Problems of Structural Change in the 21st Century: National and Comparative Research from Argentina, Brazil and Germany 9783964564566

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Ulrich Peter Ritter (Ed.)

Problems of Structural Change

Ulrich Peter Ritter (Ed.)

Problems of Structural Change in the 21st Century National and Comparative Research from Argentina, Brazil and Germany Papers and Proceedings of the first Arnoldshain Seminar October 18-20, 1995

Vervuert

• Iberoamericana

1996

This book was printed with the support of the Stifterverband für die Deutsche Wissenschaft

Die Deutsche Bibliothek - CIP-Einheitsaufnahme Problems of structural change in the 21st century : national and comparative research from Argentina, Brazil and Germany ; papers and proceedings of the First Arnoldshain Seminar, October 18 - 20, 1995. Ulrich Peter Ritter (ed.). - Frankfurt am Main : Vervuert; Madrid : Iberoamericana, 1996 ISBN 3-89354-084-9 (Vervuert) ISBN 84-88906-45-5 (Iberoamericana) NE: Ritter, Ulrich Peter [Hrsg.] © Vervuert Verlag, Frankfurt am Main 1996 © Iberoamericana, Madrid 1996 c/Amor de Dios, 1 E - 28014 Madrid All Rights Reserved Cover Design: Peter Orlopp Printed in Germany

5

Contents

Contents

Preface

9

National Research from Argentina, Brazil and Germany

17

Labor Markets

19

Leticia Borges Costa Demographic Structural Change in Brazil, Argentina and Germany

21

Ulrich Peter Ritter /Jens Hohmeier / Ute Schadler The Integration of Elderly People into the Workforce Present Trends and Future Needs

45

Comment by Alberto M. Diaz Cafferata

68

Comment by Alberto J. Figueras

71

Lenina Pomeranz / Adriana Nunes Ferreira Structural Adjustments and Unemployment

77

Comment by Alberto J. Figueras

94

Alberto M. Diaz Cafferata /Alberto José Figueras / Ernesto Capmourteres Structural Change and Unemployment

97

6

Contents

Public Economics

121

BasiliaMaria Baptista Aguirre/Marcos Ribeiro de Moraes The Federalism Issue in Brazil: The "State of Arts" of the Theory

123

Dieter Biehl Economic Theory of Federalism and its Application to the European Union

144

Ernesto Rezk Federal Finance in Argentina, Germany and Brazil

173

Financial Systems

197

MartaPodzun de Buraschi / Paola Valinotti Banking Efficiency

199

Reinhard H. Schmidt /Marcel Tyrell Financial Financing Patterns Comment Systems by Martaand Podzun de Buraschi

209 229

Agricultural Policy, Foreign Trade and Technological Change

231

Michaela Hoffmann/P. Michael Schmitz The Common Agricultural Policy of the EU and its International Implications

233

Martin Jayo Adoption of Technology in Brazilian Agriculture: Information Technologies in Agricultural Machinery

251

Fernando Sonnet/Maria L. Recalde de Bemardi / Carlos Valquez Technological Changes in Agriculture: The Argentine Experience

263

Siegfried Bender / Julimar da Silva Bichara Competitiveness of Brazilian Exports in the EU

286

Contents

7

International Comparisons

309

Ulrich Peter Ritter Some Basic Considerations and Methodological Decisions in Comparative Research

311

Richard Hauser Are Pension Systems Converging in the European Union?

320

Roland Eisen An International Comparison of Securing Long-Term Care Systems

348

Regional Mentors

369

Regional Coordinators

3 71

9

Preface

Preface 1. The first Arnoldshain Seminar on "Problems of Structural Change in the 21st Century" October 1 8 - 2 0 , 1995 "To prophesy is very difficult especially with respect to the future," a wise man once said. And if he is right, as few people will doubt, what gives us the right to speak today of the structural problems of the 21st century? Three reasons can be mentioned here. In the first place the 21st century does not lie in the far future. Rather we are right at its doorsteps. Secondly structural changes and structural problems are usually long term phenomena, which signal their appearance long in advance. These future developments are detectable through a careful analysis of the present. And only when we understand the present can we design the future. And thirdly the study of structural changes is a prerequisite for a future orientation of economic policy. Thus it is normal that economists from different regions of the world are occupied with the study of such changes and it is a worthwile endeavour to bring together such researchers from different parts of the world to compare different views and interpretations, to exchange ideas and to question and discuss. With this in mind in October 1995 thirty researchers and research students from the departments of economics and business administration of the J. W. Goethe-Universitát, Frankfurt am Main, the Universidad Nacional de Córdoba, Argentina and the Universidad de Sao Paulo, Brazil got together to inform each other on the results of their research, to discuss theoretical as well as methodological questions and to plan common research projects for the future. The title of this volume must be subject to a modest interpretation. Neither do we pretend to discuss all the structural problems of the 21 st century nor do we pretend to say that the problems dealt with here are or will be the most important ones on a global scale. We only say that these are among the problems which will be important for the countries involved and that they

10

Preface

merit our attention and further research of a comparative nature. The themes dealt with in this volume form the basis for future research, the foundations for which were laid in Amoldshain. When economists from different countries meet to discuss structural change and structural problems of the future, different approaches and different views are likely to surface particularly when they come from such different countries as Argentina, Brazil and Germany. However, it is these differences which make comparisons fruitful and useful.

2. National research on structural change 2.1. Labor Markets A wide diversity of aspects of structural changes of labor markets is presented in the four studies of this section. Leticia Borges Costa describes and compares demographic structural change in Brazil, Argentina and Germany. Despite differences in levels and timing, demographic aging in all three countries is calling forth structural adjustments. Looking at Brazil Costa points out that from a strictly demographic point of view, the present is an optimal time to devise and implement policies concerning the quality of life. Lenina Pomeranz and Adriana Nunes Ferreira study the unemployment due to structural adjustments in Brazil. They discuss international changes to which Brazil is subjected and the main lines of the adjustment policies followed by the Brazilian government. The authors present the socioeconomic structure of the country, which constitutes the basis of departure for the new adjustments, with special concern to employment. In his comment Alberto J. Figueras shows how the methodological approach used by him and Diaz Cafferata could be applied to the research proposed in this paper. Alberto M. Diaz Cafferata, Alberto José Figueras, Ernesto Capmourteres analyze structural change and unemployment in Argentina. They focus on regional changes, the international dimension of structural change and the consequences of adjustments in the labor market and the question whether there is a causal relationship between the deep structural changes Argentina is facing at the moment and the high unemployment rates.

Preface

11

Ulrich Peter Ritter studies the process of aging of a population and the possibilities of integration of elderly people into the workforce. To describe and measure integration the concepts of age flexiblility, flexibilization and flexibilization potentials are introduced and applied Case studies are proposed and a pre-case study of the Diamant shoe factory is presented . to discover new models for integration. In his comments on this paper Alberto M. Diaz Cafferata uses microeconomic theory to speculate on the effects of the aging process on consumers' decisions while Alberto J. Figueras adds reflections on the labor market in Argentina, the consequences of the demographic trends for social security and on the concepts of old age and retirement in view of future developments. 2.2. Public Economics Problems of public finance in federal states in times of structural changes and adjustment are the concern of the authors in this section. Basttia Maria Baptista Aguirre and Marcos Ribeiro de Moraes discuss the question whether a system of multiple fiscal units is more efficient than a centralized system in a single fiscal unit. The authors show how the approaches to the federalism problem in Brazil have proven to be insufficient. Thus, they discuss the contributions of the authors from the "Public Choice" School and the "Institutionalist" school. Dieter Biehl develops a number of principles for a Public Finance Union based on elements of what may be called an economic theory of federalism. This reference system is then compared with the existing European Union Financial Constitution. Then the same reference system is used to develop proposals for reducing the unnecessarily high costs. Ernesto Rezk studies the Federal Finance performance of Argentina taking into account the fiscal experiences of Germany and Brazil. He shows quantitative evidence regarding expenditure and tax assignments. Also, he analyzes the vertical fiscal imbalances in Argentina. 2.3. Financial Systems Aspects of structural changes of banking systems are the themes in this section.

12

Preface

Marta Podzun de Buraschi analyzes the banking efficiency in Argentina, including aspects of structural changes of banking systems. Although banking processes have been restructured the financial sector continues to show many problems. The purpose of the author is a revision of the theory related to the so called X-efficiency or inefficiency (Leibenstein), in relation to the general performance of banks, especially of private commercial banks, in order to compare some accepted ideas with the Argentine experience. As an annex Paola Valinotti adds some observations on the integration process of Mercosur and the role of small and middle enterprises. Reinhard H. Schmidt and Marcel Tyrell compare the financial systems and financing patterns of selected countries. They distinguish between capital-market and bank-market dominated financial systems and analyze the specific role of the financial sectors versus the enterprise sector. The authors discuss whether financing patterns in different countries differ according to these criteria and analyze the role played by financial systems. In her comment on this paper Marta Podzun de Buraschi discusses the possibilities of applying Schmidts' and Tyrells' analysis to the Argentine financial system. 2.4. Agricultural Policy, Foreign Trade and Technological Change In this section the authors discuss specific aspects of agricultural exports, the effects of technological change and trade policies. Peter Michael Schmitz and Michaela Hoffmann describe the importance of the EU in international food trade and demonstrate the negative influences of its agricultural policy on world market conditions and the welfare of third world countries. New developments like the CAP reform and the GATT agreement are reviewed, and potential changes are discussed. Within the context of the international technological trends Martin Jayo evaluates one specific aspect - the incorporation of electronic information technologies into agricultural machinery. He discusses two basic challenges to the effective introduction of such innovations into Brazilian agriculture. Fernando Sonnet, Maria L. Recalde de Bernardi and Carlos Valquez examine the technological changes in Argentina during the last three decades. The study aims at the evaluation of the technical change process in three well defined stages - related to the Pampean region where a substantial

Preface

13

agricultural transformation has taken place. Also, a theoretical framework is presented to explain technological change. Siegfried Bender and Julimar da Silva Bichara analyze the general causes of competitiveness as supported by the global orientation of macroeconomic policy. The paper focusses on competitiveness through an analysis of a set of trade policies followed. Special concern is given to the causes of the trade and financial liberalization process. 2.5. Economic comparisons The three contributions in this section are concerned with methodological, theoretical and practical aspects of international comparisons. Ulrich Peter Ritter draws attention to the fact that the questions of the subject of the comparison (who compares?), of the objective of the comparison (with what purpose do we compare?), the object of the comparison (what is to be compared?) and of the method of comparison (how do we compare?) are interrelated and that decisions referring to these four aspects are just as important in determining the results of economic comparisons and their usefulness as the theoretical background. They play an important role in the planning of comparative research as well in its execution and evaluation. Richard Hauser compares various pension systems in the European Union. He shows the problems of convergence or of non-convergence after giving an overview of some retirement systems - concentrating on the socalled core pensions. Since it is not possible to infer the economic situation of the elderly from the present institutional regulations of the core pension system the author presents empirical evidence about their economic position in each member state. Roland Eisen demonstrates the problems of an international comparison of the ways different societies have chosen to deal with securing long-term care systems. The emphasis is on long-term care services and its financing. First the „German question" and its solution is discussed. Second, some information on the development of the „demand side" and the "supply side" are given. Third, the problem of "equal treatment" within the European Union is touched on giving also some reasons for an international comparison. Fourth, the structure of their approach for comparing different systems is presented.

Preface

14

3. Comparative approaches There is a general understanding, that a comparative methodology will be used in future research cooperation. These comparisons will refer to systems or partial systems, economic phenomena, economic policy and economic problems in the three countries. Methodological questions will play an important role, i. e. the methodological reflection will be part of the projects. Already in this seminar comparative studies played an important role. Of the 15 papers presented, five were of a comparative nature. Four of these are comparisons of partial systems. However, in the paper of Reinhard Schmidt and Marcel Tyrell the purpose is not the analysis of this partial system but rather an institutional phenomenon, i.e. capital market versus bank market domination. In the case of the paper of Roland Eisen the question in the foreground of the study is the problem: How can society take care of its elderly people who need care? It is therefore a problem-oriented comparison. The discussion of methodological questions and problems will continue to play an important role not only during the next seminar but also in its preparation. Thus members of each of the four research groups formed a fifth group on methodological problems and will work on them in the process of the preparation of the next seminar.

4. Future prospects Participants of the seminar will continue to work together in the form of an open network. For this they will use technical media like internet to continue communication during the research process in the preparation of the papers for the next seminar, which will take place in Córdoba in March/April 1996. This will be accompanied by research stays of some of the participants and by student exchanges. New participants will be accepted, if they fulfill the following criteria: • The topics of research must be future-oriented and refer to structural change • The seminar is open to persons dedicated to the broader subjects • The participants have to be open for comparative research • Personal input (involvement) is necessary

Preface

15

• Everybody must be able to speak English The Arnoldshain Network and future Arnoldshain Seminars are established as learning systems. Some of the improvements proposed by the closing session were: • In future seminars there should be one predetermined discussant for each paper. Fewer papers will be presented and more time for the discussion of each paper will be provided. • The format "presentation - small group discussion - plenary meeting" should be continued. • The exchange programme should be improved. The possibility of writing diploma theses, doctoral theses or of studying in one of the other countries should be enhanced. • Research students will be prepared for their participation through seminars in which the papers are discussed prior to the event in order to increase their chances for active participation in discussions. Regional coordinators will cooperate in maintaining communications and planning future seminars and regional mentors for research themes will serve as resource persons and consultants. Their names and addresses are listed at the end of this volume. Special thanks are due to the DAAD and the Stifterverband fur die Deutsche Wissenschaft for their willingness to give financial support to this first Arnoldshain Seminar which is to form the nucleus of a future international research network, and for the publication of this volume. It is in print less than four months after the seminar took place. This was only possible because of the cooperation of the authors, the help of Brian Neigut, B.A. in going over the English language in the different papers and the dedication of Dipl.-Kauffrau Beate Klower to her job of editing the papers and lay-outing the print version. Frankfurt, February 1996

Ulrich Peter Ritter

National Research from Argentina, Brazil and Germany

Labor Markets

Demographic Structural Change in Brazil, Argentina and Germany

21

Leticia Borges Costa1

Demographic Structural Change in Brazil, Argentina and Germany No single economic activity takes place in a vacuum, but it always involves a population, whether as producers, as consumers, as trade partners or whatever. This paper is intended to present a sketch of the demographic profile of the three countries involved in the the joint project of comparative economics between Brazil, Argentina, and Germany. Historically speaking, the control of death and the effective command over the creation of new life are very recent achievements, dating from the middle of the present century. The significant reduction in the mortality rate can be attributed to the control of infectious diseases and the popularization of birth control methods, both of which are leading to dramatic population changes all over the world. The extent and depth of this change is not always seriously taken into account. The description which follows is based on the evolution of the three populations in question and will rest on the basis of the theory of demographic transition. After a brief exposition of this theory, a comparison will be carried out among the three countries. Finally, the Brazil case will receive more detailed consideration. The demographic transition is a process according to which populations evolve from high to low levels of mortality and fertility. In a pre-transitional phase, both mortality and fertility are high. When change sets in, mortality goes down first, widening the gap between itself and fertility and then causes an increase in the rate of population growth. After some time fertility begins to decrease and population growth slackens. As some countries in Europe have experienced, growth can be negative if fertility plunges below mortality. At any rate, the population becomes older. Although this is called a "theory" and is used to "explain" the demographic experience of most countries of the world since the XIX century, it offers no rigour as to causal relationships, timing, mediating variables, and 1

Fundafäo Seade (Säo Paulo, Brazil).

22

Leticia Borges Costa

so on. In fact, there is a wide variation from population to population regarding the conditions which set up the process of mortality decline, the threshold of mortality from the onset of fertility decrease, the levels of both variables at the beginning, and at the end of the process. Even so, the theory is helpful in understanding the changes in population age structure. In the pre-transitional phase, populations are young, showing high proportions of children and youngsters as well as small proportions of older people. At the onset of the transitional process, populations are still younger because mortality rates decline which benefit both children and infants. So, a larger proportion of live births survive, thereby increasing the relative weight of the younger ages. Populations continue to be relatively young as the transition proceeds due to the presence of large proportions of women in the reproductive age (15 to 50 years), which is a result of high fertility in the recent past. Although fewer births per woman are produced, the sheer number of mothers in the population generates a large number of births when compared to the next phase where the proportion of mothers decreases. At this point in time the proportion of the elderly segment is still not very significant. As the transition develops, the proportion of old people begins to grow and that of children and youngsters declines. The end result of the process is an older population, typically made up of small proportions under 20 and large percentages of older people, however defined. Characteristically, both mortality and fertility assume low levels and the population grows at a much slower pace, if at all.

The demographic transition in the three countries The use of age pyramids will help to visualize the demographic transition, and the result thereof in the three countries under consideration (Figures 1, 2, and 3). Brazil, alongside other countries in Latin America, is a late comer in the realm of demographic transition. So much so that by 1950 and 1960 it had an age distribution which is typical of a very young population: high percentages in the younger age groups meaning higher fertility, and large differences between the groups which implies high mortality. As can be seen in Figure 1, the pyramid for 1950 has a broad base of more than 16% (plus than 8% for each sex), and it narrows pronouncedly from bottom to top. The

Demographic Structural Change in Brazil, Argentina and Germany

23

pyramids for 1980, 2000, and 2020 show the progression of the process of aging: the base shrinks and the differences between age groups narrows from date to date, so that by 2020 the shape of a rectangle is slowly developed. Argentina, on the other hand, has undergone the first phases of transition prior to 1950 (Figure 2). In that year, Argentina had already less than 12% in the first age group and a much steeper rise from group to group. From the relative size of the bars from bottom to top one can conclude that Argentina presents lower mortality rates than Brazil for the whole period considered.

24

Leticia Borges Costa

Figure 1: Age pyramids. Brazil, 1950 - 2020

Males

Males

80+

H

60-64

j

50-54

i

'i

40-44

~

30-34

H

20-24

fc

10-14

t

0-4

S

90+

Males

1980

, f~] 70-74 r n

70-74 60-64

Females

2000 Females

50-54 40-44 30-34 20-24 10-14 CM B 80+

Males

70-74 60-64 50-54 40-44 30-34 20-24 10-14

%

0-4 10

Source: Celade (1993).

10

2020 Females

25

Demographic Structural Change in Brazil, Argentina and Germany

Figure 2: Age pyramids. Argentina, 1950 - 2020

q 80+ Males

1950

43,

70-74

Females

60-64 50-64

r u

' 40-44 30 34 20-24

10 14 0-4 8 80+

Males

70-74 60-64

10

1980 Females

50-54 40-44 30-34 20-24 10-14

%

10

_

0-4

8 80+

Males

70-74 60-64

10

2000 Females

50-54 40-44 30-34 20-24 10-14 0-4

80+

Males

70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4

Source: Celade (1993).

• % 10

2020 Females

26

Leticia Borges Costa

Germany on the other hand, accomplished its transition much earlier than either of the previous two countries (Figure 3). The general shape of its pyramid for 1950 is similar to that of Brazil in 2020, except for the effects of war. The age group 30-34 is relatively smaller than all the other ones because it corresponds to births which took place from 1915 to 1920, during or soon after the first World War. Obviously, this figure is less than at normal times. From that age upwards, men represent smaller percentages than women due to war losses. A broader historical perspective for Germany can be gathered from Figure 4 (which was borrowed from Verlag). Verlag's pyramids are not strictly comparable since they do not represent the population of the entire country for the entire period (only 1946 and 1970 for the Bundesrepublik). One can see that in 1910 the age pyramid for Germany still showed a pre-transitional shape, implying relatively high levels of fertility and mortality. Those which follow show the consequences of both the shortage of births and the losses experienced during the two wars which were more pronounced on the male side. They also show the shortage of births during the depression of 1932, the survivors of which were 14 years old in 1946. By 1990 the pyramid for united Germany had a pronouncedly smaller base, but still a high proportion at the middle which is probably due to the post-war "baby boom". Table 1 shows the age distributions of Brazil, Argentina, and Germany used to construct the pyramids. The age grouping selected tries, broadly speaking, to group together pre-school children (age 0-4), school children and youngsters (age 5-19), working age people (age 20-64), and the elderly (age 65 or over). After the age distributions, the proportions that are 80 years old and over and the median age of each population are then added. The sources were derived using census data which were corrected for underenumeration and population projections. The data was prepared by Celade (Latin American Demographic Center), for Argentina and Brazil, and prepared by the United Nations for Germany.

Demographic Structural Change in Brazil, Argentina and Germany Figure 3:

27

Age pyramids. Germany, 1950 - 2020

1950

80+ 70-74

Males

Females

60-64 50-54 40-44 30-34 20-24 10-14

_

0-4

8

1980

eo+ 70-74

Males

. %

10

Females

60-64 50-54 40 44 30-34 20-24 10-14 0-4

10

8

6 80+ 70-74

Males

60-64 50-54 40-44 30-34 20-24

" 0

'

2

'1

4

8

10

2000

Î

Females

1 1 ' r

h

'

10-14 0-4

10

8

6

8

2020

80+ 70-74

Males

10

Females

60-64 50-54 40-44 30-34 20-24 10-14 0-4

10

8

6

Source: United Nations (1993a).

6

8

10

29

Demographic Structural Change in Brazil, Argentina and Germany

Table 1: Age distribution, median age, and total population (thousands) for Brazil, Argentina, and Germany, 1950 - 2 0 2 0

Country ana age group1 BRAZIL 00-04 05-19 20-64 65+ Total

Median age 80+ ARGENTINA 00-04 05-19 20-64 65+ Total

Median age 80+ GERMANY 00-04 05-19 20-64 65+ Total

Median age 80+

Year

Variation

1950

1960

1970

1980

1990

2000

2010

2020

16.9 35.4 45.2 2.5

17.3 35.8 44.0 2.9

15.2 37.8 43.6 3.4

11.8 32.8 50.7 4.7

100.0 (53,444)

100.0 (72,594)

100.0 (95,847)

13.8 35.3 46.9 4.0 100.0 (121,286)

100.0 (149,042)

9.5 29.8 55.1 5.6 100.0 (172,777)

8.5 25.1 59.7 6.7 100.0 (194,002)

7.6 22.8 60.7 8.9 100.0 (212,350)

18.9 0.3

18.3 0.3

18.6 0.4

20.5 0.5

22.9 0.7

25.8 0.9

29.2 1.2

32.8 1.5

11.4 28.3 56.1 4.2 100.0 (17,150)

11.0 28.2 55.3 5.5 100.0 (20,616)

10.3 28.1 54.6 7.0 100.0 (23,962)

11.5 26.8 53.5 8.2 100.0 (28,237)

10.0 28.5 52.4 9.1 100.0 (32,322)

9.4 26.7 54.1 9.8 100.0 (36,238)

8.9 25.2 55.9 10.0 100.0 (40,193)

8.2 24.2 56.6

100.0 (43,837)

25.7 0.5

26.8 0.6

27.4 0.8

27.4 1.1

27.8 1.4

28.4 1.7

30.0 2.0

31.8 2.1

6.6 23.8 59.9 9.7 100.0 (68,376)

7.8 20.8 59.9 11.5 100.0 (72,673)

7.7 22.4 56.2 13.7 100.0 (77,708)

5.1 21.8 57.5 15.6 100.0 (78,304)

5.7 16.9 62.8 14.6 100.0 (79,480)

5.5 17.2 61.8 15.5 100.0 (82,583)

5.2 16.6 59.8 18.4 100.0 (84,111)

5.1 16.1 59.7 19.1 100.0 (84,281)

35.4 1.0

34.7 1.6

34.3 1.9

36.4 2.8

37.1 3.6

39.0 3.3

42.2 4.0

43.7 5.0

11.0

-55,0 -35,6 34,3 256,0

-28,1 -14,5 0,9 161,9

-22,7 -32,4 -0,3 96,9

Sources: Celade (1993); United Nations (1993a).

According to these projections, in 2010 the Brazilian population should be the youngest of the three with a median age of 29.2, as opposed to 30.0 in Argentina and 42.2 in Germany. The data in Table 1 clearly shows that Brazil has been undergoing its demographic transition since the sixties; the percentage of children under 5 declined from 17.3% in 1960 to 11.8% in 1990 and is projected to be 7.6% in 2020. The percentage of youngsters also declined. On the other hand, the potential labor force increased from 44.0%

30

Leticia Borges Costa

to 50.7% in the same time period as did the older group which doubled in relative terms, although its share in the total population was still rather small by 1990. The median age is a summary indicator of demographic transition in Brazil; it fell somewhat between 1950 and 1960 (18.9% to 18.3%), and then increased steadily. Supposedly, the median age group will reach 32.8% by the year 2020. However, it should be noted that this figure is rather high, even by international standards. Population aging is not so fast in Argentina, because this country entered its demographic transition earlier than Brazil. In the fifties it presented an age structure similar to the expected one for Brazil in year 2000: around 40% under 20, 56% in the 20-64 age group and 4 or 5% in the older group. As its fertility and mortality had already reached relatively low levels by 1950, the changes henceforward were less abrupt and so was the reshaping of its age structure, as compared to Brazil. The median age of its population, which was 25.7 in 1950 and 27.8 in 1990, is projected to increase to 31.8 by 2020, as compared to 32.8 in Brazil. Germany presents a more peculiar demographic history because of the effects of the two wars and the great depression. The number of births is greatly reduced during a war, not only because of widespread instability, but also because of the distortions introduced into the marriage market by the decrease in men. As it can be observed (Table 1), the German population was already older by 1950 than those of Argentina and Brazil. Germany later experienced a process of rejuvenation as the median age relative to 1960 and 1970 indicates, partly because of its share of the post-war "baby boom". However, by 1980, Germany once again had a larger segment of elderly people. By the year 2020, Germany's median age is projected to be 43.7, over 10 years more than its Argentinian and Brazilian counterparts. The most conspicuous fact about German age structure is the weight of the elderly segment. Although this segment is supposed to increase at a much slower rate than in Brazil or Argentina, by 2020 the group of people 65 and over is projected to represent 19.1% or 1/5 of the total population, as opposed to the 11% in Argentina and 9% in Brazil. The older sector(ages 80 and over) are expected to constitute 5% of population, which amounts to 4.2 million people. Table 2 shows the evolution of fertility, mortality, and population growth in each country for the period under analysis. The following indicators were used: for fertility the total fertility rate was used, which conveys the total number of live-births each woman will have had, (taken after her repro-

31

Demographic Structural Change in Brazil, Argentina and Germany

ductive cycle had ended); for mortality the life expectancy at birth was used which encompasses all age-specific mortality rates, and the annual population growth rate was used as well2 Table 2: Total fertility rate, life expectancy at birth and annual growth rate Brazil, Argentina and Germany, 1950 - 2020

Period

Variation

Country

(»)

1950/60

1960/70

1970/80

1980/90

1990/00

2000/10

2010/20

BRAZIL Fertility rate Life expectancy Growth rate

6.15 52.22 3.06

5.73 56.89 2.77

4.45 60.83 2.35

3.51 64.15 2.06

2.60 66.87 1.48

2.19 69.11 1.16

2.05 71.01 0.90

-66.7 36.0 -70.6

ARGENTINA Fertility rate Life expectancy Growth rate

3.15 62.74 1.84

3.07 65.73 1.50

3.26 68.02

1.64

3.06 70.15 1.35

2.72 71.68 1.14

2.48 72.79 1.04

2.32 73.59 0.87

-26.4 17.3 -52.7

2.23 68.30

2.41 70.60 0.67

1.58 71.80 0.08

1.45 74.30 0.15

1.55 76.40 0.38

1.74 77.80 0.19

1.78 78.90

-20.2 15.5 -96.7

GERMANY Fertility rate Life expectancy Growth rate

0.61

0.02

Sources: Celade (1993); United Nations (1993a).

As can be observed, Brazil started off with 6.15 births per woman, whereas Argentina had 3.15 and Germany only 2.23. The decline has been more pronounced in Brazil than in the other two countries. A total fertility rate of 2.05 is projected for Brazil by the second decade of the next millennium, as compared to 2.32 in Argentina and 1.78 in Germany. Mortality conditions, as measured by life expectancy at birth, were much better in Germany and Argentina than in Brazil at the beginning of the period of study; it is expected that at the end of the projection period they will be similar in Argentina and Brazil, but considerably better in Germany. As a result of the interplay of these two variables, and in the absence of significant international migration, total population growth will drop from over 3% per year

2

The quinquennium fertility rates and life expectancies at birth offered by Celade and the UN were averaged, to stand for 10 years periods. Growth rates were computed directly from population numbers.

32

Leticia Borges Costa

to less than 1% in the case of Brazil. The reductions should be more modest in the other two countries, which were growing at a slower pace to begin with. If the hypothesis behind the projections hold, Germany should start experiencing negative growth in the period 2015-2020, although at a very small rate (-0.03% per year).

The dependency ratio Demographic aging is not neutral from an economic standpoint. Among other things, it can facilitate investment as opposed to consumption expenditure or vice-versa, and it has had an impact on the trends of demand because it impinges on the possibilities of financing social security programmes and effects the relative availability of man-power. These points will be taken up again in the discussion of Brazil. The sway of the demographic process over such economic aspects of reality is better analyzed with the help of the dependency ratio. This is defined as the number of "dependents" in relation to the "productive" population. It is a theoretical indicator which takes into account age exclusively. Usually, people below 15 and above 60 or 65 are considered dependent, and the population in between is taken as productive, regardless of their activity status. Table 3 shows dependency ratios for the three countries under study from 1950 to 2020. Dependency ratios have been computed taking into account separately the youngsters and the elderly, and then the two groups together.

Demographic Structural Change in Brazil, Argentina and Germany

33

Table 3: Dependency ratios (per 100); Brazil, Argentina, and Germany, 1950-2020 Country and Age

Variation

ï e a r •

(*)

1950

1960

1970

1980

1990

2000

2010

2020

BRAZIL Age 0-14 Age 65+ Total

75.7 4.4 80.1

81.5 5.4 86.9

77.8 6.3 84.1

64.8 6.9 71.7

57.1 7.7 64.9

44.6 8.6 53.2

36.8 9.9 46.7

33.4 13.1 46.5

-55.9 197.7 -41.9

ARGENTINA Age 0-14 Age 65+ Total

46.8 6.4 53.2

48.3 8.7 57.0

46.1 10.9 57.0

48.6 13.2 61.8

49.1 14.9 64.0

43.2 15.6 58.9

40.7 15.7 56.3

37.8 17.0 54.8

-19.2 165.6 3.0

34.6 14.5 49.0

31.7 17.1

36.8 21.7

48.8

58.5

28.0 23.7 51.7

24.3 21.2 45.5

24.9 22.8 47.8

24.6 28.0 52.6

24.1 29.3 53.4

-30.3 102.1 9.0

GERMANY Age 0-14 Age 65+ Total

Source: United Nations (1993).

The first observation to be made is the striking difference amongst the countries at the beginning of the series and some convergence towards the end. In Brazil, in 1950, the younger population had a much higher total dependency ratio than its counterparts due to its younger population. Its juvenile dependency ratio was 75.7, as compared to 46.8 in Argentina, and 34.6 in Germany. By the beginning of next millennium Brazil is expected to catch up with Argentina as far as juvenile dependency is concerned, but not with Germany. Since the older age groups will not have time to expand as much in Brazil in comparison with the other two countries, at the end of the period the total dependency ratio will be lower in Brazil (46.5), than in Argentina (54.8) and Germany (53.4). Again in Germany, the evolution of the ratios is peculiar, at least as far as 1990, as generations which are successively large, then small, then large again, pass from young age through adulthood into old age (remember Figure 3). As to the near future, the population projection used implies a juvenile dependency ratio more or less stable around a value of 24.5 per hundred, and a steady rise in the total dependency ratio which is a function of the increase of the proportion of old people in the population. Let us observe now the elderly dependency ratio. For all three countries considered, its movement is monotonically upwards except for a short

34

Leticia Borges Costa

period in Germany. Its values are supposed to go from 4.4 to 13.1 in Brazil, from 6.4 to 17.0 in Argentina, and from 14.5 to 29.3 in Germany. This means that by 2020 each 100 potential workers will have to support around 13 old people in Brazil, 17 in Argentina, and 29 in Germany. This rate, computed for the age group 60 and over, is supposed to produce values of 23.7, 29.3, and 48.8, respectively in Brazil, Argentina, and Germany by the year 2020. These figures speak for themselves.

The case of Brazil The point here is to try and understand the demographic processes taking place in Brazil, and sketch out some of their economic implications, especially in relation to the labor market. Further research on these topics in the case of both Brazil and the other countries involved, may yield interesting comparative studies. In Brazil, which in 1950 had the youngest population, the mortality decline typically, at first, increased infant and child survival, thereby raising both juvenile and total dependency ratios. From the sixties on, mortality decline extended to all age groups; besides, as the generations born prior to fertility decline reached adulthood, their relative size outweighted that of the younger generations and that of the elderly despite the increase of this group. As the large generations pass from middle age into old age, somewhere beyond our time reference, the total dependency ratio will start moving upwards. Perhaps the most important effect of the changes in population age structure, as shown with the help of dependency ratios, is on demand. Hopefully, this point will become even clearer after the analysis of the age specific growth rates (Table 4).

35

D e m o g r a p h i c Structural C h a n g e in Brazil, Argentina and G e r m a n y

T a b l e 4: P o p u l a t i o n v o l u m e and annual g r o w t h rates by a g e g r o u p s Brazil, 1950 - 2020 Population by age groups (thousands)

0-4 5-19 20-64 65 + Total

1950

1960

1970

1980

1990

2000

2010

2020

9,053 18,907 24,173 1,310 53,444

12,581 26,022 31,889 2,103 72,594

14,523 36,261 41,758 3,304 95,847

16,717 42,783 56,881 4,904 121,286

17,638 48,862 75,545 6,998 149,042

16,369 51,482 95,208 9,717 172,777

16,411 48,753 115,770 13,068 194,002

16,042 48,448 128,938 18,921 212,350

Annual growth rates Age 1950/60

1960/70

1970/80

1980/90

1990/00

2000/10

2010/20

3.29 3.19 2.77 4.73 3.06

1.44 3.32 2.70 4.52 2.77

1.41 1.65 3.09 3.95 2.35

0.54 1.33 2.84 3.56 2.06

-0.75 0.52 2.31 3.28 1.48

0.03 -0.55 1.96 2.97 1.16

-0.23 -0.06 1.08 3.70 0.90

0-4 5-19 20-64 65 + Total

Source: C e l a d e (1993).

As can be observed in both the sixties and seventies, children and youngsters have grown historically and are expected to grow at a diminishing rate, which is much lower than the total population growth rate. On the other hand, the potential labor force will maintain high rates of growth well into the next millennium. Although the elderly segment shows fast growth, they started off from a very low base in 1950 when they represented only 2.5% of total population. So, despite their rapid increase, in 2020 they will not amount to more than 9% of total population (Please read Table 1 again). They should represent around 15% of population by the year 2100 (Carvalho and Wong, p. 16). The differential growth of the several age groups and the resulting relative weight thereof, is what led Carvalho and Wong (1995) to say that "Brazil is entering a sort of demographic golden stage". The pressure on the younger generations to supply financial support, health, education, training, and so on is being greatly relieved by the dramatic fall in fertility. At the same time, the generations now reaching the working age are the survivors of the large number of births which took place prior to the decrease of fertility. Therefore, they shall constitute a relatively larger group than both the young and elderly together well into the 2000's. The elderly, although growing fast

36

Leticia Borges Costa

in numbers, will continue to represent a rather small share of the total population. Furthermore, the actual labor force is in fact growing faster than either total population or working age population, as shall be seen shortly. But what does all this have to do with demand? Everything. Since the sort of goods and services demanded by a population made up mostly of adults will be quite different from that put forth by a younger population. Looking again at Table 1, one can see that from the year 2000 forward, the adults will represent always at least 60% of total population, whereas in the fifties and sixties they represented less than 50%. It is not postulated here that sheer numbers of people, whether young or old, constitute a sufficient basis to determine the size of demand, apart from other considerations. In fact, at the present time there are enormous needs that have to be met for all age groups concerned, as the several stabilization plans in Brazil have shown. Whenever the income in the lower brackets of the population becomes less eroded by inflation, an enormous demand for salary goods develops which often spreads into sectors such as household appliances and other goods. It is often said today that in the not so long run (hopefully...), if and when income distribution becomes less iniquous, the population profile as far as age distribution is concerned, may be something to be considered in production planning. From the standpoint of social demands, this slackening of growth in the younger groups, coupled with a fast growing labor force, offers a rare opportunity for the country to take care of some of its basic problems. Relieved from the pressure of sheer numbers, public policy can now turn in the direction of improving the services to children and youth, thereby improving the quality of the new generations. For example, for elements such as nutrition, vaccination, and health care in general, as well as for schooling and technical training, all of which will help to make citizens happier and create a better labor force in the near future. Although Elementary schooling is more or less universal these days, the rates of failure are appalling. So much so, that only 32% of children who start off reach the 8th grade (Costa, 1993, quoting P. Fletcher). By the year 2020, Brazil will have the same number of school-age kids that it had in 1990 (48 million). So, it would appear to be very wise to concentrate on improving the quality of the education, not just building new schools. When one thinks of social demands, one naturally thinks of the elderly. In 2020 or 2030 this group should increase at high rates (Table 4), because it will be made up of the survivors of large birth cohorts after they go through

D e m o g r a p h i c Structural C h a n g e in Brazil, Argentina and Germany

37

their working age. Nevertheless, their weight in the total population should continue to be relatively small, as compared to Argentina and much more so to Germany and other countries (Table 1). For instance, by 2010 or 2015 Brazil is expected to have the same percentage of elderly people that Argentina had in 1970, i.e., 7%. This notion is reinforced by the dependency ratios of Table 3. Again this puts Brazil in a privileged demographic position, in the sense that considerable time will elapse before the elderly gain more conspicuous weight. The problem is that things are bad enough for the elderly as they are. In its world conference on demographic aging of Vienna, 1982, the United Nations declared that the responsibility for the generations beyond working age lies with the state, the family, and the community. The share of state responsibility has not been discharged properly in Brazil, despite the persistency of a favorable elderly dependency ratio for the last few decades. In light of the inexorable increase of the elderly dependency rate which lies ahead, what will happen? The efficiency of the "pay-as-you-go" mode of financing old age benefits depends primarily on age distribution. More precisely, on the relation of active population to the number of retired people. The gain in life expectancy well beyond age 60 has caused the distribution to become unbalanced. The problem is, that people contribute for 30 or 35 years into the system, but live as beneficiaries for 40 or 50 years. So, there is a significant disparity between how much one pays into a system and how much they take out of it. A perfect example is the Uruguaian social security system. This system, which is similar to the Brazilian one, is already in deep trouble. The social security system is being revised in Brazil within the scope of the constitutional reform that is under way. Among other things, a minimum age for retirement is being thought of, as well as a larger contributory period. It is doubtful whether the timid proposals being made will be enough to cope with the situation as the large generations now working will pass on to old age, and then replaced in the labor market by the smaller generations bom after the decline of fertility. This is epecially true if you think of a decent livelihood at old age as a human right, and not as a right exclusive of those who worked in the legal sector of the economy3.

3

In 1980, last census available, only 72.6% of the total labor force contributed to any social security fund.

38

Leticia Borges Costa

Demographic aging not only poses the question of financial support for the elderly, but also the physical care as a segment of this group will progressively lose the ability to take care of themselves. As the ratio of dependent elderly to the healthy adult population increases, this problem is liable to become dramatic as can already be seen in other countries. Women, the traditional caretakers of young and old, are joining the labor force in ever increasing proportions. People that are age 80 and over are projected to represent 1.5 million workers in the year 2000, and 3.1 millions by the year 2020. Coming now to the productive ages, this group is supposed to keep increasing at least until 2020, as a proportion of total population (Table 1). From a strictly demographic perspective, this situation is thought to be favorable for both savings and capitalization. At least theoretically, if a great proportion of the population is made up of income earners, that would tend to sustain demand and the ability to save and invest. Brazil now has the best age structure that it has ever had on which to work out its stabilization plan, and hopefully can find solutions to some of the structural problems which have plagued it before it begins to face a disbalance between the productive and the dependent populations.

Economic participation in Brazil Lastly, let us document the evolution of economic participation in Brazil, as opposed to the background of an aging population. First of all, a few comments on data and procedures must be presented. In the first part of this paper straight census data were not used, but estimates of the population instead. For coherence's sake, the same procedure shall be adopted in the analysis of the labor force. The main difference at stake is the correction of census underenumeration. So, the following procedures were adopted: firstly, participation rates were computed on a straight census population and labor force data basis since the relation between those two sets of data were thought acceptable; then the participation rates so produced were applied to Celade's population estimates by age and sex, producing an estimated labor force for each date. In the absence of a census, the rates for 1990 were calculated with the National Household Sample Survey (PNAD).

Demographic Structural Change in Brazil, Argentina and Germany

39

Table 5 shows age specific activity rates for the Brazilian population (19601990) separately for men and women, the total participation rates which consider both ages 10 and over and 15 and over, and the median age of the work force at each date. Broadly speaking, the Brazilian census represents both the labor for paid and unpaid workers (who work for more than 15 hours a week), whether it is in the market protected by law or in the informal sector. In Brazil work is legally permitted only from age of 14 on, but official statistics enumerate workers since the age of 104. The 10-year grouping hides substantial differences between 5-year groups. Whenever available, rates for the age 10-14 were around 20% for males and less than half that much for females. On the other hand, the age group 15-19 showed rates of 65% and 24% for males, and 31% and 41% for females respectively in 1970, 1980, and 1990.

4

Child labor is known to occur in Brazil even below that age.

40

Leticia Borges Costa

Table S: Age specific participation rates by sex, median age and total labor force (thousands). Brazil, 1960 - 1990

Age HEN 10-19 20-29 30-39 40-49 50-59 60+ Total 10+ Total 15+ Median age HOHEN 10-19 20-29 30-39 40-49 50-59 60+ Total 10+ Total 15+ Median age TOTAL 10-19 20-29 30-39 40-49 50-59 60+ Total 10+ Total 15+ Median age

Sources:

Year 1960

1970

1980

1990

45.2 38.8 41.8 46.5 94.4 91.1 92.9 94.0 97.4 96.2 96.6 96.9 96.0 93.3 93.2 94.5 90.4 85.5 82.4 82.3 67.8 59.2 44.5 46.0 77.2 71.9 72.5 75.3 (19,164) (24,230) (32,598) (43,146) 83.7 82.8 84.6 — 30.5 15.0 20.8 17.0 16.7 14.6 9.6 16.5 (4,081) ~

32.4

31.1

30.1

27.1

30.4

28.6

66.7 153.8 221.8 196.4 136.3 19.8 137.6

30.2

29.9 26.7 30.7 35.8 56.3 57.8 64.8 72.8 57.0 58.0 65.0 75.0 57.3 56.8 61.4 71.3 53.6 50.9 51.7 57.7 38.4 33.0 25.0 27.3 46.6 44.9 49.3 56.7 (23,246) (30,425) (44,596) (65,855) 52.0 56.0 63.6 — 30.2

2.9 -0.4 -0.5 -1.6 -9.0 -32.2 -2.5

30.5

19.7 14.9 25.0 26.1 37.7 52.8 20.8 34.2 54.7 19.6 30.1 49.5 15.5 21.4 34.5 7.4 8.2 11.5 18.5 26.6 39.2 (6,195) (11,999) (22,710) 21.2 30.1 44.0 26.4

Variation m

19.7 29.3 31.6 24.4 7.6 -28.9 21.7

30.4

IBGE, Demographic Census, 1960, 1970, 1980 and 1991; Celad e (1993).

Demographic Structural Change in Brazil, Argentina and Germany

41

Similarly, the group 60 years old and over is heterogeneous in regard to economic participation. In 1980, the rates for age 60-69 were 49.3% for males and 8.3% for females; for age 70 and over they were 16.5% for men and 2.2% for women. A first comment, still methodological, is that the labor force estimated here is always larger than that proposed by Celade (1992). The main reason for this is that Celade considered only workers in urban activities, whereas here all workers are included. Another discrepancy, with reference to 1980, is that for Celade the most recent available source was the 1980 census, whereas for this paper the 1990 Household Survey (PNAD) was used. The most outstanding feature of these rates is the large increase in female participation in all age groups. Usually, it was considered that the increase from 1970 to 1980 was greatly due to a change in the census questionnaire, which made women workers more visible. However, the increase is confirmed and even enhanced by 1990 data. Although PNAD's rates usually come out a couple of points above those obtained from the census, a substantial increase in female activity is not to be discarded because it is supported by other sources, besides being on line with the experience of several countries. Apparently, women all over the world are recovering their status as producers which was partially lost at the first Industrial Revolution, when the place of work was severed from the place of living. The increase is extensive to all age groups and is stronger in the bracket 20-49, i.e., the reproductive cycle of women. It means that married women, and women with children are joining the labor force in ever increasing proportions. This implies a change of behavior patterns because formerly women worked while single or recently married, leaving the market at the arrival of their first babies. It can be observed that in 1960 and 1970 the maximum participation took place at the ages between 20-29 and decreased thereafter5. In 1990, one can say that activity rates reached a plateau that spread out from age 20 to somewhere in the middle of the age group 40-49. The explanations for this behavior are manfold. One can mention the tremendous decline in fertility (see Table 2), although there is no evidence in favor of a cause/effect relationship between fertility decrease and the rise of female activity rates. Most probably these are correlated phenomena, influenced by another set of variables. All of following elements and many more could have played a role in the expansion of the female labor supply: the 5

In fact, age 20-24, from other sources.

42

Leticia Borges Costa

change of the status of women, the hardships of raising large families in the urban setting, the expectation of a higher consumption pattern as fostered by the media, and the overall increase in levels of schooling. On the demand side, both the urbanization of economic activity in general and the growth and diversification of the tertiary sector opened up new job opportunities for women. In fact, the urban sector accounted for only 45.4% of jobs in 1960 and for 77.2% in 1990. The second fact to be inferred from Table 5 is the diminishing economic participation of older men. The rate for men age 60 and over suffers a total reduction of 32%. Even the rate for men age 50-59 decreases from census to census, in a total decrease of 9%. Again, the urbanization of economic activity may have played against older men, and at the same time enhanced the opportunities for women. Besides, illiteracy rates and poor schooling are higher among the older generations. Also, in times when more education is needed to face new complexities, the processes will change in the work world. Apparently this fact does not effect women as much as it does men. In Brazil, women who work have more schooling than both male workers and the general population. The levels of female participation, lower than men's, leaves room for a selective engagement of the more educated women at all ages. Obviously, total activity rates are a weighted average of male and female rates. Therefore, they increase during the time period considered basically due to the increase in female activity. They are presented here mainly for the sake of international comparison. Despite the aging of the Brazilian population, the labor force did not become older. The median age of men is about 30 the entire period, and that of women dropped a little in 1970 and 1980, only to raise again to 30 in 1990. The decrease of the activity rates of the elderly men, which represent a much smaller percentage of the population, was compensated by the increase in the younger group which is much larger. As far as the women are concerned, all the age specific rates have risen. After some rejuvenation, the female labor force ended up with a slightly lower median age: 32.4 in 1960, and 30.2 in 1990.

43

Demographic Structural Change in Brazil, Argentina and Germany

Final remarks The demographic transition in Brazil, Argentina, and Germany w a s assessed comparatively,

and

a process

o f population

aging

was

documented.

Considerable changes in the age structures o f the three countries were observed and are projected into the future. Despite differences in levels and timing, demographic aging in all three countries is calling forth structural adjustments in the face o f relatively smaller labor forces, larger older groups, and a changing demand profile. The present situation in Brazil w a s shown to be at its most favorable stage in the transition. From a strictly demographic point o f v i e w , the present represents an optimal time to devise and implement policies that would lead the country in the path o f providing a better quality o f life for old and young alike.

Bibliography CARVALHO, J. Alberto M. e WONG, Laura R. (1995): The rapid fertility decline in Brazil - some socio-economic implications from the new demographic age pattern. Belo Horizonte (mimeo). CELADE (1992): Economically active population, period 1970-2000. Demograpic Bulletin, Santiago, 25 (49), Jan. CELADE (1993): Latin America: population projections (1950-2025). Demographic Bulletin, Santiago, 26 (51), Jan. COSTA, Leticia B. (1984): Participaçào da mulher no mercado de trabalho. Sâo Paulo, USP/CNPq. COSTA, Leticia B. (1993): Urna análise demográfica do desempenho escolar. Sâo Paulo em Perspectiva, Sâo Paulo, 7(1), jan.-mar. COSTA, Leticia B. (1994): Populaçâo e trabalho, uma análise demográfica. Sâo Paulo, Seade. (Coleçâo Informe Demográfico, 28). MORELL, M.Graciela González de and COSTA, Leticia B. (1995): Populaçôes do Mercosul: evoluçâo histórica e cenários futuros. Sao Paulo em Perspectiva, Sâo Paulo, 9(1), jan-mar. pp. 93-103. MOSK, Cari (1995): Une revision du concept de transition démographique à la lumière de l'expérience de l'Asie orientale. Population, Paris, 50 (2), Mars-Avril, pp. 482-574. PRATA, Lizete E., CAMPANÀRIO, Paulo and SOARES, Andrea C. (1993): Envelhecimento, renda e familia no Estado de Sâo Paulo. Sâo Paulo em Perspectiva, Sâo Paulo, 7(4), out-dez. RIBEIRO, Sérgio C. (1991): A pedagogia da repetência. Estudos Avançados, Sâo Paulo, 12(5), maio.

44

Leticia Borges Costa

UNITED NATIONS (1993): The sex and age distribution of the world populations (the 1992 revision). New York, United Nations. UNITED NATIONS (1993): World population prospects (the 1992 revision). New York, United Nations, 1993. VERLAG, Erich Schmidt (ed.): Staatsbürger-kundliche Arbeitsmappe.

45

The Integration of Elderly People into the Workforce

Ulrich Peter Ritter in cooperation with Jens Hohmeier and Ute Schädler

The Integration of Elderly People into the Workforce Present Trends and Future Needs 1. The process of an aging population and the importance of the integration of elderly people into the workforce 1.1. The process of aging within the German population Like most industrialized countries, Germany is faced with the problem of an aging population, a problem also facing many newly industrializing countries like Brazil and Argentina. The aging of a population means that an increasing percentage of the total population is found in the age groups of 55 years and higher. This process is shown by the following graphs. Fig. 1: Age structure of the German population, 1910, 1988 and 2010 [19101

119831

Source: Naschold, F./Vroom, B. de/Casey, B. (1994), p. 437.

12040]

46

Ulrich Peter Ritter / Jens Hohmeier / Ute Schädler

The population pyramids show a stable population for 1910; in 1988 there is a decreasing population with an increasing share of elderly persons, and in 2040 a decreased and aged population with a share of the people over 50 years of age by almost 50 %. Fig. 2: Changes of the age structure of the German Population (West) 1985 - 2030

56,6 21%

56,2

54,9

51,5 Mio

47,3

22% 26%

42,6

28%

S6% • 60 years and older

S4%

E3 20 - 6 0 years • below 20 years

1985

1990

2000

2010

2020

2030

Source: Bundesminister des Inneren (ed.) (1987), quoted from: Krause, W . (1988), p. 11.

Fig. 2 shows this process for the years 1985 - 2030. It implies that the percentage of the age group of 60 and older will increase from 21 % to 35 %, while the percentage of those under twenty will decrease from 23 % to 15 %, and of those between 20 and 60 from 56 % to 47 %.

47

The Integration of Elderly People into the Workforce Table 1: Demographic trends in selected European countries. 1 The older population in 1990 and 2020 as a percentage of total population 1990 age group

2020

B

DK

FRG

F

NL

50 +

32.0

30.8

34.1

29.7

27.4

65 +

14.7

15.5

15.3

14.0

12.8

75 +

6.6

6.9

7.4

6.8

5.3

85 +

1.4

1.4

14.0

1.5

1.1

age group

B

DK

FRG

F

NL

50 +

43.5

40.4

47.1

39.5

40.5

65 +

20.2

19.5

22.2

19.7

18.6

75 +

9.1

8.2

10.6

8.2

7.4

85 +

2.8

2.0

2.5

2.4

1.9

Table 1 shows the similarities existing in this respect between several Western European countries. This process is due to several reasons, one being the dramatic decrease of the birth rate. The net reproduction rate in Western Germany for example dropped from 1.13 in 1950 to 0.74 in 1980, and 0.63 in 1991.2 The second reason for the aging of the German population is the increase of life expectancy. Life expectancy at birth rose from 64.6 in 1950 to 72.5 years in 1990 for men, and from 68.5 to 79 years for women.3 For the 65 year olds between 1970/72 and 1991/1993 it rose from 77.1 to 79.2 for men, and from 80.2 to 83.4 for women. Thus, the average life span after retirement rose from - 0.6 years for men in 1950 (the official retirement age being 65 years) to + 10.5 years in 1990. For women it rose from 6.5 to 18 years, the official retirement age decreasing from 62 to 60. This life span is even greater when average retirement age is taken into account. In view of this substantial increase of the life span after retirement, combined with the increase of the life span before entering the workforce, the tendency in Germany at present leads towards a situation in which life outside the production phase equals or even surpasses the life span spent working.

1

Bjorneby, S. (1995), p. 74.

2

Zwischenbericht der Enquete-Kommission Demographischer Wandel (1994), p. 25.

3

Zwischenbericht der Enquete-Kommission Demographischer Wandel (1994), p. 26.

Ulrich Peter Ritter / Jens Hohmeier / Ute Schädler

48

The process of an aging population is often referred to as a triple process:4 1. It implies an increase in the absolute number of elderly people. 2. It means an increase in the relative proportion of elderly people in relation to total population and to all other age groups. 3. It is accompanied by a substantial increase in the number of people with an age of 75 years and more. This must be seen in the context of a rise in the entering age to the workforce, the lower exit age, and the reduction of the hours of work. Viewed from the standpoint of the economist these demographic changes pose several severe problems in the decades to come, such as: • The problem of income distribution between age groups in view of the deterioration of the relationship of productively active and non active persons. • The problem of financing consumption and investment among age groups. • The problem of production, i. e. who is going to participate in the production of BSP in the future? • The problem of financing the social security system. All of these problems are interrelated and the well-being not only of the elderly, but of the total population will depend on whether and how far we succeed in finding adequate solutions and answers. In this paper we will concentrate on the third problem. We will analyze the integration of elderly people into the workforce, elderly being defined here as those between 55 and 65 years of age, i. e. those elderly persons who can normally be expected to be part of the work force. We will analyze their integration or externalization and the factors and forces determining integration vs. externalisation, in the end considering paths for comparative research.

4

Tews,H. P. (1993), p. 17.

The Integration of Elderly People into the Workforce

49

1.2. Labor force participation rates and retirement age of elderly persons in the FRG 5 In the last decades, labor force participation of persons aged between 60 65 has decreased substantially. Thus, in table 2 it is shown that between 1960 and 1990 participation rates of this age group dropped from 67 % to 35 % for men, from 39 % to 21 % for single women, and from 16 % to 11 % for married women. Fig. 3: International comparison of participation rates (60 - 64 years)

" • H

w o m e n (%)

•

FRG Sweden

Japan -x Great Britain

*

Netherlands

••• USA

Source: Rosenow, J./Naschold, F. (1993), p. 147.

This development is not limited to Germany as can be seen in Fig. 3. However, among the countries under study in this figure the drop in participation rates in Germany is particularly marked, exceeded only by the Netherlands. The decline of employment of men from 55 to 64 as Jacobs and Rein characterize it is „one of the most dramatic economic transformations of labor markets and modern industrial economies."6 As can be seen in Table 2, this decade in Germany (West) was particularly marked in the 1970s. Between 1970 and 1980 the participation rate of men between 60 and 65 dropped from 69 % to 44 %, for men aged 55 - 60 from 94 % to 93

5

For the purpose of this study it seems advisable to define as „elderly persons" those who are aged 55 to 65, because substantial retirement rates appear when people are 55 and older.

6

Jacobs, K./Rein, M. (1994), p. 19.

50

Ulrich Peter Ritter / Jens Hohmeier / Ute Schädler

%, and from 1980 to 1990 from 44 % to 35 % and 93 % to 81 % respectively. Table 2: Participation rates (in percent) for Germany (West) 7 age

Men

Women

group unmarried 1960

1970

1980

1990

15-20

87

65

48

20-25

91

86

82

married

1960

1970

1980

1990

1960

1970

1980 1990

43

85

63

41

37

65

60

62

40

80

92

84

77

79

51

53

64

83

35-40

98

99

98

98

88

88

91

93

37

40

50

63

55-60

94

94

93

81

78

84

87

74

30

37

41

39

60-65

67

69

44

35

39

41

26

21

16

17

11

11

15-65

92

89

83

83

85

74

61

68

34

38

45

54

This drop is due largely to the spread of the phenomenon of early exit and early retirement. From the perspective of the labor market this represents a significant restructuring of the age, wage, and skill composition of the work force. The trend of early exit is a general trend. However, it does not affect all industries in the same way. Thus, early retirement before the age of 63 is 97.2 % in the steel industry versus 78 % in machinery building, 75 % in the electric industry, and 66.7 % in the printing industry.8 The interindustry differences falsify the hypothesis that early exit can be explained by national policies and practices. These differences exist in other countries as well, showing similar patterns. For this reason Jacobs & Rein postulate „Additional work is needed to explore this area". 9 Retirement age has decreased substantially since 1957. The average retirement age for men (excluding disablement) dropped from 65.2 years in 1970 to 62.8 years in 199110. This trend shows no signals of coming to an end. In 1995 the average retirement age (including disablement) is approaching 58 7

Zwischenbericht der Enquete-Kommission Demographischer Wandel (1994), p. 102.

8

Rosenow, J./Naschold, F. (1993), p. 148.

9

Jacobs, K./Rein, M. (1994), p. 40.

10

Verein Deutscher Rentenversicherungsträger (eds.) (1992), p. 56 - 59.

The Integration of Elderly People into the Workforce

51

years. On the other hand there are many reasons to believe that pressures to reverse this trend are on the increase, due, mainly, to the rising cost of the social security system. Fig. 4: Labor market prospects for Germany (West) 1990 - 2030

T o t a l labor supply

Source: Griitz, J. et. al. (1993), p. 460, quoted from: Zwischenbericht der EnqueteKommission Demographischer Wandel (1994), p. 113.

The strength of these pressures will become even more intensive as the reserves of the labor market are depleted. As can be seen in Fig. 4, between 2010 and 2015 an acute shortage of labor can be expected which will put pressure on firms to keep elderly people employed because young workers become increasingly scarce. But how and by what means can a reversal of the trend to early retirement be engineered? Before this question can be properly addressed, the process of the aging of individuals must be discussed.

52

Ulrich Peter Ritter / Jens H o h m e i e r / U t e Schädler

2. Aging as an individual process One of the most important findings of gerontology is the fact that the elderly are different from each other and age differently (Bakes & Baltes).11 When we speak about aging populations, we refer to a general phenomenon. The process of aging of a person, however, is a very individual phenomenon. All classifications defining a person as old, be they cultural, legal, sociological, or statistical, lose their justification when applied to individual persons. The group of elderly people is in no way homogenous. Chronological age is no indicator for the physiological and psychological age of an individual. While some persons at 55 or 60 years of age would have to be classified as old, this might not apply to other persons of 70 years or even older. Differential aging, i. e. the interindividual variability of aging is particularly pronounced in the first phases of the aging process. These individual differences can be found in every aspect of aging: biological, psychological, and social. The elderly differ greatly with respect to psychic and physiological health, social participation, and economic situation.12 The heterogenity of the group of elderly and old people with respect to their ability and willingness to work, the type of work, and the amount of weekly hours they can manage is such, that these individual differences become one of the main reasons for the necessity of having an age-flexible work-system.

3. The integration of elderly members into the workforce „Integration" refers to those elderly persons between 55 and 65 years old who stay integrated in a firm until they reach the retirement age, or who return to a firm after having been unemployed.13 Furthermore, by integration we also imply the process and strategies of the agents state, firm, and individual worker which lead to a person remaining in or reentering the workforce of a firm. The necessities of integration of the elderly into the work-system are located on several levels. The first level is the level of social security. A system of 11

Baltes, P. B./Baltes, M. M. (1992), p. 14.

12

These questions are widely discussed in: P. B. Baltes and J. Mittelstrass (eds.) (1992).

13

Vroom, B. de/Naschold, F. (1994), p. 4.

The Integration of Elderly People into the Workforce

53

social security insures workers against the risks of unemployment, accidents, sickness, and poverty in old age through compulsory quotas. In Germany this system works on a „pay-as-you-go" basis. As a consequence of this system, the aging of the working population and the increase of the phenomenon of early exit lead to severe problems. For example, in the old age pension system income decreases with a decreasing number of persons active in the work-force while on the other hand payments increase as the number of retired persons increases both absolutely and relatively. Financial problems will also surface because the unemployment insurance which, due to German regulation, pays in part for early retirement. Finally, health insurance is faced with the necessity of raising rates as an increasing percentage of its clients become older and health costs increase. On the level of the individual reasons for wanting to continue to work differ widely. One reason can be the wish to keep up the standard of living. For women there might exist the necessity to continue working so that they can obtain the necessary number of years required to receive a full pension. This is due to the fact that women often have interruptions in their working life. For example, the birth of a child. This forces women to reenter the work force later when the children have reached a certain age. Psychological reasons might also exist. Individuals may simply want to continue working because their job provides them with social contact, meaning, and a sense of belonging. On the level of the firm the main reasons for keeping elderly persons employed could be their loyality, their working discipline, and working morale as well as their valuable experience with respect to activities specific to a firm. Also, firms must become aware of the fact that in the future, innovations will have to be made in view of the aging of the population in general, and of the work-force in particular. As this trend further develops firms also must be able to recognize the necessity to employ elderly persons to minimize difficulties as the shortage of qualified, younger personnel increases. On the macroeconomic level the aging of the work-force will lead to structural scarcity of workers, which will in turn lead to the necessity to increase the participation rate of certain groups of the population. Together with the group of women and migrants, this might also include the elderly workers. To insure the competitiveness of Germany as a location for future

54

Ulrich Peter Ritter / Jens Hohmeier / U t e Schädler

oriented industries, it is important that qualified workers with their specific know-how remain within the workshop for an extended period of time. Since human capital is one of the most important location factors in the Federal Republic, this is imperative for Germany to keep its competitive advantage. Another aspect is the drifting of elderly persons from the official work system into the shadow economy. Economically it might be advantageous to keep elderly workers within the official economy as long as possible. Attention must also be paid to the interdependence between levels. Reasons for integration should not be seen as independent of each other. Connections and interplay take many forms and channels. Thus, for example, one interdependence between the level of the firm and the level of the individual, could be seen in the possibilities of the enterprise to make use of the positive qualifications of elderly workers. Thus, the individual might derive meaning and job satisfaction from continuing to work while the firm profits from his or her special experience and know-how. The higher the firm values the know-how and experience of the individual, the more meaning and satisfaction the individual will derive from her or his work and will thus be more willing to take on responsibility.

4. Flexibility, flexibilization and flexibilization potentials The integration or reintegration of elderly workers into the work system depends on the flexibility of the system as it is and on the potential flexibility, i. e. the possibility to heighten the flexibility of the system. Thus, flexibility can be seen as a desired state or goal resulting in a behavior of a system, which reacts to different situations or environmental conditions with an adequate behavior. In a society, which is characterized by processes of change, of individualization and increasing competitive pressures, flexibility has a key role. Flexibility is the opposite of rigidity and implies the ability to react to new demands, and to learn new patterns, behaviors, and strategies. For the individual, flexibility can also be seen as a chance for learning and personal development. When looking at the flexibility of the work system in the following paragraphs, we will focus on the principal agents firms, elderly workers, and the

The Integration of Elderly People into the Workforce

55

state. These agents simultaneously shape a system as well as being affected by it. Within a firm organization, production, and human resources will determine flexibility. As an example we shall look at the interface between work and production: Flexiblilization can, for example, mean the decoupling of individual working time and the use of machinery and other capital goods. 14 This is just one reference to the large list of models for the flexibilization of working time on a continuum marked by the flexibilization of life-working time on the one end to part time work, and pauses of elderly workers on the other.15 For elderly workers flexibilization can also imply a larger differentiation of wages, new work forms, and contracts. This could also mean saying goodbye to higher wages due to seniority. One could also think of employment on the basis of contracts of manufacturing something at home. Potentials for flexibilization can also be found in the organization of work. Among the possibilities discussed in this field we can mention tele-work, job rotation, job enlargement, and job enrichment as well as different forms of working such as group and project work. To make use of these potentials for flexibility a firm must pay attention to the health of its workers as well as to the ergonomic aspects of jobs. It must also invest in furthering the education and formation of its elderly workers, so as to be able to use them more flexibly. The flexibilization potential of the elderly workers depends on the one hand on the institutional arrangements, which firms and the state provide, and on the other hand on the willingness of the individuals to consider and make use of different alternatives to immediate exit from the firm such as gradual retirement, part-time work, and taking up a different job in the same or in another firm. It also depends on the willingness of the individuals to invest time and energy into continuing their own education. The potential of the state for flexibilization can be seen in the regulations of social security. Here the system has many rigidities and unnecessary impedi-

14 Keller, B. (1993), p. 343. 15 Bäcker, G./ Naegele, G. (1993), p. 58 and 59.

56

Ulrich Peter Ritter / Jens Hohmeier / Ute Schädler

ments. Starting points can be seen in the retirement age16 and in the calculation of pensions. One handicap for elderly people to continue working are the rules for earning income through work in addition to receiving pension payments. Here there is a limit of DM 580,- per month (1995) in the case of invalidism, pensions for elderly women, unemployment pensions, and flexible old age pensions. These regulations do nothing but demotivate elderly people from working further. Also, these regulations tend to act more as an invitation to abuse than a protection.17 Normally, old age pensions do not include limits on additional earnings after people have reached the age of 65. A further handicap can be seen in the way pensions are calculated. Normally the income earned in the last years before pension payments starts are used as the basis. Thus, if people work part time before reaching the pension age, this lowers their pension income. This is a strong incentive not to make use of the possibility to work part time.18 Thus, to increase the flexibility of the working system one of the primary tasks of the state would be to regulate the social security system in such a way, that pension payments depend mainly on accrued years of payment into the system and the amount people have payed into the system. Since the German pension system depends on the time people have worked productively, the state must also see to it that work is actually available by actively intervening in the labor market. The state could provide incentives for firms who encourage elderly people to continue work, or provide jobs for elderly persons. The state could also encourage the creation of networks which coordinate efforts and initiatives for job opportunities and continuing education for elderly workers. Furthermore, the state can make use of the potential for flexibilization in publicly owned firms.

16

The official retirement age for men is 65 years. This must be made more flexible. Correspondingly retirement before this age could be punished by reductions in pensions. If people work longer their pension payments should increase correspondingly.

17

Bäcker, G./Naegele, G. (1993), p. 93.

18

Bäcker, G./Naegele, G. (1993), p. 65.

The Integration of Elderly People into the Workforce

57

5. Measuring flexibility The ability of a firm or an industry to integrate elderly workers can be estimated and quantified if we can find an indicator of flexibility. One such indicator, which we want to propose here, is the relative importance of elderly persons working, i. e. persons over 55 years of age, in relation to total employment of the firm or an industry. When we compare such data, we can identify industries or branches with high and low percentages. If we use the average age by age group and we find that this average for one industry is significantly above the average of the total work-force, then we can say that this firm or industry exhibits high flexibility. Correspondingly, if this value is below average we can speak of a firm or an industry with low flexibility. Three percent above or three percent below average can be considered significant. Thus, we can identify industries and enterprises with high and low flexibility. Another measure of the flexibility could be the relative percentage of people making use of early retirement versus the total number of retiring persons. Corresponding to what was said above, we could also differentiate here according to industry and firms. Other indicators could be the percentage of elderly people as a part of all persons hired in a period of time. However, for these latter measures, it would be difficult to get data which are representative for industries or firms. As far as the integration of elderly workers through flexibilization is concerned, impulses come from several fields such as chances for further education, the flexibilization of working time, the existence of measures of preventive medicine, and the science of the adaption of work to human physiological needs. These could be indirect indicators of flexibilization. The lack of data for total industries will impede identification of particular industries and firms in this respect. Therefore, such factors can only be analyzed through case studies. The dependency and flexibility of the profile/structure of employment within a branch or firm can be shown as the following function:

58

Ulrich Peter Ritter / Jens Hohmeier / Ute Schädler

Flex = f (ee, er, he), with: SFlex > 0 SFlex < 0 Ser See

SFlex > 0 She

Legend: ee =: the percentage of elderly employees (above the age of 54) compared to the total employees in a branch or firm during a specified time period er =: the percentage of early retirement compared to the total retirement in a branch or firm during a specified time period he =: the percentage of new hiring of elderly persons (above the age of 54) compared to the total new hiring in a branch or firm during a specified time period

In the following we will measure flexibility only through ee, that is, the relative importance of workers above the age of 54 as part of total employment in an industry or a firm.

6. Differences in the flexibility rates of branches of industry The most important factors determining early exit and retirement as well as the remaining of elderly people in the work-force seem to be the same (social policy), or similar (wage rates) on a national scale. If we find, as was mentioned earlier, that flexibility rates differ substantially between industries, then the factors causing these differences of flexibility deserve being studied. In West Germany industries about 10 % of the socially insured workers are older than 54 years. In the group between 55 and 59 years of age the average is 8 % and in the age-group of 62 to 64 only 1.67 %. The differences between branches, however, are substantial. On the one extreme there is the branch of forestry where 19.97 % of the socially insured workers are older than 54 years, and on the other extreme there is the branch of stone and brown bituminous coal mining, in which only 1.71 % of the socially insured workers are older than 54 years. To get a somewhat more detailed view we ordered information from the 95 branches used in the statistics of the German social security system according to the percentages of elderly workers employed. This list is led by such branches as private households, forestry, defense, public security, churches and other religious organizations, public security and defense, and social insurance. We did not want to study branches with very small firms such as households or branches with special protection such as agricultural, forestry,

59

The Integration of Elderly People into the Workforce

and fishing. Also, we wanted to study a branch where employment was not regulated by public budgeting and tariffs. Thus, we decided on the following list of industrial branches which we rank in order according to the different age groups. Table 3a: Absolute and relative quota of elderly insured workers in selected branches19 bran-\ age ches\groups 04 Water-, Gas- and ElectricitySupply. 14 Production and Treatment of Natural Stones 36 Manufacture and Repair of Watches 45 Leather Production and Dressing 46 Manufacture and Repair of Shoes 57 Beverage Production All Branches

%

12.25

60- 64 years 6636

2.58

over 64 % years 167 0.07

21754

11.32

5793

3.01

753

0.39

16.17

1073

13.67

161

2.05

35

0.45

3447

15.37

2796

12.47

509

2.27

142

0.63

29856

4624

15.49

3716

12.45

803

2.70

105

0.35

92386

14020

15.18

11309

12.24

2405

2.60

306

0.33

10.05

1835209

8.06

379803

1.67

73025

0.32

over 15 years 257666

over 55 years 38916

%

%

15.10

55- 59 years 32113

192138

28300

14.73

7848

1269

22429

22755284 2288037

60

Ulrich Peter Ritter / Jens Hohmeier / Ute Schädler

Table 3b: Ranking of selected branches relative to the quota of elderly insured workers 1 9 \ age groups branches* 04 Water-, Gas- and Electricity-Supply. 14 Production and Treatment of Natural - Stones 36 Manufacture and Repair of Watches 45 Leather Production and -Dressing 46 Manufacture and Repair of Shoes 57 Beverage Production

Rank: over 55 years 13

Rank:55 - 59 years 13

R a n k : 6 0 - 64 years. 21

Rank: over 64 years 87

17

21

9

27

8

6

36

23

11

11

28

10

10

12

14

33

12

14

17

36

In table 3 a you can see, that the industry „Manufacture and Repair of Watches" has the highest quota (16.17 % of the social security workers are older than 54 years). However, this branch is small. Only 7848 insured workers are employed in this branch, i. e. only 0.035 % of the total number of insured workers. Branches like „Water-, Gas- and Electricity-Supply" or „Production and Treatment of Natural-Stones" are much more important. On the one hand they have a high quota of elderly employees, on the other hand their percentages of insured workers with regard to the total numbers of insured workers in West-Germany is relatively high. The ranking is shown in table 3b. Here one can see that the branch „Manufacture and Repair of Shoes" is also in a high positition.20 We then interviewed the representatives of the associations of these industries. We came up with the following list of hypotheses: • In the public utilities (water, gas, and electricity) the situation is considered to be very different from industries with high competition. There is less pressure for lean production and thus also less pressure to force early retirement. The pay- and work-system is rather similar to public service.

19

3a and 3b: Bundesanstalt f ü r Arbeit (1994), Tab. Sozialversicherungspflichtig Beschäftigte nach Wirtschaftsgnippen und Altersgruppen im Bundesgebiet West am 30 Juni 1994 Unpublished Statistics. All Calculations by the Author.

20

If one compares these percentages with the data from the year 1989 one can observe a significant increase of age-flexibility. Thus, in the shoe-industry in 1989 only 11.50 % of the insured workers were in the age group 55 to 64, in 1994 the percentage had risen to 15 %. In other industries a similar tendency can be observed. Is the labor force already showing signs of aging? For the data for 1989 see Rosenow, J./Naschold, F. (1994), p. 92.

The Integration of Elderly People into the Workforce

61

• In the branch „Production and Repair of Watches and Jewellery" industrial production is practically non-existent except in three locations. This branch is dominated by small firms, often the owner being the only person working in the firm. We then took a more detailed look at the shoe and shoe repair industry. Among branches with above-average percentages of the work-force in the group of elderly workers, this branch ranks 10 for the groups of 55 years old and older and 12 for the age group 55 to 59, and ranks 14 the age group of 60 to 64. Only for for age 64 and above does it rank lower, position 33. That is the age group, where most retirement occurs. Table 4: The shrinking of the German shoe industry 1960 - 1994 2 1

Year

Number

of Number

companies

employees

729

105.152

1965

823

99.628

1970

719

89.404

1975

516

55.628

1980

445

54.521

1985

328

44.391

1990

233

30.483

1994

223

22.080

1960

of

As can be seen from table 4 the German shoe industry has been shrinking since 1965. The number of shoe factories decreased from 823 in 1965 to 223 in 1994. Also, the number of employees decreased from 99.628 in 1965 to 22.080 in 1994.

21

Hauptverband der Deutschen Schuhindustrie, Statistiken 1960 - 1994.

62

Ulrich Peter Ritter / Jens Hohmeier / Ute Schädler

Fig. S: The German Shoe Market in 1993

Source: Hauptverband der Deutschen Schuhindustrie

In 1993 the shoe industry produced 27 Mil. pairs of shoes compared with imports of 385 Mil. pairs. Thus, German production amounted to only 7% of total consumption. As can be seen in fig. 5 the main providers were Italy and China. The federation of German shoe-producers (Hauptverband der Deutschen Schuhindustrie) has the following hypotheses to explain the relatively high percentage of elderly workers in this branch: • It is still a branch dominated by family owned small and medium sized firms. • Tradition is more important in the management of these firms where modern fads such as lean production, are not practised on a large scale. • Among the owners there is a somewhat patriarchal feeling of responsibility for elderly workers. • There is a different mentality in small business in comparison with medium and big businesses (for example satisfying rather than maximal profits). • The industry is not very attractive for young workers. It is hardly possible, to validate these hypotheses on the level of branches of industry. The data are lacking and studies would be very costly. Therefore, it seems a good idea to do case studies, maybe with one firm in the upper ranks and one on a very low level with respect to the average branch level. This would also open up the possibility to discover new factors and maybe also some positive models for integration. With this in mind a questionaire

The Integration of Elderly People into the Workforce

63

was developed with different open and closed questions for the different divisions of a firm, and different aspects of its production and personnel policies. To get some idea about the use of this questionaire we did a small pre-case study in one firm of the shoe industry.

7. Pre-case study: The Diamant shoe factory The firm was founded in 1873 in Frankfurt. Originally the firm specialized in orthopaedic shoes, but it soon diversified production. About 20 years ago, Otto Müller (now age 78), decided that the shoe industry was a dying industry and that only very specialized firms could survive. A new factory was built in Bad Soden (near Frankfurt). Employment was reduced from 200 in 1955 to 40 in 1985. Since then the number of people employed has remained constant. The firm specialized in dance shoes in the lower price range, a limited market with little fluctuations where the constant contact to clients is of high importance. It produces around 100,000 pairs of shoes per year. The company posted revenues of 4.2 Mil. DM in 1994, as earnings were very good throughout the industry. Thus, there is always enough money to invest in modern machinery and the improvement of work conditions. There are 40 employees including part time workers, 80 % of them being women. One fourth of the employees work in administration, the rest in production. All the selling is done by the son of Otto Müller. Exports (to the US, Asia, and Australia) are managed by placing advertisements in specialized papers. There are no travelling salesmen. Sales promotion is only done through magazines that are specialized in dance and dance competitions. Sales are made through 170 customers or firms, i. e. shoe-shops, danceclubs, and private persons. The firm produces 100,000 pairs of shoes per year with different designs in a flexible semi-automated production. Most of the machines are CNCmachines. The once heavy, dirty, unhealthy jobs have disappeared. Automation allows part time work. Workers are semi-skilled and some of them can work on various jobs. They begin work as unskilled workers and are trained on the job. The firm no longer trains young people because they are not interested in working in an industry where wages are low and the work is monotonous.

64

Ulrich Peter Ritter / Jens Hohmeier / Ute Schädler

The climate in the firm is very personal. Mr. Miiller knows most of his employees and many of their personal problems and histories. Employees maintain contact with the firm even after they have retired. The workers also still receive bonuses, and on this occasion the owner visits them personally. The percentage of elderly workers corresponds to the average for the shoe industry. This however, is not due to a policy of the firm. The firm encourages elderly workers to stay on since it is hard to find skilled workers in the labor market. Also, elderly workers are considered to be more reliable and stable, they tend to be absent fewer days per year, and are sick less often. Furthermore, Mr. Miiller has not observed any decrease of productivity with increasing age. „1 have never tried to get rid of a person because of old age. Only once did I had to bribe a foreman to quit before retirement age because he could no longer get along with the new production manager."

8. Interpretations and some conclusions from the pre-case study The observed flexiblity rate in this firm corresponds to the average rate of the shoe- and shoe-repair industry. Potential flexiblity, however, is much higher. The organization of the production process in the form of decentralized work stations allows job sharing and part time work. The owner is offering this to workers who want to retire. However, workers really do not consider staying on after retirement age. Women retire at the age of 60, men at 63, most of them having worked in the firm for a minimum of 10 years. Workers consider it their right to stop working when they have reached this age. They have their own plans for traveling, moving to more attractive parts of Germany, hobbies etc. Usually they have enough money through saving and pension plans to live comfortably after retirement. On a very general level one can say, that the hypotheses of the Federation of German Shoe Producers, as they are listed above, can be validated by the case of the Diamant shoe factory. This is so despite the fact that Otto Miiller pointed out repeatedly that his firm was not representative for the whole industry, but rather a very special case. His criteria, however, were different: his firm's profits are high (10 % of sales versus 2 % of sales in many other shoe factories), and he is producing in a safe niche while others sell under very heavy international competition. As far as exit and retirement are

The Integration of Elderly People into the Workforce

65

concerned, interviews with workers in this firm confirmed other studies' general hypothesis which showed that workers doing monotonous work do not want to continue working after the official retirement age. In this case it holds true in spite of the fact, that other working conditions like cleanliness, noise, climate, etc. are very favorable. As a result of the pre-case study we found that additional factors such as management style and organizational culture have to be mentioned as influences on the flexibility rate. As to general conclusions, these depend on the research interest. If one is interested in general hypotheses and analyzing factors which contribute to a higher age flexibility in an industry, case studies can be a very good instrument of research (even when one takes the top down approach, as we have done), i. e. looking for an industry with a high participation rate of elderly workers and then studying closer one or more representative firms. If, however, one is interested in social innovations such as flex-time, job sharing, group work, etc. and their influence on elderly employees, one should go directly into innovative firms within this branch. We also think it would be very interesting to study firms outside industrial production and to analyze other, maybe also potentially important factors. In this case one would analyze branches which we have deliberately excluded such as the service industries, the public and semi-public sectors.

9. Some questions for further research and international comparisons As we have argued in Arnoldshain, Brazil and Argentina are currently facing problems of an aging population and will increasingly do so in the future. Comparisons could prove to be very useful on a very general level to understand more about the phenomenon of aging populations and the aging of the work-force. They could help to clarify and analyze factors influencing the flexibility within different industries by showing their similarities and differences. For example, such factors could be the attitude toward work, the existence of other possibilities of work in the informal sector, the organization of work, and the supply of and demand for work, etc. They could help to clarify the problems, conditions, models, and instruments for the integration of elderly people into the production process etc.

66

Ulrich Peter Ritter / Jens Hohmeier / Ute Schädler

Comparisons could also be used to show how similar or identical problems are solved or treated by different systems or societies. The same holds true for the analysis on the level of firms. Social innovations practised in one country can also be helpful for finding new solutions in other countries. Thus, new solutions are in no way limited to the older industrialized nations such as Germany. For instance, there might be many solutions and models practised in Argentina and Brazil, which could be useful in Germany.

Bibliography BÄCKER, G. and G. NAEGELE (1993): Altemde Gesellschaft und Erwerbstätigkeit: Modelle zum Übergang vom Erwerbsleben in den Ruhestand, Köln (Bund-Verlag). BALTES, P. B. and M. M. BALTES (1992): Gerontologie: Begriff, Herausforderung und Brennpunkte, in: P. B. Baltes and J. Mittelstrass (eds): Zukunft des Alterns und gesellschaftliche Entwicklung, Berlin, New York (de Gruyter), p. 1 - 34. BALTES, P. B. and J. MITTELSTRASS (eds.) (1992): Zukunft des Alterns und gesellschaftliche Entwicklung, Berlin, New York (de Gruyter). B J 0 R N E B Y , S. (1995): The Needs of Elderly People in Intelligent Homes, in: J. Esser/G. Fleischmann/Th. Heimer (eds ): Soziale und ökonomische Konflikte in Standardisierungsprozessen, Frankfurt a. M., New York (Campus), p. 73 - 88. BUNDESANSTALT FÜR ARBEIT (1994): Tab. Sozialversicherungspflichtig Beschäftigte nach Wirtschaftsgruppen und Altersgruppen im Bundesgebiet West am 30 Juni 1994. Unpublished Statistics. BUNDESMINISTER DES INNEREN (ed.) (1987): Modellrechnungen zur Bevölkerungsentwicklung in der Bundesrepublik Deutschland. ESSER, J ; FLEISCHMANN, G. and Th. HEIMER (eds.) (1995): Soziale und ökonomische Konflikte in Standardisierungsprozessen, Frankfurt a. M., N e w York (Campus). FRANZ, W. (1993): Der Arbeitsmarkt. Eine ökonomische Analyse, Mannheim et. al. (BI-Taschenbuchverlag). GRÜTZ, J. et. al. (1993): Modellrechnung zum Erwerbspersonenpotential und zur Arbeitsmarktbilanz bis zum Jahre 2030, in: Deutsche Rentenversicherung, N o 7 / 1993, p. 4 4 9 - 4 6 2 . JACOBS, K. and M. REIN (1994): Early Retirement: Stability, Reversal, or Redefinition, in: F. Naschold and B. de Vroom (eds.): Regulating Employment and Welfare: Company and National Policies of Labour Force Participation and the End of Worklife in Industrial Countries, Berlin, New York (de Gruyter), p. 19 - 49. KELLER, B. (1993): Einführung in die Arbeitspolitik, 3rd ed., München, Wien (Oldenbourg). KRAUSE, W. (1988): Die alternde Gesellschaft, Vortrag vor der Vereinigung ehemaliger Mitglieder des Landtags von Baden-Württemberg am 19. September 1988.

The Integration of Elderly People into the Workforce

67

NAEGELE, G. and H. P. TEWS (eds.) (1993): Lebenslagen im Strukturwandel des Alters, Opladen (Westdeutscher Verlag GmbH). NASCHOLD, F. and B. DE VROOM (1994): Regulating Employment and Welfare: Company and National Policies of Labour Force Participation and the End of Worklife in Industrial Countries, Berlin, New York (de Gruyter). NASCHOLD, F.; VROOM, B. DE and B. CASEY (1994): Regulating Employment and Retirement: An International Comparison between Firms and Countries, in: F. Naschold and B. de Vroom (eds ): Regulating Employment and Welfare: Company and National Policies of Labour Force Participation and the End of Worklife in Industrial Countries, Berlin, New York (de Gruyter), p. 433 - 489. RITTER, U.P. (1992): Vergleichende Volkswirtschaftslehre, München, Wien (Oldenbourg), Part V. RITTER, U. P. (1995): Thesen zu Überalterung, Lebensarbeitszeit, Altersgrenze und Ruhestand, in: B. Schefold (ed.): Wandlungsprozesse in den Wirtschaftssystemen Westeuropas, Marburg (Metropolis-Verlag), p. 175 - 188. Rosenow, J./Naschold, F. (1993): Ältere Arbeitnehmer - Produktivitätspotential oder personalwirtschaftliche Dispositionsmasse?, in: Sozialer Fortschritt, Vol 42 (1993), No 6 - 7, June/July , p. 146- 152. ROSENOW, J. and F. NASCHOLD (1994): Die Regulierung von Altersgrenzen: Strategien von Unternehmen und die Politik des Staates, Berlin (Ed. Sigma). SCHEFOLD, B. (ed.) (1995): Wandlungsprozesse in den Wirtschaftssystemen Westeuropas, Marburg (Metropolis-Verlag). TEWS, H. P. (1993): Neue und alte Aspekte des Strukturwandels des Alters, in: G. Naegele and H. P. Tews (eds.): Lebenslagen im Strukturwandel des Alters, Opladen (Westdeutscher Verlag GmbH), p. 15 - 42. VEREIN DEUTSCHER RENTENVERSICHERUNGSTRÄGER (eds.) (1992): Rentenversicherung in Zeitreihen, 3rd ed.; Frankfurt a. M. VROOM, B. de and F. NASCHOLD (1994): The Dialectics of Work and Weifare, in: F. Naschold and B. de Vroom (eds ): Regulating Employment and Welfare: Company and National Policies of Labour Force Participation and the End of Worklife in Industrial Countries, Berlin, New York (de Gruyter), p. 1 - 1 7 . ZWISCHENBERICHT DER ENQUETE-KOMMISSION DEMOGRAPHISCHER WANDEL (1994): Herausforderungen unserer älter werdenden Gesellschaft an den einzelnen und die Politik, Deutscher Bundestag, Drucksache 12/7876 vom 14.6.1994.

68

Alberto M. Díaz Cafferata

Alberto M. Diaz Cafferata

"The Integration of Elderly People Into the Workforce. Present Trends and Future Needs". Comment on Ulrich Peter Ritter's Paper. The paper by Prof. Ritter is both interesting and stimulating. As he frequently likes to quote, most blind men who have examined the elephant of the economic world have come away with different impressions of the animal. Dr. Ritter compels us to give close attention to a particular, vital organ of the animal of modern economic organization, since it concerns no other than the human base of the system. The problem created by the dramatic demographic changes in the world, and specially the aging population in industrial countries, is clearly and vividly stated. Carlo Cipolla (1978) argues in „The Economic History of World Population" that „in the developed countries further industrialization is creating all sorts of problems in all aspects of life, in the field of ecology as well as in human relations... at the material as well as the spiritual level. While we strive to deal with one problem, we innocently cause another. It is a nightmare...; now we are beginning to ask ourselves how far we can go" (op. cit. p. 129). I intend to contribute some ideas about how we could expect that individual consumer's decisions may be affected by the perception of the problem; that is, the consequence on the labor supply side of aging of the population. Gary Becker (1976) emphasizes that contemporary researchers have been forced by the failure of simple demographic extrapolations to pay greater attention to family decision making. In „An economic analysis of fertility" he develops a framework to explain the optimal size of the family as the result of demand and supply for children (which must be produced at home). A useful prediction for our discussion is that over time families have moved

69

Comment on Ulrich Peter Ritter's Paper

to higher quality children and that a desire for a fewer number of children is directly related to income. This behavior has created unexpected social consequences. Dr. Ritter's presentation deals with the reaction of firms, government and elderly people. Youngsters should also be considered, since they have to receive decisions that will affect their future welfare. In terms of the rational expectations approach developed among others by the freshly Nobel Prize awarded Robert Lucas Jr, the point of departure for our analysis should be that individuals have now both new information about the effect of their family decisions and an understanding of a „model" of the economy, such that they are able to predict the consequences of current trends. This means, for example, that a German youngster will grow progressively aware that the Social Security System will be less reliable in the future. I S'

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70

Alberto M. Díaz Cafferata

The figure synthesizes some of the relevant variables. The life cycle is represented by the segment (LF), and (PH) is the length of the production phase. At point P, the problem of the consumer is to plan the allocation of time to work, and consumption levels over time, such as to maximize utility. (II) is the typical income cycle; (SS) are savings, and the distance I-S=CC is consumption during the production phase. Suppose that consumption is smoothed over time. After retirement, the flow of consumption expenditure OC is equal to the sum of interest earned on accumulated savings plus government transfers (R) (coming from redistribution). We also need to recognize that consumers get utility from goals purchased in the market (measured by C) and consumption of non market goods (call it CN). If (R) is expected to fall such that consumption is reduced to (OC') each year in the retirement period, what will happen with the level of choice variables? i) ii) iii) iv)

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Structural Adjustments and Unemployment

93

Bibliography AMADEO, E., PAES D E BARROS, R., CAM, J.M., Gonzaga, G. and Mendonça, R. (1994):"A Natureza e o Funcionamento do Mercado de Trabalho Brasileiro desde 1980". Anais do XVI encontro da SBE. CANO, W. (1994): Industrializaçào, crise, ajuste e reestruturaçâo, in: Oliveira, C A. (org): O Mundo do Trabalho, Sritta. CASTELLS, Manuel (1993): The Informational Economy and the N e w International Division of Labor, in: Carnoy, M., Castells, M., Cohen, S., Cardoso, F.H.: The New Global Economy in the Information Age. University Park, Pennsylvania, Pennsylvania Univ. Press. CHESNAIS, François (1994): La Mondialisation du Capital. Paris, Syros. COHEN, Stephen S. Geo-Economics: Lessons from America's Mistakes, in: Carnoy, M., Castells, M., Cohen, S., Cardoso, F H.: The New Global Economy in the Information Age. University Park, Pennsylvania. Pennsylvania Univ. Press, 1993 COMMISSION E U R O P É E N N E (1994): Croissance, Compétitivité, Emploi. Les défis et pistes pour entret dans le XXI siècle. Livre Blanc. Luxembourg, Office des publications officielles des Communauté Européennes. COMMISSARIAT GÉNÉRAL DU PLAN (1993): La France et L'Europe d'Ici 2010. Paris, La Documentation Française. COUTINHO, L. and J.C. FERRAZ (eds.) (1994): Estudo da Competitividade da Indùstria Brasileira. Sào Paulo, Editora da Unicamp and Papirus Editora. ERBER, F S. and R. VERMULM (1993): Ajuste Estrutural e Estratégias Empresariais, Rio de Janeiro, IPEA. FREEMAN, Chris and Luc SOETE (1994): Work for all or mass unemployment? London, New York, Pinter Publishers. HARVEY, D. (1992): Condiçào Pós-Moderna. S.Paulo, Ediçôes Loyola. MATTOSO, Jorge (1995): A desordem do Trabalho. S.Paulo, Scritta. SCHAFF, Adam (1991): A Sociedade Informatica. S.Paulo, Ed. U N E S P and Ed. Brasiliense, 2d.Edition. SUZIGAN,W. (1992): "A Industria brasileira após urna década de Estagnaçâo: Questôes para Politica Industrial", in: Economia e Sociedade, N I , ago. TAVARES, M. C. (1993): Ajuste e Reestruturaçâo nos Paises Centrais: a Modernizaçâo Conservadora. in: Tavares, M.C. and Fiori, J.L. Desajuste Global e Modernizaçâo Conservadora. Rio de Janeiro, Paz e Terra.

94

Alberto J. Figueras

Alberto J. Figueras

"Structural Adjustment and Unemployment". Comment on Lenina Pomeranz' and Adriana Nunes Ferreira's Paper The research is concerned with unemployment due to structural adjustments in Brazil. The paper has two parts. First, our colleagues give us a general overview of the research. They present the international scenario (the new production function, the new pattern of international competition and the new conditions of international monetary system). Then, they continue with a brief presentation of Brazilian economic performance in the last two decades. They remark on the recent changes in the policies. They called the policies the "first wave" of structural adjustments, during '80 (the structural reform within the old model) and the "second wave" of structural adjustments, during the '90 (which was a great modification of the economic model). All these historical facts reflect the Argentine events. Some indicators of the Brazilian economic structure can be looked up in the tables at the end of the paper. Finally, our neighbors present the hypotheses to test and the method to use. Our colleagues will conduct a very similar research process for the survey, which Alberto M. Diaz Cafferata and myself have been working on during the last two years. We worked on selected firms in Catamarca and Córdoba, and now, we think about extending the same project to Buenos Aires, utilizing UADE University to help set up the interviews. Our papers have two sources of data : 1) the interviews to enterprises; 2) the figures given by INDEC. With these elements, we elaborated our conclusions, which can be seen in Diaz Cafferata & Figueras (1994), Figueras & Diaz Cafferata (1994), and Diaz Cafferata & Figueras (1995).

Comment on Lenina Pomeranz' and Adriana Nunes Ferreira's Paper

95

With the interviews, we wanted to discover: (a) how the principal government policies affect the decisions of the firms; (b) how the firms adjust their action to the policies; (c) which events prevent (or make easier) the adjustment actions; and, the principal purpose, (d) to know the impact of new strategies on the employment level of the firm. As it has been explained, both of them, ours and theirs, are analogical ways. In short, a comparison between the Brazilian and the Argentine solutions of the firms (and, of course, the conclusions) will be very interesting and fruitful.

97

Structural Change and Unemployment

Alberto M. Diaz Cafferata / Alberto José Figueras / Ernesto Capmourteres

Structural Change and Unemployment I. Structural change and growing unemployment in Argentina 1.1 Trade liberalization, productivity changes and unemployment The Argentine economy is operating a deep structural change. At the same time, it currently faces the highest unemployment rate in history. Is there a causal relationship among both phenomena? This is a key question because the impact on employment of the labor force, given its social consequences, has become one of the most serious problems of the policy of transformation.

Figure 1 Argentina, Unemployment Rate 20 18

/

2

2.3%

0 1967

70

75

80

85

90

Year Source: INDEC, Permanent Household Survey

1995

98

Alberto M. Díaz Cafferata / Alberto J. Figueras / Ernesto Capmourteres

Unemployment grew persistently from a negligible level of 2.3% in October 1978, to 8.6% in May 1990, after the hyperinflation, fell to 6% in 1991, the first year of Cavallo's Convertibility Plan, and raced to a shocking 18.6% in May 1995, as is shown in Figure 1. Adding to the open unemployment the underemployment rate of 12.4%, we reach the current 31% of labor force with employment difficulties in Argentina. Together with high unemployment levels, economic changes generate strong sectoral and regional effects, along with a shift toward the use of more capital intensive technologies. Lastly, unemployment grew despite a substancial increase in GDP. From 1991 to 1994 GDP grew 33,6%, whereas urban employment increased just 8,4% (under plausible assumptions). The employment elasticity of GDP is for these years 0.25, lower than the 0.35 estimated for 1989/1992 in Paredes and Riveros (1993). 1.2. Two sectoral cases. Figure 2.a Cordoba Shoes Index 11/91=100 250

Cordoba. Shoes Productivity per worker and per hour Index 11/91=100

200 150

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Structural Change and Unemployment

99

Two cases examined in Diaz Cafferata and Figueras (1994), reveal the impact of structural change on employment conditions. Figure 2 describes the change of productivity and employment in two manufacturing sectors in the province of Cordoba: shoe and food & beverages. The first one was affected negatively by the opening of the economy; it is currently a declining industry. The drop in production has been accompanied by an abrupt reduction in labor use since 1992. There is no room to cushion the effect on employment. The second, with comparative advantage, has expanded since 1990, but the increase in employment is clearly inferior to the level of activity of the sector; productivity per hour almost tripled between 1990 and 1994.

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100

Alberto M. Diaz Cafferata / Alberto J. Figueras / Ernesto Capmourteres

1.3 Regional changes in the market for labor When there is a geographic concentration of activities affected by structural change, sectoral impacts are also shown as differential regional consequences. Figure 3 depicts selected1 regional rates of unemployment in Argentina in October 1979, October 1991 (the first year of the Convertibility), and May 1995. The growing national average is shown by the points on the right side. Note the remarkable regional differences of structural change on unemployment in that period. Industrial locations in the East, on what is called "Balcon del Litoral" or "Littoral Industrial Front" (Buenos Aires, Rosario, Santa Fe), jumped from the lowest relative levels in 1979 (below the average), to the highest records of unemployment (over the average) in 1995. Figure 3 25 t

Argentina. Regional Unemployment

0 -I—I—I—t— Location

October 1979 — ' — M a y 1995 - A - October 199l]

At first sight, the message from Figure 3 is that the statistics of unemployment reveal fluctuations which are not homogeneous in the different areas of the argentinian territory. That is to say, there is in fact a differential regional behavior in the rate of unemployment.

1

The Permanent Household Survey of the INDEC (National Bureau of Statistics and Census) has included 25 urban areas since May 1988. The number of observations is smaller for the period before 1979, and there are no data before April 1967 from this source.

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Structural Change and Unemployment

Gran Catamarca • • * • • • Gran Bs As

— • — G r a n Côrdoba Total 25 Aglom Urb

The next step would be to state the weight of the local determinants of those differences, such as: the different adjustment policies of national and provincial administrations, the participation of manufacturing sectors in local employment, and the sectoral structure of production in each region. On the supply side, Figure 4 shows another important aspect of the changes occurred in the labor market: the systematic increase in the participation rate since the eighties. The figure illustrates this fact for three areas of different degree of development, Buenos Aires, Côrdoba, Catamarca and the whole country. -With a population of about 35 million people, one point in the participation rate amounts to 350,000. An increase of 4 points require the creation of 1,400,000 jobs just to avoid a rise in unemployment.

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Alberto M. Diaz Cafferata / Alberto J. Figueras

II. The end of the objetive of full employment The state as guarantor offull

employment

In the case of Argentina, the policy of trade liberalization has been the key instrument for the transformation of the economy. From the forties onward the Argentine economy began to close (the share of Argentine exports on world exports was 2% in 1950, 1% at the beginning of the sixties and 0.5% in the seventies), firstly as a practical effect of the war on trade flows, and later with the adoption of import substitution as a strategy of growth in agreement with the thinking of the CEPAL (Prebisch). The state intervention was the natural consequence of that approach, with the main objective of keeping full employment. Peron's government concern, since the middle forties, to create urban employment (strengthening his popular political support), was shown in the stimulus to light industry and construction. But "in his zeal for creating occupation, the government stimulated an inefficient fragmentation in many industrial sectors, which were protected against the consequences of its inefficiency..." (Diaz Alejandro, 1970, p 264). Expanding occupation in the public sector was also considered to be a valid tool to safeguard full employment, without the eventual inefficiency being considered a problem. Particularly in some more relegated provinces, the public sector is a "hidden informal" sector which substitutes unemployment compensation in the american or european style (Figueras, 1994). But these welfare programs have a limit, due to the fiscal restriction and the very low productivity of overemployment. The remedial measure of subsidized public employment served as an exhaust valve, but failed in the long run, since productive alternatives were not generated in other sectors 2 . There is a remarkable similarity in the objectives of the economic policy in socialist countries. Ham, Svenjnar and Terrell (1995), explain that zero open unemployment was a primary objective of the Soviet-type system. Low wages, soft budget constraint, penalties for unfulfillment of plan targets, made it rational for state enterprises and other organizations to hoard labor. Unemployment was thus an unknown phenomenon, but (as was the case in Argentina), much of the employment was redundant. 2

Such situation has not disappeared in provincial administrations (Figueras y Diaz Cafferata, 1994, p. 60/65).

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103

Lastly, for decades, the labor force which was not absorbed by the formal sector of the labor market was finally incorporated into the informal sector, where it turned out to be, as in the public sector, underemployed due to the relative low productivity. Lopez and Riveros, 1989, argue that this segmentation of the labor market is an important factor in explaining incomplete structural adjustment. Real wages tend to be more rigid in the formal sectors reducing labor mobility. The Harris and Todaro (1970) model shows that when there are wage differentials institutionally imposed in one segment of the market, some labor force participants will stay unemployed rather than taking a nonprotected segment job. This mechanism is a suggested partial explanation for the rural-urban migration in Argentina, the rising participation rate in urban areas and the surge of an underground economy (Figueras y Diaz Cafferata, 1994). If informal wages fall faster, a heavier burden of the adjustment would be put on the poorest segment of the labor force. The aforesaid draws our attention. To study the evolution of the labor market in the period of structural change in Argentina, we should think not only in terms of open unemployment but also in terms of "underutilization" of the labor force, since the labor market undergoes a period in which up to now hidden vices appear on the surface.

III. The international dimension of structural change. Globalization and comparison of country experiences III. 1. Globalization Now we have to place ourselves in the world scene. As Toffler points out very well, we live a huge alteration in production methods passing from the labor productivity levels of the "second wave", to a world highly technified by the cybernetics revolution. "The chimneys and the assembly lines of the past will not reappear... and the employments they provided are gone for ever" (Toffler & Toffler, 1992). The technological impulses (and particularly in the area of communications) have broken frontiers, producing the socalled globalization (favored by the generalized financial deregulation). Which has been the impact of globalization on employment in the economies in transformation? Firstly, the possibility to manage the economy of each country in an autonomous way has been greatly reduced. Secondly, it has

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Alberto M. Diaz Cafferata / Alberto J. Figueras

created oportunities of access to new markets and new technologies, and it has also contributed to create new employments... but to destroy the old ones (OIT, 1995). Argentina has abandoned the economic organization described in section II, trying to go to a model of development supported by greater internal efficiency and the expansion of exports. This way out has been tried with multiple obstacles in the last two decades: the first one was the Martinez de Hoz period between 1976 and 1981; another attempt in the same direction was made during the Juan Surrouille ministry. We are now in the adjustment to the opening shock of the 1991 Convertibility Plan. The effect of reforms on employment in the Martinez de Hoz period were obscured because "public enterprises were not privatized, and the military stated that the reforms should avoid creating unemployment and social unrest" (Corbo y de Melo, 1985, p.9). Domestic and international conditions today are quite different from those prevailing at that time, and contribute to a stronger impact of the liberalization policy on unemployment. The adjustment has been drastic at the private firms level. We have stated in a previous paper that the present structural transformation is perceived as irreversible. The magnitude of the changes in the competitive conditions of enterprises, make it unfeasible the traditional forms of operation; at the same time the import facilities of machinery and other imputs alters relative prices, and the reduced trade union resistance facilitates changes. These conditions arise from a survey of a group of firms we carried out in 1993-1994 (Diaz Cafferata and Figueras, 1994). At the same time the role of the state as a "last instance employer" disappears, due to the fiscal requirements of the Convertibility. The technological gap of the protected economy and the shock of liberalization The result of the import substitution model was a progressive stagnation and technological backwardness that took the productivity gap to a 60% of the international frontier3. A jump in technology and organization was required.

3

The existence of this technological backwardness generates, in turn, an important type of cost in the structural transition. With the sudden foreign competition which results from a rapid liberalization of trade, a fraction of the capital becomes obsolete. When this economic destruction of capital is

Structural Change and Unemployment

105

As we have stated, the adopted strategy is the competitive insertion in the world; and competitiveness implies, to be simple, a lower cost per unit of product of constant qualitiy. This has been achieved through higher labor productivity; that is, a reduced employment per unit of output. Another significant fact, the speed of the change, has influenced upon unemployment. The velocity of the openness and institutional transformation requires a similar quickness of reaction in the enterprises to be able to survive. The fastest way of adjustment in a short term (in many cases given a previous overemployment), has been the reduction in the number of workers, together with the closing of inefficient plants and the effort to modernize management and productive processes. If the unemployment consequences of technological change are serious around all the world, this situation becomes more critical in our country, because in addition to the required technological innovation and to the change in relative prices, the economy underwent a significant adjustment at the macroeconomic level (fiscal restriction, stabilization, deregulation). Pessino and Giacchino, 1994, carry out what we consider a verification of the existence of structural changes. They proceed to test the existence of displacements in the sectoral demand for labor during the last fifteen years. Starting from Lilien's model (1982) they state the relationship between unemployment and vacancies, known as "Beveridge curve". Sectoral growth in demand, both cause and reflection of structural modifications, originate two impacts: cycles in unemployment and changes of the natural unemployment rate. The outward shift of the unemployment-vacancies curve (or Beveridge curve) suggests a raising natural rate of unemployment and therefore "structural changes" in the labor market. This is precisely what happens in the Argentine economy. The "Unemployment-Vacancies" curve has undergone consecutive outward shifts in Argentina, at the beginning of the eighties and again at the beginning of the nineties, showing an increasing frictional unemployment (Pessino & Giacchino, 1994, p 1140).

significant, it causes an additional impact of unemployment in the adjustment (Diaz Cafferata, 1994).

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Alberto M. Diaz Cafferata / Alberto J. Figueras

III.2. Comparison of international problems of structural adjustment The problems of adjustment to trade liberalization can be compared with those suffered by countries in Eastern Europe and Russia in the reform process. In the words of Michael Bruno 4 , when the transition started "it was clear that unemployment would emerge and that, at least initially, job losses were likely to be large given the size of the shocks and the disruption to systems of production and trade. How large the unemployment would be and for how long it would persist was, and to some extent remains, as unknown". Conditions of transition5. Speed of the change We have to point out two usual difficulties in interpreting the observations. The first one, to identify which part of the changes in unemployment can be specifically attributed to the policy of transformation, when simultaneous processes of structural change and macroeconomic stabilization come together, as well as long term processes and external shocks and their interactions. The other problem for the interpretation arises from the lack of a unique standard of structural change. The comparative study of structural change experiences provides useful conclusions. In the first place, it is important to distinguish between the two types of structural change according to the speed of transformation: long-term processes and rapid processes. When the process is slow and predictable, the policy can promote a progressive adaptation to new conditions. On the other hand, the recognition that the new economic environment is irreversible, makes easier the control of lobbying that is triggered by income distributional and related implications of structural change. In contrast to those long-term processes of structural transformation, nowadays we observe the extension of extremely rapid structural changes phenomena, in which the immediate impact on economic agents is accentuated, as well as the uncertainty, and consequently the cost of the adjustment. Today Argentina and the socialist countries share experiences of rapid structural transformations; both processes of change coincide, in their origin, in a decision of a structural reform policy. Despite the apparent

4

Preface to Commander and Coricelli (1995).

5

Cfr. Diaz Cafferata (1991).

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advantage which would represent a transformation process adopted by a policy decision, instead of arising from an unexpected exogenous shock, the depth of the transformations has raised difficulties of difficult control. The change of the system for the reunification of Germany and the events of the Community of Independent States (CEI), provide an additional analytical element of interest: the critical role of institutions and of the social dynamics of institutional transformation. The change of system in the former German Democratic Republic after its reunification with the Federal Republic of Germany is rapid. The union with the most important economy of Europe, in a process seen as irreversible 6 , enables deep sudden changes such as the one in the property system, the change of currency, the radical redefinition of the role of the state and of the markets in the process of resource allocation. It is the case of an economically "small country" adopting the economic system of the big country. Besides, Germany's capacity to absorb the fiscal cost of heavy amounts of financial help by way of assistance to the adjustment, reduces the distributive conflicts of the transition. This is a clear practical example of a rapid, deep structural change, with low uncertainty, which is a useful historical point of reference. Compare the German experience with the transformation of the former USSR. Though starting from a similar economic system, the latter is, in contrast, much more difficult and uncertain, because of the power conflicts and the apparent dificulties in the definition of objectives and in the application of policy. In Argentina, the transformation requirement does not reach the essential relationships of the system (as the property system), which makes things on that account easier. But costs have to be absorbed internally, the budget restriction is more severe, and the search of consensus in the new institutions is subject to trial and error, causing a more conflictive political process.

6

The theoretical case of the creation of an Economic Union would be applicable assuming a regional integration process between a "small economy" and a "big" neighbor.

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IV. Adjustments in the labor market. Changes in the supply and demand for labor We denote total population by N. L s is the labor force, which is the sum of workers (L) and unemployed people (U). Thus: U = Ls - L. Let p = z,,/ N = participation rate. Changes in the identity decompose in the contributions of changes in the participation rate and demographic changes, on the supply side, and changes in sectoral demand for labor on the demand side. The rate of unemployment is u s (U/L s )= 1- {L /(Ls.N/N) = 1- (L/p .N). Denoting the rate of change of x by: x= dx/x, we find for Argentina: u = — = f.-L = p + Nu "

L>0

In the usual framework of the two sector model, L=Li+L2. If l=Lj/L then: Z = /. ii = p + N-l.i,

+ (7 -1). ¿3, such that: -

(1-1).L2

This is a useful expression to organize the description of processes that explain the change in unemployment. IV. 1. The supply of labor. Tendency of the participation rate Now we should consider the two elements of the labor supply: population, and the rate of activity. The changes in population N have already been seen as an endogenous variable by Malthus who, in 1798, published a controversial work of great influence: An Essay on the Principle of Population. More recently, we find detailed microeconomic analysis of demographic changes, as those of the Nobel prize Gary Becker. Concentrating on facts. The annual demographic growth in Argentina is 1.33%. It is lower than other Latin American countries, Chile 1.68%, Brazil 2.14%, and is not far from those of USA (0.95%) and Canada (1.05%). It is much higher than most industrial countries (UK 0.23%; Spain 0.33%, Austria 0.36%, Japan 0.52%, Germany about 0.1%, and even Uruguay 0.6%) Argentina would double its population in 52 years, compared to the 304 years of UK (Diaz Cafferata, 1995). In the same way as population, the activity rate p is an explained variable. The models of individual behavior investigate the determinants for the decision of offering services in the labor market. We currently observe this type of phenomena in Argentina. Among others, changes in participation rates associated with the fluctuations in the level of activity (the hypothesis of the

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109

discouraged worker and of the additional worker), the increase in married women's participation in the labor force. The raising participation rate in Argentina Since the beginning of the eighties, there has been a growth in the supply of labor in Argentina7 (particularly, of women in the area of Gran Buenos Aires). This fact is made worse by the important rural migration in some centers of the inner part of the country, which has led both to a growth in employment (1.6% for the 90-94 period) and a growth in unemployment (from 6.7% in 1990 to 10.8% in 1994, for all the cities in the provinces measured in October). As we all know the demographic behavior determine pressures in the offer of labor. In this sense one of the questions is to what extent the increase in the unemployment rate can be explained by a greater share of those groups with the highest unemployment rates (young people, women, etc.) in the economically active population. It might be expected that married women (with employed husbands) had higher unemployment levels as a consequence of a higher reservation wage; and, therefore, if the weight of this group is higher, the average rate of market unemployment will be higher too. The empirical result is, however, that the change in the unemployment rate due to changes in the composition of the labor force is very small; in Pessino et alter, 1994, the subject is investigated in detail; they find that from the beginnings of the eighties there is a convergence in unemployment rates for men and women (Pessino & Giacchino, 1994, p 1129). IV.2. The adjustment with rigidities in the labor market. Unemployment peaks and persistence The reference to "a market of labor" is an oversimplification, since there are actually many different markets which differ in localization, qualification, etc. There is in fact a system of interrelated markets, which in turn interact with other markets. Similarly, the representation of the complex mechanism 7

According to Carlos Sánchez (1982) the price elasticity of supply was quite high for women and youngsters (the typical secondaiy workers). More recent works point out a total elasticity of the market of 0.8. However, the women segment shows an elasticity of 1.53, whereas that of men is only 0.07 (Bour 1995, p 172).

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of wage setting is usually oversimplified. After this explanation, the problem of adaptation can be posed schematically in terms of the Ricardo-Viner model which introduces, as representative of the short term, the specificity of sectoral capital. The opening of the economy with a previous anti-export bias of protection, by way of change in the relative price of goods, generates a differential in sectoral factor payments in favor of the sector producer of exportables. This operates as an incentive for the reallocation of labor. If there is initially full employment, wage flexibility enables the preservation of full employment. But the adjustment process is not carried out if the salary is rigid. The theories of efficient wage, in turn, suggest that companies may prefer to pay salaries over the equilibrium level, in order to improve the productivity of the labor force. But such a raise in salaries tends to generate unemployment. Other models include the effect of workers wealth; if people receive rental income, even though they are unemployed, there is a possibility of devoting a longer time to the search for employment, which raises the reservation wage. Similarly, unemployment compensations weaken the worry of employees to keep their jobs, or the urgency to find one if they are dismissed, with the consequent rise in the natural rate. Experience in several countries tells us that persistence of unemployment has been greater in countries where salaries had more resistance to fall (Phelps, 1992). The real wage resistance may have several origins. The answers to the problem are in many cases non competitive among them but complementary, with the same consequence in all cases: rigidity hinders adjustment and can generate unemployment. There is an additional problem. Unemployment can be very difficult to reduce once it reaches a peak. It is the so-called problem of hysteresis. Transitional

unemployment

and

hysteresis

The following is a stylized description of unemployment evolution: consider a real shock as trade liberalization, or a monetary shock, whose impact raises the unemployment rate over the natural rate. From this starting-point, two opposing forces act; one of return to long-term normal level, and the other of unemployment persistence (Phelps, 1992). The last one corresponds to the hysteresis phenomena.

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111

The conceptual importance of the magnitude of the shock we have already pointed out, appears here and again. Lindbeck (1992, p 231-232), points out that though "fine tuning" monetary and fiscal policies are not advisable, when significant disturbances appear, (such as the sudden rise of unemployment rates), there is a case for that he calls "coarse tuning" policies. "If this economic policy philosophy is accepted, he adds, it is certainly more important to analyze the consequences of huge macroeconomic shocks, wich are often related to unique historical events, and to the persistence of the effects of these shocks, than to study short-term fluctuations in unemployment in connection with "ordinary" business cycles. "Policies that avoid huge increases in aggregate unemployment to begin with, or that speed up the adjustment... after a huge rise in unemployment, before persistence mechanisms have much time to operate, may then be regarded as "investment" in the future. This is perhaps the most important lesson from both recent empirical experience and contemporary developments of the theory of employment and unemployment". Our concern points precisely towards the conditions under which the shock produced by an extraordinary event of trade liberalization (when it is generator of structural change), can cause high unemployment levels in the adjustment period. The problem generated by an instant unemployment impact of liberalization exceeds the transition period, because they are difficult to revert due to hysteresis phenomena. Cleansing effects Caballero and Hammour (1994), describe the "cleansing effect" of recessions: outdated production units are the most likely to turn unprofitable and be scrapped in a recession. Interestingly, studies of recession show that simultaneously with the "cleansing" of the productive structure with plants shutdown, there is at the same time a sizable number of new plants entering. However, they report evidence that "job destruction is much more cyclically responsive than job creation". Trade liberalization may also generate a sudden economic "cleansing" or "destruction" of productive assets. The technological sclerosis of the protected economy already mentioned in section III, creates a productivity lag relative to the most efficient foreign technologies. As is shown in Diaz Cafferata, 1994, the opening up of the economy may cause an "obsolescence shock": antiquated machines are scrapped, plants unable to produce at

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Alberto M. Diaz Cafferata / Alberto J. Figueras / Ernesto Capmourteres

competitive costs are shut down. Structural change (in this case generated by trade liberalization), may exacerbate transitional unemployment because the derived demand for labor falls in the sectors where the stock of capital is scrapped. The global and sectoral shortage of capacity impedes the smooth reallocation of labor. When both processes of "destruction" operate simultaneously, i.e. when there is a recession in the period of structural adjustment, the combination is on this account extremely dangerous 8 . The problem of transition When the discussed influences operate simultaneously the cost of adjustment rises. Trade liberalization, technological change, the required structural changes, the increase in labor offer; they all demand a resource reallocation (in both the economic and geographic spaces). But this reallocation takes time. A time during which the economy faces the socalled problem of transition. We may distinguish between two different periods with different behavior during the Convertibility Plan (Beccaria, 1995): a) Period of growth of labor employment (May '91- May '92); during this time, labor employment increased an annual 4% whereas the non-wage employment decreased a 2.1%. b) Period of decrease in labor employment (May '92- October '93); employment fell an annual 0.4%, though at the same time the non-wage employment evolved positively to an annual growth rate of 7.1%. This bad performance of employment is typical of economies in structural transition. This has happened, as we have said before, to former socialist economies. "The decrease in production is the direct and inevitable result of transition, when activities which have lost competitiveness are liquidated. We may expect a J curve as the guideline of change, with unavoidable great losses in the first stage of transition" (OIT, 1995, p. 121). "The decrease of production, ceteris paribus, leads to negative variations in employment (OIT, Chart 16, p. 123); as can be observed in that chart, the decline is not uniform. This is explained by the different conditions previous to the start of structural change. Actually, Argentina's trouble is the world's trouble of this decade; yet consolation cannot be found in this fact. The transition period shows its 8

This is the case in Argentina, in May 1995.

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113

profile of high social cost, even though a significant fraction of unemployment is only an evident sign of pre-existing unemployment, but formerly hidden. It exposes a previous situation of the labor market. Informal Market ad precarious work Precarious workers (broadly speaking) are those workers who declare themselves as non contributors to social security (Montoya, 1993). During the eighties the phenomenon of precarious employment expanded, and has become more severe since 1991. However, this situation is the consequence of strong regulation in the labor market and the incidence of direct cost (salary, social security) and indirect cost (compensation for accidents or dismissal, etc.), which oblige employers to "flexibilize" on their own account, side-stepping the law. This is a de facto flexibilization. However, if our concern is to "flexibilize institutionally to compete" then we should worry about "relative flexibility " and its legalization. We should compare this kind of costs with their incidence in other countries. Changes in wage setting Years ago wage fluctuations were much more related to macroeconomic matters (like inflation) or to factors external to the firm (like "collective agreements" determined salaries at the sectoral level). Nowadays, wages are closely bound and determined by productivity. Because of this, centralized negotiation by Production Chambers or Industrial Associations, has lost functionality. In an open economy with strong technological and organizational changes, the dispersion of productivity levels is high. Consequently, wage dispersion must also be high, at the risk of the loss of "labor sources". We have already mentioned wage elasticity of supply; consider now the wage elasticity of the demand for labor. As far as we know, there is no estimate for our country. However, Dormont (1994) estimates for France quite a low figure (below -0.3); in other countries it fluctuates between cero and -0.8, not very significant. With elasticities in this range the positive effect of flexibilization would not be significant (OIT, 1995). Beccaria also questions the effectiveness of reduction of labor cost, implicity arguing, on the one hand, over the theory of efficient wages and on the other hand, over the little influence of labor cost upon the traded goods

114

Alberto M. Diaz Cafferata / Alberto J. Figueras

sector. According to measurements taken for the 1970-1982 period (PNUD/OIT, 1993 mentioned in Santangelo et alter, 1994), "direct" contract cost represented a 19% of the total cost of production for the argentinian industry. As regards indirect cost, an econometric study by E. Lazear (1990) studies the impact of "contract stability" over unemployment. Working on 667 "cases" between 1956-1984 distributed in 22 European countries, he comes to the conclusion that changes in the legislation on dismissals are highly significant (v. gr. rigidity in labor stablility explains the 71% increase in unemployment in Portugal, and the 59% in France)(Schenone, 1994). The fall in aggregate

demand

We have stated so far that the causes of unemployment by structural transformation, have had a microeconomic origin up to 1994. But, all of a sudden, in December 1994 the so-called "Mexican Effect" came on the scene, leading to a liquidity crisis and ended up in a "crisis of solvency". The difficulty to obtain external financing to meet debt payments led to an inconsistency in fiscal accounts. Expectations became pessimistic, and the fly of deposits came to an 18% of the total in 3 months. The interest rate increased. Stock exchange collapsed, and the Aggregate Demand lost its dynamism. Then, the adjustment problem of the labor market, which had remained partially hidden by the boom in the cycle, came to the surface. This keynesian component, could have been even more acute without the intervention of: a) a "Brazilian Effect", as expansion of the Aggregate Demand of our neighbor country, raised the demand for Argentine exports (exports to Brazil in the first three months of 1995 were 1259 million US$, a 97% increase over the 639 million US$ of the same period in 1994); b) a rise in the international price of our commodities.

115

Structural Change and Unemployment

V. Synthesis and conclusion V. 1. Unemployment in the adjustment Changes in the demand for labor In a few words, the structural changes we point out as explaining the rising unemployment in Argentina are the following: (a) A growing population N >0, together with, (b) a steadily rising participation rate, p >0 particularly for secondary workers, (c) The change in relative prices and the required technological change explain a shift toward the use of more capital intensive techniques. Labor productivity has thus increased, but the demand for workers in the expanding sectors (¿ J > 0) is smaller, and the contraction of the demand for labor in distressed industries9 (/*, < 0) is stronger than would have been under a "purely reallocation" adjustment usually represented in international trade models, (d) A particular case of adjustment in labor employment is the public sector. < 0, specially in privatized public enterprises, (e) Wage and institutional rigidities in the labor market, (f) To those microeconomic effects in the transition, a macroeconomic recession (attributed to the Mexican effect) in 1995 must be added. In short. Job creation during the transition does not keep pace with the rising labor force and job destruction in public enterprises and distressed sectors. This means it is critical to discuss how the government can handle efficiently the correction of this trend and a compensation policy to the unemployed. V.2. Policies Policy actions to cope with the phenomenon of unemployment during the structural transition will aim to: i) control of unemployment, ii) social assistance to unemployed people. The social cost of structural changes tend to concentrate in the short run, and the losses will be heavier for factors 9

Patrick and Meissner (1991) stress the problem of competitiveness in structural adjustment, and establish empirical criteria to identify a distressed industry. Those are absolute decline in output, employment, and profitability, or the presence of government intervention to prevent such declines. Of these, unemployment is the most clear cut... and much of the concern about the social cost of adjustment relates to the distress of those made unemployment.

116

Alberto M. Diaz Cafferata / Alberto J. Figueras

specific in the sectors that suffer more with liberalization. Distributional arguments tend to support gradualism. But the experience of many failed attempts to reduce protection and state intervention, due to built-in resistances in the system, explain the current government's shock strategy. The policy choice is not easy. A shock therapy is possibly more effective, but it is also the most costly. And fiscal restrictions preclude the government from developing widespread unemployment assistance programmes. The legal framework To discuss the policy options we must understand the economic process. The other piece is the institutional transformation. All policy actions to fight unemployment have now as a legal reference the National Employment Law (N° 24013, enacted on 5/12/1991) and the so-called "Agreement for Employment Productivity, and Social Equity" signed on the 27/7/1994 by the President, labor unions and producers organizations, promoting 13 laws to be discussed in the Parliament. The different assumptions about the reasons of unemployment can be classified as: (a) Keynesian (or insufficient Aggregate Demand); (b) Microeconomics (c) Structural crisis "related to capitalism" (the marxist approach). If we consider that the main portion of unemployment responds to insufficient demand and not to a misbehavior of the labor market, we must discuss keynesian-type recommendations. On this matter we should point that: (1) it is difficult to argue that demand deficits can be a sustained because of unemployment in a globalized economy in which the market (if we are competitive) is the whole world; (2) the tight budget restrictions imply that the application of expansive policies would create a disorder in fiscal accounts and with this, emerging inflationary pressures. Anyway, as the consequences of the shock are corrected and given an apparent improvement in the world economy, the keynesian component of unemployment may disappear. An alternative diagnosis is that the problem is the labor-saving nature of technological change and the cyclical crises of capitalism, that generates a growing "Industrial Reserve Army", which roots in a conflict between the dynamic "productive forces" and the static "productive relations" (the diagnosis of the Kaleckian-Marxist analysis). If this were the case little

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117

could be done except "the deepening of the contradictions". But this is not our point of view. As we said before, our position is that the main causes of unemployment in Argentina are of a microeconomic kind. Rigidities are admissible in a protected economy with a static technology. In this scenery, the regulatory rules were operative and contributed to achieve the redistributive and employment objectives. But today, the new competitive conditions created by liberalization ask for a highly efficient labor market. Among measures enhancing market efficiency, considerable emphasis is placed on facilitating the flexible reallocation of workers. We should point out, however, that wage rigidities may result from a strategy of the firms, and not an institutionally imposed limitation. But wage rigidities may not be the main constraint to efficient allocation. Schenone (1994) lists three causes of inflexibility: (1) the contracting and dismissal legal procedures (like contracts sine die)-, (2) centralized wage negotiations and strike legislation: (3) labor unions are monopolists that get a rent. As we said before, the other policy objective is to reduce the social costs of unemployment. But the well known crisis of the welfare state or "social keynesianism" suggest the need to be cautious. Much can be learnt from the international experience. As Michael Bruno warns discussing unemployment in the OECD and in Eastern Europe, the clear danger is that equilibrium unemployment may tend to rise, and this is much more difficult to correct. To finish. The National Employment Law 24103 (17/2/91) is the first Argentine attempt to develop a useful legal framework to deal with unemployment. The law promotes the creation of new jobs and practices that facilitate mobility, and the protection to the unemployed. It establishes that the Ministerio de Trabajo must prepare annually a National Employment Plan. Table I shows the jobs created under the new more flexible contract modalities. On the other side, the law includes an unemployment subsidy (Sistema Integral de Prestaciones por Desempleo art 111/117), which benefits previous contributors to social security. It has reached, as can be read in Table II, 1,890,000 people in three years, in comparison with a total of 405,778 beneficiaries during six years, (1985-1990) of the old system. The "July 1994 Agreement" already mentioned, includes proposals for other laws, all destined to remove obstacles that hinder employment: "Law for

118 Small

Alberto M. Díaz Cafferata / Alberto J. Figueras / Ernesto Capmourteres and Medium

Enterprise",

another dealing with

"Job Risk",

a

"Bankruptcy Law", a "Law for Profesional Honorariums".

Table I Number of contracts under promoted modalities YEAR

TYPE

TYPE

TYPE

TYPE

TYPE

A

B

C

D

E

1992

3309

8565

1807

775

1993

10504

16206

773

1659

64963

1994

22171

34937

4047

3146

63584

127885

TOTAL

35984

59708

6587

5580

128547

236516

Source:

Ministerio

de

Trabajo

y

Seguridad

S.D.

TOTAL

Social,

According

pp. 98/105

Table II Unemployment insurance (Law N° 24103) EXPENDITURE (MILLION

US$)

N U M B E R OF BENEFICIARIES

1992

25.8

1993

324.2

874516

1994

333.6

994555

TOTAL

683.5

1892292

Source:

According R. Diaz, p. 108

23221

S.D. 94065

R.

Díaz,

Structural Change and Unemployment

119

Bibliography BECCARIA & LOPEZ (1995): "Reconversión y empleo en Argentina", in: Fundación Ebert. BOUR, Juan Luis (1995): "La oferta laboral", in: Libro Blanco sobre el empleo en Argentina. BRUNO, Michael (1989): "Opening up: Liberalization with Stabilization", in: Dornbusch & Helmers ( e d ) : The Open Economy. Oxford University Press. CABALLERO, Ricardo and M. L. H A M M O U R (1994): "On the timing and efficiency of creative destruction". Mimeo, (May). CABALLERO, Ricardo and M. L. H A M M O U R (1994): "The cleansing effect of recession". Mimeo. COMMANDER; Simon and F. CORICELLI (1995): Unemployment restructuring and the labor market in Eastern Europe and Russia. EDI Development Studies. The World Bank. Washington. CORBO, Vittorio and Jaime DE MELO (1985): Scrambling for Survival. H o w Firms Adjusted to the Recent Reforms in Argentina, Chile and Uruguay. World Bank Staff Working Paper. No. 764 (November). DIAZ, Rodolfo (1995): "El empleo: cuestión de Estado", in: Libro Blanco sobre el empleo en Argentina. Ministerio de Trabajo. DÍAZ ALEJANDRO, Carlos F.(1970): Ensayos sobre la historia económica argentina. Amorrotu. Buenos Aires. DÍAZ CAFFERATA, Alberto (1995): "La explosión demográfica y la pobreza en el mundo", in: Actualidad Económica Año V, No. 24, Jan.-Feb., pp. 3-9. DÍAZ CAFFERATA, Alberto M. (1994): "Shock tecnológico, obsolescencia del capital y desocupación, en la transición de la apertura comercial". XXIX Meeting of the Argentine Association of Political Economy. La Plata (October). DÍAZ CAFFERATA, Alberto (1991): "Dinámica del cambio estructural. Lecciones de los países socialistas", in: Actualidad Económica. Año 1 No. 3. DÍAZ CAFFERATA, Alberto M. and Alberto J. Figueras (1995): "Desempleo Regional en Argentina", in: II Encuentro Internacional de Economía. Córdoba. DÍAZ CAFFERATA, Alberto M. and Alberto J. FIGUERAS (1994): Efecto de la apertura comercial en la economía regional. Respuesta de las firmas e impacto en el empleo. Research Program Secyt. DORMONT, B. (1994): "Quelle est l'influence du coüt du travail sur l'emploi", in: Revue Economique. Vol. 48, No.3, (May). FELDMAN e.a. (1989): "The role of structural policies in industrial countries", in: World Economic Outlook, Washington D C., (July). FELDMAN, R. A. (1989): "La ejecución de reformas estructurales Industriales", in: F & D, Vol. 26, No. 3.

en

Países

FIGUERAS, Alberto José (1994): "El progreso técnico o la Caja de Pandora", in: Actualidad Económica. No. 22, Instituto de Economía y Finanzas, Córdoba.

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FIGUERAS; Alberto J. and A. DÍAZ CAFFERATA (1994): "Cambios estructurales y desocupación regional: Catamarca". XXVIII Jornadas de Finanzas Públicas. Published in: Revista de Economía, No. 75. FUNDACIÓN E B E R T (1995): Más allá de la estabilidad. Buenos Aires. HAM, John, Svenjnar J. Sue and K. Terrel (1995). "Czech Republic and Slovakia", in: Commander and Coricelly. HARRIS, John R. and Michel P. TODARO (1970): "Migration unemployment and development: a two sector analysis", in: The American Economic Review. Vol. 60, No. 1 (March), pp. 126-142. LAZEAR, E. (1990): Job security provisions and employment", in: Quarterly Journal of Economics. Vol. 105, No.3. LILIEN, David M. (1982): "Sectoral shifts and cyclical unemployment", in: Journal of Political Economics. Vol. 90, No. 4, August, pp. 777-793. LINDBECK, Assar (1992): "Macroeconomic theory and the labor market", in: European Economic Review. Vol. 36, pp. 209-235. LOPEZ, Ramón E. and Luis A. Riveros (1989): "Macroeconomics Adjustment and the Labor Market in Four Latin American Countries", in: World Bank PRE Working Papers. WPS 335, December. MONTOYA, S. (1993): "El lado oscuro de las estadísticas", in: Novedades Económicas. (April). MUSSA, Michael (1982): "Government policy and the adjustment process", in: J. Bhagwati (ed). In port competition and response. The U. of Chicago Press. Chicago OECD (1994) Economic Outlook. Paris, (December). OIT (1995): El empleo en el mundo. OIT, Suiza. PAREDES and RIVEROS (1993): Estimación de los efectos económicos de los programas de entrenamiento para jóvenes en Argentina. PNUD, Arg/91/104, (Agosto). PESSINO, Carola and Giacchino (1994): "Rising unemployment in Argentina". XXIX Meeting of the Argentine Association of Political Economy. La Plata. PHELPS, Edmund S. (1992): "A review of unemployment", in: Journal of Economic Literature. Vol. XXXV, No. 3 (September), pp. 1476-1490. SANCHEZ, Carlos (1979): "Fuerza laboral y desempleo oculto", in: Estudios, No. 9. SÁNCHEZ, Carlos (1982): "Salario y oferta de trabajo", in: Novedades Económicas, No. 25, 1982. SANTANTONIO, S. et alter (1994): "Flexibilización, empleo internacional". Congreso Nacional del ASET. Buenos Aires.

y

competitividad

SCHENONE, O H. (1994): "El desempleo en Argentina, 1992-1994" Working Paper, Universidad de San Andrés, (June). STURZENEGGER, A. (1988): "Gobiernos, Lobbies y Política Conservadora". Revista de Economía, Banco Central del Uruguay, (August). TOFFLER, A. and A. TOFFLER (1992): "Las razones ocultas de por qué los Estados Unidos estallaron en llamas", in: La Nación, July 12.

Public Economics

T h e Federalism I s s u e in Brazil: T h e "State o f Arts" o f t h e T h e o r y

123

Basflia Maria Baptista Aguirre1 / Marcos Ribeiro de Moraes2

The Federalism Issue in Brazil: The "State of Arts" of the Theory Introduction Nowadays it is impossible to state that Brazil has one federalism issue because there is a unicity of approaches and opinions among the researchers. It would be more precise to affirm that there are several federalism issues, considering the current discussion of the relevant literature. The existence of the various approaches cannot be explained simply by the complexity of the subject, but stems mainly from the difference of perspectives adopted by scholars. Depending on the emphasis, the problem can assume varied dimensions. One of these perspectives, for example, is the solution of the federal government's financial problem. Another is the increase in the states' autonomy, as reflected in the fiscal structure. A third prism corresponds to the maintenance of the tax-collection capacity of the states with larger economic bases. Lastly, is the less unequal distribution of tributary resources. Of course all of the perspectives mentioned above are closely related, but the existence of differences between them makes the analyses, conclusions, and the suggestions for resolution of the problem vary so much that it becomes extremely difficult for the involved parties to understand each other. At most, we could say that the conflict of interests embedded in the issue becomes a "conflict of issues" which is not always explicit in its real form. In this text we propose, firstly, to show how the approaches of the federalism problem in Brazil have proven to be insufficient, despite providing extensive study material. The point we intend to demonstrate is that the conflict of interests subjacent to the discussion requires a theoretical instrument that takes into consideration the problems related to the under1

Professor of Economics at the University of S3o Paulo (USP).

2

Phd Student of Economics at the University of SSo Paulo (USP).

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standing of collective action or, in other words, how social, economic, and political relations are founded. This being so, our initial step will be to do a short survey of the economic theory literature related to this area. We begin with an analysis of fiscal federalism (traditional Public Finance Theory) as established by Oates (1972), Musgrave (1976), Messere (1993), and Bird (1994). In this case the main argument to be developed is based on the fact that this point-of-view does not take into consideration the interrelation between the agents involved. For this reason, we sought the contributions of the authors from the "Public Choice" School, in particular, Buchanan (1962, 1967, 1972, 1980, 1991) and Olson (1982), who will show us how this theory is not totally adequate for explaining certain observable collective behavior patterns, especially in countries like Brazil. Once again we have the problem of searching for alternative approaches, and so we look to the contributions of those authors linked to the "Institutionalist" school. As we know, this theoretical line presents two quite diverging branches which will be looked at separately. On one side, there are the so-called "New Institutionalists", among whom we will give special attention to Williamson (1985) and Langlois (1986). We will see how this focus can provide elements for understanding the Brazilian case, though important criticisms should be made. On the other, we find those known simply as "Institutionalists" who attempt to follow the tradition of the old authors such as Commons and Veblen. Supported by Guerrien (1990), we will discuss the treatment of the problems of Brazilian federalism and the resulting fiscal issue on a somewhat more secure base. Subsequently, we will deal specifically with the manner in which the most recent studies of the national federative issue have been conducted, in other words, what theoretical branches they are supported by and, in consequence, what the principal existing disagreements are. A good part of the material used was extracted from some exhibits and papers of participants of the international seminar named "Impasses and Perspectives of Federation in Brazil", organized by FUNDAP and IESP and held last May in Sao Paulo. The principal conclusion that will be drawn from this analysis is that the discussion of the Brazilian federative conflict finds itself wanting for a theoretic base adapted to its specifications. The few analyses which seize upon some theory either remain loyal to the precepts of the traditional theory of public finances or are based on neoclassical maximizing models.

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Finally, we will discuss some considerations in respect to how, from our point-of-view, the framing of this theme should be dealt with to give us a better understanding of it.

1. Fiscal Federalism - Traditional Public Finance Theory The basic issue of Fiscal Federalism is fiscal decentralization. In this context, assuming the suppositions of public finance theory, it is possible to reach normative conclusions with respect to the fiscal structure which best heeds the criteria of economic efficiency in relation to allocation, distribution, and stabilization. The problem is that the supply of public goods, which despite the difficulty in defining the terms, are assumed to be those that are characterized by non-rival consumption, even when there are problems of congestion. The issue is whether a system of multiple fiscal units is more efficient than a centralized system in a single fiscal unit. In favor of the latter, is the existence of economies of scale in production and the supply of public goods at a federal level. At the same time, however, there is a series of arguments for decentralization. The first is the fact that there is a good amount of public service determined by the size of the community to be served. Another deals with the existence of congestion which would occur if the provision were executed in a centralized fashion. A third argument is the existence of differences of preference among localities, which would determine differences in the type of service to be supplied. Also, income differences between groups could establish distinct public service demands which suggests a better adaptation of the decentralized supplement to the needs of each community. Others are related to the defense of minority rights and also to the incentive for greater political participation and, as a result, a strengthening of democracy and quality of life. Finally, one cannot forget to consider the degree of mobility of the factors being taxed. Based on the consideration discussed above, Musgrave (1976) establishes the criteria for the distribution of resources among the different levels of government. Generally speaking, in terms of an efficient tributary division, progressive income tax would go to the federal sphere: the states would receive consumption taxes and local governments would collect property

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and use taxes. Note that this division aims for clear and precise boundaries for the responsibilities of each level of power, giving each its own revenue base. More recently, Messere (1993) amplified and detailed the principal foundations of Fiscal Federalism which are found in the work of several present authors, which emphasize a greater participation in the federal orbit: 1) The Union should tax those factors which present a high degree of mobility while the municipalities would be responsible for those taxes which occur on totally fixed factors; 2) the subnational levels would collect those taxes which are based on residents of their jurisdictions (residential property tax, retail sales taxes, personal income tax) while those based on sources should go to the central government (VAT collected at the origin and corporation income tax); 3) two arguments in favor of a centralized revenue administration are the possibility of imbalances among the subnational governments, which would impose a compensation system of grants, and the greater efficiency of this sphere in tax collection. Concernig the efficient distribution of duties and expenditures, Bird (1994) presents the following basic rules of Fiscal Federalism: to the extent that there are local variations of tastes and costs, there are efficiency gains in the decentralization of public sector expenses. The only goods and services which should be offered by the central government are those in which: a) there are no demand differences among the various localities, b) the state or local administration costs for supply exceed the benefits, and c) the range of the benefits provided exceeds the subnational territory frontiers ("spillover effect"). So, the great majority of public goods and services should be provided at a state or local level. As we can see, all the arguments listed above refer to the basic fiscal function of the allocation of funds and expenditures. However, with respect to the functions of distribution and stabilization, the arguments suggest no need for decentralization. Anti-inflationary measures, for example, fall under the responsibility of the federal orbit. We can perceive that Fiscal Federalism presents arguments for and against decentralization. A good federal administration, then, should be one which attempts to achieve the three objectives in a harmonious fashion. From this, the main conclusion is that some form of federalism is desirable. The theory gives us some criteria which should be taken into consideration in discussions about any changes that ought to be made to the fiscal structure invol-

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ving the different government units, but it does not manage to go beyond that. The normative character of the theory has another serious problem. It can suggest that there exists a great combination of the three objectives and that this combination is uniform among countries or regions. However, it also makes it impossible to ask much more interesting questions about how certain countries have a certain fiscal structure and how it could possibly be altered. Perhaps the principal problem with the theory of Fiscal Federalism results from the fact that it is based on the traditional theory of public finance which in essence is an application of consumer theory. The difficulty in applying this theory to the objectives in question is that it can only treat problems of individual choice adequately. The fiscal federalism issue, like public finance, is a collective choice issue. In dealing with this, economic theory presents several other options, which if not as well systematized as the public finance theory, on the other hand have a great advantage in that they are more adequate for the problem in focus. We move on, then, to a discussion of alternative approaches of group choice presented by economic theory.

2. "Public Choice" The so-called "Public Choice" School attempted to present an explanation about how a community reaches a consensus about how, by whom and which public goods are supplied. It was the realization that the "social welfare theory" was not enough to provide this explanation which led a series of authors to seek it in other ways. Perhaps the main issue, as stated by Buchanan (1967), is that public finance theory provides important contributions when investigating how certain fiscal structures affect the consumer's decision, without, however, explaining how the same consumer chooses the fiscal structure. According to Buchanan (1967), in democratic environments the consumer can be classified in two categories: buyers (sellers) of private goods and buyers (sellers) of public goods. In relation to private goods, the market is the locus where decisions about price and quantity are made. As to public goods, the decisions are made through organized political process. For this reason, the definition of distribution of resources among different

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government units is, in the conception of "Public Choice", much more dependent of the political-institutional arrangement which develops in each country than merely on economic criteria. Therefore, the consumer's choice of public goods should incorporate the same rules which command the political decision process. If in fact the branch of public finance can be considered, in the view of Buchanan (1967), "the political economy" (p. 171), the introduction of the political process is not simply another step, but an indispensable one. On this track, the theory of political process combined two distinct elements: the concept of "politics as an exchange" and the extension of economists' utility maximizing behavior model for political choice. Before we analyze the form in which Buchanan takes this step, it is worth considering the main supposition he makes. The basic hypothesis of his theory is that it applies to a situation in which the political process is democratic. What is a democratic political process? First of all, the rules of political participation should be such that they make access to participation possible, even if indirectly, for all members of the community. Secondly, public institutions must be truly democratic. That means that there cannot exist, or at least only exist in very low levels, nonrepresentative forms of political participation. Also, the degree of institutionalization should be high, which means, in relation to important decisions, the means to reach a consensus should follow previously established rules which require acquiescence of the political representation. Preferably, these rules should exist in writing, so as to maximally reduce all possible interpretation loopholes3. When such conditions are present, we can assume that each citizen has about the same power to influence the results of the political process in general and specific terms4. In these circumstances, the extension of the utility maximizing behavior model for the theory of political choice coupled with the idea of "politics as an exchange" begins to make sense.

3

We will return to this point later when approaching the Brazilian political process.

4

Buchanan disagrees with Pareto when the latter states that "all discussion about democratic process is unreal" and that "in all social organization, there is always a minority group that rules over a majority one". In his opinion, there are two distinct theoretical models, one for the democratic case and another for the "minority government" case.

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However, when elaborating his principles of fiscal federalism, Buchanan (1967) is still stuck to the prescriptions of traditional theory of public finance, though he does emphasize that the aspect of economic efficiency is only one of the criteria necessary in determining the division of tax funds among the units of the federation. Buchanan (1980), in an attempt to approach this issue from the political-institutional focus, falls into the same normative trap from before, once his consumer-voter-contributors are inserted into an ideal environment represented by an completely representative democracy. Under these conditions, the rational "buchanian" agent would opt to attribute both the taxes with highest collection potential and principal public duties to the subnational governments because, in this way, they could monitor and fiscalize the execution with greater efficiency. In this context, there are two important theoretical lines which present restrictions to Buchanan's traditional view; the first fits into the "Public Choice" field and, so, will be discussed next. Olson's (1982) contribution may be one of the most important in recent years in the sense that he showed that the ideas of "politics as an exchange" and the utility maximizing behavior model alone cannot guarantee that politics be a positive-sum game. In his opinion, there is no "invisible hand" which will necessarily guide the results of cooperative games when there is a conflict of interests. The point Olson (1982) developed is that the observation of economic performance in various First World countries indicates that economic reasons alone are not enough to explain the differences between them. It also shows that there is some empirical support for the thesis that in economies where interest groups are stronger and better organized, a series of mechanisms for limiting economic growth is developed. From this comes the implication that in countries where the political process is more truly democratic, the growth barriers are larger than in those where there are other forms of political process 5 . Theoretically, Olson's argument was developed in the following way. In the absence of arrangements or special circumstances, large groups, if made up

5

Olson believes that democratic regimes create more drawbacks to economic growth than authoritarian ones. We consider this belief too radical, as he does not notice the distinct features of formally democratic governments that actually behave as not being so.

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of rational individuals, in the homos economicus definition, will not act in the interest of the community. That is because the sacrifice each group member will have to make is greater than the benefit they will receive. Not only that, but if the benefit results from the actions of part of the group, all the individuals in the category will benefit, which stimulates "free rider" behavior. In this form, the logic of collective action can allow for antigrowth behaviors, such as monopolies and income concentration, to appear as a result of the strict economic rationality6. It follows, then, that there should be some other reason which would induce organized collective action. Despite the fact that the collective action logic is in a certain sense perverse, there are, according to Olson (1982), certain conditions, called selective incentives, which favor cooperation. These selective incentives can be positive or negative. As an example of positive selective incentives we have services offered by certain organizations, such as medical and dental services, and holiday colonies, among others. But negative incentives, which most of the time are disguised forms of coercion, are much more frequent. Despite this, Olson (1982) argues that these selective incentives are much more commonly found in small groups and are limited by the heterogeneity of the groups. Moreover, the problem of information contributes to the limitation of the impact these mechanisms have on large groups. An example of this is the fact that, because the elector's contribution to the final result of the election is marginal, it is common that the individual rationally behaves ignorantly. Olson (1982) concludes that a situation exists in which the effect of selective incentives is broadly felt. This union of circumstances becomes evident when there is a small number of individuals who will profit from collective action. The implications of Olson's logic are, in a sense, terrifying to the perspectives of democracy as a political organization which would lead to more favorable economic results. However, we cannot forget that such a conclusion could only be accepted if we supposed that the logic which orients the economic collective action is exclusively the logic of economic rationality. On this point, we should make two comments. The first is that the theory of public choice developed within the canons of pure economic 6

Within Olson's notion of economic rationality, not only self-interest is included, but also some kind of altruism.

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rationality does not satisfy the necessity for an explanation of economic collective action. The second comment is that, as Olson emphasizes, there should be other reasons which orient collective action7. Unfortunately, although Olson brilliantly explains how economic rationality leads to behaviors such as "free rider" or "moral hazard", he does not explain how collective action leads to more constructive results. The other reasons, mentioned as necessary for explaining any collective action, is not studied in his book. This being so, we must seek other sources which are concerned with this subject. The next step is an analysis of the "Institutionalists".

3. Institutionalism Among the Institutionalists, there are two principal lines. The first subgroup is the so-called "New Institutionalists", among whom Williamson and Langlois distinguish themselves. The second subgroup are those who consider themselves more traditional and here will be referred to simply as "Institutionalists". We will begin with the first group. The "New Institutionalists" can be characterized by their wish to develop an analysis which encompasses both economic theory and the existence of institutions. In Langlois' (1986) words: "...what we should really want is both institutions and theory - not only pure economic theory informed by the existence of specifics institutions, but also an economic theory of institutions" (p. 5). Putting it differently, we can say that the "New Institutionalists" intend to create a link between the German Historical School and neoclassical theory. From this aim come the themes discussed by the school's followers. According to Langlois (pp. 5-6), they are as follow: "1. Although definitely rational in a true sense, the agent of economic theory is not best conceived as rational in the narrow sense of maximizing within a framework of known alternatives. 2. Economic phenomena are in large measure the result of learning over time by economic agents; economic explanation should thus be

7

As the theory just presented does not provide any explanation for collective action, it is not worth commenting its ideas about federalism.

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a dynamic exercise - dynamic not merely in the sense of dynamic neoclassical models, but in a sense best rendered as evolutionary. 3. The coordination of economic activity is not merely a matter of price-mediated transactions in markets, but is supported by a wide range of economic and social institutions that are themselves an important topic of theoretical economic inquiry." Although the three themes are fundamentally important to the interests of the present article, we will concentrate on the first and second because they affect more directly the federalism issue. In relation to the question of rationality, the "New Institutionalists" hold a much more flexible attitude than does traditional economic theory. These authors note a series of problems with the ordinary instrumental concept of rationality and search for more adequate alternatives. One of the first to appear in the literature was Williamson's (1985) suggestion of "bounded rationality". Williamson's area of interest, as we know, is Industrial Organization and within it, he concludes that transaction costs - which are by Arrow's definition8, the costs of running the economic system - play a role of utmost importance. Given the transaction costs in a world ruled by contracts, the study of economic organization turns to two critical behavioral hypotheses. The first is that rationality is bounded, especially by information problems, and the second, that agents are given to opportunism. Also, Williamson (1995) attributes a central importance to asset specificity, which determine significant differences in the transaction costs. Langlois (1986), continuing the discussion of rationality, argues that it is not only in reference to the problem of complexity that rationality is limited. To Langlois and many others, the boundaries of rationality stem from the possibility of an optimization problem being badly specified, resulting from uncertainty (uncertainty being defined in the wider conception as agents having or acquiring knowledge of an exhaustive set of states which are complete for all purposes). In this way, Langlois' following suggestion would seem most adequate for our interests: the criterion of rationality is the ability to act reasonably, to act appropriately to one's circumstances, and to adapt.

8

See Willianson (1985).

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Turning our attention to the question of institutions, we see that the problem is two-dimensional. On the one hand, institutions limit and mold individual behavior; on the other, they are the fruit of individual behavior solidified in collective actions. Before moving on, the meaning of the concept of institution should be very clear. Quoting Schoter (1981, p. 17)9, "a social institution is a regularity in social behavior that is agreed to by all members of society, specifies behavior in specific recurrent situations, and is either selfpoliced or policed by some external authority". Within the bounded rationality of "New Institutionalise theory, institutions exist to economize transaction costs. Such a supposition is justified when we remember that, to these theoreticians, economic rationality, despite being bounded, continues to presume that more is better and that individuals will mold their behavior by this criterion. From this perspective, we understand that even the existence of institutions is always explained by individual behavior. On this path, the problem of institutions is no longer two-dimensional because, at the end, it is individual behavior which explains everything. The study of institutions should be the most profitable means to understand the collective action, but the way the "New Institutionalists" treat it, the problem of collective behavior is reduced to an individual dimension. And so, there is, in fact, only one line of causation. The point raised in the previous paragraph is heavily criticized by those known simply as "Institutionalists". For example, when Guerrien (1990) places the problem of how to establish a frontier between ideology and efficiency, he is asking in what measure the existing institutions, guided by regularities (many of them determined by convention and/or tradition considerations), are not influencing the behavior of the economic agents and modifying the results of their actions. On this way, in his vision, the collective action will not be oriented only by the criterium of economic efficiency, but will also include the way the institutions act. From all we have seen, we can summarize the present stage in the following manner. Fiscal Federalism theory does not involve problems of collective action and so is inadequate for explaining how to determine a fiscal structure. "Public Choice" theory, which concerns itself specifically with this issue, either deals with an ideal democratic environment or limits itself

9

See Langlois (1986).

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to reproduce the economic normative principles of Fiscal Federalism. Olson (1982) is an exception to this rule; it explains how the interest groups act in modern capitalist economies according to the ordinary instrumental economic rationality, without setting up, however, the motivations of cooperative collective action. The conclusion is that the results of the actions of these groups are most probably conflicting, generating impasses or barring transformations that would permit advances in economic terms. As a result, we looked to the "New Institutionalists" and discovered that, at its core, the way they treat institutionalism is not significantly different from the treatment given by Fiscal Federalism, with the exception that they try to understand how institutions are created. For those interested in the conditions that allow for the creation and maintenance of institutions which in fact regulate the reproduction and growth of any economic system, among which fiscal structure plays a central part, the theoretical body analyzed in the previous paragraphs continues to be insufficient. All the contributions which were analyzed are highly relevant, but none of them are autonomous enough to generate the required knowledge. Intuition, together with the preceding discussion, tells us that a broader historical analysis which includes the issues of political organization is the most fruitful path and the only way to truly include a real discussion of institutions. Our aim in the subsequent paragraphs is to relate this theoretical discussion to the Brazilian case.

4. The "Federalism Issues" in Brazil Over the last decades, the Brazilian federative conflict has appeared widely in its "vertical" (between Union, states and municipalities) and "horizontal" (between states and even municipalities) dimensions. Because it involves tense disputes between government spheres, a great part of the analyses are much more imbued with "ideologized" conceptions than with any type of theoretical reference. What we see most are studies describing facts and statistical data and that, with no theoretical base, write prescriptions for what should and should not be done in relation to this problem. When there is some form of theorizing, which in our view is in itself a positive point, it is either restricted by the precepts of traditional public finances theory and more recent variations (very rarely a notion or two of "Public Choice"), or by optimizing modeling of neoclassical theory.

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Beginning with the approaches of Affonso (1988), Affonso (1995), Jayme (1994), and Lopreato (1992), we perceive a complete lack of any theoretical structure to support them. These works are ruled by the historical contextualization of the present crisis of the national federation, besides providing numbers on the situation in which the relations between government levels developed. In our understanding, the greatest contribution of these authors was to realize the strong constraints imposed on the Brazilian federalism problem by the particular political structure of the country. In AfFonso's (1995) view, at the base of this question are "the disputes for power of command over public spending" 10 . As he himself describes, given the Brazilian political party structure, in which the federal legislature is elected with state and municipal bases and the political parties which do not have a national identity, much less a program, the National Congress functions as a sort of "National Town Council", where the regional representatives vie for public funds in an attempt to guarantee the subsistence of their electoral bases. With the recurring economic crisis of recent years, this situation has become more tense. "The Union, in turn, needs free resources at its disposal so that it can solidify its national alliances and counter the political weight of the regions/states" 11 . However, to understand the specifications of the Brazilian political-institutional arrangement and its influence on the economic interaction process between government units, it would be necessary to construct a theoretical model which could explain the collective action of these agents. And this is not included in the above mentioned analyses. The same happens with Afonso (1994), Afonso (1995), and Rezende (1995). They too consider the role that the political-institutional context plays in determining the format of intra- and inter-governmental relations to be extremely relevant. They do not, however, attempt to understand how this process was consolidated. While the first two emphasize the importance of gathering data and trustworthy statistics in the hope of contextualizing the national federalism issue better (this is the form they use to elaborate their diagnoses and propositions), the last insists on seeking efficiency criteria for the elaboration of a new institutional rearrangement, without trying to understand how it can be implanted practically.

10 Afonso (1995), p. 22. 11 Afonso (1995), p. 24.

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Utilizing the example of the so-called "fiscal war" between the Brazilian subnational governments, we can see how the absence of a theoretical frame entangles the discussion of the federalism theme. From the perspectives of Affonso (1995) and Afonso (1995), the consequences of this competition are extremely adverse, for both the states and the whole federation. They translate to 1) a greater decrease in the capacity for collection of the ICMS, once the aliquots are decreased, and 2) alteration in industrial activity distribution, hurting the states where these investments were concentrated (for example, Sao Paulo), and divide the national market. From Langemann's (1995) point-of-view, however, we cannot attribute a great amount of responsibility for the drop in ICMS collection to the "fiscal war" between states; from his perspective, the greatest problem created by this fact is an enormous gap which opens for the increase of tax evasion. Moreover, based on recent theories on interjurisdictional competition, Langemann (1995) points to the occurrence of industrial decentralization from congested areas to unexploited regions as a positive aspect related to this phenomenon, which would bring benefits for the areas and the rest of the country. The United States is an example of a country where interjurisdictional competition was encouraged with the objective of promoting a more homogeneous distribution of productive investment, and, consequently, a decrease in the "horizontal" imbalance of the North-American federation. It can be concluded, then, that the approaches of Affonso (1995) and Afonso (1995) present an unfounded opinion with respect to the meaning of the "fiscal war", which camouflages their principal concern with the situation of state of Sao Paulo, the most "hurt", in the authors' view, by this "disloyal" behavior on the part of the other states. The dichotomy between fiscal centralization/decentralization also constitutes a controversial subject. Once again, the previously cited works bring arguments with no theoretical foundations that do not help to put an end to the uproar. Affonso (1995), Afonso (1994) and Afonso (1995) state that the decentralization process over the last decades in Brazil, despite being chaotic and contradictory, occurred on the sides of both revenue and spending, countering the most widely-spread views (see tables 1 and 2). However, after analyzing the data they present, the decreased spending in the federal jurisdiction and the increase in the sub-national governments' spending do not, by any means, signify that this movement was symmetrical, or in other words, that the states and municipalities began to spend money

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on those areas that the Union stopped spending money on. Furthermore, they disregard the mechanisms of state and municipal debt transfers to the federal sphere. So, there is no way to say there really was a fiscal decentralization process in the country. To Affonso (1995), Afonso (1994) and Afonso (1995), fiscal decentralization, more than being fact, is inevitable at this point in the democratization of the country and, for this reason, must be organized into a well-founded federative pact. Rezende (1995) also vouches for this opinion; according to him, a new fiscal centralization process is neither desirable nor viable, in as much as the political autonomy of the subnational governments is an unshakable democratic conquest. Here, we find another problem: on what do the authors base these affirmations? Putting the question in other way, what theory claims that fiscal centralization is incompatible with democracy? Taking it a step further, not even the nations with a longer democratic tradition than Brazil confirm this. In this context, FIPE's proposal (1994) for fiscal reforms sheds more light on the centralization/decentralization issue than the studies discussed above which argues in favor of fiscal decentralization with a base in the Fiscal Federalism precepts of traditional theory of public finances. As expected, the problems contained in its suggestions stem from the deficiencies of the theory, as exposed in the first section of this article. Lastly, it is worth making a reference to Werlang (1992) and Werneck (1992) for modeling the vertical conflict between the government spheres in the optimization methods of neoclassical economic theory. The first deals with the problem of state banks, and how they hurt a consistent stabilization policy when they transfer the state deficits to the Union, using the "game theory" instrument. In this sense, Werlang (1992) assumes that the subnational governments' behavior is uncooperative because they aim to maximize their deficits. Werneck (1992), without making an explicit reference to the "game theory" and the state banks, approaches the state and federal relationship in an analogous fashion, proposing the same problem of maximization. This, by itself, represents something very positive since both studies attempt to explain, by means of theoretical constructs, how the interaction between the government spheres occurs. To us, however, the main defect of this type of theoretic formalization is that it is restricted to a merely instrumental rationality, which disregards the political objectives and the

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institution restrictions. This being so, it is not possible to understand the reason the different governments act in an uncooperative manner. In an attempt to reframe the treatment given to the Brazilian federation issue, some suggestions on how to prepare a theoretical structure capable of understanding the operation of the intra and intergovernmental relations will be made next.

5. Concluding Remarks Currently, there is absolute agreement that the resolution of the Brazilian federalism issue is fundamental to solving the problem of both stability and growth in the country. From what we saw in the previous section, the contributions from the Brazilian economics literature on the subject do not lead to an understanding of how a new national federation pact can be reached. The economic theory analysis, outlined in the first part of this article, concludes that Fiscal Federalism (or the traditional theory of public finances), despite bringing valuable insight to the discussion, has an extremely normative character. Moreover, because it is based exclusively on individual choice, it does not expound on the most critical point of the problem, which is to explain how federative pacts are defined in political negotiations. In our view, if this point is not considered by the economists, the proposals based only on these economic precepts (see FIPE'S proposal for fiscal reform) become mere exercises in logic. For its part, the "Public Choice" theory, which, in principle, should be an alternative analytical instrument, when dealing with the issue of federalism, treats it as if the determining political factors can be studied separately from the economic ones. Add to this the fact that the entire theory of "Public Choice" was developed for true democratic environments. Joining the analysis of economic theory to the results found in Brazilian economic literature on the issue leads us to argue in favor of new approaches to the problem. What appears to be the most promising approach would be an analysis of Institutionalist character, which takes into account the specifications of the Brazilian case. For this, the following points should be part of any hypotheses which are adopted.

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The first, and perhaps most important, is the inexistence of a truly democratic context in Brazil, which is defined, in our perspective, as being one with democratic negotiating institutions, or in other words, channels of political representation through which the demands of all segments of society flow. These channels of representation, more precisely the political parties, should be structured in a way that they share responsibility for the results obtained by the actions of the government. Since no such scenario exists in Brazil, the model that would facilitate the understanding of how to achieve a consistent federative pact should have as its basic presupposition our specific form of participation and political negotiation. The second point that must be present is related to the notion of "ideology". It deals with the value judgments that the organized groups of society have in respect to the main national economic goals, given our participation structure. Here, we can insert questions such as what the relative importance of growth and stabilization notions are; what level of centralization versus decentralization is desired by citizens; what the position of the Union, the states and the municipalities is in respect to the "fiscal war" phenomena; etc. Without the necessary definition of what the priorities listed by represented groups is, it is impossible to determine what the feasible pacts are. In fact, what is being demanded is an amplification of the rationality of the economic models so as to include elements considered to be essential to the treatment of the subject. It must be very clear that we are not suggesting discarding narrow economic rationality. On the contrary, what is being proposed is an amplification of the instrumental rationality in order that matters involving collective action can be understood. Similar to what Williamson (1995) did in the case of Industrial Organization, it should be possible, for the purposes of a better understanding of the Brazilian federalism issue, to build up a model which incorporates the behavior rules of the agents involved in the action of the different units of government, as well as the political-institutional environment in which they function.

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Appendix

Table 1: Tax Revenue and Available Revenue - Levels of Government - 1980/88/93. Levels of Government Tax Revenue as % of GDP: Tax Revenue Structure:

1980

1988

1993

24.5% 22.4% 26.4% 100%

100%

100%

75%

71%

68%

Taxes

38%

36%

28%

Social Insurance

28%

29%

38%

State

22%

26%

27%

Local

3%

3%

5%

100%

100%

100%

69%

62%

58%

Fiscal

41%

33%

21%

Social Insurance

28%

29%

37%

State

22%

27%

26%

Local

9%

11%

16%

Federal

Contributions

Available Revenue* Structure: Federal

Contributions

*

"Available Revenue" includes the intergovernmental transfers of tax revenue legally defined.

Source:

Afonso (1995): "A Questào Tributària e o Financiamento dos Diferentes Níveis de Governo".

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The Federalism Issue in Brazil: The "State of Arts" of the Theory Table 2:

Expenditures - Current Consumption and Gross Investment (GI) Levels of Government. (%GDP)

(%GDP)

% of Total

% of Total

1980

1990/91

Amount

Amount

1980

1990/91

Federal: Current Consumption

4.0

5.4

44

35

GI

0.7

0.7

30

20

Current Consumption

3.6

6.3

39

41

GI

0.9

1.4

39

41

Current Consumption

1.6

3.7

17

24

GI

0.7

1.3

31

40

Current Consumption

9.2

15.4

100

100

GI

2.4

3.3

100

100

State:

Local:

Total Amount:

Source: Affonso (1995): "A Crise da F e d e r a l o no Brasil".

142

Basília Aguirre / Marcos Ribeiro de Moraes

Bibliography ADAMS, J. (1990): "Institutional Economics and Social Choise Economics: Commonalities and Conflicts", in: Journal of Economic Issues, vol. XXIV, n° 3, September. AFFONSO, R. B. A. (1988): "Federalismo Tributàrio e Crise Econòmica - Brasil: 19751985", Dissertaçâo deMestrado, UNICAMP, Campinas. AFFONSO, R. B. A. (1995): "A Crise da Federaçào no Brasil", Seminàrio Internacional: "Impasses e Perspectivas da Federaçào no Brasil", Säo Paulo, May. AFONSO, J. R. (1994): "Descentralizaçâo Fiscal: Ser ou Näo Ser, Nâo é a Questäo", in: Anais do XXII Encontre Nacional de Economia, Florianópolis, December. AFONSO, J. R. (1995): "Notas para o Debate: A Questäo Tributària e o Financiamento dos Diferentes Níveis de Governo", Seminàrio Internacional: "Impasses e Perspectivas da Federaçào no Brasil", Sao Paulo, May. BIRD, R M. (1993): "Threading the Fiscal Labyrinth: Some Issues in Fiscal Decentralization", in: National Tax Journal, vol.46, June. BRENNAN, G. e BUCHANAN, J. (1980): "The Power to Tax", Cambrige: Cambridge University Press. BUCHANAN, J.M. e TULLOCK, G. (1962): "The Calculus of Consent", Ann Arbor: The University of Michigan Press. BUCHANAN, J.M. (1967): "The Public Finances", Illinois: Richard D. Irwin, INC. BUCHANAN, J.M. (org.) (1972): "Theory of Public Choice", Ann Arbor: The University of Michigan Press. BUCHANAN, J.M. (1991): "The Economics and the Ethics of Constitutional Order", Ann Arbor: The University of Michigan Press. GUERRIEN, B. (1988): "Quelques Reflexions sur Instituitions, Organisations et Histoire", in: Economie Appliqué, XLIII, n° 3. JAYME, F. G. (1994): "Crise Fiscal, Federalismo e Endividamento Estadual: Um Estudo de Caso das Finanças Públicas de Minas Gérais", Dissertaçâo de Mestrado, UNICAMP, Campinas. LANGEMANN, E. (1995): "O Federalismo Fiscal Brasileiro em Questäo", Seminàrio Internacional: "Impasses e Perspectivas da Federaçào no Brasil", Säo Paulo, May. LANGLOIS, R.N. (1986): "The New Institutional Economics: an Introductiory Essay", in: Economics as a Process, Essays in The New Institutional Economics, Cambridge: Cambridge University Press. LANGLOIS, R.N. (1986): "Rationality, Institutions and Explanation", in: Economics as a Process, Essays in The New Institutional Economics, Cambridge: Cambridge University Press. LOPREATO, F.D.C. (1992): "Crise de Financiamento dos Governos Estaduais: 19801988", Tese de Doutorado, UNICAMP, Campinas. MARTONE, C. et allii (1994): "Urna Proposta de Reforma Fisca para o Brasil", Säo Paulo, FIPE. MESSERE, K.C. (1993): "Tax Policies in OECD Countries-Choices and Conflicts", Amsterdam : IBFD.

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MUSGRAVE, R. e MUSGRAVE, P. (1976): "Public Finance in Theory and Practice", New York: McGraw-Hill. OATES, W. (1972): "Fiscal Federalism", New York: Harcourt Brace Jovanovich. OLSON, M. (1982): "The Rise and Decline of Nations", New Haven: Yale University Press. REZENDE, F. (1995): "Descentralizado e Desenvolvimento: Problemas Atuais do Financiamento das Políticas Públicas", Seminàrio Internacional: "Impasses e Perspectivas da Federado no Brasil", Sao Paulo, May. SHOTTER, A. (1986): "The Evolution of Rules", in: Economics as a Process, Essays in The New Institutional Economics, Cambridge: Cambridge University Press. WERLANG, S. (1992): "Os Bancos Estaduais e o Descontrole Fiscal - Alguns Aspectos", in: XX Encontro Nacional de Economia, Campos do Jordäo, SP. WERNECK, R. (1992): "Fiscal Federalism and Stabilization Policy in Brazil", Texto para Discussào n. 282, PUC/RJ, June. WILLIANSON, O. (1985): "The Economic Institutions of Capitalism", Free Press, New York.

144

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Dieter Biehl

Economic Theory of Federalism and its Application to the European Union I. Introduction To the best of my knowledge, nobody seriously claims that European Integration should finally lead to a European unitary state. The focus of the general political discussion is as to whether the future European Union is to be organized like a Federation, like a Confederation or even less than that, a sort of "community" of states where only some functions are shared responsibilities. This excludes one possible methodological approach for designing a "Fiscal" or "Financial" Constitution for the European Union (EU), namely to start from its intended final character and structure, e.g. a federal one, and then to look into existing federations in order to construct an analogy. The approach that will be chosen here - and has been chosen earlier by the present author 1 - consists in trying to develop first a number of principles for a Financial Constitution or a Public Finance Union based on elements of what may be called an economic theory of federalism. These principles ought to be of a more general nature so that they are not necessarily and directly linked with a Federation or a Confederation, but can be applied also to other forms of international communities and organizations, even to unitary states. The differences between these forms will obviously stem from basically two types of variations: First, not all the principles will necessarily be always present, and second, those principles that are present, may differ as to the intensities of their realization. The principle of vertical separation of power e.g., one of the principles to be presented later, is a basic element of a federal state, but does not exist in a unitary one, whereas the principle

1

Cf. e.g. Biehl (1985), (1987), (1989), (1991) and (1994).

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of horizontal separation of power is present in any democratic state, being one of the basic principles of democracy. The principles to be developed should also not be designed totally separately and independently from each other, but should have a common base and some links with each other. If these requirements are fulfilled, they can form a sort of a multi-dimensional "reference system" that can be used in evaluating both existing financial constitutions and in designing new ones. Being an economist, the choice of the present author as to the common base is an extended cost approach. As will be explained, there exist already ideas and even principles in the writings of a number of authors that have already made important contributions to the economic theory of federalism in general, and to the theory of fiscal federalism in particular. "Federalism", in this context, does not mean that this theory is only applicable to Federations; rather it covers a large band of different forms of centralized versus decentralized systems of government as already mentioned. Those elements of these systems of governments that concern the public finance sector are then considered to represent the Financial Constitution for the respective individual system of government or for a "Public Finance Union" (PFU), a partial Union within a broader politial Union. The PFU reference system will then be compared with the existing EU Financial Constitution in order to check whether and to what extent it is in line with those principles. This comparison will reveal that a few deficiencies exist. The same reference system will then be used to develop proposals for reducing the unnecessarily high cost caused by these deficiencies. These proposals are meant to be an input into an already running discussion of possible institutional reforms of the EU that is expected to take place in the intergovernmental conferences in 1996.

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II. Elements of a Theory of Fiscal Federalism as a Reference System for a European Public Finance Union II. 1. An extended Cost Framework in the Buchanan/Tullock Tradition To evaluate a government system or a Constitution from an economic point of view implies that the analytical economic tools will have to be considerably extended. Such an extension has been proposed in 1962 by Buchanan and Tullock (B/T) under the heading of "calculus of consent". They distinguish between two major cost categories, decision-making cost and external cost. Their first category covers all resources that the individual will have to use in order to participate in a political system; so, I renamed it "resource cost" (RC). B/T called their second category "external cost". They consist of all the negative consequences the decisions of others will have for an individual that will have to accept and to comply with these decisions even if they are incompatible with his own personal values and preferences. In order to avoid any possible mixing-up with what in the meantime is understood as "external cost", I renamed this category "preference" or "frustration cost" (PC)2 Fig. 1 gives a graphical representation of this extended cost approach3. N represents the number of members of a society or group considered. RC is zero at N=l, implying that all cost involved (e.g. with collection of information, design, and execution and control of decisions) are exclusively borne by the single decision-maker or "dictator"4; all other members are free to use their resources for profitable private activities. However, N=1 is also the point where PC is at a maximum: if a dictator decides all political issues, 2

The term "frustration" has been coined by Pennock (1959) in his analysis of the implications of the US Presidential elections.

3

Fig. 1 is based on the graphical presentations in Buchanan/Tullock (1962, chapter 6) as modified in Biehl (1990, p. 87).

4

Buchanan/Tullock (1962) insist on speaking about "any person rule" and claim that the "dictatorship or monarchy model" is "wholly different" (p. 67). I think, however, that the argument is not convincing as the example given by B/T (any individual is entitled to order street repair, compared with the order of a road commissioner) does not differentiate between decisions made on a constitutional level (that do not have direct consequences as to the benefits of services for individuals), and decisions concerning the provision of public goods (which do have such consequences) - a distinction that they maintain throughout the book.

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there is a great risk that his decisions can be totally incompatible with the preferences of the other members of the society considered. The diagram shows two levels of frustration: PC 2 represents a higher level of frustration than PC], (e.g. if the community considered is more heterogeneous or if the decision to be taken will substantially affect the preferences of the members of the community). To the extent that more persons participate in political decision-making, P Q and PC2 are declining because the previously excluded members have now the opportunity to bring in their preferences and to modify policies. PC could fall to zero since all members are entitled to participate in decision-making, especially if the unanimity rule applies. At the same time, RC reach their maximum at the same point PC=A11, as full political participation in a plebiscitarian framework requires many resources. The diagram is based on the assumption that cost evaluations are done by each individual and that the individuals are able to aggregate for themselves RC and PC in order to obtain their individual total cost curves TCi and TC 2 . They are U-shaped and have, therefore, minimum cost points at N*i and N*2- N* is the "optimal" number and N*/N is the "optimal" share of members that can participate in political decision-making in order to minimize TC.

Dieter Biehl

148 Figure 1:

Preference Cost, Resource Cost, and Total Cost, Depending on the Number of Decision Makers

A first conclusion of the extended cost approach is that neither a dictatorial nor a plebiscitarian framework is found, but only a representative political system that minimizes costs. Another insight can be gained from the economic implications of different majority rules for constitutional decisions and for decisions on current issues within a given constitutional framework.5 To ask for a higher consent in the first case, sometimes even for unanimity, can be understood as attributing a high weight to the potential frustration involved (if e.g. a small majority were able to abolish or modify substantially basic constitutional rights in order to exclude minorities). PCi can then be considered as reflecting the frustration caused by normal legislation whereas PC2 would apply if preferences were more heterogeneous or represented far

5

Buchanan/Tullock characterize their book of 1962 as a study of the (economic) implications of collective choice in general (p. 3), and of unanimity and majority decision-making rales in particular (p. 7).

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reaching constitutional decisions. In the latter case, cost minimization requires a larger majority than in the first case. The extended cost approach also implies an extension of the familiar allocation, distribution, and stabilization functions 6 : •

•

•

Allocation now aims at the efficient use of resources not only for the provision of private and public goods, but also for establishing and maintaing institutions that "produce" and control private and public property and action rights ("competences") as a sort of higher level public-institutional goods. Distribution is no longer restricted to income and wealth, but applies also to the equitable and fair assignment of rights and responsibilities to individuals, to families, to groups, and to units of governments. Finally, stabilization is extended to comprise not only stable prices, high employment and foreign balance, but also stability of society and its political-institutional structure. II.2. Operational Principles of Fiscal Federalism

The basic extended cost approach just presented has to be made more operational in order to be useful for practical purposes. A first guideline would be to differentiate according to the number of problem dimensions that are related with specific goals. However, reality is complex and can have as many dimensions as one wishes to distinguish. It is, therefore, not possible to objectively fix one single figure. The proposed twelve principles are, therefore, not "holy" - one could conceive also a smaller or a larger number 7 . As will be seen from the following discussion, these twelve principles are related with important principles already existing in the framework of constitutional law and economics on the one hand, and on the other allow a reasonable degree of analytical differentiation. 8

6

Richard A. Musgrave introduced this trias in his Theory of Public Finance (1959), p. 5; cf. also Musgrave/Musgrave (1984), pp. 6-16. As to the extensions of the allocation, distribution, and stabilization functions, cf. Biehl (1991), pp. 138-40.

7

In previous publications, I myself have worked with different numbers of principles, e.g. six in Biehl (1989) and (1991), eight in (1994a) and nine in (1994b).

8

The subsequent presentation of the twelve principles follows Biehl (1994a) and (1994b), but differs in so far as some of the principles in these texts have been split in order to obtain a better separation of dimensions and to have one principle per one dimension.

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(1) The principle of congruence This principle is a "basic" one in so far as it is related to spatial economies of scale. The idea is that public goods differ in their servicing or "benefit" areas. For example, defense has a larger area (which often even exceeds national territories) than a local school; there are other services that lay in between. In order to minimize resource cost, servicing areas and territorial responsibility areas should be congruent. If congruence is not secured, more or less costly "spillover" effects will arise as a servicing area can either be larger or smaller than a responsibility area or government territory. In case a new level of government is to be created, like in the EU, congruence can serve as a criterion for identifying those public goods that can be more efficiently provided by the new level. Allocative efficiency requires that responsibility is to be given to that level or unit of government that can provide the service concerned at lowest resource cost. (2) The principle of mono-functional or "club" organization Assuming that servicing areas differ strongly in their spatial dimension and that congruence is cost minimizing, each service is to be provided by a specific organization that has authority only for this single function and for the territory concerned. This is an extension of Buchanan's (1965) concept of "economic club".9 Clubs or mono-functional organizations can also be established by governments either in the form of associations of local governments in order to deal with water supply or waste disposal, or in the form of international organizations like defense alliances (NATO), the GATTorthe UN."> (3) The principle of optimal representation of tax-payers and beneficiaries This principle can be based on the ideas of Breton (1965) and of Oates who called it the "correspondence principle" (1972, p.34). It intends to avoid both an under- and an oversupply of a public good. Even if spatial 9

Buchanan's motivation in developing this idea seems to have been more to demonstrate that there are possibilities for private provision of public goods. Nevertheless, resource cost minimization is one of the underlying criteria, the other being that there has to be a sufficiently high degree of private good characteristics or low degree of transaction cost as otherwise voluntary provision would be undermined by free rider strategies. This implies that the servicing area of a typical voluntary private "club" good offered to individuals cannot be very large. However, if not individuals, but governments are founders of a "club", so that the number of members is reduced, such an organization can be a large one (e.g. UN, GATT, NATO, EU).

10

Cf. for such an approach Olson/Zeckhauser (1966).

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congruence is secured and spillover effects are absent, undersupply will result if in a decision-making body the tax-payers (i.e. those that have to shoulder the burden of financing public goods) dominate when compared with the beneficiaries, whereas oversupply results if the beneficiaries are the majority. An optimal supply can only be obtained if both tax-payers and beneficiaries are adequately represented 11 . (4) The principle of horizontal separation of powers Horizontal separation of powers is a well-known basic characteristic of a true democratic society 12 . From the point of view of the extended cost approach, horizontal separation of powers cannot be based on efficiency, but only on equity or justice: Preference for controlling government power is attributed such a high weight that the most efficient solution is not chosen (an all-powerful single political entity), but that three different institutions are created and endowed with separate legislative, executive, and judiciary powers are charged with controlling each other. (5) The principle of merging monofunctional organizations If all the first four principles are to be applied without exceptions, a large and differentiated institutional decision-making capacity would have to be created for each single service. As a consequence, resource cost would be maximized. They can be reduced if all mono-functional organizations with roughly equal-size benefit areas are merged so that a system of multifunctional territorial units of government results. Merging of responsibilities can continue as long as the cost per responsibility diminishes if more of them are assigned to a given institutional capacity. Beyond that minimal cost position, cost will increase again due to the increasing overcharging of the decision-making capacity. There can be, however, also reasons for not merging every function. For example, if long term monetary stability is a highly valued asset, it is more efficient to have an autonomous Central Bank than to give this responsibility to a government where changing majorities and short-term interests may lead to potential monetary instability. 11

A similar argument is to be found in Olson (1969).

12

The principle of the (horizontal) separation of powers is traditionally attributed to Montesquieu, De l'Esprit des Lois (1748), who, however, could build upon other authors, in particular John Locke, Two Treatises concerning Government (1690). The basic idea that powers should control each other is one of the fundamentals of the US-American Constitution, the system of "checks and balances" (Madison). Montesquieu and the American Federalists also developed the concept of a bicameral system for legislation and control of the executive government.

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(6) The principle of vertical separation of powers Applying the congruence principle already implies that monofiinctional organizations providing small scale public services will find themselves within the territory of other providers of large-scale services. If merging results in only three major categories of government (small, medium, and large) with a certain concentration of responsibilities, it needs to be clarified as to whether this situation requires to explicitly establish a hierarchy between these governments.

In a unitary state, usually the national

government responsible for uniform nation-wide provision of services represents the top level; all other regional and local governments are subordinated. In a federal system, such a concentration of power is deemed to be undesirable, based on a different valuation of (potential) frustration cost. Here, the highest level of government is divided into a federal or a confederal level and a state level, and the states are not subordinated to the federal level as far as the competences attributed to them are concerned. Accordingly, vertical separation of powers is a typical characteristic of federal or confederal systems. Compared with horizontal separation, it restricts powers more in order to avoid possible frustration due to the uniform provision of public goods. At first sight, this could imply that vertical separation of powers will necessarily increase resource cost. However, this is not the case because vertical separation of powers has also positive efficiency implications: existence of several units of government at the top level, endowed with the same competences, allows for different solutions in line with differences in preferences of the regional populations. If congruence is secured, this creates a competitive environment for the provision of public services which contributes to reducing resource cost. (7) The principle of optimal endowment and combination of competences If the principles presented up to now are all applied, each level and unit of government will have been attributed a certain number of competences. However, these numbers of competences may not necessarily be the optimal, i.e. the cost minimizing ones. The reason is that the institutional decision-making capacities are created in a way that can sometimes be too large and sometimes too small in relation to these competences. Sometimes over-, and sometimes under-utilization of institutional capacities will result.

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Such a situation is obviously not optimal. If used and unused institutional capacities exist excessively side by side, it is, therefore, possible to reduce the cost per competence by transfering competences from the first to the second type of units or levels of government. In realizing such a redistribution of competences, substitutability and complementarity between competences can also be taken into account. (8) The principle of differentiation of responsibilities I: full vs. partial competences Responsibilities can be designed as "full" competences so as to enable one unit or level of government to provide the service in full autonomy. However, a full competence can also be divided into its elements, e.g. the power to legislate tax laws, to administer them, and to be entitled to cash and spend the collected tax amounts. To the extent that these partial competences are attributed to different units or levels, no single unit or level will be able to act autonomously; each one needs to cooperate with others that dispose of the complementary competences. The result will be a trend towards cooperative federalism. Assigning full competences creates a predisposition for competitive federalism. (9) The principle of differentiation of competences II: exclusive vs. concurrent and joint competences The second form of differentiation of competences distinguishes between exclusive, concurrent or joint competences. An exclusive competence will always have to be a full one as otherwise the service could not be provided at all. The concurrent variant implies that, for example, the federal or Union government is authorized under certain conditions to take over a responsibility that originally was assigned to the member state level without a formal constitutional amendment. A major reason for concurrent competences seems to be a preference for a more homogeneous supply of public services or for more "uniformity of living conditions", to use the basic argument in the German "Grundgesetz" 13 . The mere existence of concurrent competences represent a potential threat: if independent state legislations

13

"Uniformity of living conditions" (Einheitlichkeit der Lebensverhältnisse) is used as a criterion in the German Constitution, the Grundgesetz. According to art. 72(2), the Bund has the right to legislate in matters of concurrent legislation if this is e.g. required in order to maintain unity of law or unity of the economy, in particular "Einheitlichkeit der Lebensverhältnisse". The same criterion reappears as a condition for revenue sharing between Bund and Laender in art. 106(3).

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create too much heterogeneity from the point of view of the federal government, the latter could "expropriate" the former. Joint or shared responsibilities avoid such a full "expropriation"; they also represent typical elements of a cooperative federalism. (10) The principle of subsidiarity The basic idea of subsidiarity is that to have decision-making authority is a value of its own that is linked with ideas of human dignity, autonomy, and freedom14 - values that should not be subordinated to economic efficiency reasons. The subsidiarity principle protects the individual, the family, and the smaller or lower levels of government against the argument that society, the state or a higher or larger unit of government can "better" serve their needs

because

they

can

provide

services

more

efficiently.

In

this

perspective, subsidiarity is based on preference cost considerations. In the European context, the term subsidiarity has been explicitly introduced into the Maastricht Treaty. Article 3b states: "In areas that do not fall within its exclusive competence, the Community shall take action, in accordance with the principle of subsidiarity, only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the member states and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community." This formulation restricts first the applicability of subsidiarity to competences that are not exclusive

ones,

and second requires that the objectives

cannot

be

"sufficiently" achieved by the member states and "better" achieved by the Community. The term "better" unfortunately is not precise enough as it could imply both efficiency and equity criteria. Subsidiarity will then become a dualistic principle that requires a trade-off within itself and that does not correspond with the general line of reasoning defended here, i.e. to clearly separate the problem dimensions and to either apply a resource cost or a preference cost calculus. In the present reference scheme approach the resource cost considerations are already covered (e.g. by the principles of congruence and of correspondence) so that subsidiarity is here understood as a justice based distributive and not an efficiency based allocative criterion.

14

The subsidiarity principle has a long history, although one of its most influential formulations is to be found in the Encyclica of Pope Pius XI, "Quadragesimo anno" of 1931. It has, however, also played an important role in the development of natural law and the liberal theory of law. Cf. for an excellent discussion based on a large body of literature e.g. Isensee (1968). For a discussion in the EU-context, see e.g. Delors (1992) and Magiera (1994).

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Subsidarity clearly implies a preference for maintaining a competence at a lower level or smaller unit of government - in the EU-context: the member state level - even if the transfer to a higher level or larger unit - the EU would be more efficient. The question is as to whether subsidiarity absolutely excludes such a transfer or whether a trade-off between resource and preference cost is possible (e.g. in case preference cost are low), but resource cost reduction due to congruence, correspondence, and optimal utilization of decision-making capacities are very high, so that the preference cost "loss" can be considered to be (more than) compensated by the resource cost "gain"15. (11) The principle of optimal assignment of tax bases Like servicing areas, tax bases can also spatially differ. It can be argued that the smaller the spatial extension of the tax base and the better the congruence of the tax base and location of its "owner," and the lower the mobility of the tax base and/or owner respectively, the more the tax concerned is appropriate for a small unit/lower level of government. Taxes on immobile property, on land and buildings, and on local consumption in many countries are traditionally local or regional taxes. Taxes on income or profits are already more volatile, in particular those on mobile capital returns like interests and dividends. Those taxes seem to be better suited for national or federal governments.16 To the extent that tax bases are assigned according to congruence, each level of government will be able to finance its expenditure at least to a considerable extent out of own resources. This is important because assignment of own tax bases guarantees autonomy and allows the correspondence to work appropriately: If the European decisionmakers do not have a tax legislation competence, they will also not be obliged to weigh the benefits of increased expenditure with the cost of financing them. This will create a tendency for overspending. In Federations in general, the constitutionally protected distribution of own tax sources to the states or a comparable constitutional entitlement to tax sharing is also important for an effective vertical separation of powers.

15

According to Magiera (1994) p. 98, the European Commission applies a two-step test procedure, the first of which is a "comparative efficiency test". If one follows the argument presented above, the efficiency test cannot and should not be based on the susbsidiarity principle.

16

Cf. Musgrave/Musgrave (1984), p. 519.

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(12) The principle of fair burden sharing and fiscal equalization Fair burden sharing between individuals can take various forms, ranging from benefit taxation up to ability-to-pay taxation. National tax systems represent different mixtures of these financing instruments and, as a result, differ as to their overall progressivity. According to the principle of optimal assignment of tax bases, the state and the local levels are to be endowed with appropriate tax bases so that, given an acceptable degree of overall tax burden and progressivity, they can finance their services from own resources. However, the tax capacity of each individual state or local government can nevertheless diverge from the overall average. The reason is that the tax bases in general are not evenly distributed in space so that one regional or local unit of government may obtain (e.g. the same revenue per capita as another one with a lower tax rate), whereas the other unit will be obliged to apply higher rates. If, however, it is a goal of the larger society concerned to supply equal public services independently from the place of residence of a citizen, the assignment of own tax bases has to be supplemented by a system of equity oriented fiscal equalization or "Finanzausgleich". The extent to which a society is ready to establish such an intergovernmental system of redistribution depends on another form of preference cost: intergovernmental solidarity. This solidarity can be high if the transfer recipients have to spend the funds received in line with generally accepted criteria; it will be lower if the paying governments fear that their transferred funds could be wasted 17 . As far as intergovernmental fiscal equalization is concerned, it can take two basically different forms: explicit horizontal and explicit or implicit vertical equalization. The two explicit variants are characterized by fixed rules that determine how much a "poor" government is entitled to receive and how the transfers required are to be financed by a "richer" government. In the horizontal case, all governments belong to the same (state or local) level; in 17

This simplified statement has, however, to be qualified as the paying governments do not always transfer amounts that reflect their own economic capacity or performance. Income and corporation taxes e.g. are normally paid at the legal seat of an enterprise; in the case of e.g. a multinational firm, profits could come from throughout the world. As large cities, especially national capitals in unitary states, are preferred locations for those companies, taxes collected from inhabitants overestimate their true tax capacity whereas the opposite is true for other regions. It nevertheless remains tme that highly urbanized agglomerated regions with central location and high infrastructure endowment do possess also a higher tax capacity (cf. Biehl 1986), and that those richer regions normally are net payers and the poorer ones net receivers in national public finance systems (cf. MacDougall-Report 1977).

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the vertical case, it is normally the higher level government that transfers to the lower level (e.g. the federation towards the states or each state towards its local governments). The explicit rules can be one-dimensional (if e.g. equalization is only based on tax capacity figures), two-dimensional (if equalization is made dependent on a comparison of actual with some sort of hypothetical tax capacity) or multidimensional (if actual tax capacity is compared with actual expenditure needs and if the latter are calculated with a more or less large number of specific expenditure indicators) 18 . Implicit equalization is always vertical; it normally takes the form of higher government spending in "poor" regions or local communities 19 . II.3. Preliminary Conclusions The following general conclusions can be drawn from the multidimensional reference scheme approach presented here: (1) If economic analysis is extended so as to take into account both resource cost based efficiency and preference cost based equity criteria, and if these two major cost categories are adequately differentiated, a larger number of principles of fiscal federalism - in the present version twelve can be derived. With the help of these principles, both new financial Constitutions can be designed and existing ones evaluated. If they are used in these ways, it results that neither complete centralization nor complete decentralization is the optimal solution for national or "Community" public finance systems. However, these principles cannot be applied mechanistically. Given the particular nature and importance of preference or frustration cost, they can only be articulated through a political decision-making process. Expert advice is needed, but can only be an input into, but not a substitute for this process. (2) According to the weights attached to these cost categories and to the principles of fiscal federalism by the legitimate decision-makers (from the voter through legislative and executive bodies up to Constitutional Courts), a wide band of Constitutions can be conceived that range from

18

As will be shown in section III., the German system of "Finanzausgleich" comprises both explicit horizontal and vertical elements; Japan is an example for a multidimensional vertical system in a unitary state with a large number of true expenditure keys (cf. Ishi (1989), pp. 259-61 ).

19

A comparison between explicit and implicit forms of fiscal equalization for a number of federal and unitary states (including Australia) is to be found in the MacDougall-Report (1977).

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highly centralized unitary states through different types of federations up to highly decentralized confederations or "Community" systems. (3) Constitutions in general and financial ones in particular also represent a balance between rigidity and adaptability between statics and dynamics20. This is particularly important for the EU-Constitution, given that the actual realization of the idea of "Union" is not yet the final one and that European Integration has to be conceived as a dynamic process. Even in the context of "mature" national Constitutions, changing preferences and historical conditions can induce changes and adaptations of these "finished" Constitutions. This is true much more for the actual European Treaties in the preamble of which it is explicitly stated that EU member states are "resolved to continue the process of creating an ever closer union among the peoples of Europe...".

III. The Actual EU Financial Constitution and its Main Deficiencies In 1951, the European Coal and Steel Community (ECSC) was granted a specific levy on the production value of the sector concerned (art. 49 ECSCTreaty), whereas the European Economic Community (EEC) founded in 1957 was initially financed only through a system of membership contributions. Since the Reform of 1988 the following financial instruments are available (EC, Office for Official Publications, 1989, pp. 58-62): - agricultural levies, - tariffs, - tax on value added revenue sharing (up to 1.4 percent of the tax base), - other levies (e.g. a levy on the salaries paid to Community personnel), - a GDP levy, decided in 1988 as an additional revenue source. The original EEC Consultative Assembly which had very few rights as far as financial issues are concerned, later became the "European Parliament" (EP) and got additional budgetary competences. Actually, Parliament and Council represent a "double budgetary authority", the relationship between them being regulated by a very complex interinstitutional agreement (EC, Office for Official Publications, 1989, pp. 119-21). 20

Cf. Wallace E. Oates for an excellent discussion of these opposing tendencies (1972, ch. 6, the Dynamics of Federalism).

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The EEC-Treaty, in addition, contains other important budgetary regulations (EC, Office for Official Publications, 1989, pp. 67-69): • Compulsory and non-compulsory expenditures. Although it is sometimes argued that this distinction is based on a clear legal criterion (i.e. as to whether there is an independent law that authorizes expenditure or not), it seems to be rather a political instrument to "reserve" a part of the budget to the final decision of the EP, and another part to the Council. Expenditure on the Common Agricultural Policy (CAP), still at almost 60 percent, is the single most important expenditure item in the budget and is classified as being compulsory and, therefore, the Council has the final word here. The largest block of non-compulsory expenditure represents the so-called structural funds (regional fund, social fund, structural part of CAP) with roughly 17.8 percent of planned EC-expenditure in 1988, to be increased to 26.8 percent in 1992 (EC, Office for Official Publications, 1989, pp. 122). • The maximum rate constraint for non-compulsory expenditure. The Commission is required to calculate and apply the maximum amount by which non-compulsory spending may be increased (art. 203(9)). This maximum rate is determined by taking into account the trends in member states expenditure, the growth of real GDP, and the development of the cost of living. The maximum rate mechanism is quite an unusual rule for a financial constitution. Its raison d'être is to be found in the fact that there is no other instrument for preventing excessive expenditure decisions or obtaining "budgetary dicipline", given that the EU is not entitled to levy revenues in order to finance its expenditure. If these twelve federalist principles are applied to assess the actual European Financial Constitution and the actual realisation of EPFU, the result can be summarized as follows: (1) The principle of optimal assignment of competences is violated as the number of competences given to the EU level seems to be too small. As far as the expenditure intensity, it also appears low. When one compares, for example, the MacDougall-Report criterion that stated that a 2.0 - 2.5 percent share of the EC budget in GDP is considered to be "prefederal", the EC is still very far from a possible fourth (or fifth) level of government 21 . This

21

Cf. MacDougall-Report, p. 17 and pp. 66-69.

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principle is also violated as far as the relationship between expenditure and revenue competences is concerned. Despite the fact that the total EC budget actually amounts to about 1.03 percent of EC-GDP with roughly 44.8 billion ECU in 1989, the EC does not dispose of an adequate system of revenues. A part of the own resources like tariffs and agricultural levies, cannot be considered to represent true revenue sources since they cannot be modified in order to increase revenues; they are determined by GATT, the development of world agricultural prices, and the exchange rate of the dollar. The Value-Added Tax (VAT) revenue sharing system is actually no longer a true revenue instrument because its maximum rate of utilization that was fixed in 1988 at 1.4 percent is already fully utilized; additional revenues accrue to the EC only to the extent that the tax base is growing. In addition, with the medium term financial plan of 1988 to 1992 an overall maximum rate of revenues in relationship to EC-GDP and also for each of the annual budgets within this five year period has been fixed. Further, any change in these figures would have to be submitted to a process of ratification in all member countries. (2) Similar conclusions are obtained when the principle of optimal differentiation of competences is applied. As already mentioned, the CAP is an example for allocation of a full competence for agricultural market policy, whereas in most other cases the EU has only partial competences. Another full competence, but one that does not have important expenditure implications, is the right of the Community to control state aids according to Articles 92 to 94 of the EEC Treaty. Where regional policy is concerned, the EU has only a partial competence insofar as it can subsidize a number of regions that are considered to be either less developed or to suffer from serious structural problems. However, the original idea was that these transfers add to actual national expenditure which speed up the process of regional development and help them to catch up with the better developed regions. This goal is, however, negatively affected by the practice of many member states increasing national spending accordingly. The principle of vertical competence differentiation is violated in that the EU has not only a limited revenue entitlement competence, but almost no legislative competence of its own. An important violation of the principle of horizontal competence differentiation represents the distinction between compulsory and non-compulsory expenditure, and the different weights attached to the competences of the Council and the EP in relation to these

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categories. As already mentioned, this distinction represents basically a political instrument in order to secure a certain division of expenditure decision-making power between the Council and the EP. Also, other existing rules and the so-called interinstitutional agreement taken together result in the fact that the Council still has the final say as to compulsory expenditure. Normal procedures for a joint responsibility of two legislative bodies would imply either the existence of a sort of joint commission or reconciliatory body that would take a final decision in case of dissent between the two bodies, or else one of the bodies would have the power of final decision. This strange construction is one of the reasons why the increase in EC spending has been so high in the past and has been especially concentrated, at least until 1988, in the agricultural field. As already mentioned, there was nothing comparable to the maximum rate increase rule that exists for noncompulsory expenditure, and in previous years the position of the Council in general was much stronger when compared with the EP. (3) The most serious violation is to be found in relation to the principle of optimal representationof tax-payers and beneficiaries. The basic deficiency is that there is no link between taxation and expenditure competences, despite the fact that such a link is a characteristic of almost all developed democratic nations. It is mainly due to the fact that neither the Council nor the EP have a tax legislation authority (so that the tax payers are not represented) and that the maximum rate rule affects only the EP. This rule only applies to the non-compulsory expenditure managed by the EP and has in the meanwhile been changed as in 1988, in order to frame expenditure increases for CAP after it was decided to introduce so-called automatic stabilizers. These regulations provide that whenever certain quantity levels are exceeded in agricultural production, the prices of the respective products are reduced or other measures of a restrictive nature enter into force. In this respect, there is now a better balance between the artificial budgetary discipline measures on the compulsory and the non-compulsory side of the budget. However, the price paid for this came through a reduced budgetary autonomy and flexibility of the EU as a whole. Another violation of the the principle of optimal representationof tax-payers and beneficiaries consists in the practice of CAP decision-making. Despite the fact that normally the General Council (the Ministers of Foreign Affairs), represent the main legislative body in the case of the CAP the General Council, ceded its decision-making power to the Council of the Ministers of

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Agriculture. This created the strange situation where one of the most important spending ministers in any national government could now decide how best to serve his clientele without being hindered, at least in the past, by the competition of other spending ministers or by the veto of the Ministers of Finance. (4) The principle of fair burden sharing is also seriously violated. Given that the major part of EU funds comes from agricultural levies, tariffs, and above all from VAT revenue sharing, the overall impact of this financing system must be classified as being regressive: It is not only poorer individuals who spend a higher proportion of their income than richer ones; poorer member countries, too, spend proportionately more on consumption than on saving or investment. A tax on consumption, such as VAT, means that poorer member countries pay relatively more than the richer ones in relation to their average national income. This argument of regressivity has already been developed in the MacDougall-Report (p. 64) and was recognized later by the Commission and the EP, and finally accepted that the share of VAT finance would be fixed at 1.4 percent and an additional GDP levy has been introduced. However, even if this latter revenue source were to be used much more strongly for the financing of the budget, at best the regressivity would only be reduced, but it would not be possible to arrive at a proportional burden sharing and it would be impossible to

achieve

progressive financing. In order to avoid excessive regressivity, it was decided in 1988 to apply cut-off maximum rates of participation in VAT revenue sharing at 55 percent (EC, Office for Official Publications, 1989, p. 59). Examination of how member countries finance their national expenditure reveals that all member countries use both indirect taxes that in general tend to be regressive, and direct taxes that tend to be progressive. On average, the relationship is about 50:50 (Eurostat Review 1976-85, p. 70). If this fact is interpreted as showing revealed preferences in the Community as to regressivity and progressivity, it would be reasonable to also endow the EC with an additional new progressive revenue instrument. (5) The principle of fiscal equalization is not realized in a reasonable manner either. Admittedly, it can be argued that systems of horizontal

fiscal

equalization presuppose the existence of a highly developed and mature federal system, so that those who pay transfers to other groups or regions

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within that federation can be sure that the money will only be spent in accordance with generally accepted principles of the federation as a whole. Until the EU has developed so far as to become a full federation, the preference cost would be extremely high if one were to try to establish an untied horizontal fiscal equalization system. The consequence is that only implicit equalization can be realized, and the instruments for this are the structural funds. According to the new regulations for the structural funds 22 , especially goal 1 regions (the really less developed ones), are found almost exclusively to be in the poorer member countries so that there is a clear net transfer into these economies. As far as goal number 2, the declining old industrialized regions are concerned, they are also partly found in richer countries. Nevertheless, the net effect of structural fund expenditure is still in the desired sense. However, given the small share of these expenditures within the total EC budget (roughly 18 percent in 1988), they cannot determine the overall redistributive effect. CAP expenditure in particular still works very frequently in the opposite direction. The basic reason for this is that when the CAP started to become expensive, especially in the 60's and later, the most expenditure intensive market systems were for those products which are produced by the relatively more highly developed agricultural regions. They produced the largest part of the surplus and were at the same time strong exporters so that they obtained high amounts of export subsidies. In the meantime, this lopsided preference for the "northern" products has been partly outweighed by new market systems for "southern" products such as fruits, wine, and olive oil. As a consequence, the EU is confronted with a dilemma. On the one hand, the homogeneity of preferences is not yet strong enough in order to allow a fair and efficient system of equalization to be introduced; on the other hand the implicit redistributive effects of regressive financing here and some expenditure policies with undesirable redistribution effects cause a sort of "perverted" system of fiscal equalization. The combination of the two latter effects was especially strong in Great Britain and caused the so-called netpayer/net-receiver discussion within the EU. This discussion and especially the debate about Mrs. Thatcher's "Want back my money" claim clearly demonstrate that the EU budget has attained a size whose redistributive effects can no longer be neglected.

22

Cf. Commission of European Communities (1989).

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The implications of "fair burden sharing" are, then, not merely academic. As the MacDougall-Report has already demonstrated, the national public finance unions in the EC member countries are, in general, characterized by an overall positive redistribution between the regions of a country, i.e. that the richer regions are net-payers and the poorer ones net-receivers in the national public finance systems (Eurostat, current information). In addition, this net payer/net-receiver position of a region normally corresponds to the fact that the richer regions are at the same time net-exporters and the poorer ones net-importers. This can be interpreted as saying that the "gains from trade" realized by the richer regions are partly rechannelled through the public finance system into the poorer regions, helping them to offer a higher level of public services and public infrastructure investment. Infrastructure represents the "public" part of the overall national capital stock; it determines to a large extent productivity and income in a region 23 . This type of transfer system is, therefore, not only oriented towards redistribution, but also contributes to convergence: if the lagging regions are to be given a real chance to catch up with the already better developed areas, they will need a substantial increase in their public investments, not only subsidization of private ones. Convergence or "economic and social cohesion", introduced in the EEC Treaty through the Single European Act of 1986 in Articles 130a 130c has now explicitly been made a goal of European Integration. This again is to be considered a revealed preference: to engage in an intensifying process of integration which combines economic with political aims. The previous analysis demonstrated that there are a number of serious deficiencies in the actual EU Financial Constitution. Some of them, for example, the CAP-dominated expenditure pattern, cannot be modified in the short run. Reforming the regressive financing system is, however, a task that can and should be taken up without delay. This reform cannot only consist of endowing the EU with a progressive revenue source, but also has to be supplemented by measures that help to improve the EU decision-making process. In the following section, such a proposal is developed for a reform of the EU financial constitution.

23 Cf. EC-Infrastnicture Report (1986).

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IV. The Centerpieces of Reform: Endowment with an own Tax Authority and Basic Design of a Progressive Surcharge As already mentioned, national public finance systems rely both on indirect regressive and direct progressive taxes. The range is from 63:37 for indirect to direct taxes in France, to 39:61 in Belgium with an average of 50:50. The first conclusion to be drawn from these revealed preferences is that, with increasing EU budgets, the Community should also use a direct progressive revenue instrument and no longer only regressive or proportional ones. The second conclusion is that the share of direct taxes with a progressive character differs widely among member countries. Therefore, it cannot be expected that it would be possible to introduce a uniform European income or corporation tax in the near future. However, it is possible to introduce progressivity by applying a progressive key to the existing own resources of the Community, especially the VAT, or by levying an EU surcharge on existing national progressive taxes such as income and corporation taxes. (1) The Progressive Key Proposal The MacDougall-Report of 1977 contains a proposal for a progressive key. 24 The basic idea is to profit from the fact that the EC had already to a large extent harmonized the tax base for the VAT and shared revenues with member states up to actually 1.4 percent. The regressivity of this system could be modified by applying a sort of progressive multiplier to the amounts that have to be paid into the EU Treasury. The scale of progressivity could be based on e.g. income per capita to the effect that a member country with an income equal to the EU average would have to pay according to a multiplier of one, whereas a higher/lower multiplier would be applied to richer/poorer countries. A similar proposal based on income per capita and number of inhabitants was developed by the EP in 198 0 25 . These two solutions, in general, are in line with the principle of fair burden sharing, but they are not compatible with the correspondence principle. The reason is that they basically remain systems of contributions that will have to

24

Cf. MacDougall-Report (1977), pp. 64-66.

25

Europäisches Parlament, Bericht im Namen des Haushaltsausschusses über die Eigenmittel der Gemeinschaft ("Spinelli-Bericht"), Dok.-Nr. 1-772/80, 5 January, 1981.

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be paid out of the national treasuries and, therefore, do not create a direct link between the EU politicians and the European citizens. (2) A Progressive Surcharge to Income and Corporation Taxes 26 This proposal consists of a two-stage procedure: • In the first stage, member countries are considered as contributors and the overall amount to be paid by them via the progressive instrument is fixed in relation to the income per capita of each country. Similar to the idea of the MacDougall-Committee, progressive multipliers could be calculated in order to determine the overall amount to be paid by each member country. The first stage corresponds, therefore, closely to a system of progressive national contributions. • In the second stage, this overall national tax burden is transformed into a surcharge to be applied to individual income or income plus corporation tax payments so that a uniform percentage surcharge on the national tax payments results. This percentage surcharge is to be explicitly shown on each tax declaration and each national tax invoice so that the tax payer knows exactly what he has to pay in order to co-finance European expenditure. This proposal is in line with the principle of fair burden sharing, as each member country is assessed on the basis of a common European scale, whereas the national citizens are burdened according to a combination of this European scale and the existing set of national rules that determine the individual income or corporation tax to be paid. In addition, the principle of optimal representationof tax-payers and beneficiaries is to be realized through the Council and the EP which are given the joint legislative competence to fix the conditions for this European tax. It is also possible to proceed in a two-stage way so that all decisions to be made in stage one are within the competence of the EU, whereas the execution and application of the criteria necessary in order to fix the individual national surcharge rate could also be decided in the framework of a European tax law by national

26

Cf. Dieter Biehl, "A Federalist Budgetary Policy Strategy for European Union", in: Sir Charles Carter (Ed ), Policy Studies, Vol. 6, part 2, October 1985, pp. 66-76. A similar proposal has been developed by El-Agraa and Majocchi (1983). A more detailed analysis is to be found in Dieter Biehl and Horst Winter, "Die EG-Finanzverfassung aus föderalistischer Perspektive", in: Bertelsmann Stiftung (Ed.), Europa finanzieren - ein föderalistisches Modell, Strategien und Optionen für die Zukunft Europas, Grundlagen 4, Gütersloh 1990, pp. 21-131.

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authorities. At any rate, EU politicians will now be in the same position as national ones: if they need additional funds, they will have to decide simultaneously on expenditure and taxes. This implies that they will have to defend their combined tax expenditure decisions vis-a-vis their voters. The question as to the degree of progressivity to be applied cannot be answered by economic reasoning as the preference costs are not known. They will, therefore, have to be expressed through the political decision-making process. Fig. 2 shows the amounts to be paid in ECU per capita by each member country if 50 percent of EC own resources in 1987 had been replaced by the proposed progressive surcharge and if a low or a high degree of progressivity is chosen. Low progression implies that the surcharge increases (decreases) by 1 percent per 10 percent per capita income increase (decrease) above (below) EC average; high progression means a 1 percent per 2 percent income change. To allow comparisons, the actual and the proportional distribution are also presented. FIGURE 2 Distribution of 50 Per Cent of EC Own Resources Per Capita in 1987 According to Hypothetical Progressive Financing with the Aid of on EC-Surcharge on National Income Toxes Ptrcoi 180

160

J I

HO

120

100

60

60

40

20

0

Member countries

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The percentages by which the national income tax amounts would change if half of the own resources of the EC in 1987 had been financed in this way as shown in Fig. 3. The reason the percentages vary considerably is due to the fact that some of the poorer member countries, especially, either have narrowly defined income tax bases and/or apply low tax rates. Ireland on the one hand would have a surcharge almost as low as Denmark, whereas on the other hand France would have to apply roughly as high a rate as Portugal, Greece, and Spain. The low progressive key is not far from the proportional one; the strong progressive key results in a much lower surcharge in the poorer and a higher one in the richer countries compared with the actual and the proportional variant. The half-financing model implies that all member countries together would save 50 percent of the actually transferred amounts mainly paid via VAT. For the poorer ones, there would be a positive net effect as they would be able to retain more funds in terms of saved VAT than their citizens would have to pay in the form of the progressive surcharge into the EU treasury. For the richer countries the reverse would apply. Independently of whether the net effect is positive or not, all member countries could use the retained VAT funds in order to decrease VAT rates or income and/or corporation tax rates. If the EU is endowed with an own tax authority, the maximum rate regulation could also be abolished as European politicians would then be under the same democratic budgetary discipline as national politicians. The classification in compulsory and non-compulsory expenditure can be abolished too, if the Council and EP are transformed in a real double budgetary authority or two-chamber system with joint responsibility for revenues and expenditures. This requires, however, that rules are devised as to who should decide in case of a conflict between the two bodies.

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FIGURE 3 Required Percentage Increose of Notional Income Tax Revenues Under Hypothetical Half-Financing of Own Resources in 1987

7

Member countries

V. Conclusion With the aid of this proposal, the Community could be endowed with a true tax competence whose progressive design would reduce the actual regressivity of EU financing. However, the overall redistributive effects of the EU budget also depend on the distribution of expenditures. It would obviously not be possible to modify the character of every EU policy so that it is always compatible with an accepted redistributive goal for Community activities in general. First of all, these policies must preserve their character, whether allocative or redistributive. What is possible, however, is to try to obtain a better balance between the different types of policies. As long as CAP, as one of the few full competences of the EU, dominates the redistributive effects of the EU budget, a need for reform exists and increases. In the present situation, with worldwide GATT-negociations

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proceeding and with the existence of pressure to abolish, or at least substantially reduce agricultural subsidies, conditions are favorable for progress in that direction. In addition, other EU policies will have to be developed further in order to reach higher expenditure shares. This has already been decided, for example, for the structural funds which will double between 1988 and 1993. In addition, the Single European Act of 1986 has endowed the EC with new competences, such as in the field of environmental and R&D policies. A reduction in the share of the CAP, to the benefit of other policies, would also help attain a better balance. The proposal would, at the same time, represent a major step forward towards political union and contribute to the realization of a better institutional and decision-making balance.

Bibliography BIEHL, Dieter, and Urban A. MUENZER (1980): Agglomerationsoptima und Agglomerationsbesteuerung - Finanzpolitische Konsequenzen aus der Existenz agglomerationsbedingter sozialer Kosten, in: Horst Zimmermann (ed.), Ballung und öffentliche Finanzen, Hannover , pp. 113-50. BIEHL, Dieter (1983): Die Entwicklung des Finanzausgleichs in ausgewählten Bundesstaaten: Bundesrepublik Deutschland, in: Neumark, Fritz, Andel, Norbert und Haller, Heinz (eds.), Handbuch der Finanzwissenschaft, 3rd. ed., vol. IV, Tuebingen, pp. 69-122. BIEHL, Dieter (1985): A Federalist Budgetary Policy Strategy for European Union, in: Charles Carter (ed.), Policy Studies, vol. 6, part 2, October, pp. 66-67. BIEHL, Dieter (1986): The Contribution of Infrastructure to Regional Development, Document, Office for Official Publications of the European Communities, Luxembourg/Brussels, 2 vols. BIEHL, Dieter (1990): Deficiencies and Reform Possibilities of the EC Fiscal Constitution, in: Crouch, Colin and Marquand, David (eds.), The Politics of 1992 Beyond the Single European Market, Oxford, pp. 85-99. BIEHL, Dieter (1991): Financing the EC Budget, in: Rémy Prud'homme (ed.), Public Finance with Several Levels of Government, The Hague/Koenigstein, pp. 137-152. BIEHL, Dieter (1994a): Intergovernmental Fiscal Relations and Macroeconomic Management - Possible Lessons from a Federal Case: Germany, in: Gupta, S.P., Knight, Peter, Waxman, Roberta J., and Wen, Yin Kann (eds ), Intergovernmental Fiscal Relations and Macroeconomic Management in Large Countries, IDE/World Bank and ICRIER, New Delhi, pp. 69-121. BIEHL, Dieter (1994b): Fiscal Federalism in Germany, in: Mullins, Anne and Saunders, Cheryl (eds ), Economic Union in Federal Systems, Sydney, pp. 151-192.

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BIEHL, Dieter (1994c): Zur ökonomischen Theorie des Föderalismus: Grundelemente und ihre Anwendung auf eine EU-Finanzunion, in: Schneider, Heinrich and Wessels, Wolfgang (eds.), Föderale Union - Europas Zukunft ? Analysen, Kontroversen, Perspektiven, Schriftenreihe des Bundeskanzleramtes, vol. 15, München, pp. 99-122 and 197-200. BRETON, Albert and Anthony SCOTT (1978): The Economic Constitution of Federal States, Canberra. BRETON, Albert (1965): A Theory of Government Grants, Canadian Journal of Economics and Political Science, vol. 31, pp. 175-87. BUCHANAN, James M. and Gordon TULLOCK (1962): The Calculus of Consent, Ann Arbor. BUCHANAN, James M. (1965): An Economic Theory of Clubs, Economica, vol. 32, pp. 1-14. COMMISSION OF THE EUROPEAN COMMUNITIES (ed.) (1977): Report on the Role of Public Finance in European Integration ("MacDougall-Report"), Office of Official Publications, Luxembourg/Brussels, 2 vols. COMMISSION OF THE EUROPEAN COMMUNITIES Contribution of Infrastructure to Regional Development, Luxembourg,(EC-Infrastructure Report).

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COMMISSION OF THE EUROPEAN COMMUNITIES (ed.) (1988): The Public Finances of the Community, Brussels. COMMISSION OF THE EUROPEAN COMMUNITIES (ed.) (1989): Guide to the Reform of the Community's Structural Funds, Document, Luxembourg. DELORS, Jacques (1992): Le principe de subsidiarité, in: J. Delors (ed.): Le nouveau concert européen, Paris, pp. 163-76. D E U T S C H E S INSTITUT FÜR WIRTSCHAFTSFORSCHUNG (DIW) (1992): Finanzprobleme der neuen Bundesländer und Laenderfmanzausgleich: Verteilungskonflikte vorprogrammiert, in: Wochenbericht 25/92, June 18, 1992, pp. 316-325. EL-AGRAA, A. and A. MAJOCCHI (1983): Devising a proper fiscal Stance for the EC, in: Rivista di Diritto Finanziaro e Scienza delle Finanze. EUROPÄISCHES PARLAMENT (1981): Bericht im Namen des Haushaltsausschusses über die Eigenmittel der Gemeinschaft, Dok.-Nr. 1-772/80, 5 January ("SpinelliReport"). HESSE, Konrad (1962): Der unitarische Bundesstaat, Karlsruhe. ISENSEE, Josef (1968), Subsidiarität und Verfassungsrecht, ein Studie über das Regulativ des Verhältnisses von Staat und Gesellschaft, Berlin. MAGIERA, Siegfried (1994): Föderalismus und Subsidiarität als Rechtsprinzipien der Europäischen Union, in: Schneider, Heinrich and Wessels, Wolfgang (eds ), Föderale Union - Europas Zukunft ?, München, pp.71-98. MUSGRAVE, Richard A. and Peggy B. MUSGRAVE: Public Finance in Theory and Practice, 4th ed., New York. OATES, Wallace E. (1972): Fiscal Federalism, New York.

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OLSON, Mancur (1969): The Principle of "Fiscal Equivalence": The Division of Fiscal Responsibilities among different Levels of Government, American Economic Review, vol. 59, pp. 479ff OLSON, Mancur and Richard ZECKHAUSER (1966): An Economic Theory of Alliances, Review ofEconomics and Statistics, vol. 48, pp. 266-279. PENNOCK, J.R. (1959): Federal and Unitary Government, Behavioral Science, vol.4, pp. 147-57. STREIT, Manfred (ed.) (1988): Wirtschaftspolitik zwischen ökonomischer und politischer Rationalität, Festschrift für Herbert Giersch, Wiesbaden. ZIMMERMANN, Horst (1981): Studies in Comparative Federalism: West Germany, Advisory Commission on Intergovernmental Fiscal Relations, Washington/DC. ZIMMERMANN, Horst (1983): Allgemeine Probleme und Methoden des Finanzausgleichs, in: Neumark, Fritz, Andel, Norbert und Haller, Heinz (eds.), Handbuch der Finanzwissenschaft, 3rd. ed., vol. IV, Tuebingen, pp. 3-52.

Federal Finance in Argentina, Germany and Brazil

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Federal Finance in Argentina, Germany and Brazil I. Introduction and Scope of the Paper In a recent paper, included in the book THE FUTURE OF FISCAL FEDERALISM (Bird 1994), R. Bird challenged the generalized use of the normative perspective for the design of federal fiscal institutions and posed the question of whether stylized facts could effectively be established concerning the FEDERAL FINANCE issue. The lack of convergence between theoretical analysis and institutional reality stemmed -in Bird's view- from the fact that the former related to FISCAL FEDERALISM (a situation depicted by the principal-agent framework in which subnational access to source-based taxes should be restricted and intergovernmental grants generally conditional), whereas the concept of FEDERAL FINANCE rested on the assumption of negotiation among equals and in that different policy objetives might be jointly pursued by both national and subnational governments. The arguments of a no one set of stylized facts and of the need of resorting to institutional analysis deserve, in the light of the various kinds of federations one can identify, a thorough consideration by those involved in the study and design of intergovernmental fiscal arrangements. In this connection, nothing seems more sensible than P. King's assertion that '...a federation might be best understood in terms of the problems to which it has constituted a set of historically varying answers. If we understand the problems, the understanding of the structure more clearly follows.' (King 1993, p.9). Equally worthy are Bird's two lessons, included in the quoted paper and based on federal countries' uniqueness and organic unity features: a) policy recommendations (on fiscal relations) must be firmly rooted in the understanding of the underlying rationale of the existing intergovernmental system and its capacity for change if they are to be acceptable or, if accepted, succesfully implemented; b) the processes and

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procedures through which solutions are reached are more important than the precise nature of the technical solutions found to even universal problems in the different countries. Although the area of fiscal intergovernmental arrangements comprised both TAX and EXPENDITURE assignments among the various levels, the first of the abovementioned assignments was more often treated in the literature on Fiscal Federalism; however, spending allocation among jurisdictions became recently a fashionable theoretic and empirical field of research as important decentralizing processes took place not only in federal, but also in unitary countries. Let it however be said, as pointed out by T. Moe that the practice of expenditure decentralization must be somehow viewed as an agency relationship, or a principal-agent framework, in which the former (the national government) considers arranging a contractual agreement with the latter (compromise of transfers to the subnational government), in the expectation that the agent will perform actions (production and supply of certain goods and services) leading to outcomes desired by the principal. Let alone that the existence of an agency relationship is not 'per se' a guarantee that subnational governments will always choose to cany out actions according to the principal's desires and interests (unless appropriate incentives in the contract induce agents to do so), the FEDERAL FINANCE stance, based on the negotiation among equals, seems to serve better the purposes of expenditure allocation at least in 'real' federal countries. An adequate analytic approach could in this case be the so-called POSITIVE PUBLIC CHOICE model which, through the study of the state, the voting rules, the voters' behavior, the parties' politics and the bureaucracies, provides the basis for the analysis of non-market decision making processes. The Public Choice approach asserts, by postulating a selfish, rational and utility maximizing behavior, that individuals will mutually benefit from exchange, or quid pro quo, and even reach Pareto optima situations (Wicksell's unanimity rule). The Public Choice framework may help individuals living in federated countries, whose subnational governments are not only constitutionally endowed with taxing and spending powers, but that they also exercise them when dealing with the national level (either at the discussion of revenue sharing schemes or of any other fiscal arrangement concerning tax or expenditure allocation), to more easier judge governments' ACCOUNTABILITY as well as GOVERNANCE. If the emphasis of the analysis is placed now on the

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expenditure side one could expect that countries would follow Oates' decentralization theorem whereby 'each public service should be provided by the jurisdiction having control over the minimum geographic area that would internalize benefits and costs of such provision' (Oates 1972, p. 55); likewise, under the FEDERAL FINANCE perspective subnational governments would seek to strengthen their own revenue sources and to secure national transfers (shared revenue or grants) in order that their budgets could be financed. The above mentioned decentralization theorem is defended in the existing literature, Shah among others, on grounds of efficiency, accountability, manageability and autonomy principles (Shah 1991, pp. 3-4); but if subnational governments are more clearly ACCOUNTABLE when they have strong taxing powers (or exercise a degree of control over shared revenue and other transfers), not less important results for them to reach GOVERNANCE, understood as the necessary conditions for the act of governing to be performed with efficacy, legitimately and with social support. In others words, governance amounts to governments' capability to channel the interest of the community, to the interaction between governments and civil society and to the former's legitimacy (Tomassini 1993, p. 6). Let this introduction be finished by stating that the essay purports in the first place to shed light on the FEDERAL FINANCE performance of ARGENTINA, specially under the Stabilization and Convertibility Programs started in 1991 and, secondly, to provide some quantitative evidence from the fiscal experiences of two other federations: GERMANY and BRAZIL. In doing this, and resorting to Bird's paper inspiring this essay, one should bear in mind that although 'comparative approaches cannot yield clear prescriptions as to what should be done at any particular time in any particular country, it may be illuminating to see how different countries have dealt with similar problems to understand factors determining what has been done (and) to consider the resulting effects in different settings' (Bird 1994, p. 294).

II. Federated Government and Federal Finance Arrangements in Argentina. References to Brazil and Germany The three-tiered system in Argentina, consisting of a national government, 23 provincial governments, a federal district comprising the national capital and

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over 1000 local governments (or municipalities), formally depicts a federal politico-institutional setting. From a fiscal stance, however, the situation falls short of what one would expect of a 'truly' federal -as opposed to a formally federal- country; in Bird's words (Bird 1994, p. 295), truly federal countries are '...those in which both national and subnational governments not only have formally independent powers, but they also use them in practice' and, in the light of figures in tables below, it will be shown that Argentina is still a formally federal rather than a decentralized federation. When REVENUE BY LEVEL OF GOVERNMENT is considered, table 1 shows that the national level collects 75.03% of the total, followed by the provinces, with 21.17% and finally by local governments, with only 3.8% of total tax revenue. The explanation for such an important revenue concentration at the national level must be sought at the division of revenue sources among jurisdictions and at the percentage share of the three main fiscal instruments: income tax, value added tax and social security contributions, levied throughout the country on a national basis, let alone existing revenue sharing arrangements whereby provinces gave up part of their independent taxing powers. Although the real situation is better than the one depicted by table 1, as the existing revenue sharing system transfers to provinces about 50% of total tax proceeds, the provinces' and municipalities' inferior fiscal position still persists as not all major taxes are included within the sharing mechanism. The bulk of provincial revenue in Argentina, let alone shared taxes, springs from stamp duties, property and turnover tax, the latter now being under revision and subject to replacement in the near future; taxes on business and property (estates and cars) account in turn for the main part of municipalities' own collection, the rest being made up with provincial shared revenues. The FEDERAL FINANCE stance does not either seem to have won more room in Argentina, during the Stabilization Program under way, if one observes that almost all provinces signed the 1992 Fiscal Pact whereby subnational governments accepted diverse constraints to be imposed upon their constitutional taxing and budgeting powers in change of a guaranteed monthly minimum revenue transfer (floor) promised by the national government. Although this Fiscal Agreement aimed at forcing provinces not to hinder the working of nationally oriented stabilizing policies, it meant a setback -in terms of the revenue sharing system- as provinces 'accepted' to continue with fixed distribution coefficients instead of classical parameters included in preceding

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regimes (i.e. population figures, population density, per capita development gap, provinces' fiscal effort). The case of Germany, a two-tiered federation composed of a central government, 16 states or lander (this after the country was reunified in 1990) and more than 9000 local administrative units for the provision of local public goods, is a good example of an extremely decentralised system of government its basic features being lander's solely (and sometimes jointly) responsibility for extensively large spending functions and states' capability to influence the country's national policies. The term 'Consensual Federalism' better depicts the nature of German federal fiscal arrangements and relations, both between central and subnational governments (due to the role played by lander through the Bundesrat) and among the latter, '...as unanimity is required in areas in which states have to act together.' (The Economist May 21,1994) A comparison of table 1 with table 2 shows now that the German situation regarding revenue by government level, in terms of FEDERAL FINANCE, is considerably better than in Argentina specially when one observes that German local authorities practically triple the latter's municipalities share of total tax revenue (11.20% to 3.8%). On the whole, and in terms of revenue accruing to the central government and to lander, the situation also differs between both countries (75.03%-21.17 and 65.30%-23.50% for Argentina and Germany respectively) due to the working of the German revenue sharing system aimed at '...ensuring that each level of government has direct access to tax revenues more or less sufficient to finance its designated expenditures.' (Bird 1986a, p. 83); revenue sharing includes taxes on income and corporate profits, value added and business tax, whereas all three government levels conserve fiscal responsibilities for determined taxes out of which social security contributions, levied by the Federal Government and not shared with lander and local authorities, is by far the most important one, followed in this level by taxes on oil, tobacco and alcohol. Lander also retain constitutional powers for the collection of certain taxes on beer, car use, real estate transactions, wealth and inheritance, betting, gambling and fire protection; whereas local governments are entitled to levy taxes on (apart from the shared tax on business returns) real estates and some local consumptions, whose revenue adds to proceedings from fees or 'contributions' for the provision of infrastructure works. In the same line of analysis the case of Brazil, also a three-tiered federation of 26 states, a federal district and 4300 municipalities, is by far a more striking

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example of a 'true' federation (in the sense defined by Bird) since it represents, as pointed out by Shah (Shah 1991, p. 1) one of the most decentralized federations in relation to other developing nations. It should also be mentioned here that statiscal data from diverse sources show that almost two thirds of total tax revenue (62%) was collected in 1991 in Brazil by the states and the municipalities (Lagemann 1993, p. 81); in the case of states mainly from a general value added tax (ICMS), from taxation of inheritance and gifts (CMD), and from motor vehicles registration (IPVA); in the municipalities by levying taxes on services, urban properties, and retail sales of fuels and property transfers (Shah 1991, pp. 12-13). The allocation of TOTAL GOVERNMENT EXPENDITURE to different government levels, according to function and as a percentage of GDP, is shown for Argentina in tables 3 and 4 below. From table 4, showing data for year 1993, one can gather that spending followed (although less markedly) a centralization pattern similar to revenue, as more than 57% of consolidated public expenditures were controlled by the national government. This again highlights the differences with the performance of Brazilian subnational governments which altogether responded, according to 1989 figures given by Shah (Shah 1991, pp. 1 and 18), for more than 56% of total public spending. The mismatch between revenue and spending at various levels, common though it may result in all federations, is however larger in Argentina, as indicated by 1994 estimates for VERTICAL IMBALANCE in table 6: even if one considers the after transfers situation (in which all kinds of national transfers are accounted for) the provinces still compute a deficit next to 2%; with regards to Germany (table 7), both the before and after transfer cases show a situation more closer to balance than in Argentina (6% and 1% deficit, respectively, for 1990). It is in this respect worth pointing out that while the revenue sharing system (with constitutionally set distribution percentages for income and corporation tax) was -in Germany- partly responsible for the vertical balance coefficient's good performance, the same fiscal arrangement (now through the more flexible distribution of VAT) and the interstate equalization payments jointly accounted, in turn, for the success achieved in the field of horizontal fiscal balance. Finally, the decentralization feature of the Brazilian tax system reflects again in the estimates for vertical imbalance shown by Shah (Shah 1991, p. 18) as the -6.9 and -2.3 deficiencies between revenue and expenditure shares for federal and state governments, respectively, indicate that both these two levels can not meet their expenditure needs, contrarily to what evidence

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shows in the case of municipalities (9.2 percent points surplus). The considerable fiscal surplus run by Brazilian local governments is not only a consequence of their own tax raising powers, but also of the existing revenue sharing system (involving transfers from the Union to the states and municipalities, and from states to the latter), whereby they are assigned an important share of the main federal (income, industrialized products, rural territories and monetary gold operations) and state (the above mentioned ICMS AND IPVA) taxes. This feature places in turn a clear difference with local governments' financial situation in Argentina, dependent upon real estate taxes and contributions for services plus a share on provincial fiscal revenues. The EXPENDITURE assignment, if performed under widely accepted conceptual basis, entails following economic considerations as the ones prescribed by the above mentioned Oates's Theorem, and it therefore requires paying due attention to spatial externalities, scale economies and administrative and compliance costs. These economic principles offer guidance on how spending allocation among the various government levels should be performed; it is also conventional wisdom that the stabilization and distributional roles are the responsibility of the national government, due to the mobility of people, labor and capital accross political boundaries. J. Stevens (Stevens 1993, p. 331), among others, endorses with reserves the argument when suggesting that, let alone the national government's primary responsibility for distribution, the possibility can not be ruled out of subnational governments getting involved in a variety of redistributive policies in the fields of health, education and welfare. Stevens' contention seems though to be reflected in the case of Argentina, as percentages for social expenditure in table 5 (for 1993) highlight the role taken by subnational governments (both provinces and municipalities) in items such as Education, Health, Housing and Welfare, all of which have definite redistributive effects upon the existing income pattern. In particular, figures in table 5 show that, except for expenditure in social security and labor in respect of which the national government's function was almost exclusive (save for provincial security systems serving civil servants), there has been strong decentralizing policies whereby the provision of the above mentioned public goods were mainly placed on subnational governments' hands. Let it be pointed out that, according to table 5 and not considering Social Security, provinces and municipalities accounted in 1993 for more than 82% of the consolidated social expenditure.

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This situation appears even more marked in Germany (table 3, year 1989) where for some social expenditures (mainly Education and Housing) the quantitative performance of states and municipalities outweighed that of the federal government. The situation replicates in Brazil, in respect of social expenditure, as all government levels share responsibility for education, health and social welfare; however, services are rendered by states and municipalities through transfers in kind. It is in this context particularly worth mentioning that social welfare spending in Brazil primarily entails benefits in a local scope. The decentralist feature of German federalism appears again stressed in table 3, as spending percentages in Public Order and Safety, Primary Sectors, Fuel and Energy and Services show that all three government levels are present in most fields of expenditure activity, what has come to be known as 'joint tasks', 'responsibility sharing' in certain expenditure fields or 'cooperative federalism' (Bird 1986a, p. 87).

III. Vertical Fiscal Imbalance in Argentina The matter of the deficiencies between revenues and expenditures at each level of government (vertical fiscal imbalance) has received extensive treatment in the literature of federalism, as well as the attempts to measure them by calculating the so called coefficients of vertical balance (Hunter 1977). Whenever vertical imbalance is seen to exist, the need to close the 'fiscal gap' is usually dealt with in writings on FEDERAL FINANCE by asserting that all government levels'...must each have under its own independent control financial resources sufficient to perform its exclusive funtions' (Wheare 1963, p. 93). The advantages and disadvantages of the above suggested separate and independent revenue sources are analyzed by Bird (Bird 1986b, pp. 396-98) quoting, at the conclusion, U. Hicks' contention that basic problems of fiscal imbalance in a federation have never been resolved satisfactorily' (Hicks 1978, p. 194). In the same paper, Bird also suggested three other ways of closing the gap, apart from the recourse to traditional intergovernmental fiscal transfers whose main effect is the perpetuation of fiscal imbalances; those being: moving up expenditure to higher government levels, moving down taxes to lower government levels and raising existing taxes and lowering spending at the government level with deficit.

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Whatever viewpoint were to be held with respect to the concept of vertical fiscal imbalance, and of suitable ways to checking it, main criticisms fell upon attempts to measure the former in terms of the simple coefficient's estimate (between 0 and 1) and also on the form of deriving (from conventionally included and judgemental weighted fiscal variables) normative universal conclusions as to the forms of reaching 'fiscal balance'. This point is clearly raised by Bird by stating that "balance', as measured by the coefficient, cannot be regarded as an unequivocal good (Bird 1986b, p. 401); that is, similar fiscal arrangements among jurisdictions can vary in nature and degree when the analysis is not limited to a single country, and this may render international comparisons totally ineffective. In line with the above developments, one must agree with Bird in that quantitative concepts (like the vertical fiscal imbalance coefficient) are interesting tools for the analysis of intergovernmental fiscal arrangements, provided one is already endowed with sufficient institutional knowledge about the scenario considered so as to guarantee that implications derived from achieved data can be really sensible. Therefore, in the light of the preceding assertion, and as international quantitative comparisons of the coefficient fall beyond the reach of this essay (except for some general comments), figures in table 8 only refer to vertical fiscal balance in Argentina, from 1983 through 1993. Estimates in table 8 (represented also in the appendix) reveal a better subnational governments' performance (in terms of closing the gap), whenever the coefficient is allowed to exclude shared revenue and provinces' net borrowing from calculations (situation in which shared revenue is equated to taxes collected by provinces) and conditional and unconditional grants are the only transfers received from the national government. The inclusion of borrowing slighdy reduces the coefficient's value (Ve), the consequent enlargement of the fiscal gap being explained now by provinces' major dependence on revenue other than their own fiscal resources; the inclusion of shared revenue in the estimation reduces by half the coefficient value (Vce); this clearly reflects that provinces really regard shared revenue as theirs when they estimate their spending needs and therefore Vce is not actually yielding a true picture of the fiscal gap in Argentina. One must recall that the common meaning assigned to the coefficient is that a value of 0 implies absolute national control over subnational governments

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whereas 1 in turn implies that subnational governments are totally autonomous in their decision making. By analyzing the means of coefficients (in table 9), one cannot definitely assert that Argentina experienced considerable progress in the field of vertical fiscal balance, as figures denote in general a cyclical behavior throughout the period analyzed, more marked in the case of Ve but also present in the estimates of V and Vce; however, maximum mean values were achieved in the period 1991-93, with V=0.84 and Ve=0.81, in coincidence with the Stabilization Program. In this connection, the success of the national government in improving the tax administration system, and in subtantially reducing the level of evasion, was reflected in the collection of major taxes included in the revenue sharing system (income tax and vat), and caused V and Ve to rise. Whether this will be a sustained trend, or another cycle, remains yet to be seen. Very interesting and important implications emerge from statistical data when the matter under analysis is viewed from a different angle, as table 10 below shows. In this case, vertical fiscal imbalance is considered not with regard to a unique set of provinces (as done above), but with respect to a set of regions each embodying a number of provinces. By so doing, one immediate realizes that the Pampeana Region (including the three most richest provinces in the country), and Cuyo to certain extent, are the only two in which the 'fiscal gap' is relatively small. In the rest, and specially in the NEA and NOA regions, values for the coefficient not only stress their important dependence on shared revenues (Vce), but also on borrowing (Ve), owing both to the limited fiscal capacity to generate tax revenue (from either source) and -in cases- to the desproportionate public spending incidence in provincial GDP. As a final comment, concerning rough international comparisons, a quick look at 1988 Brazilian figures for two versions of the coefficient (Ve=0.89 and Vce=0.83) renders now evidence totally compatible to what one would have expected of a country in which state and local government levels really exercised their independent taxing powers. The average oefficient's values for Germany (Ve=82 and Vce=0.85) can also be taken as an indication of the country's success in closing the fiscal gap even though, similar to the Argentine case (but in a much smaller level of importance), figures for vertical balance are concealing regional fiscal differences among states (horizontal fiscal inbalance)

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that are in part being dealt with by the revenue sharing system, but mainly through interstate equalization payments, as was mentioned above.

IV. Conclusions Let it be recalled that this essay purported to gain some insights into the performance of Argentina in relation to the FEDERAL FINANCE framework, and to match it (when possible) with that of two other federations: BRAZIL and GERMANY. As expected, quantitative evidence regarding EXPENDITURE and TAX ASSIGNMENTS revealed that Argentina is still a 'formal' federation rather than a 'true' one, as compared to the other two countries, in spite of an appropriate federal institutional setting (in terms of constitutional provisions) endowing subnational governments with independent taxing and spending powers. The above assertion amounts to saying that so far fiscal relations between national and subnational governments are better depicted in Argentina by the principal-agent model of analysis rather than one in which effective negotiaton among equals lends support to alternative approaches, as for example the public choice model. As for vertical fiscal balance, the cyclical behavior of coefficients reflects the provinces' great dependence on the performance of the revenue sharing system. This lends support in turn to the argument that subnational governments should strive for exercising more actively their negotiating powers as the design of fiscal intergovernmental arrangements, on the basis of the FEDERAL FINANCE approach, requires subnational governments really to practice their formal independent fiscal powers. Also, marked regional disparities in terms of economic and of fiscal macroeconomic performance makes difficult to view the issue of vertical balance as if provinces formed an homogeneous set, the rationale underlying this argument being that Argentina is so far lacking more consistent and strong fiscal equalizing arrangements, apart from existing transfer mechanisms. Let this reference to Argentina be finished by simply saying that the country has now a 'unique' opportunity, in this field, to carrying out reforms to improve traditional federal fiscal arrangements, as the recently ammended Constitution requires that a NEW REVENUE SHARING SYSTEM be established before

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the end of 1996, by a Congress law, to be approved in with special majorities in both chambers and in which the following principles will be mandatory: automatic revenue distribution to provinces, relationship between distribution to provinces and provinces' services and functions and priority to an equal development level, and quality of life and opportunities all throughout the country. The truly federal feature, in fiscal terms, is well marked in Brazil as -according to available and quoted figures- states and municipalities account for the major part of both revenue and spending and, as stated by Mathews (Mathews 1980, p.10), this gives government levels the chance '...to command the financial resources necessary for them to carry out their expenditure responsibilities and to be held accountable for both spending and taxing decisions'. As for Germany, spending decentralization (towards lander and local authorities) as well as the wide range of expenditures that are lander's solely or joint responsibility (with the federal government) is not accompanied by the decentralization of revenue, whose collection basically rests on central government's hands. In this connection, some studies focusing on the future of German fiscal federalism would assert that giving states some independent tax-raising powers would help in shifting the country away from the rigidities of consensus towards a more competitive version of federalism (The Economist May 21,1994, p. 31). It is however worth pointing out that the revenue sharing mechanism in Argentina -despite its concentration effect upon the collection of the tax- is seen to be playing in the direction of vertical fiscal balance and, due to the possibility of it also embodying equalizing features (like in Germany and as required by the new 1994 Constitution), this arrangement can also help to lessen horizontal fiscal imbalances.

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Bibliography AGfflON, Philippe; BOLTON, Patrick (1989): The Financial Structure of the Firm and the Problem of Control, in: European Economic Review, Vol. 33, pp. 286-293. BERGLÖF, Erik (1990): Capital Structure as a Mechanism of Control: a Comparison of Financial Systems, in: M.Aoki et al. (eds ): The Firm as a Nexus of Treaties, London: Sage Publications, pp. 237-262. BERTERO, Elisabetta (1994): The Banking System, Financial Markets, and Capital Structure: Some new Evidence from France, in: Oxford Review of Economic Policy, Vol. 10, pp. 68-78. BORIO, Claudio E.V. (1990): Leverage and Financing of Non-Financial Companies: An International Perspective, in: BIS Economic Papers, No. 27, May. DAVIS, E. Philip (1994): Banking, Corporate Finance, and Monetary Policy: An Empirical Perspective, in: Oxford Review of Economic Policy, Vol. 10, pp. 49-67. DEUTSCHE BUNDESBANK (1994): Eigenmittelausstattung der Unternehmen ausgewählter EG-Länder im Vergleich, in: Monatsberichte 10/1994, pp. 73-88. DIMSDALE, Nicholas (1994): Banks, Capital Markets, and the Monetary Transmission Mechanism, in: Oxford Review of Economic Policy, Vol. 10, pp. 34-48. EDWARDS, Jeremy; FISCHER, Klaus (1994): Banks, Finance and Investment in Germany, Cambridge: Cambridge University Press. FRANKS, Julian; MAYER, Colin (1994): Corporate Control: A Comparison of Insider and Outsider Systems, Working Paper, London Business School. FUKAO, Mitsuhiro (1995): Financial Integration, Corporate Governance and the Performance of Multinational Companies, Washington, D C . : The Brookings Institution. HART, Oliver (1995b): Firms, Contracts, and Financial Structure, Oxford: Oxford University Press. JENSEN, Michael C. (1988): Takeovers: Their Causes and Consequences, in: Journal of Economic Perspectives, Vol. 2, pp. 21-48. JENSEN, Michael C.; MECKLING, William H. (1976): Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, in: Journal of Financial Economics, Vol. 3, pp. 305-360. LAUX, Christian (1995): Kapitalstruktur und Verhaltenssteuerung, Diss. Frankfurt a.M.. MANNE, Henry (1965): Mergers and the Market for Corporate Control, in: Journal of Political Economy, Vol. 73, pp. 110-120. MAYER, Colin (1990): Financial Systems, Corporate Finance, and Economic Development, in: R.G.Hubbard: (ed.): Asymmetric Information, Corporate Finance, and Investment, Chicago: The University of Chicago Press, pp. 307-332. MAYER, Colin ALEXANDER, Ian (1990),: Banks and Securities Markets: Corporate Financing in Germany and the United Kingdom, in: Journal of the Japanese and International Economies, No. 4, pp. 450-475. MYERS, Stewart C. (1977): Determinants of Corporate Borrowing, in: Journal of Financial Economics, Vol. 5, pp. 147-175.

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MYERS, Stewart C. (1984): The Capital Structure Puzzle, in: Journal of Finance, Vol. 39, pp. 575-592. PROWSE, Stephen (1995): Corporate Governance in an International Perspective: A Survey of Corporate Control Mechanisms Among Large Firms in the U.S., U.K., Japan and Germany, in: Financial Markets, Institutions & Instruments, Vol. 4, pp. 1-63. RAJAN, Raghuram G.; ZINGALES, Luigi (1994): What Do We Know about Capital Structure? Some Evidence from International Data, NBER Working Paper No. 4875, Cambridge, MA. RUTTERFORD, Janette (1988): An International Perspective on The Capital Structure Puzzle, in: J.M.Stern/D.H.Chew (eds.): New Developments in International Finance, New York: Basil Blackwell, pp. 194-207. SUSSMAN, Oren (1994): Investment and Banking: Some International Comparisons, in: Oxford Review of Economic Policy, Vol. 10, pp. 79-93.

Comment on Reinhard H. Schmidt's and Marcel Tyrell's Paper

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"Financial Systems and Financing Patterns". Comment on Reinhard H. Schmidt's and Marcel Tyrell's Paper. The authors focus the investigation in the different types of financial systems (dominated by capital markets or by banks). They distinguish anglo-saxon countries like the United States, the United Kingdom and Canada, from continental European countries and Japan. Different questions are treated: provision of capital to finance investments, corporative governance, balance sheet analysis, in special cash flows of non financial companies, equity and leverage ratios, external and internal sources of funds, in relation with the country, enterprise size, and management (corporative governance with inside and outside control). They present some figures extracted from Mayer(1990), Edwards/Fischer (1994), Deutsche Bundesbank (1994), Rajan/Zingales (1994), Fukao (1995), Price Waterhouse- Franks/Mayer (1994) and Sussman (1994) who present in many cases contradictory or insufficient evidences. For instance, 3 papers showed significant differences in the financing patterns of firms of different sizes. Others did not find conclusive evidence. By making a detailed revision of the articles, the theory and country analysis, they conclude that it makes sense to distinguish different groups of countries to determine an ideal financial system which better provides the funds for real investments. They conclude at the same time that there is a convergence between both characterized systems. Taking into account the example of the USA case, that we still must look for a better control of corporative organizations, where reforms or changes must be strong and not gradual. My commentaries are first of all focused on the usefullness of this analysis. From a Latinamerican view I do not see how this classification could be applicated to our analysis because we see all industrialized countries having a strong finance system, either capital or bank dominated. Different financing patterns are more related to stability, as the authors also mentioned, and

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financing systems are indeed converging with globalization and block agreements. Reglamentations are made for finance services in GATT's environment, and they include not only banking, but insurances, mutual funds and other financial instruments to guarantee regional freedom (SELA 1994). In our context, studies of banking optimal size and efficiency related to the average performance for regulatory reasons are of present interest. Basilea principles to preserve banking efficiency are adopted by restructuring countries in a worldwide connected system. At the beginning of this year Argentina felt the impact of the Mexican devaluation, harder than other countries did. This accelerated the restructuring processes and demonstrated evidence of our economic weakness that was built on foreign capital flows. The corporate governance analysis is very interesting and useful for all countries. More and more the microanalysis is on the top. Theories of optimal enterprise administrations are very important, not only to improve individual firm gains, but also to the welfare of the whole country, considering optimal source allocation. Along with globalization, competition increases and services become better and cheaper, but the stability for developing countries is difficult and they need to build up a reliable "safety net" to determine which assets and activities should be guaranteed. We have much to learn from the restructuring processes of transitional countries of ex-URSS (Borish, Long, Noel 1995), from asiatic countries, and from regional agreements such as European Comunity. Policy harmonization and lessons from regulations are the first duty.

Bibliography of References SISTEMA ECONÓMICO LATINOAMERICANO (SELA) (1994): "Reformas de los sistemas financieros en América Latina" N 40, julio/septiembre, Venezuela. BORISH, M., M. LONG and M. NOEL (1995): "Restructuring Banks and Enterprises. Recent Lessons from Transition Countries", World Bank Discussion Papers, N 279.

Agricultural Policy, Foreign Trade and Technological Change

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Michaela Hoffmann and P. Michael Schmitz

The Common Agricultural Policy of the EU and its International Implications Introduction The Common Agricultural Policy of the EU considerably contributes to the high worldwide level of trade distortions. For a long time the EU has been critisized for its world price depressing and destabilizing effects. However, it was not until international pressure for reform became stronger and stronger and the budgetary costs of the CAP grew higher and higher, that the EU started to realize that things could not go on as they did over the last decades. This paper aimes at describing the importance of the EU in international food trade, analyzing the influences of its agricultural policy on world market conditions and the welfare of third world countries. New developments like the CAP reform and the GATT agreement are reviewed, and the potential changes they bring about are discussed.

Position of the EU in World Food Trade World food trade has been characterized by a vast dynamic. Between 1961/65 and 1976 the volume index of trade in agricultural products rose from 100 to 154, that is at a rate of 4% p.a.. The figures of trade value are much more striking: The value index of trade in agricultural products rose from 100 in 1961/65 to 344 in 1976 which equals a rise of 12% p.a. 1 Although agricultural trade growth slowed down in the 80s, with a value of

1

The figures for trade in food (excl. fish) are slightly different: Between 1961/65 and 1976 the volume index of trade in food (excl. fish) rose from 100 to 169, that is at a rate of 4.9% p.a.. The value index of food trade (excl. fish) rose from 100 in 1961/65 to 394 in 1976 which equals a rise of 13.3% p.a. The data comes from the FAO trade yearbook 1976. Trade in food (excl. fish) now has a value of approximately 240 billion US$ and accounts for 6.3% of total international trade (FAO trade yearbook 1993).

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more than 350 billion US$ 2 , total agricultural trade accounted for approximately 10% of total international trade. The EU share in international agricultural trade underwent dramatic changes over the last decades. In 1970 EC-6 accounted for about 29.8% of agricultural imports and 22.0% of agricultural exports. In 1993 these figures had changed to 41.7% and 44.5% (EC-12), respectively. The EU switched from being a net importer to a massive net exporter of important food stuffs (Table 1). Prominent examples are beef, pork, dairy products, and wheat (Roningen, 1993, pp. 9-21). This contrasts sharply with the decreasing share of developing countries in world food exports and their growing import needs (Figure 1). Table 1: The Development of EU Trade in Important Agricultural Products Exports Mill, t

Imports Mill, t

Product

1972-74

1992/93

1972-74

1992/93

Cereals

9,4

33,5

25,0

4,3

Wheat

6,2

22,5

5,8

1,5

0,5

16,6

2,0

Corn

Exports 10001

Imports 1000 t

Product

1971

1991

1971

1991

Beefand

94

1.027

414

216

Veal

Source: The data comes from TOEPFER INTERNATIONAL, 1993; STAT. JB. ELF 1975, pp.373,385; STAT. JB. ELF 1992, pp.471,479.

2

There has been a decline from the maximum value of 383.1 billion US$ in 1992 to 351.2 billion US$ in 1993 (total agricultural imports cif; FAO trade yearbook 1993).

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Figure 1: The Distribution of World Food Trade, 1961-64 and 1983-86 1961 - 6 4

Exports

1983 - 86

' } Centrally planned Europe j Developing economies 1961 - 6 4

Imports

1983 - 86

Industrial market economies

Source: Tyers/Anderson, 1992, p.21.

The explanation does not lie in slow production growth in developing countries. In fact, food production grew substiantially more in these countries than in developed countries. But whereas consumption stagnated in industrialized countries, there was a rapidly growing demand for food in developing countries (Tyers/Anderson, 1992, p. 22). Still another striking feature is the development of agricultural prices: Not only was there a decline in real food prices over the last century of about 0,5% p.a. (Tyers/Anderson, 1992, p. 20), but prices also fluctuated substantially from year to year around the declining trend. What was the role of European Agricultural Policy in this development?

The Common Agricultural Policy The Common Agricultural Policy (CAP) was established in the crop year 1967/68. It started with the markets for crop products and covers now more than 90% of EU agricultural production value (Henrichsmeyer/Witzke, 1994, pp. 548-550). The CAP can be regarded as the first attempt of the newly created European Economic Community (EEC) to formulate common political goals and instruments and was meant to act as an engine for further integration of the Western European Countries. Europe still stood under the impression of food scarcity after World War II, so food security was the most important aim for the politicians. The objectives of the CAP were

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already defined in Article 39 of the Treaty of Rome in 1957 and can be summarized as follows (USDA, 1990, p. 3): • Increase agricultural productivity through technical progress and optimal utilization of labor • Ensure a fair standard of living for the agricultural population • Stabilize markets • Guarantee regular supplies • Ensure reasonable prices to consumers. It would be an exhausting task to describe all market regulations in detail, so only the most important policies will be presented. Main instruments of the CAP are price protection measures like import levies, export restitution payments and the so-called market intervention, i.e. state organized buying action for stockholding when the market prices fall below a certain politically acceptable level. So, trade restrictions and internal measures are combined. Besides, the markets for sugar and milk are restricted by quotas. Administered prices like the target, the threshold, and the intervention prices are fixed in ECU at a much higher level than actual world market prices. To avoid sudden massive price falls in national currency when a currency revalues, a complicated agricultural monetary system was established. All instruments had to be adjusted and changed once in a while, but the basic mechanisms are still at work.3 Since the beginnings of european integration agricultural production increased much more than consumption, leading to ever increasing surpluses. Growing degrees of self-sufficiency soon resulted in surpluses, especially of cereals, sugar, and milk products. Only oilseeds and grain substitutes are imported in significant quantities as well as tropical products (Henrichsmeyer/Witzke, 1994, p. 573). Whereas producers are the winners of those policies, the economy as a whole has to face welfare losses. They result from a loss in specialization because of excess usage of resources in agriculture as well as losses in gains from trade because of the artificially high consumer prices.

3

Other policies like structural policy shall not be presented here.

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How Does the CAP Affect World Markets? Effects of levies and subsidies on price levels If a countiy imposes levies on agricultural imports and pays subsidies on agricultural exports, the products involved become more scarce in the internal market and as a rule the price will rise. As a result, domestic demand is dampened, domestic supply stimulated, imports curbed, and exports expanded. The more elastic the reaction of supply and demand to the policy intervention, the more pronounced will be the volume effects. If a trade policy of this kind is applied by a small country, it has no impact on the level of prices in the world market. In the case of a large country or group of countries such as the EU, by contrast, a change in the volume of trade also induces an adjustment in the world market price. Import levies and export subsidies depress world market prices, because the artificial distortion of trade flows makes the goods less scarce outside the EU. In figure 2 the EU is shown as an importer. With a tariff of z the world market price will fall to Pwl and the import volume will be reduced to q l . The same effects can also be shown for the EU as an exporter applying an export subsidy. • • • • • •

This price reduction effect is all the greater the more elastic are supply and demand in the EU, the more inelastic are supply and demand outside the Union, the higher the levies and subsidies in relation to the world market price, the higher the share of the EU in the market and the more price responsive the production-tied technical progress is.

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Figure 2: Effect of an Important Tax on World Markets P ES

ID,EU

qj

q

q°

It is not solely agricultural protection within the EU that is depressing the world market prices of many agricultural products; they are also being affected by the trade policies of other industrial countries, some of which use similar instruments and some of which adopt a different approach (such as Export Enhancement Program and countercyclical import quotas in North America and Japan). Nevertheless, there can be absolutely no doubt that the EU has built up one of the highest average levels of protection in the world, measured in terms of nominal protection rates, and therefore bears a substantial part of the blame for the depression of prices on the world market. However, any assessment from the point of view of non-member countries would be incomplete without first examining a further aspect. Price stability

effects

The establishment of variable import levies and export subsidies considerably narrows the scope for price fluctuations within the EU itself. Internal prices can only move in the narrow band between intervention prices and threshold prices, with the result that changes in scarcity on the world market do not lead to price adjustments within the Union. This artificial price stability in EU markets in turn triggers reactions on the part of market participants. In particular, the cost of the risk borne by suppliers decreases, as there is less need to spread the risk by diversifying production. The intensity and specialization of production therefore increase and the stabilization of internal prices generates a further incentive to raise

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production in addition to the stimulus provided by price support. This dual effect has undoubtedly contributed greatly towards the production of surpluses in the EU. Like price support, price stabilization in the EU naturally also has repercussions on international markets in agricultural goods, although the link between trade restrictions and price uncertainty in the world market is not as simple and clearcut as in the case of the price level. Despite this, literature on the subject has long relied exclusively on the elasticity argument, whereby the price-stabilizing isolation of one part of the market leads to a reduction in the elasticity of demand and supply in the remainder of the market, so that autonomous fluctuations in supply and demand cause sharper price movements. According to this argument, the world market price is therefore undoubtedly destabilized as a result of the Community's foreign trade policy. Figure 3 shows that with the totally inelastic export supply of the EU the world market prices vary significantly more (Pw3Pw4) with demand shocks than in a situation in which the EU would adjust to scarcity or excess supply in world markets (Pwl-Pw2). The resulting price instability is even increased in relative terms when the higher guaranteed prices in the EU that lead to a higher export volume of the EU is taken into account. Figure 3: Price Stability Effects of CAP

q

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In reality, however, it is not solely the level of elasticities or their adjustments that determine the result of such a policy of delinking, but also a series of other factors which influence the outcome in widely differing ways: • the choice of the instrument of protection, • level of protection, • the protectionist country's shares of production and demand, • the nature of stochastic disturbances (additive, multiplicative), • the origin, scale, and distribution of stochastic disturbances, • the correlation of disturbances, • substitution effects on the supply and demand sides, • the way in which price expectations are formed, • differences in the level of information of market participants, • adjustment in the behavior of private holders of stocks, • the form in which public stockpiles are held. Hence, in theory at least it is not possible to make a clear pronouncement about the influence of EU agricultural policy on stability on the world market, but empirical studies suggest that its destabilizing effects outweigh its stabilizing effects. Apart from the elasticity argument, two aspects in particular militate towards that conclusion: First, isolating the EU market through the stabilization of internal prices destroys the incentives for the private sector to hold stocks and engage in futures transactions within the EU. Possible additional stockpiling by foreign stockholders, particularly in developing countries, cannot as a rule fully offset the loss of domestic stockpiling because of the higher marginal costs involved. For that reason and on account of the narrowing of the futures markets, the realized carry-over volumes in the world market diminish and trade restrictions in the form of variable import levies and export subsidies destabilize the world market. This aspect lends powerful support to the traditional view. Secondly, an analysis of the EU cereals market has shown that stockpiling by state agencies in the EU has also had a destabilizing effect, because fluctuations in Community production have been partly externalized and the official agencies' carry-over policy has not been geared towards the cereal futures market. It is not improbable that such a state stockpile policy will be applied to other EU products in surplus, so that this too has a destabilizing effect on the world market.

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Effects on the structure of prices Widely differing values are obtained if one calculates and compares the nominal protection rates afforded to EU farm products, that is to say the difference between internal and world market prices in relation to the world market price. A comparatively high level of protection has been built up for dairy products, sugar, beef, and cereals, whereas relatively low rates apply to fruit and vegetables, vegetable fats and animal feed high in protein and carbohydrates, for example. This distortion of the internal price structure has diverted factors of production to the highly protected parts of agriculture, where they have caused surpluses; less protected sectors show deficits that must be offset by increased imports from non-member countries. The counterpart to this price distortion is to be found in the world market, though with the signs reversed. Here the prices of dairy products, sugar, beef, and cereals fall in relative terms while those for other products with low EU protection rates rise. For example, cereals production becomes less advantageous for the poorer developing countries, whereas the export of animal feed increases in importance. In extreme cases, entirely new markets may emerge, such as the world market in tapioca, which for a long time consisted almost exclusively of Thailand's exports to the EU. On the other hand, regional markets may disappear altogether as a result of a protectionist policy. For example, this would be the case if the exporting country's transport, marketing, and insurance costs were no longer covered owing to artificially low world market prices. This appears to apply to many countries of Africa. Hence, the impact of the Union's agricultural policy on the structure as well as on the level and stability of prices is to blame for the distortion of world trade flows, and the fact that as a consequence the advantages of the international division of labor cannot be fully exploited. Evaluation through the eyes of non-members An evaluation of the Common Agricultural Policy from the point of view of non-member countries must be based on all three price effects. However, it is the effect on the level of prices that is often given prominence; within the framework of applied welfare economics, policy-induced price reductions on the world market mean losses in producer surplus and increases in consumer surplus, provided corrections in world market prices are also allowed to

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apply in the internal market. A country that exports goods both before and after the introduction of EU protection therefore suffers a welfare loss as a result of the artificially low world market prices. By contrast, a country that was already importing goods before the introduction of external protection by the EU will reap a welfare gain. This supposed advantage for importing countries is not unqualified if one assumes, as is in fact the case, that many countries that are now importers were themselves traditionally exporters before the introduction of farm protection by the EU and many other industrialized countries. In these circumstances, it is highly probable that the loss in producer surplus outweighs the gain in consumer surplus, so that even countries that are now importers have suffered a net welfare loss as a result of the Community's policy. This line of argument is strengthened if one also considers the effect on price stability. If it is assumed that price risks on the world market adversely affect the welfare of the trading nations owing to risk aversion and the danger of the misallocation of resources, both exporting and importing countries must be expected to suffer a welfare loss as a result of the policy's impact on price stability. Developing countries especially have to carry the burden of price instability because of their low income level and the high percentage share of food in total expenditures. This destabilizing effect is far from insignificant, and if it is ignored it can distort the evaluation, especially as far as importing countries are concerned. Finally, account must also be taken of the effect on the price structure, which distorts the patterns of production and consumption in the nonmember country in question. As can be demonstrated easily in the twoproduct case with the aid of production possibility curves and indifference curves, a change in world market price ratios induced by the EU leads to an overall welfare loss for the country, irrespective of whether the goods in question are imports or exports if only this effect is considered. Hence, when all three price effects are taken into consideration, the frequent assertion that importing countries would automatically benefit from an EU price support policy needs to be modified. There are even grounds for holding that both exporting and importing countries are among the losers. A final counterargument is that the EU has concluded a series of preferential trade agreements with developing countries and hence contributes to increasing their welfare. Indeed, evidence of such gains can be found for individual countries. For example, the sugar and beef protocol under the

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Lomé Convention with the countries of Africa, the Caribbean, and the Pacific (the ACP countries). Nevertheless, the EU's perfect export subsidy system ensures that additional, preferentially treated imports from ACP countries are re-exported, so that roundabout transactions arise and the potential downward pressure on prices is diverted from the EU market to that of the rest of the world. First, this needlessly ties up valuable transport resources, and secondly all countries that do not enjoy preference suffer discrimination. In some cases, therefore, EU preferential trade agreements may indeed produce welfare gains, but overall they cannot offset the disadvantage for non-member countries created by EU protection. Preferential trade agreements are also problematic from the point of view of resource allocation, as they discriminate not only between recipients and nonrecipients, but also between countries within the recipient group. An international comparison shows that the recipient countries are not always the countries most in need. Often they are former colonies or have other special relationships to the donor countries. What does all that mean for welfare, especially in poor countries? There has been a number of analysis published concerned with how CAP, or more generally agricultural protection affects welfare in certain regions or the world as a whole. In a recent study (Hartmann, Hoffmann, Schmitz, 1994) the world wide welfare effects generated by agricultural protection in the EU are shown to sum up to a loss of more than 9.35 billion US$. It is interesting to see that the EU itself has to bear the largest burden. Of course producers are favored by CAP, but their gains are more than compensated by losses in consumer welfare and budget outlays. The U.S.A. would also be a winner of CAP liberalization (+413.1 million US$). Because different studies apply different approaches it often is difficult to compare their results. As far as developing countries are concerned there are great differences in the calculated welfare changes (Hartmann, 1991, pp. 185-192). Most partial models that often focus on just one or only a few products see welfare losses for the developing world when agricultural protection in the EU or OECD countries is abolished totally. Sectoral and

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general equilibrium models draw a more diversified picture.4 This is especially true when a large range of products is included in the analysis. National policies in developing countries are also adapted to the new world market conditions and inter-industry incentives are taken into account. From this position the developing world as a whole is that of a winner. Latin America can be considered as the major winning developing region, whereas Africa might be considered a loser of a total liberalization of world agricultural markets. If the withdrawal of macroeconomic distortions and the price stabilizing effects of liberalization were included in the models, a better situation might arise for Africa as well.

New Developments in EU Agricultural Policy With the ever increasing budgetary burden caused by agricultural protection5, growing international pressure for liberalization for example in the ongoing GATT negotiations and decreasing sympathy in the public for a policy that more and more leads to environmental problems, reform could not be avoided any more. So, after years of discussion about the ways to reform and the necessary scale of policy changes, a fundamental reform was agreed in May 1992. The reform featured reduced support prices and, notably, the introduction of direct compensation payments and mandatory set-asides for large farmers which are also compensated. That means the EU began to decouple official support from production levels by farmers. Still there is no total decoupling because to recieve the direct payments farmers are obliged to cultivate the land with certain products. The reform does not include all agricultural markets, but with cereals, oilseeds, and protein plants on one hand, and meat on the other, a major part of EU production is affected. On average the support price for cereals will be reduced by approximately 30% over 3 years (from 1992/93 to the year 1995/96). The reduction in threshold prices will be more moderate so that even intracommunity preference will increase. The direct compensatory payments are

4

5

In the study of Hartmann, Hoffmann, Schmitz (1994) a welfare loss of 690 million US$ is calculated for the world excl. EU and the U.S.A.. Because there is no further disaggregation, the situation of developing countries cannot be shown in isolation. Budgetary costs amounted to 22.137 billion ECU in 1986 and 36.465 billion ECU in 1994 alone in the so-called guarantee section of the European Agricultural Guidance and Guarantee Fund (EAGGF) (Stat. Jahrbuch fur Ernährung, Landwirtschaft und Forsten, 1987 and 1994). The market regulations for cereals, oilseeds, sugar, milk and beef are the most expensive in budgetary terms.

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calculated by multiplying the average yield per hectar of the years 1986-90 with a so-called base amount that is a constant amount for oilseeds, but grows over the years for cereals. If the fixed regional base area is exeeded the payment will be reduced proportionally and in the next year the mandatory set-aside will be raised. Small farmers are not obliged to set aside in order to recieve compensation payments for the price reductions. Support prices for beef will be cut by 15% and intervention will be reduced substiancially. To compensate for the losses direct payments will be granted per animal up to a fixed regional number. There is also an extra premia for extensive animal farming. This description of the main elements of the CAP reform leaves out all the details that make the reform so complicated and control intensive. However, recent experience shows that it takes farmers and administrators a lot of time to implement and control the changes brought about by the reform. Also, from a scientific point of view there are several problems with the 1992 reform. (Koester/Taubadel, 1992) If we focus on the changes in world market conditions caused by the reform several statements can be made: CAP reform will contribute to an increase in world market prices for many important internationally traded agricultural products. This can be concluded by reversing the analysis of the former chapters and is also confirmed by many studies. In the study of Hartmann, Hoffmann, Schmitz (1994, table 8b, p. 312) for example world market price increases of 25.1% to 32.1% for wheat, 18.5% to 26.7% for coarse grain, 6.2% to 8.2% for oilseeds (excl. soybeans), and 3.0% to 4.3 % for beef are calculated. The higher the expected degree of decoupling the higher is the percentage increase in world prices. Because the mechanism of variable import levies and export restitution payments is still in action, market price instability will not be reduced considerably. However, the increase in the price level will make relative price variability decrease. As mentioned above, reform concentrates on certain products leaving policies in other markets unchanged. Important markets like sugar and milk are either not covered by reform or only touched to a minor degree. So the distortions in the price structure remain or get even stronger.

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Reform will reduce the EU cereal production because intensity will be adjusted downward and set-aside schemes will be put in place. The costs of meat, egg, and poultry production will be reduced by decreasing prices of feed grains. This may be an incentive to expand production. Depending on their trade status some developing countries may face a deterioration in their position because main export goods are excluded from reform, whereas main import products become more expensive (Hartmann, 1995, p. 409). Developing countries that depend to a considerable degree on food aid fear a reduction of aid flows because of the reduced production in the EU (Koester, 1994, p. 4). Countries that profit from trade preferences see them eroded. Calculated welfare changes for developing countries as a whole will be negative. Depending on the world price transmission elasticity the losses will amount to 0.35 billion US$ (with full price transmission) and 2.46 billion US$ (with zero price transmission). Whereas Latin America, Asia, and Eastern Europe can gain, Africa will be the big loser of the CAP reform (Hartmann, 1995, pp. 415-416). The second very important change in policy conditions comes from the GATT agreement. After eight years of negotiations on April 15, 1994 representatives of more than 120 member countries signed the final document in Marrakesch. The General Agreement on Tariffs and Trade (GATT) was established in 1948 to put international trade on an orderly and solid basis to benefit from the merits of international trade. It is governed by the principle of non-discrimination and reciprocity of tariff cuts, and other reductions in protection. Over the decades massive liberalization in trade with manufactured goods was achieved, but agriculture remained largely protectionist. Right from the beginning of GATT exceptions from general principles highlighted the special role of agriculture in politics. Export enhancing measures were not all rejected, but 'should not be applied in a manner which results in that contracting party having more than an equitable share of world export trade in that product'(Art. XVI). Import restrictions that are 'necessary to the enforcement of governmental measures which operate to restrict the quantities of the like domestic product to be marketed or produced' or 'to remove a temporary surplus of the like domestic product...' (Art. XI) are allowed. It was only in the eighth round of GATT

T h e C o m m o n A g r i c u l t u r a l P o l i c y o f t h e E U a n d its I n t e r n a t i o n a l I m p l i c a t i o n s

247

negotiations that agriculture was put on center stage. This was especially true for the EU and the U.S.A. which advocated totally different positions with the U.S.A. wishing to liberalize agricultural trade as much as possible, and the EU trying to avoid extremely large cuts. The agreement finally reached in 1994 can be seen as a great step forward, but major exporting countries are still disappointed. Internal protectionist measures have to be cut by 20% over the next 6 years. The EU was able to succeed with excluding the direct payments from being cut because they were considered as decoupled payments and therefore put into the 'green box'. All import restrictions as quotas and variable import levies have to be converted into equivalent tariffs ('tariffication') and cut by 36% altogether over the next 6 years. In each product category tariffs must be reduced by at least 15% (EU 20%). Because the base period is 1986-88, a time when protection was extremly high in the EU, even after the 36% cut there still exists a high degree of protection.6 Special tariffs are allowed if the world market price falls under a certain fixed level. Minimum market access for foreign products of 3% first and 5% later has to be guaranteed in each product category by a further reduction in tariffs. How this is implemented is important in regard of how emerging rents will be allocated. Export restitution payments have to be cut by 36% and the export quantity by 21% over the next 6 years, too. Generally, every product category has to meet this requirement, but a certain aggregation is possible for cereals and milk products. An agreement was also reached for oilseeds. Planted area was restricted to approximately 5 Million hectars, the average of 1989-91, and there is a mandatory set-aside. The least developed countries are subject to special favorable conditions. The GATT agreement does not only cover some products, but includes all products. This makes a big difference in comparison to CAP reform. Also, GATT goes beyond CAP reform in the obligation to abandon variable levies. However, possibilities still exist to protect 'sensitive' products more than others.

6

Special regulations for some important cereals ('55%-clause') shall not be presented here.

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The GATT agreement will contribute to world market price increases, especially as a consequence of reductions in export restitutions. The other aspects also lead to upward pressure on world market prices, but their influence will be tempered by the small degree of actual tariff reductions, the possibility for aggregation, and additional tariffs when world market prices are low, etc.. Tarification leads to less price variability because countries will have to adjust to scarcity or excess supply in world markets. As a result of the GATT agreement Francois, McDonald, and Nordstrom think that agricultural trade will expand by 20% in value and by 17.7% in quantity. A quantitative analyses by Goldin et al. (1993), who simulated a liberalization in agricultural trade similar to the actual GATT outcome, expects welfare gains of 190 billion US$ per year. Not only can the OECD countries alone gain 120 billion US$, but also the developing world and the former socialist countries will have a better position after the changes. Brandao and Martin (1993) calculate welfare gains in a range of 20 to 59 billion US$ per year depending on the degree of liberalization in the countries themselves (overvaluation, low transmission of world price changes into internal prices, etc.). They also show that welfare gains are much higher if endogenous productivity response is accounted for. Estimations of the FAO and the United Nations Organization for Food and Agriculture expect an increase in the value of world agricultural trade of about 9%, mostly because of higher prices (wheat +7%, coarse grains +510%). The primary winners will be North America and Australia. Western Europe will export less and import more. Latin America and the Caribbean can expect higher export earnings while African Countries have to fear deteriorations if they are not able to expand production substantially, to diversify their supply, and promote regional trade (see Panholzer, 1995). Pinstrup-Anderson (1995) sees increased export earnings of about 1.4 billion US$ for poor LDCs and 4.9 billion US$ for middle- and high-income LDCs. But for some countries (like Bangladesh, Ethiopia, Haiti, and Mosambique) this will not be enough to compensate for the higher import expenditures.7

7

It has to be emphasized that changes in net export earnings are not equivalent to welfare changes, except under very restrictive assumptions.

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Concluding Remarks The C o m m o n Agricultural Policy o f the E U (CAP) influences massively the conditions in world agricultural markets; it contributed considerably to decreasing and unstable prices. This lowered the production incentives in many countries. H o w e v e r , on the other hand s o m e importing countries were able to make gains through reductions in their import bill. These countries will n o w have to adjust to rising world market prices because o f the protection cuts in developed countries, especially in the EU. It will be important to raise productivity and to improve infrastructure in these countries to allow for a more flexible response to the n e w environment. Only then can it be guaranteed that as many countries as possible can reach higher welfare levels under the n e w world market conditions.

Bibliography BRANDAO, A. and W. J. MARTIN (1993): Implications of agricultural trade liberalization for the developing countries. In: Agricultural Economics, Vol. 8, No. 4, pp. 313-343. BUNDESMINISTERIUM FÜR ERNÄHRUNG; LANDWIRTSCHAFT UND FORSTEN (ed.) (1975, 1987, 1992 and 1994): Statistisches Jahrbuch über Ernährung, Landwirtschaft und Forsten. Münster- Hiltrup. FAO (ed.) (1977): FAO Trade Yearbook 1976, vol. 30. Rom. FAO (ed.) (1994): FAO Trade Yearbook 1993, vol. 47. Rom. GOLDIN, I., KNUDSEN, 0 . , and D. VAN DER MENSBRUGGHE (1993): Trade Liberalisation: Global Economic Implications. OECD, Paris. HARTMANN, Monika (1995): Die EU-Agrarreform aus Sicht der Länder der Dritten Welt sowie Mittel- und Osteuropas. In: Grosskopf, W., Hanf, C.-H., Heidhues, F. and J. Zeddies (eds.): Die Landwirtschaft nach der EU-Agrarreform. Münster-Hiltrup, pp. 407-419. HARTMANN, M. (1991): Wohlfahrtsmessung auf interdependenten und verzerrten Märkten - Die europäische Agrarpolitik aus Sicht der Entwicklungsländer. Kiel. HARTMANN, M., HOFFMANN, M. and P. M. SCHMITZ (1994): Allokations-und Verteilungswirkungen der EG-Agrarreform. In: Verteilungswirkungen der künftigen EU-Agrarpolitik nach der Agrarreform, Schriftenreihe der Landwirtschaftlichen Rentenbank, Band 8. Frankfurt am Main. HENRICHSMEYER, W. and H. P. WITZKE (1994): Agrarpolitik Band 2: Bewertung und Willensbildung. Stuttgart. KOESTER, U. (1994): The GATT Compromise and Developing Countries. In: Quarterly Journal of International Agriculture, No.l, pp. 3-7. KOESTER, U. and S. von Cramon-Taubadel (1992): EG-Agrarreform ohne Ende? In: Wirtschaftsdienst, No.7, pp. 355-361.

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PANHOLZER (1995): Industrieländer sind GATT-Nutznießer. In: Der Förderungsdienst, No. 6, 1995, p. 168. PINSTRUP-AANDERSEN, P., DeROSA, D. and S. ROBINSON (1995): CAP Reform and Developing Countries. In: Grosskopf, W., Hanf, C.-H., Heidhues, F. and J. Zeddies (eds.): Die Landwirtschaft nach der EU-Agrarreform. Münster-Hiltrup, pp. 15-27. RONONGEN, V. O. (1993): Managing Free Trade For Agriculture. Washington, D.C. TOEPFER INTERNATIONAL (ed.) (1993): Statistische Informationen zum Getreideund Futtermittelmarkt, Edition 1993/94. Hamburg. TYERS, R. and K. ANDERSON (1992): Disarray In World Food Markets - A Quantitative Assessment. Cambridge. UNITED STATES DEPARTMENT OF AGRICULTURE (ed.) (1990): The Basic Mechanisms of European Community (EC) Farm Policy. Economic Research Service, Miscellaneous Publication Number 1485.

Adoption o f Technology in Brazilian Agriculture

251

Martin Jayo1

Adoption of Technology in Brazilian Agriculture: Information Technologies in Agricultural Machinery? I. Introduction Recent years have been characterized by an accelerated process of modernization in world agriculture. Innovations have been successive, comprised of two inter-related components: (a) a renovation of the technological basis of agriculture and (b) the appearance of new modalities of agricultural management, particularly in relation to the coordination of transactions between the agricultural sector and its input and equipment suppliers. Trends that were initially witnessed in European and North-American agriculture, are now beginning to appear in Brazil. This paper will focus on the perspectives of incorporating those changes into Brazilian agriculture and, more importantly, on the effects the changes have on transactions involving agriculture and its input/equipment suppliers. Within the context of the general technological trends, one specific aspect was selected for evaluation: the incorporation of electronic information technologies into agricultural machinery. This choice is explained in section II. In section III, we point out two basic challenges to the effective introduction of such innovations in Brazilian agriculture. These statements are illustrated analytically in section IV, and some international precedents are commented on in section V.

1 2

M.Sc. candidate at IPE-USP and researcher at PENS A - University of S3o Paulo Agribusiness Program. The author is grateful for the comments by Prof. Elizabeth Farina.

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II. Global Trends in Agricultural Technology II. 1. The broader focus: General Trends On the global plane, the last ten years can be viewed as a time of change of paradigm in agricultural technologies. The predominant technological model during the last decades was based on the intensive use of mechanical processes (reduction of the area/machines ratio) as well as agrochemicals (defensives, herbicides, etc.) By these means, the model was successful in generating high productivity indices (output/area and output/worker) as well as in protecting against exogenous phenomena such as plagues and diseases. There was, however, no concern for the environment which has led to significant environmental damage. In reference to the period in which the old paradigm predominated, the time period differs from region to region. For Europe, we can set it roughly between 1950 and 1980, according to Cheze(1992). In the case of Brazil, a time lag should be taken into account, and the beginning of this technological model is reckoned to have occuiTed in the late sixties. Figure 1: General Technological Trends

Technical basis

Former Paradigm

New paradigm

Mechanical and chemical

Biotechnology, genetics,

processes

electronics, artificial intelligence.

Objectives

Mass production without

Quality, regularity and

concern for the environment.

'systemic management' of

Increase in yield per hectare

agricultural production

and per worker. Protection against hazardous conditions

[Adapted from Chèze (1992)]

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253

Nowadays the worldwide trend is a progressive transition towards a new paradigm represented by: (a) strong environmental concerns, giving rise to the development of biological inputs and biotechnologies which tend, in the long term, to support the use of chemical supplies. To a great extent this trend is the result of social complaints, reflected in the demands of the final agroindustrial consumption market, which requires more and more "ecologically correct", safe products. (b) the emergence of a new generation of agricultural machines, particularly tractors and harvesters, what we call New Mechanization Technology (NMT). The main innovation accomplished by these machines is the incorporation of on-board electronics, such as electronic sensors and data transmission systems for controlling the efficiency and regularity of the operation. They also indicate, or even perform automatically, the necessary adjustments in the machine. Such innovations allow the operational efficiency to increase significantly, thus reducing costs, and granting a more homogeneous and regular crop. This new technological paradigm is largely connected to the modern standard of farm management, which involves a stronger coordination with the other segments of agri-food production. More and more, the food industry increases market segmentation and value-adding, following the changing trends of the final consumption market.3 Such strategies make use of higher quality inputs coming from agriculture necessary to the industry. The development of biological processes to substitute the chemical based agricultural inputs is in a very preliminary stage. This subject must be treated only as a long-term perspective. On the other hand, the incorporation of electronics into farm machinery has been a reality in the European and North-American markets since the end of the last decade, and is now beginning to expand to Brazil. Because of its greater immediate importance, we have selected NMT as the specific subject of this paper.

3

For further details, see Barkema (1993).

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Martin Jayo

II.2 The specific focus: Information Technology in Agricultural Machinery4 The use of measuring instruments in agricultural machinery has gradually been improved over the past several decades through the development of mechanical, hydromechanical, and electrical systems. The greatest improvement, however, involves the application of on-board electronics which appeared as recently as the eighties. The currently available technology allows us to equip tractors and harvesters with 'artificial intelligence'. The main improvement to these modern machines is the ability to drastically reduce the operational inefficiencies which result from human errors. As the cost of electronic components becomes lower, the number of feasible technological solutions will increase. It is possible to distinguish two broad categories of such technological solutions: (a) monitoring systems, composed of sensors that follow the operational performance. The variables measured by the sensors are transmitted and indicated to the operator which are then recorded for future use (data logging for maintenance programs, records of performance, etc.) and activate alarms when particular variables reach pre-set critical levels. Necessary adjustments should be made by the operator. (b) control systems: In addition to the monitoring functions, the control systems include the processing of information received from the sensors and automatic adjustment. While control systems are still subject to continual innovations, the monitoring systems, which appeared in the mid-eighties, are at present fully consolidated. Their development cycle seems to be near exhaustion. This is a natural trend, as the efficiency of these systems is bounded by the operator's capacity to receive and process information. According to Scarlett (1993),

4

Due to the nature of the subject, it is unavoidable to use literature belonging to Agricultural Engineering related areas. However, a great part of the technical contents of these sources are not directly aimed toward our primary interest here. Thus, what we present herein is the result of an addressed reading, only commenting on the information that pertains to our particular interest for this work.

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"(...) the provision of excessive amounts of information can contribute to operator fatigue, thereby possibly reducing long-term profitability. Control systems circumvent this problem by deriving information, determining courses of action, and performing them without external aid." (p.2) This trend was already foreseen by Grogan et al.(1987): "Most current monitors are information monitors. (...) A comprehensive control monitor has not yet been introduced, but these monitors appear most promising for commercial production because they reduce, rather than increase, the decision load on the tractor operator." (p.229)

III. Challenges for the Diffusion of NMT in Brazil There is a vast potential market for NMT in Brazil. Initially, the major potential demand should come from the large production units such as those of the sugar cane sector in the state of Sâo Paulo or the grain producers in the Brazilian central region known as 'Cerrado'. This market segment requires large machines (high-powered tractors and large capacity harvesters). 5 Thus, it is reasonable to foresee good possibilities for NMT in Brazilian agriculture. However, it is worth noting that NMT will modify the interrelation mechanisms between agriculture and its input/equipment suppliers. In this respect we can see two basic challenges: First challenge: With the innovations of NMT, the relations between the tractor industry and agriculture become more complex. In the existing model, tractor manufacturers work with distribution networks -independent concession operators spread around the country. The function of these agents is limited to selling with a mark-up and rendering the eventual technical assistance required. With NMT, other means of interaction become necessary, such as information handling, training programs, and post-sale services in general. The existing commercial structures are far from being easily adapted to this reality.

5

Tractors above 100 HP represent nowadays about 33% of the tractor market. The industry sales in 1994 totalled 38,000 units.

Martin Jayo

256

Second Challenge: For efficient implementation, NMT requires the use of compatible inputs and implements, with much more rigorous technical specifications. This requires greater cooperation between the tractor manufacturers and the implement and input sectors, especially in the form of joint development programs. In summary, both challenges point to modifications in the interfaces between the agricultural sector and its suppliers. For this reason, the problem might be approached under the analytic framework known as the Agribusiness Systems Approach.

IV. Analytic Treatment The so-called Agribusiness Systems Approach was initiated by Goldberg (1968) which was born from a previous work by Davis & Goldberg (1957). An agribusiness system can be defined as the collection of "(...) all the participants involved in the production, processing, and marketing of a single farm product. Such a system includes farm supply, farmers, storage operations, processors, wholesalers, and retailers involved in a commodity flow from initial inputs to the final consumer. It also includes all the institutions which affect and coordinate the successive stages of a commodity flow such as the government, futures markets, and trade associations". (Goldberg, 1968, p.2). The coordination of an agribusiness system is a key concept in this approach. It denotes the way through which the agents involved in a system transmit information and impose controls on one another, according to the final consumer's demands. So, the coordination of a system depends on the administration of two flows: [a] a commodity flow and [b] an information counterflow as shown in figure 2.

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257

Figure 2: Simplified Representation of an Agribusiness System

[a] commodity flow

[b] information flow

In relation to our specific subject, NMT has a strong impact on the coordination of agriculture and its preceding segments in the commodity flow. With respect to this, it is important to note that, traditionally, studies based on the Commodity Systems Approach focus on one particular commodity system. The system is defined in terms of its final product or key input, and taken as a whole, such as the wheat system, the orange system, or the soybean system. This is not our primary concern, since our focus is on a coordination question which is present, simultaneously, in several commodity systems. Some recent studies have dealt with the coordination of agribusiness systems through the lens of Transaction Cost Economics (TCE), proposed by Williamson (1985). The application of TCE was proposed in Brazil by Farina & Zylbersztajn (1994) and Zylbersztajn (1995), within the scope of the University of Sào Paulo Agribusiness Program (PENSA). According to Williamson (1985), transaction can be defined as the movement of an intermediate good or service across the interface that separates two technologically distinct productive stages. There are many possible ways to organize transactions, for example: governance structures- vary within a continuous scale from the market (price mechanisms) to vertical integration (hierarchic structure). Between these outer limits, there is a progression of intermediate contractual arrangements. A model is proposed for determining the most suitable governance structure for each transaction. Its most important exogenous variables are: (a) the frequency (recurrence) of each transaction and (b) the characteristics (asset specificity level) of the investments involved. The model also makes the

Martin Jayo

258

assumptions of imperfect information, uncertainty, bounded rationality, and opportunism. With respect to NMT, we can say that its introduction makes the transactions between agriculture and its suppliers more specific. The goods being transacted are no longer standard, nonspecific ones; instead they hold a certain degree of specific investment. Under these conditions, the transaction costs under market governance become too high, so it is feasible to expect the development of some kind of more economical extra-market contractual arrangements. Figure 3 illustrates the idea. Figure 3: Efficient Governance Structures

INVESTMENT CHARACTERISTICS

[Adapted from Williamson (1985)]

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259

V. The European Experience In section III above, we pointed out two basic challenges to the feasibility of NMT in Brazilian agriculture. The European experience is relevant to this issue since most European agriculture has already carried out these innovations. Real prices received for farm products in Europe have decreased continuously for several years 6 , a fact reflected in the considerable reduction of investment rates in agriculture. In the case of the machinery sector, the result was a great decrease in production and sales. Tractor registrations in Western Europe declined from 276,000 units in 1983 to 151,000 units in 19927 Behind this reduction in machinery demand, there is the advent of new formulas for farm investment which provide cost reductions by way of optimizing the use of equipment. Among them, we can emphasize: (a) The increase of the average farm surface, through the fusion (rental) of old, small units. In this way, the typical European farm pattern changes, with agricultural exploitation becoming larger and less numerous. This phenomenon is consistent with the current demographic trends in Europe, which indicate a strong reduction in rural population. (b) Sharing of machinery, either through agricultural cooperatives or by subcontracting from third parties (mechanization services suppliers). This kind of solution is becoming more popular in the case of harvesters, whose use is seasonal and occurs at different times in different regions. The consequences of (a) and (b) on the demand for machinery are quite clear. These new investment formulas tend to favor the larger-sized segments. This fact is reflected in recent data: between 1982 and 1991, the market segment of tractors between 100 and 200 HP grew from 9% to 26% in Germany and from 9% to 22% in France.8

6

From 1985 to 1991, the index of farm-received prices for the European Community countries rose about 17.9%, while the General Consumption price index had a 29.1% increase. (Source: European Community, 1992).

7

Source: "Landmaschinen und Ackerschlepper Vereinigung", Frankfiirt, cited by Renius (1994).

8

Source: Iochpe-Maxion SA (interview by the author).

Martin Jayo

260 Table 1: Number of agricultural production units(thousands) 1970 Belgium Denmark Former West Germany

1980

1990

1990/1970 (%)

115

93

-49.5

-

123

87

-

1075

850

705

-34.4

184

Greece

-

953

Spain

-

1792

-

France

1588

1255

982

-38.2

Ireland

.

224

217

-

2850

2634

2784

-2.3

8

5

4

-50.0

185

149

132

-28.6

Portugal

.

_

635

-

United Kingdom

-

269

260

-

Italy Luxembourg The Netherlands

Source: European Community (1992)

The first challenge referred to in section III discussed the need to implement efficient training and after-sale services. In the European case, the new investment formulas seem to follow this trend. The use of shared machines reduces somewhat the number of agents - cooperatives and service contractors which mediate the flow of information between the tractor industry and the farmers, thus reducing transaction costs. The cooperative-sharing solution seems, at least initially, feasible for some regions of Brazil, mainly the southern and south-east areas of the country. With respect to the second challenge, the European experience is not exactly a success story. The incorporation of NMT did not involve enough cooperation between the tractor industry and the other farm suppliers, and so generated cost inefficiencies, mainly due to incompatible interfaces and component duplicity (components that can be shared, installed in both tractor and implement - e.g. data processors).

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VI. Final Considerations In sections I to V, it w a s argued that Brazilian agriculture is on the verge o f receiving a collection o f technological innovations - the N e w Mechanization Technology - as part o f a broader transition context towards a n e w technological model. It w a s also stated that such changes will necessarily affect the relationship between agriculture and its inputs and equipment suppliers. This can be seen and understood through the use framework

o f the Transaction Cost

Economics

applied to the Commodity Systems Approach tradition.

It remains for a subsequent stage o f analysis to identify, through

field

research, the concrete arrangements that will need to be developed in Brazil between those agents. This is the subject o f a M . S c . Thesis that the author is developing at the University o f Sào Paulo.

Bibliography ANDRADE, C.H.J.(1991): A Eletronica em Tratores e Colheitadeiras: Arma Eficaz contra as Perdas na Lavoura. Maquinaria Agrícola, ano 6, n° 4. BARKEMA, A.D. (1993): New Roles and Alliances in the U.S. Food System. Mimeo. CHEZE, B.(1992): Coming Technologies in Agriculture. Prague: Zmèdèlskà Technika vol.5 n.38 DAHAB, S.(1993): Estudo da Competitividade da Indùstria Brasileira - Competitividade da Indùstria de Máquinas Agrícolas. Universidade Estadual de Campinas, Mimeo. DAVIS, J H . and GOLDBERG, R.(1957): A Concept of Agribusiness. Harvard University, Division of Research. EUROPEAN COMMUNITY (1992): Notre Avenir Agricole. Sèrie Docomentation Européene. Brussels: CECA-CEE-CEEA FARINA, E.M.M.Q. and D. ZYLBERSZTAJN (1994): Competitividade e Organiza?ào das Cadeias Agroindustriais. Instituto Interamericano de Cooperación para la Agricultura (Costa Rica), Mimeo. GOLDBERG, R.(1968): Agribusiness Coordination: A Systems Approach for the Wheat, Soybean and Florida Orange Economies. Harvard University, Division of Research. GROGAN, J., D.A.MORRIS, S.W. SEARCY and B.A. STOUT (1987): Microcomputer-based Tractor Performance Monitoring and Optimization System. Journal of Agricultural Engineering Research, vol.38. HIRAKAWA, A.R., A.M. SARAIVA and C.E.CUGNASCA (1991): Eletronica Embarcada em Máquinas Agrícolas. Maquinaria Agrícola, ano 6, n° 6. HOOD, C E , R E . WILLIAMSON and G.E.WELLS (1991): Tractors for 2000. Agricultural Engineering, vol.72, n° 3.

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McKEE, A. (1992): The Role of the Conventional Tractor. The Agricultural Engineer, vol.47, n° 2. RENIUS, K.T. (1994): Trends in Tractor Design with Particular Reference to Europe. Journal of Agricultural Engineering Research, vol.57. SCARLETT, A.J.(1993): Integration of Tractor Engine, Transmission and Implement Depth Controls: Part 2, Contol Systems. Journal of Agricultural Engineering Research, vol.54. SHELMAN, M.L. (1991): The Agribusiness Systems Approach: Cases and Concepts. Proceedings of the International Agribusiness Management Inaugural Symposium. SYGMA (1993): Machines Agricoles de France. Syndicat Général des Constructeurs de Tracteurs et Machines Agricoles. WILLIAMSON, O. (1985): The Economic Institutions of Capitalism. New York: The Free Press. ZYLBERSZTAJN, D.(1995): Governance Structures and Agribusiness Coordination: A Transaction Cost Economics Based Approach. Mimeo.

Technological Changes in Agriculture: The Argentine Experience

263

Fernando Sonnet / Maria L. Recalde de Bernardi / Carlos Valquez1

Technological Changes in Agriculture: The Argentine Experience 1. Introduction In the last three decades, Argentine agriculture has occupied an important position in world trade, which has been linked to technical progress and the adoption of technological innovations. As of the mid 1950's, the agricultural sector has been influenced by social, political, and technical changes in the course of an industrialization and of the opening of the economic system process. Furthermore, government policies and restrictions on trade flows affected agricultural growth. By the early 1960's agriculture in Argentina experienced a substantial alteration in the underlying development conditions, manifesting a new and widespread farm behavior. The changes in relative prices of the main crops in the Pampean region led to a rapid and favorable fanner response. Agricultural output growth under advantageous conditions was encouraged by government policies and by an overall improvement in the inputs productivity. During 1970's to 1980's new innovations appeared in the fields of complementary inputs (seeds, chemicals); furthermore, machinery and modern implements complemented the new practices of farm harvesting firms. Recently, the outstanding farm innovation has been the adoption of management capacity to deal with the farm business. This paper examines the technical changes in Argentina during the last three decades. Particularly, this study aims at the evaluation of the technical change process in three well defined stages. This process will be related to

1

Instituto de Economía y Finanzas, Universidad Nacional de Córdoba, Argentina.

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Fernando Sonnet / Maria L. Recalde de Bernardi / Carlos Valquez

the Pampean region where a substantial agricultural transformation has taken place. Also, a theoretical framework is presented to explain technical change in Argentina. An agricultural production function is computed and estimated from 1960 to 1988, and the relative efficiency is measured by applying an estimation of a deterministic production frontier.

2. General Line of Evolution As of the mid 1980's the profile of the sector showed the following main characteristics: a. Specialized production of five crops that make up about 90% of the total agricultural production: wheat, corn, sorghum, soybean, and sunflower. b. High technological innovation: corn, sorghum, sunflower hybrids, wheat exotic germoplasm, and a complex soybean technological package. c. Complete mechanization for the different jobs. d. Widespread use of herbicides, improved seeds, and pesticides. e. Extended use of nitrogen and phosphoreted fertilizers. f. Improvements in the storage and drying of grains. g. Improvement and specialization in agricultural management, and the birth of new organization conducts. h. Significant advances in genetics, tillage, and sowing. i. Introduction of new policies in organization. 2.1. The 1960's In the 1960's, the Pampean agriculture sector recovered to the production level prior to the 1950's crisis, and then experienced an almost uninterrupted period of productivity increase starts which was brought about by the important technological changes. Two key technological advances take place in this period: development and improvement of agricultural techniques, and total mechanization in tillage and harvesting. The creation of INTA (Institute Nacional de Tecnologia Agropecuaria)-(National Institute for Agricultural Technology) in 1956, is the starting point for immediate improvements in cultivation practices, reaching its highest point in the 1960's. Together with INTA in 1959, CREA (Consorcios Regionales de

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265

Experimentación Agrícola)-(Regional Consortia for Agricultural Experimentation), a group of farmers stressing similar research lines, started its activities. Both institutes aimed to improve the experimentation, adoption, and the spread of agricultural technologies. The importance of developing new agricultural techniques lies in the fact that it represents a breeding ground for the adoption of new technological packages. Through new agricultural techniques, since the mid 1960's, there was a total mechanization in sowing and harvesting. This was mainly induced by the industrial imports substitution policy introduced since the end of World War II. Following Obschatko (1988), the introduction of the tractor symbolized the passage from a "disembodied" technology of agricultural techniques, to an "embodied" technology in capital goods and inputs which would later on characterize agricultural activities significantly. The reason that mechanization can transform so quickly is due to the fact that the adoption of agricultural techniques does not require high cost, or already existing infrastructure. Three sub-sectors must be distinguished in mechanization: tractors, combine harvesters, and agricultural implements. Argentina experienced a decline in its industrial imports from countries involved in World War II. The imports substitution policy and the protection of the domestic tractor manufacture was started; it was oriented toward meeting domestic demands and substituting the importation of machinery and spare parts. This policy was continued for several decades with different alternatives and variations, and led to the growth of the tractor manufacturing industry which today supplies the domestic market. The domestic production of harvesting machines and agricultural implements is older than the production of tractors because it began in the first half of this century; furthermore, agricultural implements production started at the end of last century. "In combine harvesting manufacturing, technological innovation possesses its own characteristics, partly related to the type of domestic capital-owned companies and to not having direct access to research in the industrialized countries. The companies' response was a slow, but steady process of adaptative investigation based on foreign models and self-owned resources".2 2

Obschatko, E. (1986).

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Fernando Sonnet / Maria L. Recalde de Bernardi / Carlos Valquez

Towards the end of the 1970's there was a technological gap with respect to the models provided by the first world countries. Nevertheless, tariffs reductions and the exchange rate in that period, generated a considerable amount of imports of state-of-the-art machinery. Later, when this policy came to an end, the domestic industry incorporated fresh innovations. The share of foreign capital in agricultural implements was quite small. The use of new inputs such as improved seeds, herbicides, and fertilizers was encouraging for the development of production. The effect of the transformation in the Pampean agriculture in the 1960's can be clearly seen in the 30% increase of agricultural production, 17% of which was a larger agricultural surface, and 13% was increased land productivity. 2.2. The 1970's In this decade, the adoption of technology can be observed through the incorporation of improved corn, sorghum, wheat, sunflower seeds, accompanied by the technological package as well as the spread of soybean and the generalized use of pesticides, especially herbicides. With respect to seed improvements, the innovation was the introduction of corn, sorghum, and sunflower hybrids, and the new soybean and wheat varieties; in particular, the varieties with exotic or mexican germoplasm. The latter deserves special mention because an exclusive technological package was developed as the consequence of a number of different factors. Corn hybrids began to spread towards the start of the 1950's, but their adoption was generalized towards the late 1970's when the cropped areas reached 100%. Their generalized use was delayed due to the absence of seed breeders, and to the need to develop specific varieties for different ecological conditions. Later, the combination of wheat and soybean in twofold crops displaced corn partly from non traditional zones to non typical ones, and the need grew for the development of corn seeds apt for more restrictive temperature and humidity conditions; early corn hybrids emerged consequently. Such improvements caused the yield to rise 69% between 1960 and 1980. Sorghum hybrids spread more quickly than corn. Hybrids and crops spread almost simultaneously towards the end of the 1950's. Knowledge of the use of corn hybrids, the associated technology (cultivation practices, mechanization, and precision sowing), and the already existing infrastructure (seed

Technological Changes in Agriculture: The Argentine Experience

267

producers and the technology for hybrids production), paved the way for the diffusion of crops. In a few years, thus, yields rose 68%. The adoption of sunflower hybrids was even quicker; between 1972-1980 they covered almost the totality of the cropped areas and yields rose aproximately 56%. Another innovation concerning seeds was the incorporation of exotic, or mexican germoplasm in the Argentine wheat varieties; yield rose 34% in the period 1969-84, and greater resistance to bending down was obtained. Together with the exotic germoplasm wheat seeds, other short-cycle varieties of wheat were developed, and they were combined with soybean in twofold crops. Although it was necessary to introduce more efficient and careful practices in cultivation, such combinations generated a very positive impact on agricultural profits. Thus, the advantages derived made them consequently extensive to other crops. Research in soybean seeds was rather oriented to finding imported varieties which could be adapted to the ecological conditions in Argentina. The outcome of this technological package increased yields about 85% between 1960 and 1980. In brief, the good use of the hybrids potential would not have been possible if earlier on some given requirements concerning agricultural practices and mechanization to ensure efficient labor practices and precision sowing had not been complied with. The other important event in the 1970's was the intensified use of agrochemicals, especially herbicides. In this decade, the use of herbicides surpassed that of insecticides. The incorporation of the former was geared mainly to those of greater selectivity and smaller application doses. During the 1970's post-emergency herbicides predominated over pre-sowing and pre-emergency ones, although this trend reverted starting in the 1980's. It is estimated that by the middle of this last decade, the percentage of land treated with herbicides with relation to the cultivated land was 77% for wheat, 55% for corn, 25% for sunflower, 89% for soybean, and 30% for sorghum. INTA continues to develop new management techniques and the private sector is generating activities for promotion and information based on technical advice and test demonstrations.

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2.3. From 1980 to Date This decade started with new growth in agricultural production due mainly to an increase of cropped areas in lands less apt for cultivation, and to the displacement of livestock from traditional zones. The reason for such behavior during the crisis of the stock-breeding sector was primarily due to the protectionist policies of the countries demanding our exports, which caused an abrupt drop in profits of stockbreeding vis-a-vis agriculture. The collapse of the financial system as well as the economic model in use in Argentina since 1976, did away with investments opportunities and with capital availability. The exchange rate at the end of the 1970's and start of the 1980's, reduced the prices of the imported inputs in the agrochemical and machinery technological package. The technological innovations that had been generated and spread in the two previous decades, have been integrated and consolidated since 1980. This process can be seen in the significant increase of profits in agriculture and the reduction of risks in agricultural activities. Oilseed technological changes must also be mentioned. The new chemical treatment of weeds in soybean consolidated the twofold wheat-soybean crops. The use of sunflower hybrids quite significantly increased yields of this crop in the higher risk cropped areas. All the technological innovations show a cumulative impact of considerable magnitude on agricultural yields in five main crops that today amount to 95% of the total production of grains. During this period, the prices that farmers obtained, maintained the traditional fluctuations. There have been no significant changes in the landowning structure. The technological changes have been the principal cause in bringing about drastic yields increases (Table 1 and Figure 1 and 2), thus, causing the increase in profits.

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T e c h n o l o g i c a l C h a n g e s in Agriculture: T h e A r g e n t i n e E x p e r i e n c e

Table 1 Yields per harvested area (ha.) Average Yearly Season Season

Wheat Kgs.

Index

Com Kgs.

Index

Soybean Kgs.

1960=100

1960=100

Index

Sunflower Kgs.

1960=100

Index

Sorghum Kgs.

1960=100

Index 1960=10

1960/61 -69/70

1350

100.0

1961

100.0

1087

100.0

749

100.0

1932

1970/71 -79/80

1537

113.9

2709

138.1

1724

158.6

768

102.5

2518

100.0 130.3

1980/81 -89/90

1814

134.4

3320

169.3

2037

187.4

1292

172.5

3094

160.1

1990/91 - 93/94

2103

155.8

4289

218.7

2186

201.1

1598

213.4

3604

186.5

S o u r c e : N a t i o n a l S e c r e t a r y o f A g r i c u l t u r e ( S e c r e t , d e A g r i e , d e la N a c . ) .

Production planning and management become particularly important when one considers the price fluctuations of the grains, and the not always favorable relative prices input-output ratios. In the recent years, there have been important advances in the use of new farm practices and organization techniques for the analysis of different production alternatives and technological options. INTA has performed a remarkable role in this sense. The use of new farm practices gives way to different technological and economic decisions. For example, data processing is a tool that may contribute to decision making and production planning. Similarly, the advances in electronics, biotechnology, and genetic engineering are changing the productive profile. With the advances in genetics, new wheat varieties have emerged in the 1990's that have outyielded those of the previous five years. Such varieties, and the wide use of nitrogen and phosphoreted fertilizers, have made yields in the areas for wheat crops rise from 35 to 45 quintals, which comes very close to the maximun genetic potential. While the short-cycle varieties take into account crops with soybeans, the new long-cycle wheat varieties reach yields of up to 50 quintals.

270

Fernando Sonnet / María L. Recalde de Bernardi / Carlos Valquez Figure 1 Yields per harvested area (Ha.) Com and Sorghum

A true technological revolution has occurred in the case of corn. In the past five years, a change from four line to two line corn has taken place. Through the technological revolution in corn and widely accepted fertilization practices, Argentina and the USA have become closer in terms of average yields. The genetics for sunflower in Argentina is held to be one of the most advanced in the world and allows very high yields. There has also been many changes in the case of soybeans as well; one of the changes is the readaptation of the cycles. Minimum tillage and direct sowing have allowed agricultural exploitation with conservation of the soil structure while, at the same time, helping to modernize agricultural machinery. For example, there are quality high precision sowers that are equally as good as those of the American market. There are also similarities with sprayers, harrows, four-wheel drive plows, rotary fertilizers, cutters, waste grinders, etc. There has been a precise, sophisticated utilization of herbicides in regards to agrochemicals in the recent years. Also, the use of fertilizers has risen considerably from 340,000 Tn. in 1991 to 800,000 Tn. in 1994. In stockbreeding, there was also an important yields improvement with the addition of new pastures, grass, and leguminous management practices (rotary pasturing on natural pastures with protein enrichment).

Technological Changes in Agriculture: The Argentine Experience

271

Sustainable, intensive agriculture is improving every year in Argentina. The main objective is to increase the production of foodstuffs, while at the same time conserving natural resources. To reach that objective the soil surface must be covered with residues, tillage reduced, machinery equipment with specific low pressure transfers systems used, and fertilizers have to be used in accordance with the levels of yields expected. Figure 2

Yields per harvested area (Ha.)

Wheat

Soybean

— - Sunflower

Conservationist agriculture with old crop biomass, reduced tillage, direct sowing, crop intersowing, rotations, row crops, supplementary irrigation, and fertilization offers a package of farm practices that can be combined successfully in the different areas of the Argentine Pampas. In 1995, INTA implemented the project "Intensificación en la Producción de Granos" (IPG) (Grain Production Intensification), which consists in utilizing complementary irrigation and making use of the water in dry barren lands more efficient through improved methods to obtain and use rainfall. The IPG will also promote the control of pests, weeds, diseases with less contaminating methods, soil surface practices that prevent erosion, and the reduction of quality loss of the grains due to manipulation after harvesting. The following estimates were made by the IPG technicians: in five years it may be possible to obtain increases of 24% in wheat, 28% in corn, 18% in soybean, and 25% in sunflower with high precision farm practices. They

272

Fernando Sonnet / Maria L. Recalde de Bernardi / Carlos Valquez

intend to include more land with supplementary irrigation (from 40,000 to 400,000 hectares), and they are planning a 20% increase in harvesting efficiency with a 20% reduction of the qualitative-quantitative losses after harvesting. The intention of this program is to motivate, inform, train 80% of the fanners, technicians, contractors, agricultural machinery manufacturers, and storage agents.

3. Technical Change, Research and Development: Basic Features3 Nowadays, the material welfare of countries and their possibilities of economic growth basically depend on three factors: the endowment of resources, technological advances and managerial knowledge development as well as the form of political and economic organization. The input sources and production factors provide the generation of various intermediate and final goods and services. Technical knowledge, manifested in several forms, shows different techniques for inputs which are to be combined with yield outputs. The profile of political and economic organization determines the extent to which production factors are utilized in an economically efficient way. To summarize all these statements we can apply the production possibilities frontier as a useful conceptual device and as an appropriate one. An outward shift in the production frontier points out economic growth as a greater capacity of the system to generate goods and services. Economic growth may come from an increasing resource base (labor force, stock of plant, and equipment) and from productivity improvements in the factors of production. Higher productivity can arise from economies of scale and/or from technical change; technical progress may be viewed in the form of new products, new processes and new ways of organizing the production of goods and services. The sources of technological change are inventive activities (in the sense of technical inventions), and scientific investigation (scientific discoveries on the basis of underlying motives of inventors and scientific investigators), both of which imply essentially an investment process.

3

This section is, in part, based upon the work of R. Sato and G. S. Suzawa (1983).

Technological Changes in Agriculture: The Argentine Experience

273

4. Nature of Linkages Between Science and Technology In recent years, the linkage between science and technical improvements has been growing, and many of the new technologies have relied on advances in scientific knowledge. Although technical change conceivably can occur independently of scientific advances, much of the recent improvements in technology have relied on scientific discoveries (Sato, R. G. S. and Suzawa, 1983).

Science based on technical change can be conceived as a sequential and dynamic process of creating stocks of basic (fundamental), and applied (practical) knowledge that serve as inputs in the generation of new techniques. Some of them are more productive than the old techniques and eventually displace them; successful new products are generally imitated by non-innovating firms. Thus, either by output augmentation or factor-saving technical change, the index of total factor productivity becomes greater as a consequence of science-based technical change.

5. Technological Change, Agricultural Development and Distributive Effects To examine the impact of technological change on economic development, particularly in agricultural activity, we should observe some controversial issues and discuss the contemporary approaches that deal with adoption of new technology associated to development. a. The more efficient allocation of resources as a way for economic growth is a limited approach, and nowadays attention must turn towards technological innovation. b. Most of the economic literature deals with technological change as an endogenous phenomenon occurring within firms and industries; in the case of agriculture, new technology is, almost exclusively, generated externally to the productive units and the market mechanism that allocates it. New products, advances in production processes, and new ways of organizing goods and services generation, reflect technical progress. But most of the successful performance in research and development activities stems from industrial research laboratories and government supports. The transfers

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Fernando Sonnet / Maria L. Recalde de Bernardi / Carlos Valquez

proceeds to farmers are made within an environment of administered changes. c. A significant matter to recognize is that technological changes are unavoidably a biased phenomenon, in the sense that the economic system perceives it as an alteration in the means or procedures in production (Yudelman, M.,1971). Hicks, J. (1963) defined as neutral technical change, the innovations that tended to leave the relative factor price ratios unaltered at a given capital-labor ratio, and on the contrary, the technical change was deemed to be biased (Sato, R., Suzawa, G. S.; 1983). A conventional twofactor production function that exhibits constant-returns-to scale, shows two possible types of biases: capital saving (labor using), or labor saving (capital using). Under biased technical change, the marginal rate of technical substitution will vary for any given factor intensity ratio. Therefore, the new technology effects will not be completely uniform throughout the system; rather, they will have differential impacts on costs and benefits determining finally a redistributive process. d. Assuming that technical change causes distributive effects, judgement about desirability becomes crucial. This focuses upon the equity as opposed to the efficiency aspects. Then, an adequate evaluation of technological alternatives in less developed countries needs a framework to assess distributive effects.

6. Estimates of the Technological Change: A Review Several causes seem to show that measurement of technical change is a complex and hard task. First, the lack of an adequate ex-ante methodology for predicting the effects of new technology has determined that most of the results of impact studies have focussed on "what" effects were, rather than "why" they have occurred. This, in part, is the consequence of the fact that there is still no clear idea in economics about what technology variable means; therefore, there have been no possibilities to formulate robust conceptual and empirical models to explain the effects of a new technology and, in turn, to link them to the rest of the analytical framework. The neoclassical economics production structure has proposed an unrealistic way out by distinguishing changes in techniques (when relative factor prices modify and affect factor combinations), and change in technology (an

Technological Changes in Agriculture: The Argentine Experience

275

alteration of the whole set of potential techniques). However, that distinction is empirically impossible in practice. The neoclassical paradigm, in short, holds that technical progress arrives in the form of greater inputs productivities, new production possibilities, and more efficiency in factor combinations. Indeed, these statements have several limitations. One of them is the assumption that factor prices are determined in competitive markets and, of course, the factor ownership distribution is well explained. But, basically, neoclassical theory production models do not capture essentially the qualitative nature of a new technology. Innovations characterized by new and quite different physical inputs (seeds, fertilizers, herbicides and pesticides, improved machinery, labor skills, etc.) lead to displacements and substitution effects among fanners with considerable implications for distribution. A new approach would be relevant to trace the redistributive effects induced by technological progress, particularly among the main agents (and not resource classes) of the economic system. Finally, a model of the rural sector is necessary that regards technical change as a dynamic process with overall and continuing effects over time. Many studies have been developed in the field of agricultural technical change and, in particular, those related to the adoption of technology innovations that has attracted considerable attention among development economists (Feder, G.,et al; 1985). In this paper, we shall review only the main research areas in technical change literature in the last decades. Kaneda, H. (1967, 1980, 1982) developed several studies for agriculture in Japan. He first analyzed the sources and growth rate of productivity and later examined the structural change in Japanese agriculture after land reform. In 1982, he wrote a theoretical paper focusing on some issues about: a) The number of variables to be included in the production function of agriculture, and b) the functional form that should be assumed in the context of a computable general equilibrium model. Sato (1967) proposed "a two level or nested" CES taking advantage of the separability property in variables. This way, the CES function could accommodate different elasticities of substitution between different pairs of input factors.

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Fernando Sonnet / Maria L. Recalde de Bernardi / Carlos Valquez

Adelman and Robinson (1978) and Kelly and Williamson (1980) adopted the Cobb-Douglas (C.D.) form in specifying the production of agriculture. Adelman and Robinson estimated a "nested C D." with land and other factors; a CES aggregate of labor and capital were used for other factors. In the case of Kelly and Williamson, the agriculture production function was a Cobb-Douglas in labour, capital, intermediate inputs, and land. They allowed agricultural factor augmentation only for labor and capital, and assumed that land stock (exogenous), is not augmented by technical progress. Kako, T. (1978) used a translog cost function and derived empirical estimation of relevant parameters for rice production in Japan. Clark, J.S. and C. E. Youngblood (1992) applied a time-series approach to estimation of a translog system of share equations for central Canadian agriculture. They found that factor shares, prices, and output are cointegrated, and therefore there is no evidence of factor share biases in central Canada. In contrast, estimating the system with a traditional time trend (as a technical change measure), leads one to conclude appropriately that technical change biases exist, at least for land, fertilizers, and possibly for labor. Aly, H. Y. and R. Grabowski (1984), estimated a weak disposability of inputs production function for Egyptian agriculture from 1952 to 1972. They concluded that technical innovation during that time period was labor-using and land-saving; particularly, new seed varieties required more labor for weeding and land preparation than do the traditional varieties. Driscoll, P. J. and R. Boisvert (1991), used the Monte Carlo experiments which were performed using second and third order cost and production models, using data generated with and without measurement error. They argue that although the Monte Carlo essays have evaluated the translog (generalized Cobb-Douglas, generalized LeontiefT) and other flexible form costs and profits models (Delfino, 1989), they have been incapable of accurately characterizing the underlying technology; using translog flexible forms, they explored some controversial issues (Byron, R. and Bera, A., 1983; Theil, H., 1980; Burgess et al 1975), proving that the errors in variables bias and not the translog specification is largely responsible for the poor tracking performance.

Technological Changes in Agriculture: The Argentine Experience

277

7. Production Function and Efficiency: The Theoretical Model To estimate an average production function, consider Y = F(X,, X 2 , . . ., X n , T)

(1)

where Y denotes output, X, are the various resource inputs and T is the time trend variable that implicitly catch the technical progress. In the expression (1), F-function characterizes a set of known techniques that constitutes the existing state of technology assumed to be given (exogenous). In this study, it is assummed a neutral Hicks technical change. In (1) all inputs can be regarded as separable from each other and additionally that each input is tied to technical progress: Y = F[h, (X„ T), . . ., h„ (X„, T)]

(2)

Two different effects may be deduced from (2): direct effects of expanding use of inputs over time and indirect effects among inputs through time. The innovation

process

experimented

by

agricultural

activities

in

most

developing countries may help to ilústrate these statements (see Feder G.). Consequently, expression (2) can be represented explicitly as: InY = a ^ a . t + X a . / K x J + I a , t /«(x,) + a a t2

(3)

and used for estimations4. Additionally, a Cobb-Douglas specification is adopted and estimated for only comparison purposes. The estimation of model (3) is some fitted average function which corresponds to the theoretical notion of production function (2). In order to obtain a measure of the technical efficiency it is necessary to compute a production frontier model. There are a variety of methods used for measuring and computing technical efficiency (Forsund, F. R., C. A. K. Lovell and P. Schmidt, 1980). In this study, the deterministic statistical frontier approach is adopted; the technique was first proposed by Afriat (1972) and has been extended by Richmond (1974), and Greene (1980). A

4

Cobb-Douglas production funtion or translog form could be used to estimate (3); however, constancies production elasticities in the case of Cobb-Douglas form, and multicollinearity problems of the translog form, are strong restrictions to use them.

278

F e r n a n d o S o n n e t / Maria L. R e c a l d e d e Bernardi / Carlos V a l q u e z

linear in logarithm functional form is chosen for the estimation of the frontier, by using corrected ordinary least squares (C.O.L.S.); Y = /(x)e"

(4)

where the random disturbances (u.) are assumed to follow a one-sided distribution of the efficiency measure, and to be independently and identically distributed5; the set of input is assumed to be independent of the disturbances (Russell and Young, 1983). 7.1. Data The data set used in this study has been derived from aggregate time series for Argentina, from 1960 to 1988. The dependent variable Y in (3) is the value of total agricultural output at constant prices, provided by F.A.O. (Food Agriculture Organization), and determined by the levels of the inputs: i) ii) iii) iv) v) vi)

land (cultivated area, measured in hectare, each year) labor (number of employee in agricultural sector, each year) total expenditure in herbicides, pesticides and fungicides, at constant prices, each year chemical inputs (aggregate expenditure of iii) items and fertilizers, at constant prices, each year) power of tractor stock (measured in CV, each year) Trend variable T.

The average production function was estimated for two différents sets of specifications: i) The linear in logarithm form was applied in regressions 2, 4, and 6 (Table 2, Reg.2, Reg.4, Reg. 6) and ii) the Cobb-Douglas form was used in regressions 1, 4, and 5, for comparison purposes (Table 2, Reg.l, Reg.3, Reg.5).

5

For all u i £ 0 indicates that observed output must lie on or below the frontier, because e" has a value between zero and one. It is assumed that for t * t' E(u„, u ' „ ) = 0 for all i and E(Uit; u ' j t ) = 0 forall i ^ j .

Technological Changes in Agriculture: The Argentine Experience

279

8. Econometric Findings a. Table 2 shows the empirical results of the aggregate production function estimation for different specifications. Comparing the statistical estimates of alternative functional forms, we see that the linear-in-logarithm model is superior to the Cobb-Douglas specification. Indeed, the t-test of the former (the first mentioned), are better than the t-test of the coefficients estimates by fitted Cobb-Douglas form. Table 2: Estimates of Production Functions Ree. 1 C-Da 7.229 (3.01)

ReE.2

LAND LABOR

Variables Constant

-3.563 (-.62)

Re & 3 C-D 7.589 (3.37)

.49** (2.03)

1.94* (2.84)

.422** (1.85)

-.076 (-.43)

-.057 (-.06) .042 (1.2)

PESTICIDES

Reg.4 -3.003 (-.42)

Reg.5 C-D 7.198 (3.08)

-4.797 (-.94)

1.619* (2.32)

.489* (2.07)

1.996* (3.4)

-.057 (-.48)

-.273 (-.93)

.025 (.53)

-.267* (-2.17)

.01* (2.61)

1.605* (4.18)

-.04 (-.33)

CHEMICALS

.022 (.42)

-.248** (-1.92)

POWER

.012 (.14)

-.281 (-.72)

-.025 (-.44)

-.161 (-.47)

T

.01*** (1.69)

1.648* (4.1)

.01* (3.28)

.549** (1.87)

LANDT

-.075* (-2.54)

LABORT

-.134** (-2.08)

-.06** (-1.84)

-.074* (-2.75) -.118* (-2.83)

.004 (.58)

PESTICIDEST CHEMICALST

.013** (1.77)

POWERT

.011 (.45)

.006 (.55)

-.004* (-2.29)

-.0002 (-.28)

t

Reg.6

2

.013** (1.88)

-.003* (-2.69)

n

29

29

29

29

29

29

D-W"

1.535

2.344

1.587

1.687

1.536

2.319

R*

.925

.961

.928

.939

.925

.96

Parentheses indicate t-test values. a Estimates of Cobb-Douglas Functions. b Durbin-Watson statistic. * significant at 5% level, "significant at 10% level.*** significant at 20% level.

280

Fernando Sonnet / Maria L. Recalde de Bernardi / Carlos Valquez

b. The best R^'s are those obtained when most of the variables considered are included in the regression models (Reg. 2 and Reg. 6); however, other are good too. c. The preponderance of t-test values associated to the coefficients of land and chemical variables, is consistent with our "a priori" theoretical expectation. However, labor coefficients are not statistically significant to explain the evolution of agricultural output. Table 3: Production Elasticities for Different Inputs, 1960-1988 Year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

Land 1.865 1.790 1.715 1.640 1.565 1.490 1.415 1.340 1.265 1.190 1.115 1.040 0.965 0.890 0.815 0.740 0.665 0.590 0.515 0.440 0.365 0.290 0.215 0.140 0.065 -0.011 -0.086 -0.161 -0.236

Reg. 2 Labor Chemicals -0.191 -0.236 -0.325 -0.223 -0.460 -0.210 -0.594 -0.197 -0.728 -0.184 -0.862 -0.171 -0.996 -0.157 -1.130 -0.144 -1.264 -0.131 -1.399 -0.118 -1.533 -0.105 -1.667 -0.092 -1.801 -0.079 -1.935 -0.066 -2.069 -0.053 -2.203 -0.040 -2.338 -0.027 -2.472 -0.014 -2.606 -0.001 -2.740 0.013 -2.874 0.026 -3.008 0.039 -3.142 0.052 -3.277 0.065 -3.411 0.078 -3.545 0.091 -3.679 0.104 -3.813 0.117 -3.947 0.130

Power -0.270 -0.258 -0.246 -0.234 -0.222 -0.210 -0.198 -0.186 -0.174 -0.163 -0.151 -0.139 -0.127 -0.115 -0.103 -0.091 -0.079 -0.067 -0.055 -0.043 -0.031 -0.020 -0.008 0.004 0.016 0.028 0.040 0.052 0.064

Reg. 4 Land Pesticides Power 1.559 -0.036 -0.154 1.498 -0.032 -0.147 1.438 -0.027 -0.140 1.377 -0.023 -0.133 1.317 -0.019 -0.126 1.256 -0.014 -0.119 1.196 -0.010 -0.112 1.135 -0.006 -0.105 1.075 -0.001 -0.098 1.014 0.003 -0.091 0.954 0.007 -0.084 0.893 0.011 -0.077 0.833 0.016 -0.070 0.772 0.020 -0.063 0.712 0.024 -0.056 0.651 0.029 -0.049 0.591 0.033 -0.042 0.530 0.037 -0.035 0.470 0.042 -0.028 0.409 0.046 -0.021 0.349 0.050 -0.014 0.288 0.054 -0.007 0.228 0.059 0.000 0.167 0.063 0.007 0.107 0.067 0.014 0.046 0.072 0.021 -0.014 0.076 0.028 -0.075 0.080 0.035 -0.135 0.084 0.042

Land 1.922 1.848 1.774 1.700 1.626 1.552 1.478 1.404 1 329 1.255 1.181 1.107 1.033 0.959 0.885 0.811 0.737 0.663 0.588 0.514 0.440 0.366 0.292 0.218 0.144 0.070 -0.004 -0.078 -0.152

Reg. 6 Labor Chemicals -0.392 -0.254 -0.511 -0.241 -0.630 -0.227 -0.749 -0.214 -0.867 -0.200 -0.986 -0.187 -1.105 -0.174 -1.223 -0.160 -1.342 -0.147 -1.461 -0.134 -1.579 -0.120 -1.698 -0.107 -1.817 -0.094 -1.936 -0.080 -2.054 -0.067 -2.173 -0.054 -2.292 -0.040 -2.410 -0.027 -2.529 -0.013 -2.648 0.000 -2.767 0.013 -2.885 0.027 -3.004 0.040 -3.123 0.053 -3.241 0.067 -3.360 0.080 -3.479 0.093 -3.597 0.107 -3.716 0.120

Technological Changes in Agriculture: The Argentine Experience

281

d. The minus in the coefficients of the chemicals variable could be explained, hypothetically, by the following arguments: i) the high degree of aggregation of the variable "chemical expenditures", the existence of possible lags and the influences of other factors upon the impact of chemicals on output (particularly, climate and farm practices), surely have affected the expected results. Examination of elasticities coefficients shows better conclusions about the trend and impact of the chemicals variable. The values of elasticities (Table 3) from 1969 in pesticides variable, and from 1980 in chemicals variable, seem to show that they influenced the level of output when the inputs amount was important relative to the other factors (Reg. 4 and Reg. 6, respectively). e. The positive and statistically significant time trend coefficients suggest that total factor productivity has increased in Argentina. Particularly, they reflect the technological change and the government policies to enhance research and farmers' education that improved agricultural production efficiency greatly. f. Production elasticities for inputs, evaluated as âlnY

=

(5)

show a decreasing trend in land variable supporting our expectations (Table 3); furthermore, labor elasticities suggest a decreasing productivity throughout time and satisfy theoretical expectations. For chemicals and pesticides, some comments are made in d.

9. Concluding Remarks The present research has helped obtain some "a priori" results for the application of the technological change phenomenon in agriculture in Argentina. Both the productive changes diagnosis and the empirical demonstration through the estimation of the model, seemingly reveal the following conclusions: a. The production volume and the physical yields rose significantly along the past three decades. Some alterations in the structure of inputs utilization have been observed (Table 4).

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Fernando Sonnet / Maria L. Recalde de Bernardi / Carlos Valquez

Table 4. Argentina Inputs Ratios (1960-1988). Year Land/Labor

Chemicals/

Land/Tractor

Land

Power

Tractor Power/Labor

(hectares per

(US$ per

(hectares per

(CV potency per

employee)

hectare)

CV)

employee)

1960 21.5

.03

6.5

3.3

1988 32.2

.28

2.1

15.2

Source: National Secretary of Agriculture (Secret, de Agric. de la Nac.).

b. The productive structure gradually adapted through development of the technological change phenomenon. This is seen in the evolution of the technical efficiency measure (1960-1988, Figure 3), whose oscillations gradually converge towards an average level of around 95%. However, this is a value we should check, since it looks somewhat high compared with the results reported in other studies for Argentina. c. Apparently, technological change was not neutral in the Hicksian sense. The increase in tractor power, along with the booming use of agrochemicals and improved seeds, shows that technological change enjoyed labor and land saving, capital using, and new inputs using characteristics. However, it must be mentioned that such assertions are still hypothetical; demonstration of that phenomenon was not possible due to the form of the estimated model and the high level of aggregation of those variables; it was also not possible to measure the inputs qualitative improvement.

283

Technological Changes in Agriculture: The Argentine Experience Figure 3 Evolution of Technical Efficiency

d. B y improving the quality o f data and considering other alternative theoretical

frameworks

(duality

models,

traditional

models

with

disaggregate components, etc.) and variables (credit, migration, public expenditure in research, etc.), better results could be available for further analysis o f technological change in Argentina. A n interesting approach w o u l d be to fit a model where the following components would be distinguished: i) the shift o f the frontier production function, ii) the improved efficiency over time (to reflect the effects o f institutional and economic organization reforms), and iii) greater inputs demands.

Bibliography ADELMAN, L. and S. ROBINSON (1978): "Income Distribution Policy in Developing Countries: A Case Study of Korea". Stanford. AFRIAT, S. (1972): "Efficiency Estimation of Production Functions". International Economic Review, No 13. ALY, H. and R. GRABOWSKI (1984): "Technological Change and Surplus Labour in Egyptian Agriculture, 1952-72". Journal of Agricultural Economics, Vol.XXXV, Nol, January. BARSKY, O. et.al. (1988): "La Agricultura Pampeana. Transformaciones Productivas y Sociales". Fondo de Cultura Económica, IICA, CISEA. BURGESS, D. F. (1975): "Duality Theory and Pitfalls in the Specification of Technologies". Journal of Econometrics, 3. BYRON, R. and A. BERA. (1983): "Least Squares Approximations to Unknown Regression Functions: A comment". International Economic Review, No 24.

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CLARK, J. S. and C. YOUNGBLOOD (1992): "Estimating Duality Models with Biased Technical Change: A Time Series Approach". American Journal of Agricultural Economics, Vol. 74, No 2, May. DELFINO, J. (1989): "Análisis de la Oferta de Productos, la Demanda de Insumos y la Tecnología del Sector Agropecuario Argentino Empleando una Función de Beneficios". Anales de la A.A.E.P., XXIV Reunión Anual, Córdoba. DRISCOLL, P. and R. BOISVERT (1991): "Dual Second and Third-Order Translog Models of Production". American Journal of Agricultural Economics, Vol. 73, No 4, November. FAN, S. (1991): "Effects of Technological Change and Institutional Reform Production Growth in Chinese Agriculture". American Journal of Agricultural Economics, Vol. 73, No 2, May. FEDER, G., JUST, R. and D. ZILBERMAN (1985): "Adoption of Agricultural Innovations in Development Countries: A Survey". Economic Development and Cultural Change, Vol. 33, No 2, January. FEDER, G. and T. O'MARA (1981): "Farm Size and The Diffusion of Green Revolution Technology". Economic Development and Cultural Change, Vol.30, No 1, October. Feder, G. and T. SLADE. (1984): "The Acquisition of Information and The Adoption of New Technology". American Journal of Agricultural Economics, No 66. FORSUND, F. R.; LOVELL, C. A. and P. SCHMIDT (1980): "A Survey of Frontier Production Functions and Their Relationship to Efficiency Measurement". Journal Econometrics, No 13. GREENE, W. H. (1980): "On Estimation of a Flexible Frontier Production Model". Journal of Econometrics, No 13. JUST, R. E. and D. ZILBERMAN (1983): "Stochastic Structure, Farm Size and Technology Adoption in Developing Agriculture". Oxford Economic Papers, No 35. KAKO, T. (1978): "Decomposition Analysis of Derived Demand for Factor Inputs: The Case of Rice Production in Japan". American Journal of Agricultural Economics, 60, No 4. KANEDA, H. (1967): "The Sources and Rates of Productivity Gains in Japanese Agriculture". Journal of Farm Economics, 49, No 5. KANEDA, H. (1980): "Structural Change and Policy Response in Japanese Agriculture after the Land Reform". Economic Development and Cultural Change, 28, No 3. KANEDA, Hiromitsu (1981): "Specification of Production Functions for Analizing Technical Change and Factor Inputs in Agricultural Development". Journal of Development Economics. KELLEY, A. and J. WILLIANSOM (1980): "Modelling Urbanization and Economic Growth". The International Institute for Applied Systems Analysis, Luxemburg. Mc INERNEY, J. (1984): "Technology Change as an Instrument in Agricultural Development". Journal of Agricultural Economics, Vol.XXXV, No 3. September. OBSCHATKO, E. and A. De JANVRY (1972): "Factores Limitantes al Cambio Tecnológico en el Sector Agropecuario Argentino". Desarrollo Enonómico, Vol. 11, No 42-44.

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OBSCHATKO, E.; SOLÁ, F.; Pineiro, M. and G. BORDELOIS (1984): "Transformaciones en la Agricultura Pampeana: algunas hipótesis interpretativas", CISEA. OBSCHATKO, E. and M. PIÑERO (1986): "Agricultura Pampeana: Tecnológico y Sector Privado". Ensayos y Tesis, CISEA.

Cambio

OBSCHATKO, E. (1988): "Las Etapas del Cambio Tecnológico". Barsky, O.; Cirio, F. y otros. "La Agricultura Pampeana: transformaciones productivas y sociales". IICA, CISEA. PARUCH, A. and K. SHAH (1994): "Measurement of Technical Efficiency in the North West Frontier". Journal of Agricultural Economics, No 45. RECALDE DE BERNARDI, M. (1987): "Beneficios y Costos de Políticas de Precios: Precio Sostén o Subsidio a los Fertilizantes". Tesis Doctoral, Fac. de Ciencias Económicas, UNC. RICHMOND, J. (1974): "Estimating the Efficiency of Production". International Economic Review, No 15. RUSSELL, N. P. and Young, T. (1983): "Frontier Productions Functions and the Measurement of Technical Efficiency". Journal of Agricultural Economics, No 34. SATO, R. (1967): "A Two Level Constant Elasticity of Substitution Production Function". Review of Economic Studies, 34, No 2. SATO, R. and G. SUZAWA (1983): "Research and Productivity. Endogenous Technical Change". Edit. Auburn House Publishing Company, Boston. SONNET, F. H. (1990): "Análisis de Respuesta de Oferta de Oleaginosos en la Provincia de Córdoba". Tesis doctoral, Fac. de Ciencias Económicas, UNC. SONNET, F. H.(1993): "Adopción de Innovaciones, Productividad e Impacto en la Agricultura de la Zona de Tercero Arriba". Prov. de Córdoba, CONICOR. SONNET, F. H. (1995): "Eficiencia Técnica y Escala de Explotación en una Microzona Agrícola de la Prov. de Córdoba". Anales de la XXX Reunión Anual de la A.A.E.P., Río Cuarto, Córdoba, Agosto. THEIL, H. A. (1980): "A System-Wide Approach to Microeconomics". University of Chicago Press.

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Siegfried Bender1 / Julimar da Silva Bichara2

Competitiveness of Brazilian Exports in the EU Introduction This article will analyze the general causes of competitiveness as supported by the global orientation of macroeconomic policy. It will also focus on competitiveness through an analysis of a set of trade policies followed. From this point of view, there are two distinct periods in the modern history of Brazilian economy. The first period lasted from the fifties to the mideighties. The second, from 1988/90 to present, was marked by wide liberalization of international trade and financial transactions with the exterior. In view of that, we will start with a short analysis of the guidelines and circumstances that characterized macroeconomic policy until the beginning of the eighties, and their reflection in the global competitiveness of exports. Next, we will analyze the trade policy implemented in the seventies and eighties, and its impact on the competitiveness of exports. In conclusion, this article will study the relevant causes of the trade and financial liberalization process, and analyze the impact the new economic policy has had upon competitiveness.

(1) The General Causes of the Competitiveness in the seventies and eighties As we know, during the long period from 1950 to 1980, Brazil adopted an economic strategy which promoted and favored the growth of the industrial sector over the agricultural. The growth model was a process of import substitution industrialization and, to that end, intensive use was made of

1

Prof, at Universidade de S3o Paulo.

2

Graduate student of economics at Universidade de Sao Paulo.

C o m p e t i t i v e n e s s o f Brazilian E x p o r t s in the E U

287

instruments of economic policy. For example, multiple systems of exchange rate, tariffs, quotas, non-tariffs instruments, fiscal and credit subsidies - with the purpose of protecting the domestic market from international competition, and making the industry of domestic goods very profitable. As a consequence of the indiscriminate adoption of exclusive policies to favor the national industry, a diversified and complex industrial sector was implemented which was not always in condition to face the international competition. In some sectors there still exists a visibly bad allocation of resources as a consequence of an exaggerated "quantitative view" in the adopted growth strategy. They tried to install, at any cost, a wide and diversified industrial structure, but completely dissociated from such considerations as efficiency and comparative advantages (static and dynamic), in the production of certain goods. The government's chosen model of industrialization and economic growth not only defined favored areas and sectors in the transference of income, but also acted directly in the promotion of public investment in non-traditional areas. This model was based on four sources by which the public sector financed its own expenditures and reallocated private savings: (1) social security system, (2) taxes, (3) inflation tax, and (4) foreign savings. Faced with the inflexibility of the first three sources of financing, the abundance of foreign credit in the seventies fended off the rupture of this model for some time. However, exhaustion of resources was inevitable because of the international financial crisis3 in the beginning of the eighties, which, almost throughout the decade, eliminated foreign savings as a source of financing for the accumulation of capital in the Brazilian economy. Adjusting the Brazilian economy to the new conditions of the international market caused a drastic change in the orientation of the economic policies. To begin with, during the first half of the eighties, the external adjustment promoted with the aid of IMF centered on reducing domestic absoiption and tried to reallocate resources into the exports sector. To achieve this, the economic policy made intensive use of a restrictive monetary policy and effectuated a strong depreciation of the real exchange rate, while maintaining and enlarging the protection system of the domestic production 3

As a result of the second oil shock and the shock in the interest rates of the international financial markets, due to the adjustment policies of the industrialized countries.

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Siegfried Bender / Julimar da Silva Bichara

and so restricting the imports of goods and services. It tried systematically to balance the budget, but succeeded only in raising taxes, and made several, mostly unsuccessful attempts to reduce public expenditure - though there had been a vast reallocation of public spending caused mostly by the rise in current expenses to buy foreign currencies, and to pay interest on the public sector's internal and foreign debt to the detriment of subsidies (fiscal and public credit), "social" transfers and public investment. The result of the first phase of external adjustment was that the commercial surplus balances which were produced4 to pay the foreign debt service, provoked an enormous domestic disequilibrium. In terms of economic growth, the economy experienced a recession and economic stagnation as never faced before 5 . The public sector, in spite of the effort to reduce the operational deficit from 7% of the GNP in 1981/82, to around 3% in 1983/84, could not achieve an adjustment capable of warding off inflationary financing, due in part to a significant increase in the interest payments on internal and foreign debt for which the public sector was responsible. As a consequence of these imbalances and other factors, the dynamics of the inflation, which at the beginning appeared to have an inertial6 feature, began changing, and from the mid-eighties began exhibiting a constant monthly acceleration7.

4

See table 11.

5

As we can see in table 01, from the fifties until the eighties, in spite of the chronic inflation, the real income and the real income per capita had shown strong growth.

6

The inertial inflationary process occurs when the level of the inflation rate stays relatively constant during a long period of time, changing position only when supply and demand shocks occur, thus moving the inflation rate to a new level.

7

Montoro (1994), estimated the monthly variation of the inflation rate of the period from March 1986 to June 1994, a period of 100 months. The empirical results showed a remarkable regularity in the Brazilian inflationary process; during this period, the inflation rate rose from one month to another by a constant value of approximately 1.2%.

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Competitiveness of Brazilian Exports in the E U

Table 01: Brazil: The Average of Inflation Rates, GDP and GDP per capita (%). PERIOD

AVERAGE ANNUAL ANNUAL GROWTH ANNUAL GROWTH INFLATION RATE

OF THE GDP

RATE OF GDP per

(REAL)

capita (REAL)

1950-60

66.0

3.1

0.0

1960-70

25.5

7.6

4.5

1971-75

22.5

9.7

6.9

1976-80

62.7

7.4

8.8

1981-83

135.3

-2.1

_

1981-85

173.0

1.3

-0.2

1986-90

955.5

1.8

0.0

Source: Banco Central do Brasil

In the foreign domain, a policy of mini exchange rate devaluations was in effect in Brazil from 1986 until 1990. In general terms, it attempted to maintain the real parity of the currency, and was implemented in order to avoid speculative attacks against it. This policy differed from the policy in effect from 1968 until 1986, which was based on the principle of purchasing power parity and depreciated the nominal exchange rate by the difference between domestic and international inflation8. During the period of 1970-80, the exchange rate policy resulted in a rise of 25% in the real effective exchange rate and the real rate weighed by the terms of exchange, showed stable behavior in that period. On the other hand, between 1980-85 the effective exchange rate rose 5% in relation to 1979, while the real rate weighed by the terms of trade registered a decline of about 11%. Consequently, in reference to trade performance, the exchange rate policy resulted in the increase of exports, in real terms, of about 65% between 1974-80, while maintaining a level of US$ 34 billion between 1980-85, 1990 prices. Imports, on the other hand, rose only 12%, in real terms, between 1974-80 and fell about 54% ,in real terms, between 1980-85. Thus, the deficit of the trade balance was continuously reduced between 1974-80, producing growing surpluses in the first half of the eighties.

8

In fact, between 1983 and 1985 the depreciation accompanied only domestic inflation, while in December 1979 and February 1983, two "maxi-devaluations" of 30% each were effectuated, and in 1980 a regime establishing the exchange rate devaluation at 4 0 % was followed throughout 1980.

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(2) Trade Policy and Competitiveness of Exports in the seventies and eighties The purpose of this section is to analyze the Brazilian trade policy followed in the decade of 1970/80, and its impact upon the competitiveness of exports. First, trade policy measures will be analyzed and associated to the strategy of industrial development implemented during the seventies, and followed until the recent trade reform (started in 1988 and finished in 1990). Then, some considerations will be made regarding the performance in terms of competitiveness and the export structure. From the adoption of this model of growth, through import substitution industrialization until the recent trade reform in 1989/90, a large-scale set of measures restricting free trade were used. Basically, they were composed of two elements. The first element was characterized by huge restrictions to free trade, consisting mainly of non-tariff barriers. The most important were: control of the emission of import permits, the so-called "Similar Law", and a special import regime (exemption or reduction of the tax to import certain products). Along with these, there was the imposition of additional charges9 and a ban on the import of a series of products10. The second element, the BEFIEX, was of a compensatory nature and was established to encourage the exports. This was a special program created to instigate exports, composed of fiscal and credit subsidies. The principal effect of this measure was to compensate for the anti-export bias created by the above mentioned restrictive policies, especially in some industrial sectors. This special trade regime, largely opposed to free trade, was associated to the strategy of industrial development in the Brazilian economy. As a strong sector of durable consumption goods had been implemented by the midseventies, in 1974 the policy was directed to develop the weaker industries of capital and intermediate goods. The intention of the policy was to strengthen the modern industrial sector of the economy through the implementation of a new series of productive sectors and sub-sectors, and through the adaptation and creation of modern technologies. With that in mind, the trade policies were seeking to benefit these industries, both through the 9

Such as the tax of 25% on exchange operations and additional taxes to improve the harbors and the merchant marine.

10

In the Appendix C of Cacex, which suspended import permits for 1200 products.

Competitiveness of Brazilian Exports in the EU

291

"Similar Law" and the special import regimes. To achieve this purpose, the trade policy became one of the central points of the industrialization strategy. The association of these policies produced a kind of discriminatory treatment among the several industries. Heavy restrictions on imports fell upon the industry of consumer goods, excluded from the priorities by industrial policy in the form of the import permit control and, in some cases, plain prohibition. As priorities of the industrial policy, the industries of capital and intermediate goods were favored by the "Similar Law" and, principally, by the special import regimes. These measures protected both the target industries of international competitiveness, and also encouraged the installation of these industries in the economy. This discriminating trade regime generated some important implications. One of these, the result of the spread of special import regimes, involved fiscal losses. According to Kume and Riani (1992: pp.95), this instrument "at its peak, affected almost 70% of overall imports". This means that almost 70% of Brazilian imports were undertaken with tax reduction or exemption. The special regimes allowed for the reduction exemption, which created a difference between the correct tariff and the one in fact collected, i.e., the relationship between the revenue from import taxes and the value of imports. In this way, the fiscal revenue generated from the import tax was much lower than the potential (see table 02).

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Siegfried Bender / Julimar da Silva Bichara

Table 02: Brazil: Legal and " T r u e " Rates of Protection, 1984 Effective

Nominal Sector

Legal

True

Legal

True

All Manufacturing

90.0

Light Manufacturing

130.5

19.1

165.6

34.5

10.1

246.1

35.2

Food

84.2

16.9

212.3

43.4

Textiles

176.9

3.3

268.4

1.1

71.9

3.9

114.4

32.4

Paper

82.2

39.4

212.9

110.9

Chemical

34.2

11.5

95.2

24.6

Non-metallic minerals

98.7

29.5

182.1

41.5

72.8

12.7

91.1

24.0

98.5

8.5

137.1

14.1 19.1

Heavy Industry

Metallurgy High Tech Machinery

81.2

14.9

121.3

Transport Equipment

115.9

2.9

217.7

-9.6

Agriculture

57.3

22.6

63.3

26.7

Source: Bonelli, Franco and Fritsch (1993), pp. 90.

Furthermore, the protectionist commercial regime, with wide governmental intervention in the market of products and factors, produced a non-efficient allocation, a distortion of the productive structure, and a change in the trade pattern. This resulted in the deterioration in the competitiveness of traditional export industries. Nevertheless, as a result of the mini devaluation policy and because of the fiscal and credit subsidies conceded, it was possible to preserve the profitability of the export sector in the seventies and beginning of the eighties (when the exchange rate was heavily depreciated. In this way, the global exports, in real terms, had grown until the middle of the eighties. Although exports continued to grow, the adopted trade regime punished the traditional and overall exports severely, and thus, showed only a slight change in their structure. So, the Brazilian economy exhibited, in the eighties, a performance below the average of the developing countries, both in terms of income growth and in relation to the openness of the economy, and participation in international trade. The Brazilian economy, as other developing economies, is relatively abundant in semi-skilled labor and natural resources, but is relatively short

293

Competitiveness of Brazilian Exports in the EU

on capital, skilled labor, and technology. The trade policy, with its high rate of effective protection and its special import regimes, encouraged the installation of highly technological industries which require intensively scarce factors. Consequently, a new distortion arose in the productive structure which caused a change in the trade pattern, favoring the exports of manufactured goods and penalizing the export of basic goods, sectors which have a natural tendency to get comparative advantages in an environment of free trade (see table 03). Table 03: Exports of Manufactured Goods within sectors and chosen years (1970-91) (in billions of dollars FOBe %) TYPES Metallurgy

1970 % 112 10.0

1975

%

1980

%

1985

%

1989

%

1991

%

263

4.3

1165

6.8 2627 11.9 6334 21.3 6112 22.4

Mechanics

65

5.8

408

6.7

1494

8.8

1492

6.8

1966

6.6

1735

6.4

Electric Equipment Transport Equipment Wood

24

2.1

178

2.9

488

2.9

593

2.7

1178

4.0 1110

4.1

23

2.0

317

5.2

1434

109

9.7

140

2.3

383

2.2

229

1.0

408

1.4

443

1.6

6

0.5

58

1.0

513

3.0

534

2.4

1286

4.3

1230

4.5

42

3.7

71

1.2

126

0.7

166

0.8

256

0.9

314

1.1

Paper and Cardboard Leather and furs Chemical

107

8.4 1804

8.2 3812 12.8 3049 11.2

9.5 1013 16.7 3014 17.7 4868 22.1 5495 18.4 4094 15.0

Textiles

75

6.7

422

7.0

738

4.3

786

3.6

1083

3.6

1095

4.0

Clothes and shoes

14

1.2

238

3.9

477

2.8

1017

4.6

1473

4.9

1364

5.0

Food

464 41.3 2607 43.0 6008 35.2 6053 27.5 4670 15.7 4504 16.5

Tobacco

33

2.9

149

2.5

295

1.7

459

2.1

539

1.8

799

Several

9

0.8

61

1.0

225

1.3

272

1.2

474

1.6

521

1.9

143

2.4

689

4.0

5.2

830

2.8

935

3.4

100 22043 100 29804 100 27305

100

Others *

41

3.6

Total

1124 100 6068

Total Manufacturing

41.1

70

100 17049 85.1

1143 86.3

86.7

•Included: Non-Metallic Mineral Products, Furniture, Rubber, Pharmaceutics, Fragrances, Soaps and Candles, Plastics, Beverages, Publishers and Typographers Source: Bonelli (1994)

87.3

2.9

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Siegfried Bender / Julimar da Silva Bichara

The change in the trade pattern occurred in the seventies in particular, when the exports of manufactured and semi-manufactured goods rose from 41.1%, to 85.1% of total exports. During the eighties, the participation of manufactured exports remained at an average level of 86% of total exports. During that same period of time, significant changes occurred in the composition of manufactured exports, indicating a rise in the participation of capital intensive products (skilled labor and technology). While the industrialization strategy achieved its purpose, which was the installation of industries with more advanced technology, changes had begun to occur in the composition of "industrialized" exports. From the data in table 03, we can see that, while in 1970, 69.9% of Brazilian manufactured exports were concentrated in the sectors of food, textiles, clothing, shoes, leather, furs, tobacco, and others; in 1985, the participation of these sectors fell to 46%. In that same period, the exports of the technologically advanced industries (Metallurgy, Mechanics, Electric Equipment, Transport Equipment, Chemical, Paper, and Cardboard), had grown from 30.1% to 54%. The data in the above table highlight the distortion in the productive and commercial structure caused by the association of trade and industrial policies. The traditional export industries with natural comparative advantages (because they use abundant resources), lost their importance in the productive structure and on the export list. As a consequence of these distortions and, mainly, of the measures adopted by the stabilization policies established in the mid-eighties (to be described later), the Brazilian exports experienced competitiveness losses, especially since 1986. Using the indices of "Revealed Comparative Advantages", it is possible to analyze the competitiveness of Brazilian exports in the period of 70/80 (see table 04). In the seventies, the indicators of comparative advantages grew both for the traditional industries (Textiles and Clothing), and also for those sectors of the industrial policy with greater priority (Transport Equipment, Machinery, and Other Manufactured Products). During that same period of time, however, the results indicate a poor competitiveness performance for Brazilian exports, both in the traditional industries and in the ones with more advanced technology - exceptions are made for the industries of oil and metallurgy. The data may suggest that the industrial and trade policies followed by Brazil, since the beginning of the seventies, were not able to

295

Competitiveness of Brazilian Exports in the EU

create the necessary and useful mechanisms to keep up with the transformations occurring in international trade in the eighties. Table 04: BRAZIL - Indices of "Revealed Comparative Advantage" * SECTORS

1970 1974 1979 1985

1. Food, Beverages and Tobacco

4.38 3.05 3.33 3.18

2. Textiles

0.87 2.96 1.84 1.06

3. Clothing 4.

Wood

1.03 Products,

Papers

and

4.1

2.1 1.81

2.54 1.29 1.57 0.95

79/70 85/79 -3.00 -0.77 8.68

-8.78

8.24

-2.45

-5.21 -8.03

Printing 5. Rubber

0.7 0.41 1.04 1.53 1.2 1.32

4.50

6.65

-1.78

1.60

6. Chemical

1.41 1.66

7. Petroleum and Coal Products

0.22 0.07 0.12 0.51

8. Non-Metallic Mineral Products

0.92 1.05 0.98 0.61

0.70

9. Ferrous and Non - Ferrous Metals

1.17 0.65 1.22 2.17

0.47 10.07

10. Transport Equipment

0.16 0.62 0.94 0.61

21.74

-6.95

11. Machinery and Others Manuf.

0.45 0.78 0.85 0.62

7.32

-5.12

-6.51 27.27 -7.60

* defined as (Xi,n/Xn)/(Xi,w/Xw),where: Xi,n = Brazilian export on the industry i; Xn = total Brazilian export of manufacture goods; Xi,w = world export on industry i; Xw = total world export of manufacture goods; Source: Silber, Simao (1994)

Consequently, the fall in the competitiveness pattern of exports since 1986 reduced both Brazil's participation in international trade, and the level of economic liberalization (see table 05). The loss in participation in international trade was particularly important in the second half of the eighties, when the volume of Brazilian trade responded for less than 1% of the international movement of goods. Hence, the Brazilian commercial strategy opted for intervention policies rather than stable and clear rules. This produced perverse effects in the productive industrial structure and consequently in the trade pattern. The exports of traditional goods with natural comparative advantages, suffered in favor of the export of technologically advanced goods which created artificial comparative advantages. Since there was no structural support to accompany the technological evolution of the manufacturing process of

296

Siegfried Bender / Julimar da Silva Bichara

these goods, the competitiveness of Brazilian exports dropped, reflecting its lower participation in the international trade for all tradable goods. Table 05: Exports, Imports, GNP and Openness: 1975-1994 (in billions of dollars and %) Brazil

World Year Exp+Imp

GNP

Openness Exp+Imp

GNP

Openness

(2)/(l) 1.25

1975

1,638.3

5,250.0

15.6

20.5

124.3

8.3

1976

1,857.3

5,729.0

16.2

22.3

152.3

7.3

1.20

1977

2,118.9

6,488.3

16.3

23.9

175.8

6.8

1 13

1978

2,455.4

7,754.4

15.8

26.1

208.3

6.3

1.06

1979

3,104.5

9,588.3

16.2

33.2

234.2

7.1

1.07

1980

3,838.4 11,939.7

16.1

45.1

239.1

9.4

1.17

1981

3,786.7 11,833.8

16.0

47.4

263.0

9.0

1.25

1982

3,535.0 12,859.7

13.7

41.2

270.4

7.6

1.17

1983

3,428.6 12,882.6

13.3

38.7

205.9

9.4

1.13

1984

3,651.5 13,373.3

13.7

42.2

212.6

9.9

1.16

1985

3,687.1 13,853.8

13.3

40.0

227.9

8.8

1.08

1986

4,053.4 16,624.4

12.2

37.9

280.2

6.7

0.94

1987

4,774.0 18,142.6

13.2

42.9

323.6

6.6

0.90

1988

5,461.9 19,547.2

14.0

49.9

333.0

7.5

0.91

1989

5,912.2 22,976.7

12.9

54.4

336.3

8.1

0.92

1990

6,760.0 24,632.8

13.7

53.9

339.7

7.9

0.80

1991

7,079.7 25,051.6

14.1

54.6

355.7

7.7

0.77

1992

7,512.3 25,878.3

14.5

58.9

366.4

8.0

0.78

1993

7,482.8

66.4

394.9

8.4

0.88

1994

8,826.0

76.8

* openness was defined as the relation between (Exp+Imp)/2 and the GNP. Source: Silber (1994) e International Financial Statistic

Competitiveness of Brazilian Exports in the E U

297

(3) Causes of Trade and Financial Liberalization The fall in the real oil prices and in the interest rates contributed, since the mid-eighties, to reduce the importance of the foreign debt service as the main restraint faced by the economic policy. As a result, the Brazilian economy entered a second stage in 1986 in which the internal objectives received the merited emphasis in the elaboration of macroeconomics policy. In this case, the priority was to control and eliminate the inflationary process, and to this end, several stabilization plans, called "heterodoxies", were successively undertaken, characterizing the Brazilian economy until today. Although inflation has been a phenomenon present in the Brazilian economy since at least the fifties, it had never been a visible impediment to economic growth11 until the eighties. The phase of relative stagnation that began in the eighties, brought about the realization of the need to eliminate the inflationary process as a pre-condition to a new phase of economic growth. From February 1986 until July 1994, seven plans of stabilization were implemented, together with five monetary reforms. These plans are said to be heterodox (as opposed to orthodox), because they used income and price policies intensively which directly and indirectly interfered in price (private and public) determination, and indirectly promoted an income redistribution in the economy. Generally, these stabilization plans consisted of an introduction of a new account unit, monetary reform, together with income policies. These income policies promoted a wide disindexation of contracts and of rules to adjust prices and wages, and also tried to control the level of wages and some essential prices (public and private), of the economy. Though policy makers recognized the need for a serious adjustment on a fiscal level, political restrictions imposed a fiscal rigidity which successively restrained the adjustments required for stabilization12. The monetary policy restrained the liquidity in the beginning of the plan (and raised the interest rate), but because of extraordinary public sector debts, finally submitted to the fiscal pressure and became passive.

11 See table 01. 12 The public sector deficit (operational concept), rose on average from 3% of GNP in 1983/84 to around 5.5% of GNP in 1986/89, and fell to 1% GNP in the period of 1990/93.

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Siegfried Bender / Julimar da Silva Bichara

In summary, repressed inflation was the recurrent outcome of these stabilization plans. Restraints on prices and the inflationary process were temporarily achieved by income policies and direct control of essential prices, while the very nature of these stabilization plans liberated forces that resulted in the elevation of aggregate demand. The pressure of demand came from not resolving the public deficit, and was also due to the rise of private consumption resulting from the increase in the population's income. The elevation of available income was caused in the short term by the near absence of an inflationary tax, compared to the situation preceding the plan 13 , and was registered during the period in which the income policies and the direct controls of prices were efficient. In the mid term, though in part linked to the reduction of the inflationary tax, the rise in available income resulted from a generalized wage increase, which in turn resulted from the increasing level of activity registered during the existence of the stabilization plans. In all of these plans the income policies instantly reduced the inflation from between 30% and 80% per month, to about 1% per month, producing a considerable reduction in the amount of inflation tax paid by the population and raising the available income, signifying that they were intrinsically expansionist. Thus, in the absence of foreign savings to handle the internal excess demand, such plans caused repressed inflation which consequently destroyed the income policies and price controls. After that, the economy quickly re-indexed in anticipation of inflation dynamics, and the inflation followed the usual path of growth, however, with one peculiar characteristic; the inflation rate rose at a constant rate from one month to the next14. With the return of accelerating inflation, the expansive cycle of the economy was aborted and returned to the stagnation phase. In the foreign area, the exchange policy has favored the administration of the nominal exchange rate. Only in 1990, was the flexible nominal exchange rate adopted, with the government still interfering frequently in the exchange 13 Toledo (1988), in ail analysis about the "Cruzado" plan (28 Feb 1986), demonstrates that the inflationary tax represented 5% of the GNP or nearly 10% of the total work force wages, and were paid by the working class which had no access to the indexed financial assets created by the sophisticated financial system in an environment of high inflation. The elimination of this tax, achieved through price stability (temporarily), in virtue of adopted income policies and price controls in the first phase of the "Cruzado" plan, represented a rise of about 40% in the available income of employees. 14 See note 5.

299

Competitiveness o f Brazilian E x p o r t s in t h e E U

market 15 . Notwithstanding, the exchange rate, one of the most important prices under control during the implementation of the stabilization policies, registered a slow and steady real effective exchange rate appreciation of about 31% between 1986 and 1994 (see table 06). Another indicator often used to show the impact of economic policy on the profitability of exports, is the ratio of exchange rate versus wages. In the period of 1986 to 1994, this ratio fell about 37% (see table 06), indicating a significant loss in profitability of the exports. In other words, both indicators (real exchange rate and the ratio exchange rate/wages), showed a significant loss in competitiveness of the Brazilian exports in the international market. In response, the Brazilian exports declined systematically in real terms between 1988 and 1991, although they returned to their former level in 1994. Between 1988-94, exports registered a growth of only 3.7% in real terms, while, for example, international trade registered a growth of 12.3% in the period of 1988-9016. As a result of its lower dynamism in relation to international trade, Brazil's participation in world exports fell from 1.16 (average of the period 1980-85) to 0.89 (average of the period 1986-90. See table 05. T a b l e 06:

Real E x c h a n g e R a t e , E f f e c t i v e Real E x c h a n g e R a t e a n d t h e R a t i o b e t w e e n E x c h a n g e R a t e and W a g e s - Brazil

Real

Exchange

1986

1987

1988

1989

1990

1991

1992

1993

1994

174.6

156.4

134.9

120.2

100.0

126.9

123.5

114.4

104.1

149.7

150.6

132.8

111.5

100.0

126.2

126.7

112.3

103.5

130.2

136.5

132.5

104.5

100.0

119.0

118.8

103.2

81.6

Rate 1 Effective

Real

Exchange Rate2 Exchange

Rate/Wages 1. D e f l e c t o r IP A B r a z i l / U S A 2. W e i g h t e d average of the index prices with the main trade S o u r c e : B o l e t i m d o B a n c o Central d o Brasil

15 From January 1992 to September 1994, with the broad liberalization of the international capital flows, the high real interest rate in the Brazilian economy caused a strong entrance of international speculative capital, and helped to appreciate the exchange rate (nominal and real). The Central Bank, in order to contain appreciation, intervened systematically in the exchange market and accumulated reserves of US$34 billion between 1992 and September 1994. See table 10. 16

Corresponds to the growth rate of international exports deflated by the IPC-EUA, source: IMF statistics.

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The Brazilian economy entered the nineties by promoting a broad liberalization of trade 17 and financial transactions with the exterior. The first pertinent question that should be raised is, what is the meaning of these policies within the general orientation of the current Brazilian economic policy? We attempted to show that since the mid-eighties, economic policy had intended to adapt the economy to a new phase of economic growth. The stabilization plans, for several reasons, resulted in successive failures; however, the bad performance of the Brazilian economy during the eighties led to a consensus between many analysts (foreign and domestic), as to which path to follow. They agreed that effective stabilization will be a result of a long process of structural reforms and reallocation of productive resources in the economy. They also decided that, despite the apparent paradox, restoring dynamic economic growth would not require, as a rule, the effective elimination of the chronic inflationary process. The stabilization plans may be seen as means of temporarily reducing the rate of inflation and permitting coexistence with a process of high, chronic inflation, while making structural reforms absolutely necessary for the effective, and permanent elimination of the effective causes of inflation and of the inflationary process. As Sachs (1988) demonstrates, "in consequence of the weak economic performance of the countries where the external adjustment is monitored by the IMF, new policies were formulated to allow the debtor countries to recover their growth, while continuing to pay their debts". The solution can be found in a development strategy oriented "outwards", and the growth of exports is a mechanism which allows for the simultaneous growth of income and payment of foreign obligations. So, as Krueger (1980) states, the strategy of growth through the promotion of exports requires, first, broad trade liberalization and a real depreciation of exchange rate, and second, emphasis in the private sector and a generalized reduction in all forms of government intervention in the markets of goods, capital, and factors. The defense of growth through export promotion lies in the relatively successful development strategies of the "Asian tigers". However, Sachs

17

The process of trade liberalization initiated in 1988, with a tributary reform, eliminated all the redundant tariffs. Afterwards, in 1990, the process was carefully extended with the complete elimination of all the non-tariff barriers, and with the definition of a global and gradual reduction program of the import aliquots between 1990-94. Thus, the average import tariff was 32.2% in 1990, and was successively reduced to 25.3% (1991), 21.2% (1992), 17.1% (1993), and 14.2% (1994).

Competitiveness of Brazilian Exports in the EU

301

emphasizes that with respect to stabilization and growth, the historical experience of those countries does not portray liberalization as an infallible measure for controlling the "crisis" of debtor countries. He points out that the "Asian tigers", adopted outwardly-oriented growth strategies long after solving their macroeconomic and financial difficulties, and more significantly, they did not promote generalized import liberalization. Nonetheless, both trade and financial liberalization have been upheld as structural reforms necessary for the elimination of the inflationary process. The primary reason for this can be attribued to the inflationary factor which is the acute distributive conflict in the Brazilian economy. These conflicts, are in part, the result of the iniquitous income distribution, which is in turn caused by domestic protection from foreign competition and by the absence of competition in general in the Brazilian economy. In summary, for somewhat distinct reasons (to some it is a new model of growth and to others a pre-condition to the effective and permanent stabilization), several analysts have agreed on the need for broad liberalization of the Brazilian economy, though not on the intensity and velocity of implementation. The notions underpinning the new orientations of the economic policy and inducing the liberalization process are: the necessity of acquiring foreign currencies and, so, the necessity to promote exports, recognition of the high cost underlying the current inefficient distribution of productive resources, the bankruptcy of the inward growth strategy and the income inequity which contributes enormously to stimulating the distributive conflicts of the economy. In the current situation, it is clear that Brazil should adopt a new growth strategy in which international trade plays an important role. To that end, the economic policy has attempted to implement a complete series of structural reforms: privatization, deregulation of the domestic economy, reform of the financial system and broad deregulation of the international financial transactions, broad liberalization of foreign trade, tributary reform, and among others, seek to reorganize the Brazilian economy so as to increase competitiveness, and make a deeper insertion in the global economy possible.

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(4) The Liberalization Process and Implications under the Competitiveness At the present moment, a new stabilization plan, the "Piano Real", is in effect. The new plan includes, together with a new monetary reform, disindexation measures, direct and indirect price controls (public and private), elevation of real interest rates and some measures for controlling the public deficit. This plan also adopted a basic anchor, the exchange rate. It established a maximum ceiling (1 US$ = 1 R$), anchoring the future prices and allowing the nominal exchange rate to float downwards. There was a significant entrance of international speculative capital; so as to mediate the higher internal interest rates, the nominal exchange rate appreciated over the ceiling, to between 0.84 and 0.83 R$ per US$. Thus, the real effective rate of exchange registered a maximum appreciation of 10%, and the ratio between exchange rate/wages a maximum drop of 18%. The exchange rate appreciation, along with measures for reducing tariffs and eliminating the non-tariff barriers, caused a rise in imports of about 80% between June 1994 and April 1995. Exports, in spite of the observed exchange rate appreciation, stayed relatively consistent at the same level of the quarter prior to the implementation of the plan, about US$ 3.75 billion per month. Thus, the significant rise of imports resulted in a constant depreciation of the trade balance, which went from surplus (about US$ 1.4 billion/month), to a deficit (about US$ 800 million/month in the first quarter of 1995). As we emphasized earlier, the trade and financial liberalization process was accompanied by a change in the exchange policy, which adopted the system of flexible exchange rates. These changes, in general, did not revert the appreciation of real exchange rate registered since 1986. The exports, after a slight drop in the period of 1988-91, in real terms, have grown since 1992 and stabilized at a level of US$ 38 billion in 1994 (see table 11). In the period as a whole, between 1986-94, the important fact is that there was a relative loss in the dynamism of Brazilian exports in relation to the growth of international trade. Consequently, Brazil lost significant participation in world exports (see table 05).

Competitiveness of Brazilian Exports in the EU

303

Table 07 : Destination of Brazilian Exports (% of total participation)

Latin America Mercosur EU East Europe

1988

1989

1990

1991

1992

1993

1994

1995»

11.1

10.2

10.2

15.5

21.1

23.6

22.4

22.7

4.9

4.0

4.1

7.4

11.4

13.9

13.6

14.5

28.7

30.6

30.9

30.9

29.6

25.9

27.1

27.5

3.2

3.2

2.3

1.3

1.0

1.0

1.2

1.8

USA and Canada

29.4

27.0

26.3

21.4

20.4

21.9

21.6

22.0

Asia

15.1

16.4

16.9

18.0

15.5

15.9

16.2

16.0

Middle East

3.9

3.5

3.4

3.6

3.6

3.2

2.5

2.4

Africa

3.3

2.8

3.2

3.3

3.2

2.9

3.1

3.0

Others

5.4

6.4

6.8

6.1

5.6

5.6

5.9

4.8

« JAN/JUN Source:

Boletin do Banco Central do Brasil(vârios n°) e Balança Comercial Brasileira do MICT, SECEX, DPPC (varios n°).

In terms of export destination since 1989, the EU has become Brazil's most important trade partner (see table 07). Their participation remained stable until 1992, and after a slight drop, is now registering a slow recovery. On the other hand, exports to the EU rose in real terms between 1980-94, showing a real rise of 18% (see table 08). During the period of 1980-8518, exports stayed around US$ 8.2 billion (prices of 1990), and between 198694, around US$ 9.4 billion, showing a real increase of 15% between these two periods. Thus, the factors that negatively affected the competitiveness of Brazilian exports in other markets, had a different impact in the EU market. Finally, analyzing the composition of exports to the EU, we see that in 1993 and 1994 primary products represented19 respectively, 52% and 54% of the total exports, while industrialized products represented only 48% and 46%, respectively. This composition contrasts heavily with the composition of Brazilian exports in other regions of the world, which have a larger participation of the industrialized goods (see table 09).

18 That period immediately preceding the period characterized by heterodox stabilization plans. 19 These are preliminary estimates.

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Siegfried Bender / Julimar da Silva Bichara

Table 08: Exports to the EU (in million dollars, 1990 prices) YEAR

EXPORT

1980

8822.1

Variation %

1981

8868.3

0.52

1982

7559.6

-14.76

1983

6902.1

-8.70

1984

8571.8

24.19

1985

8308.3

-3.07

1986

6910.2

-16.83

1987

7905.4

14.40

1988

10682.9

35.14

1989

11050.7

3.44

1990

9652.1

-12.66

1991

9361.4

-3.01

1992

9803.2

4.72

1993

8998.7

-8.21

1994

10425.3

15.85

Source: Boletim do Banco Central do Brasil Table 09 : Composition of Total Brazilian Exports (in million dollars, 1990 prices) INDUSTRIALIZED YEAR

PRI-

PART

SEMI

PART

MA-

PART

TOTAL

MARY

(%)

(%)

NUFC.

(%)

1988

10314,6

27,98%

5456,5

14,80%

21093,5

57,22%

36864,6

1989

10093,6

28,23%

6105,2

17,08%

19552,0

54,69%

35750,8

1990

9825,0

30,84%

5115,0

16,05%

16923,0

53,11%

31863

1991

8406,1

28,58%

4614,0

15,69%

16388,9

55,73%

29409

1992

8240,5

24,83%

4831,9

14,56%

20110,5

60,61%

33182,9

1993

8499,5

24,45%

4926,8

14,18%

21330,6

61,37%

34756,9

1994

9826,1

26,05%

6119,2

16,22%

21781,1

57,73%

37726,4

Source: Suma Económica, August-1995.

Competitiveness of Brazilian Exports in the EU

305

Conclusions The competitiveness of Brazilian exports witnessed two distinct periods. The first lasted from 1968 to 1985, and can generally be characterized as positive to the competitiveness of Brazil. In the seventies, the rise in competitiveness was established on the relative stability of the effective exchange rate, joined with fiscal and credit subsidies on exports. During the first half of the eighties, the rise of competitiveness was reflected in the elevation of the effective real exchange rate, caused by the external adjustment policies monitored by the IMF. In that period, a change in the composition of global exports was registered with emphasis on the export of manufactured goods, at the expense of traditional exports goods. In the second period, between 1986-1995, a reduction in competitiveness was registered through a drop in the participation of Brazilian exports in total world exports. Between 1986-90, that reduction was directly caused by the administration of the exchange rate during several "heterodox" stabilization plans implemented in that period. Then, from 1990 to 1995, lower competitiveness was generated by the significant entrance of international speculative capital that caused a meaningful exchange appreciation. In terms of exports to EU, in contrast with exports to the rest of the world, there was a rise during 1980-94, and stability during the sub-period 1988-94. In addition to that, the composition of the exports to the EU, the majority being primary goods, is markedly different from the composition of exports to the rest of the world, the majority of which were industrialized goods. Thus, the factors that depreciated the competitiveness of Brazilian exports in the various world markets, particularly in the period of 1986-91, affected preferentially the industrialized goods and did not affect the primary goods in which Brazil has presumably comparative advantages. The recent economic policy changes toward trade and financial liberalization, as well as the elimination of price distortions, tend to benefit the trade partners who exploit the structure of real distortion-free comparative advantages of Brazil. So, it seems that one of the biggest winners of Brazil's trade liberalization, is the European Community.

306

Siegfried Bender / Julimar da Silva Bichara

Table 10: Brazil: Real Interest Rates (Federal Bonds) and Reserves - 1987-94

1987

1988

1989

1990

1991

1992

-14.8

-4.9

18.7

-4.8

6.7

30.1

4433

5359

7268

8751

8552

1993 SEP.94 DEC.94

Real Exchange Rate Federal Bonds ( % a.a)

7.1

24.8

Reserves (mill, of USS) Cashier

Liquidity

19008 25887 40873

36471

7458 9140 9679 9973 9406 23754 32211 43455

38806

Source: Boletim do Banco Central do Brasil Table 11: Trade Balance (in millions of dollars, 1990 prices)

IMPORTS 1980

Var. %

41,189.77

EXPORTS

Var. %

33,221.12

BALANCE (7,968.65)

1981

35,992.53

(12.62)

34,817.64

4.81

(1,174.89)

1982

29,262.50

(18.70)

28,020.83

(19.52)

(1,241.67)

1983

22,194.19

(24.15)

28,928.67

3.24

6,734.48

1984

19,132.08

(13.80)

33,968.55

17.42

14,836.48

1985

17,267.47

(9.75)

30,890.36

(9.06)

13,622.89

1986

18,280.85

5.87

26,262.04

(14.98)

7,981.20

1987

18,884.97

3.30

29,867.88

13.73

10,982.92

1988

17,662.27

(6.47)

36,847.08

23.37

19,184.82

1989

20,899.05

18.33

35,770.77

(2.92)

14,871.71

1990

22,524.00

7.78

30,870.00

(13.70)

8,346.00

1991

21,982.76

(2.40)

30,287.36

(1.89)

8,304.60

1992

21,418.76

(2.57)

33,298.05

9.94

11,879.29

1993

25,058.72

16.99

34,960.25

4.99

9,901.54

1994

29,303.62

16.94

38,478.38

10.06

9,174.76

Source: Boletim do B a n c o Central do Brasil

Competitiveness of Brazilian Exports in the EU

307

Bibliography BONELLI, Regis (1994): "Productivity, Industrial Growth and Manufacture Export in Brazil: Performance and Competitivity". IPEA, Discussion Paper N° 327, Rio de Janeiro-RJ. BONELLI, R.; FRANCO, G. and FRITSCH, W. (1993): "Macroeconomic Instability and Trade Orientation in Brazil: Lesson from 1980s and 1990s", in: Macroeconomic Conditions and Trade Liberalization, edited by Adolfo Lanifrat and Silvia Junco, ITDT, Argentina. KUME, H. and RAINI, K. (1992): "A Liberalizado do Regime Comercial Brasileiro", in: Boletim de Conjuntura, IEI, UFRJ, vol.12, n. 2, julho, Rio de Janeiro-RJ. KRUEGER, Anne (1980): "Trade Policy as a Input to Development", in: American Economic Review, 70(2): pp. 288-92. MONTORO FILHO, A.F. (1994): "The Regularity of Brazilian Inflation", in: Revista Brasileira de Economia, 48(4): pp. 479-89. SACHS, Y D. (1988): "Política Comercial e Cambial em Programas de ajustamento voltados para o Crescimento", in: Revista de Economia Política, 8(2): pp. 21-48. SILBER, Simào D. (1994): "Setor Externo da Economia Brasileira", mimeo. TOLEDO, E.C. (1988): "Congelamento de Presos e Ciclos Económicos no Plano Cruzado". Texto de Seminàrio, FIPE-IPE, mimeo. TOLEDO, E.C. (1991): "O sucesso dos Planos Collor", in: Estado de Sao Paulo de 27/07/91. TOLEDO, E.C. (1992): "Déficit, Conflito e Processo Inflacionário". Texto de Seminàrio, FIPE-IPE, mimeo.

International Comparisons

Some Basic Considerations and Methodological Decisions in Comparative Research 311

Ulrich Peter Ritter

Some Basic Considerations and Methodological Decisions in Comparative Research 1. Why compare? The question of the purpose of a comparative study is seldom discussed. However, this is a fundamental question, which must be treated systematically, because it affects all decisions in the research project, i. e. also the decisions on what and how to compare and thus - in the end - also the results of the comparative study as well as the conclusions which can be deducted from it. Different goals of the comparatists, different purposes lead to different decisions on the what and how to compare and - because of that also to different results. Let me show this interdependence later in an example. This is why the decisions on the purpose of a comparison must be thought through and discussed carefully at the beginning of a comparative study. These decisions, as was discussed profoundly in Amoldshain, will be influenced by the backgrounds of those who make them as well as on the theories on which they are based.1

1

These questions and the relationship between theory and comparisons are discussed in more detail in: Ritter, Ulrich Peter (1992): Vergleichende Volkswirtschaftslehre, München: Oldenbourg, pp. 19 -65.

312

Ulrich Peter Ritter

Figure 1: Interdependence of decisions in comparative research

If we look at international economic comparisons and classify the purposes, for which they are made or used we can come up with the following tentative classification. • Didactic purposes: to illustrate a point etc. • Rhetorik purposes: to underpin an argument; to "prove" a point. These purposes can hardly be classified as scientific although, of course, they are quite popular among scientists of all disciplines. As to scientific comparisons I would like to discern the following six main purposes: 1. Cognition: Many economic phenomena, many characteristics of factors are unknown to us until we compare our own reality with the reality in other countries. We could say: "We compare to know more not only about other countries but about ourselves." 2. Demonstration: for example Richard Hauser uses his criteria to demonstrate the differences between the EU-countries in core pension systems. 3. Understanding: Many comparative studies were undertaken to help us understand such economic phenomena as development, industrialization and structural change.

Some Basic Considerations and Methodological Decisions in Comparative Research 313

4. Assessment and evaluation: We use international comparisons to show, that something or some situation is better and/or different from another. 5. Control: International comparisons can be used to test hypotheses and theories. We want to see, whether generalizations developed for one country hold true in others and thus are true in a wider sense or whether they are falsfied or at least restricted. 6. Discovery: New penomena are discovered through international comparisons (for example the phenomenon of stagflation). But we can also compare internationally how the same problem is solved in different countries, i. e. to discover new possibilities and new alternatives for dealing with problems. It is obvious, that depending on the purpose the definition of the object of the comparison and the methodological questions will be answered differently. In reality, however, many comparisons lack clarity in this respect and thus become fuzzy.

2. What shall be compared? Potential objects for economic comparisons are unlimited. Everything, that can be the object of an economic question can also be the object of an economic comparison. The question of what should be compared is, however, not to be separated from the question of the objective of the comparison. As to the types of comparisons I would like to discern the following four types by admitting at the same time that many comparisons we are confronted with in literature lie between or are a combination of these four types.

Ulrich Peter Ritter

314 Figure 2:

Types of economic comparisons

2.1. The comparisons of systems This is the oldest field of international economic comparisons. It goes back to the Greeks and had one first climax in the German Historical School, a second climax after the development of soviet type economic systems. Today this dualism has disappeared. Interest in the comparison of whole economic systems has declined. The most interesting field still left is the transformation of economic systems in the former socialist states and the still existing socialist states and the transformation of economic systems in developing countries. The most important field of interest today seems to be the comparison of partial systems or parts of economic systems. Let me draw attention to the fact, that of the four international comparisons presented in this seminar three are such comparisons of partial systems and the fourth is a combination of a comparison of partial systems and of economic phenomena.

Some Basic Considerations and Methodological Decisions in Comparative Research 315

2.2. International comparisons of economic policy By far the most ubiquitous and popular of all international comparisons are those of economic policy in its various forms, i. e. the comparison of economic performance, of ratings, of instruments and objectives as well as of institutions. It is, however, also the field in which academic research is least present. It is the field of action of international organizations, institutions and private associations. Here, international comparisons are not only used for illumination and information but also as an instrument of policy and here it becomes very obvious, why the fourth question becomes extremly important. It is the question of the subject, i. e. who compares? How is the comparison affected by the interests of the author or the institution, to which he or she belongs, by the cultural background, by the policy intended and by the economic school of thought from which he oder she comes? Making policy with and through performance criteria was and is not only very popular in development policy and at present in the European Union with the so-called criteria of convergence. It also affected the financing or not financing of this seminar. At first the state of Hessia had agreed to subsidize us. In the administrative process, however, it was discovered that Argentina and Brazil are no longer developing countries but rather threshold countries according to OECD-statistics. For this reason the project was no longer elegible under the programme from which the money was to come.

2.3. The comparison of economic phenomena While academic research is almost absent in the comparison of economic policy the comparison of economic phenomena is a very academic field of study. By the comparison of economic phenomena we mean comparisons of such phenomena as structural change, inflation, unemployment, public dept, state expenditures, etc. The comparison of economic phenomena deals with the existence, the appearance, the extension, the causes and the forms of economic phenomena in different economies. Four subtypes can be defined:

316

Ulrich Peter Ritter

Figure 3:

Types of comparisons of economic phenomena

When we explore a phenomenon such as structural change caused by microelectronics we try to define the phenomenon. How can the phenomenon be described. What are its elements, what are its boundaries? When we explain a phenomenon, we must already know what the phenomenon is. Only then can we look for factors causing it and for theoretical explanations. This, of course, presupposes, that such theories already exist. The international comparison can also show the need for new theories and lead to new explanations. This type of theory developing comparisons has been quite important for instance in the discussion on the Phillipps-Curve and the phenomenon of stagflation. The type of comparison, which is probably most demanding and difficult is the comparison of economic phenomena with the purpose of testing hypotheses. An example for this type of comparison are the comparisons relating distribution, the aggregate consumption function and economic development.2 2

Atkinson, Anthony B., Micklewright, John (1992): Economic transformation in Eastern Europe and the distribution of income.

Some Basic Considerations and Methodological Decisions in Comparative Research 317

2.4. Problem-oriented comparisons A new type of economic comparisons is still in its development phase. I call it the POC or problem-oriented comparison. This type of comparison is based on the fact that societies, countries and cultures often have to solve similar problems. However, they find different ways of dealing with these problems and it can be very stimulating to see what the different ways of dealing with these problems look like. Let me explain this by using an example which also deals with another question concerned with the object and the method of international comparisons. Sometime ago I had a very interesting discussion with Richard Hauser on the question of whether we should accept the old statistical saying: „You shall not compare apples with pears!" Richard Hauser argued in favour of this precept. In the case of core pension systems, for example, it did not make sense to compare these within the European Union but not with African, American or Asian countries with a vastly different historical, cultural and economic background. I then presented him with the example of a problem-oriented comparison we did once in a project-seminar. This seminar was dedicated to the topic „The situation of elderly people in different countries, economic systems and cultures." Had we only compared similar countries - which we did - i. e. we had comparisons of the industrialised countries, of the developing countries and of catholic and islamic countries, we would not have come up with very deep and provocative ideas. Only when so called uncivilized ethnic groups and cultures were taken into consideration, did we come up with interesting theoretical models and new concepts and ideas. We found, for example, that for a satisfactory integration of the elderly, five functions had to be fulfilled by a society: Economic integration, i. e. the integration into the productive system, social integration, consumption, health and the search for meaning. Had we only compared apples with apples, nothing new would have come from this seminar. However, thus we could come up with interesting ideas possibly relevant also to our society such as the one of the necessity of a change of occupation for elderly people.3 We could illustrate the four types of economic comparisons by applying them to structural change, the topic of our seminar. In the case of 3

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comparisons of subsystems the object probably would be the consequences of structural change for the economic system as a whole and its effect on such institutions as social insurance, unemployment insurance etc. When we compare economic policies we would probably compare the effects and the gestalt of policies trying to modify, foster or smooth structural change. If we want to compare phenomena we might study different aspects and factors effecting structural change or even try to find out what structural change really is about. In a problem-oriented comparison we might ask how different societies or social systems react, when they are confronted with structural change. How do they deal with the problems involved? What alternatives are developed, what are their consequences?

3. How ? - The selection of methods for comparisons With the problem the comparison of apples and pears we have already come to the third question: the „how"? How are we going to compare? What are adequate methods and research strategies? How can methodological problems be solved? When the question of the methodology is discussed, a number of problems come up, which must be decided on within the context of the other two questions. And the question of „who compares" is probably the one which will influence most the preference for one method versus the others. I cannot go into the various statistical problems involved. Let me only mention a few of the questions, which have to be discussed. One is the question of the level of the comparison. Is a micro-view, a meso-view or a macro-view adequate? Should we look at states or developments, structures or processes? What section of reality is to be observed? Which countries and what number of countries should be decided on? Should we use a primary source for our data or can secondary data be helpful? Of what use are quantitative data and how can they be substantiated by qualitative data? What should be the design of research and how could research be organized? Can existing national or international constructs be used or must new constructs be developed? How should relevant factors, indicators and criteria be selected? These, of course, are only some of the questions, which must be considered and they merit more time and space. However, my time is limited.

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Let me close this chapter by taking up the example of the comparison of apples and pears. In the discussion between Richard Hauser and me, which I mentioned earlier, his argument was, that it did not make sense to compare for instance pension, systems in countries, which were completly different from our system. I contested this by saying, we would never find something new if we only compared apples with apples. Of course, basically, up to a certain degree I agree with Richard Hauser: It certainly does not make sense to compare objects, which have absolutely nothing in common. We compare objects in relation to certain properties or characteristics. What and whether they do have something in common depends, however, in the first place on our research interest, which in turn is influenced by our personal values, our socialization and the theories we apply. This must be reflected and discussed by the comparatist in its effects on his comparison in order to make it transparent for discussants and readers.

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Are Pension Systems Converging in the European Union? 1. Introduction Pension systems are an important component of the systems of social protection in all the member states of the European Union. Great differences exist, however, between the various countries. Some systems are oriented toward the so-called Bismarck model, whose basic ideas were implemented in Germany in 1887 with a mandatory social security system based on the insurance principle. Others follow the ideas of Beveridge, developed after the Second World War in the United Kingdom, that implied a universal minimum pension for all the elderly. With some other country's systems one can doubt whether the term „system" is appropriate at all since they have up to three hundred different subsystems for as many categories of people, like blue collar workers, white collar workers, employees of banks, civil servants, miners, farmers, craftsmen, lawyers, opera singers and so on. There exists, therefore, not only a diversity between countries but also within some of the countries. Since the European Community of the Six was founded in 1958 and later enlarged to ten, then to twelve and now to fifteen countries, the field of social protection remained mostly outside the jurisdiction of Community Law. From the beginning, however, the first Treaty of Rome contained clauses to protect workers who moved between member states. Nationals of other EU countries should not be treated worse than the nationals of the countries where they found work. Claims to social security benefits acquired in one country have to be exported to other countries if the claimant moves again, and the various time periods spent in different countries have to be added up if minimum periods are a prerequisite for receiving certain benefits. The restriction to granting benefits according to a territorial principle, i.e., only to the residents of a country, was only accepted for social assistance benefits and similar means-tested benefits. A second clause of the

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Treaty of Rome that proved to be important for social policy obliged the member states to treat men and women equally. Based on this clause the European Court of Justice in many cases declared regulations of the social protection systems in member countries as not conforming to European supranational law, and, therefore, they had to be changed. Several reforms changed the original Europe of the Six clearly increasing the supranational powers of the governing bodies of the European Community. The last one, laid down in the Treaty of Maastricht in 1992, created the so-called European Union. This Treaty concluded the process of economic integration by removing the last obstacles to a free movement of goods, services, labor and capital across the European borders. It also set the aim of a Monetary Union and of a closer cooperation in foreign policy and defense. In the field of social policy the Treaty of Maastricht confirmed and strengthened the commitment of the European Union to improve its „social dimension" stating three points quite clearly: First, that there are common social aims for the social protection systems. Member states should aim at a high level of social protection for the elderly to enable them to keep up their living standard after retirement. They should be included into the health system and a minimum of subsistence should be guaranteed for each elderly resident. Men and women ought to be treated equally. Second, that the principle of subsidiarity should govern the development of the various social protection systems, i.e. that the systems are to be further developed by national law taking into account recommendations by the Council of Ministers of the European Union. Third, a social protocol was agreed upon by eleven member states (except the United Kingdom) opening up the possibility to set standards and rules in the field of social provision for the signatory states by a unanimous vote. The term convergence that is the focal point of my talk is ambiguous in its meaning. Convergence can be meant in the strict institutional sense, i.e. that the end-point of a process of convergence is reached when all the pension systems are alike and are governed by the same laws. If I interpreted convergence in this narrow sense, the answer to the question posed would clearly be „no" for two reasons: Given the legal situation, a convergence of the various national pension systems forced by supranational Union law can be ruled out for the foreseeable future. And great reforms in all the member states to change the national systems toward the same model can also be

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ruled out because the various systems of social protection are deeply rooted in national traditions, they depend on a balance of power between the various political players, and they are protected by vested interests that are difficult to overcome. Only small changes at a time can reasonably be expected. A looser and more fruitful interpretation of the term convergence is a functional one, meaning that the end-point of convergence is reached if the pension systems are functionally equivalent in fulfilling the above mentioned aims as defined by the Treaty of Maastricht. I shall use this meaning in my talk. But it has to be emphasized that this interpretation refers to an endpoint that is defined by quite ambitious aims. It has to be distinguished, therefore, from a convergence process aiming at the average social protection provided in the European Union at present because such an interpretation would imply that the above mentioned aims of social protection are on average already reached. The general discussion in European circles about adding a „social dimension" to the economic integration, and also the viewpoint of the Commission documented in a recent White Paper is based on the belief that the social aims as stated in the Treaty are not yet reached. Given the limited powers of the Union to harmonize the various national retirement pension systems by supranational law, other forces can be at work that lead to a convergence: First, some impetus comes from the European Court of Justice based on the few clauses contained in the Treaty of Rome and its revisions, especially the „equal treatment of men and women-clause" and the regulations for migrating workers. Second, the Commission can issue and has issued recommendations about a convergence of the aims and the instruments in the field of social protection, and it intends to monitor regularly whether progress has been made at the national level. This may have a mild political influence on the national policies. Third, countries may spontaneously adopt successful elements of other countries' old-age protection systems. Fourth, pressures resulting from inter-country mobility of EU nationals, possibly induced by differences in the social protection systems, may arise. Fifth, pressures resulting from immigration from states outside the Union i

may lead to similar reactions. Sixth, similar internal social and demographic pressures calling for changes can be at work.

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Seventh, similar economic restrictions to unlimited improvements of the social provisions for the elderly or even economic conditions forcing reductions of benefits may arise in most countries. For some of these forces empirical evidence can be provided, others can only be guessed at. I shall concentrate in my talk on demographic factors and economic restrictions, but I ask you to keep in mind that economic and demographic facts only signal the outer limits of possible developments. The various possibilities of political coalitions and even of a more basic change of political thinking with respect to the merits of a welfare state and its aims can never be ruled out. To show the problems of convergence or of non-convergence more clearly I shall first present you with an overview of the various retirement systems, but concentrating on the so-called core pension systems, i.e., the main mandatory system in each member country. In some countries the core pension system is the only one, in others it is one among many, but by far the biggest as judged by its coverage. Then I shall show some empirical figures about total pension expenditure in relation to gross domestic product to highlight the differences between countries. Since it is not possible to infer the economic situation of the elderly from the present institutional regulations of the core pension system I shall present empirical evidence about their economic position in each member state. The last part of my talk will be devoted to describing past tendencies in the development of the various pension systems and then to offering you some „informed guesses" about future developments based, on the one hand, on foreseeable social needs and demographic trends, and, on the other hand, on economic restrictions to an extension of the pension systems that are becoming more and more evident.

2. Main characteristics of the core pension systems of twelve member countries of the European Union 2.1 Main institutional characteristics Core pension systems differ in so many respects that several criteria are needed to characterize them. These criteria can also be used later on to show convergence at the institutional level of the core pension systems. To roughly characterize the benefit side of the core pension systems I use five criteria.

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The first criterion is coverage. Coverage can be based (1) on residence, (2) on participation in the economic production process as an employee or as a self-employed person, (3) on labor income earned in the production process or (4) on being a dependent person of a covered family member. From Table 1 you can gather to which type belong the core pension systems in the twelve member states. (See Table 1, Appendix). Two countries rely on residence based pension systems: Denmark and the Netherlands. The coverage of the basic pension systems of two other countries is related to participation in the production process. The other systems are based on income from earnings. The mandatory supplementary systems in Denmark, France and the United Kingdom also differ in this respect. As seen from the point of view of equal treatment of men and women it is obvious that both sexes can fulfill the necessary prerequisites for a pension equally well only if the system is based on residence. The second criterion results from the role the time period plays during which persons are members of the system. For short I call this the time-factor. The influence of the time-factor is given by the pension formula used to calculate initial pensions of retirees. The effect of the time-factor is always positive, but from Table 2 one can see that there are proportional and less than proportional effects, and that the domain of the time-factor is limited in most countries by the respective social security laws. (See Table 2, Appendix). The third criterion is given by the minimum pensionable age for a retiree. In addition to fulfilling this condition there usually exist minimum periods of membership to the system that are not dealt with here. Again one can see from Table 3 that there are the considerable differences between the member states' core pension systems, but that the majority has set minimum pensionable age at 65 with some countries allowing women to retire earlier, sometimes only if they fulfill additional conditions. France and Italy are the member states with the lowest minimum age. Under certain conditions, not shown here, other early pensions are possible. (See Table 3, Appendix). The fourth criterion refers to the relevance of previous labor income on the level of the initial pension. The effect of previous labor earnings of a retiree is also determined by the pension formula used in the respective country. This I call the income-factor. Four main types of influence can be distinguished: There can be no effect at all. Some best years of earnings can be selected for the calculation of a pension. The last years of working life

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can be used for this purpose. And finally, the pensions can be based on lifetime labor income. Table 4 shows which core pension systems and which mandatory supplementary systems belong to each category. (See Table 4, Appendix). Looking at these systems from the viewpoint of equal treatment of men and women it can be concluded that - given the differences in life-time earnings pension systems that calculate pensions with no regard to previous earnings will lead to the smallest differences between men and women. These systems will reduce equality within a cohort as it moves across the life-cycle from working age up to retirement. Pension systems that rely on life-time income will transfer earnings inequality during working life of a cohort into its old age. 2.2 Relative pension levels The fifth criterion relates to the proportionality of the influence of the income-factor and to the level of pensions that are provided by the various core pension systems. If the effect of previous labor income on gross pensions were strictly proportional the ratio of a gross pension to current gross earnings of a worker of the same kind would be the same over the whole earnings scale. In Diagram 1 such a pension system would be characterized by a straight horizontal line. This Diagram shows the ratios of gross pensions to current gross wages for workers of the same kind over a range of labor incomes under certain assumptions. These assumptions refer to the model household (a single person), to the period of membership in the pension system (40 years of contributions or 50 years of residence), and to an economic growth path with 4 percent inflation and 6 percent growth of gross wages per year. For the sake of comparability the labor income axis is standardized in units of average labor income of a production worker in the respective country as published by the OECD (abbreviated as APW). (See Diagram 1, Appendix) Without going into details the following points can be emphasized: First, there are great differences in the benefit levels of the various systems. Second, only four systems are continuously regressive (United Kingdom, Netherlands, Denmark, Ireland); the others are in the middle range fairly proportional and only in the upper range regressive.

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Third, for pensioners with a long contribution record most systems contain some minimum provisions that result in much higher ratios in the lowest labor income range. Taxes and social security contributions for workers and for pensioners vary widely between countries. To see the result of these institutional differences one can calculate the ratio of a pension net of taxes and contributions to current net income of a worker of the same kind at the average gross labor income level (1 APW). Table 5 compares the ratios the relative gross pension levels (column 1) with the relative net pension levels (column 2) for each country. In most countries these ratios differ considerably, and even the ranking of the countries using this criterion change.(See Table 5, Appendix)) It becomes obvious, that for a single worker with average labor income and with a long contribution record there exists an astonishingly wide range of relative net pension levels between 37.3 percent for the United Kingdom, 95 percent for Portugal and even 102.9 percent for Greece. One can argue, however, that a comparison of the core pension systems by way of a single pensioner is misleading because some pension systems provide a spouse supplement or even a separate pension for spouses who have never participated in the labor market themselves while others do not. To take account of this point Column 3 of Table 5 shows the ratio of the gross pension income of a retired one-earner couple to the current gross labor income of an average worker who has to support a spouse. One can see that the inclusion of spouse's benefits makes a difference in some countries, but the same countries remain in the top range (Spain, Portugal, Italy, France, and Greece) . The other countries now concentrate in the middle around ratios of 45 percent. If the ratio of net pensions to net income is taken into account the five leading countries fare even better with two of them showing net relative pension levels above 100 percent. The others are around 80 percent. Another warning, however, is appropriate: For some of the countries this comparison does not capture the situation of the average pensioner because the relevant time-factor is in fact lower than the one assumed in the model case. This glimpse on the differences in pension levels was intended to give you at least a feeling of the vast differences that exist between the European core pension systems, and how far countries will have to go in a converging process.

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2.3 The financing of the core pension systems Another very important difference between the member states exists in the field of financing pensions. Denmark has a completely tax-financed core pension system but other countries have core systems with mixed financing from contributions by employees and employers and from general or specific taxes. Contributions of workers are usually based on their wages, sometimes with an upper limit, contributions of firms are also related in some way to wages. Everyone who has studied tax systems knows how vested interests block change. This problem becomes even more complicated if reforms are envisaged for federal states as opposed to centralized ones. As it happens both types of states exist among the member states of the European Union. Looking only at the core pension systems, however, does not give the full picture. In most of the countries there exist smaller categorical systems besides the core pension system, and in addition to that there are mandatory or voluntary supplementary pension systems. A functional approach to the problem of convergence implies that these different mixes of systems should converge in their combined effectiveness of providing a sufficient income for the elderly. This adds another dimension of complexity to the process of convergence. Speaking of the financing of the pension systems some figures may also be useful to illustrate the difference in the shares of gross domestic product the various member states of the European Union are willing to allocate for their elderly. Table 6 shows total pension expenditures as a percentage of gross national product. One has to take into account, however, that pensions to younger people and occupational pensions are also included in these figures. (See Table 6, Appendix). The discrepancies between the various countries are very great. Ireland spent only about 7 percent of her GDP for pensions while Italy allocated a share of more than double this size for pensions. Most of the countries are in the range of 10 to 13 percent of GDP. It has to be emphasized, however, that very little of the difference can be explained by differences in the share of elderly in the population. More important are pension levels and the generosity of the systems with respect to pensionable age and to the level of disablement used as a precondition for early retirement.

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3. The relative economic position of the elderly Using model pension cases of the core pension system can only show the actual outcomes of the system if the system had remained the same for a very long period of time in a given economic environment. It is not possible, however, to draw conclusions from these calculations about the actual living standard of the elderly, because • the assumptions of the model case may not capture the actual situation in the various countries equally well, • the core system may not cover all the elderly, • current pensions may be partly based on former systems, • several pensions may cumulate in one household, • there may be other sources of income of a household besides the pensions of the core system. Only empirical data can show the actual situation. Without going into the details of the enormous data problems involved I should like to show you one result that confirms the point that model calculations alone may not tell the full story. Table 7 depicts the average economic position of the elderly population, aged 65 and over, in relation to the younger population, including children, for twelve countries. The results are based on consumption expenditure data of households in years of reference around 1988, recalculated per adult equivalent unit. (See Table 7, Appendix). One sees that the living standard of the elderly is lower than the living standard of the younger population in all countries. In seven countries the ratio is around 90 percent. This can be considered a Union average. Far below this average with a ratio around 70 percent is the relative economic position of the elderly in Portugal, in Greece and in the United Kingdom. Denmark's and Italy's ratio is around 80 percent. This table shows that the pattern of the actual relative position of the elderly in EU countries can look quite different from the pattern of institutional discrepancies. It is hard to imagine that any process of convergence will meet the ambitious aims of the Treaty of Maastricht.

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4. Tendencies of the European pension systems 4.1 Development during the eighties With three exceptions (Belgium, Germany and Ireland) most countries increased the share of their total social expenditures in gross domestic product (compare Table 8). Therefore, the average share in the European Union has risen and is now about 26 percent. (See Table 8, Appendix) Similarly, pension expenditures as a share of gross domestic product has risen considerably, the only exception being Germany (before unification) and Ireland. In only a few countries changes in the population share of the elderly roughly paralleled changes in the shares of pension expenditures (Denmark, Germany, Spain, Portugal). Ireland decreased its share of pension expenditures despite an increase in its elderly population share, while the other countries increased their share of pension expenditure by more than the population changed, thus presumably increasing relative pension levels or coverage. At the institutional side some tendencies of convergence can be found: First, a pronounced tendency toward equal treatment of men and women pushed by the European Court of Justice. Second, in those countries with categorical systems a tendency to widen coverage of the core pension systems and also steps to harmonize the various subsystems within the same country. Third, in some countries a tendency to increase the minimum pensionable age and to equalize it between men and women. Fourth, in some countries a tendency to strengthen the insurance principle by moving pension formulae toward a proportional influence of the timefactor and toward the influence of life-time income. Fifth, in some countries a tendency to give some additional credit to women who bring up children. Sixth, in some countries a tendency to introduce minimum benefit for the elderly, either within or next to the core pension system. Seventh, in some countries a tendency to introduce or to promote occupational pension schemes.

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Based on a few indicators, but not yet on reliable empirical data, one can also suppose that the relative economic positions of the elderly in the various member states have converged a little toward a Union average. On the financing side, however, it appears that heterogeneity has increased while several countries during the past years have started to confine increases in pension expenditure. 4.2 The future As a general hypothesis I suppose that all of these past trends with respect to institutional changes will continue in some countries for some time to come. But there will be additional influences. Some of the factors that are relevant for the shaping of the pension systems will change in the foreseeable future. Of the various factors mentioned at the beginning that might contribute to a convergence of the pension systems I can take up only a few ones. 4.2.1 Pressures resulting from some social problems No member state can claim that all its elderly residents are and will be sufficiently protected by its present pension system. In some countries not all of the elderly residents are covered and in some countries there exists a poverty problem even among those covered by the pension systems because meanstested or unconditional minimum pensions are too low. Conversely, in some countries certain groups are extremely well provided for by special subsystems or by a cumulating of various old age benefits. In the foreseeable future the growing numbers of divorced women and single-parent families as well as the growing share of long-term unemployed persons who are not fully able to provide for their old age will also result in problems that have not yet become visible. A special problem will arise in many of the member states with respect to immigrants from Third World countries who immigrate in their forties or later because they will not be able to accumulate sufficient pension claims during the rest of their working life, even if they find jobs. These problems will be the more severe the more the public pension system follows strict insurance principles. An obvious counter-measure to these social trends would be to make the systems more universal, to provide minimum benefits and to reduce maximum benefits obtainable from statutory pension systems. But it is uncertain whether systems will converge in this

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direction. In several countries with very heterogeneous pension systems a trend toward harmonization within the system geared toward reducing extreme privileges appears to be emerging (e.g., Italy, Spain, Greece). 4.2.2 Pressures resulting from the functioning of the core pension systems A pay-as-you-go pension systems based on contribution records or substitutes thereof takes about 40 years to show its full effect on the pensioners and on the economy. This is due to the time-factor in the pension formula that allows the individual pensioner to build his pension claim during his whole working live. The longer the system is in operation the more years of contributions or membership new pensioner cohorts will have accumulated and the higher their pension will be. Since some core pension systems in European countries have been introduced or extended during the seventies (e.g. Spain, Portugal, Greece) these systems have not yet fully matured. In some countries there exists, therefore, a tendency to increasing pension expenditures even with unchanged institutional settings and with stable populations. Although it can not easily be quantified this effect will increase economic pressure on the systems. A second economic effect influencing the share of pension expenditure can result if the pension systems are not neutral with respect to changes in the rates of inflation and of real growth. The neutrality of a system is determined by its pension formula. Only in the case in which former earnings are indexes to current wages, will there be no effect on newly granted pensions. And only if current pensions are indexed to nominal wages, and thus are adjusted regularly, will there be no effect on the share of pension expenditures for older pensioners. In some member states their core pension systems are not neutral with respect to rates of inflation and real growth, given the institutional arrangements being in effect in 1992. The non-neutrality in Spain, Portugal, and Denmark is such that the share of pension expenditures drops with increasing inflation rates, and vice versa. The Italian system is also not neutral with respect to inflation. There are two effects that go in opposite directions so that nothing can be said about the net effect (Compare Table 9, Appendix). The Treaty of Maastricht laid down strict criteria for entry into the European Monetary Union envisaged for the turn of the century. A low rate of inflation

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ranks high among these criteria yet present rates of inflation in most countries, especially in those with a non-neutral pension system, are quite high. These rates have to be reduced and this in turn will result in a considerable increase in their pension expenditures. I expect that this pressure will induce countries to adjust their pension formula in the direction of inflation-neutrality. This trend will be one toward convergence. 4.2.3 Demographic pressures and possible

consequences

In the longer run, starting during the first decade of the next century, aging populations are likely to cause serious for the statutory pension systems as well as for the voluntary occupational pension systems, and more generally for any form of savings for retirement. For all of the member states of the European Union, EUROSTAT and other research institutions predict a strong increase in their population share of the elderly as well as an absolute shrinking of their population provided that immigration is not stepped up to a presumably unacceptable level. Table 10 presents some figures for 1991 and projected population shares of the elderly aged 65 and over in year 2020. (Compare Table 10, Appendix). The Union wide average of the share of the elderly will increase by about one third but for some countries like Belgium, Germany, Greece and Italy it will be around one half. Projections up to the year 2040 show a further increase that seems even more problematic. Given the present pension systems all of which are financed on a pay-as-you-go basis, these demographic changes would imply redistributing a much larger share of income from working age population to the elderly regardless of whether the systems are financed by contributions, by taxes or by a mixture of the two. Taxes or contribution rates or both would have to be increased enormously. Therefore, similar pressures to reform the pension systems will result from these demographic changes for all the member states of the European Union. The reactions of the member states to these pressures will mainly depend on the economic restrictions they will face during the first decade of the next century. Tables 7 and 8 showed the shares of pension expenditures and of total social expenditures as a percentage of gross domestic product for all the member states. Most of the countries with high shares ( Belgium, Denmark, Germany, France, Luxembourg, the Netherlands) will have very little room to increase these shares considerably. Even now in some of these

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countries influential politicians and commentators are demanding a reduction in these shares to improve their country's international competitive position. In some countries reforms are already on its way to reach this goal. Given these economic restrictions four options are available: First, reducing unemployment. This would both increase gross domestic product and reduce social expenditures for the unemployed, thus allowing pension expenditures increases without increasing the share of total social expenditures. Second, reshuffling of other social expenditures in favor of the elderly. Third, reducing the relative pension levels for all the pensioners proportionately. Fourth, restructuring the pension systems in such a way that pension levels are disproportionately reduced for higher income pensioners. Such a reform would move toward a pension system that provides only a basic level of protection in old age but leaves it to the individual to provide for a higher living standard in old age by private savings during working age. If such a strategy is chosen and if other aims laid down in the European documents universal provisions for minimum income in old age would be a necessary complement in some countries. Even for those countries who, because of lower shares of total social expenditures, may have some room to increase pension expenditures, the demographic pressures will be so strong that they will induce reforms along one of these lines. It is fundamental that the future development of all EU countries' pension systems will depend crucially on whether unemployment that on average is now around 10 percent can be reduced. Although many observers argue that unemployment will diminish automatically in the course of the aging of its population this may not happen because of other intervening factors. Among others, these factors include: increases in female labor force participation; increases in productivity that are not accompanied by similar increases in aggregate demand; changes in the structure of qualifications demanded in the labor market to which the labor force can not adjust as quickly as necessary; and finally large numbers of immigrants from Third World countries with little or no vocational training. To add a last word: The extension of the European Union in 1995 to include Austria, Sweden and Finland has not changed the general picture. However, if a further extension to Eastern European states - as some people

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advocate - would take place, heterogeneity would be greatly increased, and the process of convergence had to start again from a lower level.

5. Summary To sum up: There are great differences in the pension systems of the member states of the European Union and in the relative economic positions of their elderly. Although the Treaty of Maastricht has laid down ambitious goals with respect to the social protection of the elderly, supranational Union law and Union power will contribute little to a convergence of the pension systems of the member states. The European Union can only issue recommendations and monitor changes in the national pension systems. The European Court of Justice had and will have some influence in shaping the pension systems. But legislative power in this field of old-age protection will continue to rest with the national states. In the past three decades and even more so during the next ones, forces will be at work leading to less heterogeneity among the various systems. So a stepwise convergence process can be expected. But few people expect and no government currently supports a move toward completely harmonized pension systems. Difference will continue to prevail in this field as in many others, differences that reflect the tastes, the cultures and economic situations of the member states.

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Notes: 'Share of survivor's pensions including orphans' pensions in grey. Measurement is according to statistical conventions of EUROSTAT. b Former Federal Republic. c 1989. Source: Kommission der Europaeischen Gemeinschaften, Generaldirektion V, Soziale Sicherheit in Europa, Bruessel 1993, Tables 12 and 2, and own calculations.

Are Pension Systems Converging in the European Union?

341

Table 7. Relative Position* of Elderly' in Comparison to Younger Population 0 Based on Equivalent Consumption Expenditures (years of reference around 1988) (in percents)

100

90 • 80

• •

70 • • SO •• 50 •• 40 • 30 •• 20

••

10

••

o |J

L+J p

L+J E

L+J F

L+J I

B

L+J L+J L+J L+J L+J L+J L+J D4) GR DK NL IRL GB L

Notes: "The relative position of the elderly is measured by dividing equivalent consumption expenditures of the elderly by equivalent consumption expenditures of the younger population. The equivalence scale used is the revised OECD scale assigning weights of 1 to the first adult person of a household, 0.5 to additional persons over age 14, and 0.3 to children aged 14 and under. ""Persons aged 65 and over. ^Persons aged 64 and under. d Germany is the former Federal Republic. Source: Panos Tsakloglou, "Elderly and Non-Elderly in the European Union: A Comparison of Living Standards," Discussion Paper No. 29, ASEG project, University of Frankfurt am Main, 1994.

Richard Hauser

342

Table 8. Share of Public Expenditures for Social Protection and for the Elderly' as a Percent of Gross Domestic Product, 1980 and 1991

S

OK

02)

GS

GR3}

E

F

IRL

I

L

NL

P

EU

Notes: "Expenditures for the elderly include survivors' and orphans' pensions; it does not include expenditures for health care or social assistance. b Former Federal Republic. ' 1 9 8 0 t o 1989. Source: E U R O S T A T , Ausgaben und Einnahmen des sozialen Schutzes, 1980-1991, Luxemburg 1993, p. 16. Kommission der Europaeischen Gemeinschaften, Generaldirelction V, Soziale Sicherheit in Europa, Bruessel 1993, Table 3.

343

Are Pension Systems Converging in the European Union? u: a

-a c « c 0

r~

IL

kind: max. 750

max. 1.800

max. 2.800

(daycare) Institutional

Transfers in

care

kind

up to 2.800"

(exclusive housing expenses)

" For cases of extreme hardship, benefits and services my reach up to DM 3,300 per month. However, the number of persons receiving such excess payments must not exceed 5% of all dependent persons in grade III. Also the average annual spending on all persons in institutions must not exceed DM 30,000 which amounts to DM 2,500 per month. b> For cases of extreme hardship, benefits and services may reach up to DM 3,750 per month. However, the number of persons receiving such excess payments must not exceed 3% of all dependent persons in grade III in home care.

354

Roland Eisen

II. Developments of "Demand" and "Supply": Some Quantative and Qualitative Trends n . l The changing age structure and the proportion of disabled elderly ("demand side") For almost every modern society we observe a shrinking future population. Figure 4 shows the forecasted development of the age structure for the German population in percentages from 1989 through the year 2010 and 2030. Especially interesting is the growing proportion of the elderly (people above the age of 60): It rises from 20.3% to 25.8 in 2010 and to 34.8% in 2030. If we combine this data with the data of age-related disability (see Figure 5 for Germany), we can imagine that there will be an even more pressing problem to solve in the future. The "double aging process" will very likely cause an increase in the number and the proportion of elderly disabled in the population beyond the capacity of the communities. Figure 4:

Age Structure of German Population in Percentage 1989, 2010, and 2030 1989

• under20 • 20 - 60 • over60 Source: Sommer (1992), p. 221.

355

An International Comparison of Securing Long-Term Care Systems Figure 5: Disabled Persons and their Caregivers Disability Ratio A c c o r d i n g to V a r i o u s A g e G r o u p s (Private H o u s h o l d s )

Disabled P e r s o n s a n d Their Caregivers

7 7 % are cared for by one main

0

5

10

15

20

25

30

Per centag«

14% are cared for by more than one caregiver

Source: Schneekioth and PotthofT (1993).

II.2. Changing family structures and the production process of care ("supply side") The changes in the number and proportion of elderly disabled can be called the "demand side". Besides this, we know that more and more women are working in the market place and therefore are not staying at home to care for children or the elderly. Today 77% of all disabled elderly living in private households are cared for by one person and 83% of the time it is a woman, e.g. wife, mother or (married) daughter or daughter-in-law. Around 14% are cared for by several persons (parents, neighbours, friends) (see Figure 5, above right). For more details compare Schneekioth and PotthofT (1993). It is important to note that this quantitative aspect is not the only one in the supply side, there are also important qualitative aspects. Depending upon the degree of impairment different methods should be applied and utilized in different places of care. Figure 6 gives an illustration, emphasizing the "process" of up- and downgrading from one level to the other or from one pole to the other.

Roland Eisen

356

F i g u r e 6: Levels a n d Process of L T C

Stationary Care

Day Care Night Care

Ambulant Care

Care by lay persons

This, however, is not a "natural process" but one that has to be thought of as a decision process where different persons (physicians, nurses etc. who decide e.g. on the degree of impairment; family members) and various externally and internally determined circumstances are decisive (see Figure 7 for an overall picture).

An International Comparison of Securing Long-Term Care Systems Figure 7: Multi-Level Model of Determinants of Long-Term Care

Macrolevel

Supply situation of professional care services Legal / institutional basic conditions Social legislation Infrastructure (traffic and transport)

I Mesolevel

Microlevel

• • • • •

Medico-technical progress Physicians' behavior Moral concepts Role in society Social expectations of disabled elderly and care-givers • Economic resources: - income - wealth

i Morbidity Chronicity Dementia Age Marital status Gender Family structure Supply of informal care-givers Social networks Housing conditions: - housing comfort - rental tariffs

I Revealed preferences of disabled elderly Decision regarding home care / day care / nursing home and care-givers

Source: Eisen and Mager (1996).

357

358

Roland Eisen

In a technical paper (see Eisen and Mager (1996)), we have modelled the "family decision" as a two-stage multi-player cooperative game. It may be sufficient here to discuss only the "decision tree" (see Figure 8). The most interesting part is the final decision, namely the "care decision" where the family has different possibilities to choose from (0 = the parents care for themselves at home, n = the parent is in a nursing home; 1 to l - \ = one of the children is caring). However, this final decision has to be taken into account when deciding on retirement or/and on one's own family decision (regarding number of children, housing, wealth, etc.). F i g u r e 8: T i m e Structure of F a m i l y Decision Process

III. The Situation in the European Union - or: Why an International Comparison? The systems of social security differ considerably in the countries of the European Union. Given the free internal market, it is, therefore, important to know • how "foreigners" (but citizens of the EU) are treated when they migrate within the EU. With regard to old-age pensions, the paper by Hauser (this volume) shows some results. However, relating to "social services" there is a clause in the EG-Treaty allowing a so-called "non-export restriction", meaning that these services can be obtained only when living in that country.3 3

It seems, however, reasonable to expect that these restrictions contradict the free exchange condition, and will fall.

A n International C o m p a r i s o n of Securing L o n g - T e r m C a r e Systems

359

• whether the different systems induce migration between the EU-countries4. But that in turn depends upon two basic characteristics of the system, namely whether the benefits are payed in cash or are rendered inkind, and whether there exists a "residence principle" or not (and the time span necessary to be allowed as a resident). For instance, it is possible for me to spend my pension in Southern Portugal and be cared for there, while these care services are payed for by my local long-term care fund. • Furthermore, it is important to account for the possibility that migration of labor and/or capital will lead to an abolishment (or less dramatic: to a convergence on a minimum level) of social insurance systems: Imigration of "high-risk" people from other member countries implies a downward pressure on the degree of coverage for the risk. However, "the mobility of capital will not lead to a complete abolishment of the social insurance as long as decision-makers are risk averse" (Verbon, 1990, p. 487). On the contrary, Verbon (ibid) shows "that if some country tries to obtain a comparative advantage in attracting capital by lowering its benefit rate, the reaction of other countries may be to increase the coverage of their social insurance systems". In a certain sense, these problems illustrate the reason why a comparison of different ways to deal with long-term care is necessary and of great value.

IV. A Frame to Compare Long-Term Care Solutions The discussion in section II made it certainly clear that securing long-term care in the various EU-countries is a multifaceted problem. Not only are demographical and societal trends relevant, but also family composition and economic variables. Social security systems show a long and unique history mirroring all these factors. Hence, social insurance and long-term care systems are hardly comparable. Therefore, in the following I shall present only a rough framework which we believe is necessary in order to receive valuable results. The two basic decisions of every (political) society with regard to social security is whether it should be tax or contribution financed and whether the benefits should be flat and universal or related to contributi-

4

I do not deal with the question of the overall effects of migration on the financing of the social insurance systems in times of population aging; cf. for this question Bôrsch-Supan (1994).

360

Roland Eisen

ons. According to these two basic decisions, the social security systems can be categorized as "Beveridgean" or "Bismarckian" (see Table 2).

Table 2: Classification of National Long-Term Care Systems in Europe

Eligible persons Financing Organisation Countries

Source:

Public Insurance Mixed Systems Svstems Residents

Bismarckian Social Insurance Systems Employees

General Budget Public B DK GB GR I IRL L N P S SF

Contributions Semi-public D(?) NL

E(?) F

Based on a similar classification of pension systems in OECD countries made by Holzmann (1988).

However, this is a very rough and incomplete picture and therefore, we developed a more detailed and comprehensive structure. Our main objective, however, is to create a comparison of the real living conditions of disabled elderly in the various countries of the EU. To fulfill this task, we start with a description of the objectives for the development of a long-term care policy in the different countries. It is our opinion that a clear understanding of objectives will facilitate a rational policy debate about which measures are best suited to meet the desired objectives. Besides identifying and clarifying the objectives for LTC financing, we try to evaluate and assess the implications and consequences of various measures and policies according to a set of criteria ("input related quality and production measures") (see Table 3).

An International Comparison of Securing Long-Term Care Systems

361

Combining output and input data we should be able to develop some "reference standards" and "case studies" taking into account e.g. pension income (net of taxes), other incomes and additional benefits plus "service equivalents" (i.e. imputed income from the services rendered). The aim of these exercises is then to compare e.g. the relative positions of both handicapped and nonhandicapped people seventy years in various countries, given a certain working and living biography (for an overview, see Figure 9). Because our research project is still running, we are at present not able to fill out all cells of Table 3, but we will continue doing this. Figure 9: Model Cases

fully disabled

0.3 APW income

alone (female) case 1

with spouse (male) case 2

0.5 APW income

in a 5-person family (female) case 3

home care

alone (female) case 4

day care

with spouse (male) case 5

nursing home

APW = Average Production Worker, according to the definition of the OECD, Paris.

in a 5-person family (female) case 6

France

< e

u«

Maintenance

Municipalities

3. Main Administration

1

2. Dominating Principle: •social insurance •maintenance -welfare

better possibilities to use one's own resources and possibilities

Social longterm care funds Departments

Central Government: Department of Social Welfare, Department of Health and Health Boards

Local Authorities

to enable those who cannot live at home to receive treatment, rehabilitation as near as possible to home Social insurance Social insurance Welfare

Ministry of Health, Ministry for family affairs

Maintenance

promoting willingness to provide longterm care within the family or the neighborhood

Home care 1 comes before institutional care;

J

greater selfdetermination/ autonomy for the elderly;

To enable the 1 elderly person to live at home at an optimal level of health and independence;

1

United Kingdom

Municipalities and Counties

Maintenance

Central Government: Department of Social Security and Department of Health

Local Authorities

Welfare

i Therightof the The central aim 1 elderly to stay ; of Government in her/his own i policy for the 1 home care of elderly people is to provide services that enable them to live independently for as long as possible

CO c

Prevention and Home care rehabilitation comes before come before institutional nursing; care; home care comes before promoting 1 institutional , willingness to care; provide longterm care within promoting the family willingness to provide longi term care within the family or the neighborhood

B u

Continuity in life conditions;

Italy

1 1

1. Special Objectives

Ireland

s

Objectives and Main Institutional Arrangements

Germany

W

Denmark

362 Roland Eisen

V)

13 ao

ë S.

Universal

Germany Cash benefits/ services in kind (Quasi) Universal

Age-related disability ratios:

7. Number and proportion of persons in need of long-term care total -in per cent of population -institutional care -home care -mixed (day care)

6. Data Sources

1.5 million 2.6 601,000 900,000

1.65 million

2.0 450,000 1.2 million

3.8 48,000 148,000 6,000

No periodical data sources; only irregular estimations and several representative cross section analyses

2.0 15,313 66,300 Not available

85,333b

No periodical data sources; one representative study of caregivers at home and in the community

France Ireland Services in kind Services in kind are offered universally; Means tested cash benefits for home care are means tested

196,000

1 Periodical statistics are partially available

Facts and Figures [Demographic Aspects]

4. Orientation of Care System: •cash benefits/ services in kind •universal/means tested 5. Structure of several/possible care technologies [Residential Care/ Home Care/ Community Care]

Denmark Services in kind

Italy

4.3 119,500 260,100

1.6 4,210 1,536 383

Universal

i

4.0 GB*: 442,523 Max. 1,7 million Not available

2.4 million.

Periodical statistics are partially available; several representative studies

Means tested

United Sweden Kingdom Services in kind Services in kind

379,600

Spain

6,129

Periodical statistics are partially available

Luxembourg Portugal Services in kind are offered universally; cash benefits for home care are means tested

An International Comparison of Securing Long-Term Care Systems 363

Denmark No legal definitions

For institutional For institutional For institutional Not available and home care care and home care

Donations, especially informal caregivers who provide their services free of charge; Taxes

Approximately 91 millon ir£; „Worth" of informal care: 159,6 millon ir£ or more (opportunity costs included)

Ireland No legal definitions but division between sickness and disability

11. Co-payments (Out-of-pocket payments)

Approximately 1 21.947 million 26 billion DM FF per year (social long-term care insurance) home care: I 9.157 million ! FF i institutional care: 12.790 FF Contributions Contributions for employees (rate 1.7% from wage 1 income until a certain limit, 5,800 DM; 50:50 employer/ ; employee)

France No legal definitions

Taxes

22 billion DKK

Germany Sharp institutional division between sickness and disability

10. Main source: •taxes -contributions -donations

•functional

9. Expenditures for Long-Term Care -total

Expenditures and Financing

8. Legal definitions

Italy

For institutional and home care

Taxes

Luxembourg No legal definitions Portugal

Donations, | especially informal caregivers who provide their services free of charge; Taxes

i

Approximately 14.2 billion £; ! „Worth" of , informal care ! about IS to 24 billion £ 1 (opportunity costs not included)

United Kingdom No legal definitions but division between sickness and disability

Partly for Partly for institutional and institutional home care care

Taxes

Spain Sweden

364 Roland Eisen

s1

For home care benefits in cash or in kind. For institutional care only services in kind

Only for home care

15. Choice between types of benefits and services

Local Categorical assessment authorities. made by No categorical physicians or general system to assess individual's needs

14. Types of benefits Mainly services and services: in kind

13. Assessment of care needs Depends on service requested; in ! general no categorial or general system to assess individual's needs

No choice

No choice

; For home care Services in kind ; benefits in cash and in cash and in kind For institutional care only services in kind

i

Departmental authorities

Permanent residence in the Republic of Ireland

Ireland

Italy

No choice

For home care benefits in cash and in kind For institutional care only services in kind

Public authorities

Luxembourg

Portugal

Mainly services ; in kind

Local authorities. No categorical or general , system to assess individual's needs

Permanent residence in Sweden

C/3 C

All persons are legally obliged to enter the long-term care insurance schemes as is the case with regard to the social health insurance

France

1

12. Prerequisites of a Permanent residence in claim Denmark

Benefits and Services

Denmark

Until now very limited, but Government considers that elderly people should have a choice of care provision

Services in kind and in cash

Depends on service requested; Since 1993: range of services provided depends on the results of an assessment of individual needs

Permanent residence in the United Kingdom

United Kingdom

An International Comparison of Securing Long-Term Care Systems 365

"g

CO

18. Number of Beds/Patients in -Nursing Homes -Day Care Facilities

48,000 6,000 601,000

Twice a year per decree

France No benefits for informal care givers

l,88d Not available

Discretionary decisions of local authorities and central government

Ireland Main benefit is Care-giver's Allowance for a person who lives with and cares for an elderly person who needs full time care

3,810 383

: Discretionary decisions of the 1 government

Contributions to the pension funds

1

Personal and Facilities

Germany Contributions to the pension funds; funding for day-, night- or short-term nursing home care; payments for substitutes while informal care-givers are on holiday; special aid and teaching arrangements Amounts are not indexed according to prices or income; no regular increases; discretionary decisions of federal government i •J

Discretionary decisions of local governments

Denmark Care allowance to persons taking care of terminally ill people M

17. Adjustment of benefits and services

16. Additional benefits for informal care givers (home care)

Spain Sweden

Not available

i,ir

Discretionary decisions of local authorities and central government

United Kingdom Main benefit is Invalid Care Allowance to persons under 65 caring for a severely disabled person at home

366 Roland Eisen

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Roland Eisen

Bibliography BÖRSCH-SUPAN, Axel H. (1994): Migration, Social Security Systems, and Public Finance, in: Horst Siebert (ed.), Migration: A Challenge for Europe, Tübingen (MohrSiebeck), 119-142. EDVARTSEN, Trond O. (1996): Possibilities and Problems in Cross-Country Comparative Analysis of Long-Term Care Systems, in: Eisen/Sloan (1996). EISEN, Roland and Hans-Christian MAGER (1996): Long-Term Care: An Inter- and Intragenerational Decision Model, in: Eisen/Sloan (1996). EISEN, Roland and Frank A. SLOAN (eds.) (1996): Alternatives for Ensuring LongTerm Care, Norwell/MA (Kluwer), forthcoming. GOTTING, Ulrike, HAUG, Karin and Karl MNRICHS (1994): The Long Road to Long-Term Care Insurance in Germany, in: Journal of Public Policy, vol. 14, 285309. HAUSER, Richard (1996): Are Pension Systems Converging in the EU?, in this volume. HOLZMAN, Robert (1988): Reforming Public Pensions, OECD Social Policy Studies No. 5, Paris. SCHNEEKLOTH, Ulrich and Peter POTTHOFF (1993): Hilfe- und Pflegebedürftige in privaten Haushalten, Bericht zur Repräsentativerhebung, Schriftenreihe des Bundesministerium für Familie und Senioren, Bd. 20.2, Stuttgart et al. (Kohlhammer). SCHULIN, Bertram (1987): Landesreferat Bundesrepublik Deutschland, in: Soziale Sicherung bei Pflegebedürftigkeit - Bestandsaufnahme und Reformbestrebungen, Schriftenreihe des Deutschen Sozialrechtsverbandes, Bd. XXIX, 8-44. SOMMER, Bettina (1992): Entwicklung der Bevölkerung bis 2030, in: Wirtschaft und Statistik, No. 4, 217-222. VERBON, Harrie A. A. (1990): Social Insurance and the Free Internal Market, in: European Journal of Political Economy 6, 487-500.

369

Regional Mentors

Regional Mentors

Universidad Nacional de Córdoba, Facultad de Ciencias Económicas, Argentina Mentor

Field of Research

Marta Podzun de Buraschi Alberto M. Diaz Cafferata / Alberto José Figueras Ernesto Rezk Fernando Sonnet / María L. Recalde de Bernardi

Financial Systems Labor Market Public Economics Agricultural Policy, Technological Change

Universidade de Sao Paulo, Faculdade de Economía, Brazil Mentor

Field of Research

Basilia Maria Baptista Aguirre Siegfried Bender Martin Jayo

Public Economics Financial Systems Agricultural Policy, Technological Change Labor Market Labor Market

Leticia Borges Costa Lenina Pomeranz

370

Regional Mentors

Johann-Wolfgang-Goethe Universität, Fachbereich Wirtschaftswissenschaften, Frankfurt, Germany Mentor

Field of Research

Dieter Biehl Roland Eisen Richard Hauser Ulrich Peter Ritter Reinhard H. Schmidt

Public Economics Social Policy Social Policy Labor Market Financial Systems

Justus-Liebig Universität, Gießen Mentor

Field of Research

Peter Michael Schmitz

Agricultural Policy, Technological Change

371

Regional Coordinators

Regional Coordinators Basília María Baptista Aguirre Faculdade de Economía Universidade de Sao Paulo Av. Luciano Gualberto, 908 Cidade Universitária - Sao Paulo SP 05508-900 Brazil Fax: ++55-51-8143379 e-mail: [email protected]

María L. Recalde de Bernardi Instituto de Economía y Finanzas Facultad de Ciencias Económicas Universidad Nacional de Córdoba Av. Valparaíso s/n 5000 Córdoba Rep. Argentina. Fax: ++54-51-231428 e-mail: [email protected]

Ulrich Peter Ritter Institut für Markt und Plan FB Wirtschaftswissenschaften Johann-Wolfgang-Goethe Universität Schumannstr. 60 60325 Frankfurt Germany Fax: ++49-69-79823849 e-mail: [email protected]