Economic Democracy & Development

1. Summer School Economic Democracy & Development Andrés Solimano Asesor RegionalCEPAL, Naciones Unidas Federica Chiocchetti Internship Program, CEPAL Santiago, 1 de agosto de 2007

2. Table of Contents • Concepts of Economic Democracy. • General Idea. • Areas of Economic Democracy’s Applications. • Rationales and Criticism of Economic Democracy as Employee Participation. • Literature Survey. • Levels of Economic Democracy Application: • The Assets’ Ownership and Accumulation Level. • The Firm Level. • Conclusions y Future Works.

3. 1. Concepts of Economic Democracy

4. 1. Concepts of Economic Democracy • General Idea… • Political participation and Economic participation. • Analitical frameworks: • Exit and Voice (Hirschman, 1970). • 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.

5. 1. Concepts of Economic Democracy • Areas of Economic Democracy’s Applications: • Consumer Participation. • Asset Ownership and Accumulation. • Democratizing the Rents of Natural Resources Exploitation • Workplace or Industrial Democracy and Work-related participation • Financial participation.

6. 1. Concepts of Economic Democracy • Rationales of Economic Democracy as Employee Participation. • EconomicRationale: • 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. • Social Rationale: • Improved quality of working life. • Improved equality. • Role of the Unions.

7. 1. Concepts of Economic Democracy • 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).

8. 2. Literature Survey

9. 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.

10. Historical Origins of Economic Democracy: Karl Polanyi • The Great Transformation (1944). • Economy Embedded in Society. • Fictitious Commodities. • Double Movement Theory.

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

12. Other Important Contributors: Daryl D’Art • Economic 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

13. Other Important Contributors: Joseph Stiglitz 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.

14. Other Important Contributors: Joseph Stiglitz • Two Industrial Relations Systems: the Low Road (Involvement) and the High Road • The Need for-and Limitations of-Collective Action • Development as Democratic Transformation • Toward Economic Democracy

15. Other Important Contributors: Robin Hahnel 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.

16. 3. Levels of Economic Democracy Application

17. 3. Levels of Economic Democracy Application • The Assets’ Ownership and Accumulation Level. • The Firm Level.

18. 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.

19. 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.

20. 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.

21. B. The Firm Level: Workplace or Industrial Democracy • 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.

22. B. The Firm Level: Workplace or Industrial Democracy • 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.

23. B. The Firm Level: Work-related Participation • “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.

24. 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.

25. Trade Union Density: World Data 2001 Source: Visser (2006) Union Membership, Monthly Labor Review

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

27. B. The Firm Level: Declining Trade Union Density Examined • 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…

28. B. The Firm Level: Financial Participation. Profit Sharing. • “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.

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

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

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

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

33. B. The Firm Level: The Knowledge Economy and the Post-Modern Workplace Democracy • 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).

34. 6. Conclusions and Future Works

35. 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.

36. Summer School Economic Democracy & Development The end Andrés Solimano Asesor RegionalCEPAL, Naciones Unidas Federica Chiocchetti Internship Program, CEPAL Santiago, 1 de agosto de 2007