and instead of recapitulating everything said before, it just draws from a few points in order to take a (succinct) prospective look. The early evaluations of the impact of market oriented reforms were far more optimistic than later ones.
The present political dynamics of these countries suggests that the fate of reforms is correlated with the outcomes of reform, and that both in turn are correlated with more slow-moving (not to say, permanent) “fundamental” local conditions, in particular with local institutional conditions. The ranking of both countries in terms of reform outcomes, and reform continuity and sustainability is almost identical to a ranking of State Capabilities developed by Stein and Tommasi at the Inter-American Development Bank, reflected in Stein and Tommasi (2005) and IADB (2005).
Perhaps the main lesson we extract from the experience at this point, is that in democratic settings it is not a good strategy to impose reforms from above or by surprise. Consensus building operating through the social and political specificities of the country is not only a better way to achieve the desired reforms, but even a process for identifying and implementing policies and reforms more suitable for each country. The capacity of countries to achieve such processes seems conditioned by their political institutions and policymaking capabilities.
REFERENCE
Aguilera-Alfred, N., D. Borda and D. Richards (2004) “Understanding Reform. The
Predatory State and Economic Reform: An Examination of Paraguay’s Political Economic Transition”, Global Development Network, Mimeo.
Castelar Pinheiro, A., R. Bonelli and B. Ross Schneider (2004) “Pragmatism and the Political
Economy of Market Reform in Brazil”, Global Development Network, Mimeo.
Chumacero, R., R. Fuentes, R. Lüders and J. Vial (2005) “Understanding Chilean Reforms”,
Global Development Network, Mimeo.
Collier, Ruth Berins, and David Collier. 1979. Inducements versus Constraints:
Disaggregating “Corporatism.” American Political Science Review 73, 4: 967-86
Fanelli, J. M. and V. Popov (2003). On the Philosophical, Political and Methodological
Underpinnings of Reform. Global Development Network.
Inter-American Development Bank (2005) The Politics of Policies. Economic and Social
Progress in Latin America and the Caribbean 2006 Report.
Kaufmann, D., A. Kraay and M. Mastruzzi (2003) “Governance Matters III: Governance
Indicators for 1996-2002.” World Bank Policy Research Working Paper 3106, Washington DC: The World Bank.
Rius, A. and N. van de Walle (2003) “Political Insitutions and Economic Policy Reform”,
Thematic Paper for the Global Research Project on Understanding Reform, Global Development Network.
Schneider, B.R. (2004) “Organizing Interests and Coalitions in the Politics of Market Reform in Latin America” World Politics 56 (April), 456-79.
Stein, E. and M. Tommasi (2005) “Political Institutions, Policymaking Processes, and Policy
Outcomes. A Comparison of Latin American Cases”, Inter-American Development Bank, Mimeo.
http://en.wikipedia.org/wiki/Military_government_of_Chile_
COURSE
COMPARATIVE INDUSTRIAL RELATIONS (MIR 709)
TOPIC
LABOUR REFORMS IN BRAZIL AND CHILE
(A COMPARATIVE STUDY)
A PAPER SUBMITTED TO THE DEPT OF SOCIOLOGY
BY
GROUP 4
Adepoju Janet Oluwatosin 167455
Ayangbemi Olusola Temitope 166905
Dagunduro Adebukola Olufunke 167457
Ogunsemoyin Olubusayo B. 81014
LECTURER IN CHARGE: PROF. ONYEONORU P.I.
OCTOBER, 2012
INTRODUCTION
Labour laws is defined as the balance of power among government, employers, workers, and unions. The redrafting of a country’s labour laws typically reflects a shift in the power relations and may carry unfavourable consequences for a former beneficiaries. As the Colliers put it, “Labour law is a highly visible and concrete policy statement around which political battles are fought, won, and lost, and around which political support is attracted, granted, and withheld… labour law thus provides a valuable point of reference for analyzing the larger political context” (Collier and Collier 1979, 971).
The reform of national labour laws is one of the most widely implemented recent policy changes in the world. Since the early 1990s, Brazil as well as Chile have changed their labour laws. Labour reforms have also provoked massive protests, including general strikes. It can be understood that the changes in labour law occurring on a global scale are themselves a response to the pressure of globalization. In most nations of the world, labour legislation was originally made to reflect government-employer-worker relationships embedded in protected national economies. But in recent years, trade liberalization and greater global competitiveness have created new challenges for employers and workers. Pressures for legal and institutional change have naturally followed.
This study is all about comparative insights into labour reform processes at the end of the twentieth century of two Latin American countries, Brazil and Chile. Despite similar initial prescriptions for change in the direction of greater flexibility, the outcomes of labour reforms differed in the two countries. In the 1990s, moderate flexibility reforms were implemented in Brazil while in Chile, changes in labour law was extensive.
THE LATIN AMERICAN CONTEXT
The region followed a common import substituting industrialization (ISI) model in the post-war period. This development strategy reshaped the Latin American economies, societies and institutions. While traditional interest groups linked to the primary sectors reduced their political influence, new social groups with interests in the local industries gained social and political strength. After some time, this inward-oriented development strategy began to show clear signs of exhaustion. The performance of Latin American countries was not good enough compared with the South-East Asian countries that claimed to adopt an almost opposite economic model. The political support of the ISI model was gradually eroding in Latin America when the debt crisis unleashed in 1982 and the failure of early policies implemented by some countries to deal with it played an important role in reshaping policy views in the region.
Latin America of course is not homogeneous, but there are some structural characteristics common to most countries in the region that had a bearing on the reform process. The region’s competitive advantages are biased in favour of natural resources, and primary commodities explain a large share of exports: minerals and oil in Chile, Venezuela and Perú, agriculture in Argentina, Paraguay, and Uruguay; even in more industrialized Brazil and Mexico primary products are still relevant. This feature impinges on the region’s political economy via the so-called natural resource “curse”.
The distribution of income and assets in Latin America is highly unequal compared to other regions in the world. As the 2006 World Development Report of the World Bank suggests, income inequality of this magnitude is quite likely a signal of unequal opportunities (rather than of different choices) – World Bank (2005). Because of the structural lack of equity, many Latin Americans did not have the chance to take advantage of the opportunities open by reform; hence many opportunities at the individual level were lost. Besides, groups that were marginalized and segregated did not support reform and often opposed it actively, fearing that a more competitive environment would do them more harm than good.
In several of the countries, the so-called structural reforms came hand in hand with efforts at macroeconomic stabilization. There had been a long list of stabilization attempts before this period, but the macroeconomic stabilization programs that accompanied the structural reforms were usually deeper and lasted more than previous ones. The perception of greater deepness of these stabilization efforts was related to the simultaneous implementation of other components of the reform package.
Also, there have been important “contagion” effects across countries, that is, learning from the interpretation of the (successful and unsuccessful) experiences of other countries in the region. Having referred to many common factors, it is also important to stress that Latin American countries are quite different in many dimensions. Country size is obviously one of the dimensions in which the region is not homogeneous; a dimension that became particularly relevant for the fate of the inward oriented ISI model (think about the size of the domestic market in Brazil as compared for instance with Chile). Economic and social development show significant variation across countries as well. The historical starting points in terms of social and economic structure, as well as in the details of past policies, were also different in different countries when pro-market reforms began. Social indicators as literacy ratios, life expectancy and the like also show much variation. Even when most countries adopted a version of the ISI model in the post-war period, the progress they made in that direction varied considerably in terms, for instance, of the degree of industrialization they reached. This was partly dictated by the size of the domestic market and partly by policy options and political conditions.
In spite of some common institutional heritage from the colonial era, political and institutional history also shows significant variation across countries in Latin America. Most countries in the region experienced periods of dictatorship in the twentieth century, but while some spent most of the century under those conditions, others did it for relatively short periods. The quality of institutions and the incidence of corruption also varies, Kaufmann, D., A. Kraay and M. Mastruzzi (2003). The different starting points and idiosyncratic characteristics influenced the fate of the pro-market reform.
BRIEF HISTORICAL BACKGROUND
Brazil
The history of Brazil starts with Indigenous Peoples of the Americas, who arrived thousands of years ago by crossing the Bering land bridge into Alaska and then moving south. The first European to explore Brazil was Pedro Alvares Cabral on April 22, 1500 under the sponsorship of Portugal. From the 16th to the 19th centuries, Brazil was a colony of Portugal. On September 7, 1822, the country declared its independence from Portugal and became a constitutional monarchy, the Empire of Brazil. A military coup in 1889 established a republican government. The country has seen a dictatorship (1930–1934 and 1937–1945) and a period of military rule (1964–1985).
Brazil returned to democracy in 1985, after more than two decades of uninterrupted military governments. The first democratic government unsuccessfully tried to stabilize the economy and made little progress with reform, but since 1990, when Collor de Mello arrived to the presidency, the successive democratic governments carried on a series of market-oriented reforms.
It was argued that democratization facilitated the introduction of market oriented reforms in Brazil. While the military stayed in government, the protective mantle of “national security” and “key-sectors protection” became a standard speech, always blocking a deeper integration into the world economy. This ideological view was present not just at the top of the military regime but also inside the mid-level military officers who were commonly appointed to prominent positions in economic ministries and state enterprises. In the nineties, under democratic rule, a new breed of internationally-minded top civil servants replaced these officers.
Reform in Brazil followed a pragmatic way, meaning that it was gradual, piecemeal, and loosely coordinated. Fragmentation of the political system prevented any group from gaining dominance and forced a negotiated style, leading to gradualism. So, most policies took time, were negotiated, and had to go through multiple veto points. The informal institution of rather fluid ties among state elites and between them and business facilitated consensus building around reform policies, but they had to be negotiated. In this manner, the policy outcomes were unlikely to be extreme.
The actual social and economic outcomes have not been too spectacular, and some discontent against “the reforms” has breaded. Yet, the arrival to office in 2003 of a left-wing party, the PT, has not generated any reversal, suggesting that “pragmatism” is not likely to be displaced soon in Brazilian economic policy making.
Chile
The territory of Chile has been populated since at least 12,000 ago. By the 16th century, Spanish conquistadors began to subdue and colonize the region of present-day Chile, and the territory became a colony from 1540 to 1818, when it gained independence from Spain. The country's economic development was successively marked by the export of first agricultural produce, then saltpetre and later copper. The wealth of raw materials led to an economic upturn, but also led to dependency, and even wars with neighbouring states. The country was governed during most of its first 150 years of independent life by different forms of restricted government, where the electorate was carefully vetted and controlled by an elite.
Failure to address the economic and social disparities and increasing political awareness of the less-affluent population, as well as indirect intervention and economic funding to the main political groups by both the KGB and the CIA, as part of the Cold War, led to a political polarization under Socialist President Salvador Allende which in turn resulted in the 11 September 1973 coup and the military dictatorship of General Augusto Pinochet, whose 17- year regime was responsible for numerous human rights violations and deep market-oriented economic reforms. In 1990, Chile made a peaceful transition to democracy.
With ups and downs, Chile followed a basically inward-looking-state-centred development strategy from 1930 to 1973. It was not very different from the experience of other Latin American countries, save probably for the socialist period between 1971 and 1973. This period ended up with a severe socio-economic and political crisis that paved the road for a military coup that inaugurated a dictatorship that would last until the late eighties. The military government pushed a far reaching pro-market reform agenda. This experience is usually regarded as a leading case of market-friendly reforms, not only for the adoption of a shock therapy, but also for doing it well before most other countries in the region.
Beginning in late 1973, several structural reforms were implemented, including the liberalization of most prices, interest rates and wages; drastic reductions in tariffs and the elimination of non-tariff barriers to trade; the strengthening of fiscal and monetary policies; the privatization of more than 500 firms; the reform of the pension program; and the adoption of new policies of competition and regulation. In the early eighties, Chile, like other developing countries, underwent a deep economic and financial crisis. There was some reversal of reforms during this period, but the military government resumed the liberalizing reforms soon after it. Chile returned to democracy in 1990.
One of the most notable aspects of the Chilean process is that after the return to democracy in 1990, the centre-left coalition that has governed the country since, did not revert the market reform process. There were several peculiar factors leading the military dictatorship to follow the suggestions of a group of foreign-trained economists towards market liberalization (against the nationalistic tendencies of part of the military). Some possible sources of opposition (such as unions or left leaning parties) were silenced by the dictatorship. Business sectors were relatively grateful since firms were devolved to private owners after nationalization by the previous socialist government of Allende, so that they did not oppose trade liberalization.
The way the transition to democracy was instrumented in the late eighties was key for the consolidation of pro-market reforms in Chile. Consolidation was by no means granted by that time, for the parties that formed the winning coalition (named the Concertación) in the 1989 elections had opposed many of the reforms. Also, formerly repressed interest groups could take advantage of the new political environment to voice their demands, pushing the new government towards a less neutral and more lenient fiscal policy. According to Foguel, Miguel, Indermit Gill, Rosane Mendonca and Ricardo Paes de Barros, (1998), several factors contributed to the consolidation of the pro-market reform in the transition period: * the good performance of the economy in 1985-1989; * the concurrent fall of socialist regimes in Europe; * the economic failure of democratic transition in Argentina (that contributed to convince several left15 wing politicians of the risks of “heterodox” policies); * the intellectual renovation and internationalization of the circles around the Concertación, which lead to a “revaluation of continuity”; and * several institutional enclaves in the new constitution, increasing the veto power and political relevance of “the right”, which forced democratic presidents to follow consensual strategies on economic matters.
Chile seems to be in a path of institutional and policy consolidation. The democratic governments have maintained the core of the economic reforms undertaken during the dictatorship, while steadily (albeit slowly, according to some views) advancing on the social and democratic front. These steps have taken place according to a style of policymaking that is much more consensual and institutionalized than that of other Latin American countries. (IADB, 2005).
EVOLUTION OF LABOUR REFORM IN BRAZIL
The Consolidated Labour Code
The main body of the Brazilian labour legislation was introduced in the 1940s, and consolidated into the Consolidação das Leis do Trabalho (CLT) in 1943. The CLT is a large, often overlapping, set of rules which determines individual and collective rights and duties of the workers, unions and firms. The law determines that all workers must have a booklet where all individual labour contracts and its changes over time are registered by the employer. By definition, a formal worker has a booklet signed by his employer (“carteira assinada”)
Besides the obligation to sign the booklet, the law stipulates a set of minimum conditions any employment relationship must follow. The most important rules are: maximum hours of work per week; maximum extra-time working hours; minimum payment for extra-time work; minimum wage; pre-paid annual vacations; special protection clauses for women and children; the dismissal of pregnant women is forbidden; the right of paid vacation before and after childbirth, for the mother; special work conditions for night shifts; one month pre-notification of firing; and protection against unjustified dismissals.
There have been changes in the legislation since the creation of the CLT. In particular: In 1962, introduction of a one monthly wage annual bonus (“thirteenth salary”). In 1963, introduction of a family allowance. In 1965, introduction of a wage adjustment law which determined the minimum rate of wage adjustments of all workers in the economy.
In 1966, creation of a severance fund (Fundo de Garantia por Tempo de Serviço - FGTS) in place of a clause forbidding dismissal of workers with more than 10 years of tenure. In 1986, creation of an unemployment insurance program which today covers about 25% of the country’s labour force. In 1988, approval of a new Constitution with the introduction of new labour clauses.
Severance Rules and Unemployment Compensation
Until 1965, to fire a worker without a proper justification the employer had to pay one month’s wage for each year of work in the firm. The compensation was calculated on the basis of the higher wage received during the work contract. It was a duty of the employer to prove the dismissal was justified, and the conditions for justified dismissals were clearly defined in the law.
After 10 years in the same enterprise, dismissals were forbidden by law, except if properly justified. In 1966, this entire system of protection against non-justified dismissals was changed. A severance fund was created, called the Fundo de Garantia por Tempo de Serviço (FGTS). When hiring a worker, the firm had to open a banking account for the worker and deposit 8% of the value of the wage in the account. Today, Caixa Economica Federal, a government saving and loans institution, collects the FGTS levy and invests it primarily in urban housing projects giving workers a legally guaranteed minimum deposit rate.
When dismissed without a just cause (“sem justa causa”) the worker could draw this money and received a monetary compensation corresponding to a fine of 10% over the total amount of the fund. Like many other Latin American countries (see Loayza, 1998), dismissal for economic reasons is not considered a just cause. In 1988 the fine for unjust dismissal was increased to 40% of the worker’s FGTS account balance. Besides this fine, the employer has to notify the worker one month before he will be fired. This is the “aviso prévio” law, or previous notification of firing.
During the month the worker has received the previous notification of firing, he/she is allowed, according to the law, to take two hours a day to look for a new job. This implies a minimum cost of 25% of the worker's monthly wage. In fact the cost is usually higher since firms end up paying the notification fee to the worker and dismissing him immediately. Thus, the total cost of dismissal is 25% to 100% of the monthly wage plus 40% of the FGTS. The cost depends on the number of months the worker has worked for the firm.
Since 1986, when fired, besides the advance notice, access to the FGTS (and the 40% fine for unfair dismissal), the worker also has the right to an unemployment compensation benefits. The unemployment compensation program offers partial coverage for up to four months of unemployment (extended to five months after 1996). To become eligible to receive the benefit, the worker must meet the following criteria: * to have been dismissed without a just cause; * to have had a formal labour contract during the last six months or to have been legally self-employed for at least 15 months; * to be unemployed for at least seven days; * must not receive any other pension; * must not have any other type of income sufficient to guarantee his own subsistence and that of his family. The value of the benefit cannot be lower than the value of the minimum wage, is adjusted monthly for inflation, and is related to the average wage received by the worker in the last three months in the previous job.
Wage Laws
An important change in the CLT was the introduction of the Wage Adjustment Law in 1965. Before this date, wage adjustments were fixed through collective bargaining between workers and employers unions, at the settlement dates (“data base”), and through individual negotiations between one worker and his/her employer. Only the minimum wage was determined directly by the President of the Republic, although most of the time it incorporated automatically the prescriptions given by indexation clauses imbedded in the Law.
The Wage Adjustment Law gave the government the right to determine the minimum rate of adjustment of all wages in the formal sector of the economy. The first wage law stipulated that nominal wages should be adjusted once a year, at the settlement date of each occupation, following a formula which took the past and expected future rate of inflation and the growth rate in GDP per capita as the base for the adjustments. The specific formula and the adjustment period changed many times over the years, as the rate of inflation increased.
In 1995, one year after the introduction of the Real Plan, the Wage Law was abolished. Today, upward adjustment of wages is negotiated between employers and employees. But downward adjustment of wages is for all practical purposes prohibited by the Constitution: attempts to do so make employers open to lawsuits, which are generally resolved in favor of the worker. This was irrelevant during a time of high inflation, but now quite possibly adds to the rigidity of the labour market.
The Reforms of 1988
The main changes of labour legislation introduced in the Constitution of 1988 can be summarized as follows: * The maximum number of hours of work per week was reduced from 48 to 44 hours and the minimum payment for extra-time hours increased from 20% to 50% of the workers’ wages. * For continuous work shifts the maximum daily journey was reduced from eight to six hours. * A vacation bonus of one-third of the workers’ wages was created. * The childbirth leave for mothers was increased to 120 days and a five days childbirth leave for the father was introduced. * Firing costs for unjustified dismissals increased from 10% of the FGTS balance to 40%.
This is the list of the minimum individual rights for private sector and state enterprise workers. Working conditions can be improved through negotiations between the individual worker and the firm, or through collective bargaining. The Constitution of 1988 clearly mandated higher nonwage benefits and made dismissals costlier for employers.
Payroll Taxes and Mandatory Benefits after 1988
The CLT and the 1988 Constitution stipulate a very comprehensive set of minimum standards any individual contract must follow. The rules do not provide much space for negotiations between employers and workers. The result is a rigid set of minimum rules, which reduces the flexibility of the labour contract in face of changes in the economic environment. In addition to the costs imposed by this inflexibility, there are more direct and obvious non-wage costs due to payroll taxes and mandatory benefits required by the law.
The cost of labour can be decomposed into four parts: * The basic contractual wage. * Mandatory benefits which include the annual one month bonus (terceiro salário), the contribution to the FGTS, vacations and other benefits. * Contributions to the official training system (SENAI and SENAC), to finance an institution which assist small enterprises (SEBRAE) and a contribution paid by firms to finance an workers’ assistance service (SESI or SESC). * Contribution to the federal social security system (INSS) and to fund educational services salário educação) and an on-the-job accident insurance fee mandatory for all firms and proportional to the payroll.
In addition to these contributions based on payroll costs, employers are also charged levies on revenues to pay for additional INSS-related obligations (Cofins), to be raised in 1999 from 1 to 2 percent and PIS/PASEP, the contributions towards the Fundo de Aparelho de Trabalhadores (FAT) which fund unemployment compensation, job search assistance and active labour programs such as training and microenterprise support schemes. These labour related levies can add up to between 2 and 3 percent of employer revenues.
EVOLUTION OF LABOUR REFORM IN CHILE
Labour Code (1931-1965)
Initially, Chile’s labour market regulations is characterized with tripartite system of collective bargaining and conflict resolution.
1931 labour code focuses on conflict resolution. While the legislation favoured collective bargaining at the firm level, and this form of negotiations was dominant, the mechanisms of conflict resolution projected negotiations beyond the enterprise. With time, sector-wide negotiations spread throughout the economy. Dismissal without expression of cause with a month’s notice. Severance payment of a month’s wage per year of tenure for “white collar workers.
The main component of payroll taxes are social security contributions. Chile started a Social Security System in 1924, building from a set of privately established pensions systems that covered specific groups of workers or sectors of economic activity. These programs finance retirement, invalidity and family survivor benefits, a public health care system, the payment of family allowances, and an unemployment subsidy. In addition, there was a 1 % contribution to fund public training programs.
The Chile labour market reform has come a long way and in each stage undergone few reforms to meet the demand of the changing market conditions. After the deadly coup of 1973, several labour unions, labour institutions were dissolved. In October, 1973, the Chilean government introduced wage adjustments, which were linked to inflation rate. Chile labour market reform is significant because of the following reasons: * The country underwent a switch over from an economy, which was regulated to an economy, which is unregulated as well as open. This was brought about by the implementation of economic reforms pertaining to labour markets and pension system in the country. * The labour market in Chile has been over the years very unpredictable.
Labour market in Chile during the seventies:
During the middle seventies, the government in Chile launched the first structural reforms in Chile. Which in turn increased the unemployment rate. However, Chile experienced a healthy growth in the economy towards the end of seventies. Despite the speedy growth in economy, the labour market refused to recover from the high rate of unemployment.
Reverse to what it was during the seventies, the labour market in the eighties recuperated very fast even though the crisis was much more severe than the previous one. Even rate of growth in wages recovered comparatively fast. During this period, rate of unemployment reached 25%.
As part of Chile labour market reform, the proportional adjustments pertaining to lower wages was made more than the higher wages. The method of indexation that existed between 1973 to 1979 had many drawbacks. In order to overcome these drawbacks, Labour Plan of 1979, was implemented, which stated that adjustment of wages would be made at or above inflation rate. At regular intervals, as part of Chile labour market reform, the government carried on with the practice of increasing wages but not in accordance with the rising rate of inflation. However, during the 1990s, there was increase in wages higher than what was declared for the purpose of readjustments.
The Employment Security Law, states that if there is no valid cause for dismissing an employee, the worker could be re engaged in the job as per orders from a labour court. However, in the year 1978, this law was substituted by a method of "severance payment".
Chile labour market reform, Decree Law 2,200 stated that employers had the right to make changes in the contract between the employers as well as the employees and that they could fire an employee without giving any explanation to the employees. A "severance payment", which was minimum was also introduced.
Decree Law 2,200 as well as Chile labour market reform of 1979, led to the introduction of new techniques to supervise the activities of the labour unions. This was stated in Decree Law, 2,756. Collective bargaining was stated in Decree Law 2,758. Decree Law 2,756 and Decree Law 2,758 are collectively referred to as Labour Plan.
Decree Law 2,756 governs matters related to labour union. Whereas, Decree law, 2,758 governs the various norms adopted in the event of a strike. Labour reforms that took place in Chile is summarized below;
Phase I (1966-73)
Increased polarization of the labour movement Generalized use of wage indexation. Dismissals require expression of “just” cause, or severance payment of a month’s wage per year of tenure. In spite of very high nominal contribution rates, by 1970 the public sector spent 20.5 percent of its budget to cover the deficits in the health and pensions systems along with its own contributions.
Phase II (1974-79)
Economic Liberalization with a highly intervened labour market. Decree Law 670 of October 1974 substituted the earlier legislation that defined the tripartite commissions, giving them a consultative character. They were understood to be a transition mechanism, while a new policy towards the labour market was developed, and while union activities were banned.. Economy-wide wage adjustments imposed by decree. Dismissal without expression of cause reinstated in 1978 for all new hires. Employers pay a severance of a month’s wage per year of tenure to all dismissed workers, unless there is “just cause,” which includes “economic cause.” A number of partial changes brought down contributions from a 60 percent at their peak in 1974, to the order of 33 percent in 1980. Rates varied according to the specific plan at which an employee was affiliated, but all the plans were guaranteed by the state. For example, in 1976, the 1% contribution earmarked to fund training program was eliminated.
Phase III (1980-1990)
Union affiliation becomes voluntary. Decentralized collective bargaining. Labour negotiations opened to market forces. Strikes without job guarantees after sixty days. No intervention of the government in the affairs of unions or the collective bargaining process, except for a wage floor guaranteed by law. The wage floor was eliminated in 1982, and as a by-product, the necessary conditions to replace striking workers were eroded.
It also marked the era of minimum wage setting. Starting in 1981, dismissals of any worker, new or previously hired, can take place without expression of cause, and as long as severance is paid. Severance payments are open to negotiations. In the absence of an explicit agreement the minimum severance would be a month wages per year of tenure with a 5 months ceiling. A 1984 reform established that the minimum severance agreed by the parties could not be less than the severance established by law. Furthermore, “economic cause” for dismissal is not “just cause” anymore.
In 1980, a reform lowered social security contributions to just above 20 percent (10 % towards retirement, 7% towards health and about 3% towards disability). New entrants to the labour force would contribute to a new old-age program based on a mandated individualized savings plan, to be managed by private administrators (AFPs). Old contributors could to opt out of the traditional pay-as-you-go system. In the case of health care contributions, both old contributors and new entrants were given the choice to opt out of the public system (FONASA) and use the 7 percent towards a health care insurance policy provided by an authorized private health insurer (ISAPRES). A basic pension, the unemployment insurance, and the family allowances programs would be fully financed by the central government budget.
Phase IV (1991 till date)
This is the Consolidation of Labour Reforms. The new law eliminated the sixty days period for the legal strike, which allowed employers to dismiss striking workers without severance. The new law also reinstated stricter conditions for workers replacements in case of strike. Labour negotiations can take place at the sector level if both workers and employers agree to it.
Dismissals require an expression of “cause”. Severance of one month wages per year of tenure applies to dismissals with “economic cause.” Severance would be paid with a 20% surcharge if the employer cannot prove an alleged “economic cause.” No severance obligation in case of dismissals with “just cause.” Dismissal ceiling on severance payment raised to 11 month wages.
THEMES ON LABOUR REFORM DISCUSSION
The thematic elements under which labour reforms that occurred in the two Latin American countries under study will be discussed will focus on the labour’s strategic interest in labour law and its ability to pursue those interest during specific rounds of reform. These interests are derived from the legal and institutional framework of labour relations, which are often inherited from earlier period of legal and political incorporation of labour.
Secondly is the willingness of government to see reform through. Government resolve is shaped by the pressure for the reform that it faces from international actors or domestic constituencies.
Another thematic approach is the transition context for the reform. The nature of transitions as well as their timing affects the political environment for labour reform. Democratic transitions tend to favour rights-based reforms and strengthen unions, while market-oriented economic transitions tend to favour labour flexibility and weaken unions.
The Initiation of the Reforms
The crisis of the ISI model in the sixties and seventies left Latin American leaders searching for new paradigms. In this context, the pro-market reform agenda began to gain strength, initially pushed by groups of professional economists trained in the US, and reinforced later in the eighties and nineties by the IFIs. The experience of Thatcher in the UK and the fall of communism also contributed to create an environment favourable to pro-market reform. In some countries, these new ideas got through to the ruling army forces. Chile was the leading case, after a short socialist experience that ended with a military coup. Other countries only began the reform process in the early nineties, after suffering severe macroeconomic instability in the eighties. By that time, Chile had already become an example of a successful reformer that many wanted to reproduce. The debt crisis that blew up in the early eighties gave place to a decade characterized by severe macroeconomic instability in most countries in the region. There were several attempts at heterodox macroeconomic stabilization that failed completely. Brazil is probably one of the most distinctive cases. The pro-market structural reforms were out of the agenda in those years in most Latin American countries.
Even in Chile, the debt crisis caused a partial and temporary reversion of the pro-market labour reform. It was only after these policies ended up in hyperinflation that the idea of implementing more orthodox stabilization programs bundled with structural pro-market reforms made its way through in the region in the early nineties. In the 1980s and 1990s, several democratic political leaders who gained elections proposing leftwing platforms ended up adopting the market-friendly package. Some of these presidents were concerned by little more than their political survival in the midst of impending or ongoing macroeconomic crises, and were pretty much open to “anything” that might deliver some short-term economic results that could lead to favourable political results for them. They ended up convinced that some variant of the market-friendly package was the most sensible option they had.
Implementation
Recent literature on reform emphasizes the key role of appropriate implementation and enforcement capacity to determine the outcome of reform (Stein and Tommasi 2005; Rius and van de Walle, 2004; Fanelli and Popov, 2003). It is considered that while the best designed policy packages may generate bad outcomes if implementation fails, policies that are not first-best in terms of design may still render acceptable results if they are well implemented (IADB, 2005).
The quality of public policies in terms of enforcement and implementation varies considerably across the Latin American countries. Stein and Tommasi (2005) classified the Latin American countries in several key dimensions of their economic policies, one of them being the capacity to enforce and effectively implement the policies. Of the two Latin American countries considered in this paper, Chile appears as the one with quite high enforcement and implementation capacity; Brazil has intermediate capability with implementation quality.
The enforcement and implementation capacities are in turn related to the quality and independence of the bureaucracy, the quality and independence of the judiciary, and the capabilities of the Congress. Stein and Tommasi (2005) show that the index of enforcement and implementation capacity is positively correlated to indexes of congress capability, judicial independence and civil service development across these two Latin American countries. An independent and highly qualified judicial system is probably the most obvious enforcer of the laws. Delegating the implementation of policies to a professional and independent bureaucracy is also a good enforcement device.
Chumacero et al (2005) claim that the Chilean military government that initially pushed the pro-market reform replaced the existing bureaucracy with a strong technocracy that contributed to improve the implementation and enforcement capacities of the State. Brazil followed a different route in that reformers did not replace the existing bureaucracy, Castelar Pinheiro, A., R. Bonelli and B. Ross Schneider (2004). Nevertheless, Brazil already had a relatively good bureaucracy before the pro-market reform era. This allowed the government to delegate the implementation of trade liberalization and privatization to autonomous agencies, which according to Castelar Pinheiro et al (2004), was key for the advance of these reforms.
Stakeholders
The labour movement was more independent from the State and from the parties that ended up being reformist. In Brazil and Chile, trade unions would not favour pro-market reform, but they were forbidden in Chile when the reform began and relatively weak in Brazil (Castelar Pinheiro et al). Labour movements in Brazil retained some degree of organizational strength, mobilization capacity and political influence, and were therefore able to fight off some of the reforms that were aimed at expanding labour market flexibility. They fought hard against the loss of core organizational resources as well as legal provisions regarding union structure and collective bargaining.
In Chile, economic labour reforms occurred mostly under the dictatorship, along with labour code changes, the prospect for expanding labour rights under the democratic transition were limited. The issue of labour reform lies at the core of this disjuncture as it straddles major fault lines innate to the Chilean neoliberal project. On the one hand, cheap and flexible labour with few rights to collective action has formed a central axis of Chile’s economic model since Pinochet’s ruthless undermining of organised labour in the mid-1970s. This oppression was given a tangible legal form in the 1980 labour code that denied even the most basic of rights to the working population. Labour movements in Chile was pressured to moderate its demands during transition. Furthermore, labour ties to parties in power under the concertacion further constrained the movements ability to assert demands for reforms in the first-round democratic government.
In summary, in Brazil political stability is a contextual premium, a potential threat to that stability came from the labour movement. By contrast, in Chile, the prime concern was economic stability. Unfortunately, labour mobilization was constrained by political compromises and organizational factors. The economic elites were the ones to be appeased. Capitalist interests, institutionally represented by the Confederación de Producción y Commercio (CPC), have strongly opposed any substantive changes to the labour code. They argue that, by impinging on labour market flexibility, reforms to the labour code would undermine the foundations of domestic accumulation to the detriment of all Chileans
Inclusiveness of the Political Process behind the Reforms
In Brazil, President Fernando Henrique Cardoso negotiated the pro-market reform along several years, and there was no reversal, even after the opposition took office. Reform was very gradual and partial, mostly due to the effective inclusion of opposition parties and social groups in the negotiation of reform. This participation slowed down reform, but it can be argued that it also contributed to render the economic policy more predictable. Political participation might not only contribute to reform because it reduces resistance, but also because it promotes a more open society in which special interests find themselves more constrained.
Chile is a case in which the bulk of the reform process took place under the Pinochet dictatorship. Yet, the decision of the successive incoming democratic governments of sustaining the main aspects of the market-oriented reforms, together with the consensual and institutionalized policymaking style with which modifications and adjustments have proceeded, has tended to generate an increasingly virtuous circle between reforms, democratic participation, and transparency.
CONCLUDING REMARKS
This paper attempted to extract some lessons from the reform experiences of the selected Latin American countries, on the basis of underlying country studies. That exercise led, in its central section, to reflections on several key themes in the political economy of reform, reflections which themselves had some elements of “concluding remarks”. For that reason, this final section is relatively brief, and instead of recapitulating everything said before, it just draws from a few points in order to take a (succinct) prospective look. The early evaluations of the impact of market oriented reforms were far more optimistic than later ones.
The present political dynamics of these countries suggests that the fate of reforms is correlated with the outcomes of reform, and that both in turn are correlated with more slow-moving (not to say, permanent) “fundamental” local conditions, in particular with local institutional conditions. The ranking of both countries in terms of reform outcomes, and reform continuity and sustainability is almost identical to a ranking of State Capabilities developed by Stein and Tommasi at the Inter-American Development Bank, reflected in Stein and Tommasi (2005) and IADB (2005).
Perhaps the main lesson we extract from the experience at this point, is that in democratic settings it is not a good strategy to impose reforms from above or by surprise. Consensus building operating through the social and political specificities of the country is not only a better way to achieve the desired reforms, but even a process for identifying and implementing policies and reforms more suitable for each country. The capacity of countries to achieve such processes seems conditioned by their political institutions and policymaking capabilities.
REFERENCE
Aguilera-Alfred, N., D. Borda and D. Richards (2004) “Understanding Reform. The
Predatory State and Economic Reform: An Examination of Paraguay’s Political Economic Transition”, Global Development Network, Mimeo.
Castelar Pinheiro, A., R. Bonelli and B. Ross Schneider (2004) “Pragmatism and the Political
Economy of Market Reform in Brazil”, Global Development Network, Mimeo.
Chumacero, R., R. Fuentes, R. Lüders and J. Vial (2005) “Understanding Chilean Reforms”,
Global Development Network, Mimeo.
Collier, Ruth Berins, and David Collier. 1979. Inducements versus Constraints:
Disaggregating “Corporatism.” American Political Science Review 73, 4: 967-86
Fanelli, J. M. and V. Popov (2003). On the Philosophical, Political and Methodological
Underpinnings of Reform. Global Development Network.
Inter-American Development Bank (2005) The Politics of Policies. Economic and Social
Progress in Latin America and the Caribbean 2006 Report.
Kaufmann, D., A. Kraay and M. Mastruzzi (2003) “Governance Matters III: Governance
Indicators for 1996-2002.” World Bank Policy Research Working Paper 3106, Washington DC: The World Bank.
Rius, A. and N. van de Walle (2003) “Political Insitutions and Economic Policy Reform”,
Thematic Paper for the Global Research Project on Understanding Reform, Global Development Network.
Schneider, B.R. (2004) “Organizing Interests and Coalitions in the Politics of Market Reform in Latin America” World Politics 56 (April), 456-79.
Stein, E. and M. Tommasi (2005) “Political Institutions, Policymaking Processes, and Policy
Outcomes. A Comparison of Latin American Cases”, Inter-American Development Bank, Mimeo.
http://en.wikipedia.org/wiki/Military_government_of_Chile_
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