Summer School
Economic Democracy
&
Development
Andrés Solimano
Asesor Regional
CEPAL, Naciones Unidas
Federica Chiocchetti
Internship Program, CEPAL
Santiago, 1 de agosto de 2007
1
Table of Contents
1. Concepts of Economic Democracy.
A. General Idea.
B. Areas of Economic Democracy’s Applications.
C. Rationales and Criticism of Economic Democracy as
Employee Participation.
2. Literature Survey.
3. Levels of Economic Democracy Application:
A. The Assets’ Ownership and Accumulation Level.
B. The Firm Level.
4. Conclusions y Future Works.
2
1. Concepts of Economic
Democracy
3
1. Concepts of Economic Democracy
A. General Idea…
• Political participation and Economic participation.
• Analitical frameworks:
a) Exit and Voice (Hirschman, 1970).
b) The Approach of Rights:
 The right and need of individuals to participate in
economic decisions that affect them.
 The form of participation should be proportional to
how much individuals will be affected by those
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decisions.
1. Concepts of Economic Democracy
B. Areas of Economic Democracy’s Applications:
a) Consumer Participation.
b) Asset Ownership and Accumulation.
c) Democratizing the Rents of Natural Resources
Exploitation
d) Workplace or Industrial Democracy and Work-related
participation
e) Financial participation.
5
1. Concepts of Economic Democracy
C. Rationales of Economic Democracy as Employee
Participation.
a) Economic Rationale:
• Financial Participation: offers employees a “stake in the firm”;
loosens collectivist ties and positively influences company
performance.
• Work-related Participation: enhances employee-employer cooperation through team working, communication and other
supportive Human Resource policies; higher employee
motivation and consequently effort.
b) Social Rationale:
•
Improved quality of working life.
•
Improved equality.
•
Role of the Unions.
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1. Concepts of Economic Democracy
C. Criticism of Economic Democracy as Employee
Participation.
 Democracy as an “expensive and inefficient luxury” for
managing an organization (Slater and Bennis, 1990).
 The need to exercising authority from the top down in
order to maximize efficiency (Cochran, 1956).
 Democracy at the level of the corporation reduces
flexibility and speed of reaction. It is a handicap in terms
of competition (Spence, 2007).
 Democracy at the corporation level protects companies
and job rather than people (Spence, 2007).
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2. Literature Survey
8
Historical Origins of Economic
Democracy: Karl Marx
Das Kapital (1867).
• Analysis of the Market System.
• Lack of Labour Relevance.
• The Theory of Exploitation.
Economic and Philosophical Manuscripts of 1844 (1932).
• The Theory of Alienation.
9
Historical Origins of Economic
Democracy: Karl Polanyi
The Great Transformation (1944).
• Economy Embedded in Society.
• Fictitious Commodities.
• Double Movement Theory.
10
Robert A. Dahl: A Preface to Economic
Democracy (1985)
• The existence of a moral right to workplace democracy:
 Assumptions about the nature of a democratic association and the people
in it.
 The assumptions apply to economic associations: the parallel case
argument.
 The right to private property as an alleged moral right.
• The alternative model of self–governing enterprises and the different
forms of ownership:
 Individual ownership
 Cooperative ownership
 State ownership
 Social ownership
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Other Important Contributors: Daryl D’Art
Economic Democracy and Financial Participation. A
Comparative Study (1992).
 The paradox of enterprise authoritarianism operating
within a formal deocratic political system.
Financial Democracy and Financial Participation.
 Profit Sharing and Employees Stock Owenership Plans
(ESOPs). A comparative study:
• United States
• Sweden
• Denmark
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Other Important Contributors: Joseph Stiglitz
Democratic Development as the Fruits of Labor (2000).
 Development Strategies and the Labor Movement.
• Flexibility vs. workers rights.
• Voice and participation to decision making.
• Labor Movement’s role in Economic Development.
 Neoclassical Perspectives on Labor and their fragility.
 Labor as a Stakeholder in Corporate Governance.
 Principal-Agent Problems and Worker Involvement.
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Other Important Contributors: Joseph Stiglitz
 Two Industrial Relations Systems: the Low Road (Involvement)
and the High Road
 The Need for-and Limitations of-Collective Action
 Development as Democratic Transformation
 Toward Economic Democracy
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Other Important Contributors: Robin Hahnel
Economic Justice and Democracy. From Competition to
Cooperation (2005) and The ABCs of Political Economy
(2002).
 Economic Freedom: Conservative Abuse.
 Economic Freedom: Liberal Misuses.
 Economic Self-Management.
 Participatory Economics:
• The decision making principle.
• Consumers’ and Producers’ Councils.
• Remuneration for Effort and Sacrifice.
• Economic Planning-Feebacks and Successive Iterations.
• Job Complexes.
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3. Levels of Economic
Democracy Application
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3. Levels of Economic Democracy
Application
A. The Assets’ Ownership and Accumulation
Level.
B. The Firm Level.
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A. The Assets’ Ownership and
Accumulation Level
 Access to bank products by the poor:
• Checking accounts, Insurance, Mortgage, etc.
 Access to housing.
Access to education and health (Human Capital).
Costs of creating an enterprise:
• Start-up, Legal Incorporation, Managing a Business, Exit a
Business.
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A. The Assets’ Ownership and
Accumulation Level: Latin America
 Housing:
• The most widespread asset in Latin America.
• A large proportion of the population (69%) owns their houses (Solimano, 2006).
 Education:
• Expanded at all levels (primary, secondary and university).
• However social differentiation in the access to “quality education”.
 Land Concentration:
• The growing urbanization of the region has diminished the importance of land inequality.
• However the lack of land titling in urban dwellings impedes the use of these assets as
collateral for obtaining loans from the banking system.
Capital Assets:
• Such as business assets, rental property, stocks and bonds.
• More concentrated in the highest income percentile than home equity.
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A. The Assets’ Ownership and
Accumulation Level: Natural
Resources’ Rent Distribution
• Rationale.
• The Alaska Model in place since 1982.
• The proposal of Dividendo Ciudadano del Cobre in
Chile.
• Other applications.
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B. The Firm Level: Workplace or Industrial
Democracy
 All substantial shift of power from management to
employees insofar as worker participation in the decisionmaking process is concerned, for a more equitable
distribution of power(Lane, 1985).
 Levels and Types of worker participation:
 Task-related, i.e. at the work station.
 Strategic, i.e. at board or corporate level.
 Communicative.
 Consultative.
 Negotiative.
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B. The Firm Level: Workplace or Industrial
Democracy
a) Tayloristic Vertical Structutre: Traditional Collective Workers
Participations
 Direct participation: Co-operatives
• Example of a formally industrially democratic firm.
• Businesses owned and controlled by the people working in them.
• Everyone shares equal work and decision-making abilities. One
member, one vote.
• Examples include: Spanish Mondragon Cooperative Corporation,
Italian Emilia Romagna, etc.
 Indirect participation:
•
•
•
•
Collective bargaining through a trade union network.
workers’ councils.
co-determination agreements.
joint consultation committees.
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B. The Firm Level: Work-related Participation
b) “New” forms of Participation:
•
More direct and individualised.
• Grew out of management strategies, like Human Resource
Management (HRM).
• Employee involvement and empowerment.
• Examples include:
 briefing groups.
 attitude surveys or suggestion schemes.
 team workimg.
 quality circles.
 total quality management.
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B. The Firm Level: Trying to Measure
Economic Democracy
 Trade Union Density – TUD (Visser, 2006): a proxy.
• Why? Schumpeter definition of Industrial
Democracy: the trade union rule over industrial
relations.
•The Rate of “Actual” to “Potential” Membership.
• Statistics in 24 Developed Countries.
• “Adjusting” Membership Statistics: Employed
Wage and Salary Earners only.
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Trade Union Density: World Data 2001
Sweden
Finland
Denmark
Belgium
Norway
Ireland
Slovak Republic
Countries
Austria
Italy
Czech Republic
United Kingdom
Canada
Australia
Germany
New Zealand
Netherlands
Japan
Hungary
Switzerland
Spain
Poland
0
20
40
60
80
United States
Korea
Trade Union Density (%)
France 25
Source: Visser (2006) Union Membership, Monthly Labor Review
Trade Union Density Trends
90
80
70
Finland
Sweden
Norway
Denmark
US
Japan
Chile
EU
TUD (%)
60
50
40
30
20
10
0
1960
1970
1980
1990
Year
2000
2010
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Source: Visser (2006) Union Membership, Monthly Labor Review and Gobierno de Chile.
B. The Firm Level: Declining Trade Union
Density Examined
 TUD declined in all but small European economies (Finland,
Sweden, Denmark and Belgium), where Unions are involved in the
administration and execution of unemployment insurance.
 Combination of a general trend reversal and the observation of
cross-national divergence suggest a structural, cyclical and
institutional factors’ influence.
•
•
•
•
•
Common trend: rapid advance of female union membership.
Increase in Part-time and more flexible jobs.
Decline among the young.
Decline concentrated in the private sector.
Latina America (Weller, 2000): repression during the military
dictatorships and economic crisis of 1980s, lack of transparency and
linkages with politics, claiming their rights to the wrong “enemy” (the
State vs. the employers), technological changes, decrease of public
employment…
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B. The Firm Level: Financial Participation.
Profit Sharing.

“An agreement freely entered into, whereby employees receive shares, fixed in advance, of
the profits”. (First definition, International Congress on Profit Sharing, Paris 1889).

Profit-sharing consists of giving employees, in addition to the fixed wage, a variable part of
income directly linked to profits or some other measure of enterprise results.
Advantages
Disadvantages
•Brings groups of employees to work together
toward a common goal (the success/benefit of
the company).
•Helps employees focus on profitability.
•The costs of implementing the plan rise and
fall with the company's revenues.
•Enhances commitment to organizational
goals.
•The pay for each employee moves up or down
together (no individual differences for merit or
performance).
•Focuses only on the goal of profitability (lack
of quality concern).
•For smaller companies, these plans may
result in drastic swings in earnings for
employees difficult to manage.
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B. The Firm Level: Financial Participation.
Employee Stock Ownership Plan (ESOP).

A defined contribution that allows employees to become owners of stock in the company
they work for. As a result of share ownership, employees may benefit from the receipt of
dividends or the capital gains that accrue to company equity, or a combination of both.

How does ESOP work?
 Operate through a trust, setup by the company, that accepts tax deductible
contributions from the company to purchase company stock.
 Distribution of the contributions made by the company to individual employee
accounts within the trust. The amount of stock each individual receives may vary
according to pre-established formulas based on salary, service, or position.
 “Cash out” option for the employees after vesting in the program or when they leave
the company. The amount they may cash out may depend on the vesting
requirements.
 Diversification Option.
 Employees receive the vested portion of their accounts at either termination, disability,
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death, or retirement.
B. The Firm Level: Financial Participation.
Employee Stock Ownership Plan (ESOP).
Advantages
Disadvantages
Capital Appreciation. Companies sell
some or all of their equity to employees
and by doing so convert corporate and
personal taxes into tax-free capital
appreciation. This allows the owner to
sell 100% of his or her company, get
money out tax-free and still maintain
control of the company.
Incentive Based Retirement. Provides
a cost-effective plan to motivate
employees.
Tax
Advantages.
Enables
tax
advantaged purchasing of stock of a
retiring company owner. With this
purpose, a company owner may sell
their shares to the ESOP and incur no
taxable gain on the sale.
Only Publicly Traded Companies.
Liquidity. If the value of the stock
appreciates substantially, the ESOP
and/or the company may not have
sufficient funds to repurchase stock,
upon employees’ retirement.
Stock Performance and Employee
Risk. If the value of the company does
not increase, the employees consider
the ESOP less attractive than a profit
sharing plan. If the company fails, the
employees will lose their benefits to the
extent that the ESOP is not diversified
in other investments.
Collective Participiation. ESOPs do
not guarantee equitable collective
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participation.
B. The Firm Level: Financial Participation.
Employee Stock Ownership Plan (ESOP).
•
•
•
•
Difficult to find reliable statistics on ESOPs.
ESOPs started in the US in 1974 (200 companies).
Rapid growth until 1990 (10,000 companies).
Stable or subtle decline from 1989, when certain tax
incentives have been removed.
• Currently in the United States there are approximately
11,000 ESOPs in place, covering 10 million employees
(10% of the private sector workforce).
• The company with the highest number of ESOPs
participants is Procter and Gamble Co.
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B. The Firm Level: The Knowledge
Economy and the Post-Modern Workplace
Democracy
• Change in the ways of organizing production: the use of knowledge to produce
economic benefits.
• Druker, P. (1959 and 2002): Knowledge Worker
• “In a traditional workforce, the worker serves the system; in a knowledge
workforce, the system must serve the worker”
 The means of production are “locked in the head” of employees.
 “Head working”to produce ideas, knowledge, and information.
 Greater participation of individuals in decision making.
 Intrinsic motivation.
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• EDUCATION REQUIREMENT: need for an academically capable workforce.
B. The Firm Level: The Knowledge
Economy and the Post-Modern
Workplace Democracy
• Postindustrial economy’s challenge: raise the productivity of knowledge and
service workers.
• Need for clear, simple and common objectives that translate into actions by
a self-disciplined and responsible workforce (Drucker, 1988).
• In a post-capitalist workplace, the professional workforce requires little
direct supervision from managers and more participation in the decisionmaking process (Mintzberg 1998).
• Decentralizing the organization into autonomous units.
• The information-based organization introduces innovation through an
organized entrepreneurship and by implementing Industrial Democracy.
• Circular information-based democracy enhances an organization’s
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readiness, willingness, and ability to change (Ackoff, 1989).
6. Conclusions and Future
Works
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Conclusions
 Economic Democracy is a view that goes beyond traditional social policies of
Washington Consensus.
 Economic Democracy is a people-centered concept.
 The advent of the knowledge economy renovates the importance of
Economic Democracy and the need to replace the traditional hierarchical
structure of capitalist corporations with a more participative and democratic
structure.
Future Works
 Consider individual participation in the establishment of economic rules
both at national (taxes) and international (WTO) level.
 Need for further research from an empirical point of view:
 Search for other indicators to measure how democratic a company is.
 Building an index of Economic Democracy.
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Summer School
Economic Democracy
&
Development
The end
Andrés Solimano
Asesor Regional
CEPAL, Naciones Unidas
Federica Chiocchetti
Internship Program, CEPAL
Santiago, 1 de agosto de 2007
36