The New World Order on Privatization – Part 3

Previously published for Part I and Part II, here is the Part III on The Effect on Employment.

Many observers fear that privatization and the associated efficiency improvements will require large labor force reductions both before privatization as governments cut the workforce and after as privatized firms continue to restructure; also narrated that large-scale job losses have been associated with privatization in most transition countries, and new private sector growth had not been sufficient to absorb labor retrenched by formerly state-owned enterprises.

The following is the examples of some countries that give a flavor of the employment challenge associated with privatization:

  1. Bulgaria:, Industrial employment in Bulgaria fell by 31.3 per cent; employment in privatized firms fell from 4 million to 1 million people, between December 1989 and December 1991.
  2. Czech Republic: A government survey of 572 companies — 101 in food, 159 in engineering, 184 in manufacturing and 128 in construction — revealed a “significant decline in employment”, with engineering (12 per cent) showing the sharpest drop, manufacturing and construction each cutting jobs by 10 per cent, and the food sector by 4 per cent.
  3. Hungary: Employment in engineering dropped by 12 per cent, in manufacturing by 10 per cent, in construction by 10 per cent and in food processing by 4 per cent during 1992 and 1993. Before privatization the lighting company Tungsram employed 35,000 people which were left 9,500 after privatization by 1993. This was done mainly through early retirement and voluntary redundancy, alongside a freeze on recruitment. Many of the jobs were redundant as a result of administrative functions being centralized with the new owner’s offices outside Hungary. As a result, non-manual grades were affected disproportionately by the Tungsram job losses.
  4. East Germany: The numbers in employment fell from 9 million before transition to 6.3 million by the end of 1992; the numbers employed in enterprises under the privatization agency, the Treuhandanstalt, fell from 4.1 million to 1.2 million during that period.
  5. Poland: Government research into 130 companies (24 per cent in manufacturing, 45 per cent in construction and 31 per cent in trade and services), employing 285 each on average, showed that employment fell by 15 per cent in the first year and by 25 per cent over the first two years after privatization, leveling-off in the third year with a drop of a further approximately 2 per cent. A study of ten privatized Polish industrial and trade companies indicated decreases in employment averaging around 12.5 per cent. In the Bialystok Municipal Refuse Collection Enterprises, privatized with a large employee stake, employment halved over the first year, and, as a result of being shareholders, the workers received no severance pay.
  6. Russian Federation: At the Shatura Furniture Company, introduction of an electronic data management system enabled nearly half the 3,700 jobs to be cut while Uralmash, the heavy machinery manufacturer in the Urals, reduced employment from 70,000 people to 20,000.
  7. Viet Nam: Between 1988 and 1992, 1.5 million workers, equivalent to 20 per cent of the urban labor force, were retrenched from state enterprises and the civil service.

Despite the concern about possible job losses, studies undertaken by World Bank showed that “African government have done very little to track the effects of privatization on employment.”

Not only that privatization is causing unemployment in Tanzania, most of workers lost their jobs before Privatization started, because more than 70 enterprises were closed and workers lost their jobs.

It concluded that despite all these successes the government goal to employment rate has not been met since most of workers lost their job at aftermath of privatization. It also concluded that privatization has a significantly negative impact on total and workers’ employment.

In the light of evidences, Pamacheche and Koma (2007) suggested that privatization is in the interest of employees, although there are a few exceptions to this.

Such benefits take three forms:

  1. employment levels tended to increase after privatization;
  2. remuneration packages tended to improve after privatization and;
  3. many employees bought shares at discounted prices in the privatized firms and these benefited when share prices eventually rose.

In cases where employees lost their jobs as a result of privatization, such employees tended to receive generous severance packages. Severance and retirement incentives buy labor support and allow privatization and its benefits to happen and, where unemployment insurance systems are not in place, mitigate the social impact of layoffs.

In some cases, the reduction in the level of employment took place prior to privatization and as such, could be attributed to the need for greater efficiency, and not just privatization. In cases where shut down enterprises were re-opened by private investors, employees benefited directly.

Evidence argued that many enterprises have been privatized with their labor force intact, either because increasing competition led to labor force adjustments under public ownership or because new private investors were willing to take on modest levels of over staffing that could be absorbed by new investments and dynamic expansion.

More important, particularly in sectors with large investment backlogs, privatization and the investments that accompany it have created new jobs at both the enterprise and sector levels. Workers remaining with privatized firms have often benefited by obtaining better-paying jobs, company shares, and improved training and career development prospects.

In general, privatization has had a minimal effect on employment in countries that carried out labor reforms well before privatization.

Chile, for example, began extensive labor market reforms in the early 1970s by rationalizing state enterprise employment and wages and changing labor market regulations regarding the hiring and firing workers. These reforms led to significant employment reductions by the early 1980s in both public and private firms.

As a result the second round of privatization that began in 1985 and involved larger firms in sectors such as telecommunications and electricity resulted in no layoffs.

In fact, employment in these firms increased by 10 percent as a result of overall improvements in the economy but also of the new investments that accompanied privatization.

Privatization has also had a minimal effect on workers in competitive enterprises. Ghana, Mexico, Morocco, and Tunisia are among many countries that have been able to sell such enterprises with their labor force more or less intact. However large employment reductions have often accompanied the privatization of state enterprises that were, in the past, heavily subsidized and protected from competition.

As reported from some studies in 1994 that in Mexico Employment in four steel plants was cut from 35,578 in 1985 to 17,485 in 1994, with the largest declines occurring just before privatization in 1991.

The privatization in the early 1990s of the two heavily overstaffed and highly unionized state airlines also involved major downsizing before privatization. In the case of Aero-Mexico a massive strike led the government to declare the company bankrupt.

The company went into liquidation and its assets were sold; new owner rehired only a fraction of the workforce. In the case of the second airline, Mexicana, the prospective buyers insisted that the lab or force be cut before privatization, and the government reduced it by more than 40 percent.

What’s next?  The Effect on Employees’ Income

In a research about Tanzania, it was reported that salaries and other incentives for workers have been increased and improved, for example before privatization the lowest salary plus other incentives at Tanga Cement Company was 120 USD per month, now after privatization the salary is more than 360 USD.

Tanzania Breweries Limited for lowest salary was 72 USD per month before privatization and after raised to 96 USD per month. Earle (2006) is of the view that the implications of privatization for wages are also ambiguous. New owners may reduce wages as part of a general cost-cutting policy, but if the firm expands, it may have to offer higher wages to attract new workers.

New private owners may also be more likely to adopt skill-biased technologies, resulting in a compositional shift toward higher-paid workers. Depending on the relative strength of such factors, wages may either rise or fall as a result of privatization.

The Upjohn Institute, in collaboration with partners from Heriot-Watt University in Edinburgh and the Central European University Labor Project in Budapest, has recently undertaken an empirical analysis of the effects of privatization on the wage bill, employment, and wage rates of firms in Hungary, Romania, Russia, and Ukraine—countries where thousands of businesses were privatized in a relatively short period of time during the 1990s.

These four countries had varied success with privatization reforms.

Hungary was considered one of the most successful, Russia and Ukraine were less successful, and Romania was somewhere in the middle. The new research in this project, however, finds no evidence of large systematic negative consequences of privatization for employment and wages.

Privatization is in the interest of employees and when the industries are given in the private hands their performance is increased manifold; remuneration packages tended to improve because employees are given better wages and salaries in order to improve their productivity and retention in the business. Privatization can be followed immediately by worse terms and conditions, but such an initial impact can be reversed later when a restructured company is able to reward employees for their contribution to its success with improvements in pay and conditions.

However, the converse initial improvement followed by later deterioration has also occurred. The examples of decline of salaries due to privatization of many countries as mentioned in following lines.

In post-reform Viet Nam, the wages of civil servants and state enterprise employees declined by 60 per cent from 1985 to 1991, followed by partial reversal of that trend in 1993. In 1989, a Vietnamese civil servant’s salary could buy 2.3 kg of rice a day and that of a state enterprise worker 3.3 kg, so that, at most, only one person apart from the principal breadwinner could be supported by the wage, compared to four people in 1985. In addition, health and education subsidies declined.

In Poland, average wages and salaries fell by 27 per cent between 1989 and 1992, opening up inequalities in income. A study of ten privatized Polish companies revealed a tendency for wages to increase sharply immediately after privatization but to stop doing so soon afterwards in favor of performance-related pay incentives.

In Estonia, foreign owners have blocked pay increases. A law on collective bargaining, which took effect in 1993, forbids new private owners from unilaterally scrapping collective agreements; it does, however, allow them to be renegotiated.

In Kazakhstan, according to a labor ministry official at an ILO seminar, while the ministry has aimed to ensure that the principles of the ILO on fair wages are followed, external pressures have pushed policy in another direction.

It is believe the consultants of the World Bank and IMF are the people dictating such policies the Governments, including of minimum wages, so that the real wages are falling. So the cheap labor of the Soviet Union, which was criticized for being cheap, remains cheap and gets cheaper. The experts of the IMF calmly ignore these principles and as there are more of these experts in our country, so the politics of ILO in this field has a rather small impact and low profile.

It had been reported that non-payment of wages (after privatization), sometimes for months at a time, has also caused great hardship on employees.

Sometimes this has been caused by government subsidies being cut or simply not paid as failure to restructure has become unsustainable. But there is also anecdotal evidence that, in some cases, managers have deliberately withheld wages due to employees in the hope of financially forcing them to sell (to the managers) their privatization vouchers at knock down prices.

How about the Effects on Working Conditions?

Sri Lanka, analyzing effect of privatization on workers who opted to remain with the privatized firm, expressed that overall the working conditions of workers who remained in the privatized enterprises seem to be at least as favorable as they were when the firms were SOEs.

In several instances there have been wage rises and better working conditions. For example, some firms now offer workers transport (Kabool Lanka Ltd), wage rises (Telecom) and better housing and sanitation facilities. In SOEs, the workers were entitled to take 42 days leave annually, absenteeism was not heavily penalized and public holidays were high. They also enjoyed a high sense of security and treated the public sector job as their entitlement rather than a position that had to be secured by efficient performance. Another reported that in Hungary, while some privatization contracts have committed foreign companies to retaining staff levels for a set period of time, there have been other adverse effects, such as cuts in staff training.

The same country has also had the opposite experience, however. In the General Electric takeover of Tungsram, for example, although jobs and pay were cut, the company quickly put in place a number of environmental and health and safety measures.

These included monitoring factory air and noise pollution levels, fixing the worst problems immediately and adopting plans to make further gradual improvements.

New safety devices were installed and comprehensive worker training programs introduced. As a result, the number of serious work-related injuries has been substantially reduced.

The changes or new privatization structure have big effects on Employees’ Health And Performance.

Experts have expressed results of their study that majority of respondents reported deterioration in conditions of employment and operational participation since privatization. It concluded that once an organization begins changing, its employees might face threats to their jobs, roles, positions, and resources. These threats can lower the employees’ trust in their organization as a whole which can be negatively reflected in employees’ attitudes toward their work. They found that stress is a general and global phenomenon encompassing man’s psychological, physical, familial, and social dimensions.

Researchers have made great efforts studying the effects of this stress on mental and physical health of employees to better understand its nature. When individuals contemplate the stress of organizational change, their perceptions, choice of reactions, and working attitudes all strongly influence whether the change will be successful and if the newly reconstituted organization will function efficiently or not.

Researchers have also concluded that after privatization, the job stress of employees increased significantly. This increase was associated with a decrease in mental health. They illustrated a recent study conducted in Thailand, which concluded that the organizational change has a significant association with more psychological stress, which in turn, resulted in poor job performance.

In Canada after privatization employees of a large healthcare provider surviving from downsizing had a higher degree of delay and also a higher degree of stress due to less control exercised over their jobs.

Consequently, they enjoyed less job satisfaction and living standards and worse general health. In this respect, International Labor Organization in 2001 discussing safety and job health, reported that privatization, organizational restructuring and increasing the number of small business units increase unemployment, stress, alcoholism, job insecurity and prolongation of work hours, all of which lead to psychic trauma at work and private life.

Moreover, it has been shown that stress and its related diseases lead to an increase in the incidence rate of indigestion, heart disease and mental disorders.

Reports shown that in the Russian Federation, conditions of labor have been affected by the “marginal” state of the economy, in transition from a planned economy to a market system. Eighty- eight per cent of equipment in Russian factories is obsolete, 400,000 work in unhealthy conditions, 8,000 every year (more than died in Afghanistan) die because of working conditions, and 14,000 become handicapped we made an inspection in newly privatized companies about how conventions on labor were being respected — these were conditions of real slavery, no human conditions. A slave owner says you must work from morning to evening, no choice, no trade unions.

Privatization also contributes to the Effects on Social Welfare of Workers

Consultants have expressed that in some cases, the true scale of unemployment has been concealed by the practice of state-owned enterprises keeping workers at home on some proportion of their pay.

Workers have also been badly affected as, many of them lost and entitlement and the social impact was worse. It was further argued that even where unemployment levels have remained relatively low, a new phenomenon has emerged — that of long-term unemployment.

In the Czech Republic, for example, despite low levels of unemployment, by the end of 1994 over a third of all job applicants had been without work for more than one year. Only those firms, which have managed to gain access to resources and modern technology, have been surviving. However, the foreign investment that can play the key part in resolving those challenges can also bring other problems.

As privatization enables formerly closed economies to join the globalization trend, employment opportunities can erode, as the Tungsram example in Hungary demonstrates.

Next episode will explain the effects on the share of ownership!

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