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Privatization and Labor Issues in the Context of Economic Reform

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Privatization and Labor Issues in the Context of Economic Reform 5 Privatization and Labor Issues in the Context of Economic Reform Rolph van der Hoeven, Massoud Karshenas, and Gyorgy Sziraczki ince the early 1980s, in the so-called post-oil boom era, the S economies of the Middle East and North Africa region (MENA) have faced major adjustment problems that have substantially slowed the growth of the regional economy as a whole.1 The re- quired adjustments and the constraints on economic growth since the 1980s can best be analyzed in the context of the experience of growth during the oil boom years. The MENA countries achieved high rates of GDP growth and rapid structural change during the 1960s and the 1970s—some of the fastest rates of growth in the world economy. This applied to output growth rates in all the main sectors of the economy in almost all the individual countries in the region as well as the average growth rates for the region as a whole (Karshenas, 1996). Rapid rates of growth of oil and other primary commodity exports constituted the engine of growth during these years. Up to the 1980s, the strategy in the MENA region, except in the low-popula- tion oil surplus economies, was import-substitution industrialization in predominantly primary exporting economies. Historically, direct Note: The authors thank Nadar Fergany, Director of the Almishkat Centre for Research and Training, and John Page of the World Bank for useful comments and suggestions on an earlier draft. This paper draws partly on van der Hoeven and Sziraczki (1997) and Karshenas (1996). 1See p. 139 of this volume for a list of the countries that comprise the MENA region. 193 ©International Monetary Fund. Not for Redistribution ROLPH VAN DER HOEVEN, MASSOUD KARSHENAS, AND GYORGY SZIRACZKI public sector involvement in industrial production has also been an important feature of the import-substitution industrialization process in the region. The availability of ample foreign exchange revenues in this way allowed fast rates of growth of industrial investment and output. The problems associated with this phase of rapid industrial- ization were not due to low investment in the traded goods sectors. Major investments were undertaken in industry and agriculture in all the economies in the region in this period. The overall growth of investment and the growth of traded goods, such as industry and agriculture, in this period were among the highest in the world economy. Economic Reform and Consequences for Labor in the Middle East and North Africa Region The major problems that haunted the economies of the region in the post-oil boom era were associated rather with the production inefficiencies that resulted from the inward orientation of the in- dustrialization strategy. With the end of the oil boom era from the early 1980s, the productive assets that were created during the ear- lier period became a liability in that they were a considerable net foreign exchange drain with high recurrent import requirements, but were not competitive enough to export. The problems of eco- nomic reform in general, and privatization in particular, should be examined in the context of the production inefficiencies inherited from the earlier phase of development. The developments in the labor markets in various countries in the MENA region have also been closely intertwined with the processes of growth and structural change during two distinct phases: (1) be- fore 1980—a period characterized by rapid inward-oriented indus- trialization fostered by fast growth of primary commodity export volumes and prices; and (2) the period since 1980, which has wit- nessed a sharp decline in primary commodity export volumes and prices as well as economic adjustment and restructuring. The fast rates of increase in primary commodity export revenues were only one of the conditions that allowed the rapid rates of in- dustrialization and growth to be achieved in the MENA region during the 1960s and the 1970s. The other important factor was the abun- dant supply of labor. During the early 1960s in the region as a whole 194 ©International Monetary Fund. Not for Redistribution CHAPTER 5 • PRIVATIZATION AND LABOR ISSUES more than 60 percent of the labor force was engaged in the agricul- tural sector. The share of agricultural labor in the total labor force was at or above 50 percent in all the countries except Jordan, and in Turkey it was 75 percent. Although by 1980 substantial changes in the structure of employment had taken place, the share of the agri- cultural labor force in the region as a whole was still as high as 45 percent. The relatively large shift of labor out of the agricultural sec- tor, together with high natural rates of population growth, ensured an abundant supply of labor during the high-growth period of the 1960s and the 1970s. During the oil boom years, the high rates of invest- ment and rapid rates of growth in the MENA region kept the rate of growth of employment high enough to prevent mounting unem- ployment and underemployment of labor. The remarkable degree of labor mobility across the different countries in the MENA region both ensured the availability of labor for the small oil surplus economies and alleviated the mismatches between the supply of and demand for different types of labor within individual countries. The overall structure of the labor force in the region both in 1965 and in 1980 was remarkably close to the structure of employment in the middle-income countries. The slight difference between the two country groupings is that the share of the labor force in the agri- cultural sector for MENA as a whole in both years is higher than in the middle-income countries, and the share of services was propor- tionately smaller. To what extent do the observed patterns of growth and structural change in the MENA region during the 1960s and the 1970s shed light on the problems of structural change and growth during the 1980s and after? The availability of external resources during the 1960s and particularly the 1970s allowed a massive investment boom in the traded-goods sectors, namely, manufacturing and agri- culture, on a scale that would not have been possible otherwise. Agricultural and manufacturing growth rates during this period com- pared favorably with the rest of the developing world and with their own performance in other periods, both for the region as a whole and for individual countries. It was indeed in the post-oil boom era that overall investment growth came to a standstill and the growth of output in traded-goods sectors, particularly in manufacturing, was substantially reduced in all the countries, especially in the major oil- exporting ones. During the investment boom years of the 1970s, the growth of nontraded-goods sectors, such as construction and ser- 195 ©International Monetary Fund. Not for Redistribution ROLPH VAN DER HOEVEN, MASSOUD KARSHENAS, AND GYORGY SZIRACZKI vices, in most countries in the region surpassed growth in other sec- tors, although the growth of one sector did not seem to compromise growth in other sectors. Also, most countries in the region wit- nessed rapid rates of real wage increase as a result of the fast rates of growth of sectors other than those for traded goods during the 1970s boom. This, however, seems to have been counterbalanced by the rapid rates of labor productivity growth in the manufacturing sector, where the availability of external rents made it possible to maintain profitability and growth by relying more heavily on capi- tal-intensive imported technology. To regard the structural problems in the MENA region economies at the end of the oil boom as merely or even largely arising from high real wages and the overdevelopment of the nontraded-goods sectors would put too much of the burden of adjustment on real wage reduction. Surely with the collapse of the 1970s commodity boom, the prevailing real wages and overvalued real exchange rates in the region were no longer sustainable and had to be reduced. If the structural problems of these economies were due to the over- concentration of labor and other resources in the nontraded-goods sector, wage price adjustments would be sufficient to reinstate struc- tural balance, with a time lag that would be longer or shorter de- pending on the labor market institutions and the mobility of labor. Two of the distinct empirical features about the labor markets in the MENA region on the supply side, however, signify that the problems of adjustment in the labor markets go far beyond a mere substitu- tion of labor between the traded- and the nontraded-goods sectors. One of these features relates to the quantitative aspects and the other to the qualitative aspects of the labor force. First, this region has the highest rate of growth of the labor force among the developing countries. This is due partly to demographic factors, namely, the high rates of growth of the population, and par- ticularly the working-age population, and partly to the low but growing labor force participation of women. The other, and perhaps larger part of the labor market adjustment problem, which remains unrecorded in the developing countries but is implicit in the differ- ential rates of growth of output and the labor force, is the growing underemployment of labor in the regional economy. With the end of significant emigration from the region during the 1990s, the prob- lems of unemployment and underemployment of labor are likely to be exacerbated. Rather than the mobility of labor between the non- 196 ©International Monetary Fund. Not for Redistribution CHAPTER 5 • PRIVATIZATION AND LABOR ISSUES traded- and traded-goods sectors, the main problem of the post-oil boom economy of the MENA region thus seems to be to achieve a high enough rate of job creation and to provide adequate training for the new entrants into the labor market to fill these jobs.
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