__________________________________________________________________ Joshua Hall and Ricky Thorson Was Guatemala “ Ready ” for More Stringent Labor Standards in 2001 ? A Comparative Development Approach 1 . Introduction . In March of 2001 , after considerable debate , the Guatemalan Congress passed a set of major labor reforms ( de la Torre , 2001 ). The motivating force behind this set of labor reforms was to move towards compliance with International Labour Organization ( ILO ) guidelines . The ILO , a specialized agency of the United Nations , is a tripartite commission of government , labor , and business interests that works to define and improve so-called “ core ” labor standards throughout the world . According to the ILO ( 2006 ), these standards are so basic and universal that “ they apply to all people in all States — regardless of the level of economic development .” The ILO pushes for improved labor standards in two ways . First , through international conventions where ILO members are encouraged to ratify “ conventions ” covering issues such as paid holidays and bans on child labor . Ratification of these conventions by an ILO member country typically makes it law within the country . Second , the ILO publishes , publicizes , and disseminates information on violations of conventions and core labor standards . The hope is that sunshine and peer pressure will work to engender reform within a country . Note , however , that the ILO has no formal enforcement power , and thus can not directly sanction or punish countries found to be in violation of agreed to conventions or core labor standards . This is important because in the eyes of many , the current method of encouraging improvements in labor standards has been ineffective , as evidenced by the failure to achieve worldwide universal core labor standards . This failure has led labor activists to suggest that trade policy be used as an enforcement mechanism to ensure compliance ( Brown , 2001 ). The primary mechanism that has been suggested has been as a part of WTO negotiations , but bilateral trade sanctions have been discussed as well . The issue of tying labor standards to trade agreements is an important one . Since the Industrial Revolution and widespread international trade between “ developed ” and “ less-developed ” countries , there have been concerns raised about a “ race to the bottom ” with respect to labor standards . At its core , this is an argument Joshua Hall is a professor in the Department of Economics and Management , Beloit College ( Wisconsin , USA ). Ricky Thorson is an economics student at Beloit College . Hall would like to thank the Visiting Scholar program at the Social Philosophy and Policy Center for its support . Thorson would like to thank the McNair Scholars Program at Beloit College for its financial and intellectual support . Both authors would like to thank participants at the 2009 SEA Conference in San Antonio , in particular Thomas Hogan and Peter Boettke . Laissez-Faire , No . 32 ( Marzo 2010 ): 56-66

__________________________________________________________________ about there being a “ prisoner ’ s dilemma ” situation among countries , where no country can unilaterally increase its labor standards without placing itself at a competitive disadvantage with respect to other nations . This idea that a failure of one country to improve its standards creates a problem for other countries wishing to do so is even enshrined in the ILO ( 2006c ) Constitution , which states that “ the failure of any nation to adopt humane conditions of labour is an obstacle in the way of other nations which desire to improve the conditions in their own countries .” Although not generally acknowledged by labor activists , implicit in this argument is that labor standards have a cost to those countries that adopt them . It was in this context of tying labor standards to trade agreements that then U . S . Ambassador to Guatemala , Prudence Bushnell , inserted herself into the Guatemalan legislative process in May of 2001 . According to some reports , Ms . Bushnell was unhappy with what she viewed as a limited set of labor reforms passed by the Guatemalan Congress in March of 2001 ( de la Torre , 2001 ). She threatened to kick Guatemala out of two preferential trade programs — the Caribbean Basin Initiative ( CBI ) and the General System of Preferences — if the Guatemalan Congress did not pass an additional 28 labor regulations . The economic consequences of losing less-fettered access to U . S . markets was clearly large , as the Guatemalan Congress passed 25 of these additional 28 regulations before the month was out . Included in these reforms were changes to the country ’ s minimum wage law , labor law administration and oversight , and measures to strengthen the power of union officials , such as exempting union officials from criminal prosecution for any actions that are the result of a strike ( de la Torre , 2001 ). 1 In the wake of her decision to insert herself into the Guatemalan legislative process , Ms . Bushnell was criticized for her actions in the pages of the Wall Street Journal ( de la Torre , 2001 ). These criticisms focused primarily on the fact that these reforms were bad for Guatemalans as a whole and would only serve to enrich a few special interests . While we view these criticisms as essentially correct in that they recognized that there exists an aggregate trade-off between more stringent labor standards and income levels , from the standpoint of positive economics there is a sense in which her call for higher standards ( but not necessarily her actions ) could be viewed as appropriate . Hall and Leeson ( 2007 ) examine the timing of labor standards in modern developed countries to find the income thresholds at which these countries — with no external pressure — were willing to tradeoff between labor standards and income . If Guatemala were above these income thresholds , then Ms . Bushnell ’ s call for increased labor standards could be viewed as part of the normal conversation 1 All of the changes could be viewed as strengthening existing labor standards . For example , Guatemala already had a minimum wage law on the books . The change urged by Ms . Bushnell was to give the Minister of Labor unilateral power in adjusting the minimum wage . Similarly , many of the reforms dealt with strengthening the power of unions . For our purposes , what is important is the argument that Guatemala ’ s labor standards at the time were too lax . Since they had some labor standards at the time , the threshold approach we employ in this paper is appropriate to addressing the question of whether Guatemala was ready for this strengthening of standards . __________________________________________________________________ Laissez-Faire 57

__________________________________________________________________ that occurs during the process of economic development . Using the comparative historical political economy approach most recently employed by Hall and Leeson ( 2007 ), we find that Guatemala was far from the income thresholds necessary for safe adoption of most “ core ” labor standards suggested by the ILO . 2 Since many of the proposals pushed by Bushnell were not new labor standards , but strengthening of existing standards , this suggests that a developmentally appropriate push would have been for relaxed labor standards in Guatemala at the time . Section 2 briefly describes the comparative historical political economy approach to labor standards that we employ . In Section 3 , we demonstrate that Guatemala was not ready for basic core labor standards , let alone strengthened minimum wage laws and collective bargaining rights . Section 4 calculates how many years Guatemala is away from reaching these income thresholds and the implications for various growth paths on the timing of their passing those thresholds . In Section 5 we conclude . 2 . Labor Standards and Comparative Development . Labor “ standards ,” in general , did not exist until the early part of the nineteenth century ( Engerman , 2003 ). According to Brown ( 2001 ) the first major labor stan- 2 This approach is as old as political economy itself ( Boettke , Coyne , and Leeson , 2009 ). Some other recent examples in a similar vein include Boettke ( 2002 ), Coyne ( 2005 ), Powell and Skarbek ( 2006 ), and Leeson and Trumbull ( 2007 ). dard was the English Factory Act of 1802 . From there , legislation restricting maximum hours worked of certain groups and working conditions spread slowly by country . In the United States , for example , the first real labor standard was an 1842 law in Massachusetts that restricted those under the age of twelve to a maximum ten hour workday . What is important to note about this spread of labor standards is that it occurred entirely because of internal pressures and did not require coordination among countries . Nor did it require any external “ carrots ” or “ sticks ” to provide incentives for countries to adopt higher labor standards . The fact that Great Britain , France , the United States , Japan and other countries were able to unilaterally increase their labor standards with little to no external pressure or coordination provides some evidence that a prisoner ’ s dilemma does not prevent developing countries from unilaterally raising labor standards . From a historical perspective , labor standards appear to be , in a collective sense , a normal good for which demand rises with income . At low levels of development it is too costly to have children not work or go to school , but at higher levels of income individuals begin to make that trade-off . At some point , so many individuals have made the trade-off that discussion turns toward codifying this change in practice into law . 3 The experience of currently developed countries in adopting labor standards thus provides a standard for evaluating whether currently developing countries are “ ready ” for more stringent labor stan- 3 This is why many of the ILO pressured labor standards are continually violated – because they do not meet the on-the-ground facts . __________________________________________________________________ Laissez-Faire 58

__________________________________________________________________ dards . 4 If the United States was not wealthy enough to outlaw child labor when its GDP per capita was under $ 1 , 000 , why should we expect that the Democratic Republic of the Congo would be able to do so today when it its residents are equally as poor ? Following Hall and Leeson ( 2007 ), we use the United States as our benchmark for establishing income thresholds . In many cases the U . S . was the leader in adopting labor standards and when it was not , it was not an outlier . Further evidence on the point that the United States is an appropriate benchmark can be found in Hall and Leeson ( 2007 : 664-65 ). imum wage laws were at a low amount and did not pose a binding constraint for a large number of workers . For our purposes here , the fact to note is that the U . S . thresholds were for the first national law passed , and thus represent a very low threshold . Nearly all of the changes in labor standards pushed by the U . S . Embassy in Guatemala represented a strengthening or extension of existing labor standards . Using the date of first U . S . adoption as the appropriate standard we thus are biased in favor of finding that the policies advocated by Ms . Bushnell were developmentally appropriate . In Table 1 , we list each major federal labor standard in the United States and the date of its passage . For example , slavery was outlawed in 1865 with the adoption of the 13 th Amendment to the U . S . Constitution . We then use the historical real GDP per capita series ( in 1990 international dollars , PPP ) of Maddison ( 2003 ; updated in 2009 ) to provide an estimate of the U . S . income threshold at the time . According to Maddison ( 2003 ), U . S . GDP per capita in 1865 was $ 2 , 445 per person . Some evidence of how the U . S . was not an outlier in terms of labor standards can be seen in Table 2 , which shows the comparative level of development for several countries ( and states within countries ) when they passed major child labor legislation . Note that for many of these standards in Table 1 , the changes were not sweeping . Child labor laws at first only slightly restricted hours of work in certain occupations ( children working in agriculture were often excluded , for example ). Min- 4 Again , to see a fuller argument in favor of this approach see Boettke , Coyne and Leeson ( 2009 ) and Hall and Leeson ( 2007 ). 3 . Guatemala Was Not Ready . Guatemala is at a lower level of development than the United States . This is also true of all of the countries in Central and South America that are in major trading agreements with the United States . Currently Guatemala is in a trading agreement with the United States and five other countries : Costa Rica , Dominican Republic , El Salvador , Honduras , and Nicaragua . The agreement , called the Dominican Republic – Central America Free Trade Agreement ( DR-CAFTA ), essentially is an attempt to create a free trade area similar to the North American Free Trade Agreement . In many respects , this agreement supplanted the Caribbean Basin Initiative for Guatemala in terms of trade with the United States . In Table 3 , we use Maddison ’ s data to identify the “ U . S . equivalent dates of development ” for the six non-U . S . DR- CAFTA countries . Guatemala ’ s 2001 GDP per capita ( in 1990 international $, PPP ) was $ 4 , 086 , which is developmentally equivalent to the United States ’ GDP per capita in 1900 . This places Guatemala as one of the wealthier and more __________________________________________________________________ Laissez-Faire 59