Recharacterizing Restructuring:Law, Distribution, and Gender in Market Reform (The Erik Castren Institute Monographs on International Law and Human Rights, ... on International Law and Human Rights, V. 3)

RECHARACTERIZING RESTRUCTURING

The Erik Castrén Institute Monographs on International Law and Human Rights Volume 3 General Editor Martti Koskenniemi

The titles published in this series are listed at the end of this volume.

RECHARACTERIZING RESTRUCTURING Law, Distribution and Gender in Market Reform

by

Kerry Rittich University of Toronto, Canada

KLUWER LAW INTERNATIONAL THE HAGUE / LONDON / NEW YORK

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THE MONOGRAPH SERIES

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he Series of International Law Monographs by the Erik Castrén Institute of International Law and Human Rights seeks to bring to the reader highquality research in international law with particular emphasis on the theoretical and historical aspects of the topics dealt with. The Series encourages doctrinal and practical criticism, a multidisciplinary approach and broad syntheses. Manuscripts that seek to renew the field's intellectual energy and political commitment are welcome. The Series is based on a conviction that theoretical ambition and practical relevance cannot be dissociated from each other and that even as it looks for a rejuvenation of the field it insists on speaking to both academic and practising lawyers.

Martti Koskenniemi General Editor

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PREFACE BY THE SERIES EDITOR

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he distinction between economics and politics is one of the structuring principles of much prevailing institutional thinking - especially "neoliberal" thought - about the role of law in furthering social development at the international and domestic levels. On the one hand, there are the "natural" legal forms of the economic market - basically encapsulating property, contract and private rights. On the other hand, there are the "artificial" interventions produced by decision-making at the level of the State that reflect different equitable and distributional priorities. Economics is neutral and comes first, politics is partial, and secondary. In this view, the post-1989 transition in Eastern and Central Europe is about moving from an excessively State-centred, and thus "politicised" form of economic regulation towards the establishment of the structures of the market as the natural and non-political basis that provides the economic resources on the basis of which the State may then carry out structural adjustments so as to effect its political priorities. In this study, Kerry Rittich effectively demonstrates that this is a profoundly ideological view of the relationship of economics, politics and law. One of the principal arguments here is that there is no neutral realm of economic efficiency, for instance, in the form of a set of best practices, that could be implemented by a determined set of legal rules. Using both Realist and Post-Realist legal critiques, the author demonstrates that every notion of the market, and every assessment of its efficiency, is always akeady infected by

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Martti Koskenniemi political choices. There is no predetermined set of legal arrangements or institutions that would correspond to an original or authentic notion of the economic market. Every market is a historical creation and reflects political priorities and distributional choices. The ways in which property rights are grounded and delimited, contracts are enforced or balance is struck between conflicting private rights reflect broad equitable principles and developmental priorities. Even non-intervention by the State is intervention in favour of the stronger actors and there is nothing in the intensity or content of the normative framework supporting either the latter or the former that would suggest one to be more natural (i.e. non-political) than the other. But moreover, any legal framework that purports merely to regulate economic activity will bear wideranging social consequences outside the market itself, by empowering and disempowering particular social actors and realising some priorities at the cost of other priorities. In this study, the focus is on the effects of economic policies on the position of women in Eastern and Central European States in the course of the years of a "transition", often characterised by participant institutions, such as the World Bank, as a movement from the artificial and • politically loaded interventionism by the State towards the natural conditions of the market. The points made in this work by Dr Rittich are extremely important and timely: neoliberal reforms have been expanding in the non-Western world as well. When the World Bank or other international institutions engage in supporting "best practices" in Africa or the creation of a "level playing field" in Asian economies, they are making choices and setting priorities that may be accepted or contested but which cannot be reduced to the application of economic or legal techniques. It is a particular merit of the present study that the author has combined her analysis of the de facto distributive consequences of the transition "From Plan to Market" with the tools of critical legal analysis. For if the boundaries between economics, politics and law are not fixed, it follows that the reach of legal study is not limited to the interpretation of normative frameworks but may extend to elucidating the way particular legal regimes bring about particular social and distributive consequences. This is a highly welcome extension of the orientations of international law as well especially since the traditional boundary between "international" and "national" is vulnerable precisely to the kinds of critiques that this book makes of the economic and conceptual constructs. If VIII

Preface developments in domestic societies hinge upon policies carried out within international financial institutions, and those policies refer back to contestable assumptions about the force and meaning of legal institutions, then surely insisting on traditional textbook divisions of legal disciplines is part of the very problem that it often seems so difficult to get a grasp of why it is that orthodox policies seem to have adverse consequences. This book produces impressive evidence for the claim that the transition "from plan to market" in the states of Central and Eastern Europe affected the position of women in significantly adverse ways. As a result of the privatization and restructuring of enterprises, large numbers of women became unemployed and the wage gap between men and women widened. The reduction of childcare and other social benefits and services that were previously integrated into the production process resulted in the forced withdrawal of women from the labour market, accompanied sometimes with massive impoverishment. Overall, restructuring in the workplace as well as in the economy at large (reduction of subsidies, privatization of education and health etc.) produced a long-term gender disadvantage. Particularly important has been the externalisation of the costs of women's reproductive labour to private economies: child care elder care, food preparation and other social tasks are allocated to women on an unpaid basis. As the present study shows, such results would often be unacceptable in the older, developed mixed economies. They are thus not a natural consequence of the transition but a result of the preferences embedded in the particular neo-liberal theory that has been predominant in the process. Applying critical insights of post-Realist legal analysis, this book is a brilliant reminder that the fluidity and open-endedness of legal institutions is not a defect or a problem to overcome. It is, rather, an indissociable aspect of the possibility of democratic social transformation - a reminder that in economics, too, everything is open for political choice and critique and that legal analysis is a good ground for preparing both. It is also a welcome invitation for lawyers to leave the prison-house of conceptualism and grasp the link between legal analysis and political commitment. Consciousness of this link has always been at the heart of international law's emancipatory potential. Martti Koskenniemi Helsinki, 10 December 2001

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ACKNOWLEDGEMENTS

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his book was begun when much about its subject matter, the legal character of contemporary economic reform and restructuring, was still an open question. During this time, I benefited enormously from conversations and workshops with a remarkably vibrant and provocative community of scholars at the Graduate Program at Harvard Law School; this book is marked in countless ways by their presence. Among those from whom and with whom I learned much are Tony Anghie, Bojan Bugaric, James Gatthi, Aeyal Gross, Mala Htun, Outi Korhonen, Vasuki Nesiah, Celestine Nyamu, Balakrishnan Rajagopal and Robert Wai. I am indebted to David Kennedy for his vision of international scholarship, and for an environment which allowed so much collective learning and encouraged so much innovative work. Special thanks also to Seyla Benhabib for her involvement at the earliest stages. My greatest intellectual debt, however, remains to Duncan Kennedy who oversaw the endeavor from its most embryonic stage with characteristic acuity and engagement. His contribution in terms of time, support and knowledge is simply incalculable. Parts of this work were presented at workshops and conferences at the University of Cape Town, the University of Connecticut, the European Law Research Center at Harvard Law School, the Human Rights Program at Harvard Law School, the Institute des Haute Etude in Geneva, and the University of Michigan. I am grateful to Jean Marc Coicaud, Joanne Conaghan, Michael

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Kerry Rittich Fischl, Veijo Heiskanen, Robert Howse, David Kennedy, Karl Klare, Joel Paul, Balakrishnan Rajagopal and Henry Steiner for their kindness and support in providing the opportunity to do so, and to the participants at these events for their responses. For comments at various points on earlier drafts and sections of the manuscript, I would like to especially thank Gregory Alexander, Bill Bratton, Karen Engle, Gunter Frankenberg, Jan Klabbers, Outi Korhonen, Marti Koskenniemi, Robert Wai and Bruce Ziff. Although they will surely find much still to amend, it is immensely better for the time and care which they took. A number of students at the Faculty of Law at the University of Toronto provided valuable research assistance in the preparation of the manuscript: for this I thank Lea Waldorf, Joe Cheng, and Erin Stoik. I also relied t at crucial moments on my assistant at the Faculty of Law, Allyn Chudy, and on Shikha Sharma at the Bora Laskin Law Library. I am very grateful for the generous financial support received at various points during this project from the Social Sciences and Humanities Research Council of Canada, and the Connaught Research Fund at the University of Toronto. Finally, to Robert Wai, for all the things that made it possible. Kerry Rittich

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TABLE OF CONTENTS

INTRODUCTION

1

PARTI

27

1. ECONOMIC DEVELOPMENT IN THE NEOLIBERAL STYLE: THE CASE OF TRANSITION 1.1 An Outline of Neoliberal Theory and Practice 1.2 The Agenda for Transition 1.2.1 Compensation and social welfare in plan economies 1.2.2 Critique of the enterprise benefit model 1.2.2.1 Enterprise benefit provision 1.2.2.2 Employment regulation and entitlements 1.2.2.3 Subsidies and cash compensation 1.2.3 Strategies for change 1.2.3.1 Wage compensation and the elimination of benefits 1.2.3.2 Reductions in public provisioning

29 30 34 35 39 40 41 42 43 43 45

2. NEOLIBERAL IMAGES OF LEGAL REGULATION AND THE STATE 2.1 Positioning the State 2.1.1 Naturalization, neutralization and normalization of the market 2.1.2 The role of anti-state rhetoric 2.2 legal and Economic Integration

49 50 55 59 62

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Kerry Rittich

2.3 The Ro/e of Law 2.3.1 The use of rights 2.3.2 Law versus regulation

65 68 70

2.3.3 Market failure and state intervention 2.4 Best Practices

73 85

3. THEORETICAL ANTECEDENTS OF NEOLIBERALISM 3.1 Libertarian Concepts of Property, Regulation and the State: Hayek andRoepke 3.2 Public Choice Theory

99 101 115

4. LAW AND DISTRIBUTION IN THE MARKET: A POST-REALIST VIEW 127 4.1 Neo liberal Legalism 131 4.2 A Post-realist View of Law and the State 132 43 Institutional Economics 143 5. RECHARACTERIZING RESTRUCTURING 5.1 Rethinking Distribution 5.2 Re-evaluating the Role of the State 5.3 The Rise of the Private 5.4 The Elimination of Subsidies 5.5 Restructuring and Regulation

153 156 158 160 161 163

PART II

171

6. THE GENDER OF RESTRUCTURING 6.1 Restructuring the Enterprise and the State 6.2 Production and Reproduction 6.2.1 Analyzing the productive and reproductive economies 6.2.2 Restructuring and reproduction 63 The Gendered Effects of Enterprise Restructuring 6.3.1 Loss of reproductive benefits 6.3.2 Cash vs. in-kind compensation 6.3.3 Employer as an efficient commodity provider

173 178 182 182 196 200 204 205 206

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Table of Contents 6.3.4 Loss of cross-subsidies 6.3.5 Increasing wage differentials 6.3.6 Control of household resources 6.4 Gender and the Transformed Ro/e of the State 6.4.1 Loss of subsidies 6.4.2 Budget reductions 6.4.3 Reductions in social provision and transfer payments 6.4.4 Reductions in the size of the state sector 6.5 Wage Suppression in Transition 6.6 Gender Disadvantage Through the Lens of Post-realism

207 208 211 213 213 215 217 220 221 227

7. GENDER EQUITY IN THE WORLD BANK: THE CASE OF RESTRUCTURING 7.1 Gender Equity and Restructuring from Plan to Market 7.2 Gender Equity and Human Capital

235 249 257

8. POVERTY VERSUS EQUALITY

263

CONCLUSION

283

BIBLIOGRAPHY

293

INDEX.

311

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INTRODUCTION

I

n its 1996 World Development Report, From Plan to Market,1 the

World Bank set out its view of the route which the so-called "transitional" states, those moving from administrative or plan to market

allocation of goods and services, must follow in order to successfully transform themselves into market economies, move toward integration into the world economy and achieve economic growth. Although the analyses and recommendations contained in From Plan to Market are specifically directed at the process of transition, they did not simply emerge in that context and on that occasion. Nor were they unconnected to other projects and debates elsewhere on development and market reform. Rather, the policies were part and parcel of an emerging orthodoxy among development and financial institutions concerning proper economic policy among both developing and developed states. Indeed, the path of reform and the policies advocated in the report can be understood as an expression of dominant ideas about the appropriate structure of market societies and the institutional and legal requirements of participation in the global economy. From Plan to Market attempts to explain the demands of transition in a way that is compatible with the central tenets of the reigning economy orthodoxy.

1

World Bank, World Development Report 1996: From Plan to Market (New York: Oxford University Press, 1996). 1

Kerry Rittich Yet many of these institutional, policy and regulatory details of this orthodoxy did not exist in a well-elaborated form before the dilemma of transition arose. Rather, transition itself proved to be a crucial moment in the consolidation of a consensus around the demands of markets-centered growth and the site of a particularly intense effort to establish its institutional form. This is a study of the relationship between the ideology which animates this restructuring project and the legal rules and institutions through which it is carried out. It seeks to explore the role of the legal reforms and policy changes advocated in the name of growth and greater efficiency and the creation of advantage and disadvantage among different social groups. The focus of the distributional analysis is a set of reforms that might be expected to generate adverse effects for women in the emerging markets. In exploring the role of law in the allocation of economic power and resources, it examines the relationship between development and market design, matters conventionally placed within the domain of economics, and considerations of equity and social justice, concerns which are thought to be quintessentially political. The intuition that is pursued is that claims and ideas about legal rules and institutions now play a key role in mediating the domains of economics and politics and establishing the boundary between them. Originally identified as the "neoliberal agenda" or the "Washington consensus",2 current development orthodoxy places the pursuit of greater efficiency, an enhanced role for markets, and integration into the global economy at the center of efforts to secure economic growth. It rests on the view that the benefits of liberal trade and open markets are beyond dispute, and that alternatives to market-driven growth and participation in the global economy no longer represent viable routes to development. According to this view, the state's role in promoting growth has been conclusively trumped by that of the market. Indeed, the state must now be cabined and controlled if it is not to subvert the project of economic growth. The new commitments to market ordering, global economic integration and minimizing the role of the state have generated a profound and important

2

John Williamson, "What Washington Means by Policy Reform", John Williamson, ed, Latin American Adjustment: How Much Has Happened (Washington: Institute for International Economics, 1990), 5.

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Introduction transformation in the manner in which economic development is imagined. Development is no longer simply a matter of particular economic objectives, such as combating poverty or ensuring adequate infrastructure investment. Instead, the successful pursuit of economic development is now explicitly conceived as a matter of law, institutions and "good governance". A wide range of state practices, rules and institutions have come under the gaze of financial and development institutions and are now implicated in the success or failure of development. Comprehensive reforms to economic policies and state institutions are routinely prescribed to ensure growth. Indeed, it seems safe to say that the management of the economy has become the focal point of development policy, as the fate of development is increasingly attributed to the characteristics of domestic institutions, rules and practices.3 In this recasting of the development dilemma, development institutions have focused their efforts on articulating and normalizing a set of legal rules and institutions, a particular set of state practices, and a distinct culture concerning the responsibilities of different actors and institutions within market societies. Indeed, the entire enterprise of development has been legalized, and many of the central activities of the international institutions should be understood as law reform projects. There is a new importance placed on the relationship between the state and the market and the appropriate allocation of functions between them. Proper economic governance turns out to be proximity to an idealized set of practices and institutions that are thought to further efficiency, facilitate investments and ease transactions. These model rules and institutions derived from the "normal" markets of the industrialized world provide a template with which to design markets that will generate improved economic growth in a range of different contexts.4 Law and institutions have not always been central to the development efforts of the international financial institutions. It is only since the 1990s that the absence of adequate legal and regulatory institutions has been systematically identified as a barrier to the achievement of development targets. Transition 3

A classic example would be the attribution of failed growth to corruption on the part of ruling elites, particularly in Sub-Saharan Africa. See World Bank, World Development Report 1997: The State in a Changing World (New York: Oxford University Press, 1997). 4 James D. Wolfensohn, A Proposal for a Comprehensive Development Framework (A Discussion Draft) (Washington, D.C.: World Bank, 1999).

3

Kerry Rittich was one of the contexts in which this first occurred.5 Although the original view appeared to be that markets would spring up as if from nature once impediments to their operation were removed, it soon became clear the transition also involved the self-conscious construction of the infrastructure of market economies. The result was an intense focus on law and institutions; what emerged from the process was a greatly consolidated theory of governance and the role of the state in market societies. As a result, the successful pursuit of development is increasingly represented as a question of finding and adopting appropriate legal rules and regulations and legal institutions. Development literature is now replete with claims about the role of law and the place of the state in market societies. States are continually exhorted to respect the rule of law, as investment and hence growth can only be expected in law-based societies that protect private rights, resist special interests, and prevent the arbitrary interference of the state in the economy. The Bank's policy proposals emphasize the importance of a stable institutional environment for business and investment, "good laws", and the withdrawal of the state from administrative control.6 The presence of canonical legal rights such as property and contract rights is said to define the very existence of market societies. A multitude of law reform and legal education projects is now funded by the Bank. However, the discourse about law in development policy ranges far beyond the need to promote law-based market societies. There are myriad claims about the effects of particular legal rules and their compatibility with markets embedded in the discussions about market reform. A wide range of laws is evaluated in terms of their contribution to growth or their capacity to impair it. In the shift toward development as good governance, claims about law have taken on heightened significance, so much so that development in general can be usefully approached through the optic of legal analysis. In light of this

5

Joseph Stiglitz, "Whither Reform? Ten Years of Transition", World Bank, Keynote Address, Annual Bank Conference on Development Economics, Washington, D.C., April 2830, 1999. http: / / nmv.worldbank.org/research a/ abcde/wasbington_11/pdfs / stiglitz.pdf (last visited 11/08/2001). 6 See World Bank, From Plan to Market, supra note 1, at 87.

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Introduction turn, this study seeks to investigate how legal and institutional reforms function as vehicles for the management and legitimation of development. It is motivated by the intuition that, as law is now among the principal mechanisms of contemporary development and market reform efforts, legal analysis might be central to understanding its effects. The study engages in a number of linked tasks. First, it attempts to make explicit the image of law and the relationship between the state and economic activity that prevails among the international institutions. Second, it traces the manner in which abstract principles and commitments to concepts such as the rule of law, markets, freedom and private property become translated into prescriptions for specific legal rules, institutional arrangements and state and enterprise policies in the context of transition. Third, it attempts to discern the distributive dimension of these reform efforts, as well as the role of legal discourse in normalizing such effects. One of the collateral effects of the turn toward law is a new normalization and a new internationalization of development. Market reform and development have become internationalized in the following senses. First, conscious efforts to engage in market reform to spur economic growth are now ubiquitous across the so-called developed and developing worlds. Second, such efforts are increasingly transnational in their aspirations. Not only are market reforms to be found everywhere, they are designed to enable greater economic activity across jurisdictional boundaries and to render those boundaries less significant. Third, there is now what approaches a universal template for market reform and development. Rather than a series of discrete initiatives and projects tailored to the needs of particular states in specific contexts, market reform projects have increasingly taken the form of common or general prescriptions. Moreover, key decisions on the structure and pacing of reforms are influenced or determined by decision-makers outside national borders who will themselves typically not experience the effects of their recommendations. Finally, economic development has become increasingly the province of the international institutions. While reforms must still be implemented largely at the national level, the international economic institutions are among the principal proponents of neoliberal reforms. The International Monetary Fund and the World Bank in particular have played an important role in the development and legitimation of this market model. At the same time, market reform has given these institutions new visibility and heightened importance in the international 5

Kerry Rittich order. Developing the architecture for global economic integration and diffusing this vision of optimal market ordering have become central to their activities, while engagement in such projects has vastly extended the scope of their concerns. No longer obscure agencies and institutions of concern only to specialists and particular departments and ministries in developing countries, they are increasingly central players in the debates around global economic transformation. A reconceptualization of the role of the state in development is fundamental to this vision. Market reformers have actively promoted the view that the principal choice is between the market and the state as an instrument of development; furthermore, it is a battle that has now been won by the market. The role of the state has long been present, central to debates over development via liberalized trade versus development through import substitution, as well as to discussions about the possibilities of industrial policy. However, the collapse of the plan economies seemed to decisively shift the balance in favor of the market, at the same time leaving neoliberalism as the residual intellectual claimant in economic and development policy debates.7 The result is that the discussion has largely been organized around the merits of markets as contrasted to the defects of the state. In the wake of the mounting evidence of the problems caused by inadequate regulatory infrastructure, market reformers are increasingly likely to concede a role for the state.8 Yet because the state/market polarity is fundamental rather than marginal to neoliberal claims about the institutional requirements of market societies, there are deep challenges and perils to the neoliberal project in acknowledging a central role for the state. As a result, the central struggles of neoliberalism - the relationship of the state and the market and the role of politics in development - are displaced to the field of law, to be played out in debates over the proper role of law in a market society and the demands, limits and logic of regulation.

7 Ute Pieper and Lance Taylor, "The Revival of the Liberal Creed: the IMF, the World Bank, and inequality in a globalized economy", Dean Baker, et al, Globalization and Progressive Economic Policy (Cambridge, U.K.: Cambridge University Press, 1998). 8

For a discussion, see Joseph Stiglitz, "More Instruments and Broader Goals: Moving Toward the Post-Washington Consensus", WIDER Annual Lectures 2, Helsinki, January 7, 1998 http://mm.wider.uuu.edu/ (last visited 11/08/2001).

6

Introduction Ideas about law and regulation consequently play a number of important roles. Throughout neoliberal discourse, a series of operative distinctions is invoked which is intended to provide the conceptual scaffolding to reforms as well as a mechanism by which the market can be distinguished from the state. Among the most important are the distinctions between public and private spheres of activity, regulation and non-regulation of the market, and intervention and non-intervention in economic affairs on the part of the state. These distinctions also provide a mode of determining good policy from bad, as the first refers to what is to be contained, discouraged or avoided, while the second of each pair is associated with a desirable state of affairs. Law also emerges as one of the fields in which the border between economics and politics is established, a matter of constant tension in neoliberal policy given the pervasiveness of reforms. Claims about law turn out to be central to managing this boundary, as distinctions between rights and regulation are some of the key ways in which neoliberal policies and institutional structures are defended yet politics is held in abeyance. For example, in neoliberal discourse, the rule of law and the protection of rights are positioned on the side of economics and efficiency, while many forms of regulation are characterized as political. Market design itself is approached as an exercise in comparative law, and the dominance and desirability of particular rules and institutions are explained through their functional superiority in generating economic growth. For a variety of reasons, the transition from plan to market has proved to be a particularly fruitful and illuminating context in which to examine the emerging role of law in global market reform and development projects. It provided an opportunity, which was unprecedented and is unlikely to be repeated, that was seized upon by market reformers to advance a general theory about the optimal structure of a market society in a globalized economy. As market societies had to be built as it were "from the ground up", transition provided the context for an explicit debate about the nature of normal markets. In addition, it provoked unusually radical and thoroughgoing proposals for institutional reform and an unprecedented effort to specify the economic and regulatory structure of a market economy. Indeed, it was an article of faith among market reformers that virtually all traces of pre-existing practices and institutions had to be eliminated in order for a successful transition to the market to be achieved. The project of wholesale regulatory and institutional 7

Kerry Rittich reform also provided the point of entry for far-reaching interventions by external experts and international institutions. The institutional dilemmas they encountered and the decisions they reached about how to respond to them in turn generated a significant amount of theorization about development and market economies in general. Thus, transition provided both the occasion and the terrain not simply to apply market principles but to articulate, contest and construct the attributes, structure and character of the "normal" market society and the appropriate roles and powers of the actors and institutions within it. Coming as it did in the wake of the abandonment of alternative economic strategies, the debate over transition also occurred in a political and ideological context that was highly receptive to arguments about the merits of markets. For these reasons, an analysis of the rationale and logic of transition helps explain not only the debates in those economies but many of the arguments surrounding ongoing policy and regulatory controversies in established market economies as well. A number of events have served to place distributive concerns at the forefront of debates over development. Development efforts, market reforms and global integration all provoke increasing anxiety, an important source of which is the evidence that the implementation of economic reforms often results in considerable social pain and dislocation. Among the results, at least in the short term, are greater poverty and rising inequality. Often the costs of greater efficiency and fiscal discipline appear to be disproportionately visited on groups that are already disadvantaged. In both developed and industrialized states there are marked disparities in the benefits and rewards of neoliberal reforms. Moreover, it now seems evident that economic growth is not necessarily co-extensive with greater human welfare. Attempts to induce greater economic growth through restructuring, even if they produce material progress for society in the aggregate, are not experienced as a single, homogeneous event nor do their benefits accrue evenly to different sectors of the population. Rather, they tend to produce different, often dramatically different, effects on different groups, gains and losses which cannot simply be described as transitional phenomena but appear to be structural features of the transformed economies. Transition is also an illuminating context in which to examine these phenomena, as the process has been marked by pronounced declines in social welfare and dramatic increases in poverty and inequality. Even on the most 8

Introduction generous reading, transition cannot be characterized as an unqualified success, and the associated human costs have been immense. The experience of economic restructuring in Central and Eastern Europe and the Commonwealth of Independent States (CIS) has been marked by high unemployment, sharp rises in prices and often even sharper declines in real wages. All of the states in the region experienced dramatic declines in productive output.9 Per capita incomes in the region as a whole have fallen on average by a third from their peaks in the mid-80s.10 By 1996, the region's average GDP had declined to about $2000, a decline of about $1000 from levels of about $3000 in 1989. While growth has resumed in most countries, in many states the losses suffered during transition have not yet been recouped.11 The decline in production has been accompanied by a sharp increase in poverty. While the number of people living on less than $4 per day was about 14 million out of a population of 360 million in the region in 1989, estimates are that more than 140 million people now live below the poverty line,12 a startling and disturbing increase by any measure. Income inequality, formerly quite low by world standards, is also markedly higher.13 The average Gini coefficient in the region has risen from 24 to 33, placing the region on par with the high income inequality OECD countries; in some countries, inequality is even higher. Moreover, the increase in the Gini coefficient was itself very rapid; over a period of only 6 years, it rose by 9 points.14 In short, high and growing inequality seems to be a well-entrenched feature of the region in its post-communist state.

9

World Bank, From Plan to Market, supra note 1, at 173.

10

United Nations Development Programme, Human Development Report 1996 (New York: Oxford University Press, 1996), 2. 11

A. Amsden, J. Kochanowicz and L Taylor, The Market Meets its Match: Restructuring the Economies of Eastern Europe (Cambridge, MA: Harvard University Press, 1994); L. Sklair, Sociology of the Global System, 2d. ed., (Baltimore: Johns Hopkins, 1995); UNDP, Human Development Report 1996, supra note 10; Branko Milanovic, Income, Inequality, and Poverty during the Transition from Planned to Market Economy (Washington, D.C.: World Bank, 1998). 12

Milanovic, Income, Inequality, and Poverty during the Transition, supra note 11.

13

Id. See also World Bank, From Plan to Market, supra note 1, at 67-70; UNDP, Human Development Report 1996, supra note 10. 14

Milanovic, Income, Inequality, and Poverty during the Transition, supra note 11, at 40.

9

Kerry Rittich All of these changes have been accompanied by dramatic declines in health and mortality indicators, especially in Eastern Europe and the former CIS.15 Apart from declines in human welfare which they indicate, they suggest significant peril to productivity and hence to resumed growth.16 Yet despite the evidence of "winners" and "losers" in the restructuring process,17 as well as a history of declines in social indicators following the introduction of neoliberal policies in other contexts at earlier moments,18 there has been relatively little attention on the part of the proponents of neoliberal restructuring as to why this should be so. How such people were situated in the old economy, how they might be positioned in the new, and the degree to which disproportionate disadvantage to particular groups might be not only foreseeable but actually produced by restructuring itself has been a subject of much less analysis. Instead, hardships are typically characterized as inevitable but temporary, the "natural" effects of submitting to the discipline of the market, the costs of past errors and the necessary price that must be paid for long-term economic health in the future.

UNICEF, Central and Eastern Europe in Transition: Public Policy and Soda/ Conditions, Regional Monitoring Report no. 1 (Florence, Italy: UNICEF International Child Development Centre, 1993); UNICEF, Central and Eastern Europe in transition: Crisis in Mortality, Health and Nutrition, Regional Monitoring Report no. 2 (Florence, Italy: UNICEF International Child Development Centre, 1994); UNICEF, Children at Risk in Central and Eastern Europe: Perils and Promises, Regional Monitoring Report no. 4 (Florence, Italy: UNICEF International Child Development Centre, 1997). 16 A number of analysts suggest that many of these consequences, particularly high unemployment and the fall in real wages, were quite foreseeable and can be attributed to restructuring strategies such as the failure to protect and restructure even the most promising and productive industrial sectors prior to privatization and the dismantling of existing markets and trade networks. See P. Gowan, "Neo-liberal theory and Practice for Eastern Europe", 213 New Left Review (1995); A. Amsden, et al, The Market Meets its Match, supra note 11; UNICEF, Public Policy and Social Conditions, supra note 15. 17

See for example E. Brainerd, "Winners and Losers in Russia's Economic Transition", Harvard University, Department of Economics, 1996, paper on file with the author; Peter F. Orazem and Milan Vodopivec, "Winners and Losers in Transition: Returns to Education, experience, and Gender in Slovenia", Working Paper, World Bank, Policy Research Department, Transition Economics Division, August 1994; Bertram Silverman and Murray Yanowitch, New Rich, New Poor, New Russia: Winners and Losers on the Russian Road to Capitalism (Armonk, N.Y.: Sharpe, 1997). 18

G. Cornia, R. Jolly and F. Stewart, eds., Adjustment with a Human Face (Oxford [Oxfordshire]: Clarendon Press, 1987).

10

Introduction Equality and distributive concerns have held a distinctly subordinated place in the neoliberal world. Indeed, there is a powerful strand of thinking within the development institutions holding that inequality is necessary to economic growth.19 Whatever the status of the debate at the theoretical level, until recently market reformers have done little to allay concerns that policies and regulations promoted in the name of growth and efficiency might adversely affect or significantly undermine the pursuit of objectives such as equality or social solidarity. Instead, they have largely pre-empted debate over the wisdom of market centered reforms, neutralizing concerns with mantra-like assurances that the rising tide of economic growth will lift all boats, claims that conformity to the demands of the market is now the sine qua non to all other goals, and prophecies that the alternatives are either worse or unavailable. Arguments about the automatic benefits of neoliberal reforms are increasingly less persuasive, in part due to stalled reform and restructuring efforts in Eastern Europe and the CIS20 and disastrous results following classic neoliberal interventions in Asia during the financial crisis.21 However, it remains difficult to integrate the concerns over inequality into discussions about economic growth. There remain large chasms at both the conceptual and institutional levels in comprehending the links between market-centred policies and differential outcomes for particular groups. This analysis attempts to explore and evaluate the assumptions that permit the ongoing bifurcation of efficiency and distributive concerns. It suggests that the difficulty in integrating equality into the analysis and discussion of market reforms, and the displacement of the distributive that results, is not accidental. Instead, it is part of the structure of neoliberal reforms, something that can be traced to its most basic features and commitments. Part of the problem can be located in the separation of the economic and the political dimensions of reform, and a division of labor which places equality and justice issues beyond the concerns of economists in the domain of the social, cultural or political. Within the Bank, restructuring is characterized as an 19 G. Cornia, "Liberalization, Globalization and Income Distribution", United Nations University, World Institute for Development Economics Research, Working Paper no. 157, (March 1999), available at. www.wider.unu.eduI'publications'/'tvp157.pdf. 20 Stiglitz, "Whither Reform?", supra note 5. 21 Stiglitz, "More Instruments and Broader Goals", supra note 8.

11

Kerry Rittich economic project that is focused simply on the objectives of increasing efficiency and maximizing growth, one that, for reasons of institutional competence and legitimacy,22 leaves the political priorities and sovereignty of nation states untouched. To this end, institutional and policy reforms are routinely described and defended as simply intrinsic to promoting economic growth. Distributive concerns, on the other hand, are regarded as the province of politics. While questions about market design and efficiency are figured as technical or management concerns to be resolved with professional expertise, distributive concerns are relegated to the legislature and treated as second order issues to be dealt with after the path of economic growth has been secured. This division has served both to absolve economists of responsibility for distributive concerns, and to obscure the intimate connection between the pursuit of efficiency and the generation of distributive outcomes through basic decisions about market design. However, whether the drive for efficiency and the resulting distributive outcomes can be so separated is deeply contested. It is part of this project to demonstrate, through attention to the properties of neoliberal policies in the context of transition and analysis of the assumptions underlying neoliberal development ideology in general, how and why it has become untenable to imagine and unwise to treat efficiency and distribution as discrete issues. This analysis will argue that no separation of the economic and the political is possible. Rather, the transformation in legal and institutional forms that is envisioned in the states in transition has profound distributive implications, in effect if not by design. However, the result is not simply the displacement but also the demotion of equality vis-a-vis efficiency, as the separation of efficiency and equality has diverted attention from the distributive effects of the policies and mechanisms through which reform and restructuring are accomplished. What is most obscured through this division are the explicit political and distributional tradeoffs that are routinely involved in designing markets, as well as the alternative rules that might be available. A central goal of transition is to construct a zone of economic activity that is insulated from "political" considerations. Good economic policy, in the view 22

The articles of the World Bank Charter prohibit interference in the political affairs of any member. International Bank for Reconstruction and Development, Articles of Agreement, as am. February 16, 1989, Article IV, Section 10 http:/ / ww.worldbank.org/html/extdr/ backgrd/ibrdlart4.htm#I11 (last visited 11/08/2001).

12

Introduction of neoliberals, requires that states desist from engaging in broad-based redistributive projects that require extensive taxation and contributions from those who are economically productive. Rather, to avoid subverting the project of economic growth, states should provide enterprises with an environment largely free of regulatory impediments and other policies that impair the flexible and efficient deployment of resources. This analysis argues against the understanding that policy and regulatory choices driven by such beliefs result in neutral market institutions of uncontroversial economic benefit. Rather, the desire to insulate market rules and institutions from competing social and political demands results in markets that are replete with submerged political and distributional choices. While the legitimacy of promoting neoliberal policies as the universal route to development rests implicitly on the premise that no contentious political or distributional decisions are involved in doing so, such policies in fact rest on contestable norms and assumptions about the proper organization of social and economic life. In large part, this is because the rules and policies which structure the market function to allocate resources and income among the different parties involved. For this reason, considerations of relative advantage for some groups and disadvantage and disparate impact for others are embedded in the heart of the neoliberal project. While this does not, in itself, discredit the pursuit of neoliberal policies, it does suggest that the claim that we all stand to benefit from the commitment to global economic integration organized along the proposed regulatory and institutional lines is an argument to be interrogated, rather than a fact that can be simply asserted. As the analysis will describe, the legal rules and institutions which are the vehicle of market design and reform themselves not only further particular conceptions of efficiency but also entail distributive choices. Despite the attempt to preserve a boundary between economic and political matters, restructuring inevitably trenches on matters of social ordering and values, and engages questions of distribution and equity along with efficiency and growth. Thus, even if overt consideration of distribution and inequality are left to one side, restructuring is of necessity also a political project. Important aspects of the relationship between market reform and issues of equity and distribution can be usefully explored by looking at restructuring

13

Kerry Rittich explicitly as a legal reform project. Market reform occurs through a transformation in the legal structure in which economic activity takes place, through a series of quite specific institutional, rule and policy choices. By altering the existing configuration of rights and entitlements, reform and restructuring will reconfigure the allocation of resources and power among different groups, and create a changed set of conditions and incentives structuring economic activity. This transformation in turn can be expected to affect the resulting distribution of income along a number of axes, and reform is likely to have a differential impact upon particular social groups, classes, productive sectors or types of relationship. While this process may play out in a variety of ways, some of which are systemic and others quite localized, the thesis at its most general level is that the production of a particular configuration of advantages and disadvantages for different groups and individuals is internal and intrinsic to the process of restructuring. Rather than an external, accidental or contingent outcome, redistribution can be thought of as a necessary and inevitable consequence of changing the regulatory structure that governs economic activity. Neoliberals argue that reforms must be organized around the protection of private rights. They propose that in order to spur economic growth, states should recognize property and contract rights and adopt a canonical list of laws that enhance efficiency. The result, it is claimed, is a set of neutral rules that provides a level playing field in which the free market can best operate. States must be vigilant, however, not to intervene in the market and adopt other rules and regulations which are likely to impede growth. In the neoliberal account, good and bad laws can be evaluated in terms of their economic effects and are either justified or not in terms of their propensity to promote efficient economic transactions. These propositions rest on assumptions about law's neutrality and determinacy. They depend on distinctions such as the difference between protecting private rights and intervening in the market. They are justified by claims that such legal rights entail no controversial political or normative choices, indeed that they are distinct from politics. They reflect the view that market rules are both settled in their content and certain in their effects. Finally, they are focused primarily on the efficiency effects of rules.

14

Introduction However, this set of claims is highly contested. The controversial nature of neoliberal arguments can be illustrated by contrasting the legal claims contained in the policies of the international financial institutions with the analysis of market rules in the realist and post-realist tradition in American legal scholarship. Closely related analyses can be found within heterodox economic scholarship as well. There is a long history of work in American legal thought, beginning with the realists and continuing throughout the twentieth century in the work of various critical scholars, much of which is devoted to the relationship between legal rules and the exercise of economic power in the market place. This analysis both relies upon and extends these insights in order to analyze distinctions such as productive versus non-productive activities and expenditures and subsidized versus non-subsidized labor and services that are key to reforms and also central to the emerging disadvantage of women in the new market regimes. Realist and post-realist scholarship provides an unparalleled framework in which to critically examine the concept of law upon which neoliberal reforms are based for two reasons. First, it makes clear the connection between different configurations of rules and the allocation of resources and power among different groups. Thus, it allows an appreciation of the role of law in constituting social and economic relations, rather than in merely 'regulating' them. Second, it provides a way to explore and to deconstruct the arguments advanced to justify and naturalize reforms. Central to much realist and post-realist scholarship is an analysis of the concepts which structure the analysis of legal rights. These include: public versus private, intervention versus non-intervention, coercion versus freedom and rights versus regulation. As post-realist scholarship demonstrates, these constructs do not provide a coherent way of organizing or distinguishing among legal rules. Nor does a preference for one half of the binary over the other indicate which legal rule to promote in a given context. As constructs, they function not as opposites, but as polarities that on examination often collapse into each other. These concepts provide the terrain upon which battles over particular interests and values are fought. However, their use to justify and explain legal rules also serves to obscure the manner in which legal rule-making involves choices among competing interests and values and decisions over the structure of social power.

15

Kerry Rittich

Many of these same distinctions also organize current development and market reform discourse and are deployed by reformers to justify particular rule and policy proposals. Yet they also block inquiry into those reforms and normalize and naturalize their effects. Post-realist analysis opens up what is occluded by the neoliberal paradigm, which is that the turn to the market does not represent merely the promotion of the market over the state, but the promotion of a particular kind of market. Slogans such as the "rule of law" and the "protection of rights" turn out only to be starting point of the real debate, which is what forms of rights to recognize and for whom. Although the legal entitlements that form the bedrock of market reforms are proffered as a neutral baseline for economic activity, post-realist analysis provides important clues as to why this neutral baseline does not, indeed cannot, exist. Thus, it demonstrates the ways in which legal regulation is of deep significance for the issue of distribution. Counter to many neoliberal claims, legal rules and regulations, rather than mere enabling devices which facilitate economic transactions and structure incentives, delegate power to private actors in the market and function to allocate resources to various parties in market transactions. Because they help determine the resulting distribution of wealth and income, the enormous questions of distribution and equity that economic restructuring raises are directly linked to the regulatory framework in which economic activity takes place. This suggests why anyone concerned with the equity of neoliberal reforms needs to become engaged at the level of market design and structure, rather than merely immersed in the politics of redistribution after the fact. A realist and post-realist analysis of the operation of legal rules and the choices available under market regimes suggests that, ultimately, many of the arguments advanced by market reformers do not provide uncontroversial support for the specific legal or institutional reforms that they characteristically promote. What is missing from neoliberal legal discourse is a frank acknowledgement that markets are constructed through a series of choices regarding institutions and rules, and that many different choices can be housed within market regimes. Nor is the state a minor player in market societies. Rather, market design is a process in which the state is heavily implicated, something which is particularly evident in the context of transition. Because the choices concerning the rules that govern market transactions affect groups differently, the state, as well 16

Introduction

as those international institutions with leverage over state actions, are necessarily engaged in a process of constructing economic power and allocating resources among economic actors. This seriously compromises the effort to establish the distinction between public and private power; it also erodes any meaningful distinction between intervention and non-intervention in the economy on the part of the state. Perhaps most important is that this framework provides a means of bringing the properties of the "normal" market into view. From this vantage point, rather than merely an uncontroversial part of the foundation of markets, it is apparent that the rule choices involved in constructing such markets entail fundamental decisions about the promotion of different values and the resources and power to be allocated to different groups. Post-realist analysis thus provides a framework within which to assess the shifts and dislocations that attend development and market reform. If market rules do not operate in a neutral way with respect to different parties, then it might be important to trace how resources might be reallocated in the course of market reforms when new rules are implemented or existing ones modified. If they are not certain or determinate in their effects, then we should expect the effects of market reforms to be quite varied rather than uniform across different contexts. It is clear that law does more in this economic reform program than merely provide the background structure for market transactions. Law performs an intensely political function, justifying the economic reform project as a whole. Claims about law and the protection of private rights are pivotal both to the appeal of the reform proposals, particularly in the context of transition, and to the legitimacy and the universal applicability of the neoliberal economic paradigm. Where, as in reform projects, freedom and democracy are linked to the presence of markets,23 the invocation of the rule of law and the deployment of the language of rights helps cement the connection. At the same time, the operation also works in reverse: neoliberal policies and institutional proposals then become embedded in dominant ideas about the rule of law simplititer,

23

See for example, Janos Kornai, "What the Change of System From Socialism to Capitalism Does and Does Not Mean", 14:1 Journal of Economic Perspectives 27 (2000).

17

Kerry Rittich associated with the legal requirements of a market economy and thereby strengthened and normalized. This analysis provides the backdrop to explain a quite concrete issue, the production of disadvantage for women through neoliberal reforms in the context of transition. The second part of the book analyzes in a more detailed way the distributive consequences of reforms, focusing on the likely effects of proposals to change the role of the enterprise and the state in distributing resources and the ensuring the provision of goods and services. The discussion centers around the proposals that seem most salient to the group that is the subject of this distributive analysis, women with obligations of care to others who find themselves now largely reliant on the market to secure their fortunes. By looking at the reform model, the policies that are advanced in its name and the justifications that underpin them, the hope is to unveil the way that disadvantageous outcomes for women, unless compensated for in some way, can plausibly and predictably be attributed to it. The ideal neoliberal market is structured in a way that allocates significant resources and power to investors, entrepreneurs and other capital holders, while other parties, workers and consumers among them, enjoy considerably fewer rights and benefits. As a result, enterprises are permitted to externalize certain productive costs that they might otherwise absorb. Among the most visible of these costs in the context of transition, and indeed in global economic integration in general, are those connected to the support and maintenance of the labor force. The neoliberal model shifts more of the costs of productive activity, including human capital costs, to other parties, namely the state, communities, or households and individuals. In addition, neoliberal restructuring seeks to limit or eliminate many of the redistributive functions that states have characteristically performed or might potentially perform. For a variety of reasons, the burden of such strategies tends to fall disproportionately on women, not least because they increase the degree of unpaid work and reliance on the "reproductive" or non-market sphere.24 In consequence, the market society promoted as the norm to which states should aspire in the interests of economic development is rife with potential disadvantage for women.

24

This is discussed in the United Nations Development Programme, Human Development Report 1999 (New York: Oxford University Press, 1999).

18

Introduction All economies, both plan and market, rely exclusively on the unpaid work of women. However, transition is a particularly illuminating context in which to observe this reliance, because it provides an opportunity to observe the way that the burdens of unpaid work can be both ameliorated and increased through policy and regulatory decisions. However the intent is not merely to tell a story about how women have been neglected or exploited, although that is certainly a conclusion some might draw. Nor is it addressed solely to those interested in the status of women, although how the effects of reform and restructuring could be evaluated to the exclusion of their effects on women seems mysterious in the extreme. Nor is it to advance the position that markets are "bad" for women, while the state is "good". As the legal analysis in the first part suggests, reliance upon the statemarket dichotomy creates a discursive and analytic impasse that tends to obscure rather than illuminate the effects of specific reforms. Instead, the general aim is to begin to explore in a more structured way the connections between dominant economic development strategies, the specific political and institutional choices to which they are connected, and distributive outcomes. The objectives are to examine how the proposed economic changes might operate to advantage or disadvantage women, given the pre-existing structures of resources and entitlements, and to foresee how these policies might intersect with other pre-existing or relatively continuous social and cultural formations. The hope is to imagine ways of fusing and infusing the debates on the status of women and inequality with those on the subject of economic transformation, discussions that too often go on in discontinuous spheres and in different languages. Much of the systematic disadvantage to women arises from the way that different productive activities, both paid and unpaid, are organized and because of the ways that women are characteristically located within the productive and reproductive spheres. Of all of the transformations, one that poses perhaps the greatest threat to women is the collapse of arrangements enabling the performance of labor market work and childcare duties by the same person. Whether such arrangements were formally available to both parents or restricted to the mother, as is common in industrialized economies, they were almost invariably taken by women. This disadvantage is then exacerbated by "efficiency-enhancing" strategies that intensify the degree of self-reliance required of individuals and house19

Kerry Rittich holds and tend to increase the amount of unpaid labor, and often the paid labor, of women. Such gendered outcomes are a common feature of neoliberal reforms, as numerous feminist policy analysts have noted.25 However, in the process of transition, they are also exacerbated by a transformed legal and institutional environment that re-allocates resources and entitlements, effectively reducing the amount of cross-subsidization for reproductive labor. The analysis does not rest on any assumption that obligations of care are simply natural. Nor does it presuppose that they are inherently gendered or feminine, or that all women do, should or will continue to perform unpaid labor. Rather, the argument is that the spheres of production and reproduction are constructed, malleable and amenable to change. Furthermore, they may be deeply influenced by policy decisions, legal entitlements and regulatory structures, and can be directly and substantially altered by changes to the regulatory environment in which economic activity takes place, whether through the policy, legislative or adjudicative process. As a result, law plays an important role in the process of gendering economic activity, and in the distribution of benefits and burdens that results. Reforms will inevitably bear more heavily on some groups of women than others; moreover, men might be subject to at least some of the disadvantages that the women experience were they to have similar obligations or engage in similar activities. However, obligations of care and the performance of unpaid work remain so strongly gendered in the economies in transition, as they do in all others, that how they are managed and organized is an important signal of the relative advantage and disadvantage of women under different institutional regimes. Focusing on the position of women and non-market obligations of care is, in addition, a particularly efficient way to get at some important distributive aspects of current strategies of market reform. For it allows an exploration of two often neglected aspects of the phenomenon: first, the relationship between markets and other social institutions such as the family; and second, the inter25 See for example Isabella Bakker, "Introduction: Engendering Macro-economic Policy Reform in the Era of Global Restructuring and Adjustment", I. Bakker, ed., The Strategic Silence: Gender and Economic Polity (London: Zed Books in association with the North-South Institute, 1994).

20

Introduction dependence between so called "productive" activity in the market and uncompensated, "reproductive" or "non-productive" forms of labor outside it. The articulation of unpaid labor and the "productive economy" tends to have widespread ramifications for women, including women's labor market prospects. While such an exploration is useful in many contexts, it is particularly important in the context of neoliberal reforms. Given the centrality of efficiency-enhancement through such strategies as privatization and "deregulation", important aspects of the redistribution that occurs in the process simply cannot be explained without looking at the general impact of reforms outside the market and considering who performs unpaid work. Focusing on women in the context of the transition to markets modelled along neoliberal ideals thus allows an angle on two key aspects of the emerging labor market picture: 1) the distributive properties of particular market rules and institutions and 2) the disadvantage which arises from the performance of unpaid work instead of, or in addition to, work in the market. The proposals which have been advanced to effect the transition from the plan to the market economy also provide a concrete illustration of the shifting, malleable nature of the boundaries between the market and other social space. Even though they are designed to separate the provision of social services from the domain of production, the state from the market, and the public from the private sphere, neoliberal policies serve to demonstrate something quite different. Instead, they illustrate the dependence of market-based economic activity on activities and inputs provided by other institutions such as the family, the imbrication of the market in the state, and the varied ways in which market and non-market productive activities are inter-connected. The ineluctable contingency, variability, fragility, porousness and flexibility of all of these boundaries becomes highly visible in the context of transition, paradoxically through the very efforts to solidify and stabilize them. These shifting boundaries also disclose myriad possibilities for organizing productive spaces and activities in different ways. Finally, because individuals and groups are not simply randomly positioned in the different domains of production, the public and the private spheres, and the state and the market, debate about the location and nature of these boundaries often functions as a proxy for debate on other social and political questions. Tracing the likely effects of these policy shifts thus helps

21

Kerry Rittich establish the connection between large questions of market design and the fortunes of particular groups. This book is in two parts. The first part is devoted to an analysis of market reform and restructuring in the context of transition, the image and concept of law that informs it, and the distributional decisions that are implicit in these legal reforms yet masked in the project as a whole. The second part is a distributional analysis of some of those reforms in terms of their foreseeable impact on women. However, it is actually the subject matter of the second part - the reports of gender disparities in the context of transition and the desire to trace how they might be structurally linked to reforms - that came first and motivated the analysis of neoliberal legalism as a general project. The subject matter of the first part is deeply informed by the issues explored in detail the second. If it reads as an analysis "in the air", a theoretical inquiry rather than one rooted in a concrete set of political and economic shifts, it may be useful to keep those issues and concerns in mind. However, at the end of the day, it seemed important to have an inquiry into the general ideas which animated the reform project as a whole from the outset. Moreover, it has become more and more evident that the set of ideas and policy prescriptions that were articulated in the context of transition and that form the subject matter of the distributional analysis were not isolated events. Instead, they have recurred in other contexts, coalescing into something that approaches a general theory of law and institutional reform in development. It has also become clear that the very enterprise of promoting thoroughgoing market reforms such as occurred during transition has had a transformative effect on the international institutions themselves. The structure of the analysis is as follows. Part I traces the legal and political underpinnings of the restructuring model, both as a way of unearthing some of the analytic assumptions in neoliberal thought and as a way of understanding how economic and political ideals become connected to specific positions on law and regulation. Chapter 1 outlines the basic neoliberal program for market reform and key programmatic and policy recommendations for the states in transition. Chapter 2 attempts to identify the ideas about legal regulation and the state, including the role of property and "best practice", that organize neoliberal thought. Chapter 3 draws out some of the submerged antecedents and influences in neoliberal policy rationales. First, it considers the writings of Hayek and Roepke, two libertarian theorists to whom the neoliberal position on market 22

Introduction regulation seems deeply indebted. Second, it examines public choice theory and the interest-based, economic analysis of the state on which it rests. Both sources shed light on the alternating yet interconnected political and economic rationales in the discourse of market reform, and suggest how different normative and ideological elements of the neoliberal agenda might operate to support each other. Chapter 4 draws on post-realist analysis in American legal thought in order to tell a counter-narrative about the role of law in economic reform. Focusing on the coercive and distributive properties of legal rules, it illustrates how and why a reallocation of resources and power and alterations to the distribution of income and wealth should be expected to occur in the course of the institutional reform of economic restructuring. The second part of the chapter describes the realist insights about the distributive effects of legal rules that are replicated and supported in the work of institutional economists. Chapter 5 attempts to recharacteriaaze neoliberal restructuring in light of this analysis. Part II explores the distributive impact of some of the key transition reforms for women and the concept of gender equality that inform such proposals. Chapter 6 identifies a number of policies and strategies for transition that are particularly relevant to women. These include: enterprise disinvestment in reproductive services, the elimination of mandated benefits and income support, and the removal of consumer subsidies and cross-subsidies for reproductive work. It then explores the interconnection between the productive and reproductive economies, an aspect of economic organization that is almost totally neglected in the Bank's restructuring plan. The analysis then considers the likely distributional effects of the restructuring plan for women, given such factors as the performance of unpaid work by women and intra-household disparities in decision-making and resource allocation. It then briefly reviews the implications of income policies such as wage control in exacerbating the negative effects of restructuring for both women and workers in general. Moving both backward and outward from these quite concrete policy discussions, chapter 7 considers the concepts of gender equality that can be discerned in the Bank's gender research and its reforms policies, focusing in particular on the contradictory ideological and programmatic positions that the simultaneous pursuit of gender equality and market-centered development entails. Chapter 8 considers the effects of the displacement of equality by a concern for poverty in the neoliberal approach to redistribution and social welfare. The conclusion 23

Kerry Rittich ventures some comments about the points of tension in neoliberal theory and practice and the possibilities for future shifts in development orthodoxy. The eventual outcome of economic restructuring in the states in transition remains unclear. Indeed, even the term transition is problematic, as it suggests passage from one fixed and predetermined state to another. It is akeady clear that this does not describe the process, and that a diversity of outcomes is to be expected. How and when to measure the effects of reform are contested; whether and in what ways different strategies might have produced different results are tantalizing yet unanswerable questions. Yet, while the outcomes are akeady quite varied in different states, current indicators suggest significant problems and adverse effects that extend well beyond what can be explained simply in terms of the short-term costs of transition. In light of these contingencies, this analysis attempts to look at the likely effects of a highly idealized market model through the operation of its constitutive rules, regulations and policies. The hope is that it will both add to sociological and empirical analyses of transition and shed light on the potential impact of the defining features and commitments of neoliberalism in other contexts as well. The analysis focuses on the content of the reform model and the nature of the prescriptions for economic growth, rather than particular case studies of economic restructuring. The claim is not that the model has been or could be implemented in any pure form, or that specific economic and social outcomes could be attributed to it in any simple way even if it were. To reiterate, there are myriad forces at work. Restructuring strategies may well generate unexpected as well as intended effects. Many forms of resistance to drastic change are to be expected; they will surely affect the course of reform. Other institutions are now involved in the dialogue over market restructuring; their analyses and prescriptions may provide countervailing forces to the neoliberal model in the future.26 The varied histories and contexts into which any reforms are introduced are sure to cast a long shadow on the outcomes in every case. Yet notwithstanding all such contingencies, it seems important to investigate the structure and to try to foresee some of the possible effects of a model

26

Bob Deacon with Michelle Hulse and Paul Stubbs, Global Soda/ Policy: international organi^ations and thefuture of welfare (London and Thousand Oaks, CA: Sage, 1997).

24

Introduction for economic development for which claims of universal applicability have been made, one which now functions as the baseline or standard against which all other strategies, in the states in transition and elsewhere, are measured. Despite vigorous critique,27 it shows few signs of being displaced by another paradigm, and so can be expected to exercise a significant degree of influence on economic reform and development, at least in the immediate future.

27

Critiques of this development paradigm have come from a number of sources. The so-called "East Asian" economic development trajectory stands as a powerful challenge if not direct counterexample, despite attempts to assimilate it to the World Bank model. See: World Bank, The East Asian Miracle: Economic Growth and Public Pokey (New York, NY: Oxford University Press, 1993); R. Wade, "Japan, the World Bank, and the Art of Paradigm maintenance: The East Asian Miracle in Political Perspective", 217 New Left Review (1996). "New trade" and "new growth" theories as well as analyses of production, the institutional requirements of lateindustrializing economies, and the role of information deficiencies all cast various aspects of these reform proposals into question. See for example: A. Amsden, et al, The Market Meets its Match, supra note 11; Stiglitz, "Whither Reform?", supra note 5; P. Krugman, Rethinking International Trade (Cambridge, MA: MIT Press, 1990).

25

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PARTI

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1. ECONOMIC DEVELOPMENT IN THE NEOLIBERAL STYLE: THE CASE OF TRANSITION

I

n order to effect the transition from plan to market, the World Bank helped devise and endorse an agenda for institutional, policy and regulatory reform in the states in Central and Eastern Europe and the former

Soviet Union, the Commonwealth of Independent States (CIS). Not only were these reforms necessary to constitute market economies, in the view of the Bank they were also consonant with prevailing wisdom concerning the promotion of economic growth in a globally integrated economy. While this reform agenda is strongly marked by policy and regulatory proposals that had been developed and implemented in other contexts, transition was unprecedented and threw up new challenges. Inevitably, transition became an occasion not simply for the implementation of a well-developed reform model, but also an occasion in which neoliberal reformers gave substance and institutional form to a variety of abstract concepts and commitments. What follows is an outline of the basic neoliberal tenets concerning markets and economic reform as they stood at the time of transition. This is followed by a description of one important part of the reform agenda for the countries in transition, the effort to separate economic life and production from the provision of

29

Kerry Rittich social services, the fulfilment of social welfare goals and the achievement of distributive equality. As this chapter describes, productive activity in the states in transition was organized so as to serve a variety of social and political as well as economic objectives. The agenda for transition calls for the dismantling of this system and its replacement with a set of institutions and practices that, in the view of reformers, is more consonant with the demands of market economies. Those reforms touch on the manner in which benefits are provided by enterprises, subsidies to goods and services, employment regulations and entitlements and the shift to wage compensation.

1.1 An Outline ofNeoliberal Theory and Practice At the center of neoliberal development theory stands an identifiable set of "best practices," consisting of laws, institutions, policies and strategies. In the view of market reformers, the adoption of these laws, institutions, policies and strategies constitutes the optimal route to economic development and prosperity. There is a variety of inherited circumstances that might affect reforms; history and culture, for example, may shape the way that legal systems function.1 States may also encounter political difficulties in their implementation. However, these variables pertain more to the expected outcomes than to the desirability of the reforms themselves. The implementation of optimal market institutions, along with the sustained application of "sound" economic policies, remains the overarching prescription for economic growth. "Best practices" and "good laws" are those which provide an enabling environment for private entrepreneurial activity and investment. They rest on the assumption that private activity is the engine of economic growth and that state intervention and interference in this process must be sharply contained if growth is not to be impeded. For transition economies, in addition to macroeconomic stabilization, the objectives consist in "getting prices right" and eliminating policies and institutions which are likely to cause distortions in the operation of the market. The funda-

1

World Bank, World Development Report 1996: FromPlan to Market (Oxford; New York: Oxford University Press, 1996), 87. 30

Economic Development in the Neoliberal Style mental if not definitional aspect of the transformation from plan to market economy is the move to market determination of all prices and factors of production. Key elements in this process include: the privatization of state enterprises, the liberalization of prices through the elimination of all forms of price controls and the administrative setting of wages, the removal of state subsidies to both consumption and production goods and services, and the structuring of an open, "deregulated" economy to foster the entry of foreign goods, services and investment Transition in addition requires the adoption of a set of "market-friendly" rules, policies and institutions. Market-friendly reforms are those that encourage foreign investment, empower owners, entrepreneurs and managers and limit the constraints such actors face in the deployment of resources and assets, including the use of labor.2 The laws and regulations thought to be fundamental, to literally define a market economy, are those which secure property rights and investments, limit investor risk, facilitate commercial transactions both within and across national or other jurisdictional boundaries, and render costs predictable.3 However, other rules, policies and institutions may be impediments to the efficient market allocation of factors of production. To the extent that they impose additional costs on employers, they are likely to impair competitiveness and growth; they may also restrain needed enterprise restructuring and interfere with privatization. Examples include various forms of labor laws and employment regulations, environmental standards which are too rigid or stringent,4 or required employer payroll contributions to fund social benefits.5 In sum, regulations which threaten to impose an excessive financial burden on enterprises and the emerging private sector are suspect and must be removed or altered.6 2

The World Bank, World Development Report 1991: The Challenge of Development (New York: Oxford University Press, 1991), 1. 3 See for example, the discussion in Prom Plan to Market, supra note 1, at 88-93. See also The Challenge of Development, id., at 70; Ibrahim Shihata, Complementary Reform: Essays on Legal, Judicial and Other Institutional Reforms Supported by the World Bank (The Hague: Kluwer Law International, 1997). 4 From Plan to Market, supra note 1, at 54. 5 World Bank, Poland: Income Support and the Social Safety Net During Transition, (Washington, D.C.: World Bank, 1993), 60. 6 See The World Bank, World Development Report 1995: Workers in an Integrating World (New York: Oxford University Press, 1995), 109-110. 31

Kerry Rittich The major role of the state is to support and complement private economic activity. In neoliberalism, there is a presumption against state "intervention" in the market; for this reason, the burden of proof lies on those proposing the intervention.7 Beyond the provision of infrastructure and basic health and education, the presumption is that public spending is non-productive and likely to impair economic performance, as it tends to be both inefficient and inflationary.8 The agenda for transition as a whole reflects a deep preoccupation with the proper role and limits of the state in a market economy9 and the normalization of a particular set of rules and structures governing economic transactions. It is a recurring theme that there are distinct functions for different institutions and actors in market societies. A major focus of activity throughout is to define the institutional structure and configuration of roles and powers among market actors that conforms to this idea of functional differentiation.10 One major objective is the definition and protection of a domain of economic activity, organized around the pursuit of efficiency and the maximization of profits, that remains largely independent of competing social and political values and interests. Above all, the regulatory structure of the market is to be determined by what maximizes economic growth. According to neoliberal theory, concerns such as alleviating poverty or inequality are to be dealt with not by altering these preferred market structures, as such efforts have proven both ineffective and inefficient where they have not lead to complete economic disaster. Instead, the proper solution is to provide limited forms of redistribution by the state that are targeted and carefully confined to the most needy. In the main, personal welfare and income security are to be ensured through personal efforts and by the assumption of individual responsibility. Market societies can promote these goals by implementing the appropriate structure of

7

From Plan to Market, supra note 1, at 111.

8

Wat 113-115. This issue is explored at length both in The Challenge of Development, supra note 2 and World Bank, World Development Report 1997: The State in a Changing World (New York: Oxford University Press, 1997). 9

10

A clear statement of this is found in World Bank, Poland: Income Support and the Social Safety Net during the Transition, supra note 6, at xiii: "Possibly the most fundamental aspect of the move towards a market economy is the change in the division of responsibilities it implies [between enterprises, the individual and the state]."

32

Economic Development in the Neoliberal Style incentives to individual initiative and productivity. Dependence on the state is pathologized and largely foreclosed. The re-organization of the state and restructuring of the market to maximize wealth rests on the premise that the quality of life is dependent on economic growth,11 and that the primary objective of states therefore lies in improving the conditions for material progress. Economic growth in turn is now thought to be linked to successful integration into the global economy and the ability to attract capital and foreign investment. Consequently, the general interest has become in important ways co-extensive with the needs of entrepreneurs and international capital and states are encouraged to pursue policies which harmonize conflicting interests and objectives among different groups to promote growth and productiv-

ity. On the one hand, the argument goes, everyone stands to benefit from economic growth, as increased economic growth is both the panacea and only solution to poverty. On the other, all stand to be seriously harmed from the lack of it. But in any event, all states are in the grip of a process of global economic integration which has a logic of its own and which will continue with or without the participation or acquiescence of particular states. The result is a fusion of the desirable and the inevitable, which is expressed clearly in the statement that "sound economic policies" are "richly rewarded," while "unsound" policies are "punished harshly" by international capital.12 While one objective is the creation of barriers around the economic domain, another is the application of market logic to other social institutions. This is particularly evident in the analysis of the role of the state and the operation of the public sector. The state is directed to provide a positive, supportive role for the market, and consequently to shrink in the areas in which it might be regarded as its competitor. The public sector is encouraged to emulate the behavior of the market and to govern and structure itself according to market-like incentives. In neoliberal theory, the behavior of the state itself is analyzed in terms of economic logic. Legislators, bureaucrats, constituents and other actors engaged with state agencies are all subject to the presumption that they are

This is explicitly set out in The Challenge of Development, supra note 2, at 4. See Workers in an Integrating World, supra note 4, at 5.

33

Kerry Rittich likely to engage in interest or rent-seeking in ways that undercut the efficient and effective operation of the state. 1.2 The Agenda for Transition "Greater disparity of wages, income and wealth is - up to a point - a necessary part of transition, because allowing wages to be determined by the market creates incentives for efficiency that are essential for successful reform. More efficient workers must be rewarded for their contribution to growth."13 "Market-determined wages and employment are vital to achieving deep restructuring, but initial conditions in transition economies make increased income inequality an inevitable consequence of reform. Until this impact is offset by renewed growth — the indispensable element in any antipoverty policy - an increase in poverty is unavoidable."14 "The aim is to make the composition of expenditures consistent with the tasks of government in a market economy and conducive to long-run growth...[R]obust empirical evidence supports the view that government spending tends to be productive and to promote economic growth where it corrects proven market failures and truly complements private activity - as do some infrastructure investments, preventive health care, and basic education - but rarely otherwise.15 From Plan to Market contains several distinct and severable recommendations which, though linked to this economic logic and theory of growth, do not follow inevitably from them; nor are they explicable simply in terms of commitments to the merits of privatization or the superior allocative efficiency of a market economy. Rather, they are attempts at the translation of a particular mode of economic analysis and development theory into state policy, legal regulation and enterprise strategies. As such, they can be regarded as a set of mid-level policy decisions about such questions as the proper concerns and optimal structuring of enterprises and the preferred degree of state redistribution.

13 14 15

34

From Plan to Market, supra note 1, at 66. Id., at 144 W, at 11 5.

Economic Development in the Neoliberal Style There are a number of key policies at this level. One is that enterprises divest themselves of "non-productive" activities and cease to compensate employees in the form of benefits and services, particularly in-kind services. A second is that particular forms of regulation, many of which govern terms, conditions and entitlements in the employment context or mandate employer contributions for benefits, be dismantled. A third is that states desist from providing subsidies or engaging in broad-based programs of redistribution and limit transfer payments to those most disadvantaged by the transition process. The end goal is a market society in which there is a distinct sphere of economic activity which remains separate from entitlements to welfare and social services, minimal public funding and provision of benefits and services, a confined redistributional role for the state, heightened personal responsibility for welfare and the provision and allocation of goods and services largely through the market. The proposed transition represents a profound transformation in the conduct of economic affairs. In order to comprehend the impact of the transformation envisioned in the course of the transition to markets, it is necessary to look at how production was organized under the plan economies. While there was significant inter-country variation within the region, the broad contours of the system remain intelligible as a particular mode of economic organization.

1.2.1 COMPENSATION AND SOCIAL WELFARE IN PLAN ECONOMIES One of the most distinctive aspects of the organization of production in the plan economies was the integration of production with the provision of a range of social and economic goals and services. In much of Central and Eastern Europe and the Soviet Union, under the regime of state ownership of enterprises, the state and the enterprise formed part of an interlocking structure for allocating resources to and ensuring the material needs of workers and other citizens. Enterprises were the major conduit for the provision of social services and carried out many of the redistributive and welfare functions commonly associated with the state in market economies.16 Enterprises often performed local administrative functions as well, 16

General description and discussion of the characteristic features of social provision and enterprise structure in centralized economies can be found in the following sources: J. Kornai, The Socialist System: The Political Economy of Communism (Princeton, N.J.: Princeton University Press, 1992); M. Boycko and A. Shleifer, "Russian Restructuring and Social Benefits," in A. Aslund, ed., Russian Economic Reform at Risk (London: Pinter, 1995); L. Specht, "The Politics of

35

Kerry Rittich maintaining schools and hospitals and even engaging in street cleaning and refuse collection.17 Unlike in market economies, the fulfilment of these reproductive functions ranked along with production targets as an important enterprise objective, as it was important that the system reproduce itself as well. The property of enterprises allocated by the planning authorities of the state included goods and capital designed for spending on the reproductive needs of labor.18 Such assets were allocated to separate social funds and were intended to be used for those purposes alone.19 For example, the principle of "operative management" which governed the use and disposition of property in the Soviet Union placed limits on the use of property allocated by the state to enterprises. Workers were entitled to access to the social fund, although access might be linked to fulfilment of the productive objectives of the enterprise.20 In toto, these entitlements and benefits represented an elaborate structure of administrative and regulatory provision.21 Although this system is commonly characterized as one in which citizens received free or subsidized goods and services, it is important to emphasize that lowor no-cost provision of goods and services was an integral part of the employment bargain.22 Wages in general were extremely low and employment compensation took the form of a mixture of wages and benefits. Benefit entitlements as well as the receipt of specific goods were in general conditional upon employment, although beneficiaries often included "outsiders" in the surrounding community as well.23

Property: Soviet Property as a Bundle of Rights", S.J.D. dissertation, Harvard Law School, April, 1994, on file with the author; G. Standing, Russian Unemployment and Enterprise Restructuring: Reviving Dead Souls (Geneva: ILO, 1996). 17 L. Specht, "The Politics of Property", supra note 16, at 105. 18 J. Kornai, The Socialist System, supra note 16, at 132; L. Specht, supra note 16, at 103. 19 J. Kornai, id. 20 L. Specht, "The Politics of Property", supra note 16, at 103; J. Kornai, id. 21 Id. 22 International Monetary Fund, World Bank, Organisation for Economic CoOperation and Development and European Bank for Reconstruction and Development, A Study of the Soviet Economy, vol. 2, (Paris: OECD, 1991). 23 See L. Specht, "The Politics of Property", supra note 16, at 108; M. Boycko and A. Schleifer, "Russian Restructuring and Social Benefits", supra note 16, at 110. 36

Economic Development in the Neoliberal Style The structure of benefit and service provision in the plan economies might be typologized in the following way. First, in-kind goods and services were provided as part of employment compensation instead of wages; these came either as benefits attached to employment or were directly integrated into the activities of enterprises. Second, benefits such as pensions and entitlements to paid leave on various grounds were provided, some of which were centrally mandated or regulated by the state and others of which were specific to particular sectors or negotiated at the enterprise level. Third, the state subsidized a variety of consumer goods, thus enabling their purchase on low wages.24 A large number of goods and services, ranging from subsidized food, housing, vacations, medical, health and childcare to sports and cultural facilities and consumer goods were provided free or at low cost as part of employment compensation. Specific benefits were typically controlled and allocated by trade unions. They varied from sector to sector and country to country, sometimes depending on the privileges extended to different sectors by the state. For example, in the Soviet Union, housing and childcare ranked among the most important benefits. In general, compensation was tilted toward benefits and services and wages were relatively low, as the wage levels set by the state or negotiated at the enterprise level reflected the fact that compensation included these goods and services.25 Among the benefits provided were those expressly designed to compensate women for reproductive labor. A characteristic feature of these economies was the high labor force participation by women relative to other economies.26 However, there was nothing natural about this state of affairs, nor was it an automatic consequence of the presence of a plan economy. Instead, various market-like incentives were implemented to induce women to engage in paid work and to enable women

24

There is considerable ambiguity as to what "subsidy" might mean in the context of the plan system in which prices and wages are administratively determined and prices expressly set to influence demand and redistribute income (see J. Kornai, The Socialist System, supra note 16, at 153). Subsidies to enterprises might refer to the absence of hard budget constraints (see J. Kornai, supra note 16, at chapter 8, "Money and Price") and continual bargaining even within the established wage and price levels, or to the ability of enterprises to sell their products at below the actual costs of their production. 25 J. Kornai, The Socialist System, supra note 16, at 225. 26 International Labour Office, Yearbook of Labour Statistics (Geneva: International Labour Office, various years).

37

Kerry Rittich to shoulder both work and family responsibilities.27 While the structure and extent of the services and benefits varied significantly from country to country,28 common benefits were extensive maternity and childcare leave provisions, days off to fulfil household or domestic obligations, and earlier retirement for women.29 Moreover, despite bureaucratic rigidities and control, actual wage and compensation levels were a combined result of administrative wage setting and market pressures arising from variations in the supply and demand of workers and the relative bargaining positions of the parties.30 For a variety of systemic reasons, labor shortages were chronic in such economies.31 Workers were strongly influenced by the attractions of various workplaces and, as a consequence, bargaining over wages between workers and immediate employers took place, sometimes on a "massive scale."32 There was considerable inter-enterprise job-hopping in pursuit 27

However, it was not neither the intent nor apparently a consequence of such regulations and entitlements to alter the gender composition of domestic or reproductive responsibilities. Hence, the oft-noted double or triple workload of women which appears to have been a general feature of these economies, as it is of others. See for example, B. Einhorn, Cinderella Goes to Market: Citizenship, Gender and Women's Movements in East Central Europe (London; New York: Verso, 1993); A. Posadskaya, ed., Women in 'Russia: A New Era in Russian Feminism, Kate Clark trans. (London; New York: Verso, 1994); Marilyn Rueschemeyer, ed., Women in the Politics of Postcommunist Eastern Europe (Armonk, N.Y.: M.E. Sharpe, Inc., 1994). 28 There were and remain significant differences among the various states as to the extent of benefit and service provision. In the German Democratic Republic, for example, childcare services were widely available; in Poland, by contrast, there were never enough services to meet even a fraction of the demand. See B. Einhorn, Cinderella Goes to Market, supra note 27, at 12-13. Hungary had the most extensive maternity leave provisions, entitling women to years at a time while still remaining employed; this often functioned in lieu of childcare services. In the republics of the CIS, even privatized firms now still provide extensive benefits to their workers, both to retain skilled workers and because it has not proved feasible in many cases to either privatize the services or transfer the administration of crucial services to municipalities without a resulting collapse of the supply. See M. Boycko and A. Shleifer, "Russian Restructuring and Social Benefits", supra note 16, at 112. 29 Monica S. Fong, "Gender Barriers in the Transition to a Market Economy", PSP Discussion Paper Series (World Bank, January, 1996), 10; Sandor Sipos, "Income Transfers: Family Support and Poverty Relief, N. Barr, ed., Labor Markets and Soda/ Policy in Central and Eastern Europe: The Transition and Beyond, World Bank (New York: Oxford, 1994), 226. 30 J. Kornai, The Socialist System, supra note 16, at 226. 31 J. Kornai, id., at 221. Guy Standing observes that such shortages were contrived, a consequence of the financial incentives to enterprises to employ large numbers of workers, whether they were needed or not, in order to expand the wage fund. See G. Standing, Russian Unemployment and Enterprise Restructuring, supra note 16, at 3. 32 J. Kornai, The Socialist System, supra note 16, at 226. 38

Economic Development in the Neoliberal Style of higher fringe benefits.33 At the same time, managers tended to lobby their superiors for larger wage funds with which to satisfy, and hence retain, desired workers. And despite the presence of administrative tariffs for wages and benefits, the bureaucracies were obliged to react to these signals by workers to some degree.34 In other words, market co-ordination had at least a minor role within the system, governing the relative wages and influencing the occupational, workplace and regional distribution of the labor supply.35 As in a market economy, this system contained a structure of incentives around which expectations developed and through which both enterprise managers and workers pursued particular objectives and attempted to maximize their respective interests.

1.2.2 CRITIQUE OF THE ENTERPRISE BENEFIT MODEL "|T]he labor markets inherited from central planning, at least for movement between different skills, effectively sacrificed labor mobility for greater individual security.... In a market system employees move between employers, between types of work, and between places - and they may experience unemployment. Income transfers ... need reform, not only to reduce poverty and contain costs but also to assist mobility. This means, in particular, supporting the unemployed and getting enterprises out of the business of delivering social benefits. Otherwise labor will remain immobile, raising the costs of transition by creating pockets of poverty in declining regions, and by pressuring enterprises and governments to defer necessary restructuring."36 "Decoupling delivery of a wide range of services from enterprises - housing and day care are particular problems - will be vital to allow workers to move readily.... In the short run... municipalities have an important role in ensuring continued provision of key services, perhaps through underwriting part of enterprises' cost of provision. A longer-term approach has three steps. First, require enterprises to separate their general accounts from those for social services. Second, for tax purposes allow enterprises to offset the costs of social services against the income those services generate, but not against income earned from the enterprises' main activities. This gives enterprises strong incentives to charge for services and might encourage the spinoff of 33 34 35

36

G. Standing, Russian Unemployment and Enterprise Restructuring, supra note 16, at 3. J. Kornai, The Socialist System, supra note 16, at 226. Id. World Bank, From Plan to Market, supra note 1, at 66.

39

Kerry Rittich new services firms. Third, help families meet those charges through higher wages and through targeted income transfers such as family allowances."37 "[P]ayroll contributions that finance income transfers (including unemployment benefits) are high, hindering new employment, encouraging workers and employers to collude in fraud, and creating incentives for unofficial employment."38

1.2.2.1 Enterprise benefit provision A number of interlocking concerns and beliefs drive the reform model with respect to enterprise restructuring and alterations to the role and size of the state. Foremost is the belief that the operation of the market should be kept separate from distributive or other political concerns. In particular, production should be separated from entitlements to welfare and social services, as these are essentially non-productive expenditures and activities. There are various rationales advanced: one is that the move to the market itself makes it necessary to reduce the degree of economic security provided to workers and to increase self-reliance for individual welfare. Another concern is that the extensive provision of benefits creates work disincentives. A third is that benefits and services are "too expensive", both for firms, because it makes them uncompetitive, and for the state, because it places a heavy tax burden on the emerging private sector. Finally, enterprise provision of benefits is thought to impair the reallocation necessary of labor from the public to the emerging private sector and from less to more productive enterprises. A host of deleterious effects are said to be associated with enterprise provision of benefits and in-kind services.39 One is that enterprise involvement in the provision of social benefits is a barrier to the process of economic restructuring in general; for example, enterprise provision of the social safety net

37

Id, at 76. Id, at 75-76. 39 These are set out in detail in M. Boycko and A. Schleifer, "Russian Restructuring and Social Benefits", supra note 16, at 108-115. 38

40

Economic Development in the Neoliberal Style has been identified as "perhaps the single most important deterrent to effective enterprise restructuring" in Russia.40 The argument is that the provision of benefits and services through enterprises operates as a source of pressure on both states and management, restraining necessary enterprise closures and bankruptcies, and making enterprises unattractive to prospective investors, particularly foreign investors. Social commitments give enterprises continued leverage over the central government for cheap credits and subsidies, generating inflation and leading to the "politicization" of even privatized firms.41 The provision of benefits also exacts financial costs which are detrimental to the primary functions of the enterprise. Benefits take up valuable resources, including management time, which could be better devoted to productive tasks,42 are extended to outsiders to the firms, and place burdens unrelated to productivity on enterprises. Enterprise financing of benefits is also inefficient because only some of the funds intended for them actually go to provide the services; some funds inevitably get diverted to the production of goods or to managers' pockets. Finally, there is serious concern that enterprise provision of services inhibits labor mobility, hindering the formation of the private sector. As discussed below, severing the ties which bind workers to particular enterprises is regarded as necessary in order to free labor for more productive uses. 1.2.2.2 Employment regulation and entitlements "Adaptable labor markets are essential if workers are to benefit quickly from economic recovery. Increasing labor market flexibility - despite the bad name it has acquired as a euphemism for pushing wages down and workers out - is essential in all regions of the world undergoing major reforms."43 Labor market regulations should in the first instance be designed to encourage positive contributions to growth.44 It is a recurring theme that, however apparently desirable or beneficial, many labor and employment regulations do more harm than good, even to those they are intended to benefit, because they reduce 40 41

42 43 44

World Bank, From Plan to Market, supra note 1, at 108. Id. Id.,at61. World Bank, Workers in an Integrating World, supra note 4, at 109-110. World Bank, From Plan to Market, supra note 1, at 77.

41

Kerry Rittich investment, wages or the number of jobs.45 Consequently, it is important to avoid over-regulating.46 For example, high payroll contributions on the part of employers are said to hinder employment creation and interfere with the competitiveness of enterprises.47 Moreover, labor market policies often create favored sectors resulting in differential benefits for protected groups at the expense of the less well off.48 For example, unions can have negative economic effects by protecting minority groups of workers at the expense of the unemployed and those in rural and informal markets, as well as consumers and capital holders;49 they also sometimes use their political power to resist structural adjustment efforts.50 Because of the importance placed on the role of the market in determining prices and re-allocating labor, labor market regulations such as job security provisions or minimum wage rates are regarded as particularly problematic for transition economies.51 Extensive maternity and other leave provisions are characterized as "generous" and identified as factors which render women more expensive to employ and generate relatively high levels of unemployment among women.52 1.2.2.3 Subsidies and cash compensation "[S]ubsidies are inefficient and should be replaced with direct income transfers, which can provide targeted, more effective transitional relief to vulnerable workers and households and do not delay necessary enterprise restructuring....Where subsidies have already come down, the main challenges are to reduce any remaining subsidies... and recover a greater share of the costs of some education, health and local transport services.53

45 46 47

World Bank, Workers in an Integrating World, supra note 4. World Bank, From Plan to Market, supra note 1, at 43, 63. World Bank, Poland: Income Support and the Social Safety Net During Transition, supra note

6, at 60. 48

World Bank, from Plan to Market, supra note 1, at 77; World Bank, Workers in an Integrating World, supra note 4, at 34-35. 49 World Bank, Workers in an Integrating World, supra note 4, at 80-81. 50 Id,at81. 51 World Bank, From Plan to Market, supra note 1, at 77. 52 Id, at 73. 53 Id, at 115.

42

Economic Development in the Neoliberal Style "There is a strong presumption that, where transfers are paid, they should be in cash wherever possible: cash payments leave buying decisions to the recipient, they are more transparent in budgeting, and they do not interfere with market prices."54 Apart from the role of enterprise benefit and service provision in obstructing the course of reform and impeding labor mobility, there is a strong preference in favor of cash compensation and income transfers, as subsidies and inkind payments are thought to "distort" prices and consumption choices and obscure the true costs of goods and services. Compensation through services and benefits imposes a cost on those who might have other spending priorities, at the same time subsidizing those who would have independently chosen to pay for the services and benefits. Cash compensation removes such distortions, ensuring that the "true costs" of all goods and services become visible and that resources are allocated to their best uses. Benefits and in-kind services also "distort" incentives for employee performance by reducing the connection between pay and effort. Cash compensation, by contrast, particularly flexible and merit-based compensation, functions as an incentive to increase productivity55 and is for that reason preferred.

1.2.3 STRA TEGIES FOR CHANGE 1.2.3.1 Wage compensation and the elimination of benefits A crucial element of the restructuring process is the move to "market patterns" of compensation, defined as "a shift from basic wages plus benefits (often in-kind) to wages plus bonuses related to productivity or profitability."56 Increased wage differentials are explicitly encouraged to reward and encourage the most productive workers. In the main, individuals and households are expected to meet needs through higher wages and, for the least well off where this proves to be inadequate, through targeted benefits. However, it is clear that a reduction in total employer expenditures and downward pressure on benefit demands, rather than a mere change in the mode

54 55 56

Id., at 80. Id., at 113. Id., at 73.

43

Kerry Rittich of compensation for reasons of efficiency and productivity, is also contemplated. For example, it is suggested that: "The employer contribution can be reduced in three ways: by reducing benefits, by financing through general taxation benefits that do not relate to any insurable risk (such as benefits for children), and by dividing the contribution between worker and employer (under the old system the employer paid the entire contribution, a fact regarded as one of the victories of socialism). "Sharing" contributions between worker and employer may make little difference to who actually ends up paying it. But it has the great advantage that workers immediately see a larger deduction on their pay slip if benefits increase; this helps reduce pressure for higher benefits."57

Hence, a number of strategies other than wage replacement of benefits, goods and services are suggested, including: simple divestment or elimination of benefits and services; user fees and increased or complete "cost recovery" for services; dividing contributions between employer and employee to suppress the demand for services; shifting either the administration or the funding of benefits and services such as housing and childcare on a temporary basis to local authorities;58 state or municipal funding of severance pay for redundant workers59 and financing, in cash rather than in-kind, benefits that do not relate to an "insurable risk" of the enterprise, such as those for children, through general taxation.60 It is central to the appeal of efficiency arguments that these changes are not intended, at least ultimately, to result in a net reduction in available services or a decline in general welfare. Instead, allowing for a period of transition, the claim is that wages will rise to enable people to purchase through the market the services previously supplied through the enterprise or by the state to the extent that they still remain in demand. For example, if there is sufficient demand, private childcare will spring up via market forces to meet it. Moreover, the quality will be higher and goods and services will be more efficiently provided and responsive to people's needs.

57

58

Id, at 76. M. Boycko and A. Schleifer, "Russian Restructuring and Social Benefits", supra note

16, at 113. 59 60

44

World Bank, From Plan to Market, supra note 1, at 47. Id, at 75-76.

Economic Development in the Neoliberal Style 1.2.3.2 Reductions in public provisioning In the course of restructuring, the state may have a temporary role to play in taking over the administration of social assets such as schools, clinics, housing, and day care centers,61 especially if it is necessary to enable enterprises to restructure, as reducing the expenditures of enterprises is a priority. However, there are strict limits to the benefits that should be continued through this route. Any proposed reliance on the state or municipal authorities for services needs to be placed against the background assumption that public provision of most social services is inefficient and should be supplanted by private provision. The reasons are as follows: "Public spending is inefficient for several reasons... [M]ost large governments in transition economies spend a disproportionate share of public funds on programs with little if any impact on productivity and economic growth, such as subsidies and social transfers ... Since these programs create entitlements or vested interests, there are strong pressures for them to expand. Second, government saving ... and public investment tend to be unusually low.... Third, the efficiency of government services such as health and education in many transition economies is undermined by entrenched spending allocations within sectors, weak implementation capacity and high staffing ratios... Increased private participation and cost recovery are urgent priorities."62 In any event, there are inherent limits to the degree of public provision arising from the fact that high spending and taxation rates place a burden on the private sector. State expenditures are explicitly defensible in terms of their capacity to contribute to productivity and growth; otherwise, extensive public spending is presumptively undesirable.63 State expenditures which directly increase productivity are more acceptable than those with only indirect effects; there is a preference for state investments in infrastructure rather than human capital, as the relation to economic growth, according to the Bank, is stronger with the former than the

61

62 63

Id, at 47. Id, at 114-115. U.

45

Kerry Rittich latter.64 While the gains from investments in basic health and education are acknowledged, subsidies and social transfers are thought to be net losses. The heart of the transformation in the redistributive role of the state is set out in the following statement: "(Tjnstead of providing generous guarantees to secure adequate living standards for all, governments need to foster greater personal responsibility for income and welfare. Providing social protection is a key function of government in all economies, but in a market economy it should ... be mainly targeted at those vulnerable groups who need it most."65 Governments should limit their role to the provision of key services; reducing the redistributive role of the state is seen to be a fundamental aspect of economic restructuring. To this end, extensive state provision of transfer payments is actively discouraged under the agenda.66 Broadly based social programs and income transfers are thought to be inefficient, create vested interests, provide disincentives to work and slow productivity. Systems of income transfers should be reduced and directed only at the poor; programs that deliver roughly equal benefits to the populace are deemed paternalistic and "poorly targeted" and not in accord with the needs of a market economy.67 A major source of concern is the relatively high percentage of state funds that are now devoted to pensions. Regulations permitting early retirement, that is earlier than the norm in market societies, and provisions for earlier retirement for women than men are a source of high state spending; pensionable ages therefore must be raised.68 Public sector reform based on a separation of state policy from actual state provision of social services is increasingly promoted, through the devolution of service provision to local authorities and greater commercial service provision through contracting out and competition. These strategies are part of an effort to

64

World Bank, Workers in an Integrating World, supra note 4, at 21; World Bank, From Plan to Market, supra note 1, at 115. 65 World Bank, from Plan to Market, supra note 1, at 110. 66 W, at 114. 67 Id., at 78. 68 /