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The improvement of the economic productivity of developing nations

Developing countries have a history of determining working arrangements and pay through industry-level collective bargaining and union action. In his recent article for IZA World of Labor Carlos Lamarche from the University of Kentucky reviews the existing evidence on collective bargaining in developing countries.

  • And in India, there is virtually no difference in employment between the older and younger firms;
  • For poor countries aiming to close the gap with the developed countries, focusing on inclusive growth is the best way forward;
  • The association between productivity and work rules on dismissals, new technologies and training is positive after the decentralization;
  • Market failures such as the inadequate provision of public goods can sap productivity.

Understanding the implications of such arrangements can effectively guide evidence-based policy making in promoting effective regulations and policies. So, what does the profession know on this issue with respect to developing countries? Lamarche shows that recent empirical evidence from Latin America indicates that negotiating work rules at firm level rather than industry level may lead to greater productivity gains.

  1. The benefits of well-managed spending on critical public goods such as basic infrastructure, education, law and order directly raise the productivity of capital, particularly in the private sector. Lamarche shows significant differences in the effects that work practices negotiated in Argentina through collective bargaining have on labor productivity before and after the reforms.
  2. This is necessary to examine the effects of work practices resulting from collective bargaining agreements on productivity.
  3. In cross-country analysis covering both rich and poor countries, the correlation between TFP and GDP per worker is an almost perfect fit of 0. Developing countries continue to face important challenges in boosting productivity growth in the difficult post-crisis environment, but also many opportunities to eliminate poverty and create shared prosperity.
  4. And it would not be wrong for them to do so, but they are not going to get very far on that alone. In other words, with strong growth in TFP, economic growth can continue indefinitely even if there is no further increase in inputs in labor and capital.
  5. In other words, with strong growth in TFP, economic growth can continue indefinitely even if there is no further increase in inputs in labor and capital.

Due to limited data availability and quality as well as the broad diversity of the institutional arrangements the evidence on this issue for developing countries is sparse. It is abundant for more developed economies, such as the US and Europe, and it is abundant on the effect of collective bargaining on wages but not on productivity. Bargaining does not follow a single model across developing countries, or even countries in a region.

Systems in Latin America vary wildly: Argentina has a highly centralized system, and has one of the highest coverage rates in the Western Hemisphere; whereas unlike Chile has a decentralized system. Latin America provides the opportunity to focus on countries which have dramatically changed the relevant institutions in the short-run.

How can we increase productivity in developing countries?

This allows us to understand how reforms in collective bargaining can improve productivity, since Labor market reforms implemented in the early 1990s across the region changed institutions and significantly decentralized negotiations.

And within Latin America, Argentina is a specifically relevant case since it has strong unions and particularly high collective bargaining coverage rates despite decentralization reforms. This is necessary to examine the effects of work practices resulting from collective bargaining agreements on productivity.

Lamarche shows significant differences in the effects that work practices negotiated in Argentina through collective bargaining have on labor productivity before and after the reforms. These results suggest that firm-level negotiations are associated with higher labor productivity.

  1. Many hypotheses exist, ranging from failures of insurance and credit markets, to the lack of information or know-how on the appropriate technologies available in a given context, to social norms, to lack of adequate infrastructure. This will require a credit card number which will be used to secure your reservation.
  2. For poor countries aiming to close the gap with the developed countries, focusing on inclusive growth is the best way forward.
  3. Despite much progress over recent decades, barriers to foreign trade and investment persist in many developing countries. A day only delegate rate is available.
  4. And in India, there is virtually no difference in employment between the older and younger firms.
  5. Latin America provides the opportunity to focus on countries which have dramatically changed the relevant institutions in the short-run.

The association between productivity and work rules on dismissals, new technologies and training is positive after the decentralization. It was negative before.

Growing after the Crisis: Boosting Productivity in Developing Countries

These results indicate that while industry-level bargaining may lower productivity by restricting managerial flexibility in response to market changes, firm-level negotiations are more efficient and improve productivity. The variety of institutional settings, economic conditions, and collective bargaining coverage and negotiation levels across developing countries, even in the same region, highlights the difficulty of drawing cross-country conclusions.

Of his work, Carlos Lamarche says: I found myself very skeptical of fundamentally uncovering causal relationships and finding policies that can be easily generalizable from country to country. This is perhaps not too surprising… Nevertheless, I hope the article stimulates further discussion and analysis on the topic. I hope future generations of economists will advance knowledge to help improving institutions in developing countries. IZA World of Labor 2015: Publication does not imply endorsement of views by the World Economic Forum.

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