Public Sector Pay and Adjustment: Lessons from Five Countries (Routledge Studies in Development Economics)

PUBLIC-SECTOR PAY AND ADJUSTMENT

This volume describes and analyses the effects of structural adjustment upon public-sector pay, based on the experience of a number of countries: Singapore, Republic of Korea, Zambia, Zimbabwe and Argentina. This selection of cases provides a variety of experience as regards paths and stages of economic and social development, the application of adjustment policies and the role of the public service in these processes. For each country a number of important issues are investigated, including: • the relationship between macroeconomic policies and private—publicsector wage developments • public-sector pay policies • reaction of public-service employees to real wage trends, pay policies and pay-administration practices • the impact of state intervention in the labour market The evidence presented in this volume shows that, in public sectors of unsuccessful adjusting countries, productivity was negatively affected by severe market-determined declines in pay. By contrast, the successful adjusters adopted an interventionist approach to the labour market, in which pay was a strategic target for government policy. Thus the need to use careful strategic interventions, rather than entirely market-determined approaches to the labour market, may be one of the major lessons of East Asian economic success. Christopher Colclough is a Professorial Fellow of the Institute of Development Studies and of the University of Sussex.

ROUTLEDGE STUDIES IN DEVELOPMENT ECONOMICS

1 ECONOMIC DEVELOPMENT IN THE MIDDLE EAST Rodney Wilson 2 MONETARY AND FINANCIAL POLICIES IN DEVELOPING COUNTRIES Growth and stabilization Akhtar Hossain and Anis Chowdhury 3 NEW DIRECTIONS IN DEVELOPMENT ECONOMICS Growth, environmental concerns and government in the 1990s Edited by Mats Lundahl and Benno J.Ndulu 4 FINANCIAL LIBERALIZATION AND INVESTMENT Kanhaya L.Gupta and Robert Lensink 5 LIBERALIZATION IN THE DEVELOPING WORLD Institutional and economic changes in Latin America, Africa and Asia Edited by Alex E.Fernández Jilberto and André Mommen 6 FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH Theory and experiences from developing countries Edited by Niels Hermes and Robert Lensink 7 THE SOUTH AFRICAN ECONOMY Macroeconomic prospects for the medium term Finn Tarp and Peter Brixen 8 PUBLIC-SECTOR PAY AND ADJUSTMENT Lessons from five countries Edited by Christopher Colclough

PUBLIC-SECTOR PAY AND ADJUSTMENT Lessons from five countries

Edited by Christopher Colclough

A study prepared for the International Labour Office

London and New York

First published 1997 by Routledge 11 New Fetter Lane, London EC4P 4EE This edition published in the Taylor & Francis e-Library, 2003. Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 © 1997 International Labour Organization All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Public-sector pay and adjustment: lessons from five countries/ edited by Christopher Colclough. p. cm. Includes bibliographical references and index. 1. Developing countries—Officials and employees—Salaries, etc.—Case studies. 2. Structural adjustment (Economic policy) —Developing countries—Case studies. I. Colclough, Christopher. JF 1661.P824 1997 331.2’8135–dc20 96–22701 CIP ISBN 0-203-44280-6 Master e-book ISBN

ISBN 0-203-75104-3 (Adobe eReader Format) ISBN 0-415-15338-7 (Print Edition) The designations employed in ILO publications, which are in conformity with United Nations practice, and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the International Labour Office concerning the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers. The responsibility for opinions expressed in studies and other contributions rests solely with their authors, and publication does not constitute an endorsement by the International Labour Office of the opinions expressed in them. Reference to names of firms and commercial products and processes does not imply their endorsement by the International Labour Office, and any failure to mention a particular firm, commercial product or process is not a sign of disapproval.

CONTENTS

Figures and tables Preface

vii x

1 PUBLIC-SECTOR PAY AND ADJUSTMENT: THEORY, POLICIES AND OUTCOMES Christopher Colclough Introduction The role of wages in adjustment What do the case studies show? Conclusions

1 1 4 9 17

2 ECONOMIC RESTRUCTURING AND FLEXIBLE CIVIL SERVICE PAY IN SINGAPORE David C.E.Chew Introduction The public sector in Singapore Restructuring the economy and the labour market Pay systems Conclusions

22 22 22 31 33 43

3 WAGE POLICY AND INTER-SECTORAL PAY DIFFERENTIALS IN THE REPUBLIC OF KOREA, 1975–91 Young-bum Park Introduction Employment Pay-setting mechanisms Wage levels, criteria for determination, structure and composition Workers’ behaviour and pay in the public sector Government wage policy and pay in the private sector Summary and conclusions

46 46 46 50 51 60 61 64

4 ECONOMIC STAGNATION AND EARNINGS DECLINE IN ZAMBIA, 1975–91 Christopher Colclough Introduction

68 68

v

CONTENTS

Economic background Employment and skills Pay Responses to real wage decline Conclusion

69 70 81 103 110

5 PUBLIC-SECTOR PAY AND ADJUSTMENT IN ZIMBABWE Mkhululi Ncube Introduction Public-sector employment Wages and salaries in the public and private sectors Pay deterioration and labour market behaviour Conclusions

113 113 113 124 129 133

6 STRUCTURAL ADJUSTMENT AND PUBLIC-SECTOR PAY IN ARGENTINA, 1975–91 Oscar Cetrángolo Introduction National trends in the economy and the labour market Public-sector employment Public-sector salaries Reactions to wage deterioration Conclusions

135 135 135 141 144 151 155

Index

159

vi

FIGURES AND TABLES

FIGURES 6.1 6.2

Argentina: real wages in public enterprises and private industry, 1980–91 152 Argentina: real wages in different categories of public and private employment, 1980–91 152 TABLES

2.1 2.2 2.3 3.1 3.2 3.3 3.4 3.5 3.6 3.7

3.8 3.9

Singapore: public wage bill, financial year 1992/93 Singapore: employment in the civil service, selected years, 1977–92 Singapore: starting monthly basic salary in the civil service, November 1977 and July 1992 Republic of Korea: public and total employment, 1975–92 Republic of Korea: public-sector employment, 1988 and 1991 Republic of Korea: competition ratios of qualifying examinations for government jobs, 1975–90 Republic of Korea: characteristics of the labour force, 1988 Republic of Korea: nominal and real salary comparisons in government authorities, 1979–91 Republic of Korea: nominal and real salary indices, government and other sectors, 1978–91 Republic of Korea: wage differentials between government authorities, public enterprises and all enterprises (government estimates), 1988 Republic of Korea: inter-sectoral salary differentials for university graduates, 1988 Republic of Korea: inter-sectoral salary differentials for high-school graduates, 1988 vii

25 29 38 47 48 48 50 52 53

54 55 56

FIGURES AND TABLES

3.10 Republic of Korea: wage differentials between public enterprises and government officials (selected occupations), January 1992 3.11 Republic of Korea: allowances paid by government authorities, 1991 3.12 Republic of Korea: proportion of basic pay in total remuneration (general public administration), 1978–91 3.13 Republic of Korea: severance pay schedule 3.14 Republic of Korea: wages in public authorities and the private sector, 1975–90 3.15 Republic of Korea: wage differentials between public authorities and the private sector, 1988 and 1990 3.16 Republic of Korea: public servants with other sources of income, 1978 and 1983 3.17 Republic of Korea: transgressions by public servants, 1980–90 4.1 Zambia: employees in the formal sector, by citizenship, 1964–89 4.2 Zambia: employees in the formal sector, by citizenship and economic sector, 1965–89 4.3 Zambia: the central government establishment, 1978–91 4.4 Zambia: establishment and employment position in 1983 and March 1990, central government 4.5 Zambia: educational qualifications held by Zambian employees, 1965 and 1983 4.6 Zambia: sample of employees by major occupational group and nationality, 1983 4.7 Zambia: occupations in which non-citizens were concentrated, 1983 4.8 Zambia: staffing levels of doctors, 1981–85 4.9 Zambia: evolution of civil service salaries, 1975–91 4.10 Starting salaries for selected posts in the Zambian civil service, 1975–91 4.11 Index of starting salaries for selected posts in the Zambian civil service, 1975–91 4.12 Nominal and real differentials in the Zambian civil service, 1975–91 4.13 Zambia: the value of housing benefits in the public sector, 1975–91 4.14 Zambia: government housing benefits as a percentage of basic salary, 1975–91 4.15 Zambia: total compensation of public employees—real gross basic salary plus benefits, 1975–91 4.16 Zambia: average earnings and allowances of public sector workers, 1983–91 4.17 ZIMCO corporate salary structure (non-unionized employees), 1984 and 1991 viii

56 57 58 59 60 60 61 62 71 72 73 74 76 78 79 81 83 84 85 86 88 91 92 94 96

FIGURES AND TABLES

4.18 Zambia: starting wages/salaries for unionized occupations in parastatal and private sectors, 1975–91 4.19 Zambia: starting wages/salaries for unionized occupations in parastatal and private sectors, 1975–91 (1975 constant prices, and index where 1975=100) 4.20 ZCCM: starting salaries for a range of occupations, 1975–91 4.21 Zambia: allowances as a proportion of the total compensation of unionized employees by sector, 1983–91 4.22 Zambia: housing benefits as a proportion of total allowances for unionized employees by sector, 1983–91 4.23 Zambia: cases before the Anti-Corruption Commission 5.1 Zimbabwe: formal sector employment, 1980–90 5.2 Zimbabwe: central government employment, 1980–91 5.3 Zimbabwe: employment in parastatals by sector/industry, 1985–91 5.4 Zimbabwe: distribution of central government employees by industry sector, 1985–91 5.5 Zimbabwe: skill composition of the civil service, 1981–91 5.6 Zimbabwe: skill levels in parastatals, 1985 and 1986 5.7 Zimbabwe: percentage of total expatriates in the civil service, 1982–91 5.8 Zimbabwe: civil service labour costs, 1979/80–1992/93 5.9 Zimbabwe: retrenchment and redeployment in the civil service (Phase 1), 1991–92 5.10 Zimbabwe: real annual earnings per worker by industrial sector, 1975–87 5.11 Zimbabwe: public-and private-sector median wages by occupation, 1988 and 1989 5.12 Zimbabwe: wage adjustments—a comparison, 1980–92 5.13 Zimbabwe: wage differentials—ratios, 1980–92 6.1 Argentina: main economic indicators, 1971–75 to 1990 6.2 Argentina: employment and unemployment, May 1992 6.3 Argentina: evolution of the underutilization of labour, 1980–90 6.4 Argentina: public-sector employment, selected years 6.5 Argentina: labour costs in the public sector, 1975–90 6.6 Argentina: real wages in central public administration, 1980–91 6.7 Argentina: central public administration—low, middle and high salaries relative to average salary, 1980–90 6.8 Argentina: real wages of teachers, 1980–91 6.9 Argentina: relative wages in relation to the average in the education sector, 1980–90 6.10 Argentina: real wages in stage enterprises, 1979–92 6.11 Argentina: central public administration—shares of posts at junior, middle and senior levels, 1980–91 ix

98

99 100 102 102 104 114 115 116 117 119 120 121 122 123 125 126 127 128 137 139 140 142 147 148 149 149 150 151 155

PREFACE

This book is the outcome of work undertaken by the ILO Interdepartmental Project on Structural Adjustment and the Remuneration Section of the Labour Law and Labour Relations Branch of the Industrial Relations and Labour Administration Department, with assistance from the Active Labour Market Policies Branch of the Employment Department. The aim of the Interdepartmental Project on Structural Adjustment is, in cooperation with other departments of the International Labour office, to reinforce ILO policy advice in relation to structural adjustment policies in order to render them more consistent with ILO principles and approaches. Among the areas selected during 1992–93 for specific analysis and policy advice, the role of public-sector pay in an adjustment process was an important one. The trimming of public-sector pay has been almost invariably a primary lever by which governments have sought to reduce public budget deficits under any structural adjustment programme. The issue of public-sector wage levels tends to be nationally important, not only in terms of providing adequate compensation to public employees but also in terms of the broader consequences of public-sector wage determination for the labour market as a whole. At the same time, however, debates on public-sector pay, particularly as regards developing countries, tend to be long on ideological positions and short on empirical bases. This book seeks to provide a little more of the latter, in trying to inform policy analysis in this area.1 This book describes and analyses the effects of structural adjustment on public-sector pay, based on the experience of a number of countries— Singapore, Republic of Korea, Zambia, Zimbabwe and Argentina. This selection of cases provides a variety of experience as regards paths and stages of economic and social development, the application of adjustment policies and the role of the public service in these processes. For each country a number of important issues are investigated, such as the relationship between macroeconomic policies and private-public-sector wage developments, public-sector pay policies, and the reaction of public service

x

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employees to real wage trends as well as to different pay policies and payadministration practices. Two of the important findings might be noted here. First, it seems that the efficiency wage hypothesis is particularly relevant to the public sector in many instances. The hypothesis states that pay and productivity are positively correlated and that a decline in pay levels below a certain threshold leads to severe efficiency losses; therefore employers have an incentive to maintain pay above the feasible minimum or market rate. The evidence presented in some of the case studies in this book documents how productivity is negatively affected by a decline in pay. This has led both to distortions in civil service pay systems and to a process of ‘informalization’ occurring within the public sector, as employees seek various (more or less unorthodox and illegitimate) means of supplementing their diminishing remuneration, all with deleterious effects on the institution of the public service. A second important finding is that in adjusting countries where levels of pay and other terms and conditions of civil service employment deteriorated less, or even improved, this was due to strong intervention by the State in the labour market to maintain public-sector pay at a certain level with respect to private-sector pay. This targeted interventionist approach is in sharp contrast to that implied by the liberal economic paradigm, which has so often been (misleadingly) used to characterize the policy stance of these countries. We are grateful to Christopher Colclough, Professorial Fellow of the Institute of Development Studies at the University of Sussex, for having selected and edited the papers for this volume in his usual perceptive, even-handed and meticulous manner, and in particular for the insightful introduction which provides a synthetic overview of theory and policy lessons relating to the subject. Professor Colclough also prepared the Zambia study. However, the present volume could not have materialized without the enthusiastic support received from many people. We would first like to thank our colleagues Andrés Marinakis and Loretta de Luca, who prepared the project outlines and oversaw the various case studies in a most effective way. Secondly, our thanks are due to Derek Robinson, from the Institute of Economics and Statistics at Oxford University and a leading international specialist on labour market and public-sector pay issues, who was involved at the earlier conceptual and methodological stages of this project. Last, and not least by any means, we are grateful to the national contributors to this book, who met the requirements of the initial outline and then responded patiently to our comments and those of Professor Colclough. These collaborators are as follows (with their institutional affiliations at the time): Oscar Cetrángolo, Institute for Industrial Development, Buenos Aires. David C.E.Chew, Department of Economics, University of Singapore. xi

PREFACE

Mkhululi Ncube, Department of Economics, University of Zimbabwe, Harare. Young-bum Park, Korea Labor Institute, Seoul. We hope that the information and analysis provided in this book will contribute to a better understanding of the crucial role that public-sector pay policies can play in an adjustment strategy that combines growth with equity concerns. Rolph van der Hoeven, Zafar Shaheed, Project Manager, Head, Remuneration Section, Interdepartmental Project Industrial Relations and Labour on Structural Adjustment Administration Department NOTE 1 As such, this book may be situated within a line of factual description and analysis initiated by the ILO on public-sector pay. See Robinson, D. (1990) Civil service pay in Africa (Geneva, ILO); Chew, D.C.E. (1992) Civil service pay in South Asia (Geneva, ILO); Sylvestre, J.-J. and Eyraud, F. (eds) (1993) La régulation des salaires dans le secteur public: essai de comparaison Internationale—France, Grande-Bretagne, Italie (Geneva, ILO). For further details, see inside back cover.

xii

1

PUBLIC-SECTOR PAY AND ADJUSTMENT Theory, policies and outcomes Christopher Colclough

INTRODUCTION This book describes and analyses trends in the public-sector wages, salaries and allowances of five countries over the past two decades. It thus provides five separate accounts of one important aspect of public policy. However, these stories are set against a background of broader economic events which give a particular context to the details of public-sector pay and which extend their significance. The main questions asked are: how has public-sector pay reacted to the adjustment experiences of countries in different economic circumstances and, more broadly, what lessons does this comparative experience suggest for the relationship between labour market policies and the conduct of successful adjustment? We must begin by clarifying what is meant by adjustment in these circumstances, and why public-sector pay is important to it. Adjustment is defined here as a process of achieving rapid structural change in an economy, so as to secure stable growth of national income over the long term. This definition presupposes that, at least in some countries, merely seeking growth in the context of the existing structure of production will be unlikely to succeed. This may be for a variety of reasons. Historically, the most important reason—which has been dominant in the countries of Africa and Latin America during the 1980s and early 1990s—is that economic growth became blocked, mainly owing to the presence of unsustainable imbalances in the national economy between aggregate demand and aggregate supply. Such imbalances typically resulted in growing deficits in the balance of payments and high levels of domestic inflation. They were also often associated with large and growing public-sector deficits. In such circumstances it became necessary to secure short-term economic stabilization—by sharply restricting domestic demand, using a range of monetary and fiscal instruments. The attempt to secure longer-term adjustment usually involved the application of 1

PUBLIC-SECTOR PAY AND ADJUSTMENT

supply-sidepolicies to promote the production of exports and import substitutes, with a particular emphasis upon the use of the exchange rate instrument, and upon the reduction of tariffs and subsidies. The experience with stabilization and adjustment policies has been mixed in that, for many such countries, the major goal of such policies—the realization of stable economic growth—has so far remained elusive. Three of the case studies in this volume—Zambia, Zimbabwe and Argentina—are drawn from this first category of countries where, using most relevant criteria, adjustment has not yet been a success. Each of them faced, over the 1980s, profound and unsustainable balance-of-payments deficits which necessitated the introduction of stabilization and adjustment measures, designed to restructure domestic production and demand. These were implemented with varying degrees of consistency, and subsequent economic performance has been mixed. Zimbabwe came closest of the three to containing its problems on external account and returning to economic stability, but progress even there was modest, and per capita incomes in each country continued to decline. A second group of countries have been pursuing adjustment policies in very different circumstances, and with much greater success over the past three decades. These are the so-called ‘newly industrializing countries’ (NICs) of East Asia, which have achieved rapid and sustained growth mainly by diversifying their economies in favour of the production of manufactured exports. Here, the style of economic management has been sharply different from that which has characterized the countries of Africa and Latin America. Their emphasis upon export-led growth was secured by a system of domestic incentives which, throughout most of their period of rapid growth, attempted not to discriminate in favour of production for the home market, and where economies were liberalized such that most of the relevant pricing and institutional barriers to trade were removed. Governments still adopted an active role in economic management, but their interventions appear to have been much more strategically successful in achieving structural change than those in most of Africa and Latin America. Although there is much debate about which are the critical features accounting for East Asian success, there is no doubt that their adjustment record provides many important lessons for other states. The remaining two case-studies in this volume—Singapore and the Republic of Korea—are drawn from amongst this second group of highgrowth economies. All the countries selected for study in this volume, then, have been pursuing ‘adjustment’ in the sense earlier defined—a process of achieving rapid structural change, so as to secure stable growth of national income over the long term. Indeed, it was partly with reference to the apparent lessons for economic policy provided by Singapore, the Republic of Korea and the other NICs that the particular mix of structural adjustment policies advocated by the international financial institutions and Northern aidagencies—essentially 2

THEORY, POLICIES AND OUTCOMES

a fairly unmitigated shift to liberal economic regimes together with a much reduced role for government as a provider of goods and services—was justified. The advocacy of state contraction and of market liberalization, as paired solutions to national economic demise, has been heavily influenced by the view that the slow progress made by many developing countries has been caused mainly by excessive economic intervention by their own governments. Neo-liberal economists have argued that the costs of this intervention have been large, and that the price distortions to which it has led have resulted in the market being hindered in promoting efficient resource allocation.1 The aim of state contraction has thus become independently influential in policy reforms advocated by the North, in addition to whatever corrective action may be needed to remove fiscal deficits in individual country circumstances. The level of government spending is, on this interpretation, an important variable to monitor during the process of adjustment. It is implied that successful adjustment, for countries with unsustainable imbalances on external account, will be unlikely in the absence of some reduction in the level of government spending relative to gross national product (GNP). The wage and salary bill, accounting, as it does, for a high proportion of total public spending, represents one of the main ways in which such expenditure reductions may be secured. An additional reason for being interested in public-sector pay, in this context, is that the theory which underpins orthodox approaches to securing economic adjustment accords a fairly central role to movements in relative wages between different economic sectors. Here, the main aim is to increase the incentives for the domestic production of traded (export-and importcompeting) goods and services so as to correct the balance of payments, and, ultimately, to seek long-term growth of production based upon national comparative advantage. Public-sector employees, in most countries, are engaged almost entirely in non-traded activities. There is therefore a question as to what approach should be taken towards wages and salaries in this important non-traded sector of the economy. We shall see that there is a certain tension—and perhaps even a contradiction—between the lessons of experience and those suggested by theory on this matter. The relevant conclusions from the theoretical literature on the role of wages in adjustment, including those which have particular significance for the public sector, are reviewed in section 2 of this chapter. Alternative explanations for sectoral income differences, which have been widely observed in developing countries, are then examined. This is followed by a summary of the evidence on national trends in average wages and in pay differentials in the South over the past two decades. Finally, against this background, section 3 reviews the main results from the five case studies of public-sector pay, and section 4 draws some lessons for policy in adjusting countries.

3

PUBLIC-SECTOR PAY AND ADJUSTMENT

THE ROLE OF WAGES IN ADJUSTMENT

The small-country, perfectly competitive case A major aim of structural adjustment programmes, introduced in response to prolonged deficits in the balance of payments, has been to increase the production of tradable goods and services, relative to those of non-tradables. The small-country, open-economy model is usually employed in defence of this strategy (Bruno, 1976; Corden, 1977). This model assumes that the country’s own actions cannot affect the international prices for the goods in which it trades, i.e. it is a price-taker on international markets. It also assumes that it can sell (or buy) as many goods or services, internationally, as it cares to at these prices. Under these assumptions, the immediate objective has been to raise the price of tradables (Pt), relative to non-tradables (Pn), in order to increase the incentives to produce the former relative to the latter. A range of fiscal and monetary measures are typically assigned as instruments to achieve this change. These aim to reduce domestic demand in general—thereby releasing more resources for export production—and to reduce the amount of government activity in particular, in part to reduce demand for non-tradables. Where international prices (Pt) are fixed, these measures require Pn to be flexible downwards, in response to reductions in demand, in order for Pt/Pn to rise, i.e. product markets have to be fully competitive. Where labour markets are also fully competitive no sustained differential can occur between the wages paid in the tradables and non-tradables sectors. Thus, wages in tradables may rise in the short run in response to the increase in demand for labour in that sector as production increases, but these are quickly reduced again, as the transfer of labour from non-tradables is effected. The net result is a rise in the real product wage (RPW) in non-tradables and a fall in tradables, owing to the rise in Pt/Pn relative to the wage (W).2 Employment in the two sectors will have moved in opposite directions to the real product wage. However, the impact of all of this upon the real consumption wage is indeterminate because, whilst the prices of tradable goods will have risen, those of nontradables will have fallen. Thus the outcome for the real consumption wage depends upon the extent to which tradables relative to non-tradables feature in the average consumption basket of wage earners. In a perfectly competitive world, therefore, the real resource shifts consequent on changes in relative prices do not imply necessarily adverse consequences for income distribution. The impact of imperfections The picture is different if we allow for the existence of imperfections, or—to put it in a different way—for the structural realities facing most developing 4

THEORY, POLICIES AND OUTCOMES

countries. If, for example, the price of non-tradables is inflexible downwards, fiscal and monetary measures alone are likely to prove insufficient, and a devaluation of the exchange rate will typically be needed in order to raise Pt relative to Pn. Here, then, Pn—and thus the real product wage in nontradables—remains unchanged, whilst Pt rises and RPW falls. In this case, the value of the real consumption wage for all workers declines to the extent that they consume traded commodities. A major form of imperfection in the labour markets of developing countries is segmentation. This occurs when some workers receive higher wages than others with similar human capital characteristics, purely because of the sector or industry in which they work. At the very least there is usually a significant difference between the earnings of those in informal self-employment (or in wage employment in the small-scale unregulated sector) and those in regular, formally contracted jobs. The former typically include many workers who are producing traded goods, and who would be beneficiaries of a rise in their relative price. How does the introduction of wage segmentation affect the analysis? The classic case of this is an economy in which non-tradables (dominated by public service) are mainly the province of the formal sector, and where tradables (primary products and small manufactures) are mainly the province of the informal sector. If we adopt the simplifying assumption that employment is exclusively formal in the non-tradables sector and exclusively informal in the case of tradables, it can be shown that a devaluation, with formal wages remaining unchanged in nominal terms, would allow a higher level of informal employment than in the pre-devaluation case. The impact upon informal sector real incomes would be uncertain: nominal incomes would have risen from the production of the traded commodity, but so, also, would the prices of all other tradables consumed. On the other hand, the incomes of formal sector workers would have fallen, since nominal wages would remain unchanged.3 This case, therefore, would be consistent with devaluation achieving a redistribution of income from wage earners in non-tradables production towards informal sector workers in the tradables sector. Of course, even in African economies, which perhaps fit the above stylized facts more closely than countries in other regions,4 the above model is likely to prove fallible in predicting outcomes. This is because, within both sectors, there are informal producers owning some capital, but producing on a small scale; and there are formal, capital-intensive, largescale producers characterized by wage employment. In African agriculture, for example, selfemployed peasant producers are easily the most numerous, yet capitalist farmers often account for a higher proportion of marketed production. The question as to whether the rich or the poor are likely to gain from a particular adjustment strategy is therefore answerable only by analysing the specific circumstances of individual countries.5 5

PUBLIC-SECTOR PAY AND ADJUSTMENT

Second, however, there may be real wage inflexibility throughout the formal sector, arising from union power, indexation agreements or other causes (see later). If this were the case, the burden of adjustment in the non-tradables sector would fall not upon wages, but upon profits, and the extent to which ‘normal’ profits in that sector could be sustained6 would become critical. If price rises could be passed on to the consumer, there might be a tendency towards real, and not just nominal, inflexibility in the prices of non-tradable goods. In these circumstances, the initial price advantage in the tradables sector, consequent upon devaluation, would soon be eroded by price inflation in the non-tradable sector, and the resource-switching effects of devaluation would not in these circumstances be sustained. If, on the other hand, price rises could not be passed on, the rise in nominal wages in the non-tradables sector would lead to a fall in employment in that sector and a lower level of output. It seems, then, that the sectoral response of real wages is at the heart of the adjustment process. If the real wage in the non-tradable sector remained constant, with Pn flexible downwards, labour demand would fall to a greater extent than would otherwise be the case, and some workers would be able to protect their own wages and jobs at the expense of others. If, on the other hand, real wage inflexibility led to the rigidity of Pn, the adjustment process would be likely to be undermined, since the rise in wages induced by the increase in Pt would increase Pn until the original price ratio Pt/Pn was restored.7 Finally, if real wages were flexible, a differential would open up between wages paid in tradable and non-tradable sectors. The extent to which this would be removed in the longer run depends upon the degree of inter-sectoral labour mobility, and upon the relative intensity of factor-use between the two sectors.8 Wage rigidity versus wage flexibility In contrast to the orthodox theoretical underpinnings of adjustment theory, which, as indicated above, are centrally concerned with the notion of wage flexibility, much of the earlier debates about wage determination in the South focused upon explanations for the apparent rigidity of wage levels, and of wage differentials, between different economic sectors. For example, a whole class of dual-economy growth models used the existence of a fixed urban wage, set at a higher rate than average rural incomes, as a central instrument for elucidating the development process (Lewis, 1954; Ranis and Fei, 1961; Jorgensen, 1961). According to this literature, the reasons for urban wages appearing to be set at levels higher than the opportunity costs of labour were to be found in the higher costs of urban living, the distance and costs of getting to the urban centres, and the need to compensate job-seekers for the time and effort involved,in seeking urban work. Under these circumstances, the urban wage would provide an unlimited supply of 6

THEORY, POLICIES AND OUTCOMES

unskilled workers to the urban sector, until such a time as the rural labour surplus were removed (after which point urban and rural living standards would rise together). These market-based explanations for persistently high rural-urban differentials were not universally accepted. Todaro (1969), for example, accepted as inevitable the downward rigidity of the urban-rural wage differential, and explained the decision to migrate from rural to urban areas in terms not only of perceived cost and income differentials, but also of the probability of finding an urban job: the higher the differential between rural and urban wages, the higher the ‘natural’ rate of urban unemployment. He, and many other observers, pointed to a range of institutional factors, or imperfections, which led to inflexibility of the urban or, more broadly, the formal sector wage. These factors, on the one hand, pushed the average level of wages well above those which could be justified on opportunity-cost grounds and, on the other, presented a formidable array of constraints which were likely to hamper any market-based attempts to reduce wages in the cause of adjustment and economic restructuring. The range of actual interventions in labour markets of developing (and industrialized) countries is wide. They include the impact of collective bargaining and the influence of unions on the structure of wages and nonwage costs (e.g. social security benefits, pensions, severance pay, etc.); minimum-wage legislation, reflecting a wish on the part of governments to protect workers from poverty-level wages; and the broader wage-policy stance of the government which, according to some authors in the new political economy (NPE) tradition (e.g. Bates, 1981), is likely to be strongly informed by the interests of the urban classes, suggesting a pre-disposition towards high wages by governments wanting to retain political power. Some advocates of the NPE have gone further, to argue that politicians and bureaucrats are motivated only by individual self-interest.9 If true, this would seem to carry particular implications for wage policy, and for the continued privileged position of public-sector wages within it. Empirical estimates of the extent of wage ‘distortion’ caused by these interventions are more scarce than one might expect in view of the frequency with which they are criticized in neo-liberal writings. For example, one recent review (Freeman, 1992) found little empirical evidence to suggest that minimum wages in general have deleteriously affected levels of employment, or indeed that they have had a strong upward influence on average wages in many countries. More generally, it concluded that studies designed to support the distortionist view of labour markets in developing countries failed to make a convincing empirical case. Nevertheless, whether distorting or not, the very existence of such interventions could be expected to provide an obstacle to the downward flexibility of real wages in response to the introduction of stabilization and adjustment measures. Rather more empirical 7

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evidence exists with which to address this question, as will be seen from the next section of this chapter. A rather different, and potentially powerful, set of explanations for the downward rigidity of wages in the formal sector is given by ‘efficiency wages’ theories. These take the view—contrary to standard wage theory—that wagesetting is not exogenous to the firm (i.e. not determined by supply and demand in the broader labour market), but that it is part and parcel of its own optimizing behaviour. This is because the productivity of labour is viewed to be a positive function of the wage—that, in an important sense, the wage rate determines labour productivity.10 If this were generally true, it would present a strong challenge to the likely effectiveness of standard adjustment policies, and to the validity of the theory upon which they are based. This is because an attempt to lower real wages using macroeconomic instruments would be unlikely to succeed, because to allow it would be contrary to the interests of individual firms. Thus, where efficiency wages held, a nominal devaluation would be followed by increases in nominal wages in both tradable and non-tradable sectors to preserve the value of the consumption wage and thereby to preserve previous levels of profitability. This would not necessarily completely undermine the differential emerging between real product wages in tradables, compared with non-tradables, depending upon the extent to which non-tradables featured in average consumption baskets. But it would certainly reduce the power of the exchange rate instrument to change the cost structure in favour of tradables production, and thereby at the very least slow down the process of inter-sectoral labour transfer. A corollary would be that if wages were, in fact, reduced in these ways, the net impact upon output and profitability in the production of both tradables and non-tradables would be negative. What do we know about wage and employment flexibility in developing countries? From the early 1960s until the mid–1970s wages in most developing countries rose. Their rise was generally faster than that of per capita incomes, and faster also than the growth of incomes from agriculture. Thus, differentials between urban and rural, and formal and informal sectors increased, in favour of the former in each case. These facts suggested that the institutional factors mentioned earlier—unions, minimum wages, etc.—were influencing wage outcomes, often rather strongly. As regards employment, labour was reallocated during the 1970s, away from primary sectors towards secondary and tertiary activities—in most countries the employment share of agriculture and mining fell, whilst that of services increased (Fallon and Riveros, 1989, p. 18). This pattern of growth is argued by some to be a natural concomitant of development—indeed that 8

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structural change away from primary activities is one test of whether development is taking place (Chenery and Syrquin, 1975). Others, however, emphasized that in many countries, and particularly in sub-Saharan Africa, it was tertiary employment which had grown most rapidly. This was interpreted as symptomatic not of healthy diversification, but of an inappropriate growth of the public sector which had become the main source of structural change (World Bank, 1981). More generally, it was argued that in many countries domestic absorption (or total national expenditure) increased faster than production capacity, thereby increasing both the costs and resources involved in the production of non-tradables. These were often strongly dominated by public-sector activities. During the 1980s, however, things changed dramatically. In most countries of Asia, real wages continued to rise—particularly in the newly industrializing countries and in China. Elsewhere, however, they fell. In Latin America, the falls were initially modest and some countries (Brazil, Colombia, Peru) continued to register gains, but in Africa wages fell in almost every country for which data are available and in some (Ghana, United Republic of Tanzania, Sierra Leone, Zambia) the decline was extremely sharp, resulting in a pauperization of large sections of the population. By consequence, real wages in sub-Saharan Africa were typically halved between 1970 and 1985.11 The decline in wages was fully shared by those working in the public sector. Indeed there is evidence to suggest that public servants were particular casualties of the economic decline. In Africa, for example, for 11 countries where the data are available, the real earnings of public-sector workers declined considerably faster than per capita income over the years 1975 to the mid– 1980s. Furthermore, income differentials within the public service also declined markedly over this period: in every case, senior officers in the public service had significantly greater reductions in real salaries than unskilled and semiskilled workers in the junior grades.12 Thus, the fears of those who doubted that wages would adjust in response to economic adversity have been shown to be unfounded. During the 1980s, the pattern throughout Africa and much of Latin America was one of sharp earnings decline—often led by wages and salaries in the public service—in response to the adjustment measures which were introduced. Wages have, then, proved flexible. Whether this has in fact helped the process of economic adjustment, however, is a different and much more complex question. WHAT DO THE CASE STUDIES SHOW? We have two groups of countries, to which we shall refer as high-growth adjusters and low-growth adjusters, repectively. These labels usefully emphasize the major difference between the recent economic histories of 9

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Singapore and the Republic of Korea, on the one hand, and Zambia, Zimbabwe and Argentina on the other—that, in economic terms, the former have grown much more rapidly than the latter. Although the first group are now at much higher income levels than the second—with Singapore having, in 1992, a per capita income which was only marginally behind that of the United Kingdom—this has not always been so. As recently as 1980, the per capita income of the Republic of Korea was less than two-thirds that of Argentina, whilst Singapore and Argentina had similar levels of per capita income around 1970. It is important, therefore, to ask whether our case studies provide any evidence, however suggestive, for differences in labour market policies, or outcomes, which may be associated with the sharply different economic performance which continues to be revealed. The high-growth adjusters Singapore and the Republic of Korea, in common with the other highgrowth economies of East Asia, each experienced strong increases in real average annual earnings during the 1970–90 period. The Republic of Korea was in fact one of the East Asian countries in which the growth of real wages was highest—running at close to 10 per cent per year during the 1970s and at about 6 per cent over the following decade. In Singapore, annual real wage growth was 3 per cent and 5 per cent for the two periods, respectively. As indicated earlier, these were years during which real wage growth in most countries of sub-Saharan Africa, and many of Latin America, was negligible. Of course, such widely different performance stems from the high economic growth enjoyed in East Asia, which caused the demand for labour to rise steadily, and allowed rapid real wage growth to occur. Equally, rates of growth of the population, and thus of the labour force, were much lower in East Asia than elsewhere, which meant that the transition from labour surplus to labour shortage economies was within closer grasp. As regards economic policies, however, the East Asian economies have often been characterized as cases where rapid growth has been facilitated by governments not intervening in the process of market allocation as much as happened in other developing regions. In terms of the labour market, the argument is advanced that a high level of efficiency in the allocation of labour was achieved by allowing wages and employment to be determined largely by the interaction of supply and demand. According to this view,13 the main contrast in policies is thus that in East Asia wages were pulled up by increases in the demand for labour, whereas elsewhere they tended to be increased ‘artificially’. Furthermore, in the East Asian countries there were generally few, if any, wage premiums offered to the elite, and segmentation in the labour market was low: inter-sectoral 10

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earnings differentials between agriculture and non-agriculture were small compared to other countries, and skilled-unskilled differentials were also low. These small gaps did not arise from unskilled wages being pushed upwards by minimum wage legislation or other interventions—rather, they were mainly a product of the large and growing supplies of educated labour, which compressed both the educational and occupational structure of relative wage rates. Finally, the size of public sectors was sharply controlled, rather than being increased in response to the job-creating demands of the unemployed, or of those in low-wage jobs. Thus, whereas in many African countries the share of the public sector dominated the increase in total wage employment in the 1965–80 period, in East Asia the role of the public sector was much less. Although the above account contains some important generalizations which are undoubtedly accurate, our case studies for Singapore and the Republic of Korea indicate the need for some qualification of these stylized facts. First, and most important, is the observation that the governments of both countries have intervened very strongly in the labour market over many years. In Singapore, the Government repressed wages sharply until 1979, which led to the emergence of an acute labour shortage and to unsupportably high levels of imported labour from surrounding countries. And in the Republic of Korea, during the 1970s and early 1980s, when surplus labour no longer acted as a brake on real wages, labour rights were denied by the Government, and trade unions were prevented from having any role in wage determination. Thus, the sense in which wages were shaped by supply and demand refers in this case to the rather special market outcomes which attend an absence of labour rights to collective association. These were undoubtedly lower than would have occurred if labour rights had not been denied. Second, government intervention went well beyond the ‘freeing’ of the labour market by curtailing union activities. Beginning in 1979, the Government of Singapore changed its development strategy away from seeking a labour-intensive growth path towards the encouragement of more capitaland skill-intensive development. It assigned wages policy a central role in this process. The annual wage guidelines promulgated by the Government for the whole economy became deliberately generous, which led to higher labour costs and strong incentives to economize in the use of labour. This led to a closer balance between labour demand and supply, and to a rapid change in the skill composition of the employed labour force. In the case of the Republic of Korea, wages policy has also been judged by the Government as being critical for the country’s continued economic success. Throughout the 1980s attempts were made to moderate the rapid rates of increase in real wages which were occurring throughout the formal sector. The main vehicle for this was public-sector wage settlements, which were 11

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held back as a means of imposing restraint upon the private sector—a policy which had only limited success. Third, the case studies suggest that, at least in the Republic of Korea, there appears to be considerable labour market segmentation—in part a product of the wage policy pursued by the Government. In recent years, the private sector has offered considerably higher salaries to university graduates and to high-school leavers than have been available in the public sector. However, closer analysis shows that, in the case of gross earnings, the balance of advantage is reversed in favour of the public sector. It appears that the restraint upon public-sector wages imposed by the Government resulted in a significant increase in the number and value of allowances, and that these more than compensated for the higher basic wages paid outside the public sector. Thus the gross earnings of public servants were between 20 and 50 per cent greater than their counterparts in the private sector by 1991. Fourth, there is a strong contrast between the size of wage and salary differentials which exist within sectors in Singapore and the Republic of Korea. In the case of the latter, there was a significant shift towards greater equality in the wage distribution during the 1980s. For example, in the public sector, differentials between the highest-and lowest-paid officers decreased from the already modest level of 11:1 in 1977 to 4:1 by 1991. On the other hand, in Singapore individual incentives were held to be of great importance, and differentials within the civil service, already very wide in 1977 (when a salary ratio of 45:1 between those at the top and bottom of the service obtained), widened further over the years to 1992. Finally, the case studies of the high-growth adjusters confirm that the size of the public service was kept slim, accounting for about 4 per cent of total employment in Singapore and about 6 per cent in the Republic of Korea. On the other hand, whilst public employment in the Republic of Korea expanded slightly faster than that in the rest of the economy between 1975 and 1991, in Singapore, after increasing by 15 per cent between 1977 and 1979, civil service employment actually fell back to its 1977 levels by 1992. The evidence suggests that this reduction in the size of the public sector in Singapore was carefully managed. Rather than being a product of recruitment freezes, or ‘blanket’ redundancy policies, a highly selective approach was employed. Over the period 1986–92 the number of public officers in the lowest-skilled grades was reduced by 40 per cent, and the number of daily paid manual workers was halved. Yet the number of generalist administrators and professionals employed increased by 70 per cent over those years. Thus the wish to achieve structural change in the general composition of employment was reflected in the Government’s approach to the public-sector: the proportion of professional and administrative officers rose from 8 to 20 per cent of government employment over the years 1977–92. This, together with a wages policy which paid public 12

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officers 10–20 per cent more than their private sector counterparts, very large seniority differentials, and an annual variable bonus for public officials which linked up to 20 per cent of their total pay to the performance of the economy, implicitly put a very high premium on the importance of achieving an effective and efficient public service. The low-growth adjusters The economic circumstances facing the group of ‘low-growth adjusters’ have been completely different from those facing Singapore and the Republic of Korea. Both Zambia and Argentina have exhibited long-term secular decline, and Zimbabwe’s economic difficulties—although more minor— also proved intractable over the decade beginning in 1982. Each of these economies faced the classic adjustment challenge of restructuring domestic production towards exportables, and thus of changing the balance of internal incentives in ways which would encourage that to happen. In response to severe balance-of-payments crises, each of these countries introduced elements of the ‘orthodox’ adjustment package. These included exchange rate devaluation and measures to liberalize trade and to reduce the growth of public spending. This section addresses the following questions: was the wage response to adjustment policy in the direction predicted by theory, and what have been the effects of the observed wage response in these three countries, in broader economic terms? There is a well-established theme in the literature—and in many diagnoses of the adjustment challenge facing sub-Saharan Africa and Latin America— that governments are too big and that public-sector wages are too high. This may have been the case until the end of the 1970s or so, but things have changed dramatically since that time. As indicated earlier, it is now well established that the reduction in real wages, particularly in Africa, and particularly in African public sectors, has been extremely sharp over the 1980s and 1990s—so much so that current levels of remuneration seem often to be incompatible with maintaining minimal levels of efficiency (Lindauer et al., 1988; Colclough, 1991b; Robinson, 1990; Jamal and Weeks, 1993). The case studies of the low-growth adjusters are no exception: they show that the real value of public-sector wages fell dramatically over the period 1975–90. This is seen most vividly in the case of Zambia, where the real value of salaries for most public-sector workers had declined, by 1991, to less than one-quarter of their value in 1975. But wage declines in the public services of Argentina and Zimbabwe were also sharp. In Argentina, average real wages of civil servants fell by 50 per cent between 1974 and 1980, and by a further 33 per cent over the following decade, whilst in Zimbabwe they had declined by 1990 to about 60 per cent of their 1980 values. 13

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Changes in the wage structure in the low-growth adjusters have often exacerbated the problems caused by declining real wages. Differentials between the pay of senior and more junior staff have narrowed very substantially. For example, the ratio between highest and lowest salaries in Zambia declined from 18:1 to 5:1 between 1975 and 1991, and from 22:1 to 14:1 in Zimbabwe between 1980 and 1989. Differentials in Argentina were also reduced. Consequently, the average wage reductions mentioned above very substantially understate the income losses incurred by officers in the more senior professional, technical and administrative grades: for example, senior staff in the Zambian public service were, by 1991, drawing salaries equivalent in value to only 11–15 per cent of those paid to their counterparts in 1975. In Zimbabwe and Argentina salary decline for those in the highest grades was also much sharper than the average for all. As mentioned in an earlier section of this chapter, the process of adjustment in Africa and Latin America has been driven by two separate—yet strongly intertwined—necessities. The first of these was to increase the relative incentives to produce tradable goods and services, which was partly, and most importantly, pursued via exchange rate devaluation. One consequence of this has been a decline in the real consumption wage, not only in government, but throughout the formal sector. The second influence was the need to secure a tolerable medium-run relationship between government revenues and expenditures. The high level of fiscal deficits was in many countries a source of accelerating inflation, and also a separate cause of balance-of-payments problems. In addition, it was argued by many analysts, including those in the international financial institutions, that a reduction in the share of government spending in GDP was also necessary in order to free up resources for more productive uses elsewhere in the economy. Accordingly, government expenditures became subject to sharp downward pressures from a number of sources, which have led to the result, documented by the cases in this book, that public employees have borne more of the wage adjustment than workers in other sectors of the economy. Given that there was a need to move productive resources from nontradable to tradable production, and that the public sector is mainly nontradable, this result is not necessarily undesirable. But the evidence from these and other studies strongly suggests that the outcome has, in fact, been counterproductive from the point of view of achieving successful adjustment (as defined earlier in this chapter). It seems, first, that both the speed and extent of salary decline have been too great and, second, that in the publicsector too much attention has been focused upon reductions in the value of the real wage, and not enough has been given to restructuring the level of public employment. In the three cases examined here there was remarkably little reduction in the level or change in the structure of public employment throughout the 14

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years of salary decline. In none of the countries did public employment show signs of being reduced until the very end of the periods studied. In the case of Zimbabwe, employment in the public sector actually grew much faster than total employment throughout the 1980s increasing its share of total employment by 50 per cent over the decade. Even in Argentina, where the political pressures to expand the state provision of services were not so pressing as in post-independence Zimbabwe, the growth of employment in the public sector proceeded at a similar rate to that of formal employment as a whole. Thus, at least until 1990/91, governments in these, as in many other adjusting countries,14 had chosen to place almost the entire emphasis of fiscal restraint upon the reduction in the level of the real wage, rather than spreading it in a more balanced fashion between the number of people employed and their levels of pay.15 This is partly because governments have found it hard, for obvious political reasons, to make workers redundant. Where this did occur, it was often concentrated (as in Zambia) amongst daily paid employees, where redundancy costs were minimal, and where articulate opposition was least strong. It was not usually a product of a thorough audit of existing staffing levels aimed at identifying suplus or low-priority posts. Such audits are critically needed in many countries, where low wages have caused major productivity declines, and where non-salary recurrent support is too low to allow many public officers to carry out their jobs effectively. An equally interesting question concerns why it is that public sectors have not contracted as a result of the supply-side pressures caused by lower wages. There was some loss of the most skilled and experienced government workers to jobs in the private sector, which created particular problems in Zimbabwe and in Argentina. Yet, notwithstanding salary decline, those with jobs in the public sector have usually preferred to keep them rather than to leave for jobs elsewhere. This was partly because these economies suffer from high levels of unemployment and because public sector jobs, even at much lower levels of real wages, remained attractive, compared with the alternative of unemployment. But other factors were also at work. The first reason for this was that the real cost of public employment fell much less sharply than the real wage, owing to an increase in the number of allowances, and to a major increase in their relative value in total remuneration. For example, in the Zambian case, the value of housing benefits for most public officers, amounted, by 1991/92, to more than the value of the salaries they received. The retention of housing benefits by Zambian civil servants was one of the more important factors which slowed the attrition of skilled and professional workers to the private sector. In general, in each of the low-growth adjusters, real earnings from government jobs dropped less sharply than real salaries, and total earnings differentials between the public and private sectors also deteriorated more slowly than relative wages. 15

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Second, the extent of salary decline in the public sector was such that many employees were forced to find additional means of raising cash incomes. Standards of management and control in the public services of all three countries were undermined by the pressures which this implied. Public employees began to engage in a wide range of income-generating activities, whilst retaining their jobs in the public sector, with relative impunity. This led to an alarming increase in absenteeism as a result of officials conducting other work during office hours.16 In all three countries there was also increased incidence of trading activities within government premises, and of the use of public equipment—workshops, repair facilities, typewriters—in the conduct of private work. Corruption increased sharply, and a culture of bribes became established, particularly in the Zambian case. Accordingly, retaining a job in the public sector was, for most people, a more profitable strategy than taking up employment in the private sector, where systems of personnel management and control were in less disarray. By consequence, productivity in public service was deleteriously affected, in ways not anticipated by most packages of policy reform. Public employees spent less time doing their jobs, in order to supplement their incomes. Motivation was seriously undermined by the massively reduced rewards from work. Inefficiency was increased by a breakdown of management authority, and by the widespread incidence of corrupt practices. Thus the output of the government sector fell, whilst the incomes of those in its employ remained above the levels which their salaries would otherwise suggest. Here, then, there appears to have been a process of ‘informalization’ occurring within the public sector. The reduction in real wages and salaries paid by governments has proceeded to levels which, in some countries, appear to be well below the reservation wages of many categories of worker in their employ. However, the particular mix of job security and fringe benefits—particularly housing—which still attend public office, together with lax standards of discipline and management which tolerate additional income-earning activities amongst employees, have substantially reduced the supply-side outflow from public employment which would otherwise have occurred.17 The public sector has itself become a significant locus for the ‘black’ economy. In this distorted, and entirely unintended sense, then, there has been a shift of employees in the public-sector towards working in informal, and often in tradable, activities—but this shift has been additional to, rather than substituting for, their public sector roles. This implies that, although the pay objectives set by these adjusting governments have perhaps been achieved, the employment and output effects of these policies, partly because of their flawed design, and partly because of the ways in which they have been implemented, have fallen well short of their stated goals: economic reforms to enhance competitiveness, such as devaluation or trade liberalization, will do little to induce civil service reform; judged by the 16

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experience of these three countries, they may, indeed, set up pressures which tend to countermand it. Civil service reform in Africa and Latin America requires the resolution of at least three important structural issues: first the question of the appropriate balance between wage and non-wage recurrent spending; second, the question of how many civil servants are required to meet the objectives of the government, at given levels of skill and pay; third, the need to develop a total compensation package that is conducive of good performance (Schiller, 1988, p.3). The difficult matter of making progress on all these fronts is likely to be further complicated if attempted within a macro setting of severe and unstructured real salary decline within the public service. Thus, the design of civil service reform packages needs to be completed alongside, or even prior to that of other adjustment measures. Their later introduction will be more difficult, and the belief that they will emerge as an automatic correlate of the general adjustment process is likely to prove seriously wrong. CONCLUSIONS Amongst the low-growth adjusting countries, Argentina and Zambia provide classic examples of countries following models of development which have been heavily criticized by neo-liberals. Over many years, resources earned by the export sector were transferred to the urban economy by highly interventionist governments. One result of these policies was a system of incentives which favoured the production of goods for the domestic market at prices which, protected by high tariff barriers and over-valued exchange rates, could not be competitive internationally. Zimbabwe, too, stagnated over much of the 1980s, although the genesis of that country’s problems was rather more to do with the impact of drought, international recession, and very large increases in public expenditure in the immediate postindependence years, than to the more structural problems faced by the other two countries. The speed and nature of response to economic crisis made by the governments in these countries varied sharply. However, each of them introduced elements of the orthodox adjustment package, particularly over the second half of the 1980s and early 1990s. These included fiscal and monetary measures to reduce domestic demand, devaluation, and the introduction of measures to reduce public expenditure. In each country wages fell substantially, particularly so for those in more senior jobs. Public-sector pay fell more sharply than elsewhere in the formal sector—often with disastrous effects upon the productivity of civil servants. Public employment, on the other hand, remained broadly unchanged or even increased. These experiences demonstrate that sharp downward flexibility in the real wage can certainly be achieved, and they are at least consistent with 17

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the view that relative wages as between the non-tradables and tradables sectors also fell: thus, institutional rigidities in the labour market are not so pronounced as to confound the adjustment process. However, they also show that the speed and extent of wage decline imposed by an entirely marketdetermined approach can often be counter-productive. Wages, under these circumstances, can fall too far and too fast to be able to sustain important parts of the production structure. Particularly in the public sector the efficiency wages hypothesis, which states that wages and productivity are positively correlated and endogenously determined, appears to be relevant. If employees react to lower pay by working less hard, or by spending less time in their main job in order to earn other income, the effects of salary decline can be negative. At very low levels of wages, or when wage decline has been particularly sharp, these effects can be magnified, since the perceived need to protect earlier standards will be the more urgent. The theories of labour market response to structural adjustment assume that the productivity of labour is largely unaffected by relative income decline. The evidence from the case studies presented here raises serious questions about the validity of that assumption. One of the main lessons afforded by the experience of the high-growth adjusters is that they adopted a strongly interventionist approach to the labour market. Wages were one of the key strategic targets for government policy. Both Singapore and the Republic of Korea experienced large increases in real earnings during the 1980s. The Government of the Republic of Korea initially resisted wage inflation, in order to remain competitive in the older export industries. One strategy used was to disguise the extent of public-sector pay increases by shifting more of the increments to allowances, whilst using ‘moral persuasion’ to inhibit wage increases in the private sector. Although this strategy worked reasonably well under authoritarianism, it became much less effective as the economy opened up. In Singapore, on the other hand, wage increases were welcomed and, indeed, promoted by the Government— in contrast to its earlier low-wage approach of the 1970s—as a means of changing the country’s comparative advantage towards more high-technology, capital-intensive, skill-based export production. The civil service, already small, was reduced further in size; its skill structure was shifted sharply upwards; wages rose, pay differentials increased, and public-sector salaries attained a significant premium in comparison with those for similar jobs in the private sector. Thus, contrary to the conventional wisdom, far from their pursuing a ‘hands-off’, market-determined approach, governments in the high-growth adjusting countries deliberately promoted both low-wage, labour-intensive and high-wage, skill-intensive development strategies at different times. It is important to note that the nature of these interventions was different to those made in many other countries. In particular, they were better timed, better planned and their effects were more strategically sensitive to market 18

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circumstances, and to the development path selected and promoted by these and other government policies, than was typically the case elsewhere. The general desirability of this type of intervention, rather than of an entirely short-term, market-determined approach, seems clear on the basis of the evidence in this book. In that sense the lessons from the experience of the high-growth adjusters have often been misinterpreted, with consequent negative implications for adjustment policies in the poorer countries, as these have so far been pursued. NOTES 1 This is a major area of current debate, and the balance of available empirical evidence cannot be taken to support the neo-liberal case. A review and assessment is given in Colclough (1991 a). 2 The real product wage (RPW) is defined as the wage paid by an employer to his employees expressed in terms of the value of his product. It is measured by deflating the nominal wage by the unit price of the product. Thus, if nominal wages remain constant as output prices rise, the real product wage falls. Reductions in the real product wage imply—ceteris paribus—increased profitability of production in the sectors concerned. This, therefore, is the most useful of the various ‘real wage’ concepts, if our main interest lies with the demand side relationship between wages and employment. The real consumption wage, on the other hand (i.e. the wage deflated by an index of consumer prices), is of most interest for analysis of the supply side of the labour market (e.g. how the wage level affects workers’ participation). 3 See Addison and Demery (1993) for a formal presentation of this result. 4 Unlike Latin America, for example, African agricultural products—the mainstay of tradables production in both cases—are predominantly produced by family farmers, and small-scale manufacturing and services remain in their infancy. 5 See also Streeten (1987, pp. 1476–1477) on the limitations of two-sector models in this context. 6 This, in turn, would be likely to be influenced mainly by the fiscal and monetary instruments in the adjustment package rather than the exchange rate. 7 Note that Pt/Pn provides one definition of the real exchange rate (Edwards, 1989). A restoration of the original price ratio between traded and non-traded goods would imply that the attempt to change the real exchange rate via devaluation had failed. In order to support the downward movement of real wages, and of Pn/Pt, demand management policies such as reduced public expenditures and tighter credit controls are usually advocated (Fallon and Riveros, 1989, p. 11). 8 On these latter points, see Johnson and Salop (1980) and Knight (1976). 9 Examples of such strong advocacy can be found in Buchanan et al. (1980). See also Findlay (1989) and, for a critique, Toye (1991). 10 For a brief review of efficiency wage theories, and of their possible relevance to the adjustment debate, see Riveros and Bouton (1994). 11 The generalizations in this paragraph are based on data shown in Colclough (1991b, table 2). The extent of salary decline, for different periods ending in the mid/late 1980s, has also been documented for more than 20 countries in Africa by Lindauer et al. (1988), Robinson (1990) and Jamal and Weeks (1993). 12 The countries are Botswana, Gambia, Ghana, Kenya, Malawi, Nigeria, Senegal, Sierra Leone, the Sudan, Uganda and Zambia. Botswana is an exception to the 19

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13 14 15 16

17

general trend in that it alone experienced rapid per capita income growth over the 1975–85 period. However, during this time the real earnings of unskilled workers remained roughly unchanged, whilst those of senior government officials fell by around 7 per cent. Here too, then, differentials within the civil service narrowed. Data are from Colclough (1991b, table 3), and Lindauer et al. (1988, table 3). A forcefully put example of the following argument can be found in World Bank (1993, pp.261–273). For other evidence from 14 African countries, which supports this statement, see Harris et al. (1987). More recently, in 1991/92, there was evidence that the Governments of both Argentina and Zambia had become more determined to reduce the levels of public employment, but the effects of these policies had still to be revealed. This phenomenon is sometimes called ‘daylighting’, in contrast to ‘moonlighting’, which refers to additional work conducted outside office hours. For a useful account of the prevalence of these and other income-earning strategies in the Ugandan public service, see Chew (1990). For a demonstration that the incidence of moonlighting increases with the size of the private/public wage differential for public-sector workers in Côte d’Ivoire and Peru, see van der Gaag, Stelcner and Vijverberg (1989). Van der Gaag et al. (1989) report similar conclusions for Côte d’Ivoire and Peru.

REFERENCES Addison, T. and Demery, L. (1993) ‘Labour markets, poverty and adjustment’, in Journal of International Development, 5/2, pp.135–143. Bates, R. (1981) Markets and states in tropical Africa (Berkeley, California, University of California Press). Bruno, M. (1976) ‘The two-sector open economy and the real exchange rate’, in American Economic Review, Sept. Buchanan, J., Tollison, R. and Tullock, G. (eds) (1980) Towards a theory of the rentseeking society (College Station, Texas, Texas University Press). Chenery, H. and Syrquin, M. (1975) Patterns of development 1950–1970 (Oxford, Oxford University Press for the World Bank). Chew, D. (1990) ‘Internal adjustments to falling civil service salaries: Insights from Uganda’, in World Development, 18/7, pp.1003–1014. Colclough, C. (1991a) ‘Structuralism versus neo-liberalism: An introduction’, in Colclough and Manor (1991) pp. 1–25, op. cit. ——(1991b) ‘Wage flexibility in sub-Saharan Africa: Trends and explanations’, in Standing and Tokman (1991) pp.211–232, op. cit. ——and Manor, J. (eds) (1991) States or markets? Neo-liberalism and the development policy debate (Oxford, Clarendon Press). Corden, M. (1977) Inflation, exchange rates and the world economy: Lectures on international monetary economics (Chicago, Illinois, University of Chicago Press). Demery, L. and Addison, T. (1987) ‘Stabilization policy and income distribution in developing countries’, in World Development, 15/12, pp.1483–1498. Edwards, S. (1989) Real exchange rates, devaluation and adjustment: Exchange rate policy in developing countries (Cambridge, Massachusetts, MIT Press). Fallon, P. and Riveros, L. (1989) Adjustment and the labour market, PPR Working Papers (WPS 214) (Washington, D.C., World Bank). Findlay, R. (1989) Is the new political economy relevant to developing countries?, PPR Working Papers (WPS 292) (Washington, D.C., World Bank). 20

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Freeman, R. (1992) Labour market institutions and policies: Help or hindrance to economic development?, Paper presented at the World Bank’s Annual Conference on Development Economics (Washington, DC, April, mimeo). Harris, J. et al. (1987) Experiments in wage-bill containment in Africa (Washington, D.C., World Bank, mimeo.) Jamal, V. and Weeks, J. (1993) Africa misunderstood, or whatever happened to the rural-urban gap? (Basingstoke, Macmillan for the ILO). Johnson, O. and Salop, J. (1980) ‘Distributional aspects of stabilization programmes in developing countries’, IMF Staff Papers, 27/1, pp.1–23. Jorgenson, D.W. (1961) ‘The development of a dual economy’, in Economic Journal, 71, pp.309–334. Knight, J. (1976) ‘Devaluation and income distribution in less-developed countries’, in Oxford Economic Papers, 28/2, pp.200–227. Lewis, W.A. (1954) ‘Economic development with unlimited supplies of labour’, in Manchester School, 22, pp.131–191. Lindauer, D., Meesook, O. and Suebsaeng, P. (1988) ‘Government wage policy in Africa: Some findings and policy issues’, in Research Observer, World Bank/ Washington, D.C., 3/1, Jan., pp. 1–24, Ranis, G. and Fei, J. (1961) ‘A theory of economic development’, in American Economic Review, 51/4, pp.533–565. Robinson, D. (1990) Civil service pay in Africa (Geneva, ILO). Riveros, L. and Bouton, L. (1994) ‘Common elements of efficiency wage theories: What relevance for developing countries?’, in Journal of Development Studies, 30/3, pp.696–716. Schiller, C. (1988) Government pay policies and structural adjustment, IMF Working Paper WP/88/73 (Washington, D.C., Aug.). Standing, G. and Tokman, V. (1991) Towards social adjustment: Labour market issues in structural adjustment (Geneva, ILO). Streeten, P. (1987) ‘Structural adjustment: A survey of the issues and options’, in World Development, 15/12, pp.1469–1482. Todaro, M. (1969) ‘A model of labour migration and urban unemployment in less developed countries’, in American Economic Review, 59/1, pp.138–148. Toye, J. (1991) ‘Is there a new political economy of development?’, in Colclough and Manor (1991, pp.321–338), op. cit. van der Gaag, J., Stelcner, M. and Vijverberg, W. (1989) ‘Wage differentials and moonlighting by civil servants: Evidence from Côte d’Ivoire and Peru’, in World Bank Economic Review, 3/1, pp.67–95. World Bank (1981) Accelerated development in sub-Saharan Africa: An agenda for action (Washington, D.C.). ——(1993) The East Asian miracle: Economic growth and public policy (New York, Oxford University Press for the World Bank).

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2

ECONOMIC RESTRUCTURING AND FLEXIBLE CIVIL SERVICE PAY IN SINGAPORE David C.E.Chew

INTRODUCTION Singapore has been a spectacularly successful economy over the past 30 years. Explanations for this record, however, have often tended to emphasize the role of unfettered market forces in shaping the pattern of industrialization and to underestimate the extent to which the Government has been directly instrumental in engineering this success. This case study argues that the quality of the civil service has been critical to these achievements—made possible by a highly instrumental approach to employment and salary policy in the public sector. Wages policy was also used as an important means of changing the economic incentives facing private industry, thereby affecting the long-term comparative advantage of the island state in ways which were to prove highly advantageous for growth and development. THE PUBLIC SECTOR IN SINGAPORE

Nature, role, structure and size of the civil service Singapore was founded in 1819 by Sir Stamford Raffles, an employee of the East India Company. The origins of the civil service in Singapore are traceable to the core of civilian officers brought by Raffles to administer the island for the benefit of the East India Company. Two administrative posts were immediately created, those of Resident and Master-Attendant. The first was responsible for general administration of the territory and the second for the regulation of the conditions of shipping and trade (Seah Chee Meow, 1985, p.95). Their early creation followed from the purpose for which Singapore was being founded, i.e. to be an outpost for furthering British commercial and political interests in the region. Singapore was joined 22

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with Penang and Malacca, to become the Straits Settlements in 1826. Later, in 1867, the island became a crown colony directly under the British Colonial Office. From that time (except for the years 1942–45 when Singapore was occupied by the Japanese), until June 1959, when Singapore became a selfgoverning state, the colonial administration’s main objectives were the protection of the commercial interests of Great Britain and the maintenance of law and order. After June 1959 came self-government, a subsequent merger with Malaya, Sabah and Sarawak within Malaysia in 1963 and, finally, separate independence in 1965. During the intervening years, the responsibilities of the civil service have, therefore, increased dramatically. A new nation was built from a populace composed of multiple races, languages and religions. Education, health and other services expanded and improved to meet the rising demands of the citizens. The conduct of foreign affairs and the defence of the country, which before independence had been discharged by the British and Malaysian Governments, were now the responsibility of the Government of Singapore and its employees. Singapore’s economy during the colonial period had been based on entrepôt trade, i.e. the import, by Singapore, of goods from Europe which were then re-exported to neighbouring countries in exchange for regional produce which was re-exported to Europe. The new government, after 1959, sought a more balanced trading, financial and manufacturing mix. An initial import substitution phase (i.e. the local manufacture of goods previously imported) changed to one of export promotion after separation from Malaysia in 1965 and the consequent loss (for Singapore) of the Malaysian common market. More recently, from around 1979, labour-intensive, lowproductivity, low-value-added economic activities were discouraged, in favour of processes with higher levels of associated technology, productivity and value added. In Singapore, employees of state enterprises are not civil servants. Neither are personnel of statutory boards. Academic staff of the two state universities, established by statutes, are not civil servants, unlike their counterparts in neighbouring countries. A statutory board in Singapore is a body established by an Act of Parliament, which is separate from the civil service and does not enjoy the legal privileges and immunities of the latter. This disadvantage is offset, however, by the greater administrative and financial autonomy accorded statutory bodies in the discharge of their functions. Respecting national practice, the civil service in this study excludes statutory boards and, a fortiori, government-owned enterprises. The terms civil service and public service are used synonymously. The legal basis of the Civil Service of Singapore is found in Part IV of the Constitution of Singapore, Articles 70–81. Article 71 states that the phrase ‘public office’ shall not include any office occupied by a person whose remuneration is calculated on a daily basis. Article 73 specifies the size and 23

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composition of the Public Service Commission (PSC), and Article 78 identifies its functions. The PSC appoints, confirms and places the permanent or pensionable establishment, and promotes, transfers, dismisses and exercises disciplinary control over all public officers except officers under the purview of the Legal Service Commission, the Education Service Commission and the Police and Civil Defence Services Commission, which, respectively, are in charge of personnel affairs within their own departments. In addition, between 1972 and 1980, the Personnel Administration Branch of the budget division in the Ministry of Finance was responsible for the classification of jobs in the civil service, and for terms and conditions of service. The Public Services Division (PSD) in the Finance Ministry was formed in January 1983. It took over all the functions previously discharged by the Personnel Administration Branch and was additionally charged with formulating and reviewing personnel policies for the civil service and ensuring that the personnel practices of ministries were consistent with those policies. The functions of personnel management were now shared between the PSD and the PSC, and to a lesser extent, the three occupational commissions. To enhance coordination between the two principle personnel agencies, the Deputy Secretary of the PSD served also as the PSC Secretary (Quah, 1986, pp.244–245). Flowing from the modest size of the island state, the distinctions between central, regional and lower levels of government are irrelevant for Singapore. Governance is at one, central level. Within the central government, the 1980s saw some delegation downwards of the authority of the PSC to permanent secretaries, the non-political heads of ministries (Teo Hee Lian, 1985, p.320). Prior to 1983, recruitment was the responsibility of the PSC alone. In 1983, permanent secretaries were delegated authority to recruit individuals to Division IV posts, which entail manual or repetitive work, in their own ministries. Subsequently, permanent secretaries were empowered to recruit temporary employees, re-employ some grades of retired civil servants and mete out disciplinary action against persons who had committed minor offences. In 1990, they were authorized to promote employees within Division IV grades and to offer the first promotion to staff in the clerical service. In 1992, the authority to promote was extended to the first promotion of new entrants in 41 services, a service being a group of posts associated with one type of work and with its own structure of grades and rules for recruitment and promotion to the higher grades. It has been suggested that permanent secretaries will be permitted to recruit Division III officers who are not graduates, such as stenographers, for their own ministries.1 The aim in devolving authority to permanent secretaries was to strengthen ties between civil servants and their ministries. Promotions granted by permanent secretaries would bring the reward system closer to 24

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the individual ministry. It would also allow the PSC to devote more time to higher-level promotions. The civil service in Singapore is small by international standards. The number of public servants was estimated at 61,650 (excluding 53,000 dailypaid employees) in June 1991, compared to a total labour force of 1,554,300 at that time (Ministry of Labour, 1991, p.3). Thus, civil servants comprised only 4.0 per cent of the labour force (almost all of which is engaged in nonagricultural employment). This compares with shares of non-agricultural employment accounted for by public employees of 12.0 per cent in Bangladesh in 1985 (central government employment only), 50.6 per cent in India in 1985 (employment in central, state and local governments), 11.9 per cent in Pakistan in 1983 (all levels of government) and 25.5 per cent in 1981 in Sri Lanka (central government alone) (Chew, 1992, table 2.8). It can be seen from Table 2.1 that the wage bill for the civil service (salaries, allowances and contributions to employees’ provident fund) absorb about 19 per cent of recurrent expenditure and 13 per cent of total expenditure. The wage bill for the government as a whole (i.e. including daily rated employees and other non-civil servants) accounted for about 20 per cent of recurrent and 14 per cent of total expenditure in 1992/93. Table 2.1 Singapore: public wage bill, financial year 1992/93*

Source: Calculated from Republic of Singapore: The Budget for the Financial Year 1991/92 (Singapore, 1991, pp.9 and 57). Notes: *Estimated. The financial year runs from April to March. † The wage bill of the government includes, in addition to that for the civil service, the personal emoluments of government ministers and other political appointees, of daily rated employees, of staff of some statutory bodies and a few other, numerically small staff categories.

In many developing countries during the 1970s and 1980s, the heavy share of the government wage bill in current expenditure put a squeeze on other types of recurrent support which, in turn, generated inefficiencies in the delivery of government services. School teachers were constrained in their effectiveness by the lack of teaching materials and supplies. Research personnel could not conduct field work, and inspectors and extension workers could 25

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not reach their target groups for lack of means of transport. The ratio of personnel emoluments to other operating expenditure rose in sub-Saharan Africa from 1.8 in 1980 to 3.9 in 1987 (Starr, 1988, appendix table 11). In Singapore, the corresponding ratio was 0.5 in 1992/93. Thus, this type of technical inefficiency, arising from an imbalanced input mix, which affected many sub-Saharan African countries was mostly absent in Singapore. Recruitment and promotion in the Singapore Civil Service are based on merit. To be eligible for appointment, a candidate must satisfy criteria pertaining to citizenship, age, education, experience, medical fitness and character (no criminal conviction, no record of corruption and not a security risk). Amongst this list, academic qualifications play a key role in assessing the suitability of candidates. As regards promotion, past and estimated potential performance of employees are crucial criteria. Patronage and political credentials play no role in recruitment. There exists a close working relationship between the civil service and its political masters. This was not always the case. The period 1957 to 1959 saw expatriate officers in key positions in the civil service being replaced by local officers. In the words of George Bogaars, a past Head of the Singapore Civil Service: During this time local civil servants who were being groomed to take over from their colonial masters found themselves meeting face to face with the new political leaders who were appearing in the legislative and other political organisations. The positions these local senior civil servants were filling caused them to come into direct conflict with the local politicians since as civil servants they were implementing the policy of their masters at Whitehall. (Bogaars, 1973, p.78) When the People’s Action Party (PAP) assumed power in June 1959, the newly elected government found the inherited public bureaucracy deficient on two counts: the civil servants had a colonial mentality and were insensitive to the needs of the general populace, and they were both hostile to and afraid of the PAP. The PAP Government, which retained power thereafter, felt that it was necessary to change the mentality of civil servants if its agenda were to be successfully implemented. A Political Study Centre was established which offered courses and seminars for senior civil servants with a view to reorienting their attitudes. Other reorientation measures included voluntary weekend participation in mass civic projects (e.g. cleaning beaches) by government employees; recruitment of Chinese-educated graduates to reduce the predominance of English-educated graduates in the public service; tougher disciplinary measures against civil servants found guilty of misbehaviour; and selective retention of competent senior officials due for retirement, together with premature retirement of incompetent senior officials (Quah, 1984, p.294). 26

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By the mid–1960s, the public bureaucracy was much more responsive to the needs of the political leadership. One factor making for a close relationship between the civil service and the ruling leadership was the idea of a meritocracy, which struck a responsive chord amongst government employees (Seah, 1985, p. 101). One manifestation of the close relationship which has existed between civil servants and their political masters is the induction over the last two decades of a number of ‘high flyers’ from the civil service into politics, as Members of Parliament belonging to the PAP, and as Government Ministers. A prominent example is the Prime Minister, Goh Chok Tong, who started his working life as an administrative officer in the public service. Human resources The principal responsibility for policy formulation in respect of human resource management lies with the PSD. That department formulates policies on personnel matters such as schemes of service, employee appraisal, posting, training and career development, industrial relations, retirement and superannuation benefits. Appointment, promotion and disciplinary control, on the other hand, rest with the PSC, which, as we have seen, has delegated some of its authority to permanent secretaries. Staff associations and unions of civil servants are typically involved only in minor ways in decisions on employment, promotion or retirement. Such decisions are made, almost unilaterally, by the employer. Unions and staff associations can, however, discuss with the employer the criteria and procedures used in exercising its managerial prerogatives, and changes to the criteria and procedures can be suggested. The union can also refer to the PSD a perceived anomaly in the treatment of a worker or group of workers. If the dispute is not resolved through negotiation, it may be referred to the Industrial Arbitration Court for settlement. The civil service does not rely on formal work study to establish staffing levels. Justification by requesting departments for additional staff proceeds along less formal lines, such as historical work standards within the requesting units, the staffing complement for broadly similar work in other departments, or a rough calculation, where possible, of the amount of work to be expected from an employee per period of time. The request for more staff is vetted by the Budget Division of the Ministry of Finance, which has to give its approval. Grades in the civil service are classified under four divisions based on broad levels of work and educational requirements. Division I includes the generalist administrative and professional grades and requires at least a good honours (upper second) degree from a reputable university. Division II includes the executive2 and supervisory grades and requires at least an Advanced Level General Certificate of Education. Clerical, technical and other support grades 27

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are to be found in Division III with an educational prerequisite of a General Certificate of Education. Workers engaged in manual or low-level, routine work (e.g. office attendants) are placed in Division IV. As indicated earlier, the government also employs manual workers on a daily paid basis (who are not civil servants). Total employment in the public service and its breakdown by division, for selected years from 1977–92, are given in Table 2.2. The statistics for 1977 are not strictly comparable with those from 1979 onwards, because the former excludes government employees in government-aided schools. However, compared with 1979, the average annual growth rate of total civil service employment to January 1992 was negative (–0.8 per cent). This mainly reflected the fact that the Government had decided, in 1986, to reduce its workforce by 10 per cent over the following quinquennium. The target was to be achieved via the rationalization of departmental functions, streamlining of procedures, intensification of automation and computerization, and privatization or contracting out of some work previously performed by the civil service. The Ministry of Finance requested the public service and statutory boards to establish manpower scrutiny teams to review activities carried out by their respective organizations with a view to improving manpower utilization and reducing staffing levels. Each team would assess whether activities were necessary in the first place, and, if necessary, whether they could be undertaken with fewer staff. As a result of these initiatives, the growth rate of total employment between January 1986 and December 1991 averaged –2.1 per cent annually. There were no recruitment freezes, but hiring policies became more closely influenced by seeking replacements only for the attrition of necessary personnel. Accordingly, the bureaucracy, already lean by 1977, became even leaner over the next 15 years. In many other developing countries, civil service employment grew rapidly in the 1970s and much of the 1980s. Governments everywhere perform a dual role in relation to the public service—as employer and as manager of the economy. As employer, they have to decide on the number and kind of employees needed for proper provision of the quantity and quality of government services they wish to supply. As manager of the economy, their responsibility for macroeconomic management led to substantial expansion of the government workforce. Some growth in employment was to be expected as independent countries sought to improve and expand their economic and social infrastructures and services. But in many, confronted with growing numbers of unemployed and underemployed citizens, governments expanded their bureaucracies so as to mop up the surplus labour. They became the employers of last resort. Numbers employed then became increasingly divorced from numbers required from the perspective of the government as employer. The fragmentary evidence from other developing countries is that employment creation in the public 28

Source: Republic of Singapore: Singapore Facts and Pictures, various years. Notes: 1977 refers to all employees except daily-rated workers and teachers in government-aided schools; 1979 and subsequent years refer to all employees except daily-rated workers. Percentages for 1979 do not add to 100.0 because of rounding. All data are for 1 January for each year shown.

Table 2.2 Singapore: employment in the civil service, selected years, 1977–92

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bureaucracy was skewed towards manual, low-skilled employees.3 Their annual rate of growth tended to be higher than that of the public workforce as a whole. The experience of Singapore in this respect too was different. Table 2.2 shows the structure of these employment changes. The shares of Divisions II and III officers in total government employment changed only marginally between January 1979 and January 1992. It was the poorly skilled employees of Division IV who experienced deep cuts in their ranks. Their annual rate of decrease far exceeded that of the total workforce during 1979–91. Furthermore, the employment of daily-rated, manual workers was virtually halved, from 10,100 in November 1983 to 5,300 in financial year 1991/92.4 At the same time, the generalist administrators and professionals in Division I saw their numbers rise by 70 per cent between January 1979 and January 1992. As a result of these changes, the average level of education and expertise in the civil service rose. Whilst the exact proportion has not been released, the Government reports that women formed slightly more than half of the civil service workforce in 1992. It would seem, however, that the share of females in the civil service workforce has declined over the last few years. Women comprised 70 per cent of the total number of candidates selected for appointment to Divisions I to III posts in 1987. But this proportion steadily fell to 63 per cent, 59 per cent and 55 per cent, respectively, over the following three years (Public Service Commission, 1991, p.11, and 1992, p.11). As elsewhere, women workers dominate the teaching, paramedical and clerical grades. They are poorly represented in the top grades (permanent secretaries, deputy secretaries, and their equivalents). The highest ranking female officer in July 1992 was a deputy secretary newly promoted to superscale grade D.5 The civil service has still to appoint its first female permanent secretary. The overwhelming majority of civil servants are employed on a permanent basis. In 1990/91, the bureaucracy employed 55,160 permanent staff, as against 526 temporary and relief staff (Republic of Singapore, 1992), the latter having remained roughly unchanged throughout the 1980s.6 No data have been released on retirements and deaths within the public service. All organizations have to expect some resignations. However, the rates of resignation amongst four categories of civil servants—the administrative service, engineers, doctors and lawyers—were sufficiently high in 1980 and 1981 to cause the PSC some concern. Particularly worrying was the fact that many of those who resigned were either senior, experienced officers or the best of the younger officers, the scholarship holders. It was widely believed that these staff had resigned for higher salaries and faster advancement in the private sector.7 Civil service salaries were raised in 1982, which subsequently helped to reduce the pace of resignations. Pockets of skill shortages exist in the bureaucracy, but they have been concentrated in a few 30

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professions—health, personnel, paramedics and secondary school teachers— and have been of relatively minor significance. RESTRUCTURING THE ECONOMY AND THE LABOUR MARKET The structural adjustment programmes for developing countries associated with the World Bank and the International Monetary Fund were initiated in response to persistent deficits in the government budget and in the balance of payments in those countries. Neither of these imbalances has afflicted the Singapore economy over the last 15 years. Government revenue has consistently exceeded the sum of its current and development expenditure. On the external front, the annual deficits in trade and in merchandise have been more than covered by the annual surpluses in trade and services and capital inflows, resulting in annual surpluses on the balance of payments. The consequences have been a strong Singapore dollar and a level of foreign reserves per capita which is the highest in the world. Nevertheless, the period under consideration witnessed significant structural change in the Singapore economy. Beginning in 1979, government policy explicitly aimed to restructure the economy away from labourintensive, low-skill, low-productivity activities towards capital-and knowledge-intensive, high-productivity and high-value-added operations. Several factors led to this change in strategy. First, by the mid–1970s, the economy was experiencing labour shortages. Economic growth could no longer be based, as in the past, on quantitative additions to the local labour force. Some recourse could be made to foreign workers—and inflows of migrant labour were indeed rising—but there was a limit to the number of such workers a small island state could absorb. With labour likely to remain scarce in future, economic growth could be sustained only if labour were employed in higher-technology, capital-intensive operations which would yield greater output per worker. Second, increased protectionism in the industrialized world, which discriminated against the import of labourintensive manufactured goods, cast doubts on the advisability of Singapore continuing to rely on the export of such products. Third, labour-intensive manufacturing in Singapore would face growing competition from other newly industrializing and developing countries, especially in Asia, many of which had lower costs and larger workforces. Accordingly, labour-intensive operations yielding low value added were encouraged to relocate to neighbouring countries. Remaining firms were urged to mechanize, automate and computerize. Foreign investors in knowledge-and skill-based activities were encouraged to establish plants in Singapore. Wage policy played a prominent role in this process of restructuring. A National Wages Council (NWC) had been formed in 1972, composed of a 31

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chairman (most recently an academic) and high-level representatives from labour, management and government. During 1972–85, the NWC recommended significant annual wage increases for the economy. Although the recommendations were in the nature of guidelines, they were widely followed and implemented. The wage increase guidelines for 1979–81 were deliberately generous—in the range of 7 to 12 per cent for each year8—and were meant to raise capital intensity and labour productivity. At the same time, the employer’s mandatory monthly contribution to an individual employee’s account in the Central Provident Fund was raised from 16.5 per cent of monthly salary in 1978 to 20.5 per cent during 1979–81. The resulting higher labour costs encouraged some low-wage, labour-intensive forms to move overseas, and the released labour was redeployed and retrained for more productive work. Other firms began to economize on increasingly costly and scarce labour through the use of higher technology, allowing substitution of capital for labour. One study estimated that capital stock per worker increased by about 2.2 to 3.3 percentage points per year during the period 1980–84. The average annual growth rate of real labour productivity rose from 3.2 per cent during 1975–79 to 4.9 per cent in 1980–84 (Lee (Tsao) Yuan, 1987, pp. 192–194). Economic restructuring was retained as a major policy objective of the government. Restructuring had important implications for the public bureaucracy. To begin with, the labour shortage, which lay at the heart of the adjustment process, dictated that government should economize on the use of scarce labour. Structural change accentuated the need for a lean civil service so that manpower would be more readily available for the private sector. Second, in order to economize in its use of labour, and to be credible in its call to private firms to upgrade themselves technologically, the Government intensified automation and computerization within the public service. Third, while recognizing that one more employee in the public sector represented one less individual for the private sector, the Government was also conscious that it must pay competitive salaries to recruit and retain the civil servants it wanted. A high-wage policy for the private sector meant high wages for civil servants too. Restructuring, with its emphasis on raising the productivity of the labour input, influenced the perception of the Government with respect to its role as employer. In April 1982, the Government announced its intention to introduce fundamental changes to the personnel management philosophy of the civil service. This followed studies of several personnel management systems, including those of the petroleum multinational company, Shell, and of the civil services of France and Japan. The system used by Shell impressed the Government greatly. The essence of the new philosophy was that management in the civil service should be employee-centred, as against the task-oriented approach of the past, and should offer the employee the opportunity to develop his or her full potential while nurturing a sense of commitment to the public 32

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service. The Government stressed that the philosophy was not adopted out of altruism or benevolence. The underlying rationale was, as far as possible, to meet the needs of employees while taking into consideration those of the public service, and ultimately to enable staff to contribute more to the State. The new approach was believed to be necessary if the public service were to attract and retain its fair share of talent (Republic of Singapore, 1982, pp. 1– 2). In order to facilitate these changes in the personnel management philosophy a 12-member Personnel Management Steering Committee was created, which was to pay special attention to recruitment, training, career development, succession planning and matching the right person with the right job. It requested the Management Services Department, Ministry of Finance, to review the role and functions of the PSC and the Personnel Administration Branch of the Budget Division to see if the direction and control of personnel policies could be improved. While there had been consultations between the PSC and the Public Administration Branch, the Management Services Department found that their sharing of personnel functions had resulted in an ambiguous definition of their respective roles, functions and authority, in divided policy directives and responsibilities, in the duplication of work, in inadequate coordination, and in an inefficient use of manpower. To remedy the situation, the functions of the two bodies were redistributed and a new department, the Public Services Division within the Finance Ministry, was created (Quah, 1991, pp.94–95). The steering committee supported reforms which would allow managers to have more say in certain personnel actions. Among these reforms were that permanent secretaries would have greater delegated authority for the appointment of certain categories of personnel. More emphasis was placed on in-service training, and major changes were made to the system of staff appraisal (Teo, 1985, pp.320–321).

PAY SYSTEMS Basic salary structures and their determination Prior to 1986, the NWC played an important role in determining the salary levels of civil servants. Although the committee’s first wage increase guideline, in 1972, was meant for the private sector alone, those for 1973–85 covered both the private and public sectors. The committee’s guidelines were consistently accepted by the Government for its own employees. An exception, however, occurred in 1985, which turned out to be a recessionary year. The NWC guideline, announced before it was made known that economic growth had fallen to zero in the second quarter of 1985, had been fixed at 3–7 per cent. The Government then announced that zero or negative economic growth 33

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was expected for the year as a whole, and that wage restraint would be needed. In response, unions in both the private and public sectors agreed voluntarily to forgo their NWC wage increase for 1985. A civil servant is appointed to a grade, for which there is a corresponding salary scale or salary point. Civil service salaries, during 1973–84, were adjusted annually in line with the recommendations of the NWC. The NWC increase for the year was offset against the average increment payable under existing salary scales for the public service as a whole. The balance, after offsetting, was paid separately as a monthly allowance. Since the monthly allowances grew with each succeeding year, they were consolidated into basic salaries in 1977 and again in 1982. The NWC ceased issuing quantitative wage guidelines in 1986. A Task Force on Public Sector Wage Reform was appointed by the Government in December of that year. It proposed a flexible wage system for the public sector, and suggested that future wage increases (on top of salary increments) be given as a mid-year or year-end variable bonus (Task Force on Public Sector Wage Reform, 1987, p.12). All of its recommendations were implemented by the Government as from 1 July 1988. The variable bonus scheme is discussed in greater detail later in this study. Here, it may be noted that its introduction raised the importance of the Budget Division and the PSD of the Finance Ministry in the determination of pay increases for the bureaucracy. In Singapore, as in many other countries, the executive arm of the Government determines the general salary revisions for civil servants. It could be argued, however, that during the period when the NWC was issuing quantitative wage guidelines, the tripartite deliberations within the NWC represented a mild form of collective bargaining. Civil service unions participated in these deliberations. They were able to comment on the Government’s assessment of the economic outlook, and to present and defend their own views. As we have seen, over 1973–84, the NWC guidelines were invariably accepted by the Government; they were usually liberal and had not been the object of complaints from civil service unions. Civil service unions in Singapore may discuss with the employer the principles underlying the determination of basic salaries and allowances. They can raise as a dispute, to be resolved through negotiation with the employer, anomalies affecting the remuneration of a civil servant or group of civil servants. They can also submit proposals for specific changes to existing terms and conditions of employment, react to proposals from the employer and discuss with the latter the issues raised. If a dispute remains unresolved after negotiations, it normally goes to the Ministry of Labour for conciliation. If agreement is still not possible, the parties singly or jointly can refer the dispute to the Industrial Arbitration Court for arbitration, subject to the approval of the President of the Republic. Should the President withhold his consent, however, the Industrial Arbitration 34

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Court cannot arbitrate on the dispute (Republic of Singapore, 1985, Chapter 136, sec. 33). The approval of the President is not required for disputes pertaining to the private sector. All civil service jobs are divided amongst four divisions on the basis of very broad orders of work and educational qualifications. There is further disaggregation into personnel groups, based on the type of work performed. The administrative, medical, nursing, executive and clerical personnel groups are examples. Each personnel group is divided into a single recruitment grade and one or more promotional grades. Thus, the clerical group has four grades (clerical officer grade B, clerical officer grade A, higher clerical officer and senior clerical officer), the executive group five, the nursing group 11 and the administrative group 18. The grades of a group reflect in a rough and commonsensical manner different levels of work difficulty and responsibility, but the grades are not the outcome of systematic job evaluation. Grade descriptions are terse and do not have the details of duties and responsibilities associated with jobs which have been systematically analysed. It is also possible, though not typical, for individuals in the same grade to discharge work of different orders of difficulty and responsibility. An administrative assistant (the lowest grade of the administrative group), for example, may be a deputy director in one ministry and an assistant director in another ministry. The correspondence between grade and level of work is not exact. The grades of the administrative group are all in Division I, but those of other groups span divisions. The nursing group, for example, has its lowest grade (student nurse) in Division III and its highest (chief nursing officer) in Division I. The terms and conditions of employment of many groups are formalized in schemes of service. A scheme of service prescribes the entry qualifications, grades, salaries, broad duties and responsibilities, probationary period, appointment, career structure and promotion requirements of its group. Promotion is almost always from a lower to a higher grade within one scheme of service. Rarely is an officer promoted into a post covered by a different scheme of service. In some countries, there is one master service of incremental salary steps for all or much of the civil service. Individual salary scales then become subsets of the master series. Such a series does not exist in Singapore, where each grade has a separate salary scale or point. There were 183 scales or points in mid–1993. They differed in respect of the starting salary, the money value of the incremental step or the number of steps, although the differences were sometimes minor. This large number of scales increased the burden of administering the pay system. On the other hand, it broadened the scope for flexibility of the compensation scheme. It was possible, for example, to lengthen the scale for a grade which faced limited prospects for promotion without having to offer the same, longer scale to other grades with adequate promotion opportunities. 35

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The scales have been strictly adhered to by the civil service. Where the scales proved uncompetitive relative to those of other employers, civil servants were not paid more than their salary scales allowed. Instead, the scales themselves would be raised. Salary differentials In many developing countries, civil servants in the top grades saw their salaries deteriorate relative to those for the junior grades during much of the 1970s and 1980s. Singapore was different. In November 1977, the highest permanent secretary grade was superscale grade A; the lowest was superscale grade D. The lowest-paid post in the civil service was office attendant. After consolidation of the NWC wage increases over 1973–77, the ratio of the monthly basic salary of the lowest permanent secretary grade to that of a newly recruited office attendant was 24.0 in November 1977, whilst that of the highest permanent secretary grade to that of the office attendant was 44.6. These ratios were high by regional, and indeed international, standards. For example, the top/bottom basic salary ratio in the countries of South Asia (where permanent secretaries are placed in just one grade) for 1977 was 13.3 in Bangladesh, 17.9 in India, 12.2 in Nepal, 13.0 in Pakistan and 12.1 in Sri Lanka. By December 1987, these ratios had fallen further to 12.0 in Bangladesh, 10.7 in India, 6.2 in Nepal, 9.7 in Pakistan and 7.5 in Sri Lanka (Chew, 1992, table 5.1, pp.76–77). In Singapore, on the other hand, differentials widened. The lowest of the permanent secretary grades in Singapore was raised from superscale grade D to superscale grade C in financial year 1980/81. After adding the 1982–84 NWC increases to the basic salaries of July 1992, the top/bottom basic salary ratio for the lowest of the permanent secretary grades increased marginally to 24.9. However, much sharper increases occurred for the higher permanent secretary grades. In May 1979, three new additional grades (I, II and III, in rising order of status) for permanent secretaries were placed above the previous maximum, superscale grade A. The rationale for their introduction was to reduce the salary gap between the public and private sectors for the highest ranks of the civil service. Two more grades (staff grades IV and V) were added later, although they had not, by 1993, yet been utilized. Staff grade III commanded an expanded basic salary (basic salary plus 1982– 84 NWC wage increases) of S$30,102 in July 1992. The top/bottom salary ratio for this grade of permanent secretary rose to 56.7 at this time. By April 1993, only four permanent secretaries were in the staff grades, one in staff grade III and the others in staff grade II. While no permanent secretary had yet been promoted to staff grade V, that grade carried an expanded basic salary (S$42,022) in April 1993 which exceeded that of a Deputy Prime Minister (about S$37,500). Only the incumbent Prime 36

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Minister and the former Prime Minister, Lee Kuan Yew (serving as Senior Minister in the Prime Minister’s Office) commanded higher salaries in 1993. The high salaries send a clear signal to civil servants in particular, and society generally, that the Government values greatly and is prepared to pay very generously a few key bureaucrats for their services to the country. Salary differentials between public and private sectors in Singapore are not easy to compare owing to the absence of job evaluation in the public sector which makes inter-sectoral job equivalence difficult to determine. However, the salaries received by new university graduates in the civil service and in the private sector can be compared. Fragmentary evidence from the Asian region suggests that this differential in many countries was in favour of the private sector during the 1980s. Singapore was, again, atypical. The Applied Research Corporation conducted, annually from 1983, an employment survey of recent graduates from the National University of Singapore and the Nanyang Technological University. The surveys revealed that Singaporean graduates of 1983 who joined the civil service were paid, on average, 5 per cent more than their peers who joined private firms. The differential in favour of government service rose to 13.8 per cent in 1984 and 20.2 per cent in 1985, but whilst still favouring government service, it fell to 14.7 per cent in 1988 and 9.3 per cent in 1989. As indicated earlier, during the late 1970s lower government salaries in Singapore led to resignations of workers who transferred to the private sector, especially amongst generalist administrators and professionals. Following the improvement of salaries in the early 1980s, dissatisfaction over pay levels has not been a major source of resignations from government service. Indeed, in the view of some observers, good pay, job security and attractive conditions of employment have resulted in the Government capturing the best university graduates for itself, to the probable detriment of the private sector and entrepreneurship. For them, it would be better for society if more of the brightest and most dynamic young people were to seek employment with private companies (Lee (Tsao) 1987, p.208, and Krause, Koh and Lee (Tsao), 1987b, pp.224–225). Maximum and minimum pay There is no pay ceiling imposed on state enterprises or private companies in Singapore. Neither has there been a national, statutory minimum wage. The National Trades Union Congress (NTUC) opposed its introduction even in the 1960s, on the grounds that a mandatory minimum wage would effectively become a maximum wage, with employers refusing to exceed it in determining pay for unskilled workers. Subsequently, a tight labour market, which exists even for unskilled labourers, has been seen as providing sufficient protection 37

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against labour exploitation which can threaten unskilled workers when unemployment or underemployment is high. Basic salary levels in the civil service Table 2.3 gives the starting salary in November 1977 and July 1992 for five grades of civil servant. It can be seen from the right-hand column of the table, which expresses real 1992 salaries as a percentage of those paid in 1977, that real starting monthly salaries rose significantly for all five grades. Only a tiny number of posts commanded a salary higher than that of a permanent secretary in the lowest grade. Each of the other posts in the civil service can be placed either on, or between, the grades shown in Table 2.3, and the trend of its real starting salary would reflect those shown. The righthand column of Table 2.3 hence captures the movement of the real starting salary for virtually the whole public service. It should also be noted that the last general salary revision occurred in 1988. Thereafter, an annual variable bonus replaced—or made less urgent— Table 2.3 Singapore: starting monthly basic salary in the civil service, November 1977 and July 1992

Source: For monthly basic salary, Republic of Singapore: The Budget for the Financial Year, 1977/78 and 1992/93. Note: *Basic salary plus NWC wage increases (see text). 38

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further salary revisions. Thus, since the annual bonus is not reflected in the table, real annual take-home pay for the five grades of employees in fact grew at a considerably faster rate than that indicated by Table 2.3. This experience, again, contrasts strongly with that of most other Asian and African countries over the 1980s. In determining the pay levels of its employees, the Government of Singapore broadly follows the principle of comparability with the private sector, that is, paying government employees at rates close to those for comparable jobs in the private sector. The Government has acknowledged that pay parity with private firms is necessary to attract and retain employees. The PSD carries out periodical surveys of salaries in the public and private sectors. The survey results are not released to the public, but form the basis for deciding whether salaries should be raised. For example, the wage survey convinced the Government that salaries need not be raised in 1984 (Teo, 1985, p.319). The following year, the Government reduced the starting salaries of some civil service grades so as to make them comparable with those of the private sector. Allowances and benefits Singapore is again different from many developing and newly industrializing countries in that relatively few allowances are offered to civil servants. The number of allowances has also tended to decrease over time. There are no cost-of-living allowances, a familiar feature in many countries. The NWC wage increases and, subsequently, the annual variable bonus obviated the necessity for a cost-of-living allowance. In countries where the Government supplies physical accommodation to staff, housing is usually by far the most valuable of all money allowances and payments in kind. Neither physical accommodation nor a housing allowance are provided to public-sector employees in Singapore, except that government quarters are supplied to the very few officers (such as medical interns) who need to live close to their place of work. The 1982–84 NWC wage increases are formally known as the monthly variable component. Earlier NWC wage increases had been periodically consolidated under the basic salary, and it seems more appropriate to consider the remaining NWC increases as part of the monthly basic salary rather than as an allowance. An additional (13th) monthly salary payment has been made in December each year since 1972. The annual variable bonus has been granted since 1988. The value of each of these three payments is based on the basic salary of the employee and is payable to all employees. However, full payment of the 13th-month salary and of the variable bonus is predicated on the staff member having worked with the Government throughout all of the preceding 12 months. If an individual has worked less than a full year, the value of the two supplements will be reduced proportionately. 39

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Unlike the case of many countries, travel allowances are carefully calculated to represent reimbursement for expenses incurred by the employee on official business. These, therefore, do not represent further supplementation to basic salary. An allowance for spouse and children used to be given but was consolidated within the basic salary in 1969. An allowance was earlier paid to an officer filling a post in an acting capacity for certain time periods, but was abolished in July 1976. Top administrators continue to receive directors’ fees or honoraria where they serve as board members of government companies. Pension arrangements are favourable, allowing public officers to retire on half salary after 25 years of service. Medical benefits, too, are generous for civil servants. Officers and their families can receive free outpatient treatment at a government hospital or outpatient clinic. In the case of in-patient care, the type of hospital ward to which a civil servant is entitled depends on his (or her) divisional status. The civil servant pays only 20 per cent of the ward charges applicable to the general public for himself and 50 per cent for his spouse and children. Officers can also receive outpatient dental treatment at government dental clinics, where they pay 50 per cent of the normal rate, subject to a maximum subsidy of S$70 a year. Loans at subsidized interest rates are provided for the purchase or renovation of houses. Loans are also provided for the purchase of a car, motor cycle or motor scooter. Since December 1981, Division I and II officers have been able to borrow from the employer to buy microcomputers for their personal use. The objective of the loan scheme is to encourage officers to understand computers and acquire experience in their use. A spectrum of training course and scholarships is available each year for civil servants. They range from short courses to first-degree and postgraduate courses at local or foreign tertiary educational institutions. The Government owns a number of holiday bungalows in Singapore and Peninsular Malaysia. Staff can rent the bungalows for short periods at nominal rates. The Government also gives financial support to ministries for staff welfare and recreation. The funds can be used by individual ministries for, inter alia, annual dinners and excursions, recreation clubs, long service awards, loans to officers who urgently need them, and financial help for bereaved officers or their next of kin. Performance-related pay Public servants are on pay scales and move up incremental steps annually until (if not promoted to a higher grade) they reach the scale maximum. Singapore salary scales tend to be long as compared to those of many other countries: 26 per cent of Singapore scales in 1987 had a maximum which was more than twice the scale minimum (Task Force on Public Sector Wage Reform, 1987, p. 18). Formally, the increment is granted only upon satisfactory 40

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performance and conduct, but, in practice, this minor prod towards greater efficiency has hardly ever been used. Annual increments have traditionally been granted in Singapore, as in other countries, virtually automatically, except for flagrant displays of inefficiency. Some countries offer one or two increments, in addition to the regular increment, for meritorious performance. Singapore operated a scheme of merit increments for scale Division I officers during the 1970s. Up to four increments in any year could be awarded for exemplary performance. This was replaced with an accelerated promotion scheme. In the Singapore Civil Service, promotion became the reward for outstanding individual performance and potential. Although merit increments were abandoned, senior officials in the superscale grades have still been eligible for a merit bonus, based on their individual performance over the previous year. This was in part to compensate superscale officers, on fixed salary points, for the possible salary stagnation which this implied. Secrecy typically surrounds the payment of the bonus. Awardees are urged to keep confidential both their status as recipient and the amount they have received. Disclosure, it was felt, would demotivate nonrecipients and make more difficult the task of supervising senior staff. However, it seems equally plausible that, for such a payment to motivate staff, employees must see the connection between enhanced performance and the payment. Secrecy, according to that view, would cloud the connection.9 Since 1988, the civil service has granted a performance bonus to all civil servants, based not on individual accomplishments, but on the performance of the national economy. This is the annual variable bonus recommended by the Task Force on Public Sector Wage Reform, mentioned earlier. An NWC subcommittee had already criticized payment systems in the private sector for their insufficient linkages between pay and the performance of the firm. Rewards were strongly governed by years of service with the employer. The subcommittee had recommended a more flexible wage structure in the private sector comprising: (a) a basic wage to provide a measure of stability to the income of workers; (b) an annual wage supplement of one month’s basic salary which could be reduced under exceptional circumstances; and (c) a variable component based on group performance which, together with the one-month annual wage supplement, would permit up to 20 per cent of pay to be made variable (National Wage Council, 1986, pp.II— III). As regards the public sector, the subcommittee had recommended that a separate task force should be formed to consider the adoption of a flexible wage system for that sector. This duly happened. The Task Force on Public Sector Wage Reform, which reported in 1987, observed: 41

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Public employees need, as much as their private sector counterparts, to appreciate that rewards should not be automatic but linked to the performance of their organization or group. In the case of the public sector, this means the performance of the nation and the economy. Measures of this performance would include the growth in the gross domestic product (GDP) and national productivity improvements. (Task Force on Public Sector Wage Reform, 1987, p.6) A wage system for the public sector was recommended with the following four components: (a) a basic wage; (b) the 1982–84 NWC wage increases to be considered as a variable component and paid monthly; (c) the 13th-month salary to be considered as another variable component; and (d) a mid-year or year-end variable bonus, the quantum of the bonus to be in line with national economic growth. Adjustments to wages would first be made through the variable bonus. If wages need to be reduced, and if the variable bonus proved insufficient to meet the downward adjustment, the monthly variable component and/or the thirteenth-month payment could then be reduced (ibid., pp. 1–2). The bonus announced in June 1992 was set at two months’ salary,10 to be paid in two instalments, subject to a GDP growth rate of 4–6 per cent for 1992 being achieved. The first instalment, equal to three-quarters of one month’s salary, was paid in July. The Government announced in December that the 1992 GDP growth rate was expected to be 4.5–5.5 per cent, i.e. within the range originally envisaged. Hence the second tranche of 1.25 months’ salary was paid in December. Organizational behaviour specialists have long maintained that for a reward to motivate performance at work, employees must, amongst other considerations, believe that good performance from them does in fact lead to more of the reward and that greater effort expended by them results in better performance.11 The weakness of the Singapore variable bonus as a motivator lies in the gap separating the achievements of an individual, or of a group of civil servants, from the aggregate performance of the national economy; it is the former which must be encouraged, but it is the latter which is rewarded. The modest size of the national economy, its openness to the external world and its high dependence on foreign trade imply that most civil servants would be unlikely to see a particularly close connection between their work and overall macroeconomic results. And in any case, even if such perceptions were held for the links between public-sector efficiency and economic performance, a large ‘free rider’ problem would remain. Thus, the influence 42

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of the GDP-determined variable bonus upon individual performance within the public sector is probably slight. CONCLUSIONS Perhaps the most important aspects of the Singapore experience for developing and other newly industrializing countries are that it demonstrates that government intervention is not necessarily bad for economic development, and that the public service is not inevitably inefficient. Civil servants in Singapore, however, are well paid. An invaluable asset for the Singapore public is that the civil service has been almost corruption free. Occasional episodes of bureaucratic corruption have been reported in the local press, but these have been isolated incidents, rather than evidence for systematic corruption within the bureaucracy. The Government has repeatedly stated that the reasons for raising civil service salaries are several: to help shift the economy towards a high-skill, highproductivity production structure, to remain competitive with the private sector for talented staff, and also to reduce the temptation for corruption. Naturally, other elements are necessary in the battle against corruption, including reducing the monopoly power of individual civil servants over clients and achieving greater accountability from them for their actions. Nevertheless, adequate pay remains an indispensable weapon in the continuous anticorruption campaign. Singapore’s policies on public-sector pay have been atypical on many counts. Where other countries under budgetary pressures have had to reduce the real value of salaries paid to government employees, Singapore raised them. Where other countries expanded the size of government employment, the Republic reduced staffing levels. Where other countries compressed top/bottom occupational salary differentials, Singapore widened them. The cost of public service is a function not only of salary levels, but also of the level of government employment. The reduction or elimination of overstaffing is directly conducive to enhanced productivity, but it also makes more feasible the payment of higher wages to serving civil servants. The staff reductions in the public-sector workforce in Singapore made it less expensive to raise public wages during the 1980s. A policy of decompressing differentials between salaries at the top and bottom of the service—which in the 1970s were already large by standards elsewhere—was further pursued during the past decade. This, together with a promotional process based strictly on merit, was seen to give rewards for efficiency and hard work which were necessary for an effective public service. More recent innovations to relate the pay of civil servants to overall performance of the economy are interesting, although they are unlikely to 43

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have the same impact upon productivity as would performance-related pay schemes based upon individual, rather than economy-wide, assessment. NOTES 1 Straits Times (Singapore), 21 Dec. 1991. 2 In the American system and its offshoots, the executive service (the Senior Executive Service in the United States, the Career Executive Service of the Philippines) is the apex of central government employment. In Singapore and other countries whose civil service is patterned after the British model, the apex is the administrative service, and the executive service is its auxiliary. Executive officers in Singapore discharge lower-level management duties, supervise the work on supplies or accounts, direct small blocks of business and examine specific cases not clearly within the scope of regulations. 3 For South Asia, see Chew (1992, pp. 15–16); for sub-Saharan Africa, see Lindauer et al. (1988, p.20). 4 For 1983, Republic of Singapore (1986, p.42); for financial year 1991/92, Republic of Singapore (1992, p.90). 5 Straits Times, 18 July 1992. 6 In 1983, for example, 60,860 permanent and 451 temporary staff were reported. 7 Sunday Times (Singapore), Feb. 1982. 8 These were: 7 per cent plus S$32 for 1979; 7.5 per cent plus S$33 plus 3 per cent for 1980; and 6–10 per cent plus S$32 plus 2 per cent for 1981. 9 See, for example, Lawler (1981, pp. 102–105). 10 ‘Salary’, for purposes of this calculation, comprised the basic plus monthly variable components of earnings. 11 See, for example, Lawler (1981, pp. 18–24).

REFERENCES Bogaars, G.E. (1973) ‘Public services’, in National Trades Union Congress: Towards tomorrow: Essays on development and social transformation in Singapore (Singapore). Chew, David C.E. (1992) Civil service pay in South Asia (Geneva, ILO). Krause, L.B., Koh Ai Tee and Lee (Tsao) Yuan (1987a) The Singapore economy reconsidered (Singapore, Institute of Southeast Asian Studies). ——(1987b) ‘Challenges facing Singapore’, in Krause, Koh and Lee (Tsao) (1987a), op. cit. Lawler, E. (1981) Pay and organisation development (Reading, Massachusetts). Lee (Tsao) Yuan (1987) ‘The government in the labour market’, in Krause, Koh and Lee (1987a), op. cit. Lindauer, D.L. et al. (1988) ‘Government wage policy in Africa: Some findings and policy issues’, in World Bank Research Observer, 3/1, pp. 1–24. Ministry of Labour (1991) Singapore Yearbook of Labour Statistics (Singapore). National Wage Council (1986) Report, Subcommittee on Wage Reform (Singapore). Public Service Commission (1991) Annual Report 1990 (Singapore). ——(1992) Annual Report 1991 (Singapore). Punyaratabandhu-Bhakdi, S. et al. (eds) (1986) Delivery of public services in Asian countries: Cases in development administration (Bangkok, National Institute of Development Administration).

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Quah, J.S.T., Chan Heng Chee and Seah Chee Meow (eds) (1985) Government and politics of Singapore (Singapore, Institute of Southeast Asian Studies). Quah, Jon S.T. (1984) ‘The public bureaucracy in Singapore, 1959–1984’, in You Poh Seng and Lim Chong Yah (eds) (1984), op. cit. ——(1986) ‘Towards productivity and excellence: A comparative analysis of the public personnel systems in the ASEAN countries’, in Punyaratabandhu-Bhakdi et al. (1986), op. cit. ——(1991) ‘Administrative reform: Singapore style’, in International Review of Administrative Sciences, 57/1, March. Republic of Singapore (various years) Singapore Facts and Pictures (Singapore). ——(1977) The Budget for the Financial Year 1977/78. ——(1982) Management Development, No.36 (Singapore). ——(1985) Industrial Relations Act (Singapore). ——(1986) The Budget for the Financial Year 1986/87 (Singapore). ——(1992) The Budget for the Financial Year 1992/93 (Singapore). Seah Chee Meow (1985) ‘The civil service’, in Quah et al. (1985), op. cit. Starr, Martha A. (1988) ‘Recent wage and employment trends in sub-Saharan Africa’ (Washington, D.C., World Bank, mimeo). Task Force on Public Sector Wage Reform (1987) Report (Singapore). Teo Hee Lian (1985) ‘Singapore civil service: General trends in civil service reform’, in Government of Thailand: Trends in civil service reforms in ASEAN countries (Office of the Civil Service Commission). You Poh Seng and Lim Chong Yah (eds) (1984) Singapore: Twenty-five years of development (Singapore, Nan Yang Xing Zhou Lianhe Zaobao).

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3

WAGES POLICY AND INTERSECTORAL PAY DIFFERENTIALS IN THE REPUBLIC OF KOREA, 1975–91 Young-bum Park

INTRODUCTION The Government is the Republic of Korea’s largest employer and has taken the lead in fast economic development for the last three decades. This case study reviews developments in the wages paid in the Republic of Korea’s public sector since the mid–1970s, and examines their relationship to those paid by the private sector. It shows that the Government has attempted to use wage restraint in the public sector as a primary instrument for holding back private-sector wage increases, but it has done so with only limited success. EMPLOYMENT In 1991 the public sector in the Republic of Korea employed 1.25 million workers, mainly in non-manual occupations, representing 6.75 per cent of total employment (Table 3.1). The public sector consists of two different parts: government authorities (GAs) (i.e. the civil service at national and local levels), in which the employment relationship is regulated by the National Public Servants Act, the Local Public Servants Act and the Public Service Regulations, all enacted in 1948; and public authorities (PAs), which comprise public enterprises (PEs), government-financed authorities (GFAs), and government-subsidized authorities (GSAs). Here, the Labour Standards Act of 1953, which also sets basic labour standards for the private sector, regulates the employment relationship. Government authorities GA employees account for two-thirds of all employees in the public sector (Table 3.2). They include workers in general public administration (283,000 in 1991); in the police and fire departments; in education, mainly teachers 46

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Table 3.1 Republic of Korea: public and total employment, 1975–92 (thousands)

Sources: Economic Planning Board: Major Economic Indicators of Korea, 1980 and 1991; Ministry of Government Administration: Yearbook of Government Administration, 1979 and 1992; author’s survey. Notes: *These data are approved posts by the Ministry of Government Administration as at the last day of the year. † These estimates are from the author’s own survey for this study.

(269,000 in 1991); technicians; and general clerical workers. The employees of the GAs can also be classified into national public servants and local public servants. However, there exist few differences in the terms and conditions of employment between the two types of public servant since their employment relationship is regulated by the same Public Service Regulations. Moreover, the GA sector in the Republic of Korea, including local government, is mainly financed by taxes collected by central government, and is closely regulated by it. The Ministry of Government Administration is responsible for all personnel matters related to public servants, including determination of levels and the distribution of various categories of occupations and grades for each GA, with the collaboration of the Economic Planning Board which determines the budget for the public sector.1 GAs have never suffered from significant labour shortages, even though wages have been lower than those in the private sector. Qualification examinations for all grades of government jobs have been very competitive. For example, in 1991 only one out of every 79 applicants passed the qualifications exam for Grade 5 public administration jobs. Table 3.3 shows that competition for most direct-entry jobs is fierce, although the data indicate some slight slackening of competitive pressures during the late 1980s. With the birth of the Fifth Republic in the early 1980s, the Government began to discourage increases in the employment levels of the GAs as a part of its Economic Stabilization Policy. In 1983 and 1984, for example, publicsector employment increased by less than 1 per cent annually. However, growth remained positive every year. Over the whole period 1975–91 employment in GAs increased by an average of 3.7 per cent per year—rather faster than the growth of employment in the economy as a whole (Table 3.1). 47

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Table 3.2 Republic of Korea: public-sector employment, 1988 and 1991 (thousands)

Sources: As for Table 3.1.

Public authorities In 1991 public enterprises employed 308,000 workers (Table 3.2). Public enterprises include: government-invested enterprises (GIEs), of which more than 49 per cent of the equity is owned by central government; governmentbacked enterprises (GBEs), of which less than 50 per cent of the equity is owned by central government (but central government is still a major shareholder); subsidiary companies of the GIEs (SCGIEs), of which the largest shareholders are the GIEs; and local public enterprises (LPEs), of which more than 49 per cent of the equity is owned by local government.2 Table 3.3 Republic of Korea: competition ratios of qualifying examinations for government jobs, 1975–90

Source: Ministry of Government Administration: Yearbook of Government Administration, annual issues.

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Government-financed authorities (GFAs), which employed 41,000 workers in 1991, total 71, of which 41 are research institutes. The GFAs are supposed to be independent, although most of their financing comes from the Government. Most of them work closely with their affiliated government ministries which provide their budgets. Government-subsidized authorities (GSAs) have a portion of their expenses financed by the Government, and employed 50,000 workers in 1991. Most are non-profit organizations working in the public interest and are closely regulated by the Government. They include the Council of Consumer Protection Groups, the Korea Securities Audit Board, the Korea Productivity Centre, the National Pension Authority and others. Employment in public authorities (PAs) is regulated by the Labour Standard Act, as is the case for employment in the private sector. Formally, each PA may determine its own levels of employment, as well as the distribution of its employment among various grades and occupations. However, a PA must obtain approval from its governing board, of which one member is by law a government official from an affiliated government ministry, before finalizing any major personnel management decisions. The result is usually that the determination of the level of employment and the distribution among grades and occupations of the PA are greatly influenced by the affiliated ministry. For example, if the negotiated pay arrangements of a PA are not honoured by its governing board, those agreements which are signed by the labour and management of that PA are not implemented. PAs in the Republic of Korea have had no significant problems recruiting qualified manpower, nor have they experienced any major retrenchment schemes since the mid–1970s.3 Working conditions in PAs are in general considered to be better than those in the private sector, and most PAs have not experienced serious financial difficulties. Characteristics of the labour force in different sectors Workers in the public sector differ importantly from those in the private sector. First, male workers predominate. The proportions of males employed in 1988 were 76 per cent in GAs, 82 per cent in PAs, and 62 per cent in the private sector. Second, as indicated in Table 3.4, the educational qualifications of workers in the public sector are higher than elsewhere. Fully 30 per cent of employees in the public sector are university graduates, compared with only 12 per cent in the private sector. Equally, those with only middle school qualifications or less account for only 12 to 16 per cent of public-sector employment, whereas they represent almost 40 per cent of employees in the private sector. These differences in education level are, of course, a reflection of differences in occupational composition. The proportion of non-manual jobs in PAs was 75 per cent, compared to only one-third of those in the private sector in 1988. Finally, public-sector workers tend to be more 49

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experienced, and to remain in their jobs longer than their counterparts in the private sector: while the average tenure of public servants was 9–12 years in 1988, that of the employees of PAs, and private-sector workers was much lower, at 3.8 years. Table 3.4 Republic of Korea: characteristics of the labour force, 1988

Source: Ministry of Government Administration: Government Official Census, 1988; Ministry of Labour: Computer tape of occupational wage survey, 1988.

PAY-SETTING MECHANISMS Public servants, except for the employees of some government enterprises, have no legal right to join trade unions. Low-ranking public servants in the Ministry of Communications, the Korea National Railroad, and the National Medical Centre are entitled to join trade unions and discuss employment terms with their employers because they had trade unions prior to their inclusion as government branches. However, as of 1991, these comprised only 6.1 per cent of all public servants. On the other hand, daily paid workers employed by the government authorities are given the same labour rights as 50

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workers in the private sector; and in the PAs, following the amendment to the Trade Union Act in 1987, labour rights equal to those enjoyed in the private sector were given to all employees. Wages for public servants who do not have bargaining rights are determined unilaterally by the Government, and even the wages of unionized public servants are in practice often similarly determined, since workers do not have the right to strike. In the PAs, as in the private sector, collective bargaining occurs between the trade unions and the management of each enterprise.4 Thus, central government is not officially involved. Nevertheless, the Government’s role in public-sector collective bargaining is more central than it might otherwise appear. Budgets of all GFAs and GSAs are examined by their affiliated ministries and by the Economic Planning Board, and the ceilings for annual wage increases are determined in advance before wage bargaining begins. Since most local public enterprises depend on the Government for financing, their budgets are also closely examined by their affiliated ministries and the Economic Planning Board. Even GIEs, which are given the most autonomy under the Government Invested Enterprise Regulation Act, must follow the Government’s wage ceilings. Government limits on budgets in the public sector have sometimes led to strikes. For example, in 1988 the trade unions of many Government-financed research institutes (part of the GFAs) held a joint strike to oppose the predetermined 3 per cent wage increase in that year. Before 1987, trade unions in the Republic of Korea did not properly represent workers’ interests in the process of wage fixing. The same could be said of the public authorities, of which only 32 were unionized as of June 1987, and where in practice wages had been determined unilaterally by the Government. Even by 1991, with 83.6 per cent of the PAs organized, the influence of the Government on wages in the PAs remained substantial. WAGE LEVELS, CRITERIA FOR DETERMINATION, STRUCTURE AND COMPOSITION Government authorities Thirteen different salary scales for public servants exist, comprising political appointees; general administration; public safety; research; guidance; technicians; general clerical duties I; general clerical duties II and III; police and firefighters; school teachers; university professors; soldiers; judges and attorneys. On most scales, a government official is able to enter into certain selected grades (such as Grades 5, 7 and 9, in the case of general public administration) on the basis of open competition, taking into account his or her education and earlier job experience. Once the entry point on the scale has been determined, usually only one additional step is offered each year. In addition to this annual increment a wage increase has usually been given by 51

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the Ministry of Government Administration. Generally, this annual wage increase differs by grade. As a result, the prevailing payment system in the GAs is based primarily on seniority, as is also the case in the private sector.5 In spite of stated attempts by the Government to limit the wages paid throughout the economy, they in fact increased strongly in real terms Table 3.5 Republic of Korea: nominal and real salary comparisons in government authorities, 1978–91 (won per month)

Sources: Economic Planning Board: Budget Summary, annual issues; Ministry of Government Administration: Yearbook of Government Administration, annual issues; Ministry of Labour: Report on Monthly Labour Survey, various issues; IMF: International Financial Statistics. Note: *These include total personnel, management and welfare expenses divided by employment in each year.

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Table 3.6 Republic of Korea: nominal and real salary indices, government and other sectors, 1978–91 (1978=100)

Sources: As for table 3.5. Notes: *These include total personnel, management and welfare expenses divided by employment in each. † Based on a sample of public and private enterprises, excluding government authorities.

throughout the 1980s and, on average, more than doubled between 1978 and 1991. The evolution of the wage structure in the GAs is summarized in Table 3.5. It can be seen that, in nominal terms, top salaries increased more than fourfold. But the increases for more junior grades were much sharper, 53

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with the least well-paid having a tenfold rise in salaries over the period. As a result, differentials in pay within the public service were sharply reduced. Table 3.6 converts these data to indices of real and nominal wages, and compares them to similar indices for the rest of the economy. It can be seen that, according to published data on average personnel costs in the GAs, the real earnings of public servants roughly doubled between 1978 and 1991. Initially, wage increases in the GAs were greater than those in other sectors of the economy. But by the mid–1980s the private and public enterprise sectors began to outpace the government increases, such that by 1991 wages in the former sectors had increased by about 10 per cent more than in the GAs, in comparison with their respective levels in 1978. Nevertheless, there were strong differences in the real increases granted to public employees at different levels of the hierarchy: the more senior grades received increases in real earnings of 30 to 90 per cent over the 13 years shown, whereas the real value of salaries for those in the clerical grades more than tripled over the period. It remains the case, however, that the salaries of public servants are considered to be lower than those of equivalent workers in the private sector. Park (1986) estimated that, for non-manual male workers, the lifetime earnings of public servants were about 70 per cent of those which could be expected by workers in the private sectors. Government estimates Table 3.7 Republic of Korea: wage differentials between government authorities, public enterprises and all enterprises (government estimates), 1988

Source: Unpublished data from the Ministry of Government Administration. Notes: *Include 40 major public enterprises. † Include 40 public enterprises, the largest 100 private enterprises (in terms of turnover), 20 banking institutions, and 40 medium-sized enterprises. ‡ The abbreviations for salary scales in government authorities refer to grades and steps. Thus, G2S8 means Grade 2, Step 8. 54

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for 1988 (Table 3.7) show that pay in public and private enterprises was higher, by between 20 and over 100 per cent, than for comparable jobs in GAs. It can be seen that the size of inter-sectoral wage differentials rises with the seniority of the post: the highest grades in public and private enterprises were associated with salaries which were about twice those in the GAs—a result of the much lower increases granted to senior officers in the GAs during the 1980s, than to those occupying the lower grades. For workers with equivalent educational qualifications, strong intersectoral salary differentials also exist. For example, a university graduate starts, in public and private enterprises, on a salary which is more than 50 per cent greater than that which he or she could earn in GAs. Assuming normal incremental progression, these differentials are maintained throughout the person’s working life, as shown in Table 3.8. Similar long-term salary differentials exist for high-school graduates (Table 3.9). Overall, the Government estimates that the wages of public servants, including those in junior posts, were, in 1988, about 80 per cent of those of equivalent workers in the public enterprises. Table 3.8 Republic of Korea: inter-sectoral salary differentials for university graduates, 1988 (won, thousands)

Source: Unpublished data from the Ministry of Government Administration. Notes: *Include 40 major public enterprises. † Include 40 public enterprises, the largest 100 private enterprises (in terms of turnover), 20 banking institutions, and 40 medium-sized enterprises.

However, some sources argue that these government estimates undervalue the earnings of public servants. The main point here is that the Government typically awards a wide variety of allowances which substantially increase the pay of public officials, and that these are not matched by the allowances paid by other employers. This has led the Council of Public Enterprise Trade Unions to claim that the earnings of public servants are much higher than those of equivalent workers in the public enterprises. An example is given in Table 3.10, which shows the basic pay and allowances for a government official at Step 7 of the lowest grade on the general public administration scale, in comparison with those for the 55

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Table 3.9 Republic of Korea: inter-sectoral salary differentials for high-school graduates, 1988 (won, thousands)

Source: Unpublished data from the Ministry of Government Administration. Notes: *Include 40 major public enterprises, † Include 40 public enterprises, the largest 100 private enterprises (in terms of turnover), 20 banking institutions, and 40 medium-sized enterprises.

equivalent employee in a public enterprise. It can be seen that, although the basic pay of the latter is some 11 per cent greater than the former, even according to government estimates, total pay including allowances is almost Table 3.10 Republic of Korea: wage differentials between public enterprises and government officials (selected occupations), January 1992 (won per month)

Source: Council of Public Enterprise Trade Unions, and government estimates. 56

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Table 3.11 Republic of Korea: allowances paid by government authorities, 1991

Source: Ministry of Government Administration.

20 per cent higher in the case of the public servant. And if union estimates are taken as a guide, the government official emerges as being almost 50 per cent better off than his or her counterpart in a public enterprise. An extremely large number of allowances are payable to public servants, as illustrated by Table 3.11:12 allowances are paid to all grades in all occupations; four allowances are paid to all selected grades in all occupations; 57

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and a further 48 allowances, including the special area allowance, are paid only to selected groups. Of these, the ‘exemplary official’ allowance is the only one paid on a performance basis. The number and values of these allowances have increased sharply since the mid–1980s. One result is that the proportion of total remuneration accounted for by an officer’s basic pay was typically halved, from two-thirds to around one-third of the total over the years 1978–91 (Table 3.12). Table 3.12 Republic of Korea: proportion of basic pay in total remuneration (general public administration), 1978–91 (percentages)

Source: Ministry of Government Administration; Yearbook of Government Administration, annual issues. Note: Figures are based on the wages of the lowest step of each grade.

The titles of most of the allowances in the GAs, such as job allowance, exercise allowance, key personnel allowance, and so on, do not have a meaningful connotation. Most of these allowances were introduced as a means of obscuring the size of the pay increases granted to public servants, since the annual increase in the basic payment within GAs was selected as a reference point for the private sector’s wage negotiations. It remains unclear as to how successful this strategy has been in providing a means of restraining the growth of total remuneration in the private sector. Finally, government pensions remain more generous than those in other sectors. A national pension scheme, covering the non-GA sector, was introduced in the late 1980s. Under its provisions an employee leaving a job either in a PA or in the private sector became eligible for a severance payment, which should be equivalent to at least one month’s wages for each completed year of service. Table 3.13 compares the lump-sum payments payable in 1991 under the government pension system with those of other sectors. The government system emerges as the most beneficial, particularly for employees who have completed many years of service. 58

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Table 3.13 Republic of Korea: severance pay schedule (multiples of monthly salary on termination)

Source: Park, Y. (forthcoming b). Note: *The pension is converted to a lump-sum payment schedule.

Public authorities The criteria for the determination, structure and composition of pay are, in principle, the same for the PAs and establishments in the private sector because in both cases employment conditions are regulated by the provisions of the Labour Standards Act. Recent analysis shows that, for the two sectors, an individual worker’s wage is mainly determined by his or her age, sex and education, in that order.6 Education is a primary factor in determining an individual worker’s entry level wage. An earlier survey conducted by the Korea Labour Institute in 1988 suggested that only 4.9 per cent of wage differences were related to an individual’s performance. The survey also showed that, at that time, the proportion of basic payment in total pay was less than 60 per cent. Most Korean companies, including the PAs, require a certain period of tenure as a promotion qualification. In other words, more emphasis is given to the income-stability function of wages than to the productivity-inducing function. With the increased influence of trade unions, after 1987, in the process of wage determination, the income-stability function of wages has been strengthened by their emphasis upon the need to compensate for increases in the cost of living and upon across-the-board settlements for all grades. Between 1976 and 1989, real wages in the PAs and the private sector increased at an annual average rate of 8.53 per cent. Differentials narrowed significantly over those years: the ratio between professional and average salaries fell by one-third, that in favour of males fell by almost one-quarter, and that favouring employees of large relative to small firms also fell slightly (Table 3.14). Thus, the distribution of income from wages has improved: the Gini coefficient for wage income decreased from 0.3985 in 1975 to 0.3687 in 1980, and to 0.2886 in 1990. As has been implicit in our earlier analysis, the wages in the PAs are, on average, higher than those in the private sector. Moreover, working conditions are also considered to be better. Average monthly earnings in the PAs were 40 per cent (56 per cent) higher than in the private sector for male (female) workers as of 1990. Even after allowing for differences in the age 59

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Table 3.14 Republic of Korea: wages in public authorities and the private sector, 1975–90

Source: Ministry of Labour: Report on Monthly Labour Survey, various issues.

and education of workers using the standard earnings function estimation, the wages in the PAs are still higher, as shown in Table 3.15. Estimated in this way, the net wages of both male and female workers in the PAs were still 17 per cent higher than those in the private sector in 1990. Table 3.15 Republic of Korea: wage differentials between public authorities and the private sector, 1988 and 1990 (private sector=100)

Source: Park, Y. (forthcoming a). Note: Net differences are those which emerge after statistically controlling for differences in education and age characteristics.

WORKERS’ BEHAVIOUR AND PAY IN THE PUBLIC SECTOR Public servants in the Republic of Korea have enjoyed significant increases in earnings over the past several decades. However, as regards basic pay, 60

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we have seen that earnings in the private and parastatal sectors have increased even more quickly than in government. Nevertheless, owing to the increasing value and importance of allowances in the remuneration packages of government employees, the net balance of earnings advantages between these sectors remains unclear. It is probable that allowances have increased less rapidly outside government, and that total remuneration of public servants remains considerably higher than equivalent workers in other sectors. Nevertheless, it is certain that the living standards of workers in both the public and private sectors have markedly improved over the 1970–90 period. This has been reflected in other aspects of workers’ behaviour: separation rates for labour in the GAs have remained stable over the 1980s. Promotions have not become more frequent; indeed, according to the government census, the average length of time before a public servant was promoted actually increased from 5.1 years in 1978 to 5.3 years in 1983, and to 6.3 years by 1988. The official government census also shows that the proportion of public servants who have a second business and whose family members, including spouses, work decreased during the early 1980s (Table 3.16). Moreover, the annual number of public servants disciplined or punished for receiving bribes fell sharply over the decade, and their incidence, relative to the size of the public service, halved between 1980 and 1990 (Table 3.17). Table 3.16 Republic of Korea: public servants with other sources of income, 1978 and 1983

Source: Ministry of Government Administration: Government Official Census, 1983 and 1988. Note: Numbers in parentheses are percentages, relative to the total number of surveyed public servants.

GOVERNMENT WAGE POLICY AND PAY IN THE PRIVATE SECTOR Before 1987, trade unions in the Republic of Korea did not function effectively in representing workers’ interests in the wage determination process. Labour rights were repressed. The Government intervened in wage determination in 61

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Table 3.17 Republic of Korea: transgressions by public servants, 1980–90

Source: Ministry of Government Administration: Yearbook of Government Administration, annual issues.

the private sector in order to sustain the international competitiveness of Korean products in world markets (Fields, 1984; Deyo, 1987; You, 1990). However, after mid–1987, the labour movement expanded. The number of organized establishments increased from 2,723 in July 1987 to 7,698 in December 1990, and total union membership also increased from 1.05 million workers to 1.89 million workers during the same period. Collective bargaining became an important method for determining wages in the Republic of Korea. Wage fixing prior to June 1987 It is well accepted that the stable supply of comparatively cheap and qualified labour has been a major contributing factor to the Republic of Korea’s economic success over the last three decades. The principle of government wage policy throughout this period of export-led industrial development was that real wage growth should be justified by productivity increases, in order to maintain international competitiveness. The Government of the Republic of Korea did not hesitate to attempt to ensure that this principle was implemented, although its mode of intervention in the wage determination process of the private sector was rather indirect throughout most of the period. During the 1960s, when job opportunities were scarce, intervention was unnecessary since surplus labour and competition for jobs kept wages low. During the 1970s and early 1980s, however, labour rights were increasingly denied, and trade unions were prevented from being involved in the wage determination process. In 1974 and 1975, under a law enacted in 1972, which expanded the scope of compulsory arbitration to all industries, labour 62

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inspectors were ordered to ensure that wage increases were accompanied by productivity increases in all sectors.7 During the 1980s, on the other hand, imposing restraint on the wages of public servants (and the increasing shift to allowances) was one of the major instruments used to slow down wage increases in the private sector. New wage-fixing institutions With the expansion of trade union activities after 1987, collective bargaining became a major force in the determination of private-sector wages in the Republic of Korea. Between June 1987 and December 1989 trade union membership almost doubled from 1 million to nearly 2 million workers. Industrial relations became increasingly unstable: approximately 7,000 labour disputes were reported between 1987 and 1989, whereas only about 1,000 had occurred over the five years 1981–86. By 1990, 17.4 per cent of all Korean employees, including public-sector workers, were covered by collective agreements. In addition, for establishments with 50 or more workers, wages were to be determined by negotiations with a labour-management council, even if establishments were not unionized. By the end of 1989, the number of trade unions had reached 7,844 and 14,064 labour-management councils had been established.8 In 1989 the trade surplus, which had been increasing since 1986, dropped substantially and subsequently the Republic of Korea ran a trade deficit. It is widely believed that sharp wage increases and less stable industrial relations contributed to the emergence of these problems. Accordingly, the Government, which during 1987–89 had maintained that wage increases should be determined mainly through collective bargaining, returned to earlier methods: rising labour costs were seen as an enemy of growth. In 1990 and 1991 several hundred public and private establishments were selected by the Government to lead wage restraint in the private sector, in a move called the ‘one-digit policy’. It appears, however, that this policy largely failed. For example, in 1990 average wage increases of 20 per cent were recorded. These were much greater than the 9.1 per cent agreed increase which had been reported to government authorities. In 1991 the Government’s stance toughened with the implementation of a ‘total’ wage system. About 1,500 establishments, covering both the private and public sectors, were singled out and advised to keep their total wage increases below 5 per cent. If reported and actual wage increases diverged, various sanctions, including a cut in government industrial financial supports, were to be imposed on the establishments concerned.9 However, the Government’s goal of wage restraint will not be attained without difficulty: trade unions are no longer regulated and the Republic 63

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of Korea’s overall economy remains strong despite its troubled export sector.

SUMMARY AND CONCLUSIONS As of 1991, the public sector in the Republic of Korea employed 1,253,000 workers, representing 6.75 per cent of total employment in the country that year. The public sector is broadly separated into two groups in accordance with the regulating law: government authorities (GAs) and public authorities (PAs). The employment relationship in PAs is governed by the same labour standards as in the private sector, while that in GAs is regulated by the Public Servants Act. The basic wages of public servants are lower than those of equivalent workers in the private sector. In the early 1980s, the Government limited the wage increases of public servants in an attempt to achieve price stability in the Korean economy. The GAs did not suffer from labour shortages, however, even though in recent years there was some evidence of a tighter recruitment market. In addition, the morale of public servants, and their productivity, have remained high, despite the evidence of deteriorating wages relative to the private sector. This fact can be interpreted in a number of ways. First, real wages in the GAs continued to increase rapidly owing to the Republic of Korea’s good economic performance since the 1960s. Second, the overall package of wages and other benefits (i.e. including allowances) of public servants is at least as good as that of workers in the other sectors. Public servants also enjoy the best pension system in the country. Third, while a job in the public sector has always been highly regarded in Korean society for historical reasons, it became even more prestigious after 1960, owing to the widespread perception that the country’s fast economic development had been led by the Government.10 Equally, after the mid–1980s, the total remuneration (pay plus allowances) of public servants increased substantially. Trade unions, in particular, believe that the Government underestimates the pay of public servants. Thus, the Government has never suffered from labour shortages in most occupations, even though its basic pay level is lower than that in the private sector. Wages in the PAs have, on average, been higher than those in the private sector. Furthermore, other working conditions have also been considered to be better. With trade union activities having expanded after 1987, collective bargaining became a major process for determining wages in the PAs, and by December 1991 the unionization rate in PAs had risen to 86 per cent. Trade unions in the PAs even held joint strikes to oppose the Government’s wage policies. Nevertheless, the role of the Government in determining wages in the PAs remained important, because many authorities depended on the 64

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Government financially and/or their major business decisions had to be approved by the Government. Thus the threat of public sanctions was not without teeth. Before 1987 trade unions in the Republic of Korea had not properly represented workers’ interests, and labour rights were repressed. The Government had intervened in wage determination in the private sector in order to sustain the international competitiveness of Korean products. Restraining public servants’ wages was one of the major instruments used by the Government to hold back wages in the private sector. Notwithstanding the expanded union movement, and the importance of collective bargaining, the Government still attempts to control wages, because rising labour costs are seen as a major contributing factor to the recent slow-down of the Korean economy. Nevertheless, government attempts to hold down wage increases in recent years have more or less failed. With the expansion of trade union activities in the PAs, the Government’s influence on wage determination in the sector will be even further diminished in future. In the PAs, the authoritarian approach no longer works. It is also likely that a union movement in the GAs may emerge soon. Were legal reforms concerning the labour rights of public servants to follow, a new method of wage determination in the GAs would then have to be found.

NOTES 1 The centralization of the pay determination and administration system in the Republic of Korea’s public sector reflects the fact that the the country’s economic development since the 1960s has been led by a strong and, until recently, an authoritarian government. Most of the decisions concerning national affairs, including those in the public sector, were made by a few power groups in central Government. In addition, Confucian ideas, which influenced the Republic of Korea until the early twenteeth century, also help to explain the relative centralization of the pay determination and administrative system. 2 Government enterprises, including the Korea Ministry of Communications, the Korea National Railroad, the Korea Administration of Supply, and the Korea Grain Management Fund are all considered part of the GAs. 3 The only exception appears to have been in connection with privatization: when the Korea Telecommunications Authority and the Korea Tobacco and Ginseng Corporation were established in accordance with the Government’s privatization plan, in 1982 and 1987 respectively, retrenchment schemes for the two PAs were implemented to reduce redundancies in unskilled or outdated occupations. These schemes were carried out without difficulty because displaced workers were given generous early retirement benefits. 4 However, the labour and management of four banks amongst the GIEs conduct joint wage bargaining, with other working conditions for bank employees being negotiated separately at each bank concerned. 5 A survey conducted by the Korea Labour Institute showed that of all the 65

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6

7 8 9

10

factors determining an individual worker’s wages, only 4.9 per cent were related to his or her performance. As a result, an individual worker’s wage in the Republic of Korea is mostly determined by his or her education, age and experience. An analysis of variance study covering both sectors shows that the relative importance of factors determining an individual Korean worker’s wage were age, 27.5 per cent, sex, 14.3 per cent, and education 12.2 per cent, for 1990 (Y. Park, forthcoming a). Since productivity increases at the enterprise level were hard to measure, this often resulted in labour inspectors siding with the management of the enterprise. Any establishment with 50 or more employees was expected to set up a labourmanagement council, even if its workers were unionized. The Government controls and regulates most activities of banks, including the private ones. For example, it appoints both board members and presidents of private banks. This is one mechanism whereby the Government can impose sanctions on private firms, since most depend on bank finance. During the Yi Dynasty which lasted from the fifteenth century to the early twentieth century, there existed a class system which consisted of four classes: the first was public servants; the second was farmers; the third was industrialists; and the fourth was merchants. Even though more than 50 years have passed since the collapse of the Yi Dynasty, public servants remain highly regarded in the Republic of Korea.

REFERENCES Deyo, Frederic C. (ed.) (1987) The political economy of the new Asian industrialism (Ithaca, New York, Cornell University Press). Economic Planning Board, ROK (1980–91) Budget summary (Seoul). ——(1980, 1991) Major economic indicators of Korea (Seoul). Fields, Gary (1984) ‘Employment, income distribution and economic growth in seven small open economies’, in Economic Journal, 94/373 (March), pp.74–83. Hwang, Il-chung, Lee, M. and Sohn, T. (1988) Study on remuneration of governmentinvested enterprises (Seoul, Economic Planning Board) (in Korean). Ministry of Government Administration, ROK (1983, 1988) Government Official Census (Seoul). ——(1977–91) Yearbook of Government Administration (Seoul). Ministry of Labour, ROK (1980–91) Report on Monthly Labour Survey (Seoul). Park, Se-il (1986) Study on the level and structure of remuneration of government enterprises (Seoul, Korea Labour Institute) (in Korean). Park, Young-bum (1989) Public sector labour market and privatization in Korea (Seoul, Korea Labour Institute). ——(1991) Study on annual payment system with special reference to governmentfinanced research institute (Seoul, Korea Labour Institute) (in Korean). ——(1992) ‘Total wage system’, in Korea’s wage system and policy options (Seoul, Korea Labour Institute) (in Korean). ——(forthcoming a) ‘Korea’s wage structure in the 1980s’, in Korea Labor Studies (in Korean). ——(forthcoming b) Private severance payment system in Korea (Seoul, Korea Labour Institute) (in Korean), —and Sung-duck Lee (1990) Public sector industrial relations in Korea (Seoul, Korea Labour Institute) (in Korean). 66

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You, Jong-il (1990) ‘South Korea’, in S.Herzenberg and J.Pérez-Lopez (eds), Labor standards and development in the global economy (Washington, D.C., US Department of Labor).

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4

ECONOMIC STAGNATION AND EARNINGS DECLINE IN ZAMBIA, 1975–91 Christopher Colclough1

INTRODUCTION In recent years few countries in the world have had a more catastrophic economic record than Zambia. The difficulties became apparent in 1975, when the price of copper on the international market fell by almost 50 per cent. Since, at that time, the value of copper exports represented about half of Zambia’s GDP, and over 90 per cent of exports in value terms, the price fall had an immediate and massive effect upon Zambia’s current income. The copper price did not recover, and that, combined with a protracted decline in copper output, resulted in a fall by one-third in per capita GDP by the early 1980s. The economic difficulties continued for the remainder of the decade. This case study documents some of the more important developments in the labour market which have accompanied these events. After a brief discussion of the main economic trends and policies which have characterized the years since 1975, the evolution of the employment and skill structure is described. The central section of the study analyses the main changes that have occurred in levels of wages, salaries and allowances in the public sector and in the rest of the formal economy over the period. It is shown that the great majority of Zambian wage or salary earners have experienced very sharp reductions in real earnings during recent years. The declines have been so great that many families have been compelled to adopt new strategies for survival. These have included sharp increases in working hours—or in hours spent seeking additional work—for those with jobs, declines in productivity in their main job, increased dependence upon female or juvenile labour, more dependence upon ‘informal’ economic activities and an increased incidence of activities of a corrupt or illegal nature. Although evidence for the extent and frequency of these different survival strategies is sketchy, some discussion of their importance is given in the final section of the study. 68

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ECONOMIC BACKGROUND A range of policies was utilized by the Zambian Government to attempt to adjust the economy to the collapse in the price of copper.2 Gross domestic expenditure had fallen by 18 per cent in 1976. This was necessary if more domestically produced goods were to be released for export or, alternatively, if imports were to fall. However, owing to the structure of the economy, which was heavily dominated by copper production, export growth required substantial product diversification, rather than mere contraction of domestic demand. Thus the main impact of the latter was felt on the side of imports, which fell by one quarter, in real terms, in 1976. Furthermore, almost the entire brunt of the fall in spending was concentrated on investment expenditure, whilst consumption continued to rise in absolute (though not per capita) terms. This pattern was sustained during the following several years, which drastically reduced the possibility of a return to economic growth. Spending by the Government was also cut back sharply. Here, too, the burden of the cuts was focused upon capital, rather than recurrent spending. Capital expenditures fell by 70 per cent over the eight years ending in 1983. In spite of this the public-sector deficit continued to represent approximately one-third of total spending. This was partly financed by borrowing from the central bank, and partly by foreign borrowing, both of which tended to aggravate the size of the external payments deficit. As regards policies focused directly upon the external sector, protection was sharpened by the introduction of an elaborate system of import licensing and of foreign exchange allocation. As has been found in many other countries, however, this system of controls was administered inefficiently, and sometimes corruptly. It certainly served to reduce the level of expenditure on imports, but it did so in ways that further undermined the productivity of the domestic economy, owing to the shortages and delays which it helped to generate. The exchange rate was gradually depreciated after 1975. By 1982 it had fallen to approximately two-thirds of its level in the mid–1970s. The pace of domestic inflation, however, was faster than in Zambia’s main trading partners and, in spite of nominal adjustments, the currency in fact became increasingly overvalued. The prevailing price incentives, therefore, tended to decrease the profitability of export-or import-substitute production over the period. In response to the high, and rising, inflation rate, the Government increased the administrative regulation of consumer prices and extended the range and extent of subsidies on basic commodities. Although this protected consumers, it further reduced the profitability of domestic industry. The consequence of the above range of domestic policies was that the economy continued to stagnate over the period 1976–83. By the early 1980s, capacity utilization in manufacturing had dropped to as little as 30 per cent, 69

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whilst transport and marketing bottlenecks prevented the effective distribution of those commodities that were available. Continued over-valuation of the exchange rate provided few incentives for diversification. Although imports were held back, the sustained decline of the copper price implied a continued reduction in real export revenues and, therefore, in the capacity to import. The rising price of oil exacerbated the difficulties. The real value of exports (adjusted for changes in import prices) was halved between 1974 and 1975– but it was halved again by 1983. Thus, domestic income remained stagnant between 1975 and 1985, and by the latter year, real income per head had fallen to a level which was scarcely more than half that of 1970. Meanwhile, current account deficits continued, which were financed by borrowing. Both loans and attendant debt service grew sharply, and by 1983 the latter was equivalent to more than half of export earnings. An already disastrous situation thus became untenable. A major injection of external resources was needed. But the country’s main donors were unlikely to supply this, in the absence of sharp changes in the direction of domestic policy. Such changes were, in fact, introduced, following extensive negotiations with the International Monetary Fund (IMF). The most fundamental of these came in late 1985. Their centrepiece was the introduction of a weekly auction of foreign exchange, which engendered a massive fall in the value of the kwacha and a sharp readjustment to the structure of relative prices. Nevertheless, these reforms proved to be short-lived. The opposition which they generated proved too much for the United National Independence Party Government to sustain, and there was a return to the earlier policy regime of direct controls and foreign exchange rationing in 1987. Although a new ‘shadow’ programme was agreed with the IMF, this was aborted in September 1991, mainly because government spending had risen to unsustainable levels in the approach to the forthcoming election. A new government was elected, led by the Movement for Multi-Party Democracy, which was committed to a more open political system and an open market economy. It introduced a wide range of economic reforms, under the close tutelage of the IMF. At the time of writing it was too early to predict what degree of success would attend these reforms. However, it does appear that the political basis for their sustainability was stronger than was the case under the earlier regime. EMPLOYMENT AND SKILLS

Employment in the formal sector Data on the number of employees in the formal sector are shown in Table 4.1. As is to be expected from what has been said above, experiences in the labour market before and after 1975 were very different. The first decade of 70

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independence was characterized by steady growth of formal employment at about 4 per cent per year, such that, by 1975, approximately 50 per cent more workers were employed than had been the case at independence. Subsequently, however, employment fell back, declining, on average, by about 1 per cent per year to 1984, and recovering only slightly by 1989. Table 4.1 Zambia: employees in the formal sector, by citizenship, 1964–89*

Source: GRZ (1985, table 6); GRZ (1991a, table 61). Note: *Prior to 1972 data are available only for Africans and non-Africans. These are shown in the relevant citizenship columns.

This circumstance of absolute decline in formal employment over the 15 years beginning in 1975 is one of the most fundamental features of Zambia’s recent labour market history. By consequence, the proportion of the labour force employed in the formal sector has fallen from about 24 per cent in 1980 to less than 10 per cent ten years later (Prices and Incomes Commission, 1991, p.5). Whereas about one in 13 Zambians had a job in the formal sector in 1975, 15 years later only about one in 21 persons had such a job.3 Thus, the number of people without access to any (direct or indirect) support from wage or salary incomes became vastly greater than it had been in the early 1970s. The structure of formal employment by industry is indicated in Table 4.2. A number of important features emerge from this table. First, job losses after 1975 were heavily concentrated in the construction industry, which lost more than half of its jobs by 1984 and continued to shed employees through 1989. The primary cause of this concentration was the massive fall in investment expenditures, which resulted from the curtailment of domestic expenditures in response to the country’s growing payments deficit. Second, employment also fell in mining and quarrying, particularly after 1980, in response to the sharply curtailed profitability of the copper industry. Third, apart from agriculture, which stagnated over the period, employment elsewhere actually rose: in manufacturing and transport by about 14 per cent, and in services, by about 12 per cent to 1989. Notwithstanding the loss of more than 40,000 jobs in the construction industry since 1975, the total number of Zambians employed in the formal sector as a whole in 1989 had almost regained their levels of the mid–1970s. 71

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Table 4.2 Zambia: employees in the formal sector, by citizenship and economic sector, 1965–89*

Sources: GRZ (1980b): Meesook et al. (1986, appendix table 1); GRZ (1991a, table 61). Notes: *Data are for the fourth quarter of each year shown, except those for 1965, which are averages of all quarters, and for 1984, which are for June. Prior to 1975, the citizenship breakdown refers to Africans and non-Africans, rather than Zambian/non-Zambian, respectively. † Includes utilities, financial and business services, restaurants and hotels, and other services.

This was because an increasing number of Zambians had been able to take over jobs previously held by expatriates. Thus, whilst the total job losses between 1975 and 1989 amounted to about 20,000, a similar number of expatriate workers appear to have been localized over that period. Thus, Zambian employment was, by 1990, virtually back to its earlier levels, taking the period as a whole. Employment in the public sector There are three main groups of public-sector employees. These comprise civil servants in established posts, non-civil service or daily paid employees, and 72

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employees in local government. The number of civil service posts, against which people can be hired, are published yearly in the establishment registers. These are shown, for selected years between 1978 and 1991, in Table 4.3. It can be seen that the number of posts rose by 10 per cent, to about 79,000, over the five years to 1983. Subsequently, they contracted somewhat, and remained at about 75,000 until 1991. Table 4.3 Zambia: the central government establishment, 1978–91*

Sources: Establishment Register (various years). Notes: *Totals exclude industrial employees and others not paid from personal enrolments. There were estimated to have been about 50,000 such workers for most of the period shown. † Incorporated in educational cadre from 1991. ‡ Incorporated in administrative cadre from 1991. n.a.=not available.

In 1983 and 1985, but not subsequently, the establishment registers gave actual employment (strength) and vacancies in established posts. It can be seen that the vacancies in those years amounted to about 8,000–10,000, or rates of 9 or 10 per cent of the establishment at that time. In the later 1980s data on employment within the public service establishment were no longer published. It appears that this was at least partly because increasingly little control was exercised by the personnel division over employment levels and payroll costs. The total number of people receiving monthly salaries from the government payroll became significantly greater than the total number of established posts and, moreover, their numbers fluctuated sharply on a monthly basis. It can be seen from Table 4.4 that the numbers on the payroll for March 1990 exceeded the establishment formally allowed for that year by some 14,000 posts (or about 20 per cent of the total ‘legitimate’ establishment). More surprising still is that data from the Personnel 73

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Division for April 1990 indicated that some 160,000 people (or more than twice the ‘official’ establishment) were paid salaries from the payroll in that month—falling back to some 92,000 in May. The reasons for these irregularities were mainly that large numbers of UNIP members received salary payments from the government, on a regular but periodic basis, even though such workers were not occupying established positions. Such large differences between reported and actual posts imply that any data on employment in the public sector over the period starting around 1985 are likely to be highly unreliable. Even by mid-1992 it proved impossible to obtain accurate data on the employment and vacancy position in central government. Table 4.4 Zambia: establishment and employment position in 1983 and March 1990, central government

Sources: GRZ, (1983b); interviews in Personnel division, 1992.

Records were not kept of the number of daily paid employees in central government. Calculations based upon data in the Government’s Estimates of Revenue and Expenditure suggested that approximately 42,000 workers were so employed in 1978 and that about 51,000 were employed in 1983 (Meesook et al., 1986, p.52). Subsequently, the numbers are reported to have remained approximately constant throughout the 1980s. Data on employment in local government are also not available. The total establishment comprised about 7,000 posts in 1992. But there were no data on vacancies, nor on the number of daily paid employees. Accordingly, the best estimate for total public-sector employment in 1985, including those in both established and daily paid employment, and those in local government, is 120,000–130,000. However, substantially greater numbers of people appear to have been in receipt of salaries from the public sector in later years. The number of people in this latter group of ‘political’ appointees was large, but precise figures are not known. 74

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Skill shortages in the formal sector Shortages of skilled and educated workers have always presented a major problem for the country’s development. During the colonial period African education was not given high priority. In spite of the comparative wealth of Northern Rhodesia, during most years far more money was spent upon the education of European children than upon all forms of education for the remaining 97 per cent of the population. In addition, racial discrimination in both the public service and the private sector was often explicit (for example, until 1959, legislation prevented Africans from being taken on as apprentices). Thus, the training and experience necessary for advancement was often not available to the African population. In consequence, Zambia started out with a major deficit of professional and industrial skills, which was to prove very difficult to remove. Table 4.5 indicates the changes in the educational structure of the formal sector of the Zambian labour force that subsequently occurred over the two decades following the country’s independence in 1964. The Manpower Survey which was held shortly after independence (GRZ, 1966a), documented in some detail the extent of the manpower constraint faced by Zambia at that time. It can be seen from the table that the vast majority of the 236,000 Africans then employed had had little or no formal schooling, and that less than 1 per cent of them had had five years of secondary schooling or more. Over the following two decades, however, the educational expansion initiated soon after taking office by Kaunda’s United National Independence Party was to alter this educational profile sharply. Table 4.5 shows that by 1983 over 20 per cent of Zambian employees had at least ‘O’ level (secondary, Form 5) qualifications, and that about half had had some secondary schooling. These were major achievements for a country which, 20 years earlier, had inherited a school system which was so thoroughly inadequate in both quantitative and qualitative terms. Nevertheless, this progress fell far short of meeting the needs of the formal sector for the full range of technical and professional skills, and a substantial number of non-citizen skilled workers had to be employed throughout the period. This was in spite of the fact that rapid localization of the labour force was assigned high political priority soon after independence. A fairly complex set of regulations was established, requiring the satisfaction of strict criteria before work permits for expatriate personnel could be issued by the Ministry of Labour. Foremost amongst these was the production of satisfactory evidence by an employer that no suitably qualified or experienced Zambian was available for the job in question. Under these circumstances, a good indicator of the extent to which skill shortages amongst the Zambian labour force have remained important is provided by trends in the employment of non-citizens. Table 4.1 shows that the total number of non-Zambian employees remained approximately constant 75

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Table 4.5 Zambia: educational qualifications held by Zambian employees, 1965 and 1983*

Sources: GRZ (1966a, table II.3); GRZ (1983a, table 8.0); and GRZ (1985, table 6). Notes: *Data for 1965 refer to Africans, rather than Zambians. Those for 1983 are based upon a sample survey covering approximately 70 per cent of total formal employment. The percentage distribution revealed by that survey has been applied to separate estimates for total Zambian employment, published by the Central Statistical Office. † ‘O’ level and ‘A’ level are examinations typically taken after five years and seven years of secondary schooling, respectively.

from 1964–75,4 although their proportional importance declined from 12 per cent to 9 per cent of formal employment over those years. Thereafter, however, the number of expatriate workers dropped sharply, such that by 1984 only 14,000 (less than half the earlier levels) remained. This new, lower level of expatriate employment remained roughly unchanged through 1989, and accounted for less than 4 per cent of formal employment. This aggregate picture of good progress with localization is, however, misleading in a number of ways. On the one hand, in one important sense, the ‘gap’ is even smaller than it appears in Table 4.1, in that approximately half of the non-citizens employed in the late 1980s were Zambian residents, mainly originating from other African countries, who, from a labour market viewpoint, can be treated as being equivalent to citizens since they were unlikely to face official pressures to leave.5 On the other hand, in a different sense, the progress with localization was less satisfactory than the table appears to indicate: although large numbers of non-citizens left Zambia after 1975, not all of those workers were replaced by adequately qualified and experienced Zambians. Many of their jobs remained vacant. This was particularly so for those expatriates who vacated professional and technical jobs after 1985 and who left the country primarily because they faced declining real incomes in the face of the kwacha devaluations which occurred. By 1987, the situation in the health sector was particularly serious, with large numbers of foreign doctors having left Zambia, without replacement by either Zambian or expatriate personnel (see below). In addition, the 76

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aggregate quantitative picture hid qualitative problems in the labour market which affected most sectors of the economy: localization had not always and everywhere been efficiently handled. Thus it is evident—particularly in the public and parastatal sectors—that key posts were sometimes filled by Zambians who had not had insufficient training or experience. This problem became particularly acute as regards deficiencies in management skills— often at quite senior levels of the public service. Finally, those non-citizens who remained in employment were often concentrated in particular specialized or technical areas, requiring long periods of high-level training. Thus the process of localizing the remaining jobs held by expatriates appeared more problematic than had typically been the case in the past. Equally, the premature departure of such workers would generate problems that would be commensurately more difficult to solve. Examination of the occupational composition of expatriate employment provides evidence for the incidence of relative shortages of Zambian skills. Table 4.6 shows that, although non-citizens were, by 1983, 6 a comparatively small proportion of total employment—less than 5 per cent—they were nevertheless proportionately much more important in professional and technical occupations, where they comprised 12 per cent of employment, and in administrative/managerial jobs, where they accounted for more than one-fifth of total reported employment. It can be seen from Table 4.7, which shows all occupations with more than 130 non-Zambian workers, that some occupations in the professional group were still heavily dependent upon expatriate skills. The case of architects and engineers is particularly significant, where more than 1,000 expatriates were employed, comprising almost half of all such workers. Zambia also remained heavily dependent upon expatriate doctors. According to the survey, they comprised more than three-quarters of all doctors in the country (although this proportion is probably correct, the figures are significant underestimates of the absolute number of doctors who were employed). Other occupations where at least one-quarter of all jobs were occupied by non-citizens included physical scientists, statisticians, accountants, university teachers and managers. These data suggest, therefore, that there was in 1983 a significant training task ahead in order to localize all of these professional posts. At first sight it may seem surprising that non-citizens still occupied a large number of jobs in the ‘production, transport and related’ occupational category: they comprised almost 4,200 workers, and accounted for onethird of all non-citizens employed (Table 4.6). Inspection of the more detailed tabulations from the survey revealed that, numerically, the largest single occupation in this category is miners (736 non-Zambian workers). Nevertheless, it can be seen from Table 4.7 that there were also substantial numbers of non-citizen production supervisors and foremen (597), machinery fitters and assemblers (435), electrical fitters (177), plumbers and 77

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Table 4.6 Zambia: sample of employees by major occupational group and nationality, 1983

Sources: GRZ (1983a); GRZ (1985).

welders (169), bricklayers and carpenters (259), transport equipment operators (425) and other labourers (741). Although the proportional importance of non-citizens in these occupations was modest—usually less than 5 per cent of total workers—these data do indicate that there remained, in 1983, a significant shortage of Zambian artisans in many of the highly skilled craft occupations, both in the mining sector and in other areas of the economy. Thus, the sharp declines over 1979–84 in the number and proportions of non-citizens employed were not so strongly indicative of an increased availability of Zambian skills as they might at first appear. Considerable numbers of expatriates left the country owing to the declining purchasing power of the kwacha. Those who left the public sector were often not replaced—sometimes because of an inability to attract new staff, and sometimes because of a wish to focus the impact of expenditure cuts on non-citizen, rather than Zambian staff. One result was a significant increase in the number of vacancies amongst professional and technical grades in all sectors of the economy. Unfortunately, comprehensive data on vacancies in the formal sector are not available. The 1983 manpower survey did not collect such information, nor do the quarterly surveys of employment and earnings run by the CSO. Nevertheless, interviews with senior managers in all sectors of the economy during field visits in both 1986 and 1992 confirmed that an increase in vacancy rates had been very widely experienced. Skill shortages in the public sector The establishment had grown by, on average, almost 5 per cent per year over the eight years prior to 1983. Payroll costs accounted, during this 78

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Table 4.7 Zambia: occupations in which non-citizens were concentrated, 1983

Source: Calculated from GRZ (1983a, appendix 1).

period, for a growing proportion of public expenditures. In the Government’s circumstances of increasing financial stringency, expenditures on supporting services (such as transport and materials) were reduced to levels incompatible with efficiency. In 1984 the Government, at the behest of the World Bank and the IMF and as part of the conditions associated with extending new loan facilities to Zambia, agreed to introduce a freeze on recruitment to the administrative cadre of the public service. Thus, a sharp increase in the vacancy rate occurred and, as indicated in Table 4.3, by 1985 approximately 10,000 of the 77,000 established posts in the civil service were vacant. 79

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This approach to reducing staffing levels in the civil service tended further to undermine its effectiveness, rather than to improve its efficiency: retirement, or contract expiry, does not necessarily occur in a way which reflects staffing priorities. An unstructured approach to reducing public-sector staffing via natural wastage may therefore compound the problems of production and service delivery. An example can be given from the Ministry of Health which, in 1985, undertook a review of medical manpower. High and unevenly distributed vacancy rates for nurses and technicians were causing major difficulties for the provision of health care, particularly away from the urban centres. The situation amongst doctors, however, was particularly critical. Table 4.8 shows how the staffing position developed between 1981 and 1985. It can be seen that, although there was a net reduction of 86 expatriate doctors over those years, they were ‘replaced’ by an increase of only 41 Zambian doctors. Thus, the vacancy rate rose from 20 to 30 per cent over the period, after allowing for increases in the number of posts in the establishment. Again the intensity of the shortages varied widely in different parts of the country, with vacancies reaching almost 60 per cent at Ndola hospital on the copperbelt. As it happens, these vacancies were caused more by the deterioration in the value of local salaries paid to doctors than by the freeze. But they are illustrative of the potentially misleading import of aggregate data on localization ‘progress’ over the past decade. The shortage of skills remained an important rigidity in the Zambian economy, increasing the costs of economic restructuring, and reducing both its speed and potency. In the early 1990s, one of the greatest personnel problems facing government remained that of recruiting and retaining professionally qualified people. The latter were easily able to secure employment in Botswana, Namibia, South Africa and, somewhat less so, Zimbabwe. Doctors and science teachers were in particularly short supply, as were engineers, accountants, architects, geologists, mining engineers and other scientists. Recruitment to professional/administrative jobs speeded up over the late 1980s owing to a somewhat greater availability of university graduates. There was, however, a stagnation of promotion, resulting from the pyramid structure of the civil service, since many of the senior positions were occupied by relatively young people who had many years to go before retirement. Notwithstanding the shortages of particular skills reported above, in general the government service remained overstaffed, in spite of the reduction in the size of the establishment which took place over the 1980s (Table 4.3). In 1992, a formal commitment was made to reduce staffing levels. The process began modestly with the abolition in that year of the Prices and Incomes Commission (PIC), the functions of which were believed by the Government not to be needed in the context of the new policy regime. Collective agreements were in future to be ratified by the Department of 80

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Table 4.8 Zambia: staffing levels of doctors, 1981–85

Source: Ministry of Health, Manpower Development Office.

Labour. But this was only a start. In May 1992, 20,000 non-established workers were laid off. However, this occurred in a completely unplanned way, and resulted in the paralysis in the work of some departments. In consequence, the decision was quickly revoked. A revised target became the achievement of 10,000 redundancies by the end of 1992, with a similar number to be further achieved during 1993. Retrenchment amongst nonestablished workers was viewed to be easier to achieve than amongst those in established posts, partly because in these cases the government was not obliged to finance redundancy pay, but partly, also, because articulate opposition was less likely. PAY

Wages and salaries in the public sector The institutional framework for salary determination in the public sector has changed over the last two decades. During the 1960s and 1970s public-sector pay was determined by Salaries Commissions, which would take evidence from all parts of government on the need for increases in pay, and on the economic factors which should influence their appropriate size. During the 1980s, however, salary revisions became the product of formal negotiations between the government and the four public servants’ unions. As in the private sector, these negotiations led to collective agreements ratified by the PIC (whose job it was to ensure that nothing in the draft collective aggreements contravened government policy). The Salaries Commissions were appointed at roughly four-year intervals. Over intervening years, civil servants generally had to forgo salary increases, which meant that adjustments, when they were granted, tended to be large. Salary scales in the civil service were compared with those for similar jobs in the parastatal sector—on the grounds that the Government needed to be able to attract and retain qualified people—and some account was taken of inflation over the period since the last salaries review. In addition, however, the Commissions took account of various principles of wages policy, the relative 81

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emphasis of which changed during different periods of Zambia’s postindependence history. The 1960s, for example, were characterized by rapid increases in both nominal and real earnings of African workers. The wage scales for African and non-African workers in government (and elsewhere) had been completely different until 1961. Over the following seven years a unified non-racial pay scale emerged, which involved granting very significant increases in pay to African staff. This trend was consolidated by the recommendations of the Brown Commission (GRZ, 1966b), which resulted in the unification of pay scales in the mining sector, and increases in African wages by, on average, about 22 per cent. By the late 1960s, however, some awareness of the potentially damaging effects of wage inflation on the country’s prospects for economic growth began to be voiced. The Turner Report on wages and incomes policy in Zambia (Turner, 1969) argued for a policy of wage restraint, and resulted in a temporary wage freeze followed by a 5 per cent nominal increase in pay in 1970. Throughout the 1970s increases in salaries in government were consistently less than the rate of inflation—and, as will be shown below, particularly so after the collapse of the copper price and the onset of severe economic difficulties in 1975. A further component of government wage policy concerned the wish to reduce the large economic disparities between richer and poorer workers. This policy, which came to be widely known as ‘narrowing the gaps’, was informed partly by the inappropriately wide salary differentials resulting from the unification of African and non-African salary scales during the 1960s, and partly by the Government’s stated political philosophy of ‘Zambian Humanism’, an important part of which was rooted in earlier strands of African socialism and ideals of equality. The main operational principle of this policy was to grant greater nominal increases in earnings to the lowerpaid than to the richer workers—a principle which was to be applied in the public sector until the late 1980s. The ways in which these various principles of policy have affected government salaries are summarized in Tables 4.9, 4.10 and 4.11. The first of these tables shows the starting salary for a selection of government posts at all levels of the hierarchy in 1975, and for each of the subsequent years in which revisions to the salary structure were introduced. The very large increase in nominal salaries which occurred is shown in this table, particularly from 1984 onwards, when domestic inflation became very rapid. Those holding senior positions in the public service saw their salaries increase more than 20–fold over the period 1975–91. The increases were larger, however, at lower levels of the service, with unskilled workers receiving more than 60 times their 1975 nominal salaries by 1991. In order properly to investigate the extent to which the purchasing power of public-sector salaries has changed at different levels of seniority, it is 82

Sources: a Personnel Division Circular No. B.11 of 1975. b Personnel Division Circular No. B.1 of 1980. c Personnel Division Circular No. B.9 of 1980. d Personnel Division Circular No. B.9 of 1985. e Personnel Division Circular No. B.11 of 1987. f Personnel Division Circular No. B.14 of 1988. g Personnel Division Circular No. B.11 of 1989. h Personnel Division Circular No. B.1 of 1990. i Personnel Division Circular No. B.12 of 1990. j Personnel Division Circular No. B.9 of 1991. k Estimated figure.

Table 4.9 Zambia: evolution of civil service salaries, 1975–91 (kwacha per year)

Source: Calculated from Table 4.9, using high-income CPI for graduate teachers and above, and low-income CPI for other posts.

Table 4.10 Starting salaries for selected posts in the Zambian civil service, 1975–91 (in 1975 constant prices)

Source: Calculated from Table 4.10.

Table 4.11 Index of starting salaries for selected posts in the Zambian civil service, 1975–91 (constant prices, 1975=100)

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necessary to show the salary data in real terms. This is done in Table 4.10, which converts the nominal salaries shown in Table 4.9 into constant 1975 prices by utilizing the consumer price indices for low-and high-income groups. Table 4.11 takes this analysis a step further, by converting the movement in real salaries shown in Table 4.10 into an index, with 1975 as the base. These tables can now be used to investigate what has happened both to income differentials and to the purchasing power of salaries within the public sector over the years since 1975. First, as regards the policy of ‘narrowing the gaps’, it is clear that salary differentials have been sharply and consistently reduced as between those in junior and in senior civil service jobs over the past two decades. Table 4.12 provides a summary. It can be seen that the differential between the lowest and highest paid members of the service in 1975 (shown in Table 4.12 as unskilled/Cabinet Secretary) was 1:22. This had been reduced to 1:10 (expressed in 1975 prices) by 1985 and to 1:7.5 by 1991. The ratio in nominal terms was even smaller but, since the CPI for low-income groups had increased faster, over the intervening years, than that for high-income groups, it is the real differential, expressed in 1975 prices, which is the more accurate indicator of change. The table also shows that it is not only differentials between salaries at the extremes of the seniority ranking that have changed: a fairly sharp decline in the ratios—of 50 per cent or more—is typical also for comparisons of the middle ranks with respect to more junior levels of the service.

Table 4.12 Nominal and real differentials in the Zambian civil service, 1975–91

Source: Calculated from Tables 4.9 and 4.10. Note: For calculations of real differentials the low-income group CPI has been used for unskilled and clerk positions. The high-income group CPI has been used for the remaining jobs. Differences between ‘real’ and ‘nominal’ columns are caused by prices facing the low-income group having increased more quickly than those facing the high-income group over the years since 1975.

Second, there is clear evidence that the Government has exercised a policy of wage restraint in the public sector over the whole period since 1975—so much so that salaries have fallen dramatically in real terms, particularly since 86

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the mid–1980s. It can be seen from Table 4.11 that all grades of the service except for the very lowest paid (represented by unskilled workers in Tables 4.9–4.11) had lost between one half and two-thirds of the real value of their 1975 earnings by 1985. By contrast, the unskilled managed to preserve the value of their 1975 real salaries over the following decade. However, further sharp cuts in real earnings were to follow for all grades of the service. By 1991 almost everyone was drawing salaries which ranged between 11 per cent and 28 per cent of their 1975 real earnings. Only the very lowest grades did slightly better than this, with junior clerical (represented in Table 4.12 by telephonists) and unskilled workers retaining about 40 per cent of the value of their 1975 earnings. Allowances in the public sector The total pay of employees in Zambia, as in other countries, often includes a range of allowances which can represent a substantial addition to the basic salary or wage. The question arises, therefore, as to whether the value of allowances in the public sector changed in such a way, over the years 1975– 91, as to alter the picture of earnings decline which emerged from the salary comparisons given above. Easily the most important fringe benefit for public servants is housing. In the mid–1980s, about 62 per cent of eligible civil servants were housed by the Government, a further 35 per cent were on waiting lists for government houses and received an ‘own arrangement’ housing allowance, whilst the remaining 3 per cent of civil servants owned their own homes. The latter were almost entirely amongst the highest-paid officials (Meesook et al., 1986, p.84). By 1992, the housing shortage in government had become more intense, with only about 40 per cent of civil servants being housed at that time. Most of the remaining 60 per cent of officers were in receipt of housing allowances. Table 4.13 sets out the value of housing benefits and allowances for public-sector employees, and shows how they have evolved for workers at different levels of seniority over the years since 1975. Those who have been housed by government have been charged a nominal rent (for most of the period, this has been an amount equivalent to 10 per cent of salary) which has been substantially less than the value of the imputed rent benefit gained. With the escalation of rents in the private sector over the 1980s, the value of imputed rents has increased much more rapidly than publicsector salaries. Accordingly, they have mitigated to some extent the impact of salary decline. The small proportion of civil servants who have owned their own houses have received an allowance which was, until 1991, related to the value of their house. The values shown in Table 4.13 are based upon the size of 87

Table 4.13 Zambia: the value of housing benefits in the public sector, 1975–91 (kwacha, nominal values)

Sources: 1975: Personnel Circular No. B.11 of 1975; 1980: Personnel Circular No. B.9 of 1980; 1985: Personnel Circular No. B.9 of 1985; 1990: Personnel Circular No. B.I of 1990; 1991: Personnel Circular No. B.9 of 1991; imputed rental values for 1975 and 1980: Meesook et al., (1986, p.86). Notes: – = not applicable. *Value of imputed rent benefits are estimated by inflating (deflating) values reported for 1980. More recent estimates are available but, since they are not tied to a particular month within the year in which the estimates were made, they are unreliable owing to the rapidity of recent monthly inflation rates. The estimates shown in the table are, in all cases, minimum estimates for the values of imputed rents.

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house which those receiving the salaries shown would be likely to own. These allowances were not dissimilar to the net benefits gained from being housed by government—at least until 1990. However, until the latter date (and unlike imputed rent benefits) the allowance was taxed, which reduced its impact upon net earnings. By comparison with the first two categories of benefit, housing allowances, for those housed neither by government nor owning their own accommodation, have had a smaller impact upon total remuneration. However, there are exceptions to this. First, the unskilled (non-established) workers had become eligible for housing allowances by 1980, which significantly improved their total pay relative to 1975 levels. Second, in 1990 these allowances were made tax-free, which again improved their value, particularly for the higher paid. Third, very considerable increases in housing allowances were granted in 1991 which significantly changed the pattern of net earnings and in the public sector— particularly when assessed on an after-tax basis. Table 4.14 shows how the value of housing benefits have changed since 1975 in comparison with the basic salaries of their recipients. It can be seen that being housed by government has always involved a substantial subsidy element. In 1975 the net imputed rent benefit for those in government houses amounted to 12 per cent of the salaries of the most senior officers, and over half of those in the most junior grades. The value of these subsidies relative to salaries has consistently risen since 1975, as salaries fell in real terms, and as rents in the private sector increased sharply. By 1990/91 the subsidy was in almost all cases worth considerably more than basic salaries and in some cases, more than twice as much. Those civil servants who owned their own houses were, in 1975, even better off than those housed by government. However, the size of this subsidy, relative to imputed rent benefits, was reduced over the following decade until, in 1991, the distinction between different groups of people not housed by government was abolished, and all received the same housing allowance, whether owning their own house or not. Throughout the period 1975–91 the values of housing allowances were less than those of imputed rents. However, since the former were received in cash, they represented a more tangible (and flexible) supplement to basic salary than the latter. Over most of the period the Government allowed a real decline in the value of housing allowances, which was roughly equal to the decline in government salaries. This can be seen from Table 4.15, part A of which shows the trend in total compensation of public employees, including housing benefits, expressed in 1975 prices. Part B of the table shows that, by 1990, the ratios of salary plus housing allowance, relative to their 1975 values, were only slightly higher for most grades of the public service than those for basic salaries alone over the same years. This indicates that housing allowances, at least until 1990, did little to compensate for the falling real values of the salaries of public servants. 90

Source: Calculated from Table 4.13. Notes: Government house=value of imputed rent less rental charge, expressed as a proportion of salary; own house=allowance for typical house affordable by officer in relevant salary range, expressed as a proportion of salary. Housing allowance=married person’s allowance, expressed as a proportion of salary. * Non-established daily paid workers did not become eligible for housing allowances until 1980. They remained ineligible for government housing throughout the whole period shown.

Table 4.14 Zambia: government housing benefits as a percentage of basic salary, 1975–91

Source: Calculated from data in Table 4.13. Note: a Engineer grades and above are deflated by high-income CPI; other grades are deflated by low-income CPI. The case of married persons, for attribution of housing allowances, is shown in the table.

Table 4.15 Zambia: total compensation of public employees—real gross basic salary plus housing benefits, 1975–91 (1975 prices)a

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One exception to this trend, however, is the case of unskilled, daily paid workers. They had been eligible to receive housing allowances, for the first time, in 1980, which gave them a 23 per cent real increase in earnings, in comparison with 1975. By 1985 they were more than 40 per cent better off, owing to the standardization of housing allowances, in that year, at Kl,080 for all public officers—a move which gave substantial real increases to the lower paid (but which resulted in income declines for the better off). Even after the years of high inflation to 1990, total compensation, including housing allowances, remained at around 57 per cent of its 1975 value for daily paid workers, compared to only 36 per cent if wages alone were considered. It is true that, after 1985, the poorest workers in the public sector began to witness a sharp decline in the value of their real earnings for the first time. But it remained the case that they were more protected by the way in which the Government managed the earnings decline, than their more senior colleagues in established posts (Table 4.15). The table shows, however, that this policy changed in 1991, when a substantial increase in the value of housing allowances was introduced. This had the effect of considerably increasing real earnings—particularly for those in the middle and senior grades of the service. Although basic real salaries continued to decline, the value of total real earnings, inclusive of housing allowances, doubled between 1990 and 1991 for senior staff, with proportionately smaller real increases for the middle and more junior grades. Thus, the long period during which income differentials between the top and the bottom of the civil service had consistently narrowed came to an end: the ratio, for total compensation, between the lowest and highest paid widened from 1:4 in 1990 to 1:7 the following year. Further, since housing allowances had been made tax free in 1990, and since marginal personal income tax rates in Zambia are modestly progressive, the revised housing allowances introduced in 1991 involved a substantial redistribution of income, in posttax terms, towards the more highly paid. In addition to housing, there have been a large number of other allowances for which incumbents of different grades and posts in the civil service have been variously eligible. These have included allowances to compensate for the expense of consuming water and electricity at home and, in the case of public medical officers, to compensate for their not engaging in private medical practice. Allowances have been available to pay for meals and travel, for holding jobs with special responsibilities, to pay for the purchase of bicycles and tools, and much more. The total value of these allowances, however, has been small in comparison with that of the housing benefits discussed above. Table 4.16 shows the evolution of average wages/salaries and allowances over the period 1983–91 for unionized workers in the public sector. It can be seen that ‘other’ allowances were, for most of the period, equivalent to only 93

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about 5 per cent of the value of total allowances. They exceeded 10 per cent of the value of the housing allowance, for the first time, in 1991. Table 4.16 Zambia: average earnings and allowances of public-sector workers, 1983–91 (kwacha per annum)

Source: Prices and Incomes Commission (1992, tables 5 and 8).

Impact of public-sector pay on the parastatal and private sectors The issue of wages and incomes policy and performance in Zambia has received considerable attention (Knight, 1971; Daniel, 1979; Fry, 1979; and Meesook et al., 1986). These studies generally showed that the workers in the copper industry had acted as wage leaders for those in other sectors, and that the strength of their organization, combined with the Government’s willingness to accede to their demands in the early years of independence, had established Zambia as a high-wage economy from an early date. There was a debate about the extent to which such wage increases presented a ‘problem’ for the country’s development. Jolly and Williams (1970) showed that about half of the increase in the cost of living over the late 1960s could be statistically attributed to increased wage costs. In a period where the economy received increasing windfall gains from the rise in copper prices, these increases in average earnings could be accommodated, even though the competitiveness of industry outside copper was badly affected. There was, therefore, a certain complacency about these trends, which was also reflected even by more recent commentators (e.g. Fry, 1979, pp.84–85). When, however, in 1975, the price of copper fell, the Zambian economy was not easily able to restructure production away from copper and into manufacturing or services. This was at least partly because its wages outside agriculture had increased to levels which were considerably higher than those in most other countries of a similar size, structure and income level.7 94

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The attempt to operate a formal incomes policy was abandoned by the Zambian Government in 1983. Prior to that year there had been wage ceilings promulgated by the Government (10 per cent, 5 per cent, etc.), with wages councils ensuring that these ceilings were not exceeded. In 1983 guidelines on wages were issued, but in that year it was decided to move to a policy of free collective bargaining. During the 1970s there is some evidence that the Government’s stated policies on wages did influence pay settlements in the rest of the economy. However, after 1983, it seems that public-sector pay adjustments followed those in the private sector, rather than vice versa (see Chiwele, 1993, chapter 5). Nevertheless, as regards the structure of wages and salaries, the earlier aim of attempting to narrow the income gaps within the formal sector was maintained. As we have seen, in the public sector this was achieved by explicitly narrowing the gap between the lowest-and highest-paid workers in successive salary agreements. It will become clear from what follows that similar pressures were transmitted to other employers. In the case of the parastatal sector (which has typically accounted for about one-third of all formal sector workers) the influence was more direct. Here, there were different procedures for wage determination covering unionized and other (roughly corresponding to blue-collar and white-collar) workers. In the case of the former, wages, terms and conditions were negotiated via collective bargaining, and formalized in collective agreements which, until 1992, were ratified by the PIC. In the case of managerial/ supervisory workers, on the other hand, the salary scales were suggested by the Zambian Industrial and Mining Corporation (ZIMCO), 8 for subsequent approval by the Government. To that extent, there was direct government control of the salaries paid by the parastatal sector although, after 1983, there was no interference in the wage settlements negotiated by the unions. Some of the latter were strong—particularly the mineworkers—and they tended to secure better benefits for their workers than the other unions. As regards revisions to the salary scales for non-unionized workers, ZIMCO paid primary regard to levels of salaries paid by the Government to staff in comparable grades—albeit aiming to pay more, job for job, than the Government. Account was also taken of the salaries offered by private firms, the cost of living, and the need to attract and retain qualified staff. A unified structure of salaries and conditions of service for these non-unionized workers was maintained throughout all companies in the ZIMCO group. The only exception to this are the non-unionized employees in Zambia Consolidated Copper Mines (ZCCM) which, until the time of writing, had been covered by a separate company salary scale, more generous than that available to the rest of the parastatal sector. The unified scale was resented by some of the other more profitable companies which could afford to pay higher salaries to their staff than those usually adopted. However, since staff are mobile across all companies, 95

Table 4.17 ZIMCO corporate salary structure (non-unionized employees), 1984 and 1991 (kwacha per annum)

Sources: 1984 data: Meesook et al. (1986, p.117); 1991 data: ZIMCO memorandum HRDTMS/02/03, 6 Feb. 1992. Note: *Professional technical and contract employees may progress beyond the maximum limit for their salary range to that indicated by the PTC extension limit.

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a unified structure was viewed to be necessary. Nevertheless, considerable flexibility was given to individual enterprises in the parastatal sector concerning the placing of particular jobs on the 19 grades of the unified scale (shown in Table 4.17). This was partly, but not entirely, determined by the ranking, on four possible salary grades, of the chief executive. Furthermore, as the table indicates, ZIMCO companies have had additional flexibility, in comparison with the government, in being able to increase some salaries by up to 90 per cent, by utilizing the scale extension for professional, technical and contract employees. In spite of this flexibility, recruitment and retention of good staff has been a particular problem in some jobs, particularly so in the cases of accountants, information technologists, and engineers. The career path for the first two of these occupations was accelerated. They also received perquisites, such as a company car, for which people at this level would not normally be eligible. More generally, the parastatal sector tended to offer superior fringe benefits in comparison with those in government. This did not prevent the loss of skilled staff to the private sector and abroad. The private sector tended not to train, preferring to bid trained workers away from government and the parastatals. The only available disaggregated data on wages and salaries in the parastatal and private sectors are contained in the collective agreements, signed by employer and union representatives in each firm, after wage negotiations have been completed and registered by the Government. These agreements show minimum and maximum salaries for each grade or occupation within the unionized categories. There are no available data on the non-unionized segment of the workforce in these sectors. A comparison of the evolution of starting salaries in nine unionized occupations over 1975–91, drawn from up to 107 collective agreements, is shown in Table 4.18. This shows that, at the beginning of the period, firms in the parastatal sector generally offered significantly higher starting salaries than did private firms in the occupations shown. This was not the case for unskilled workers, where private firms paid about 10 per cent more than those in the parastatal sector. But in the other occupations the parastatal advantage varied between 10 per cent for clerks/office orderlies, 33–50 per cent for bookkeepers, watchmen and typists, and more than 100 per cent for electricians and mechanics. Over the following 15 years, however, the premium paid by the parastatal sector was much reduced and, usually, reversed in favour of the private sector. In the case of unskilled workers, minimum starting salaries were equalized between the two sectors over the period, and the 1975 differential for office orderlies remained unchanged in percentage terms. However, in all other occupations, the private sector had at least caught up with parastatal firms by the late 1980s and, in two-thirds of the occupations shown, the private sector was paying a significant premium by 1991. 97

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Table 4.18 Zambia: starting wages/salaries for unionized occupations in parastatal and private sectors, 1975–91 (kwacha per annum)

Source: Data are derived from collective Agreements for 107 firms in the parastatal and private sectors. The number of firms included varies between both years and occupations.

Table 4.19 converts these data to real 1975 prices. As expected, a sharp fall in the real purchasing power of wages in all occupations and in both sectors 98

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Table 4.19 Zambia: starting wages/salaries for unionized occupations in parastatal and private sectors, 1975–91 (1975 constant prices, and index where 1975=100)

Source: Calculated from Table 4.18. The low-income CPI has been used for the constant price estimates. Note: *The unweighted average for the parastatal and private sectors is calculated by summing the index values shown for each occupation in the table and dividing the result by 9. The unweighted average for the public sector is calculated in the same way from the data for five comparable occupations shown in Table 4.11. The occupations are: unskilled worker, telephonist, office clerk, typist and engineering assistant/draughtsman. 99

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is apparent. By 1991 their value had fallen to between 12 and 46 per cent of their 1975 levels. The impact of the Government’s policy of ‘narrowing the gaps’ can be seen, with the occupations having the highest 1975 salaries showing the greatest deterioration in relative purchasing power by 1991. For example, artisans and clerical workers in the parastatal sector were, by 1991, earning only between 12 and 18 per cent of their 1975 real salaries. By contrast, unskilled workers and office orderlies, who were at the lowest end of the wage distribution, had managed to retain over 40 per cent of their real 1975 earnings at the end of the period shown. The same trend is shown in Table 4.20 for unionized workers in the copper industry. Again the unskilled remained most protected, retaining about 45 per cent of the real value of their 1975 earnings by 1991. On the other hand, wages in the more highly paid clerical and artisan occupations retained only between 36 and 22 per cent of their 1975 values, respectively. Thus, it seems clear that the Government’s intention to reduce the salary differential between the highest-paid and least well-paid workers in the formal sector was fairly successfully implemented throughout the 1980s. Its impact was felt not only amongst those employees directly paid by the Government but, more generally, by workers throughout the formal sector of the economy. Table 4.20 ZCCM: starting salaries for a range of occupations, 1975–91 (current and constant prices in kwacha per annum)

Sources: ZCCM, Copper Industry Service Bureau, Personnel Research Unit; Meesook et al. (1986, p.118). Note: G1 scale deflated by high-income group CPI. All other scales deflated by lowincome group CPI.

The last three lines of Table 4.19 provide some summary statistics which allow a rough comparison of the extent of earnings decline in the parastatal, 100

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private and public sectors of the economy. It follows from what has been said above that workers in the private sector were relatively more protected from the decline in earnings than those in the parastatal sector. The table suggests that for all the unionized occupations taken together, workers in the private sector had, by 1991, experienced a real wage fall of about two-thirds, compared with one of over three-quarters for those in parastatal firms. The losses experienced by similar workers in the public sector appear to have been roughly in the middle of this range. Thus, it seems that, at least for unionized employees, those in the private sector have tended to fare better, during the prolonged period of earnings decline, than employees in both the public and parastatal sectors. The differences between sectors, however, are fairly small, in comparison with the overall magnitude of the reductions in purchasing power which have been felt by wage and salary recipients throughout the formal economy. Allowances in the parastatal and private sectors We know that, in the public sector, as real earnings declined, allowances became a much more significant component of total pay. This was partly because the value of subsidized housing in government (and therefore of the value of net imputed rent benefits) increased much faster than nominal earnings during the 1980s, and partly because the Government introduced sharply increased housing allowances, measured in real terms, in 1990/91. The question arises as to whether similar trends have affected the private sector over this period of time. Table 4.21 indicates the trend in allowances, expressed as a proportion of total employee compensation, over the period 1983–91. It can be seen that their importance increased very considerably over those years: allowances comprised around 13 per cent of total pay in 1983/94; they increased to 30 per cent between 1987–89 and to 40–50 per cent in 1990–91. All sectors were strongly affected, such that by the end of the period allowances accounted for less than one-third of total pay in only two sectors—utilities and construction—and even here their proportional importance had more than doubled compared to 1983. Fringe benefits in the private and parastatal sectors have been less dominated by housing allowances than has been the case for government. Table 4.22 shows that other allowances have always been important in some sectors. It also shows that the relative importance of housing benefits in total allowances has declined significantly over the last decade. This was particularly marked in mining (where housing benefits fell from 86 per cent to only 36 per cent of total allowances over 1983–91), utilities (with a fall from 100 to 68 per cent) and distribution (93 to 53 per cent). But in almost all sectors the fall was significant, faster than that in government, and particularly marked during the second half of the period shown. 101

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Table 4.21 Zambia: allowances as a proportion of the total compensation of unionized employees by sector, 1983–91 (percentages)*

Source: Prices and Incomes Commission (1992, table 6). Notes: *The percentages shown express the total value of annual allowances as a proportion of total annual pay plus allowances, for each year shown. † National average was calculated by weighting sectoral estimates by their employment share.

Table 4.22 Zambia: housing benefits as a proportion of total allowances for unionized employees by sector, 1983–91 (percentages)

Source: Calculated from Prices and Incomes Commission (1992, tables 6 and 8).

This recent proliferation and increased relative importance of allowances (including those other than housing) in total employee compensation, for unionized workers, was heavily influenced by the Government’s policies on direct personal taxation. Prior to March 1992 most allowances were untaxed. Thus, many firms increased the incidence of fringe benefits during the 1980s, since they represented the most tax-efficient, and therefore least costly, means of improving the net pay of their employees. Perhaps the proportional importance of allowances in total pay will eventually return to its earlier levels, consequence of the reversal of this tax policy in 1992. 102

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However, it is likely that the greater relative importance of benefits other than housing will remain characteristic of compensation packages outside the public sector. RESPONSES TO REAL WAGE DECLINE The extent of the fall in value of real wages over the years 1975–91 was so severe that many workers, and their families, had great difficulty in adjusting to their straightened circumstances. There developed a complex pattern of responses aimed at maintaining family consumption at minimally tolerable levels. These included attempts to diversify income sources, both by existing wage or salary earners and by other members of the household, and to sharply reduce household expenditures on luxury or unnecessary items. Some of these responses, on the income side, involved increasing the total amount of time spent by households on income-earning activities. Often, however, the wage decline was accompanied by workers spending part of the time paid for by their employers on other remunerated work, which resulted in a fall in productivity from wage employment. In other cases, additional income was extracted from the main job in different ways. These included strategies to achieve promotion, to increase overtime working, and to enhance non-cash benefits and allowances. They also included behaviour which, in various ways, offended usual acceptable standards, and which was often illegal. Corruption One of the most frequent forms of illegal abuse of office was that of soliciting for or accepting a bribe for goods and services which would normally be supplied in the course of duty. Such behaviour has been frequent in Zambia, and in 1982 an Anti-Corruption Commission was established by the Government to combat bribery, and to investigate and prosecute offenders. The Commission received complaints or allegations of corruption from individual citizens—sometimes anonymously—and from institutions in the public and private sectors of the economy. Where the allegations appeared to be made in good faith, and where the charge appeared to be substantive, investigations were conducted by the Commission. If evidence of bribery was found, prosecutions could be initiated, with the consent of the Director of Public Prosectutions. In other, less serious cases, the information gleaned was made available to the employer to enable disciplinary action to be taken. In the public sector, in cases where there was an insufficient basis for prosecution, but where evidence was available to indicate that the officer had acted in a manner conducive to corrupt practices, a report was made to the President who could then decide to take some form of admininistrative action against the offender. 103

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Table 4.23 shows that the number of complaints received by the AntiCorruption Commission more than doubled during the 1980s. The number of investigations authorized by the Commission also increased, and the number of prosecutions tripled during the period 1989–91, as compared with earlier years. Table 4.23 Zambia: cases before the Anti-Corruption Commission

Source: Anti-Corruption Commission, Lusaka.

The nature of the typical corruption case was reported by the Commission to have changed over this period—from being motivated mainly by greed, amongst people who were already relatively well-off, to being motivated mainly by perceived economic necessity, amongst the newly impoverished. This is not to imply that senior officers were acting more honestly than in the past. In July 1992, for example, the Anti-Corruption Commission was conducting five separate investigations involving alleged corruption of Ministers or senior bureaucrats. Nevertheless, corrupt practices had spread down the social scale to affect—either as practitioners or targets—the large mass of the people, and very large numbers of people in Zambia, by 1992, asked for bribes. Reported cases and prosecutions for bribery over the period 1989–91 were believed by the Commission to reflect only a tiny part of the problem, as a culture of corruption became more widespread, individual cases seemed less worthy of report. The activities in which corruption was most widespread were those where supervision of, or services to the public, were directly provided. Within the public sector the greatest incidence of cases involved employees of the police department. Members of the public could sometimes avoid being reported for minor offences on payment of a bribe, and there were reports of policemen requiring a ‘fee’ in order to provide reports of incidents of robbery or assault, which victims needed for insurance purposes. Customs and immigration 104

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regulations and procedures provided ample scope for corruption. Passports typically took Zambians weeks to acquire. But the payment of a ‘fee’ allowed the queue to be avoided and the document to be obtained quickly. No major department of government has been completely free of corruption. It is well known that, whenever rationing occurs, requiring bureaucratic allocation mechanisms, there are potential rents to be gained. For example, being responsible for the issue of a prospecting licence for minerals, a business licence for a shop or restaurant, a veterinary certificate for farm stock, or a driving licence, officials in the departments of mines, commerce and industry, agriculture and transport have opportunities for potential profit. Such rentseeking behaviour had, by 1992, become widespread in Zambia. Thus, the extent and nature of corruption in Zambia appears to have changed over the past decade—in particular involving a much larger number of petty officials and bureaucrats in the public service than was the case in earlier years. It is widely perceived in Zambia that the main cause of this behaviour has been the reduction in the value of wages and salaries that has occurred throughout the formal sector. For those at the bottom of the wage distribution, their jobs have provided insufficient income to maintain their families, for several years during the 1980s and early 1990s. It is perhaps not surprising that, in such circumstances, the temptations to indulge in corrupt practices proved, for many people, impossible to resist. Other crime The annual number of convictions for fraud and theft remained unchanged— at around 450 and 30,000, respectively—over the years 1982–88 (GRZ, 1991b, p.60). However, although data are not yet available, interviewees in Lusaka consistently claimed that there had been a marked worsening of the crime rate since 1988. As an example of this, a relatively new phenomenon of robbery from and vandalism of public buildings has emerged. In three primary schools in Lusaka visited during a field trip in 1992, most of the children were sitting on the floor, because all their desks had been stolen. Most windows were broken, doors had been taken off their hinges and removed—for use or sale—and notice boards and blackboards had been removed from the walls. The schools selected were said, by the Ministry of Education, to be typical of those in urban Zambia. This phenomenon had not appeared by 1986, when the present author last visited schools in Lusaka. It was symptomatic of a serious deterioration in public order and of greater desperation as wages and other incomes fell. Other responses: the public sector Many of those employed in the public sector could not, by the late 1980s, support their families at existing levels of wages and salaries. Other members 105

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of their households, including children, have been forced to find work—often in the informal sector, which has been flourishing in Zambia. Absenteeism became rife for those with jobs in the civil service. Sources in government reported that people were absent, typically, for between one-fifth and one half of their official working hours.9 This has inevitably led to a further fall in productivity in the civil service. As a symptom of this, most petty bureaucratic tasks took longer than before to accomplish. For example, over the years 1989–92, the amount of time taken to pass memoranda between government ministries increased by a matter of days. Although there was wide recognition of the scale of this problem within government, there was, in 1992, no sign of any solutions being implemented. In response to low wages, many people in the public sector had taken on additional income-earning activities. Those with marketable skills (e.g. university staff) set up consultancies; many sold clothes or food in offices or in the market; nurses were reported to leave wards to sell food; teachers were absent from schools doing other things. These problems were widely perceived to be more acute in the public sector than in the rest of the economy, mainly because there was little effective action that could be taken to combat them. Public disciplinary procedure was cumbersome. In response to an officer being persistently absent from duty, a reprimand could be issued, copied to the Personnel Division, which forwarded it to the Public Service Commission. By the time the case was heard, three years would typically have passed. There have been cases of employees in government being suspended on half pay for up to six years. Thus, discipline had broken down. This circumstance was widely known, and civil servants flouted the rules with impunity. As regards other responses to salary decline, there is no direct evidence of accelerated promotion having occurred as a response to austerity. In government the establishment structure tended to prevent this, and there were well-established procedures for receipt of increments and movements from grade to grade. On the other hand, procedures for payments made to the ‘shadow’ politically appointed civil service, mentioned in section 3.2 above, are unknown. It seems extremely likely that many of those in receipt of this type of patronage would have been protected to the extent perceived necessary by the ruling UNIP groups to keep themselves in power. The extent to which allowances increased during the 1980s in the public sector has been documented earlier. Throughout most of the 1980s housing allowances increased in close step with nominal salaries, and thus did not compensate significantly for salary decline. Policies appeared to change, however, in 1991, when very large increases in allowances were granted— particularly for the higher grades of the service. These were consolidated the following year when, in addition, overseas per diem allowances for travel in Europe rose to US$400. Thus, those offered an overseas trip (which by the nature of things tended to be those in more senior posts) would be unlikely to 106

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ignore the opportunity: considering that the annual salary of a Zambian permanent secretary in early 1992 was less than the equivalent of US$500, the savings which could be made from travel expenses were enormous relative to salaries in kwacha terms. Allowances for travel within Africa were lower, but were nevertheless generous. Given the salary differentials between public, parastatal and private sectors, many officers moved out of government during the late 1980s. Nevertheless, job security in the public sector was greater; it being easier to be fired in the private sector. And those with government housing were always less likely to move, since the market value of their accommodation was many times greater than the rents which they were required to pay. Notwithstanding the fact that those with the lowest categories of government housing sometimes moved out of their houses, in order to receive the cash benefit of housing allowances, they were invariably made worse off, in real terms, by so doing (see Table 4.14). Other responses: the parastatal and private sectors A study of the responses by formal sector workers to adjustment and austerity, and of the survival strategies of households, has been completed (Simutanyi, 1993). Two hundred workers were randomly selected amongst railway workers in Kabwe, and 50 of these workers were also followed through to their households. Real earnings from formal employment had fallen for almost all employees in the sample, including managerial workers. Many reported that they were no longer able to afford the basic necessities of life. Their diets had changed, with luxury items being eliminated. The amount of bread eaten had been reduced. In many households only the children were given breakfast. Most workers therefore had to supplement their income from other sources, since they spent more than they earned in their main jobs. Those with craft skills involved themselves in part-time work after hours. Others used the facilities at work to do private jobs during official working hours. This was frequently the case amongst typists, who could easily type private work without arousing the suspicion of their employers. Women and junior workers often sold products whilst at work. These included food and new and secondhand clothes—the latter often imported from Zaire. Items were often sold for credit, pending payment being made on pay-day at the month-end. Craftsmen were able to find repair work—unblocking pipes, repairing electrical goods, mending furniture—for which purposes they often left early from work. These activities were often lucrative—one craftsman reported average earnings of K5,000 per day (about US$20) from private work of this kind. In spite of these additional income-earning opportunities, many workers reported that their earnings remained insufficient for their needs. One option 107

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used by many was to borrow money from informal moneylenders, under a system known as kaloba. This option was extremely risky, because interest rates were typically 50 per cent per month, and once indebtedness built up individuals found it extremely difficult to free themselves from the grip of the system. Another option used by some workers was a form of forced savings, called chilimba. Under these arrangements, a group of people commit themselves to making regular contributions of cash to a central pool, which is then given to one member of the group for his or her own use. The beneficiary changes in subsequent rounds, until each member of the group has received a payment. This system allows people to acquire more expensive goods which cannot be afforded out of monthly or weekly wages. Previously, employers had fulfilled this role by giving employees advances of salary, but this practice became less common owing to the liquidity squeeze which affected most businesses. This informal savings mechanism had the effect of retiming rather than increasing consumption. However, it provides a further symptom of economic adversity, as employers were increasingly unable to provide credit. At the level of the household, other members of the family were usually involved in income-earning activities. Market gardening and poultry-keeping were frequently reported, although the latter needed a high capital outlay. Those with company housing often sublet their servants’ quarters—even if servants were kept, they tended to stay elsewhere. Wives and children worked on a range of informal activities. There was evidence of income from prostitution and from theft, although their incidence, understandably, was difficult to quantify. With the increased dependence on other means of earning cash, competition in the informal sector had become fierce. Furthermore, in the formal sector shortages of commodities had been eliminated by price rises. This had resulted in prices in the informal sector dropping below those of the formal sector (where, with the end of price control, prices became closer reflections of scarcity), and competition was further enhanced. These surveys confirmed that, as in the public sector, corruption had become part of the survival strategy of individuals and households: there were reports of accounts clerks delaying the payment of cheques, and of services not being rendered to households in the absence of bribe payments being made. Some of those in senior management positions had been involved in false invoicing, and other types of fraud. Bribes had become part of the commercial culture: obtaining a telephone, a bank loan, a construction or other contract, all typically required payment of an unofficial ‘fee’. A final means of survival for households was, of course, to cut back on all unnecessary household expenditures, even where (as with diets, mentioned above) the health of family members might be deleteriously affected. Many of those interviewed by Simutanyi formerly travelled to work by bus, but 108

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now walked in order to save the cost of the fare. This was no less true of employees who received transport allowances: there were more important ways of spending the money, even though the walk to work might have to start as early as 0500 hours. At an early stage in the economic reform process, it was reported that households sharply changed their consumption away from beef, chicken, fish and other high protein items which were more expensive (UNDP, 1986, vol. 2, pp.38–51). Almost one-fifth of households from a sample of low-income earners in Lusaka reported reducing the number of meals eaten per day. On the other hand, maize-meal and vegetables remained high priorities in family budgets. By 1992, however, people had significantly reduced their maize consumption—a result not only of lower household incomes, but also of the reduction in the consumer subsidy formerly provided by the Government (Simutanyi, 1993, p. 32). Some companies responded to this by buying mealie meal, and selling it to their employees at a lower price. Accordingly, the provision of subsidy had in these cases (Zambia Airways; ZCCM) passed from the Government to the employer. Some unions in the private and parastatal sectors have always been strong. It became customary, during the late 1980s, for wage settlements to be influenced primarily by the cost of living. But some firms were unable to pay higher wages in line with inflation, and in some cases increased their borrowings from banks to settle wage claims. The increase in strikes (which doubled from an annual average of 53 between 1986 and 1989, to over 100 in 1990 and 1991)10 reflected the growing dissatisfaction of workers with their terms and conditions of work. Absenteeism was reported to be a problem in the private sector, but not so much as in the civil service, owing to private employers applying stronger management controls. With the reintroduction of taxation of allowances in 1992, many employees were initially made much worse off, owing to the high proportion of their pay which had recently been in the form of allowances (section 4.4, above). Accordingly, the size of allowances was typically increased—or consolidated in basic pay—so as to compensate employees for the taxes on allowances which now had to be paid. The response by all private employers who could afford it was to gross up the value of allowances paid, so as to leave workers at the same levels of net pay as they had enjoyed prior to the tax changes being introduced. As indicated earlier, the informal sector in Zambia grew rapidly in the 1980s—fuelled by the necessity to enhance earnings for many families which had previously been entirely dependent upon wage incomes. On the consumption side, also, the demand for informal sector products increased as more and more consumers were forced to shift demand towards cheaper informal sector goods and services. Car maintenance and house construction were now seldom purchased by households from the formal sector. A very 109

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large market for second-hand clothes developed, without which many families would have been unable to manage. The clothes were often bought from neighbouring countries, and sold in markets throughout Zambia, and, as in the public sector, often in offices and other places of work. CONCLUSION The extent of earnings decline in Zambia over the years 1975–91 was very great. An earlier paper (Colclough, 1989) concluded that wages and salaries in Zambia appeared to be relatively inflexible, and that, at least until 1983, the extent of earnings decline had been fairly small. The apparent unwillingness of the Government to allow wages and salaries to adjust appeared to be an important ingredient in the country’s continued economic demise. The more recent data analysed in this paper, however, show that these circumstances changed very sharply after 1983. By the end of the decade, wages and salaries in all sectors of the economy had fallen to only a small proportion of their 1975–80 levels. The adjustment burden was being faced by most households, and particularly by those who had previously been towards the top end of the salary distribution. Differentials were much reduced, but even the poorest workers in the formal sector received wages which were scarcely more than one-third of their real 1975 values. Accordingly, many households in Zambia were pauperized by the long years of economic decline. New survival strategies were made necessary, aimed at increasing household incomes and reducing household expenditures in order to make ends meet. Some of these actions further undermined labour productivity—at least as regards primary jobs—in consequence of the sharp increase in rent-seeking activities in all sectors, of excessive rates of absenteeism and of low worker morale. Thus, we have seen that, during the early stages of the adjustment process in Zambia, real wages fell—as predicted by theory, and as intended by the selection of the particular stabilization instruments used. But the major goals of such changes—to increase Zambia’s production efficiency at home and competitiveness abroad—remained elusive owing mainly to the declines in productivity following from the extreme adversity imposed upon most formal sector workers. In the short run these changes brought negative net consequences for society as a whole. Whether they were a necessary harbinger of longer-term recovery remains to be seen. NOTES 1 Dennis Chiwele provided excellent research assistance in the production of this paper, and made the arrangements for a series of interviews conducted by the author during a research trip to Zambia in July 1992. 2 These are discussed, in more detail than can be given here, in Colclough (1988). 110

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3 These statements assume a population of 4,830,900 in 1975 and 7,818,500 in 1990, as given by the 1980 and 1990 population census reports (GRZ, 1980a; GRZ, 1990), together with levels of formal employment, for those years, indicated by Table 4.1. 4 The declining trend indicated by Table 4.1 for the years 1964–69 relates to nonAfricans, as mentioned in the notes to the table. Although their numbers fell consistently, there was a rising tide of non-Zambian African immigrants from elsewhere in the continent. As is suggested by the data which use a changed basis of classification from 1973, it is believed that these trends roughly coincided in magnitude, providing approximate stability in the number of expatriates employed. 5 Since, however, such people remain non-nationals, they do have the option of returning to their home countries. Emigration, for them, is thus much more likely than for most members of the citizen labour force. From a supply-side point of view, therefore, it would be unwise to count automatically upon their continued presence, particularly under the more recent circumstances of sharply declining incomes from wage and salaried employment. 6 More recent data on the skill and occupational composition of the non-citizen labour force had not, by 1992/93, been published. 7 Strictly, of course, it is the comparison between labour costs in different countries which matters. However, the evidence for the reported differences in real earnings, utilizing data from the mid–1970s for 19 countries, is given in Colclough (1989, pp.21–25 and appendix). 8 ZIMCO is the parent company for all nationalized enterprises in the industrial and mining sectors. 9 It should be noted that one valid reason for absence, which has become increasingly frequently cited, is to attend funerals—a consequence of the recent substantial increase in the death-toll from AIDS-related diseases. It was estimated that, in 1983, 35 per cent of all hospital beds in Zambia were occupied by such patients (Times of Zambia, 12 June 1993). 10 Data are from ZCTU (1992, table 1).

REFERENCES Chiwele, D. (1993) ‘Stabilisation, the real wage, employment and welfare: The case of Zambia’s formal sector employees’ (Brighton, University of Sussex, D. Phil. thesis; mimeo). Colclough, C. (1988) ‘Zambian adjustment strategy—With and without the IMF’, in Colclough and Green (eds) (1988), op. cit. ——(1989) The labour market and economic stabilisation in Zambia, PPR Working Papers, WPS 222 (Washington, DC, World Bank). ——and Green, R. (eds) 1988. ‘Stabilisation—For growth or decay?’, in IDS Bulletin, 19/1, Jan. Daniel, P. (1979) Africanisation, nationalisation and inequality: Mining labour and the Copperbelt in Zambian development (Cambridge, Cambridge University Press ). Elliott, C. (ed.) (1971) Constraints on the economic development of Zambia (London and Nairobi, Oxford University Press). Fry, J. (1979) Employment and income distribution in the African economy (London, Croom Helm). Government of the Republic of Zambia (various years) Establishment Register (Lusaka, Government Printer). 111

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Government of the Republic of Zambia (1966a) Manpower Report (Lusaka, Cabinet Office). ——(1966b) Report of the Commission of Inquiry into the Mining Industry 1966 (Lusaka, Government Printer). ——(1980a) Population and Housing Census of Zambia, Vol. III, Analytical Report (Lusaka). ——(1980b) Monthly Digest of Statistics, Supplement (Lusaka, CSO, Jan./Mar.). ——(1983a) Manpower Survey of Employees (draft) (Lusaka, mimeo). ——(1983b) Establishment Register (Lusaka, Government Printer). ——(1985) Monthly Digest of Statistics, XXI 6–7, June/July. ——(1987) Consumer Price Statistics (Lusaka, CSO), No. 21, May. ——(1990) Census of Population, Housing and Agriculture: Preliminary Report (Lusaka, CSO). ——(1991a) Monthly Digest of Statistics, Jan. ——(1991b) Women and men in Zambia: Facts and figures (Lusaka, CSO). Jolly, R. and Williams, M. (1970) Fiscal, monetary and cost-push factors in the Zambian economy, 1964–70 (Lusaka, Planning Office; mimeo). Knight, J. (1971) ‘Wages and Zambia’s economic development’, in Elliott (ed.) (1971), op. cit. Meesok, O. et al. (1986) Wage policy and the structure of wages and employment in Zambia, CPD Discussion Paper No. 1986–41 (Washington, D.C., World Bank). Prices and Incomes Commission (1991) Social Economic Bulletin (Lusaka), 1/2, Nov. ——(1992) Report on developments of incomes of unionised formal sector workers 1983–1991 (Lusaka). Simutanyi, N.R. (1993) Crisis, adjustment and survival strategies of workers in Zambia; The case study of railway workers, Kabwe, UNRISD Research Report (Geneva, July; mimeo). Turner, H.A. (1969) Report to the Government of Zambia on incomes, wages and prices in Zambia: Policy and machinery (Geneva, ILO). United Nations Development Programme (UNDP) (1986) Restructuring and development in Zambia: Roles for technical cooperation, Report of the National Technical Cooperation Assessment and Programming Mission to Zambia, New York (2 vols.). Zambian Congress of Trade Unions (ZCTU) (1992) Position paper on the causes of recent strikes in Zambia: A worker’s view (Lusaka, July 1992; mimeo). ZIMCO Memorandum (1992) HRDTMS/02/03, 6 Feb.

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5

PUBLIC-SECTOR PAY AND ADJUSTMENT IN ZIMBABWE Mkhululi Ncube

INTRODUCTION Zimbabwe’s early years of independence appeared to augur well for the country’s future prosperity. Renewed access to trade and aid after many years of sanctions, good weather conditions and harvests, and favourable terms of trade, brought rapid growth in excess of 10 per cent per year in 1980 and 1981. Investment rose sharply, and access to services by the population rapidly increased. However, this good record did not continue. The current account balance became heavily negative, and inflation rose sharply (both of which were aggravated by burgeoning public spending). Moreover, the onset of world recession, declining terms of trade and three consecutive drought years caused economic growth to be arrested. The Government was forced to introduce a range of stabilization and adjustment measures which were pursued with only limited success over the period 1983–90. Accordingly, growth remained modest, and per capita income actually fell over those years. This case study traces the impact of these events upon the labour market, with a particular focus upon earnings and employment in the public sector. PUBLIC-SECTOR EMPLOYMENT The poor economic record following independence held back employment growth in the formal sector to less than 2 per cent per year over the decade 1980–90. This was insufficient to absorb even the incremental growth of the labour force, causing unemployment (estimated in 1992 at 30 per cent) to rise sharply. In recent years up to 250,000 school-leavers have entered a labour market offering only 10,000–20,000 formal sector job opportunities. Many have had to join the informal sector, which in 1987 employed 7.4 per cent of the labour force (up from 5.9 per cent in 1982). Although total employment growth was sluggish, employment in the public sector grew rapidly, particularly until 1983, whilst that in the rest of the economy actually fell between 1980 and 1987, and increased only modestly thereafter (Table 5.1). Accordingly, the share of total employment accounted 113

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for by the public sector increased from 13 per cent to 19 per cent over the decade. Central government became the major public employer, with civil servants increasing in number from 48,000 to 183,000 between 1980 and 1991 (or from 5 per cent to 15 per cent of formal employment). This fourfold increase was strongly influenced by the transfer, in 1987, of all teachers in private institutions and in the Unified Teaching Service to the civil service (Table 5.2). Table 5.1 Zimbabwe: formal sector employment, 1980–90 (thousands)

Source: Central Statistical Office: Quarterly Digest of Statistics, various issues (Harare). Note: *Includes central and local government, education and health.

Thus, during the first few years of independence the new government expanded the civil service rapidly. It was politically necessary to absorb many returning combatants in the public sector and, more generally, to satisfy postindependence aspirations and expectations. This included a rapid expansion of education and health services, and early progress with Africanizing senior levels of the public service. Rapid public service growth was also a response to the new role assumed by the Government. Functions of the civil service were broadened from a narrow revenue collecting and law enforcement remit to a more developmental role. Increased services and the decentralization of activities to provinces and districts necessitated a rapid expansion in employment. On the other hand, employment in parastatals and in local authorities did not change as rapidly as in the civil service. These institutions have concentrated more on replacing lost workers than upon growth in numbers employed. As shown in Table 5.3, employment in the parastatal sector remained roughly constant over 1985/86–91. Distribution of the public-sector labour force Central and local government workers are concentrated in public administration, health, education and construction activities. In the civil service, about 82 per cent of the employees are in public administration, health and education, as shown in Table 5.4. In local authorities, for every five employees, four are in either education, health or construction. The heavy 114

Source: Table 5.1 and Public Service Commission (Harare).

Table 5.2 Zimbabwe: central government employment, 1980–91

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concentration of public-sector employees in the social sectors reflects the Government’s vision of the promotion of ‘growth and equity’. Table 5.3 Zimbabwe: employment in parastatals by sector/industry, 1985–91

Source: Ministry of Public Service, Labour, Manpower Planning and Social Welfare: Annual Review of Manpower, various issues (Harare).

In the case of public enterprises, Table 5.3 shows that the high concentration areas are transport, electricity and manufacturing activities. Each of these three industries is dominated by public monopolies: the National Railways of Zimbabwe (NRZ), Zimbabwe Electricity Supply Authority (ZESA) and Zimbabwe Iron and Steel Company (ZISCO), respectively. 116

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Table 5.4 Zimbabwe: distribution of central government employees by industry sector, 1985–91 (percentages)

Source: Central Statistical Office, Labour Statistics Section (unpublished data). Note: The phenomenal growth in the proportion of central government employees in education in 1987 was a result of the absorption of teachers from the Unified Teaching Service by the civil service. These teachers (from mission, local government and private schools) were not paid directly by the Government before 1987. They were paid indirectly through lump-sum grants from government. In 1987, they became directly paid by central government and were regarded as part of central government thereafter.

Employment determination in the public sector Parastatals have autonomy in the determination of both employment and salary levels. The State appoints and determines the salaries only of chief executives in the parastatals. The immediate post-independence appointments of chief executives were, however, often based more on political affiliation than strictly on merit. This policy had its costs; subsequently, many parastatals performed badly because of poor management. Furthermore, the autonomy of parastatals as regards employment determination was often compromised. For example, in 1985/86 the Minister of Transport issued directives to the NRZ management to appoint over 100 individuals, despite resistance from NRZ. Cases of nepotism and tribalism were also rife in the promotion and appointment of officers in that institution.1 Local government authorities, on the other hand, set their own employment levels, depending on their budgetary constraints, and in this sector central government interference has been minimal. In the civil service the employment process is centralised in the Public Service Commission (PSC). That authority determines the number of established posts and the appointment of individuals to different departments. Heads of departments can only appoint junior staff after permission has been granted by the PSC. Following the introduction of the economic reform programme (ERP) in 1990, the personnel function was tightened. Any posts which fell vacant were carefully scrutinized by the Efficiency Units in the PSC to ascertain their 117

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necessity. Appointments at all levels were made only after investigations by Efficiency Units in order to minimize inefficiency. The public-sector labour force and Black employees’ advancement At independence in 1980, senior public-sector employees were mostly Whites. About 5,000 Whites occupied 90 per cent of all senior and middle management positions in the public sector. A Presidential Directive, issued three weeks after independence, sought to redress this imbalance. This reflected the provisions of the new constitution, which stated that ‘the President may give general directions of policy to the PSC with the objective of achieving suitable representation of the various elements of the population in the Public Service and the prison service’.2 By the late 1980s the racial imbalance had been much reduced. By 1987, for example, amongst 252 senior management posts at NRZ, 48 per cent were occupied by Blacks. They also held almost 40 per cent of posts in the officer ranks.3 In the civil service as a whole, by 1989, about 95 per cent of the approximately 300 most senior posts in the government were occupied by Black Zimbabweans. The apparent success of the Black advancement policy was aided, first, by an attractive retirement package which induced many Whites to relinquish their posts. This incentive scheme, allowed for in the Lancaster House Agreement,4 permitted those Whites retiring before 1982 to receive their pensions in foreign currency. Second, the rapid extension of the public service made the process of Black advancement easier. Finally, a significant exodus of Whites—mainly to South Africa and Australia—led to the early incidence of a large number of vacant posts (Table 5.2). Nevertheless, rapid Black advancement was, on balance, detrimental to the efficiency of the public sector. The public sector lost many skilled and experienced workers who proved difficult to replace. Quality of the civil service Human capital flight soon after independence left the public sector with deep skill shortages. The external and internal brain drain continued over the 1980s, thereby eroding the quality of the public-sector labour force.5 Table 5.5 summarizes the skill composition of the civil service. It can be seen that over the period 1981 to 1986 the professional category trebled, accounting for almost half of the total increase in civil service employment over those years. This was mainly due to the introduction of free and compulsory primary schooling, which required mass recruitment of teachers. This growth (although abrupt in 1987 due to the transfer of teachers from the Unified Teaching Service) was moderated over the years 1987–91, although the professional grades continued to expand faster than other parts 118

Source: Public Service Commission data, 1981–91 (Harare).

Table 5.5 Zimbabwe: skill composition of the civil service, 1981–91

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of the service. Skilled and semi-skilled workers expanded much more slowly, taking the decade as a whole, mainly because many such workers left the public sector for other jobs at home or abroad. Declining real incomes and a steady widening of public-and private-sector income differentials encouraged this exodus. A return to growth in the number of semi-skilled workers was only possible, towards the end of the period, by consequence of allowing uncertified but experienced craftsmen to become trade-tested. Similar trends were apparent in the parastatal sector. Table 5.6 shows that, between 1985 and 1986, the number of skilled workers fell by onequarter in parastatal enterprises. Semi-skilled employment also fell slightly, even though total employment was roughly unchanged between the two years. Meanwhile, vacancy rates were 19 per cent and 15 per cent respectively for professional and technical staff categories. At this time, therefore, there were acute, and growing, skill shortages in the public sector as a whole. Table 5.6 Zimbabwe: skill levels in parastatals, 1985 and 1986 (percentages)

Source: Ministry of Public Service, Labour, Manpower Planning and Social Welfare: Annual Review of Manpower, 1985/86 (Harare). Note: This information is based on annual sample surveys of manpower.

In the short run, imported labour was used to meet the skill shortages. Table 5.7 shows the number of expatriates employed by the civil service and in the economy as a whole. The proportion of expatriates employed in the civil service increased from 14.2 per cent of total expatriates in 1980 to a peak of 75 per cent in 1987. Education (mostly secondary and tertiary institutions) has had the highest concentration of expatriates in the civil service. These were mostly from European countries. The construction sector of the public sector has also employed a significant proportion of expatriates, mainly Koreans, Bulgarians and Chinese. After 1987 the number of expatriates employed by the civil service fell significantly. The major reason for this was the declining salaries offered by Zimbabwe in comparison to other countries within the region. The devaluation of the currency, and the introduction of the highest taxation rates in the region, reduced the competitive advantage 120

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which was enjoyed by Zimbabwe soon after independence. Thus, it became difficult to attract and retain expatriate labour.6 Table 5.7 Zimbabwe: percentage of total expatriates in the civil service, 1982–91

Source: Ministry of Public Service, Labour, Manpower Planning and Social Welfare: Annual Review of Manpower, various issues (Harare).

Public-sector retrenchments and redeployment The costs of the increase in public-sector employment have contributed significantly to the public-sector deficit, which averaged 10 per cent over 1982–91. The curtailment of this deficit has been a major objective of the Economic Structural Adjustment Programme (ESAP). Table 5.8 shows that the proportion of public recurrent expenditure accounted for by wages and salaries increased from around 30 per cent in the early 1980s to around 40 per cent by the end of that decade. There is also some evidence that public-sector wages increased slightly as a proportion of the national wage bill over those years. The general restructuring of the economy under the ESAP started in October 1990. In the public sector the reforms sought to reduce recurrent expenditure, which had accounted for almost a third of total expenditure. The wage bill which, as we have seen, is a significant proportion of recurrent expenditure, was to be cut from 16.5 per cent of GDP (1990/91) to 12.9 per cent (1994/95). It was expected that this would release pressure on taxation, and help to reduce the deficit to 5 per cent of GDP by 1995. In order to achieve these targets, planned rationalization measures included a reduction of the civil service labour force (excluding education and health) by 25 per cent (23,000 workers), and of the labour force in parastatals by 4 per cent (2,000 workers). In local authorities no significant reductions in staffing levels were planned. The retrenchment process was to be phased in regularly over the years 1991/92–1994/95 in order both to avoid large numbers of retrenchees being ejected onto an already tight labour market, and to stagger the financing of terminal benefits over a number of years. The rationalization exercise first 121

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involved a freeze on all civil service recruitment, and abolished vacant and unnecessary posts. In the 11 ministries where retrenchment occurred, a total of 1,184 vacant posts were abolished. Table 5.9 shows that 84.6 per cent of these posts were for junior employees and the remainder were for officers.7 Table 5.8 Zimbabwe: civil service labour costs, 1979/80–1992/93

Source: Central Statistical Office: Quarterly Digest of Statistics, 1980–1992 (Harare).

Retrenchments began in early 1992, almost a year behind schedule. In the first set of 11 ministries, a total of 6,197 ‘superfluous’ posts were identified as at end of August 1992. These posts were said to comprise areas of overlap, duplication and overstaffing. Again, a substantial majority (97 per cent) of these were occupied by junior unskilled employees. The incumbents of these superfluous posts were either laid off or redeployed. Table 5.9 indicates that 5,403 (or 87.2 per cent) of the 6,197 workers were laid off and 794 (or 12.8 per cent) were redeployed. Of the workers laid off, 5,364 (or 99.3 per cent) were junior employees and only 39 were officers. On the other hand, the incidence of redeployment has been high amongst the officer ranks: of the 181 officers in redundant posts, almost 80 per cent were redeployed within the civil service, whereas only a tenth of the junior employees were reabsorbed within the civil service. The disparity in redeployment figures reflects the extremely cautious government policy in dealing with professional, technical and administrative manpower: most of the 37 officers laid off were close to retirement age. The stated aims of the rationalization of civil service employment were to increase efficiency and savings. However, as to the latter, this first round of retrenchments indicates that savings are likely to be small, owing to the low wages earned by the majority of those laid off. 122

Source: Ministry of Public Service, Labour, Manpower Planning and Social Welfare: Annual Review of Manpower, various issues (Harare). Notes: *By the end of 1992 only 11 ministries had been affected by the rationalization exercise. † ‘Superfluous’ posts means occupied but unnecessary posts.

Table 5.9 Zimbabwe: retrenchment and redeployment in the civil service (Phase 1), 1991–92

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Retrenchments in parastatals have been less than in government, notwithstanding warnings of overstaffing. The iron and steel company (ZISCO) and the railways (NRZ), for example, were warned of overstaffing as early as 1985 but continued to increase their employment levels. Parastatals and local authorities preferred to emphasize human resources reorganization in order to improve efficiency. Employment was frozen in all parastatals and local authorities after 1990, except in critical shortage areas. Only four out of 40 or more parastatals had, by 1993, laid off any workers. These organizations, the Mining Development Corporation (ZMDC), the Grain Marketing Board (GMB), ZISCO and NRZ, had together shed only 863 employees by 1993, accounting for less than 2 per cent of total employment in the parastatal sector.

WAGES AND SALARIES IN THE PUBLIC AND PRIVATE SECTORS

Public-sector wage distribution and developments The wage bill in the public sector has increased fivefold in monetary terms over the past decade. However, despite this sharp increase it has fallen dramatically in real terms. This has been true throughout most of the economy. In all sectors except mining, average wages have fallen below their 1980 levels. Table 5.10 shows that the largest falls have been experienced in the public administration, education, health and transport sectors. However, there has been greater deterioration of pay levels in the public sector than elsewhere, and on average public-sector employees are 40 per cent worse off than they were in 1980. The heavy fall in public-sector real wages is primarily attributable to government policies. Wage restraint was more closely adhered to in the public than in the private sector. The PE Consulting Group’s National Salary Survey of 1989, for example, indicates that despite a government legislated maximum salary of Z$50,000 per annum for 1985, the average chief executive in the private sector earned more than this. The private sector also increased employees’ non-cash benefits—both in size and variety—as a way of circumventing government wage controls. Table 5.11 shows that, in the late 1980s, median wages in the private sector were significantly higher than in the public sector, for common jobs at all levels of the hierarchy. In general, salaries in the private sector were at least 50 per cent higher, but in some senior management and professional jobs it was possible for civil servants almost to double their salaries by a move to the private sector—particularly for graduates in commerce or engineering. 124

Source: Calculations based on employment and earnings statistics and the low-income price index from Central Statistical Office: Quarterly Digest of Statistics, 1975–88 (Harare).

Table 5.10 Zimbabwe: real annual earnings per worker by industrial sector, 1975–87

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Table 5.11 Zimbabwe: public-and private-sector median wages by occupation, 1988 and 1989 (Z$, annual)

Source: Private-sector figures from the PE Consulting Group, National Salary Survey (1989). These figures are based on a sample of 90,000 workers. For other sectors the data are available from their respective annual salary review tables. Note: *Zimbabwe Electricity Supply Authority.

Incomes policy, 1980–90 Initially, the major aims of incomes policy were to reduce income differentials between high-and low-income earners in general, and between Blacks and Whites in particular. However, in later years it became an instrument which was used to contain inflation. The process of wage determination was centralized, and it became a tradition, in July of every year, for the Government to announce wage changes for different sectors. The role of trade unions in public enterprises and local authorities was reduced to solving disputes at shop-floor level, rather than collective bargaining. The Government took the view that it itself championed the workers’ cause. Labour was regarded as being in a weak position, unable to bargain with capital on equal terms. The main instruments of incomes policy were twofold. Minimum and maximum wages were prescribed by the Government. Between these legislated parameters, employers were allowed to make their own salary adjustments for different jobs. 126

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Public-sector wage adjustments have been influenced by a number of factors. First, as mentioned above, existing wage differentials were a major consideration for the central authority in making wage changes: the gap between high-and low-income earners was to be narrowed, by offering the highest proportional increases at lower pay levels. Table 5.13 demonstrates the way wages were adjusted at the bottom and at the top of each scale during the 1980s, and the results, in terms of salary ratios, are shown in Table 5.13. The ratios in the civil service have decreased with time, indicating some narrowing of wage differentials. In 1981 the chief executive in the civil service was paid 25 times the wage of a labourer, whereas by 1988 this had dropped to a factor of 14. For local authorities (P2) wage differentials reached an all-time high in 1985, but declined in subsequent years. For public enterprise-transport (P3) a branch head in the production department received 14 times more than a general hand in 1984, but by 1990 this had dropped to a factor of 11. However, in the case of P4 (public enterprise-marketing), the policy of narrowing wages is not reflected by the figures in Table 5.13. Table 5.12 Zimbabwe: wage adjustments—a comparison, 1980–92 (percentage increases over previous year)

Source: Annual salary review tables from the respective sectors. Key: P1=Central government. P2=Local authorities. P3=Public enterprise (transport). P4=Public enterprise (marketing). Note: *Critical allowance.

Second, salary and wage adjustments have been influenced by the changes in the cost of living. The immediate post-independence adjustments were in line with the Riddell Commission’s recommendation that wages for the lower paid should rise until they reached 90 per cent of the poverty datum line (PDL) by 1984. This, however, only happened until 1982, whilst real wages in general were rising. Subsequently, the comparison with the PDL was abandoned as real wages fell. 127

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Table 5.13 Zimbabwe: wage differentials—ratios,* 1980–92

Key: As for Table 5.12. Note* Ratios are for the highest-to the lowest-paid employees, except for P3 and P4 where salaries of branch heads were used. Ratios for P3 and P4 are therefore an underestimation of the true differentials, n.a.: not available.

Third, the centralized wage determination mechanism was also influenced by the fight against inflation. All wages were frozen during 1983 and 1987 to dampen inflation, and in 1984 a maximum salary of Z$50,000 per annum was stipulated throughout the economy. The fourth influence on wage adjustments in the public sector was the salary gap between the public and private sectors. This reflected increasing concern about the effects of the loss of skilled and experienced workers by the public sector. According to the Public Service Commission, ‘an attempt was made to ensure that salary gaps were narrowed as quickly as possible so as to reduce the incidence of “job hopping”’.8 In this connection, in 1984 workers in jobs where the public sector faced growing skill shortages were awarded supplementary allowances equal to 15 per cent of their annual salaries. This was a move in the direction of equalizing private-and publicsector salaries for certain jobs. Continuity rather than change in incomes policy, 1990–92 With the advent of ESAP in October 1990, the above wage regulations were relaxed. The private sector had been in the forefront of those advocating deregulation of wages. Minimum wages were said to have militated against employment creation, owing to their impact on labour costs. Under the reforms, the whole economy was moving towards greater liberalization, and the labour market was to be decontrolled in line with other sectors. The wage determination process became more differentiated. In local government and parastatals, collective bargaining was now allowed. Henceforth, trade unions and employers met under the auspices of their employment councils9 and negotiated wages and other employment conditions. However, collective bargaining agreements in all the sectors still had to be approved by the Government. In practice, the Government did not approve increases negotiated by the parastatal unions which would have allowed improvements greater than those granted to central government employees. 128

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Thus the extent of liberalization in the labour market during 1991–93 was very limited. In the case of the central government, the wage determination process remained centralized. The legal infrastructure was not changed to allow for free collective bargaining. Public servants continued to operate in a different legal environment from other employees, governed by their own Act of Parliament. The Public Service Labour Act does not allow for free collective bargaining, and all government employees are grouped into associations which have no legal status to bargain for their working conditions. Civil service associations, under the Act, can only recommend salary/wage adjustments to the PSC which, in turn, can consider or disregard the recommendations. The PSC in consultation with the Finance Ministry makes its own adjustments and passes its recommendations to the Cabinet. It is the Cabinet which finally approves the adjustments proposed by the PSC. Recommendations of civil servants’ associations have rarely affected cabinet decisions and they have no legal basis to enforce them. According to the Labour Relations Act of 1985 civil service employees are a category of ‘essential services’ and are not entitled to take industrial action. PAY DETERIORATION AND LABOUR MARKET BEHAVIOUR It has been shown above that the Government’s policy of narrowing wage and salary differentials seemed, during the 1980s, to have been implemented more strongly in the civil service than in other public-sector organizations. It has also been shown that pay deteriorated in the public sector more than in other sectors of the economy: the private sector could more easily ignore the ceilings on salaries for the highly paid than could employers who were directly under the control of government. Earnings differentials in favour of the private sector were further heightened by private employers paying additional allowances to cover the costs of fuel, telephone and entertainment for their senior staff. Various forms of non-cash benefits were also increasingly introduced as a way of cushioning senior staff against salary controls. One result of the increased relative attractiveness of employment in the private sector was a growing loss of public-sector workers to jobs elsewhere in the economy. For example, over the four years 1983–86 there were 2,581 resignations amongst civil servants, mainly from the technical and administrative grades. Most of these officers took up jobs in the private sector, and they accounted for about 5 per cent of total civil service employment at that time. By comparison, the number of retirements over the same years amounted to fewer than 800.10 The pattern of resignations often badly affected the operational ability of particular departments. Thus, for example, in the Ministry of Labour between July 1982 and September 1984, the Department of Industrial Relations lost 48 officers to the private sector. These included four Chief Industrial Relations Officers, one Deputy Chief Industrial Relations 129

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Officer, one Senior Industrial Relations Officer and 18 Industrial Relations Officers.11 The parastatal sector was also affected, with 2,332 resignations being recorded for 1983 alone, and vacancy rates amongst professional posts reached 19 per cent by 1985. The responses to pay deterioration in the public sector were not, of course, limited to resignations. A range of other reactions became evident amongst those who, whilst retaining their posts, pursued other strategies to attempt to preserve their earlier standards of living. Some discussion of these responses now follows. Moonlighting and absenteeism Moonlighting by public servants became common. For example, a large number of accountants, engineers, teachers, technicians, lawyers and lecturers in the public sector engaged in moonlighting to raise more income. Many taught in private colleges and polytechnics. Most private colleges, which increased in number rapidly after 1980, maintained no permanent staff but relied on skilled and experienced manpower from the public sector. Absenteeism amongst public officers became rife during the 1980s. In many cases additional money could also be earned whilst at work: clerical workers, for example, frequently engaged in privately contracted typing, duplicating, knitting, etc., during office hours. Traditionally, workers in the public sector have not been allowed to engage in activities of this kind. Thus, section 9 of the Public Service (General) Regulations of 1992 reads: A person in the employment of the Public Service shall, unless the commission otherwise determines: (a) place the whole of his time at the disposal of the state and (b) receive no additional remuneration as a right in respect of any duty or work in the Public Service which he may lawfully be required to perform and (c) not perform or engage himself to perform work outside the Public Service for remuneration. However, in recognition of the growing prevalence of moonlighting, new regulations permitting public service employees to engage in remunerated activities outside the public service were introduced in 1992. Public Service Circular No. 7 of 1 July 1992 states: The Public Service Commission has decided to relax some of the rules regarding engagement for remuneration outside the Public Service. Civil servants can now perform or engage to perform work outside the Public Service for remuneration provided: 130

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(a) the work is not performed during working hours and this includes selling of goods in offices. (b) the work does not in any way conflict with the interests of the state or be inconsistent with their rules. The circular further indicates that: The Commission has delegated to heads of ministries powers to give authority on cases that may be in violation of the provisions of paragraph 2(a) and (b) and these cases include the following: — Lecturing, tutoring, teaching — Writing and editing books — Contributing material for publication — Setting and marking examination scripts — Consultancy — Farming — Running family or own business — Attending meetings pertaining to shareholders or Directorships of companies etc. These changes represent a great departure in public service regulations. They are a recognition that public servants may need to engage in other activities to improve their living standards. Trading The prevalence of advertisements for items for sale in government offices is testimony to the high incidence of public servants engaging in trading activities. Their frequency led to the activity of ‘offering goods for sale in offices’ being specifically disallowed by the provisions of the Public Service Circular quoted above. Items advertised have ranged from imported to homemade goods. Local items have included woollen goods such as sweaters and embroidered work. Imported items include electrical gadgets from Europe and clothing from other African countries. Trade in local produce has usually been conducted by women. Imported items have often been sold by senior civil servants whose work involves trips abroad. For this reason, foreign visits became a considerable perk for civil servants, not only because they gave the opportunity to buy foreign goods for resale, but also because they brought access to foreign exchange. Corruption A growing number of cases of corruption have involved middle and senior government officials. In 1989, for example, the Sandura Commission implicated five Cabinet Ministers, two Deputy Ministers and two Members 131

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of Parliament for the illegal procurement of vehicles. Subsequently, the Ministers of Education, Defence, Labour and Industry were found guilty of illegal procurement and subsequent resale of cars at prices far above the controlled prices. A Senior Minister in the President’s office committed suicide before being found guilty. In 1992 the Police Commissioner, an Assistant Commissioner and other senior police officers were found guilty of various corruption charges. In the same year an official in the Ministry of Industry and Commerce was arrested for selling import licences to the private sector, which had involved revenue losses amounting to millions of dollars by the Government. Corruption also increased at border posts. A number of customs and immigration officials were found guilty of accepting bribes from cross-border travellers. In education a number of school heads were imprisoned between 1990 and 1992 for converting examination and school fees to personal use. The fast deterioration of pay levels was widely seen as an important cause of the escalating incidence of corruption. Collective cushioning mechanisms: workers’ initiatives Within the public sector, civil servants also responded collectively to falling pay levels and standards of living. They initiated two savings schemes to provide limited financial protection in the face of low and declining salaries. Some discussion of each of these now follows. Public Service Association Savings and Credit Cooperative Society Limited The main purpose of this scheme is to assist members to obtain loans which— in view of low salaries and lack of collateral—would otherwise not be available from banks. Members invest in the cooperative by purchasing shares and depositing money. A maximum of 200 shares, with a nominal value of Z$10.00, can be purchased. Monthly members pay Z$5 to their share account, but any member of the society may make deposits up to a maximum of Z$2,000 for a period of at least 12 months. These deposits earn interest, which is fixed from time to time by a board of directors, and paid quarterly. After saving for 12 months, members may then apply for loans. The maximum loan value is three times the total value of an applicant’s shares and deposits. The rate of interest charged on loans is fixed from time to time by the board of directors, but does not exceed 2 per cent per month of unpaid balance. This scheme provides civil servants with easier access to funds than they could obtain from other financial institutions. Low interest rates and long repayment periods (which are negotiable) cushion participants from the impact of deteriorating pay. 132

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Unemployment and Death Benefit Scheme This scheme provides financial assistance for the following purposes: (a) support for those whose services are terminated (possibly due to a strike or lay-off); (b) support for those taking unpaid study or maternity leave, or leave for other purposes; (c) support for those suspended without pay; (d) support to dependants in cases of death or insanity. Government employees subscribe to the scheme for between six and 15 months. They subscribe a minimum of Z$1.75 and a maximum of Z$41.75 per month. Benefits depend upon contributions, but could vary between Z$300 and Z$7,500. CONCLUSIONS Zimbabwe’s adjustment problems have been relatively minor compared with those faced by many other countries in sub-Saharan Africa. Nevertheless, from the mid–1980s the Government began to face severe budgetary problems, which were tackled by sharply curtailing the further growth of the civil service, selectively retrenching some employees, and restricting the growth of wages and salaries to well below the level of inflation. By consequence, the average civil servant experienced a 40 per cent cut in real earnings over the decade. Many in the private and parastatal sectors were also hard hit by recession— employment was stagnant throughout most of the decade and earnings there too fell sharply. However, salary decline for public servants (including teachers) was considerably greater than in other sectors of the economy. The falls were sharp enough to lead to the emergence of moonlighting, absenteeism, and (probably) corruption on a significant scale within the public sector. The impact of these changes on the productivity of public servants was undoubtedly negative. NOTES 1 Justice Smith, Commission of Inquiry into Parastatals, 1987, National Railways of Zimbabwe, Harare. 2 Government of Zimbabwe: Constitution of Zimbabwe, 1989, chapter VII (75)(2). 3 Justice Smith, Commission of Inquiry in Parastatals, 1987, Harare. 4 The Lancaster House Agreement (1979) led to Zimbabwe’s independence. The incentive scheme is set out in section 25, paragraph 1. 5 External brain drain here refers to movement of manpower to other countries. Internal brain drain is a movement to other sectors within the country. 6 One additional reason for the apparent decline in the use of expatriate labour 133

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7 8 9

10 11

was the increased use of Technical Cooperation Officers, who are not held against established posts and, thus, do not appear in the civil service statistics. TCOs are seconded only to specific projects and their salaries are fully paid by donor governments. The distinction between junior employees and officers is that the former are unskilled grade 1, 2 and 3 workers, whereas the officers are semi-skilled, technical and professional workers. Public Service Commission: Public Service Manpower Plan, 1986/87 to 1990/91 (unpublished). Employment councils were set up for all local authorities and most parastatals. These consisted of an equal number of workers and employers’ representatives and were chaired by a neutral person acceptable to both parties. The mandate of employment councils governed pay, and terms and conditions of work for each parastatal and local authority. Data supplied by Manpower Planning Unit, Ministry of Public Service, Harare. Reported by G.Raftopoulos et al. (1987) ‘The internal brain-drain; Its effect on government development policy and possible alternatives. The case of Zimbabwe’, in Zimbabwe Journal of Economics, 1/4, Jan.

REFERENCES Central Statistical Office (1975–92) Quarterly Digest of Statistics, Harare. Ministry of Public Service, Labour, Manpower Planning and Social Welfare (various years) Annual Review of Manpower, Harare. PE Consulting Group (1989) ‘National Salary Survey’. Raftopoulos, G. et al. (1987) ‘The internal brain-drain; Its effect on government development policy and possible alternatives. The case of Zimbabwe’, in Zimbabwe Journal of Economics, 1/4, Jan. Smith, Justice (1987) Commission of Inquiry into Parastatals.

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STRUCTURAL ADJUSTMENT AND PUBLIC-SECTOR PAY IN ARGENTINA, 1975–91 Oscar Cetrángolo1

INTRODUCTION Throughout the 1980s the Argentine economy experienced sharp decline. Gross domestic product (GDP), which had managed an annual growth of 3.8 per cent over the first half of the 1970s, fell during most of the 1980s. The fall in per capita income exceeded 34 per cent between the beginning and the end of the decade. Investment, which had amounted on average to 21.7 per cent of GDP over the 1970s, fell to around 8 per cent over the following ten years. The external current account was repeatedly in deficit. The inflation rate accelerated continuously, until it reached hyperinflation by 1989. This case study examines the links between these disastrous economic events and the labour market, particularly focusing upon the public sector. It asks how and to what extent public-sector wages and employment levels have adjusted to economic decline, and what impact these changes have had on the rest of the economy. Sharp declines in real wages are demonstrated— most acutely in the public sector—and some of the labour market responses to these events are documented. NATIONAL TRENDS IN THE ECONOMY AND THE LABOUR MARKET The emergence of the debt crisis and attempted adjustment, 1975–83 Like other middle-income countries in Latin America, Argentina’s industrialization process was established through tariff protection, the provision of incentives to the domestic market and giving a dominant role to the public sector. Essentially, the strategy lay in the transfer of resources from the agricultural export sector to the urban economy. The Argentine economy did grow as a result of this strategy, although at a slower pace than other 135

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countries following a similar course. However, by the end of the 1970s, this strategy was showing signs of exhaustion, as inflation and urban-rural conflict—between an industry oriented to the internal market and the agricultural export economy—became endemic. In 1975, the emergence of high inflation, imbalances in the external accounts and fiscal disarray2 brought a major political crisis for the Peronist Government, and led to a coup d’état in March 1976. The high political tensions during this period, and the accommodations which the Government had been forced to make, created significant distortions in intersectoral relative salaries (Diéguez and Gerchunoff, 1984). The new government, led by General Videla, put forward an ambitious programme which attempted to open the economy and achieve financial reform. However, the Government did not manage to overcome the difficulties created by inflation. The period can be divided into two phases, which are separated by a significant change in the instruments of anti-inflationary policy towards the end of 1978. Between 1976 and 1978 all price controls were eliminated and nominal wages were frozen. This led to a significant fall in real wages. However, from 1978 wage controls were abandoned. Instead, anti-inflationary policy was based on the adoption of a prescheduled exchange rate with the peso, devaluing by controlled (and decreasing) amounts over time. The result was an expansion in the production of goods and services which were not internationally competitive, an increase in real wages and a deficit in the trade balance.3 The attempt to stabilize the economy failed: the nominal depreciation in the exchange rate was substantially slower than the rate of domestic inflation. Thus, the real exchange rate appreciated, and demand for foreign goods and services continued to grow apace. One consequence was a dramatic growth in external debt, which increased fivefold between the mid–1970s and the early 1980s (Table 6.1). The loss of competitiveness, high domestic interest rates and a decrease in demand for domestically produced goods led to a sharp fall in GDP during the period 1981–83. In spite of a wage freeze in the public sector, and attempts to reduce public spending more generally, the public deficit rose to almost 15 per cent of GDP (Table 6.1). The share of public spending in total output also continued to rise—from 44 to 50 per cent of GDP between 1980 and 1983. A sharp reversal of economic policies in 1983 created further fiscal disorder, and a new, democratically elected government came to power in December of that year. Stabilization attempts and the onset of hyperinflation, 1990 After an initial period of indecision, during which the economy continued to deteriorate, the new government, in 1985, introduced a drastic change in 136

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Table 6.1 Argentina: main economic indicators, 1971–75 to 1990

Source: Damill and Frenkel, 1992. Notes* Annual average. † At the end of each period.

policy which attempted to integrate the use of all relevant policy instruments: strict fiscal adjustment (mainly centred around better tax collection); incomes policy to enable the coordination of expectations (the exchange rate was fixed, and both public-and private-sector wages were frozen); and an active negotiation with credit institutions. Nevertheless, these reforms were no more successful than those of the past. Declining terms of trade had a negative impact upon both the trade balance and public-sector revenues. Strong trade union opposition to the policies led to high wage claims. Monetary policy was lax. Fiscal policy efforts were not applied evenly in all subsectors: whilst public-sector cuts were substantial in central administration and public enterprises, provincial administrations increased their spending. For example, provincial public employment grew by 23 per cent between 1983 and 1987 (Carciofi, 1990, p.58). Several further stabilization attempts were made throughout this period, but the Government was increasingly incapable of implementing them. By early 1989, the interaction of high inflationary expectations and increasingly unsuccessful economic policies led to a period of hyperinflation which caused an unprecedented fiscal crisis.4 The public sector was especially hit by hyperinflation and difficulties emerged in the provision of services (particularly health, education and social security). A new government assumed office in July 1989. Its stabilization policy appeared familiar, being based upon foreign exchange controls and relative price adjustment. An agreement with employers was used as an instrument for price and wage policies, and a rescheduling of public domestic debt was achieved. But a new element was the emphasis placed upon structural reforms which implied a reduction in the size of the State and a comprehensive 137

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privatization programme. In addition, an economic emergency law was passed, which allowed the adoption of new measures to raise public revenues. Despite a better fiscal performance and an initial fall in inflation to around 6 per cent per month in the third quarter of 1989, the programme ran into problems. Again, towards the end of that year, developments in the foreign exchange markets fuelled the perception that the programme required additional adjustments. In the last days of 1989, a new economic team was appointed, which had serious problems in bringing about the needed monetary control. It became impossible to sustain the demand for domestic financial assets and the Government, taking advantage of a holiday, converted private deposits into external debt. With the sudden demonetization and the control of the sources of expansion, monetary policy became more effective. By the end of March 1990, with the strengthening of monetary policy, new fiscal measures and stricter regulations on banks, the sale of foreign exchange increased and, with it, the nominal devaluation against the dollar. However, towards the end of that year, a new wave of capital flight took place. The convertibility plan A new economic team took office in January 1991 and shortly afterwards the floating exchange rate policy was abandoned. Based on a healthier state of foreign reserves of the central bank and a more sustainable fiscal account, it was decided to adopt a fixed exchange rate and freedom of buying and selling foreign exchange. Wage indexation was discontinued, and wage increases henceforth had to be justified by productivity increases. The fiscal situation improved as a result of a comprehensive fiscal reform which eliminated export duties, enhanced the value added tax and achieved a remarkable improvement in the efficiency of tax administration which managed to reduce tax evasion. Thus a tax system with more emphasis on horizontal than vertical equity, and more responsive to the economic cycle, was shaped. The better fiscal position, together with more comfortable levels of foreign exchange reserves, allowed Argentina to tackle the external debt renegotiations. On the other hand, internally, the rise in the prices of non-tradable goods continued to exceed those of tradables. Taking into account a slightly lower exchange rate than the one that had previously prevailed (except for the 1979–81 period), the Government tried to increase the competitiveness of the tradable sectors through a reduction of their tax liabilities, the deregulation of some basic services and the reduction of labour costs. These policies remained in place through 1992/93.

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Labour market trends Wages policy in the public sector needs to be seen in the wider context of national employment, which at the beginning of the 1990s showed serious imbalances. Their origins lay in the mid–1970s and some authors have traced them even earlier.5 As regards the static situation, a macroeconomic assessment of employment at the beginning of 19926 suggested that fully 36.7 per cent of the economically active population (EAP) were underutilized. That is, only 63.3 per cent were fully, or legitimately, employed. Although open unemployment accounted for only 6 per cent of the economically active population, about 30 per cent were estimated to be underemployed (Table 6.2). The most important elements of underemployment were to be found in the urban informal sector, and among those in involuntary part-time underemployment and in domestic service. In addition, the estimate of the degree of labour underutilization also included an element of hidden unemployment and an estimate for the extent of public-sector overstaffing.

Table 6.2 Argentina: employment and unemployment, May 1992

Source: Ministry of Labour and Social Security, Project UNDP/ILO-ARG/92/009.

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Other estimates show that the underutilization of labour increased fairly steadily from the mid–1970s onwards. Table 6.3, for example, shows that, whilst the EAP increased by more than 16 per cent over the decade 1980–90, the number of persons reported to be fully employed remained unchanged over the period. Accordingly, underemployment increased by almost 40 per cent, and open unemployment almost tripled over the ten-year period. Table 6.3 Argentina: evolution of the underutilization of labour, 1980–1990

Source: As for Table 6.2.

Thus, the national employment situation in Argentina was characterized by continuous deterioration over the 1980s. This was caused by the production crisis of the national economy, which began in the mid–1970s and which had, by 1993, not yet shown signs of recovery. This crisis emerged partly as a result of the import substitution strategy (IS), initiated in the period following the Second World War. The intervening years, should the outcome prove successful, could be interpreted as a prolonged transition from the IS period to a period of economic growth, following a different pattern. 140

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PUBLIC-SECTOR EMPLOYMENT Three points should be made by way of introduction. First, comprehensive data on public-sector employment are not available.7 Furthermore, the quality and quantity of information are uneven among the different components of public-sector employment. The best information is provided by central public enterprises and, to a lesser extent, by the central civil service. Information on teachers, however, poses more problems and, in the case of provincial and local employment, which account for a large proportion of public employees, comprehensive and up-to-date information does not exist. Secondly, most of the information is expressed in terms of the number of posts, rather than the number of people employed. This poses two problems: first, the effects of double or multiple jobs (which are becoming increasingly widespread) cannot be assessed; and, second, in the education sector data are often shown in terms of ‘teaching hours’—especially in secondary education. This introduces an element of heterogeneity into the statistics, which is very difficult to solve. Thirdly, the available data strongly suggest that, at least between 1975 and 1990, there was no major change in the structure of the civil service. In 1990, however, an important contraction of central public employment took place, associated with the successive privatization of state enterprises, a civil service retrenchment and the transfer of secondary education and health services to provincial administrations. Such transfers initially increased provincial employment, in the context of broader pressures from central government to reduce the level of public-sector employment in provincial authorities. Thus, structural adjustment of public-sector employment in Argentina is a very recent phenomenon. Consequently, the scope of these changes and their final outcomes can only be assessed in a preliminary way. Similarly, an assessment of their impact upon the operational efficiency of the State and the quantity and quality of the services provided can also only be preliminary. Trends in the evolution of public-sector employment, 1975–89 The main trends in the evolution of public-sector employment between 1975 and 1988 are summarized in Table 6.4. Between the mid–1970s and the late 1980s, total employment in the public sector grew at an average of around 0.9 per cent a year, which was low relative to both population and employment growth. However this average conceals the fact that public employment growth was negative between 1975 and 1983. After that year, the growth rate was higher than the average (3.4 per cent per year) and, thus, significantly higher than population and employment growth over the final four years of the period shown. 141

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Table 6. 4 Argentina: public-sector employment, selected years (in thousands)

Sources: Calculated from DIGRAD data, National Directorate of Budget Programming. Note: Data for ‘National social security’ and ‘Official banks’, 1975, and ‘Local administration’ and ‘Political appointees’, 1986, are estimates.

As regards the composition of this growth, different parts of the public sector had sharply contrasting records. Amongst various influences on the aggregate picture, one of the most important was the fact that primary education was transferred from central to provincial administration in the second half of the 1970s. This mainly explains the decline in employment in public administration over the period, and the initial rise in provincial staffing. In addition, provincial and local administration grew rapidly during the 1980s, which more than compensated for the falls in employment recorded by public enterprises and by the civil service. 142

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Labour retrenchment in the public sector The new government which took office in mid–1989 following the elections held in May that year, unexpectedly undertook an aggressive reform programme in the public sector within the general framework of privatization, market deregulation and trade openness. This produced a watershed in national trends in public-sector employment. The privatization of public enterprises began at the end of 1990 and was expected to be completed by the end of 1993. Thus, from the initial levels of around 350,000 employed in 1989, there was a 22 per cent decline in 1990 due to the privatization of the telephone and airline companies. In 1991, no privatization of significance for public-sector employment took place. However, some public enterprises which were soon to be privatized laid off staff, especially the oil and railway companies, which led to a 20 per cent reduction of public-sector employment that year. Thus, by the end of 1991 215,000 workers remained employed in public enterprises, a reduction of 134,000 between 1989 and 1991. In addition, the central civil service administration experienced a major decrease, though at a later date than the adjustment described above. Five different means were basically used to implement this: the termination of contracts of short-term staff; early retirement; abolition of posts; freezing vacancies; and the introduction of attractive incentives for early retirement. As a result of these measures, the number of those employed in the civil service—which had been around 100,000 in the 1980s—fell to 71,000 in 1990. In 1991, there was an additional decrease (around 20,000 civil servants) as a result of a reorganization of the central administration, whereby 12,000 posts were abolished in health and 4,000 in finance and infrastructure.9 Further reform for 1992 envisaged another reduction of 23,000 officials, mainly arising from the transfer of hospital services to the provinces and to the city of Buenos Aires.10 The final effect of these adjustments on the number of those employed in the central civil service was its reduction to around half of its historical levels. According to some sources, this sharp reduction in employment (in a country already suffering from shortages of personnel, problems of internal organization, sharp policy changes, and declines in salaries) seriously affected state management, notwithstanding the aims of the administrative reform programme launched at the end of 1991. The new organizational schemes did not, apparently, increase the efficiency of the administration, and staff reallocation created widespread discontent, which in some cases led to court settlements. In addition, the increase in nominal salaries, made in the framework of the reform programme, failed to offset the continuous real decline in public-sector salaries observed since 1975, analysed below.

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PUBLIC-SECTOR SALARIES Determination of employment conditions in the public sector Over the years since 1953, when the first law allowing collective bargaining in the private sector was passed (law 14250) there were, in fact, few periods during which free collective bargaining prevailed, most of them being before the years covered by this study. Collective bargaining was repeatedly hampered by the successive military governments that outlawed trade union activities and by the implementation of stabilization plans subsequently carried out by constitutional governments. Direct wage-setting by government replaced collective bargaining (see Thompson, 1988). This section presents the different ways in which salaries have been determined in the public sector and reviews the evolution of the different mechanisms of wage bargaining since 1975. Later, the real earnings of public-sector employees are presented, together with some commentary. Public enterprises and provincial administrations The determination of working conditions and wages for both private and public enterprise employees was governed by the same mechanisms (under law 14250). However, some public enterprises, especially those in the field of defence, were regulated directly by central government. As for provincial administrations, according to a study carried out in 1991 (Rial et al., 1991, p. 47), only four provinces had legislated on collective negotiation in the public sector: Santa Fe, Santa Cruz, La Rioja, and Salta. In the remaining provinces, the determination of working conditions was established through authorities’ decrees, although in many provinces there were informal negotiation mechanisms, especially in the context of collective conflicts. Central administration Public administration was excluded from collective bargaining until 1973, when the tax administration, the customs administration, the cattle marketing board and the highway administration were allowed to negotiate on a collective basis. With few changes, these groups remained the only ones subject to collective bargaining arrangements in the public sector until 1990. They represented an insignificant proportion of public employees.11 For the remainder of the public sector, wage revisions were based upon the deliberations of ‘joint committees’, established under the auspices of the Ministry of Finance. Such committees established salary levels for both the civil service and for other parts of the administration, including the defence industries, civil personnel in the armed forces, health and social services personnel, and education. 144

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Wage negotiations after 1975 In a difficult macroeconomic environment characterized by a high inflation rate, the discussions about collective negotiations were one of the factors which created an acute political and constitutional crisis. The military government which came to power in March 1976 imposed a wage freeze and, through government decrees, gave itself powers to establish the nominal value of wages. However, private-sector enterprises began to develop informal negotiations, and the Government allowed increased flexibility in setting wage increases in individual firms between 1977 and 1979. From 1980 this flexibility was eliminated and the criterion of linking wage rises to productivity increases was resurrected. Towards the end of 1981, the new military government implemented a strict, orthodox stabilization programme, which included drastic cuts in public spending and an economy-wide wage freeze. That programme lasted until September 1982. Argentina’s defeat in the armed conflict of the South Atlantic brought about a crisis which led to a change in government and to a process of greater political and social openness, culminating in the accession of a democratically elected government in December 1983. The military government’s legislation, which had given it exclusive power to set wages, was kept in force by the new government (decree 21307). In the first year of Dr Alfonsín’s Government, wage policy was based on periodic wage increases—through government decrees—both for the private and public sectors. The aim of this policy was to achieve an improvement in the real wage by establishing higher nominal wage increases than price increases. However, inflation proved to be so high that real wages continued to fall. From mid–1985, an integral part of the new stabilization programme (‘Plan Austral’) included a freeze on both prices and wages for the economy as a whole. This triggered a decision to postpone the re-enactment of legislation on collective bargaining which was to have come into force in October of that year, after nine-and-a-half years of suspension. In its place, a government decree (No. 2226) of November 1985 limited negotiations to those aspects that did not affect labour costs and, thus, did not affect the price freeze. The Government granted increases in the quarterly wages of the central administration from 1986. These increased as inflation accelerated: 5 per cent in the first two quarters of 1986, 7 per cent in the third, and 9 per cent in the fourth quarter of that year. Simultaneously, the Government also intervened in the setting of private-sector wages by determining a floor and ceiling within which increases would be allowed. The authorized rises were higher than in the public sector and included the possibility of additional increases justified by improvements in productivity. 145

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The professional categories of state workers that had lagged behind in wage increases were granted a 35 per cent rise (16 per cent for the highest categories) in mid–1986. Around 160,000 employees of the public administration benefited from this agreement. Yet, later in the same year, owing to continued declining real wages, public-sector employees became at the centre of labour conflict: more than 75 per cent of the disputes registered between September and October 1986 were initiated by such employees.12 In the first months of 1987, the Government tackled negotiations with the unions in a less confrontational manner and was more inclined to dialogue. As a result of these negotiations some unions in public enterprises (oil, electricity, and telecommunications) obtained important wage increases and managed to form, together with others in the private sector, a larger group (called ‘Grupo de los 15’). The new relationship which developed between these unions and the Government led to the appointment of a public-sector union leader (Carlos Alderete) as Minister of Labour in May 1987. This took the struggle for higher wages to the Cabinet itself. In this unstable environment, which, as will be seen, became very significant for public-sector unions, elections were held in September of the same year. The relationship between the Government and the unions was modified after the subsequent electoral defeat and consequent change in the Minister of Labour. By the end of 1987, the legislation allowing collective bargaining had been re-enacted. None the less, in December the Government announced that collective agreements whose impact on production costs exceeded 4 per cent would not be officially approved, since a major aim of economic policy was to control inflation. From March 1988, negotiating committees started to meet on a regular basis and agreements began to be officially recognized in August.13 In the public sector, however, collective bargaining remained limited to only five major activities,14 and the bulk of the public sector remained subject to the earlier arrangements. These circumstances remained basically unchanged until collective bargaining was again restrained by the Convertibility Plan (March 1991), which required that increased wages should be justified on the grounds of productivity increases. Throughout this period, most workers in the public sector received much lower increases in wages and salaries than those received by private-sector workers. The only exceptions were provided by employees in some state enterprises and provincial governments which had achieved a degree of autonomy from the adjustment discipline imposed by the national Government. Thus the most salient feature of wages policy during the period 1975–91 was the subordination of collective negotiations to the imperatives determined by the national economy. The Ministry of Finance played a key role in determining public-sector wages, and—though to a lesser extent—was highly instrumental in private-sector wage setting. 146

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Structure and evolution of public-sector salaries Total spending on personnel in the public sector is obviously determined by the overall evolution of employment and pay. As shown in Table 6.5, it accounted for about 12 per cent of GDP between 1975 and 1990. The exceptions were in the periods of fiscal mismanagement (1975), when the share reached 16 per cent of GDP, and the periods of severe adjustment (1977 and 1982), when the share fell below 10 per cent of GDP. Typically personnel costs have represented around one-third of total public spending. The evolution of public-sector wages will be analysed below, distinguishing between three subsectors: national public administration, teaching staff and public enterprises. Table 6.5 Argentina: labour costs in the public sector,* 1975–90 (as % of GDP)

Source: Based on data from the Secretariat of Finance. Note: *Excluding banks.

Public administration By 1980, salaries in public administration had fallen to some 51 per cent of their highest levels, achieved in 1974. Table 6.6 sets out their subsequent evolution, and indicates that they had fallen by a further third by 1991. This more recent reduction was considerably faster than that borne by workers in other sectors. The fall in the real wage in industry, for example, was 22 per cent over the years 1980–91. It can be seen that, although the real wages of 1980 were not regained after 1981, their decline was by no means monotonic. There were substantial 147

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Table 6.6 Argentina: real wages in central public administration, 1980–91 (base year 1980=100)

Source: Ministry of Labour and Social Security, Project PNUD/OIT-ARG/92/009. Note: Salaries shown in this table are a weighted average of those for the more representative grades of clerical, supervisory and senior staff, namely categories 10, 16 and 22 respectively of scale 1428. The weights are determined by the total number of posts in each of these staff grades, and account for 30 to 40 per cent of total posts.

upward adjustments in 1983, 1986, 1988 and 1989. But workers were not fully compensated for inflation over the intervening years, and the subsequent decline in the real value of salaries, after each of these revisions, was rapid. The extent of real wage reduction was not equal for all categories within the central administration. Table 6.7 shows the evolution of three representative categories of the main salary scale relative to the average salary paid in central administration. It indicates a clear erosion of wage differentials over the 1980s. It can be observed that the pay of the highest category was five times higher than that of the lowest category at the beginning of the 1980s. However, this difference decreased until 1990, when pay for category 22 was less than two and a half times higher than that for the lowest category. The real wage series presented above corresponds to the basic pay in each category. In addition, every central public administration official received additional pay and allowances during the period studied. These included bonuses for seniority (linked to the number of years an official had worked), for academic qualifications, for working outside normal office hours, and for years spent in the same grade (whereby individuals were given salary supplements where two or more years had been worked without 148

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receiving promotion). These allowances sharply increased the total value of remuneration received by civil servants, in comparison with their basic pay. Table 6.7 Argentina: central public administration—low, middle and high salaries relative to average salary, 1980–90

Source: Ministry of Labour and Social Security, Project UNDP/ ILO/ ARG/92/009.

Teaching staff During the 1980s the relative fall in the real earnings of teachers was even greater than that of civil servants. For example, as shown in Table 6.8, by 1985 the salary of a primary school teacher was 27 per cent less than at the beginning of the 1980s; that of secondary school teachers was 40 per cent lower, and a university lecturer earned half of what he or she would have earned in 1980. By 1991 there had been a 50 per cent fall in a primary teacher’s real wage compared to 1980. Slightly greater falls in real earnings were experienced by teachers at secondary and university levels. Table 6.8 Argentina: real wages of teachers, 1980–91 (base year 1980=100*)

Source: Ministry of Labour and Social Security, Project UNDP/ ILO-ARG/92/009. Note: *Data are for the fourth quarter of each year shown. The index of 100 for 1980 is based on the average for the whole year. 149

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Table 6.9 shows that, unlike the case of civil servants, the narrowing of salary differentials in the teaching profession was relatively modest over the 1980s. However, allowances, as a supplement to basic pay, were just as important as in the civil service. These included bonuses for years of service, for location, for special responsibility and regular overtime. Together, these various allowances could often more than double total earnings, in comparison with teachers’ basic pay. Table 6.9 Argentina: relative wages in relation to the average in the education sector, 1980–90

Source: Ministry of Labour and Social Security, Project UNDP/ ILO-ARG/92/009.

Public enterprises Public-enterprise employees suffered a smaller deterioration in their real wages than those in the rest of the public sector. The production nature of their jobs, their different negotiation mechanisms and their comparability with others in the private sector prevented these workers’ real wages falling sharply—at least until the first period of hyperinflation. Average pay over 1985–89 was only 11 per cent lower than the 1980 average, whereas for those in public administration the comparable decline was 22 per cent. Later, although wages fell briefly in the first quarter of 1990 to around 40 per cent of 1980 levels, their subsequent recovery left them at about 70 per cent of 1980 levels by the end of 1991 (see Table 6.10). Figure 6.1 shows that there was a relatively close relationship between real wages in public enterprises and those of private industry, if the extremes of the series are compared.15 By 1991 real wages in both sectors stood at about 80 per cent of their 1980 values. However, during the 1980s real wages fell somewhat more sharply in public enterprises than in the private sector. In conclusion, we have shown in this section of the chapter that real wages in all sectors of the economy fell sharply during the 1980s and that, for the public sector in particular, this was a continuation of trends which had been already well established during the previous decade. Figure 6.2 shows that, by 1991, the real wages of civil servants and teachers were less than 40 per cent of their 1974 values, and that the salary decline experienced by teachers during the 1980s had been particularly sharp. In the private sector, on the other hand, the level of real 1974 earnings was sustained until 1984, although 150

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there had been a decline, equivalent to more than one-third of 1974 earnings, in the private sector by 1991. Table 6.10 Argentina: real wages in state enterprises, 1979–92 (base year 1980=100)

Source: Ministry of Labour and Social Security, Project UNDP/ILO-ARG/92/009. Note: The public-enterprise salary series used here were prepared from nominal income indicators gathered by the Sindicatura General de Empresas Públicas (SIGEP) on the basis of the average real earnings of 16 state enterprises. It should be noted that earnings here include basic pay, extra pay, years of service and qualification bonuses, overtime and family bonus. Thus, absolute comparison with levels of wages in the public and teaching services cannot be made, since the latter data exclude allowances. Relative comparisons remain valid, however, since allowances are generally fixed as a percentage of basic salary.

REACTIONS TO WAGE DETERIORATION The reactions to real wage deterioration by public-sector employees have had varied forms. These will be identified and commented upon in what follows. Although the evidence available is mainly qualitative in nature, this should not detract from the importance of the phenomena investigated. Creation of special scales A unique wage regime for public administration employees was established in 1973 by decree (1428/73) of the National Executive. Those with separate 151

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Figure 6.1. Argentina: real wages in public enterprises and private industry, 1980– 91 (base year 1980=100) Sources: Ministry of Labour and Social Security, Project UNDP/ILO/ARG/92/009; Coloma, 1992.

Figure 6.2. Argentina: real wages in different categories of public and private employment, 1980–91 (1974=100) Sources: Monza, 1986; Coloma, 1992. 152

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scales comprised teaching staff, the diplomatic service and the security forces. Thus, the majority of civil servants were paid in accordance with the general scale. However, throughout the period to 1991, many groups of employees sought to achieve extra pay on the grounds of their special status. Whether they succeeded in these endeavours varied according to their negotiating skills, which in turn were influenced by whether or not they directly contributed to raising revenue (e.g. tax administration and customs) or by their status within the government machine. The magnitude of the extra pay obtained by these means was significant, and in many cases it became the most important part of total earnings. Special scales increased throughout the 1980s until, by 1988, there were more than 20 such scales and a multiplicity of extra pay clauses and supplements. The result was the creation of deep inequality within the public sector, where employees with equivalent tasks on the same basic scale received markedly different real earnings. Four distinct groups can be distinguished. First, there are those employees with total salaries amounting to twice their basic salaries. In this group are included employees of different revenue bodies: tax administration, customs administration, insurance, lottery and casinos. In addition, this category includes several other departments which obtained similar treatment, for example the Secretariat of Finance and the Secretariat of Economic Coordination. Second are those personnel in departments dependent on the State President whose extra pay for ‘greater dedication’ and special post location amount to twice their basic pay. This group includes, apart from direct employees in the State President’s Department, those working in the Planning Secretariat, the Ministry of the Interior, and the Institute of National Public Administration. Third are personnel in technical bodies who receive a smaller amount of extra pay than the two previous groups; among them are those related to data processing, nuclear energy, forestation and research. Finally, there are the employees in categories earning only their basic pay: the Secretariats for Industry and Trade, and for Commerce, and the Ministries of Social Affairs, Labour and others, provide examples. Public employees with more than one job Searching for a second job has been a typical response by public employees faced with sharply reduced real pay. In many cases, of course, public employees with the highest qualifications and/or those who were in high demand from the private sector have left the public service. But for many others less favourably placed, the preferred option was to seek a second income, whilst keeping their job in the public sector. A study carried out in 1986 on the basis of interviews with different types of public employee concluded that the magnitude of this phenomenon depended strongly on the degree of wage deterioration. In addition, the study 153

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found that traditional mechanisms to control working hours failed because supervisors were victims of similar income loss and they too often held second jobs (see Cesilini, 1986). For all workers in public administration it was estimated that the average working day had been reduced to between five and six hours, compared with the officially designated working day of seven hours for junior and eight hours for senior personnel. Male employees were found to be in a better position to pursue a second job, whilst women, especially married women, had greater problems in adding this to their existing responsibilities. However, circumstances were often different for professional women and for separated or single women where the economic factor was paramount. Holding a second job became common for employees in senior posts, partly because of their less rigid work schedule. The use of official premises as an office to deal with private matters was verified in several cases. Some categories of professionals—especially lawyers and accountants—often held a publicsector job to provide secure income and used the public infra-structure to which they had access (office, phone, secretaries) in the pursuit of additional private income. In the case of doctors, it became commonplace to work in a public hospital in the mornings and hold a private surgery in the afternoons (see Marconi et al., 1986). Promotions and regradings A very common way to offset the fall in wages in public administration has been the granting of promotions regardless of the responsibilities required by the grade to which officers have been promoted. Although the existence of this phenomenon is widely accepted, unambiguous data are not available to demonstrate its incidence. However, taking the central administration as a whole, there has been a significant shift in the structure of the civil service towards proportionately larger numbers of senior positions. Table 6.11 indicates a reduction in the share of the lower category of post (grade 10) by almost two-thirds over 1980–91. Similarly, the proportionate importance of senior posts (category 22, equivalent to department head) increased sixfold— from 2.5 per cent to 15.6 per cent of all posts—over the period. Such shifts are puzzlingly large, but partly reflect the widespread pressure to upgrade both people and posts, as a defensive reaction to income decline. Informal markets and services Cases of public employees seeking payment for services privately provided became frequent. For example, in some departments the cleaning and maintenance staff provided coffee and lunch services privately, thereby benefiting from state facilities, though without paying rent, tax or utilities. More sinister is the fact that the sale of official information led to the emergence 154

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of a black market, owing to the statistical deficiencies in the public sector and the growing importance of such information for taking decisions in the private sector. It is widely believed, furthermore, that both public procurement and privatization processes have been beset by corrupt practices. Table 6.11 Argentina: central public administration—shares of posts at junior, middle and senior levels, 1980–91 (percentages)

Source: National Directorate of Budget Programming and author’s estimates.

CONCLUSIONS During the 1975–90 period, successive governments in Argentina introduced a range of stabilisation and adjustment packages in response to the economic difficulties facing the country. None of them were successful. GDP fell consistently over the 1980s. Inflation—already high in the 1970s– dramatically increased to become hyperinflation by 1989/90. External debt rose sharply and employment stagnated. Nevertheless, a recurring theme of these stabilization attempts was the intention, on the part of the Government, both to control inflation and to reduce the size of the fiscal deficit. The imposition of restraint on the growth of public expenditure was therefore a fairly consistent aim. Notwithstanding these intentions, employment in the public sector increased by almost 1 per cent per year over the 1980s. This growth, however, was mainly centred upon provincial and local administrations, which developed rapidly over the decade (and in which employment was further boosted by the transfer of teachers from central to local authority control). However, at the end of the period covered by this study (1990/91) sharp reductions in government staffing were begun. A privatization programme resulted in a halving of employment in the public enterprise sector over those two years. Equally, and more significant, the number of posts in public administration was also roughly halved at that time. 155

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If the attempts to control expenditures on the employment side were unsuccessful until the final two years of the period, the Government’s control over wages and salaries appeared to be much more effective. Throughout the period since 1975 the Government adopted a highly interventionist role in wage determination—directly so in the public sector, and to a lesser extent in the rest of the economy. The value of wages and salaries paid to workers in public administration fell sharply by 50 per cent between 1974 and 1980 and by a further 33 per cent to 1991. Differentials, also, were much reduced. On the other hand, allowances increased and compensated, at least partly, for salary decline. Salary declines for teachers were even greater than those incurred by workers in public administration, although here too allowances increased over the period. Workers in public enterprises, on the other hand, suffered less. Their salaries followed a pattern which was closer to the private sector, where the decline in real average earnings amounted to about 20 per cent over the years 1980–91. It is difficult, however, to know whether these policies provided any concrete benefits for Argentina. The efficiency and effectiveness of the public service appears to have been negatively affected by the long years of earnings decline. In addition, the worsening economic circumstances facing workers in the public sector prompted a wide range of individual responses by workers and groups, who attempted to re-capture their earlier living standards. Labour disputes increased markedly. Some of the more powerful employees—for example, those in revenue-earning departments, or those serving senior ministers—secured additional pay in the form of special scales or bonuses. Others took second jobs which they pursued during office hours. Promotions accelerated, resulting in a significant shift in the structure of employment towards those in more senior jobs. Corrupt practices became widespread in some cases. The costs of all this in terms of efficiency losses may well outweigh whatever gains have been secured from lowering the real salary burden on the Government. It remains to be seen whether the stronger policies to contain public expenditures via reductions in public employment, which have been pursued in Argentina over more recent years, show greater success in shifting the balance of economic incentives towards an efficient and internationally competitive production structure. NOTES 1 The author wishes to acknowledge the substantive contribution made by Christopher Colclough to the final version of this paper. 2 The non-financial public-sector deficit reached previously unknown levels: 15.1 per cent of GDP in 1975. 3 In 1979 the trade balance had been positive, at US$1,111 million, but in 1980 there was a deficit of US$2,519 million. 156

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4 National public revenue fell to 12.3 per cent of GDP in that quarter, the lowest in the decade. Later, during the second hyperinflationary period, in 1990, revenue would fall even further. 5 See, for example, Lindemboin (1992). 6 Ministry of Labour and Social Security Project UNDP/ILO-ARG/92/009 (mimeo). 7 A full coverage of public employment should include central government (including legislative and judicial powers), state enterprises belonging to national jurisdiction (i.e. not only those that are presently under the Secretaría de Obras y Servicios Públicos—works and public services), bilateral institutions (Argentine employees only), Cajas Nacionales de Previsión Civiles, Militares y de Seguridad (civilian and military national pension funds), Cajas de Previsión Compensadoras (compensatory pension funds), Cajas de Asignaciones Familiares (family allowance funds), Obras Sociales Nacionales (national social services), Bancos Oficiales Nacionales (national official banks), Provinciales y de la Municipalidad de la Ciudad de Buenos Aires (provinces and Buenos Aires municipality), Empresas Provinciales (provincial enterprises), Obras Sociales Provinciales (provincial social services), Empresas y Entes Interjurisdiccionales (interjurisdictional enterprises and bodies), Municipios (municipalities), Cajas de Previsión Municipales (municipal pension funds), Empresas Municipales (municipal enterprises), Bancos Municipales (municipal banks) and, finally, elective posts (legislators, town councillors) and political authorities (Ministers, Secretaries, Under-Secretaries, Presidents of Bodies and State Enterprise Directors, etc.) at all levels of government. 8 Although there are minor differences, according to the sources used, the annual rates of growth of population, EAP, and employment were within 1.2 to 1.8 per cent over this period. 9 The administrative restructuring was based on rationalization, the abolition of some organizations, the privatization of some services and the transfer of others to provincial and local governments. 10 The transfer of secondary schools to the provinces and local councils also began to be implemented in 1992. As yet, no reliable data are available on the scope of the implied reduction of central public employment. 11 Until 1990 it is estimated that a total of 29,254 employees of the national public administration (items I and II in Table 6.4) were affected by collective negotiations. This represented around 3 per cent of total employment in this administration. See De Urraza (1990, Annex 1), and Rial et al. (1991). 12 See H.Palomino: ‘Los conflictos laborales de 1986: un balance necesario’, in El Bimestre (Buenos Aires, CICEA), Jan.-Feb., quoted in Gaudio (1989, p.50). 13 The process of collective bargaining during the last year of Raúl Alfonsín’s Government is analysed in Gaudio and Tomada (1991). 14 These were tax administration, customs administration, the grain marketing board, coal mining, and shipping companies (Gaudio and Tomada, 1991, p.49). 15 The real salary series for industry presented in Coloma (1992, Table 1) has been used. A detailed analysis of wage deterioration of the different professional groups between 1975 and the mid–1980s can be found in Monza (1986).

REFERENCES Carciofi, R. (1990) La desarticulación del pacto fiscal. Una interpretatión sobre la evolutión del sector público argentino en las dos últimas décadas, Documento de Trabajo 36 (Buenos Aires, Economic Commission for Latin America and the Caribbean). 157

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Cesilini, S. (1986) ‘La multiplicidad ocupacional de los empleados estatales’, Estudio exploratorio (Buenos Aires, mimeo). Coloma, G. (1992) Costo laboral relative y competitividad de la industria, Documento de trabajo núm. 3 (Buenos Aires, Institute para el Desarrollo Industrial, Fundación Unión Industrial Argentina). Damill, M. and Frenkel, R. (1992) Restauración democrática y política económica: Argentina, 1984–1991 (Buenos Aires, CEDES, mimeo). De Urraza, R. (1990) La negociación colectiva en la administración pública en la Argentina (Buenos Aires, ILO). Diéguez, H. and Gerchunoff, P. (1984) ‘La dinámica del mercado laboral urbano en la Argentina, 1976–1981’, in Desarrollo Económico (Buenos Aires, Institute de Desarrollo Económico y Social), 24/93, April-June. Gaudio, R. (1989) Política de ingresos y estrategia sindical, Documento de trabajo 24, Project Government of Argentina-UNDP-ILO-AR/87/003 (Buenos Aires, Ministry of Labour and Social Security). ——and Tomada, C. (1991) ‘El restablecimiento de la negociación colectiva en Argentina (1988–1989)’, in Boletín Informative Techint (Buenos Aires), No. 267, July-Sept. Lindemboin, J. (1992) ‘Reestructuración industrial y empleo. Mitos y realidades’, in Desarrollo Económico, Revista de Ciencias Sociales (Buenos Aires, Institute para el Desarrollo Económico y Social), 32/126. Marconi, E. et al. (1986) La terciarización del empleo en la Argentina. El sector de la salud, Estudios y documentos de trabajo sobre empleo, remuneraciones y recursos humanos, Project Government of Argentina-UNDP-ILO-AR/84/029 (Buenos Aires, Ministry of Labour and Social Security/Planning Secretariat). Monza, A. (1986) La evolución de los ingresos reales en el último sexenio (1980– 1986), Estudios y documentos de trabajo sobre empleo, remuneraciones y recursos humanos, Project Government of Argentina-UNDP-ILO-Ar/84/029 (Buenos Aires, Ministry of Labour and Social Security/Planning Secretariat). Rial, N., Sánchez, A.M. and Vuotto, N. (1991) La negociación colectiva en la administración pública (Buenos Aires, PRONATASS). Thompson, A. (1988) ‘Negociación colectiva, democracia y crisis económica. Argentina 1983–1988’, in Boletín Informativo Techint, No. 255, Nov.-Dec.

158

INDEX

absenteeism 16, 106, 130–31 adjustment 1–19; and economic growth 1–3; high-growth adjusters 2–3, 10– 13; labour market response to 4–9, 17–19, 31–33, 103–110, 129–33, 151–55; low-growth adjusters 2, 13–17; role of wages in 4–9; under imperfect competition 4–6; see also high-growth adjusters; low-growth adjusters; survival strategies Alderete, Carlos 146 allowances and benefits: Argentina 148–49; housing 15, 40, 87–93, 101–102; Korea 12, 56–59, 64; as significant part of remuneration 15, 18, 58, 101–103; Singapore 39–40; Zambia 15, 87–94, 101–103, 106– 107; Zimbabwe 133; see also bonuses Anti-Corruption Commission, Zambia 103–104 arbitration: Korea 62–63; Singapore 27, 34–35 Argentina 2, 10, 13–15, 17, 135–56; allowances and benefits 148–49; competitiveness 136, 138, 156; debt crisis 135–6; employment 15, 139– 43, 155; employment, public-sector 15, 141–43, 155; government expenditure 136, 155–56; government intervention 145, 146, 155; incomes policy 136–37, 145– 46; inflation 135, 136–38, 145–46; pay determination 144–46, 156; pay, public-sector 144–53, 156; privatization 143, 155; real wages

13, 146, 147–51, 156; stabilization policies 136–38, 144, 145–46, 155; unemployment 139–40; unions 144, 146; wage differentials 14, 148, 150, 152, 156 automation 32 Bangladesh 25, 36 basic pay: Argentina 148–49, 151–53; Korea 55–58, 59, 60–61, 64; Singapore 33–36, 38–39; Zambia 87–90 benefits see allowances and benefits Bogaars, George 26 bonuses: Argentina 148–49; Korea 57; Singapore 34, 38, 39–40, 41–43; see also allowances and benefits Brown Commission, Zambia 82 capacity utilization 69–70 Central Provident Fund, Singapore 32 civil service see public sector collective bargaining 7–8; Argentina 144, 145–46; Korea 51, 62, 63; Singapore 34; Zambia 95; Zimbabwe 126, 128; see also pay determination; unions commissions and reports: AntiCorruption Commission, Zambia 103–104; Brown Commission, Zambia 82; Prices and Incomes Commission (PIC), Zambia 80, 81, 95; Public Service Commission (PSC), Singapore 24–25, 27, 30, 33; Public Service Commission (PSC), Zimbabwe 117–118, 128, 129;

159

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Riddell Commission, Zimbabwe 127; Salaries Commission, Zambia 81–82; Sandura Commission, Zimbabwe 131–32; Task Force on Public Sector Wage Reform, Singapore 34, 41–42; Turner Report on wages and incomes policy, Zambia 82 competitiveness, international: Argentina 136, 138, 156; Korea 61– 62, 65; Singapore 31 computerization 32 Convertibility Plan, Argentina 138, 146 corruption: Argentina 155; Korea 61, 62; as response to falling pay 103– 105, 108, 131–32; Singapore’s freedom from 43; Zambia 16, 69, 103–105, 108; Zimbabwe 131–32 crime 105 debt crisis, Argentina 135–6 developing countries 8–9 economic growth 1–3 Economic Planning Board, Korea 47, 51 Economic Stabilization Policy, Korea 47 Economic Structural Adjustment Programme (ESAP), Zimbabwe 121– 24, 128–29 educational qualifications: Korea 47, 48, 49–50, 59; Singapore 27–28; and Zambian skill shortages 75–76; Zimbabwe 118–20 Efficiency Units, Zimbabwe 117–18 efficiency wages 8, 18 employment: Argentina 15, 139–43, 155; expatriate 71–72, 75–78, 80, 120–21; flexibility 8–9; formal sector 70–72, 114; informal sector 139–40; local government 74, 142; public-sector see public-sector employment; Zambia 15, 70–74, 75–81; Zimbabwe 15, 113–124; see also labour force characteristics; labour market; unemployment exchange rates: Argentina 136, 137, 138; Zambia 69, 70 expatriates: Zambia 71–72, 75–78, 80; Zimbabwe 118, 120–21

shortages 75–78; Zambia 70–72, 75–78; Zimbabwe 114 Goh Chok Tong 27 government authorities (GAs), Korea 46–48, 51–59, 64–65 government expenditure: Argentina 136, 155–56; downward adjustment 14, 69, 121, 155–56; Zambia 69; Zimbabwe 121 government intervention 3, 11–12, 18– 19; Argentina 145, 146, 155; Korea 51; in private sector pay 51, 61–64, 65, 145, 146; see also incomes policy Government Invested Enterprise Regulation Act, Korea 51 grades, civil service: Korea 47, 51–54; Singapore 27–28, 30, 35, 36–37; see also salary scales health services: Zambia 77, 80; Zimbabwe 114–116 high-growth adjusters 10, 11–13, 18– 19; see also Korea, Republic of; Singapore household consumption 108–109 housing benefits: Singapore 40; Zambia 15, 87–93, 101–102 hyper-inflation, Argentina 135, 136–38 import licensing, Zambia 69 import substitution strategy, Argentina 136, 140 incentives 17 income distribution 5 incomes policy 11–13, 18–19; Argentina 137, 145–46; Korea 11– 13, 61–65; and productivity 32, 43, 62–63, 145; Singapore 11, 12–13, 18, 31–32; Zambia 82–87, 94–95; Zimbabwe 126–29; see also wage restraint India 25, 36 Industrial Arbitration Court, Singapore 27, 34–35 inflation: Argentina 135, 136–38, 145– 46; Zambia 69, 82; Zimbabwe 113, 126, 128 informal economy: Argentina 139–40; and public-sector employment 16–

formal sector employment: skill 160

INDEX

17, 105–107; and survival strategies 109–110, 154–55 International Monetary Fund (IMF) 70, 79 Jolly, R. 94 Kaunda, Kenneth 75 Korea, Republic of 2–3, 10–13, 46–65; allowances and benefits 12, 56–59, 64; educational qualifications 47, 48, 49–50, 59; government authorities (GAs) 46–48, 51–59, 64– 65; incomes policy 11–13, 61–65; international competitiveness 61–62, 65; living standards 60–61; pay determination 50–51, 61–65; pay system 51–61, 64; pensions 58, 64; private sector pay 61–64, 65; productivity 62–63; public authorities (PAs) 46, 48–49, 51, 59– 60, 64–65; public-sector employment 12, 46–51, 64; real wages 10, 18, 52–54, 59–60, 62, 64–65; trade unions 11, 50–51, 61– 62, 63, 64–65; wage differentials 12, 49–50, 54–57, 59–60 labour force characteristics: Argentina 114–17; Korea 49–50; Singapore 28–30; Zambia 71–72; Zimbabwe 114–17 labour market: labour shortages in Singapore 32; and public-sector pay in Korea 60–61; response to adjustment 4–9, 18–19, 31–33, 103– 110, 129–33, 151–55; response to high wages policy 11; rigidity 80; Zambian survival strategies 68, 103– 110; Zimbabwean survival strategies 129–33; see also employment; public-sector employment Labour Relations Act (1985), Zimbabwe 129 Labour Standards Act (1953), Korea 46, 49, 59 laws: Government Invested Enterprise Regulation Act, Korea 51; Labour Relations Act (1985), Zimbabwe 129; Labour Standards Act (1953), Korea 46, 49, 59; Local Public Servants Act, Korea 46; National

Public Servants Act, Korea 46; Public Service Labour Act, Zimbabwe 129; Public Service Regulations, Korea 46; Trade Union Act (1987), Korea 51 Lee Kuan Yew 37 living standards, Korea 60–61 local government employment: Argentina 142; Zambia 74 Local Public Servants Act, Korea 46 localization: Zambia 76–78, 80; Zimbabwe 118 low-growth adjusters 13–18; see also Argentina; Zambia; Zimbabwe macroeconomic policy: Argentina 136– 8; see also incomes policy; stabilization policies management skills shortages, Zambia 77 maximum and minimum wages: Singapore 37–38; Zambia 97; Zimbabwe 126, 128 minimum wage see maximum and minimum wages moonlighting 16–17, 61, 106, 130–31, 153–54, 156 Movement for Multi-Party Democracy, Zambia 70 National Public Servants Act, Korea 46 National Railways of Zimbabwe (NRZ) 116, 117, 124 National Trades Union Congress, Singapore 37 National Wages Council (NWC), Singapore 31–32, 33–34 nepotism 117 newly industrializing countries 2–3, 9 Pakistan 25, 36 parastatals: Zambia 94–103; Zimbabwe 114, 116, 117, 120–21, 124 pay: maximum and minimum 37–38, 97, 124, 126, 128; performancerelated 40–44; see also basic pay; pay determination; pay systems; salary scales; wages pay determination: Argentina 144–46, 156; Korea 50–51, 61–64; Singapore 33–36; Zambia 81–82, 95–97;

161

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Zimbabwe 126–29; see also collective bargaining; unions pay systems: Argentina 144–51; Korea 51–60; Singapore civil service 33– 43; Zambia 81–103; Zimbabwe 124–26 pensions: Korea 58, 64; Singapore 40 People’s Action Party (PAP), Singapore 26–27 performance-related pay 40–44 Personnel Administration Branch, Singapore 33 personnel management 32–33 Personnel Management Steering Committee, Singapore 33 price control: Argentina 136; Zambia 69 Prices and Incomes Commission (PIC), Zambia 80, 81, 95 private sector: government intervention in 61–64, 65, 145, 146; in Korea 49–50, 54–60, 61–64, 65; in Zambia 94–103; in Zimbabwe 124, 126; see also wage differentials privatization, Argentina 143, 155 productivity 16; incomes policy and 32, 43, 62–63, 145 promotion: accelerated 106, 154, 156; Korea 59, 61; Singapore 24–25, 26, 35, 41, 43; Zambia 106 protectionism: Argentina 135; Zambia 69 public authorities (PAs), Korea 46, 48– 49, 51, 59–60, 64–65 public enterprises (PEs), Korea 46, 48, 51 public sector: in developing countries 8–9; incentives 17; informalization 16–17; moonlighting in 16–17, 61, 106, 130–31, 153–54, 156; productivity 16; reform 17; size 17, 18, 25–26; skill shortages 30–31, 78–81, 118–20; trading by employees 131; see also publicsector employment; wage bill, public-sector Public Service Association Savings and Credit Cooperative Society Limited, Zimbabwe 132 Public Service Commission (PSC), Singapore 24–25, 27, 30, 33

Public Service Commission (PSC), Zimbabwe 117–118, 128, 129 Public Service Labour Act, Zimbabwe 129 Public Service Regulations, Korea 46 Public Services Division (PSD), Singapore 24, 27, 33, 34 public-sector deficit: Argentina 136; Zambia 69; Zimbabwe 121 public-sector employment 11, 12–13, 14–18, 105–107; Argentina 15, 141–43; Korea 12, 46–51, 64; Singapore 12–13, 28–30; Zambia 72–74; Zimbabwe 113–24; see also recruitment; resignations; retrenchment; staffing levels qualifications see educational qualifications Raffles, Sir Stamford 22 real wages: and adjustment 10, 13, 17– 18, 103–10; Argentina 146, 147–51; Korea 10, 18, 52–54, 59–60, 64–65; Singapore 10, 18; Zambia 9, 13, 100–101, 103–10; Zimbabwe 13, 124–26 recruitment, civil service: Singapore 26; Zambia 97; Zimbabwe 121–22 reform, civil service 17 resignations, civil service: Singapore 30, 37; Zambia 107; Zimbabwe 129–30 retrenchment, public-sector: Argentina 143; Singapore 18, 28–29; Zambia 79–81; Zimbabwe 121–24 Riddell Commission, Zimbabwe 127 Salaries Commission, Zambia 81–82 salary differentials see wage differentials salary scales: Argentina 148, 151–53; Korea 51–52; Singapore 33–36, 40– 41; special 151–53, 156; Zambia 82–87, 95–97; see also grades; pay; wages Sandura Commission, Zimbabwe 131– 32 saving schemes: chilimba forced savings, Zambia 108; Public Service Association Savings and Credit Cooperative Society Limited, Zimbabwe 132 Shell 32–33

162

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Singapore 2–3, 10–13, 22–44; allowances and bonus schemes 34, 38, 39–40, 41–43; civil service, nature and role 22–25; civil service, relationship with government 26– 27; educational qualifications 27– 28; human resources 27–31; incomes policy 11, 12–13, 18, 31– 34, 43–44; international competitiveness 31; labour shortages 32; pay determination 33–36; pay systems 33–43; performance-related pay 40–44; productivity 32–33, 43; public-sector employment 12–13, 18, 27, 28–30, 43; real wages 10, 18; wage bill 25–26; wage differentials 12, 35–37, 43–44 skill shortages: and exodus of expatriates 77–78, 80, 118, 120; Singapore 30–31; Zambia 75–81; Zimbabwe 118–21, 128 Sri Lanka 25, 36 stabilization policies: Argentina 136– 38, 144, 145–46, 155; Korea 47 staffing levels, civil service 17; Korea 47, 49; Singapore 27, 28, 43; Zambia 78–81; Zimbabwe 117– 118; see also public-sector employment survival strategies: additional family income 61, 105–106, 108; chilimba forced savings 108; corruption 103– 105, 108, 131–32; reduced consumption 108–109; Zambian 68, 103–10; Zimbabwean 129–33 Task Force on Public Sector Wage Reform, Singapore 34, 41–42 Todaro, M. 7 tradables versus non-tradables 4–6, 14, 138 Trade Union Act (1987), Korea 51 trade unions see unions trading (by public-sector employees) 131 training 33, 40 Turner Report on wages and incomes policy, Zambia 82 underemployment, Argentina 139–40 unemployment, Argentina 139–43

Unemployment and Death Benefit Scheme, Zimbabwe 133 unions: Argentina 144, 146; Korea 11, 50–51, 61–62, 63, 64–65; Singapore 27, 34; and wage distortion 7–8; Zambia 95; Zimbabwe 126, 128; see also collective bargaining United National Independence Party, Zambia 70, 74, 75, 106 wage bill, public-sector: Argentina 147; Singapore 25–26; Zimbabwe 121, 122, 124 wage differentials 8–9, 12, 13–14; Argentina 148, 150, 152, 156; Black-White 82, 126; Korea 49–50, 53–57, 59–60; narrowing 82–86, 95, 126–28, 129; public-private sector 37, 39, 54–57, 59–60, 97– 101, 124, 128, 150; rural-urban 6– 7; Singapore 35–37, 39, 43–44; widening 36–37, 43; within public sector 35–37, 43–44, 53–54, 82–86, 127; Zambia 82–86, 95, 97–101; Zimbabwe 124, 126–28 wage flexibility 5–9 wage restraint: Argentina 136–37, 145; Korea 63–64, 65; Singapore 33–34; Zambia 82, 86–87; Zimbabwe 124; see also incomes policy wage rigidity 6–8 wage segmentation 5, 10–11, 12 wages: efficiency 8, 18; role in adjustment 4–9; see also pay; pay determination; real wages; salary scales; wage differentials Williams, M. 94 women in civil service: Argentina 154; Korea 49; Singapore 30 World Bank 79 Zambia 2, 13–16, 17, 68–110; allowances and benefits 15, 87–94, 101–103, 106–107; corruption 16, 69, 103–105, 108; economic background 68, 69–70; employment 15, 70–74, 75–81; employment, public-sector 15, 72–74, 78–81; expatriates 71–72, 75–78, 80; IMF and World Bank intervention 70, 79; incomes policy 82–87, 94–95; localization 76–78, 80; parastatal

163

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and private sector 94–103; pay 81– 87, 94–101; pay determination 81– 82, 95–97; pay, public-sector 81–87, 95–97; real wages 9, 13, 100–101, 103–10; skill shortages 75–81; survival strategies 68, 103–10; wage differentials 14, 82–86, 95, 97–101 Zambia Consolidated Copper Mines (ZCCM) 95, 100 Zambian Industrial and Mining Corporation (ZIMCO) 95–97 Zimbabwe 2, 13–15, 17, 113–33; Black advancement 118; corruption 131– 32; education 118–20; employment 113–114; employment, public-sector

15, 113–24, 129–30; expatriates 120–21; incomes policy 124, 126– 29; inflation 113, 126, 128; labour force distribution 114–117; labour market behaviour 129–33; pay determination 126–29; pay, publicsector 124–26, 129–33; real wages 13, 124–26; skill shortages 118–21, 128; wage bill, public-sector 121, 122, 124; wage differentials 14, 124, 126–28, 129 Zimbabwe Electricity Supply Authority (ZESA) 116 Zimbabwe Iron and Steel Comany (ZISCO) 116, 124

164