Introduction

Thai clothing and textile industries have become increasingly export-oriented during the 1970s and 1980s. Exports as a percentage of the total value of production in these industries have increased markedly: from 4 per cent in 1972 to 46 per cent in 1987 for clothing; from 8 per cent in 1972 to 22 per cent in 1986 for fabrics; and from 0.5 per cent in 1972 to 22 per cent in 1986 for yarn. However, although the importance of domestic consumption has declined, it still accounts for most of clothing and textile production.

The share of domestic consumption of clothing and textiles in total production declined from 80 per cent in 1972 to 65 per cent in 1986. The domestic market has two components: “border trade” and actual domestic consumption. Border trade consists of exports to neighbouring countries such as Burma, Kampuchea, Laos and Malaysia. Official data are not available, but it is estimated that around 20 per cent of domestic consumption, or 13 per cent of total production, is in the form of border trade (IFCT 1986; Theravaninthorn 1982). Domestic consumption and border trade use the same distribution channels, that is through the central market in Bangkok.

Export values for clothing and textiles have increased consistently. Thailand was a net importer of clothing and textiles until 1972 but since then has become a net exporter. Clothing has been the major export item, accounting for 76 per cent of the total for clothing and textiles in 1987, followed by fabrics (19 per cent), yarn (4 per cent) and fibre (1 per cent). Despite some fluctuations, the export value of clothing and textiles has grown by around 30 per cent per year since the 1980s, from $0.5 billion in 1982 to $1.9 billion in 1987. Clothing and textiles have been the country's major foreign exchange earners since 1985, displacing the traditionally dominant export item, rice (Table 6.1).

Exports destined for MFA-markets accounted for 56 per cent of the total in 1987 (Figure 6.1). The EC and the United States are the major markets for Thai clothing and textiles, each accounting for around 23 per cent of export value.

Historical Background

Although Thailand has a long history of textile production, the modern clothing and textile industry was established relatively late compared with other East and Southeast Asian countries (Koomsup 1973). Low import tariffs following the imposition of the Browring treaty in 1830 forced Thailand to open its market to the colonial powers and therefore inhibited the early development of the industry.

The first textile machines, including 3,232 spindles and 72 looms, were imported from Germany by the Ministry of Defence in 1936 for military purposes (Koomsup 1973). It was not until 1946 that modern, privately owned textile mills began to operate with a capacity of 3,600 spindles. The first privately owned modern textile mills were, in fact, established by a local entrepreneur in response to the shortages of the Second World War.

After 1946 the industry, particularly mechanized spinning, expanded rapidly, with the number of spindles rising to 43,000 in 1952. However, production collapsed in the late 1950s due to competition from low cost imported cotton textiles from Pakistan. The price of imported cotton yarn was 25–30 per cent below that of domestically produced yarn. Santikarn (1977) suggests that Pakistan export subsidies were one reason for these low import prices. Several Thai spinning mills went bankrupt and had to be closed down. The Thai Government reacted by giving protection to the industry for the first time, imposing the Import Restriction Act on cotton yarn imports in 1955. The Act was amended to include cotton fabrics in 1957.

Import tariffs and the introduction of the Investment Promotion Act in I960 encouraged investment. The textile mills that had closed during the 1950s, including the textile mills owned by the military, were taken over and expanded by local entrepreneurs as well as by Chinese entrepreneurs from Shanghai and Hong Kong. Three pioneer firms were established, mainly in cotton textiles: the Thai Blanket Industry (1959); Thai Durable Textiles (1961); and Luckytex (1961).

Most studies on the effects of the MFA on developing countries have focused on evaluating the rents gained by developing countries. Hamilton (1986a) measured the rents gained by Hong Kong using information on the value of that country's bidding quota. He found that in 1983 the quota rents gained by Hong Kong exports to the United States, the EC and the European Free Trade Association (EFTA) countries were $506.8 million. Hamilton also estimated that the rents gained for ASEAN countries in 1981 and 1982 (at 1982 prices) were $28.14, $21.14, and $19.95 million for Thailand, Indonesia and Malaysia respectively (Hamilton 1986a).

Another effect of the MFA that needs to be evaluated is the loss to developing countries of not being able to export in a free trade situation. This should be added to the efficiency loss and the dead weight loss in any measurement of the net welfare effects of the MFA.

A recent model for the clothing and textile trade, developed by Trela and Whalley (1988), concluded that developing countries are the losers. They suggested that if the MFA were abolished the MFA exporting countries would gain approximately $11 billion. Trela and Whalley's study assumed differentiated product groups.

To focus on the welfare effects of the MFA on developing countries, the “world” has been divided into three regions: MFA-importing countries (MFA-M), MFA-exporting countries (MFA-X) and the rest of the world (ROW). Some important assumptions are as follows:

1. there is only one aggregated product, clothing (SITC 84), that is, the product is homogeneous;

2. all excess demand and supply are log-linear.

Figure 5.1 is based on these three country groups. ES is an excess supply function of the MFA-X to both MFA-M and ROW. ED* and ED' are excess demand functions of MFA-M and ROW respectively, where EDED is the total excess demand function of the two regions. In a free trade situation, the equilibrium point where total excess demand equals excess supply is A, the world market price is Pf and the imports of MFA-M and ROW are PfA.

The manufacturing sector has become increasingly important to the Thai economy since the 1980s: in 1987 it comprised about 22 per cent of GDP and brought in 50 per cent of foreign exchange earnings. Manufactured exports largely consist of labour intensive industries, such as clothing and textiles, integrated circuit assembly and jewellery, which together accounted for around 54 per cent of manufacturing exports and 27 per cent of the country's total export earnings in 1987.

The clothing and textile industry has become particularly important to the Thai economy in recent years. Clothing and textile exports grew so rapidly that in 1985 they became the highest foreign exchange earning commodity. In 1986 the clothing and textile industries contributed about 26 per cent to GDP from manufacturing and had the highest employment share in the manufacturing sector with around 500,000 workers. In 1988 exports of textiles and clothing increased to $2.4 billion compared with $0.8 billion in 1984. (All dollar values are in U.S. dollars.) Since 1986 clothing exports have become the highest export commodity; the export value was $1.9 billion in 1988.

The clothing and textile industry is likely to become the largest manufacturing industry if Thailand follows the industrial development path of Japan, Hong Kong, the Republic of Korea and Taiwan.

Nominal protection has been high for clothing and textiles, and production capacity has been controlled to limit domestic competition. The tariffs on spinning, weaving, clothing and man-made fibres have been high. This could have been expected to restrict export growth. High protection on intermediate products such as fabric could have been expected to reduce the competitive edge of downstream industries, notably clothing. High tariffs on clothing suggested that there was no incentive to export. From 1978 to 1986, moreover, the production capacity of spinning and weaving was controlled. Neither expansion nor new establishments were permitted.

Introduction

Economics has traditionally assumed that agents always make best decisions based on available information. The latter may itself be inaccurate or incomplete, but no further imperfection enters into the analysis about agents' ability to decide optimally. Not surprisingly, perfect decisions have been criticized by many investigators including Simon (1983), Elster (1984), Tversky and Kahneman (1974), Slovic and Lichtenstein (1983), as well as by decision theorists such as Arrow (1982, 1986), Nelson and Winter (1982). Despite the plausibility of these criticisms, it has still proven difficult to develop useful analytical tools that do not depend on assuming perfect choice. I shall thus describe a conceptual framework and related theoretical tools for studying the behavioral implications of imperfect choice that may not always react optimally to information. The resulting analysis implies that imperfect agents will benefit from following rules adapted only to recurrent situations rather than allowing complete freedom to decide independently on a case-by-case basis, thereby producing a tendency to ignore relevant and even costlessly available information.

From imperfect choice to predictable behavior

I begin by suggesting a conceptual basis for analyzing imperfect choice. Figure 5.1 depicts a flow chart beginning with imperfect decisions and ending with systematic behavior patterns. Two guiding intuitions on how to model behavior are shown. Standard analysis combines the first two steps leading to conclusion A: that modeling systematic features of behavior requires exclusive focus on perfect choice. Despite many helpful ways of modifying standard theory, like adding search and transaction costs (Williamson, 1979; McCall, 1965; Stigler, 1961), decision errors still ultimately represent unpredictable tendencies which cannot in and of themselves contribute to systematic regularities in behavior.

Introduction: new light on an old debate

What rules of the game render an economy participatory, fair, and democratically accountable without compromising efficiency and other valued social goals? The chapters in this volume explore this question from the vantage point of the revolution currently under way in microeconomic theory constituted by the abandonment of the simple world of Walrasian general equilibrium in favor of a richer world of imperfect information, incomplete markets, unenforceable contracts, costly transactions, and strategic interaction. In this new world people do not always do what they are supposed to do, nor do they always know all that they would like to know.

By the “Walrasian model” we mean the strand of neoclassical economics that proceeds from the assumptions that preferences are exogenously determined, contracts are exogenously enforced, and economic agents have infinite information-processing capacity (Arrow and Debreu, 1954). Post-Walrasian economics, as we will see in this Introduction, departs from one or more of these assumptions, asserting instead the implications of bounded rationality (Heiner, Chapter 5 in this volume), the importance of incomplete or incompletely enforceable contracts and the social origin of tastes, values, and commitments.

These new developments in microeconomic theory provide the basis for a rethinking of the old debate that pits economic planning against the market. Post-Walrasian microeconomic theory also allows us to add an essential missing term to the economists' “socialism versus capitalism” debate: namely, democracy (Weitzman, Chapter 18 in this volume). The last great round of this debate took place during the 1930s, with Oscar Lange and other advocates of socialist planning contesting the claims of Friedrich Hayek and other advocates of capitalist market allocations (Hayek, 1935; Lange and Taylor, 1938).

Introduction

Why are labor unions in industrialized market economies more common than worker-owned firms? Throughout most of the nineteenth century, the primary goal of the labor movement was to build an alternative economy of cooperative associations that would eventually replace capitalist-owned enterprises. The dominant figure in the first wave of union growth in England in the 1830s was Robert Owen with his schemes of “villages of cooperation” and worker-managed factories. Among working class leaders in France in the 1860s, Pierre-Joseph Proudhon's anarchist vision of a society of decentralized producer cooperatives was far more influential than the socialism of Karl Marx. Even the German Social Democratic Party program called for government aid for the creation of workers' cooperatives until the adoption of the Erfurt Program in 1891 (Lindemann, 1983).

In the last decades of the nineteenth century, Marxists, who insisted that socialists must be dedicated to the attainment of political power, replaced the anarchists and communitarian socialists as leaders of the emerging working class movement (Przeworski and Sprague, 1986). However, it was not the socialist or social democratic party alone that triumphed as the expression of workers' hopes, but the combination of parties in the electoral arena and unions in the labor market. By 1980, union membership averaged 54 percent of the labor force in advanced industrial societies (Wallerstein, 1989). In contrast, membership in worker-owned firms in 1980 comprised only 2.5 percent of the non-agricultural labor force in Italy; even less in other European countries (Ben-Ner, 1988a, 1988b).

A plausible explanation of the success of union organizing relative to the formation of cooperatives is that organizing unions was easier. Establishing worker-owned firms requires capital to invest. Establishing unions requires militants.

Introduction

A multitude of individuals and entities (“participants”) have a stake in any organization. Resource suppliers, for example, have an interest in how an organization functions because their own well-being is affected via their remuneration. Likewise, the welfare of the users of an organization‘s output is affected by price, quality and other decisions made in the organization. The interests of various participants with a stake in the same organization are both intertwined and divergent. Participants seek both to maximize the total return from their common transactions (i.e., the size of the surplus that can be distributed among them) and to maximize their respective shares in the surplus. The desire to maximize total surplus amounts to maximizing productivity and technical efficiency and minimizing production and transactions costs; this draws participants together and drives them to cooperate. The goal of maximizing individual shares propels participants to conflict with each other (either individually or in groups), possibly to the detriment of the size of the total surplus.

Incentives for both cooperation and conflict exist because participants must often bear some costs in moving from one organization to another and because participants who have already collaborated together, having developed relationship-specific human and physical capital, are capable of generating more value than other combinations of participants (Aoki, 1984; FitzRoy and Mueller, 1984).

Cooperation and conflict characterize all organizations. Likewise, control is employed universally. Different organizational structures, production technologies and environments are associated with different degrees of cooperation and conflict and with different methods of control.

Introduction

The defining feature of a Labor-Managed Firm (LMF) is that the ultimate decision-making rights are assigned to the workers. From this we can expect that the decisions of the LMF conform to the interests of the (majority of) worker-members. But which worker-members do we mean? In an intertemporal context we must distinguish between the ex ante members of period t and the ex post members of period t. The ex post membership consists of the ex ante members who remain with the LMF and those additional workers who join the LMF during the period. They will be the ex ante members of period t + 1. It seems obvious that the ex ante members make the decisions in any given period because those who are not yet members of the LMF can hardly be given a direct say in firm decisions. To be more precise: assume that decisions are made at the beginning of the period. Only those who are a member of the LMF at that time, i.e., the ex ante members, can participate in these decisions while those who join the LMF later are excluded.

Beginning with Ward (1958), Domar (1966) and Vanek (1965) the larger part of the economic theory of the LMF assumes that LMFs maximize the (present value of) per capita income of ex post members. A recent example is Drèze (1989). The LMF is thus assumed to act in the interests of its ex post members in any given period.

Introduction

Many countries seem to favor mixed ownership as a way to make firms democratic. Employees are therefore induced to buy shares in the firm where they work. Among other things, this may reduce the conflict between labor and capital as both groups get interests as shareholders in the firm.

A crucial point for the proposers is often that the shares should be purchased and held by the individual worker, not by an organized group of workers. There should, for example, be no restrictions on each employee's trade of shares. A free individual purchase and sale of shares, however, may be inconsistent with a stable mixed ownership structure. Employee-owners may have the opportunity to avoid equal profit-sharing with the other owners. They can, for example, allocate the income of the firm to higher wages and fringe benefits for themselves, instead of paying out profit to all the shareholders. To pursue their own interests in the firm, the employees need the majority of shares. As a consequence, the external owners also want the majority of shares to prevent a non-value-maximizing policy. Hence, there may be a struggle for control over the firm between the two groups.

The conflict may not be solved through a free market for shares and a market for corporate control. On the contrary, restrictions on the trading of shares may be necessary to obtain a stable ownership structure. The initial majority owners as a group have no interest in selling their control over the firm for less than a full compensation for their loss from the takeover. However, there is a conflict between collective and individual rationality.

We need decentralization because only thus can we ensure that the knowledge of particular circumstances of time and place will be promptly used. But the man on the spot cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings. There still remains the problem of communicating to him such further information as he needs to fit decisions into the whole pattern of changes of the larger economic system. (F. Hayek, 1945)

Introduction

This chapter deals with incentive issues involved in workers' collective participation in information-processing (e.g., problem-solving on manufacturing site, horizontal coordination, on-the-job learning, R&D) in the context of large firms. In exploring this theme, it specifically tries to make the following two points: first, the critical basis of “workers' power” in the firm in accord with internal and allocative efficiency lies not so much in the “democratic rule” per se that workers' majority voting (or unanimous will) is explicitly applied to management decisions (or selection of management) of the firm. Nor does it lie in the workers' exclusive property rights which allow them to appropriate all gains arising in the associated firm. Rather, workers' power is derived more fundamentally from their ability to generate information value through active, collective participation in information-processing within the firm. By “workers' power,” I mean their capacity to have due influence over management decisions relevant to their own economic welfare, learning opportunities, membership status in the firm, etc.

Introduction

Two fundamental reasons why firms should be owned and run democratically by their workers may be given. (1) Accountability: because the employment relationship involves the exercise of power, its governance ought on democratic grounds to be accountable to those most directly affected. (2) Efficiency: the democratic firm uses a lower level of inputs per unit of output than the analogous capitalist firm.

Neither claim is obvious. If wage labor is a voluntary exchange in a competitive market, how can it exhibit a well-defined power relationship? If the democratic firm is more efficient, what prevents the capitalist from replicating it and reaping the profits? And if capitalist firms cannot capture the efficiencies of democratic firms, why do democratic firms not simply outcompete capitalist firms? In this chapter we will substantiate these claims through a comparative analysis of a capitalist and a democratic firm facing incentive incompatibilities concerning worker effort, managerial performance, and risk-taking.

Our approach differs from much of the literature on economic democracy in two ways. First, our focus on the agency problems associated with the regulation of the intensity of labor allows us to define precisely the exercise of power of employers over workers in a competitive capitalist economy, to advance specifically democratic criteria for the evaluation of the organization of the firm, and to demonstrate the superior efficiency characteristics of the democratic firm. Neither the political nor the efficiency argument, we think, can be sustained in a framework that ignores agency problems. Indeed, the elimination of agency problems by assumption, typical of much of the literature on worker self-management, reduces the case for the democratic firm to the curious claim that it would mimic the capitalist firm.

Introduction

In an era of major changes across the globe in economic as well as political institutions, there should be little argument about the need for an analytical framework to help us understand the observed phenomena. In the past, the development of such a framework was obstructed by imperfect communication between “theorists” and “institutionalists.” Our objective here is to facilitate communication by integrating institutional phenomena into models that have been developed for the study of economies, voting systems, and organizations. Primarily, we are interested in economic institutions, but certain aspects of the model are general enough to be applicable to political and other social institutions as well. Indeed, these non-economic aspects cannot be ignored, since introduction, implementation, and enforcement of the rules are essential features of the model.

Our point of departure will be the theory of economic mechanisms (formalized, for example, as adjustment processes or game forms). Although this theory has had a normative orientation, we intend our framework to be usable for descriptive and explanatory analysis as well. We do not share the view that at the present stage formalization is premature. It seems important to make institutional phenomena amenable to analysis with tools that have resulted in progress in many areas of economics and other social sciences.

Before proceeding with details, let us clarify the intended meaning of the term “institution.” In common parlance, this term has two distinct meanings. To illustrate by example, we refer to such organizational entities as a university, a central bank, an ombudsman's office, or a state as institutions.

Introduction

Recent events in the (former) Soviet Union and Eastern Europe have awoken the field of comparative economic systems from its quiet backwater. Spurred by the delegitimation of an undemocratic system which no longer delivered the goods, these changes challenged standard comparative systems' assumptions of placid, obedient workers, and unchanging economic and political systems.

The economic problems result from the inherent “shortage” character of centrally planned economies (CPEs) (Kornai, 1982), which causes input hoarding by managers, unfulfilled plans and a shortage of consumer goods, in turn weakening work incentives. The problems are also linked to the paternalistic, and often corrupt, nature of the state, which failed to represent citizens (Nove, 1983).

Underlying these failures are agency problems between owners and managers, between managers and workers, between producers and consumers, and between the state and citizens. These same four types of agency problems are common to all economies, although the specific forms they take in CPEs result from the particular institutional structures of these societies.

In spite of the importance of agency problems in CPEs, the agency-theoretic approach is conspicuously underdeveloped in the field of comparative economic systems. The dominant paradigms in the field have examined only one agency problem closely, the principal–agent problem between planners and managers. Other agency problems have rarely been addressed. Further, the planner–manager problem has been examined exclusively in the context of comparing problems arising under state ownership and central planning to that of an ideal market economy in which agency problems are assumed away.