Mobilizing Restraint: Democracy and Industrial Conflict in Post-Reform South Asia

Chapter 1

Introduction

The Political Management of Industrial Conflict

How should developing countries manage the social and economic tensions inherent in periods of rapid economic change? Are democratic states handicapped in their efforts to promote rapid economic growth by the fact that they afford workers greater freedom to form unions and to strike? Or do the freedoms afforded to workers make protest more manageable over time?

These questions are hardly new. From the moment the Luddites began destroying looms in nineteenth-century Britain, states have struggled to manage the dislocation and unrest associated with modern factory production. Governments have employed a variety of strategies to curtail and institutionalize industrial conflict, ranging from the summary execution of union leaders to the enactment of legislation designed to promote collective bargaining and third-party mediation. For their part, trade unions have responded to the state in different ways. Some unions eschew politics altogether, while others develop close ties to political parties and invite government intervention in industrial disputes.

Today, the fiercest and most destabilizing industrial conflicts occur in low- and middle-income countries, where workers struggle to contend with the pressures and uncertainty associated with greater exposure to the global economy. Numerous examples illustrate how governments have endeavored to contain the damaging waves of economic protest related to market liberalization over the last two decades. Most prominently, China has grappled with the rising tide of headline-grabbing protest that has accompanied the phenomenal surge in foreign direct investment (FDI) and rapid industrial growth in that country (Gallagher 2005; Keidel 2005). Similarly, in the 1990s, Southeast Asian countries experienced a surge in violent worker protest associated with export-oriented development and greater exposure to trade (Kammen 1997). And over the last two decades, Latin American governments have sought to co-opt and undermine the organizational capacity of unions in order to push through neoliberal economic reforms (Kurtz 2004).

For many years, the conventional wisdom held that the repression and political exclusion of labor was necessary to promote industrial peace and economic growth. The continued policy relevance of this opinion is demonstrated by the fact that democratic ideals and institutions have spread through the developing world at a faster pace than commitments to labor rights. Despite the ubiquity of elections and parliaments, capitalism in most low- and middle-income countries continues to be characterized by despotic industrial relations as well as state exclusion and repression of organized labor. According to one source, labor rights are severely restricted in 41 percent of countries in Africa, Asia, and Latin America and somewhat protected in 58 percent of these countries. Out of the 135 countries listed in these three regions, labor rights are fully protected in just one (Japan).¹

The available evidence, however, sheds doubt on the notion that labor repression constitutes a long-term viable strategy for managing industrial conflict in low- and middle-income countries. Findings in political science indicate that regime type does not correlate with developmental success, implicitly calling into question the argument that labor-repressive regimes grow faster than labor-permissive regimes (Geddes 1991; Przeworski et al. 2000). Studies in economics and sociology, which I discuss in greater depth below, have demonstrated that labor repression produces labor market distortions that hinder growth and lead to worker backlash, resulting in more disruptive patterns of industrial and political protest in later periods. Moreover, the debate over the extent to which the wholesale Soviet-style repression of labor benefits development has increasingly become less relevant as the rapid spread of democratic ideals induces even authoritarian and hybrid regimes to employ more subtle tactics to subdue organized labor (Kim and Gandhi 2010; Robertson 2011).

At the same time, previous studies leave a number of important gaps in our understanding of state-labor relations in the developing world. While we know that brutal authoritarian tactics fail to achieve labor peace, we do not know enough about why these tactics fail or how democracies succeed in promoting industrial relations stability. This book aims to fill this gap through an examination of state-labor relations in South Asia. Specifically, the analysis points to the critical importance of two aspects of political democracy for managing industrial unrest—political competition and worker rights.

Political competition increases the reliance of parties on unions to mobilize votes for the party. In this way, a more competitive political system encourages parties to offer union leaders and workers material benefits and political representation of worker interests in exchange for their help in meeting party objectives. Over time, the ties between parties and unions that develop out of this exchange help to stabilize industrial conflict by linking workers to the broader societal interest in rapid industrial development. Major political parties are encompassing organizations that internalize the externalities associated with aggressive protest by their affiliated unions (such as unemployment and lost investment). Party leaders therefore endeavor to restrain the protest of affiliated unions and to encourage union members to pursue institutionalized forms of grievance resolution. In this way, the deepening of democracy helps to reduce worker protest in the context of greater economic openness.

Democracy is also associated with robust freedom of association and collective bargaining (FACB) rights, which are important for the institutionalization of industrial conflict. Robust worker freedoms are essential to the success of collective bargaining and labor institutions such as labor tribunals and labor courts. Policies and practices that compliment FACB rights may invite more worker protest by encouraging workers to air their grievances, but they also provide more sophisticated tools for managing worker protest. Workers in competitive democracies are permitted to go on strike, have the right to organize independent unions and negotiate legally binding collective bargaining agreements, and are represented by union officials or labor lawyers in arbitration and other legal proceedings. Because they are better represented and better prepared to defend their interests, workers in regions or sectors with more robust FACB rights are less likely to engage in highly disruptive forms of protest. They are also less likely to be exploited by employers, and the absence of such exploitation reduces turnover and boosts labor productivity. For these reasons, the provision of FACB rights translates directly into better economic outcomes. Regions that provide more opportunities for institutionalized grievance resolution and better protection of worker rights will enjoy higher productivity, higher industrial output, and more investment than regions that do not.

In contrast, nondemocratic states lack the organic ties to labor present in democratic countries and the political competition that might encourage governments to effectively utilize such ties to restrain worker protest. Consequently, authoritarian states use labor law and labor institutions more as means to co-opt, marginalize, and smash organized labor than to resolve worker grievances. This book demonstrates how the political exclusion and repression of organized labor is a highly ineffective strategy for managing industrial unrest. Repressive legislation erodes worker confidence in the state and collective bargaining, thereby making its institutions less effective at resolving the types of workplace tensions that lead to wildcat strikes and violent acts of desperation.

The Challenge: Managing Class Conflict in a Developing Democracy

The politics of class conflict have featured prominently in debates over how developing countries can accelerate industrial growth. The most clearly articulated argument about class politics in this literature is that successful late developers achieve rapid growth in part through the political exclusion and repression of organized labor. This argument is closely related to the view that governments must adopt a benign authoritarianism and cannot afford full-fledged democracy in the early stages of industrial development. The belief that labor repression facilitates growth has been highly influential in the policy world; and while it has been contested in academic circles, there has been no effort to develop an alternative framework illustrating how developing democracies can effectively manage tensions in the industrial relations arena.

The argument that labor repression promotes industrial development has a long intellectual lineage. As early as the 1950s, economists worried that the premature political mobilization of working-class interests would increase consumption at the expense of investment (de Schweinitz 1959; Galenson 1959; Mehta 1957; Sturmthal 1960). Subsequently, the argument that labor promotes economic growth was popular in the political science literature pertaining to bureaucratic authoritarianism, which emerged from the developmental experiences of Latin American countries. According to the bureaucratic authoritarian view, the transition to a more capital-intensive stage of import substitution industrialization required heavy investments in technology and capital, a disciplined and efficient workforce, and a demobilization of working-class opposition to more disciplined economic policies—goals that many believed could not be achieved absent repression of organized labor (O’Donnell 1973; 1978).

More recently, the argument that repression compliments development found expression in the concept of the developmental state, a theoretical enterprise that has sought to explain rapid economic growth in East Asian countries. One of the primary arguments in the developmental state literature is that rapid industrial growth becomes possible when a plan-rational state enjoys autonomy from society. Put simply, late developers must adopt some form of benevolent authoritarianism to catch up with the West. Elite politics and the exclusion of civil society are thus an inherent part of the developmental state narrative. In Japan, elite government officials, highly skilled bureaucrats, and owners of heavy industry achieved rapid industrialization through steadfast cooperation and shrewd economic planning (Johnson 1982). Similarly, states in other East Asian countries succeeded in promoting industrial development through the heavy regulation of medium- and large-scale industries, and by coercing firms to invest in sectors state planners believed would be the most viable (Wade 1990). For some observers, the authoritarian state-society relations useful for planning were also useful for producing the docile workforce that facilitated the East Asian miracle of decades of uninterrupted export-oriented growth (e.g., Deyo 1989; Haggard 1990).

As heavy industry took off in these newly industrialized countries (NICs), production of low-end manufactured products shifted to lower-wage venues. For many years, the vast majority of investment and jobs in low-end manufacturing went to China, which has been just as authoritarian in its handling of labor as the East Asian NICs. Nevertheless, labor shortages have recently fueled a wave of strikes as well as rapid wage growth in Chinese cities. In response, multinationals have begun shifting production—to rural areas in China but also to countries in South and Southeast Asia. Workers in many of these countries enjoy robust FACB rights and legal protections. Will employers encounter better or worse industrial relations conditions outside of the authoritarian contexts in which they are accustomed to operating?

By most accounts, South Asian countries have never emerged as successful developmental states. Herring, for example, characterizes India as a state committed to planning, yet too democratic, soft and embedded to govern the market (Herring 1999, 309). The highly pluralist and regionally fragmented political system has prevented the emergence of a coherent class-based politics at the center (Rudolph and Rudolph 1987, 20). Historically this absence of class cohesion prevented the owners of private capital from emerging as a dominant distributional coalition and allowed conservative factions of the Indian National Congress (INC) to agitate against planning (Chibber 2003, chap. 4). The lack of class cohesion on the part of industrialists has also meant that South Asian governments have been unable or unwilling to suppress organized labor, ensuring the continued vibrancy of the Indian labor movement in both the political and industrial relations arenas (Teitelbaum 2008). For most observers, the presence of a highly mobilized workforce and absence of class cohesion among elites put India at a disadvantage relative to East Asian countries, where the state could direct private investments to the most profitable sectors while holding wages at artificially low levels to squeeze productivity out of a docile workforce (e.g., Kohli 2004).

The notion that a cohesive state representing the interests of capitalists and planners must dominate a quiescent labor force as a prerequisite for industrial growth is pervasive, but it has not gone unchallenged. It is unclear, for example, whether unions in developing countries push up overall consumption enough to trade off with investment, or whether labor repression can push down consumption enough to boost economic growth (Freedman 1960; Fisher 1961). Even among the East Asian tigers, the link between repression and economic growth has not been demonstrated. On the contrary, a study of six East Asian countries showed that adherence to core labor standards had no effect on economic growth, and that East Asian growth rates did not result from labor repression (Freeman 1993). Moreover, in East Asian countries where the government was successful in repressing wages, the strategy backfired by generating artificial shortages (Fields 1994). In its study of the East Asian growth miracle, the World Bank suggests that, rather than being the result of labor repression, East Asian growth occurred because of substantial investments in infrastructure and human capital (World Bank 1993).

Additionally, repression can backfire in a number of ways. Cross-national comparisons suggest that labor-repressive countries experience more labor market distortions than nonrepressive countries (Banerji and Ghanem 1995), while a number of country studies show how repression generates more disruptive patterns of industrial protest. Freeman (1993) argues that the East Asian crush strategy of the 1970s led to a sudden burst of labor discontent and unionization in East Asian countries in later periods. Similarly, Evans (1995) suggests that repression in South Korea gave rise to a surge of industrial protest in the late 1980s and Seidman (1994) shows how the efforts of authoritarian states to deepen industrialization manufactured militance among industrial workers in Brazil and South Africa, ultimately placing workers at the forefront of democratic transitions in these countries.

While scholars have recognized that repression does not always work, the need to move beyond the discussion of whether repression succeeds or fails as a developmental strategy is apparent. With a handful of notable exceptions (e.g., Evans 1995; Heller 1999), existing studies fail to acknowledge that developing countries are capable of sophisticated strategies for engaging organized labor. Yet, as I discuss below, democracies have unique tools at their disposal for managing industrial conflict. Moreover, these tools tend to work very well in the pluralist settings prevalent in developing democracies, and are not dependent on a highly developed class politics or well-articulated corporatist political structures.

Economic Change and Industrial Conflict in South Asia

This book develops new arguments about the political management of industrial protest by drawing on data from the private manufacturing sector in South Asia where, over the course of the past three decades, economic reforms have increasingly placed the objectives of union leaders and party leaders at odds. Like their counterparts in other regions, policymakers in South Asia perceive industrial unrest as a major threat to investment and rapid economic growth.² By freeing investment and product markets from the grip of central government control, economic reforms have forced regional governments to compete with one another over private sector investment. This need to promote private sector investment has, in turn, increased the pressure on policymakers to restrain the protest of affiliated unions. At the same time, by exposing workers to market forces, reforms have made it more difficult for unions to win their demands, providing individual union leaders with incentives to ratchet up pressure against the management.

Within South Asia, the process of economic reform has been most robust in India and Sri Lanka, where national and regional governments have adopted economic policies that garnered broad support among voters and, with the exception of workers in the private manufacturing sector, presented very little challenge to traditional economic stakeholders.³ In India the process of economic reform began in the 1980s as a halting, stealthy, and elite-led process, but then gained steam and wider support among the electorate during the 1990s.⁴ Popular support for reforms came even earlier in Sri Lanka. In 1977 the center-right United National Party (UNP) came to power winning 83 percent of the seats in parliament on a platform of economic liberalization, a victory that was widely interpreted as a voter mandate for the UNP’s proposed reforms.⁵

Despite their popularity among voters, the reforms presented a challenge to political parties by reducing the scope of public sector employment, which had historically served as a major source of political patronage (Chandra 2004). In the wake of the reforms, public sector job growth declined, particularly in manufacturing. During the 1980s and the early 1990s the Sri Lankan government began privatizing public sector industries in earnest as it simultaneously ramped up public investments designed to boost exports in low-end manufacturing. And while India has generally taken a gradualist approach to privatization, total employment in the public sector stalled at about 194 million jobs and began to trend downward toward the end of the 1990s as the government slowed investments in the public sector and began to privatize some of the larger public manufacturing companies (Kapur and Ramamurti 2002).⁶

In combination with the popularity of the reforms, this reduction in the availability of patronage resources put pressure on political leaders to stimulate investment and job growth in the private sector. Consequently political parties boosted their efforts to attract private sector investment, both domestic and foreign, to their regions through a variety of investor-friendly policies (Sinha 2005). Much of this effort focused on improving labor-market flexibility and industrial relations. Sri Lanka set up export processing zones (EPZs) where labor laws were not enforced and unions were prohibited from organizing, while states in India stopped enforcing some of its most stringent labor regulations. State governments turned a blind eye, for example, to provisions of the Industrial Disputes Act of 1947 (IDA) that require a company to seek government approval to retrench workers (section 25M) or to close a factory (section 25N) (Bardhan 1998).

The need to attract new investors also spurred major political parties to proactively moderate protest by affiliated unions. Such efforts involved drawing on ties with unions to mobilize worker restraint and putting to better use aspects of the IDA designed to institutionalize grievance resolution. This was true for all political parties, regardless of their political stripe. In the southwestern state of Kerala, leaders of the Communist Party of India (Marxist) (CPM) endeavored to forge class compromise as part of a broader effort to woo private investors back to the state (Heller 1999). Similarly, in West Bengal, Jyoti Basu, a CPM politburo member and chief minister from 1977 to 2000, traveled far and wide in the 1990s on a public relations campaign to overcome West Bengal’s image as a red state and to attract international investment. Buddhadeb Bhattacharya, also a CPM politburo member, closely followed the example of his predecessor in the early and mid-2000s.

At the same time that regional governments in South Asia have struggled to promote investment and private sector job growth, greater economic openness has entailed increasing difficulties in the industrial relations arena. Workers in manufacturing began to contend with more competitive domestic product markets as early as the 1970s, when the bargaining power of unions was reduced by a dramatic increase in competition from rural and small-scale production units. These changes, along with the more recent neoliberal reforms that exposed the manufacturing sector to international competition, have put downward pressure on wages, made it difficult for unions to win their demands, and rendered routine strike tactics less effective.

Prevailing labor market conditions thereby put pressure on individual union leaders to mobilize resistance—to ratchet up militancy to overcome employer recalcitrance at the bargaining table. Fearing reputational damage from their inability to call out strikes and negotiate favorable contracts, some union leaders responded to new economic pressures by piling on demands and applying more aggressive and unorthodox protest tactics, including the strategic use of collective violence. The overall dynamic thus became one in which workers were reticent to go on strike, but those that did go on strike took a more aggressive and unorthodox approach to voicing their demands. In recent years, a number of high-profile strikes have called international attention to the increasingly tense and turbulent industrial relations environment in South Asia. In many of these strikes workers engage in acts of desperation like climbing to the top of high structures and threatening to jump or dousing themselves in kerosene. Others involve acts of vandalism, hostage takings, or violent confrontation between management and workers. In a small number of cases, such confrontations have even resulted in the deaths of workers or managers.

The Political Logic of Industrial Conflict

Despite the general trend toward a more tense industrial relations environment in South Asia, there has been substantial variation in patterns of industrial protest across regions and individual firms. This variation in the character of industrial protest gives rise to the central puzzle explored in this book: in the era of economic reforms, why do some labor union leaders restrain worker protest to facilitate social stability and long-term economic performance, while others use economic hardship to ratchet up militancy against employers and the state? My analysis points to two aspects of political democracy that are critical to the effective management of industrial conflict—political competition and the provision of FACB rights.

Political Competition

By engendering political competition and participation, democracy plays an important role in the effective management of industrial conflict. Enhanced electoral competition and voter turnout