POLICY PAPER NO. 1 LABOUR MARKET DEVELOPMENTS IN EASTERN AND CENTRAL EUROPE by Guy Standing* 39464 Note: *Director, Central and Eastern European Team, International Labour Organisation. Budapest H-1066, Mozsar u. 14, Hungary January 1993 LABOUR MARKET DEVELOPMENTS m EASTERN AND CENTRAL EUROPE 1. Introduction While the human suffering and deprivation in many parts of the so-called developing world defies sensible comparison with developments in other parts of the world, it is understandable that recent economic and social upheavals in the countries of eastern and central Europe should have attracted global attention. Nurturing and sustaining a climate of democracy and equitable growth in this region will be vital for the future global economy. The economic reality in the ECE region since the late 1980s has been calamitous. One may quibble about the exact magnitude, yet nobody disputes that the economic decline has been tragic and frightening. And as of late 1992, it was continuing, bringing social discord, wars, ethnic and religious tensions and unhappy memories of things past. This paper reviews the main labour market developments that have emerged from the economic chaos and the pursuit of "structural adjustment" strategies in the countries of the region, drawing in part on ILO studies in seven of the main countries. A basic premise is that without effective micro-level institutional restructuring, including adequate attention to the full range of human development policies, macro-economic stabilisation and adjustment strategies will fail by any decent yardstick. The notion of eastern and central Europe is an expanding concept, in two senses. The number of countries that have moved into a process of "transition" has been growing, and the number of independent countries has been growing. 1 For our purposes, although each country is distinctive in structure, performance and potential, one should distinguish between them according to the extent and pace of change, between the "early starters" (Hungary, the Czech and Slovak Republics and Poland) and the "late starters" (primarily the countries of the former Soviet Union, as well as Bulgaria, Romania and Albania), as well as according to whether they have adopted what is euphemistically called a "shock therapy" approach to structural adjustment or what we might call an "institutional reformist" approach. 2. The Economic Context Whatever the distinction, in 1990-92 all countries of the region were hit by a cruel combination of factors that plunged their fragile economies into deepening crises. The enormous declines in GDP in 1990 and 1991 owed much to the collapse of trade between the countries themselves, following the collapse of COMECON and the Soviet economy, the fall in export earnings and the associated inability to import, coupled with the If one includes those of the former Soviet Union, there are at least 25 ECE countries. 3 inflationary and recessionary impact of energy price rises due to the Gulf War and the effects of the recession in the industrialised market economies. The profound dislocation deserves a new name — hyper-stagflation — to describe circumstances in which there has been upward of 500% inflation in a year coupled with a fall in national income of one- third.2 At the end of the 1980s, GDP per capita in eastern and central Europe overall was probably no more than one-eighth of the average in western Europe. Yet in 1990, real GDP in the region fell by over 7%, and in 1991 it fell by well over 10%. In Bulgaria and Romania, industrial output fell 20% in 1990 alone, in Poland it fell by 23% and in the former east Germany it probably shrunk by over 25%. In the countries of the former Soviet Union, the fall was probably higher. In no country in the region did real GDP rise in 1991, and in 1992 there have been further declines, in some cases very steep declines. In Hungary, for instance, GDP fell by over 10% in 1991 and is expected to fall by about 8% in 1992. In Czechoslovakia, after falling by 16% in 1991, national income continued to fall in 1992, and by mid-year was 13% down on the same period a year earlier. But in 1992, differences in performance have been notable. Although industrial output in Czechoslovakia, Hungary and Poland fell on average by 11 % in the first half of 1992 (compared with 12% in the first half of 1991), both Poland and Hungary are expected to have only small declines in GDP in 1993. In Russia, after shrinking by over 11% in 1991, national income shrunk by about 20% in the first nine months of 1992 and industrial output by nearly 18%, while in Ukraine industrial output fell by about 10% in the first nine months of 1992, twice as much as in 1991, during which time national income fell by about 11%. One can quibble about definitions, omissions, etc., but although inflation has probably been underestimated, and the fall in national incomes probably slightly overestimated, the composite "misery index" has been pretty awful by any standards. Industrial output in eastern and central Europe, according to the Vienna Institute for Comparative Economic Studies, was 13% lower at the end of the first quarter of 1991 than it had been in the corresponding period in 1990. Even more worrying, investment had fallen by about 20% in that time. See, e.g., Ministries and Departments of the Government of the Russian Federation, Draft Programme of Reform (Moscow, June 1992). Figyelo, Budapest, October 1, 1992. Some observers mistakenly believe that the decline in GDP has been predominantly in the Slovak Republic, but although it was much greater there (declining by over 26% in 1991), most estimates suggest that there was a double-digit rate of decline in the Czech Republic as well. Overall, the countries of Bulgaria, Czechoslovakia, Hungary, Poland and Romania are expected to experience a fall of 6% in GDP in 1992, after an average of 12% in 1991. According to the Vienna Institute, the fall is projected to continue, at a slower rate, in 1993. o Data kindly supplied by Goskomstat of the Russian Federation, Moscow, and Goskomstat of Ukraine, Kiev. 4 In ordinary industrialised market economies, such performances would have produced something like the Great Depression of the 1930s, and in some parts of the ECE region such comparisons are already apt. However, there have been various forms of inertia and "distortion" that have slowed the emergence of crisis in the fledgling labour markets of the region. In essence, unemployment has not risen by as much as might have been expected. Among the factors that explain that peculiar developments are the pre-existing structure of employment and the fact that "unemployment" had been banished from the official system for decades — since the 1920s in the former Soviet Union. That created a psychological barrier to the admission and recording of unemployment. There are three features of the employment structure that in eastern and central Europe have to be taken into account in considering labour market developments in the early 1990s. First, the economic restructuring had to start from a distorted industrial structure of output and employment. In some of the countries, that was not quite what many commentators believe. All agree that the tertiary sector, i.e., services, was small and inadequate for a modern economy, and it is generally recognised that new jobs and skills will have to be developed in that part of the economy, in consumer, producer and financial services. Yet it is not so much that the manufacturing sector ("material production") has been excessive — although on average it has been by western European standards — but that agriculture and the primary sector generally was artificially maintained as a large proportion of total employment, particularly in Poland and the countries of the former Soviet Union. Since labour productivity in agriculture has been low, for the next few years a feature of many of these economies will be high labour mobility out of agriculture, hitherto perceived as something of a labour reservoir. That in itself will contribute to labour market problems of unemployment and segmentation. Some sectoral restructuring of employment has started. In most countries there has been a shift from heavy industry to consumer goods and services, and within manufacturing away from the military-industrial complex towards light industry. Yet manufacturing is not expected to be the source of increased employment. That role is left for services. And one must note that, according to official statistics, service employment actually declined in 1991 in many countries of the region. It rose in Romania, but fell in Bulgaria, Czechoslovakia and Hungary. Admittedly, service sector employment held up better than manufacturing, agricultural or construction sector employment in those countries. The second structural feature is that there has been what by international standards has been a distorted size structure of enterprises, with large proportions of the workforce concentrated in large-scale, old enterprises with obsolescent technology. There has also been a chronic lack of capacity to generate new enterprises, since there has been an inadequate incubator system of small firms with diverse forms of ownership and organisation. So, reformers have had to grapple with an urgent need to restructure In a survey carried out by the ELO in Russia in 1992, the mean average age of factories was over 70 years. 5 enterprises, often having to break them up and encourage forms of labour mobility and reskilling with which neither the authorities nor workers have had any familiarity. The third structural feature is, of course, the predominant role played by the State and the overwhelming emphasis given to "privatisation" as the means of economic regeneration. In most of the region, a majority of workers still work for state-owned enterprises, but the state sector has been shrinking fast, in terms of output, income and employment, while the "private" economy has everywhere been growing, in relative if not absolute terms.