Labor Market Policies as Instruments of Industry Policy. What Can Europe Learn from Southeast Asia?

By Chowdhury, Anis | The American Journal of Economics and Sociology, October 2008 | Go to article overview

Labor Market Policies as Instruments of Industry Policy. What Can Europe Learn from Southeast Asia?


Chowdhury, Anis, The American Journal of Economics and Sociology


I

Introduction

IN AN ERA OF UNPRECEDENTED GLOBALIZATION, the efficacy and forms of industry policy are being widely debated once again. (1) Both supporters and skeptics cite examples from East and Southeast Asia. The focus of the debate has been mostly on the fiscal, credit, and tariff measures, which are generally designed to favor particular activities. (2) There has been some discussion of human resources, technology, and R&D as instruments of industry policy as well. But little attention has been paid to industrial relations or wages policy. (3) Here again, the discussion has been dominated by the issue of labor rights and, generally, very little explicit linkage is made to industrial restructuring. As far as policy lessons are concerned, the focus has been mostly on other developing countries seeking rapid growth and industrialization. (4) The idea of directive industry policy for the advanced market economies of Europe is generally perceived as a questionable proposition. (5)

There are at least three reasons for this pessimistic view. They are: (a) inapplicability of the standard rationale, such as the infant industry argument for industrial policy due to their advanced stage of industrialization; (b) constraints on trade protection under the WTO rules and constraints on selective fiscal and credit measures for the European Union countries due to fiscal harmonization and other common market rules; and (c) inability of the bureaucrats to pick "winners" in a complex economy subject to rapid technological change. In addition, to the extent that directive industrial policy has been associated with the suppression of labor rights in East Asian countries, the general view is that there is nothing to be learned for mature democracies.

I am going to argue that there is more to industry policy than fiscal, credit, and tariff measures. The literature on industry policy has focused predominantly on these measures to protect infant industries or to correct market failures and reap the benefits of externalities from knowledge spillover and learning by doing. However, the rationale for industrial policy does not have to be the infant industry argument or market failures and knowledge spillover. The rationale for industry policy in advanced industrial countries arises from the need to constantly restructure their economies to maintain competitiveness, and useful lessons can be learned from the East and Southeast Asian experience.

I am going to argue further that the association between industry policy and the suppression of labor rights in East and Southeast Asia was an accident of history. Many observers believe that the attenuation of labor rights in East and Southeast Asia was the result of either geopolitics of containing "communist" threats or benign neglect. (6) The primary objective has been the restriction of political activities of unions, susceptible to influence by radicalism, rather than reducing labor standards and entitlements.

The lesson that mature democracies can learn from East and Southeast Asia is the importance of consensual policy making, especially in the realm of the labor market. Such policies have not only helped them maintain macroeconomic stability but also accelerated industrial restructuring.

It seems some mature democracies have a mistaken belief that East and Southeast Asian countries could maintain their international competitiveness by keeping the labor cost low. Thus there have been attempts to deregulate the labor market, especially by removing job security and entitlements such as minimum wage and penalty rates. The attempt by the French government to dilute the employment conditions of the youth is the most recent example of such moves in removing workers' rights. (7) Although consensus building and protection of rights are the hallmarks of democratic polity, ironically these countries have taken a confrontational approach and are trying to create an economy characterized by low wages and minimal labor rights. …

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