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Unions and Governors

Question: What do auto unions in Mexico and Brazil have in common with provincial governors in Argentina? Answer: A reality deficit.


EITHER THAT OR they are like the scorpion in the tale of the scorpion and the frog: A scorpion needs to cross a river, but can't swim. So he asks a frog if he can take him over. The frog agrees - on one condition: That the scorpion doesn't attack him. "If you do, we'll both drown," the frog says. The scorpion agrees and they start their journey. However, mid-ways, the scorpion does attack the frog, and they both start drowning. The frog manages to scream: "Hey, why did you that? Now, we'll both die." And the scorpion answers: "I know, but I couldn't help myself."

Let's start with the governors in Argentina. A majority have rejected the government's plan to reduce the monthly federal subsidies of $1.4 billion to the provinces. The reduction is a key element in the government's plan to reduce costs, maintain "zero deficit" and avoid an outright default on its foreign debt. The lack of an agreement with the governors has delayed vital support from US investors for the government's plan and threaten to destroy an already fragile effort to avoid economic chaos.

The governors seem to believe they actually have a choice, i.e. that they can continue getting those government subsidies as if nothing had changed. Wake up, Dear Governors! Argentina is facing one
of its worst economic crises ever and your efforts to help are badly needed.

While we understand the anger and frustration expressed by one governor, who complained that they had to pay for the federal government's mistakes, fact is the provinces are way overdue in terms of reforms. Many have acted fiscally irresponsible and their behavior now further undermines the arguments for decentralization. Delegating authority is aimed at improving efficiency, not boosting irresponsibility.

THEN THERE ARE the unions. Despite a global decline in auto sales, labor organizations in Mexico and Brazil have acted as if the auto industry was still experiencing boom times.

At Volkswagen's auto plant in Puebla, Mexico, unions held a 19-day strike after rejecting a pay increase of 7 percent. That compares with the 6 percent inflation rate of Mexico. In the end, Volkswagen agreed to a pay raise of 14.7 percent.

However, while that bought labor peace at Puebla, it was also the beginning of the end for the plant as a key facility. As a result of the strike (the second in two years), Volkswagen has suspended a $1 billion investment plan for the next five years and decided to shift production of its Jetta from Mexico to China.

Volkswagen and other carmakers in Mexico have been suffering from the decline in auto sales in North America. Mexico's economy is expected to grow 0.8 percent this year, a significant decline from last year's 6.9 percent growth.

In Brazil, the union at Volkswagen's plant in San Bernardo do Campo - the automaker's largest in Brazil - rejected a new plan aimed at reducing costs by slashing hours and pay by 15 percent. The plant has been suffering from reduced demand of cars in Brazil and Argentina. In October alone, demand in Brazil was down by 15 percent compared with the same period last year.

As a result of the rejection, Volkswagen announced last week that it will lay off 3,000 of its 16,000 workers at the plant. The unions answered today by going to strike, as if that's going to help.

Two weeks ago, a strike by the United Oil Workers Federation in Brazil, which represents 20 unions and 34,000 oil workers, ended a five-day strike against state oil company Petrobras after accepting an offer of a 6.4 percent raise and a bonus, which brought the total to 9.1 percent. That's nearly twice what Petrobras had originally offered.

The strike cut production by more than 60 percent at a time when Brazil is suffering from a major energy crisis and declining economy.

WHILE WE UNDERSTAND the difficulties of union members in Mexico and Brazil (and the rest of Latin America, for that matter), the tactics of strikes and rejecting limited reduction plans will not help their plight any further - as the decision by Volkswagen to cut jobs clearly showed.

The problem with the union's premise for pay raises is that they obviously believe the pie is getting bigger, when it - in fact - is shrinking. Any pay raise has to come from a budget that grows, not declines.

And while we disagree with the reactions of both the Argentine governors and the unions in Mexico and Brazil, they are only the latest in a wave of growing protests in Latin America against stringent fiscal policies that seem to bring little prosperity to the majority of people.

But as painful as they are, those policies are essential to Latin America's well-being and a safeguard against a return to the "lost decade" of the 1980's.

We therefore urge the governors in Argentina and unions throughout Latin America to look beyond the short-term and act constructively.

These are difficult times for Latin America. The region's economy may grow less than 1 percent this year. Intransigence against constructive solutions only make matters worse. Instead of helping cross any symbolic or real rivers, they only help everyone drown.

Originally published November 12, 2001

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