Economic and Social Council

 Distr. GENERAL
20 April-1 May 1998
ORIGINAL: ENGLISH

Economic and Social Council
Commission on Sustainable Development
Sixth session
20 April-1 May 1998

                 Industry and sustainable development

                    Report of the Secretary-General

                               Addendum

                  Industry and social development*

(* The present addendum was prepared by the International Labour Organization,
in accordance with arrangements agreed to by the Inter-Agency Committee on
Sustainable Development;  it is the result of consultation and information
exchange between United Nations agencies, international organizations,
interested government agencies and a range of other institutions and
individuals.)

Contents         

                                                     Paragraphs   Page

  I.  Introduction . . . . . . . . . . . . . . . . . .   1-7        2

 II.  Industry and human development . . . . . . . . .   8-22       3

III.  Policy challenges for government and business. .  23-38       5

 IV.  Policy challenges for the international community 39-43       7

                       I.     Introduction

1.   Social development is a multifaceted concept
involving the creation of employment, the social protection
of workers, improvement of their working environment and
investment in human capital. There does not have to be a
trade-off between the profitability of industry, a condition
of economic sustainability, and social development.
Industrial development is unsustainable unless it provides
adequate employment together with working conditions that
respect workers' health and safety, and the environment.
More positively, profitable industrial growth is one of the
best ways of supporting social development. The role of the
state in creating and maintaining a level playing field is
essential because market forces do not provide incentives
to all firms to pay attention to the social development of
their workforce or of the surrounding community.

2.   The relation between industry and social development
is a global issue linked to the changing structure of
employment both within and between regions. The
International Labour Organization (ILO) World
Employment Report, 1996/97 concluded that full
employment, one of the pillars of social development,
remains an achievable goal. Fear of the emergence of a
general phenomenon of jobless growth in countries of the
Organisation for Economic Cooperation and Development
(OECD) is not well founded. Nevertheless, there are intense
anxieties in many quarters over the possible job-destroying
effects of rapid technological change and intensified
international competition. Industrial workers in OECD
countries fear that globalization accelerates such changes
even if it does not cause them, and reinforces them by way
of the delocalization of industrial production to relatively
low-wage developing countries. At the same time, while
industrial workers in certain developing countries may be
benefiting from new sources of employment thanks to
access to global markets, the sustainability of such
employment is far from guaranteed.

3.   To achieve sustainable social development, it is
essential to create sufficient employment of acceptable
standards for all those who desire to work, which is an
enormous challenge. OECD countries have experienced
high rates of unemployment, informalization of production
and working conditions, and increased income inequality.
In other regions, the employment situation has been
similarly subject to upheaval. Latin America and sub-Saharan 
Africa have experienced a decline of the formal
manufacturing sector, increasing informalization and
underemployment. Certain African countries have
experienced a trend back to the agricultural sector. South
Asia has shown a slow but continuous improvement of
economic conditions and levels of employment; yet poverty
remains high and much remains to be done to provide the
population with decent employment. The recent financial
crisis in South and South-East Asian countries indicates the
fragility of economic development and employment growth
even in those countries considered, up to now, as the most
successful examples of industrial growth and development. 

4.   These experiences make it  clear that social protection
is a necessary complement to employment generation.
Globalization will not be politically viable if it leads to a
deterioration in social justice. Rising inequality,
deteriorating labour welfare and the absence of adequate
social protection could breed discontent and provoke a
strong backlash against globalization.

5.   Nevertheless, there are some reasons for optimism.
Expansion of export-oriented manufacturing has led to
increased job opportunities for women, albeit usually at a
lower-than-average wage rate, but the gains made from
increased access to labour markets are of great importance
to enhance gender equality. Notwithstanding recent events,
the experience of East and South-East Asia offers hope that
poor countries can achieve rapid growth without increasing
inequality, and also shows that human development, such
as providing education and health care, is essential for
sustainable economic growth. But there are also positive
developments outside East Asia. The corporate
responsibility movement is making strong headway in
OECD countries, as firms find that less exploitative
working conditions -- better health and safety conditions,
shorter working hours and more consultative management
forms -- can improve economic performance in many
dimensions.

6.   Interestingly, such initiatives are not confined to the
formal sector. There are cases of small enterprises in South
Asia and Africa collectively providing social protection for
themselves, on their own initiative, on the clear
understanding that such measures enhance the productivity
of their operations. One important policy challenge is to
find ways to facilitate and encourage the spread of such
initiatives throughout the informal industrial sector. The
potential to enhance productivity is very great in this sector,
given low productivity levels in many such activities to
date, and the need to do so is most pressing, not only
because wages are low in the informal sector but because
the great bulk of industrial employment is generated in
small enterprises.

7.   At the macroeconomic level, sustainable social
development can only be achieved with a reasonable rate
of economic growth; at the level of the firm, sustainable
improvement of working conditions can only be achieved
with increases in value added, so that competitiveness is not
threatened. However, the contrary is also true, that is, social
development provides the foundation for and preconditions
of both economic growth at the macro level and
competitiveness at the level of the industrial enterprise.
There are many such instances of  good practices, in which
social development and good economic performance go
hand in hand.

       II.     Industry and human development

8.   Social development is a precondition for
competitiveness in an increasingly global economy. For
example, providing basic education and health care to the
majority of the population is essential for rapid
development. High levels of literacy in East Asia preceded
and accompanied its economic boom rather than following
it. Conversely, the low levels of education in South Asia or
sub-Saharan Africa have formed a barrier to growth.

9.   Investment in human development, in general,
provides positive returns. But improving basic education
and health is not a simple strategy, especially for the
poorest countries. At the same time that these measures
need to be taken, increasing competition makes it harder
to implement them. Although industrial development is
seen to be largely the responsibility of the private sector
and despite the move towards privatization of industry that
accompanied many structural adjustment programmes, the
State has a crucial role to play in making industry
competitive.

10.  Although industry is one of the engines of economic
growth and employment creation, in many developing
countries industrial employment and output have grown
very slowly over the last two or three decades. The "tiger
economies" of East and South-East Asia were the only ones
to simultaneously achieve rapid growth in output,
employment and real wages through industrial expansion.
Some of the newly industrializing Asian economies, such
as China and Indonesia, have recently benefited from a
labour-absorptive pattern of growth based on expansion of
industrial capacity.

11.  Employment usually increases along with industrial
output, but that relationship is far from fixed. Growth is in
many places becoming less employment intensive: between
1975 and 1990, employment elasticity fell in 9 of the 16
economies for which it was possible to make such a
comparison. 1/  This trend is not limited to the richest, OECD
countries: it is a cause for concern in some developing
countries, such as India and Pakistan, since they display
very low elasticities of employment in industry, with
industrial employment increasing much more slowly than
the value of output.

12.  Accompanying these changes in employment have
been changes in wages, including the disparities between
men and women. There has been enormous divergence
between regions: whereas real wages declined in only four
of a sample of 20 developed countries, they declined in
about half of a sample of Asian countries. 2/  In other places,
experiences were even less favourable: real manufacturing
wages declined in 26 of 33 non-Asian developing countries.
Wage disparities between men and women in
manufacturing are large, with a female-to-male ratio of the
order of 2 to 3, with no evidence of any general diminution
of the gap. The East Asian developing countries tend to
have the largest gender gap in wages, and where the wage
gap is decreasing, it is declining less than proportionally
to gains in women's education. But the declines in real
wages may reflect the absorption of more lower-paid
women into the industrial sector workforces rather than
falls in existing wage levels. 

13.  Worry about the impact of globalization on both
quantity and quality of industrial employment is justified,
but it is certainly not universally true that globalization
leads to an overall decline in employment. As the share of
manufactures in the exports of many countries, particularly
in the developing world, has increased, the resulting rise
in industrial output has been accompanied by an increase
in employment. However, the impact varies across regions,
between and within countries and sectors.

14.  Overall, in richer countries, the impact is labour-saving 
and employment-reducing, especially for unskilled
workers. Countries with a traditional manufacturing base
have tended to experience the sharpest reductions in
industrial employment as a consequence of globalization.
By contrast, in the East and South-East Asian countries,
employment has been created at rapid rates, and in some
cases full employment has been sustained for many years
on this basis. Middle income countries face greater
international competitiveness from lower-cost suppliers as
world trade continues to be liberalized. For their industries
to survive, they must expand export capacity into new,
more technology-intensive product areas, where fewer but
more highly skilled workers will be required. Even so, in
some cases the growth of output may be sufficiently rapid
to generate increases in total employment, even with
reduced employment elasticities. And real wages are likely
to rise in this situation. In low-income countries that have
developed an export orientation, manufacturing
employment in relatively labour-intensive forms of
production is expanding rapidly, which draws in far higher
proportions of female labour than other types of industrial
production.

15.  The situation regarding the quality of employment is
equally diverse. Although increasing competition stimulates
increased productivity, it jeopardizes the survival and
profitability of many firms, which may seek short-term cost
savings by cutting back on social protection for their
workers and by attenuating the nature of their contractual
obligations to their workforce. Globalization often leads to
cost-cutting and delocalization of once protected industries,
raising also the danger of a "race to the bottom" insofar as
respect for fundamental labour standards is concerned.
Trade unions are confronted with a reduced ability of
workers to resist such deterioration in standards.

16.  Thus, globalization has introduced the possibility of
deterioration in working conditions for large sections of the
industrial workforce worldwide. In some places, this is
already happening, as indicated by evidence of dramatic
moves away from guaranteed jobs to "flexible" labour
markets and the rise of non-regular forms of employment
in the old industrial centres. Self-employment and part-time
and temporary employment have risen markedly in all
OECD countries. Some export-oriented industries in
developing countries still use child and bonded labour, and
ignore safety considerations. Here, however, more research
is required to determine whether or not globalization
actually contributes to poor working conditions and
disregard of core labour standards or merely increases the
international visibility of pre-existing working conditions.
There is a danger, especially for women drawn into the
market for cheap labour, that gains in women's labour
market participation may be short-lived and not carry
through when industries move to more skill-intensive
production.

17.  Central to the possibility of a country gaining from
globalization is the fulfilment of certain conditions of social
development. As indicated above, the East Asian countries
provided health, education and some other social services
to the population before the onset of rapid economic
growth. Some countries, such as Pakistan, have
acknowledged the force of this argument in deciding to
reallocate state expenditures in favour of social sectors.
Others, notably East Asian countries in transition from
centrally planned to market systems, are finding that a
historical pattern of high social spending serves them in
good stead in the new global trading system.          

18.  Increasingly, the service sector is becoming the most
important employer of labour in various parts of the world.
Its growth has also been closely linked to overall increase
in welfare, as well as to the globalization of the economy.
Liberalization, which has begun with the inclusion of
services into World Trade Organization rules under the
Uruguay Round of multilateral trade negotiations, may help
to increase service sector employment. The growth of the
service sector has also facilitated the growth of global
industrial trade, particularly as a result of innovative
information technology and new forms of financial and
business services.

19.  Figures on the growth of service sector employment
are partly a statistical illusion. Many enterprises are
reducing their in-house workforces, buying services from
external providers instead of hiring labour. Technological
progress, particularly in telecommunications and
information processing, has allowed many such services to
be relocated internationally. Thus, industry remains the
motor force in expansion, but with increasing linkages to
services. The health of the service sector and linkages to
industry are factors that help globalization to foster
increased employment. 

20.  Much of the growth in manufacturing employment
takes place in informal enterprises. In poorer countries, the
informal sector forms the major part of the economy, and
that sector has been growing in richer as well as in
developing countries. Therefore, its productive potential
should be harnessed while at the same time seeking to
improve the conditions of workers. The concept of the
informal sector, however, hides enormous diversity. In
middle-income countries in Latin America, South Asia and
the Middle East, small-scale urban industry in the informal
sector is much more important relative to the formal sector
than in most East Asian countries. The traditional informal
sector in developing countries includes independent small
producers, but sub-contracting is also common, particularly
between formal and informal enterprises. These
developments require new efforts to extend the protection
of core labour standards to informal enterprises.

21.  Informalization in the industrialized countries is often
a reaction to increasing international competition, and
provides a means to reduce labour costs and introduce
greater flexibility, including casual and part-time
employment. The result is "third-world" labour conditions,
and small  sweatshops employing vulnerable groups within
the large cities of the United States of America and Europe,
alongside increases in non-regular forms of work by
established producers. In developing countries also,
pressure of competitiveness is pushing producers towards
atypical ways of organizing production, which in turn is
leading to the informalization of employment.

22.  But the informal sector also contains small companies
with high skill levels and with certain comparative
advantages. The greater knowledge that the informal sector
may have of the local institutional context and of other
complementary informal enterprises helps it to benefit from
globalization. Where clusters develop or strong links are
established between international firms and local small
suppliers, the informal sector is more likely to be able to
move to exporting and/or to act as a supplier to export-oriented 
industry. The greatest potential for employment
growth lies with small and medium enterprises (SMEs), and
policies that support informal sector enterprises with micro-credit 
and with improved working conditions and social protection can 
help them to cross the threshold to the formal sector.

     III.      Policy challenges for Government
               and business

23.  Recent changes in employment worldwide,
particularly related to globalization, thus provide risks as
well as opportunities. To turn current challenges into
advantages, policies that promote the quality as well as
quantity of employment are necessary: on the one hand,
there is a win-win situation, in that there are policies that
promote social development and at the same time enhance
productivity and competitiveness, but on the other hand,
in many situations employers are unlikely to create such
conditions of social development. Countries where this
tendency is paramount are at serious risk of falling behind
in the globalizing economy.

24.  For the market to function in the long-term interest
of the population, certain preconditions need to be created
that will steer enterprises in this direction and facilitate the
task for the state and private sectors of enhancing social
development. There is increasing emphasis on the need for
partnership between the State, the private sector and civil
society in pursuit of this goal. A first policy challenge is to
ensure sufficient employment of high quality. This
presupposes sustainable economic growth. Employment
creation should not compromise basic efficiency, especially
in an increasingly competitive environment. For this, a
supportive macroeconomic environment is essential. In
addition, patterns of economic growth should be channelled
towards employment-intensive forms of growth, especially
in labour-surplus economies. Labour-intensive
manufacturing is an option for developing countries, and
it has provided jobs, especially for women, more effectively
than import-substitution strategies. Economic reforms that
correct for incentive biases, such as overvalued exchange
rates and protection of capital intensive sectors, are likely
to improve the situation. The basic infrastructure and
services that support the productivity of SMEs are often
inherently labour-intensive, and investments in public
works infrastructure are a good way to create employment
in both the infrastructure and industrial sectors.

25.  According to a United Nations Industrial
Development Organization (UNIDO) estimate, the informal
sector typically employs three quarters of the industrial
labour force in developing countries. It cannot be taken for
granted that informal-sector enterprises have higher labour
intensity, and substandard working conditions are a
common problem. The policy and regulatory environment
should enable rather than obstruct the success of SMEs
through the removal of market and product barriers, and in
accordance with social development objectives, should also
encourage higher levels of social protection in this sector.
Fiscal policy should be non-penalizing in its impact on
small firms, and finance and credit policies often need
specific revision to ensure that the needs of small firms for
finance capital are met. Limited access to capital is
commonly much more of a bottleneck for the growth of
small firms than is the cost of capital. An enterprise and
productivity enhancing culture can be supported by
Governments in quite simple ways, such as with a system
of rewards to successful innovators and firms that introduce
good employment practices.

26.  Another policy involves clustering that supports
organizational capacity-building for collective access to
services, such as market information, trading standards and
marketing. The nurturing of institutional links between
small firms can also provide the basis for harmonization of
and improvements in social protection for member firms'
workers. The ILO has given technical assistance to
groupings of small enterprises in the United Republic of
Tanzania and India in projects that have been successful in
supporting employment security and improved labour
productivity.

27.  Increasing labour force participation by women
should be welcomed. Barriers preventing women from
entering the labour force -- including high fertility, low
levels of skills and education, or lack of child-care
facilities -- should receive attention. Virtuous circles can be
created that improve women's welfare and capabilities, at
the same time increasing overall economic growth.

28.  Conditions of employment for women should be
central to employment policy. Many discriminatory
practices exist in the rapidly growing economies no less
than elsewhere. Women are overrepresented in industrial
sectors, with low pay and insecure jobs, and face
discrimination in relation to employment conditions and
wages. Also, policies should focus on the further
development of skills among the female labour force to
ensure that countries have a large supply pool of skills as
they graduate out of simple labour-intensive and into higher
value-added, more technology-intensive production
activities.

29.  Agenda 21 also recognizes the role of business in
achieving its objectives by working towards cleaner
production and responsible entrepreneurship. The
importance of increasing the efficiency of resource use,
including the reuse, recycling and reduction of waste per
unit of economic output, is well recognized. Employers are
increasingly becoming aware of their social responsibility
in achieving such objectives. The ILO programme on
employers' organizations and cleaner production aims to
encourage businesses to work proactively to improve
environmental performance and assist them in doing so.

30.  There are three ways in which business perceives its
social responsibilities. According to one school of thought,
the business of business is to make business. After all,
enterprises pay taxes, make donations to non-governmental
organizations and pay wages. But that view no longer
dominates. A second common view recognizes that there
are serious social problems and that business has a social
role, with a responsibility to devote resources to tackling
such issues as ecological degradation and unemployment.
In reality, however, words and actual action differ
considerably, as shown by the widespread trend towards the
downsizing of the workforce.

31.  A third small but rapidly growing group of enterprises
sees social problems as symptoms of more fundamental
issues. The strategy of these enterprises to cope with such
problems is not through incremental changes in attitude of
enterprises towards customers, employees and suppliers.
Rather, it requires a fundamental change in business itself.
Social initiatives are an essential component of the new
strategy, which aims to achieve a growing  convergence
between the needs of society and business interests. While
enterprises have always been involved in social activities,
genuine new initiatives are characterized by financial
support to outplacement, self-employment, employee buy-outs, 
business start-ups and indirect assistance to outsiders,
and the financial involvement of employees in business
management.

32.  It is essential to integrate action on the general
environment with activities on the working environment.
Although it is not easy to monitor progress regarding the
working environment, there is a concern that single-minded
pursuit of economic growth alone in a competitive world
may sometimes result in a lack of adequate safeguards on
safety and environment in places of work, which may be
at least partly responsible for the growing number of
accidents in workplaces and an overall deterioration in the
work environment in many countries. The trends that are
noticeable in workplaces include increased intensity in pace
of work, greater use of chemical substances and
introduction of new technologies. Improving occupational
safety and health, as well as more participatory
management strategies, makes good business sense. More
needs to be done to spread the lessons and examples of such
good practices, and to provide incentives to contribute to
better working conditions. Simple measures, relating to
hygiene for example, may improve working conditions and
efficiency. Incentives are important. For example, accident
insurance can have built-in inducements to reduce the
number of occupational accidents. 

33.  Working conditions for women should be high on the
agenda. A major neglected issue is violence at the
workplace; certain exposed occupations are particularly
affected. Finally, adoption of legislation on issues that
affect women, especially maternity rights and provisions,
and night work need special attention to ensure that
protection does not lead to declining access to jobs.

34.  If poor countries can build their human capital
resources, catch-up is possible. If early development of
human capital resources does not take place, the possibility
of convergence is less. Improving basic education and
health is a win-win strategy, but it is not a simple strategy,
especially for the poorest countries that have severe
budgetary constraints. Yet countries need to prepare their
population for international competition, and this is a major
policy challenge for the State.

35.  Many industrial enterprises are worried by the level
of education of school-leavers, for example, and by the
educational requirements of a flexible labour force. Better
information regarding specific demands for labour, as well
as the provision of schooling, can be provided by
enterprises, sometimes in partnership with Governments.
Again, a serious problem is that the poorer countries who
need such measures most, are less likely to obtain them,
either from business or the Government.

36.  Over the last decades and often linked to the crisis of
employment, much concern has rightly been expressed
about the viability of many social security provisions,
particularly in the face of growing unemployment and
ageing. Furthermore, there is a danger of jobs being lost to
the detriment of sectors with good social protection in
favour of employers or countries that do not provide such
coverage. An opposing concern has been the limited
coverage of social security, particularly in developing
countries.

37.  But there are also positive lessons to be learned.
Unemployment benefits have successfully been restructured
in some OECD countries, such as to stimulate re-entry into
labour markets. The role of both business and Government
in retraining workers for "employability" provides one
avenue for reducing the pressure on traditional safety net
programmes.

38.  In poorer areas, successful social security provisions
are by necessity different, but positive measures are
possible. For example, the Indian Self Employed Women's
Association has stressed child care as the most important
measure for assuring mothers' peace of mind and improving
productivity. Recent work by the ILO has attempted to
introduce adapted forms of social security in the informal
sector, such as in the form of collective (mutual) insurance
against health costs in Dar es Salaam.

       IV.     Policy challenges for the
               international community

39.  The central concern of the international community
with respect to industry should be its growing international
disparities. Globalization renders these inequalities more
visible, and it increases countries' and groups' risks of
falling deeper into poverty and exclusion. Enhancing social
development worldwide is a common goal, one that will be
advantageous in the long run for all concerned.

40.  The World Summit for Social Development (1995)
provides perhaps the strongest basis for international
cooperation to eradicate poverty. Policies should build on
countries' commitments expressed in the declaration, which
includes the expansion of productive employment and the
reduction of unemployment for those able to work, as well
as the enhancement of social protection and reducing
vulnerability of the poorest groups. For employment-related
policies, the international community has a role to play to
ensure that international trade and trade agreements do not
halt the creation of employment on a world scale, and that
core labour standards are adhered to, especially with respect
to freedom of association, collective bargaining, abolition
of child and bonded labour, and gender discrimination.

41.  Adherence to the core standards and other standards
related to working conditions, occupational safety and
health, and social security offer promising means of social
development. While encouraging the observance of these
standards, international agencies should also focus on
assisting countries at lower levels of development in their
efforts to participate in the global economy. Although the
ultimate objective is to enable these countries to be
competitive in the global economy without compromising
on labour standards, technical assistance may be required
to help firms in low-income countries and small enterprises
in all regions to attain the required standards without
undercutting their competitive position.

42.  The ILO programme of action against child labour,
implemented in collaboration with private-sector employers
and trade unions, has helped to change the climate of public
opinion, persuading Governments that practical solutions
to the problem of child labour are possible, and mobilizing
resources internationally to address the issue. This approach
also provides the lesson that multi-enterprise involvement
is essential, i.e., that employers across the board must be
drawn in to any sectoral programme to improve labour
standards. The introduction of such improvements may
carry a cost to enterprises, even if only in the short term.
Only if all firms are involved and make changes at the same
time can the problem of penalizing compliant firms in terms
of their market share be overcome.

43.  With globalization, the role of Governments,
employers and trade unions is undergoing transformation.
For actors in the international community, a number of
options are suggested. First, the United Nations has a role
in the monitoring of the progress made in following up the
Copenhagen Declaration on Social Development, in
conjunction with Agenda 21. Second, the ILO has a central
role in monitoring the implementation of relevant labour
standards, and in stimulating patterns of economic growth
that provide job opportunities for all those who desire to
work. Third, countries within trade blocs should consider
the wider implications of trade agreements and make long-term 
effects in terms of employment creation and social
development central not only to trade but also to investment
policies. Fourth, both domestic and multinational
enterprises have an interest in developing social initiatives:
enhancing social development within and outside
companies makes good business sense, certainly in the long
run. International organizations of employers are playing
a role in spreading information about and expanding these
good practices. Finally, trade unions are facing an
unprecedented challenge as a result of rapid technological
development and globalization. They need to reorient and
reorganize at both the national and international levels to
confront an increasingly global economy, in which global
inequalities are increasingly coming to the forefront. Also,
new emphasis is being placed on reaching out to and
organizing workers in the informal industrial sector. Trade
unions have a vital economic function during industrial
restructuring, and continue to play an important role as
vehicles of democracy and advocates of social justice,
notably by reaching out to women, minorities, consumer
groups, the unemployed and the growing numbers of
working poor in countries round the world.

                           Notes

          1    See World Employment 1996/97 (Geneva, International
               Labour Office, 1996), p. 151.

          2    See A. Amsden and R. Van der Hoeven, "Manufacturing
               output, employment and real wages in the 1980s: labour's
               loss until century's end", Journal of Development Studies,
               vol. 32 (1996), No. 4, pp. 506-530.

Date last posted: 8 December 1999 15:15:30
Comments and suggestions: DESA/DSD