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Economic Democracy &

DevelopmentAndrés Solimano

Asesor Regional

CEPAL, Naciones Unidas

Federica ChiocchettiInternship Program, CEPAL

Santiago, 1 de agosto de 2007

Summer School

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Table of Contents1. Concepts of Economic Democracy.

A. General Idea.

B. Areas of Economic Democracy’s Applications.

C. Rationales and Criticism of Economic Democracy as Employee Participation.

2. Literature Survey.

3. Levels of Economic Democracy Application:A. The Assets’ Ownership and Accumulation Level.

B. The Firm Level.

4. Conclusions y Future Works.

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1. Concepts of Economic Democracy

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1. Concepts of Economic DemocracyA. General Idea…

• Political participation and Economic participation.

• Analitical frameworks:

a) Exit and Voice (Hirschman, 1970).

b) The Approach of Rights:

The right and need of individuals to participate in economic decisions that affect them.

The form of participation should be proportional to how much individuals will be affected by those decisions.

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B. Areas of Economic Democracy’s Applications:

a) Consumer Participation.

b) Asset Ownership and Accumulation.

c) Democratizing the Rents of Natural Resources Exploitation

d) Workplace or Industrial Democracy and Work-related participation

e) Financial participation.

1. Concepts of Economic Democracy

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C. Rationales of Economic Democracy as Employee Participation.

a) Economic Rationale:• Financial Participation: offers employees a “stake in the firm”;

loosens collectivist ties and positively influences company performance.

• Work-related Participation: enhances employee-employer co-operation through team working, communication and other supportive Human Resource policies; higher employee motivation and consequently effort.

b) Social Rationale:• Improved quality of working life. • Improved equality.• Role of the Unions.

1. Concepts of Economic Democracy

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C. Criticism of Economic Democracy as Employee Participation.

Democracy as an “expensive and inefficient luxury” for managing an organization (Slater and Bennis, 1990).

The need to exercising authority from the top down in order to maximize efficiency (Cochran, 1956).

Democracy at the level of the corporation reduces flexibility and speed of reaction. It is a handicap in terms of competition (Spence, 2007).

Democracy at the corporation level protects companies and job rather than people (Spence, 2007).

1. Concepts of Economic Democracy

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2. Literature Survey

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Historical Origins of Economic Democracy: Karl Marx

Das Kapital (1867).• Analysis of the Market System.• Lack of Labour Relevance.• The Theory of Exploitation.

Economic and Philosophical Manuscripts of 1844 (1932).• The Theory of Alienation.

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Historical Origins of Economic Democracy: Karl Polanyi

The Great Transformation (1944).• Economy Embedded in Society.• Fictitious Commodities.• Double Movement Theory.

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• The existence of a moral right to workplace democracy: Assumptions about the nature of a democratic association and the people

in it.

The assumptions apply to economic associations: the parallel case argument.

The right to private property as an alleged moral right.

• The alternative model of self–governing enterprises and the different forms of ownership:

Individual ownership

Cooperative ownership

State ownership

Social ownership

Robert A. Dahl: A Preface to Economic Democracy (1985)

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Other Important Contributors: Daryl D’ArtEconomic Democracy and Financial Participation. A Comparative Study (1992).

The paradox of enterprise authoritarianism operating within a formal deocratic political system.

Financial Democracy and Financial Participation.

Profit Sharing and Employees Stock Owenership Plans (ESOPs). A comparative study:

• United States

• Sweden

• Denmark

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Democratic Development as the Fruits of Labor (2000).

Development Strategies and the Labor Movement.

• Flexibility vs. workers rights.

• Voice and participation to decision making.

• Labor Movement’s role in Economic Development.

Neoclassical Perspectives on Labor and their fragility.

Labor as a Stakeholder in Corporate Governance.

Principal-Agent Problems and Worker Involvement.

Other Important Contributors: Joseph Stiglitz

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Two Industrial Relations Systems: the Low Road (Involvement) and the High Road

Other Important Contributors: Joseph Stiglitz

The Need for-and Limitations of-Collective Action

Development as Democratic Transformation

Toward Economic Democracy

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Economic Justice and Democracy. From Competition to Cooperation (2005) and The ABCs of Political Economy (2002). Economic Freedom: Conservative Abuse.Economic Freedom: Liberal Misuses.Economic Self-Management.Participatory Economics:

• The decision making principle.• Consumers’ and Producers’ Councils.• Remuneration for Effort and Sacrifice.• Economic Planning-Feebacks and Successive Iterations.• Job Complexes.

Other Important Contributors: Robin Hahnel

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3. Levels of Economic Democracy Application

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A. The Assets’ Ownership and Accumulation Level.

B. The Firm Level.

3. Levels of Economic Democracy Application

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A. The Assets’ Ownership and Accumulation Level

Access to bank products by the poor:• Checking accounts, Insurance, Mortgage, etc.

Access to housing.

Access to education and health (Human Capital).

Costs of creating an enterprise:

• Start-up, Legal Incorporation, Managing a Business, Exit a Business.

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A. The Assets’ Ownership and Accumulation Level: Latin America

Housing:• The most widespread asset in Latin America.

• A large proportion of the population (69%) owns their houses (Solimano, 2006).

Education:• Expanded at all levels (primary, secondary and university).

• However social differentiation in the access to “quality education”.

Land Concentration:• The growing urbanization of the region has diminished the importance of land inequality.

• However the lack of land titling in urban dwellings impedes the use of these assets as collateral for obtaining loans from the banking system.

Capital Assets:• Such as business assets, rental property, stocks and bonds.

• More concentrated in the highest income percentile than home equity.

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A. The Assets’ Ownership and Accumulation Level: Natural Resources’ Rent Distribution

• Rationale.

• The Alaska Model in place since 1982.

• The proposal of Dividendo Ciudadano del Cobre in Chile.

• Other applications.

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All substantial shift of power from management to employees insofar as worker participation in the decision-making process is concerned, for a more equitable distribution of power(Lane, 1985).

Levels and Types of worker participation:

Task-related, i.e. at the work station.

Strategic, i.e. at board or corporate level.

Communicative.

Consultative.

Negotiative.

B. The Firm Level: Workplace or Industrial Democracy

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a) Tayloristic Vertical Structutre: Traditional Collective Workers Participations

Direct participation: Co-operatives• Example of a formally industrially democratic firm. • Businesses owned and controlled by the people working in them. • Everyone shares equal work and decision-making abilities. One

member, one vote.• Examples include: Spanish Mondragon Cooperative Corporation,

Italian Emilia Romagna, etc. Indirect participation:

• Collective bargaining through a trade union network.• workers’ councils.• co-determination agreements.• joint consultation committees.

B. The Firm Level: Workplace or Industrial Democracy

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b) “New” forms of Participation:

• More direct and individualised.

• Grew out of management strategies, like Human Resource Management (HRM).

• Employee involvement and empowerment.

• Examples include:

briefing groups.

attitude surveys or suggestion schemes.

team workimg.

quality circles.

total quality management.

B. The Firm Level: Work-related Participation

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B. The Firm Level: Trying to Measure Economic Democracy

Trade Union Density – TUD (Visser, 2006): a proxy.

• Why? Schumpeter definition of Industrial Democracy: the trade union rule over industrial relations.

•The Rate of “Actual” to “Potential” Membership.

• Statistics in 24 Developed Countries.

• “Adjusting” Membership Statistics: Employed Wage and Salary Earners only.

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0 20 40 60 80

Trade Union Density (%)

Co

un

trie

s

Sweden

Finland

Denmark

Belgium

Norway

Ireland

Slovak Republic

Austria

Italy

Czech Republic

United Kingdom

Canada

Australia

Germany

New Zealand

Netherlands

Japan

Hungary

Switzerland

Spain

Poland

United States

Korea

France

Source: Visser (2006) Union Membership, Monthly Labor Review

Trade Union Density: World Data 2001

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0

10

20

30

40

50

60

70

80

90

1960 1970 1980 1990 2000 2010

Year

TU

D (

%)

Finland

Sweden

Norway

Denmark

US

Japan

Chile

EU

Source: Visser (2006) Union Membership, Monthly Labor Review and Gobierno de Chile.

Trade Union Density Trends

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TUD declined in all but small European economies (Finland, Sweden, Denmark and Belgium), where Unions are involved in the administration and execution of unemployment insurance.

Combination of a general trend reversal and the observation of cross-national divergence suggest a structural, cyclical and institutional factors’ influence.• Common trend: rapid advance of female union membership.• Increase in Part-time and more flexible jobs.• Decline among the young.• Decline concentrated in the private sector.• Latina America (Weller, 2000): repression during the military

dictatorships and economic crisis of 1980s, lack of transparency and linkages with politics, claiming their rights to the wrong “enemy” (the State vs. the employers), technological changes, decrease of public employment…

B. The Firm Level: Declining Trade Union Density Examined

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“An agreement freely entered into, whereby employees receive shares, fixed in advance, of the profits”. (First definition, International Congress on Profit Sharing, Paris 1889).

Profit-sharing consists of giving employees, in addition to the fixed wage, a variable part of income directly linked to profits or some other measure of enterprise results.

Advantages Disadvantages

•Brings groups of employees to work together toward a common goal (the success/benefit of the company). •Helps employees focus on profitability. •The costs of implementing the plan rise and fall with the company's revenues. •Enhances commitment to organizational goals.

•The pay for each employee moves up or down together (no individual differences for merit or performance). •Focuses only on the goal of profitability (lack of quality concern). •For smaller companies, these plans may result in drastic swings in earnings for employees difficult to manage.

B. The Firm Level: Financial Participation. Profit Sharing.

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A defined contribution that allows employees to become owners of stock in the company they work for. As a result of share ownership, employees may benefit from the receipt of dividends or the capital gains that accrue to company equity, or a combination of both.

How does ESOP work?

Operate through a trust, setup by the company, that accepts tax deductible contributions from the company to purchase company stock.

Distribution of the contributions made by the company to individual employee accounts within the trust. The amount of stock each individual receives may vary according to pre-established formulas based on salary, service, or position.

“Cash out” option for the employees after vesting in the program or when they leave the company. The amount they may cash out may depend on the vesting requirements.

Diversification Option.

Employees receive the vested portion of their accounts at either termination, disability, death, or retirement.

B. The Firm Level: Financial Participation. Employee Stock Ownership Plan (ESOP).

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Advantages Disadvantages

Capital Appreciation. Companies sell some or all of their equity to employees and by doing so convert corporate and personal taxes into tax-free capital appreciation. This allows the owner to sell 100% of his or her company, get money out tax-free and still maintain control of the company.

Incentive Based Retirement. Provides a cost-effective plan to motivate employees.

Tax Advantages. Enables tax advantaged purchasing of stock of a retiring company owner. With this purpose, a company owner may sell their shares to the ESOP and incur no taxable gain on the sale.

Only Publicly Traded Companies.

Liquidity. If the value of the stock appreciates substantially, the ESOP and/or the company may not have sufficient funds to repurchase stock, upon employees’ retirement.

Stock Performance and Employee Risk. If the value of the company does not increase, the employees consider the ESOP less attractive than a profit sharing plan. If the company fails, the employees will lose their benefits to the extent that the ESOP is not diversified in other investments.

Collective Participiation. ESOPs do not guarantee equitable collective participation.

B. The Firm Level: Financial Participation. Employee Stock Ownership Plan (ESOP).

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• Difficult to find reliable statistics on ESOPs.• ESOPs started in the US in 1974 (200 companies).• Rapid growth until 1990 (10,000 companies).• Stable or subtle decline from 1989, when certain tax

incentives have been removed.• Currently in the United States there are approximately

11,000 ESOPs in place, covering 10 million employees (10% of the private sector workforce).

• The company with the highest number of ESOPs participants is Procter and Gamble Co.

B. The Firm Level: Financial Participation. Employee Stock Ownership Plan (ESOP).

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• Change in the ways of organizing production: the use of knowledge to produce economic benefits.

• Druker, P. (1959 and 2002): Knowledge Worker

• “In a traditional workforce, the worker serves the system; in a knowledge workforce, the system must serve the worker”

The means of production are “locked in the head” of employees.

“Head working”to produce ideas, knowledge, and information.

Greater participation of individuals in decision making.

Intrinsic motivation.

• EDUCATION REQUIREMENT: need for an academically capable workforce.

B. The Firm Level: The Knowledge Economy and the Post-Modern Workplace

Democracy

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• Postindustrial economy’s challenge: raise the productivity of knowledge and service workers.

• Need for clear, simple and common objectives that translate into actions by a self-disciplined and responsible workforce (Drucker, 1988).

• In a post-capitalist workplace, the professional workforce requires little direct supervision from managers and more participation in the decision-making process (Mintzberg 1998).

• Decentralizing the organization into autonomous units.• The information-based organization introduces innovation through an

organized entrepreneurship and by implementing Industrial Democracy.• Circular information-based democracy enhances an organization’s

readiness, willingness, and ability to change (Ackoff, 1989).

B. The Firm Level: The Knowledge Economy and the Post-Modern

Workplace Democracy

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6. Conclusions and Future Works

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Conclusions Economic Democracy is a view that goes beyond traditional social policies of Washington Consensus.

Economic Democracy is a people-centered concept.

The advent of the knowledge economy renovates the importance of Economic Democracy and the need to replace the traditional hierarchical structure of capitalist corporations with a more participative and democratic structure.

Future Works Consider individual participation in the establishment of economic rules both at national (taxes) and international (WTO) level.

Need for further research from an empirical point of view:

Search for other indicators to measure how democratic a company is.

Building an index of Economic Democracy.

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Summer School

Economic Democracy &

Development

The end

Andrés Solimano

Asesor Regional

CEPAL, Naciones Unidas

Federica ChiocchettiInternship Program, CEPAL

Santiago, 1 de agosto de 2007