How industry - labor relations and government policies affect Senegal's economic performance

Policy, Planning, and Research WORKING PAPERS Macroeconomic Adjustment and Growth Country Economics Department The World Bank January 1990 WPS 271 How Industry-Labor Relations and Government Policies Affect Senegal's Economic Performance Katherine Terrell and Jan Svejnar Renewed growth in Senegal calls for more worker training, fewer government regulations, less trade protection, and more cooperation between labor and industry - for example, by linking wage supplements to performance indicators. The Policy, Planning, and Research Complex distnbutes PPR Working Papers to dtsscmainatc the findings of work in progress and to encourage the exchange of ideas among Bank staff and all others interested in development issues These papers carry the names of the authors, refect only their views, and should he used and cited accordingly The findings. tnterpresauons, and conclusions are the authors' own They should not be attributed to the W'orld Bank, its Board of Directors, Its management, or any of its member countnes.  Plcy, Planning, and Rese.rch Mcroeconomic Adjustment and Growth Senegal is in the grip of a long-tern economic * Protection generates inefficiency. This in- crisis. Senegalese industry suffers from a highly efficiency is not an economic rent reflected in adversarial system of industrial and labor higher wages. Recent policies aimed at reducing relations, excessive govemment regulations in protection should improve productivity. some areas and inadequate government support in others, and many misperceptions about the * Popular hypothesis is that the more firms in ethnically diverse labor force and cnterprise developing countries are exposed to world ownership. Terrell and Svejnar conclude that: markets, the more productive they become. Terrell and Svejnar round that the extent of an * Senegal needs to adopt a social compact enterprise's export orientation had no bearing on that would replace the current adversarial system its productive efficiency. with more cooperation among labor, industry, and the government. Linking a part of worker * The unwillinigness of firms to invest in compensation.(for example, the wage supple- physical and human capital - combined with ment) to specific individual or group perform- labor market and other govemment regulations ance indicators would increase worker motiva- - seems to have contributed to Senegal's tion. decline in total factor productivity. C Currc.it regulations contribute to the un- * The average contribution of inon-Africans deruse of labor. Relaxing regulations about has been high, but their gradual exodus appears (paid) hours of work, layoffs, and the use of to have benefited Senegal's economy. temporary (daily) workers would, along with transfer payments, improve the welfare of all * Special consideration should be given to parties. retraining displaced workers within existing firms rather than outside of them, as the return * Some form of collective action or govem- (in terms of eamings) is higher on firm-specific ment intervention may be needed to provide the experience than on general experience. training that firms do not provide for fear of later being raided by other firms. * The burdens of rising unemployment and limited hiring of young workers are borne * No particular type of ownership has been mostly by older industrial workers who must linked with higher productivity, so policies support ever larger extended families and would geared toward changing enterprise ownership or thus benefit from economic growth. Output providing preferentiai treatment toward certain growth would also probably increase workers' types of ownership should be based on a careful eamings. examination of specific cases, not general rules (such as privatization, Senegalization, or prefer- ential treatment of foreign capital). This paper is a product of the Macroeconomic Adjustment and Growth Division, Country Economics Department. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Raquel Luz, Room N I I - 059, extension 61760 (124 pages with tables). Thc PPR Working Paper Scrics disseminates the findings of work under way in thc Bank's Policy, Planning, and Rescarch Complex. An objectivc of thc scrics is to get these findings out quickly, even if prcsentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official policy of thc Bank. Produced at the PPR Dissemination Center  Contents Acknowledgme Fowword Guy 1ffermnn 1 Introduction 1 2 The Economic Performance of Senegal, 1960-1987 5 2.1 Structure and Growth of the GDP, 5 2.2 Structure and Growth of the Industial Sector, 8 3 Labor Market Institutions and the Industrial Relations System 13 3.1 Specific Institutional Aspects, 15 3.1.1 Hiring, 15 3.12 Employment Contacts, 16 3.1.3 Layoffs, 17 P 3.2 Wages, Bonuses, and Supplements, 17 4 Basic Demograpiic, Employment, and Wage Statistics 21 4.1 The Demographic Situation, 21 4.2 Labor Force, Employment, and Unemployment, 22 4.3 Industrial Employment in the Modern Sector, 24 4.3.1 Employment of Permanent Workers, 25 4.3.2 Employment of Temporary Workers, 28 4.3.3 National Composition of Employment, 31 4.4 Earnings, 34 4.4.1 Components of Total Compensation, 34 4.4.2 Evolution of Wages by Skill Groups, 38 4.4.3 Evolution of Total Compensation by National and Skil Groups, 40  5 Labor Market Regulations, Industral Rdations, and Enterprise Performance 43 5.1 The Position of C;overnment Officials, 43 5.2 Managers' Views, 45 5.2.1 Restrictive Labor Regulations, 45 5.2.2 Recruitment and Tainin& 46 5.3 Workers' Views of Unions, 49 5.4 Trade Union Perspective, 50 5.5 The Nonuoperative Outcome, 51 6 The Productuinty Effects of Labor Force Strucure, Enterprise Ownership, and Foreign Trade Variables 53 6.1 Overall Production Function Estimates, 56 6.2 Industry-Specific Production Function Estimates, 70 7 Econometric Estimates of the Determinants of Wages 101 8 Industrial Wages and the Extended Family 107 8.1 Size of Extended Families, 108 8.1.1 Nuclear Families, 108 8.1.2 Non-nuWdear Families, 110 8.2 Relationship Between Earnings and the Extended Family, 112 8.3 Secondary Income, 114 9 Summary and Policy Implications 117 9.1 Summary, 117 9.2 Policy ImpLications, 119 References 123 Index 125  Acknowledgments The research for this monograph was in large part funded by grant no. 674-03 of the World Bank Research Committee. We are especially indebted to Guy Pfeffermann for conceiving the idea and assisting us in launching and implementing the project. Without his guidanice and supervision the study would not have been realized. We are also grateful to a number of other individ-ials and organizations that provided invaluable help during the research project: Mark Leiserson contributed enormously to the project'r formation, and the World Bank Senegal Division, the Industrial S.rategy and Policy Division, and the World Bank Resident Mission in Dakar assisted in our fieldworlk We are particularly grateful to Kemal Dervis, Christian Duvigneau, Nicolas Gorestani Frans Kaps, Christopher Redfern, and Eugene Scanteie. We extend special thanks to Mine. Thiongane, the Director of Statistics at the Ministry of Finance in Senegal, for providing us with the data; to Prospere Youm, the Director of Forecasting at the Ministry of Finance, for providing data on the effective rate of protection; and to Alhousseney Sy, the Chief of the Census Bureau, for collaborating with us on the sample survey. The trade union representatives and numerous enterprise managers who provided us with their- perspectives have made valuable contnbutions to qpruinderstanding of Senegal's industrial sector and its labor market institutions. Finally, we thank Bela Balassa, Guy Standing, Gerald Starr, Erik Thorbecke, and the participants at the World Bank seminar for their many helpful comments, Sathi Pandian and Seng-Lee Wong for their excellent computational assistance, and Lauree Graham for invaluable help in the preparation of the manuscript. All remaining errors are our own. Kadwrine Temrel Jan Sveinar  Foreword Nearly 25 years ago, I interviewed industrial workers and their employers in SenegaL Industrial Labor in the Reoublic of Senegal (Praeger, New York, 1968) tells the story. Labor market imperfections, mostly inherited from French colonial legislation and institutions but also rooted in the extended family system, were so egregious as to stifle development. The replacement of expatriates by African workers was proceeding at a snail's pace, government and union wage policies were curbing employment growth, vocational schools were turning out graduates unsuitable for industrial employment. Wage and other regulations intended to advance the workers' welfare failed to achieve their objectives. The extended family system obliged workers to support a multitude of unemployed hangers-on, all the more numerous owing to polygamism, and this undercut incentives to strive for better pay and to save more. Labor market distortions encouraged enterprises to use capital-intensive methods of production rather than to expand employment. And a parallel 'informal sector" had sprung up of firms small enough to evade labor legislation. I Like the Three Musketeers, TerreUl and Svejnar have revisited the Senegalese labor ma*et 20 years or so later. Undoubtedly, some things have chaige;d. Fewer expatriates are now working in SenegaL But the striking picture which emerges is that mostly, things have remained unchanged. Labor regulations are still pervasive and largely self-defeating. Labor productivity remains low. The supply of skilled workers remains limited. And the burden of the extended family on wage-earners has become even greater. The authors document this unhappy situation very carefully with the help of interviews and detailed surveys, and ask themselves to what extent Senegal's uncommonly poor growth performance can be traced to labor market imperfections. They draw policy implications and make recommendations that address some of the root causes of stagnation. These should be of great  interest to the Government, which has been striving to improve the structure of the economy so as to accelerate growth in a sustainable manner. The book will also be of interest to other developing countries whose labor market institutions have much in common with Senegpl's. Guy Pffe,maim Economic Adviser to the International Finance Corporation World Bank Group  1 ]Introduction Senegal is in the grip of a long-term economic crisis. Since 1960, it has experienced the smallest growth in gross domestic product (GDP)-2.3 percent--of any African country not affected by war or civil strife. Moreover, data suggest that the GDP per capita has been at best stagnant ard probably falling over the last twenty years as the productivity and real income of most of the population have not been raised since independence. Since the late 1970s the Senegalese government has recognized the need to embark on a sustained and long-term adjustment program and has searched for appropriate policies to pursue this goal. In this context, an important objective of this study is to provide an up- to-date analysis of several issues that are pertinent to the ongoing debate in the choice of appropriate adjustment policies in Seneral. Since many pro'olems examined in this study have been encountered in other countries, we hope that our analysis also has broader policy ramificatiois. One of the structirtltauses of the current economic crisis is believed to be the inability of the modern sector to raise its overall share of employment as well as its productivity and average real earnings in the past two decades. The sluggish performance of the modern (formal) industrial sector has been the subject of major debate, given that the sector had a relatively matire base at independence, has received considerable investment since then, and has enjoyed significant protection as well as preferential trade agreements in both the European (EEC) and West African (CEAO) Economic Community. Most economists agree that employment in the informal urban sector has grown over the past two decades but that the formal sector has not generated much employment and has instead switched to more capital-intensive methods of production. It is also suggested that public enterprises have been the only significant providers of jobs in the modern sector. A recent study by Mingat (1982) claims, however, that employment generation in  2 the informal sector has slowed. What has increased, according to this study, is the level of open unemployment in the urban labor .narket. These opposing views illustrate the prevailing lack of basic knowledge about the structural features and functioning of Senegal's industrial sector and labor market. They have also provided us with dn important motivation for undertaking the present study. Our goal IS to examine Senegal's industrial labor market and relate its principal features, together with the structure of enterprise ownership and government policies, to the country's economic performance. Our primary aim is to assess how the employment and wage setting system affects allocative and productive efficiency of industrial enterprises. Because efficiency is widely believed to be tied to the structure of ownership and to the government's ;ndustrial and trade policies, our secondary aim is to estimate the total factor productivity effects of different forms of enterprise ownership, the degree of effective protection of firms, and enterprise export orientation. The emphasis of our study is on the modern industrial sector, although linics with other sectors in the economy are also explored. The modem industrial sectco' includes large as well as relatively small firms (e.g. ones with LJ employees) and for the purposes of this study it is defined as that part of industrial activity which is systematically recorded by official statistics. Our focus on the mod;prnseZtor is motivated by the fact that (1) its economic performance is believed to have been largely impeded by government regulations and could therefore be expected to improve significantly as a result of more appropriate policies; (2) it provides thc: maiority of Senegal's exports; and (3) in the long term it should play a leading part in spearheading economic growth, in generating employment, and in absorbing and diffusing new technologies. Moreover, relatively reliable data and qualitative information on this sector were available or could be gathered within a relatively short period of time. Finally, knowledge of the characteristics and performance of the formal labor market provides an important yardstick against which one can compare and evaluate the performance of the informal labor market. The main part of our analysis relates to the period from 1980 to 1986. The selection of this time period was guided by both the need for policy relevance and data availability. However, to  3 provide a fuller understanding of the main issi -as and the underlying dynamics, the findings from this period are compared with those of Pfeffermann (1968) for the 196(s and, whenever possible, with those of Svejnar (1984) for the mid 1970s. As mentioned above, our main aim is to provide an understanding of the functioning of the industrial la' 'r market and evaluate the effects of the employment and wage s3tting practices on enterprise efficiency. In undertaking this task, we pay particular attention to government wage and employment regulations; the role of trade unions and the organizational characteristics of firms; the national and skill composition of the labor force and the corresponding labor productivity and wage differentials; the existence of training schemes and skill bottlenecks; the effect of education, experience, and training on worker earnings; and the relationship between a worker's income and the migration of family members from the countryside. Our approach is to combine institutional analysis with econometric estimation. In Chapter 2 we provide a brief survey of Senegal's economic performance, focusing on the evolution of the industrial sector. In Chapter 3 we describe the main features of the Senegalese industrial relations system, and in Chapter 4 we discuss basic statistical evidence relating to the characteristics of the labor force, employment, and worker earnings. Chapter 5 contains an institutional analysis of the impact of labor regulations and the industrial reliti6ns system on economic performance in industry; chapters 6 and 7 present the corresponding econometric analysis. Chapter 6 also contains estimates of the productivity effects of the national and skill composition of the labor force, different forms of enterprise ownership, and foreign trade variables. This analysis is based on data from a relatively sizable enterprise sample which we collected during the course of the research project. Chapter 7 presents econometric estimates of the determinants of worker earnings in a smaller (sub) sample of modern sector industrial enterprises. Chapter 8 is devoted to exploring the relationship between industrial wages and the size of the extended family. Finally, Chapter 9 presents the summary and policy conclusions.  2 The Economic Performance of Senegal, 1960 - 1987 At independence, Senegalese nationals inherited a relatively weliequipped physical and social infrastructure and a GDP per capita that was larger than that of either the Ivory Coast or Cameroon. Over the quarter of a century that followed, however, the economy failed to raise either labor productivity or real per capita incor-e. Official data actually suggest that real GDP per capita decrc .ed by 4 percent between 1967 and 1987,1 while real output per employec and real earnings per employee in manufacturing dropped 31 percent and 33 percent, respectively, during the 1974 - 1985 period. As a result, by 1983 Senegal's per capita income of $440 (using the 1987 exchange rate) was barely half that of Cameroon and the Ivory Coast, placing it near the bottom of the ranks of lower middle-income oil importers. The following two sections describe how the structure and growth of gross domestic product changed between 1960 and 1986. 2.1 Stricture and Growth of the GDP Despite certain structural changes, the Senegal economy strongly refects the production patterns established during the colonlial period. As can be seen in Table 2.1, Senegal already had a relativel large secondar and tertiary sector at independence 1. Tbb result i band on calculatons from the foUowing data: current GDP in 1967 205S bilion CFA (Afican Financial r inmunity) Francs, current GDP in 1987 - 1419 bilion CFA Francs, GDP deK i