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Defragmenting 'Global Disintegration of Value Creation' and Labour Relations

This paper tries to interpret the nature of emerging labour relations in the manufacturing sector in the era of globalisation in India. It shows how high road employment practices can exist only if conditions of competition are violated. It also argues that it is the control over value that determines the choice of the social mode of production and not the other way round. While arguing that it is not value chains but value cycles that generate different social modes of production relations, the paper tries to establish the existence of a global cost chain, which ultimately is borne by the most insecure and vulnerable social groups caught in an irresistible structural transition.


Defragmenting ‘Global Disintegration of Value Creation’ and Labour Relations

G Vijay

This paper tries to interpret the nature of emerging labour relations in the manufacturing sector in the era of globalisation in India. It shows how high road employment practices can exist only if conditions of competition are violated. It also argues that it is the control over value that determines the choice of the social mode of production and not the other way round. While arguing that it is not value chains but value cycles that generate different social modes of production relations, the paper tries to establish the existence of a global cost chain, which ultimately is borne by the most insecure and vulnerable social groups caught in an irresistible structural transition.

I owe thanks to D Narasimha Reddy, Jan Breman, and Barbara Harriss-White who were very encouraging at different stages of the writing of this paper. I would also like to thank my colleagues at the Department of Economics, University of Hyderabad, who provided me with valuable inputs and helped me improve the paper. The cooperation and academic inputs of G Haragopal, Vanamala, Gudavarthy Ajay, Sanghamitra Mishra and my wife Krishnaveni are much appreciated.

G Vijay ( is at the Department of Economics, University of Hyderabad, Hyderabad.

1 Introduction

ven more than three centuries after its emergence, capitalism has remained a system of paradoxes and contradictions. Capitalism emerged after having offered stiff resistance to the monopolies of mercantilists and guilds. Adam Smith’s opposition to the state’s participation in the economy was b ecause of the monopolies it generated. Monopolies were the r esult of the patronage enjoyed by mercantilists, which hindered the growth of manufacturing industries and the bourgeois. To Smith, competition, not monopoly, was socially desirable. The rise of competition was coterminous with the rise of civil society. Civil society marked a change in the course of social processes, away from the rigidly hierarchical feudal social order with hardly any freedom for other contending social classes, an essential p recondition for enhancing productivity and for the generation of abundance.

Smith, who saw in the emergence of competitive markets the scope for greater division of labour, improved efficiency and the expansion of wealth, however, did not pay much attention to the problems of risk and uncertainty they give rise to. The problems with competition thus get a meta-social treatment in Smith. That competition entails social costs and that these costs have to be addressed or they will get transformed into political questions and social conflicts is validated by historical experience. Capitalism in the course of its development passes through phases of expansion and contraction that have different consequences for the different economic actors who are part of the process. The social costs of competition remain veiled during the phase of e xpansion, often taken care of by legally permissible compensatory solutions paving the way for advancing accumulation. There are also costs as a fallout of this process of expansion that remain unaddressed and are treated with a sense of social desirability because they have been characterised as costs suggestive of a process of “creative destruction”. It is the contraction phase of capitalism that poses an explicit social challenge. How societies that run on the lines of a free-market economy handle social costs during the contractionary phase of capitalist development reveals the paradoxes of capitalism not anticipated or analysed by Smith, who believed in unlimited possibilities for capital accumulation and saw in capitalism the potential for an unending secular growth process.

Marxist analysis, while admiring capitalism for its capacity to unleash productive forces, conceptualised the other side. M arxism unveils the anatomy of competition which is riddled with unequal exchanges and structural coercion. Capitalism in

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the course of achieving its primary objective of profits and selfexpansion uses competition as a means to generate and shift social costs through unequal exchanges brought about by historically and socially generated structures of coercion and control embedded in institutions (legal, political, social and so on). This gives rise to specific forms of division of labour and exchange between capital and labour; between rural and urban economies; between different sectors; between handicraft manufacturing and modern industry; between small and large scales of operation; and between rich and poor nations. Thus the myth of c ompetition is laid bare as the realities of exploitation and m onopolisation surface in what is seen as the historical and social path of capitalist development. Although this tendency gets r egulated, it seems to have remained unresolved even in varieties of capitalism with increasing degrees of distance from the f ree-market model.

While neoclassical institutionalists and evolutionary theories of economic history1 try to explain the rise of capitalism on the premises of efficient choices between alternative systems and adaptability to changing external conditions, respectively, Marx would differ with such frameworks. First, Marx would find a system of equivalent exchanges causing a surplus and the e xpansion of capital mysterious. The process of private surplus appropriation and capital accumulation cannot benefit all the actors involved in an exchange equally or, in other words, in a ccordance with the contribution the actors make to the generation of value. Thus, unequal contribution to value and its appropriation by structural coercion, a consequence of the ownership of means of production by capital, generates a relationship of power and dependence which has its roots in the institution of legally enforced private property rights, whose origins lie outside the purview of competitive processes. Thus the paradox of competition in a free market becomes the source of surplus and expansion. The dependent relation of “free” labour to capital for means of subsistence is the social condition for this unequal exchange2 (Marx 1977; Meek 1973). Second, Marx would contend that risk and uncertainty are not autonomous but innate to a capitalist s ystem. It may be deduced by extending the arguments of Marx that the socially and historically generated unequal capacities to cope with risk and uncertainty are the conditions that cause unequal exchanges between capitals with different scale, scope and speed, between different classes, between c ommodity segments, between diffe rent sectors, between r egions within national boundaries and between different n ations. Business cycles become necessities for the self-expansion of capital, the costs of which are shifted to other actors in the larger society (Rosa Luxumberg). Based on the above premises and framework of analysis, this paper tries to interpret the processes of capitalist development in an era of globalisation and the nature of emerging labour relations in the manufacturing sector in I ndia.

The second section of this paper reviews different models of “high road labour relations” and shows how high road employment practices can exist only if conditions of competition are v iolated. The third section argues that it is the control over value (surplus) that determines the choice of the social mode of production and not the choice of social mode that determines control over generation of value. This section shows that under mono poly and oligopoly, control over value is held by producers of certain nations and producers of other nations can survive only by accepting an unequal position, which, in turn, leads to low road labour market practices. The fourth section shows that it is not value chains but value cycles that generate different social modes of production relations. It is as a consequence of value cycles that the production relations between different producers reinforce and institutionalise global inequality of production relations, which form structured networks called Global Value Chains (GVC). Value cycles make unequal power relations between producers necessary and inevitable. And these power relations between producers do not manifest their levels of competencies but the unequal relations between and within the societies that enter into production relations. The fifth and concluding section argues that the new production arrangements and networks generated by the so-called GVC e ntail enormous social costs to working classes and countries engaged with producers not in control of value. They work in favour of producers and countries that are in control of value in the process of value cycles. This section tries to establish a structural relationship between social costs that are manifested in the form of rural distress conditions, which get aggravated simultaneously as a consequence of the emergence of GVC. They, in turn, play an important role in providing the necessary social conditions for shifting the costs of the super normal surplus appropriated by monopolist and oligopolist producers of dominant capitalist countries on to the dominated economies. This section tries to establish the existence of a global cost chain, which ultimately is borne by the most insecure and vulnerable social groups caught in an irresistible structural transition. And unless society in general and policy in particular address the causes of rural distress, even within the GVC framework, there will be no social pressure on capital to become more innovative or to move up the value chain.

2 Competition, Labour and Employment

Sustained growth and social mediation have been the two sources of betterment of conditions of work for labour. Protagonists of the market, who believe that markets (regulated or otherwise) can deliver social welfare, right from classicals to different strands of liberal economists, have held this view. The role of social mediation in delivering quality of life for labour gets nullified in conditions where growth itself is constrained. All classical economics scholarship (with the exception of Smith) and its greatest critic Marx saw the growing crisis of growth in capitalism based on different perspectives and analyses. A bleak future is what is painted on the abstract canvas of a systematic theory of capitalism in the making. The resolution comes in Marx, in the form of a social revolution and transformation of the mode of production, away from the uncanny scepticism and irresolvable cynicism emanating from a reading from within of the direction of the dynamics internal to the d evelopment of capitalism.

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Two contemporary contributions to the debate on the labour market also focus on the significance of sustained growth and social mediation.

2.1 Hayek and Solow on Competitiveness and Labour Markets

Hayek (1980) tried to analyse the role of trade unions in Britain during the 1980s. He believed that they were exercising coercion and the role they played was not in the interests of society. The power of the unions and the legal exemptions provided to them under British law became a matter of contention at a time when the country was passing through a phase of stagnation. The conflict was seen as a choice between the right to association and the individual liberties of certain sections of workers excluded by the unions. It was an attempt to portray the internal contradictions within different sections of the working class to draw a moral justification for advocating free-market practices in the labour market. When trade unions used their coercive power to fix wages above the open market wage rate, it led to adverse outcomes for the economy as a whole. Trade unions were seen as exercising a monopoly power leading to segmentation of the labour market and unemployment, which was not in the interest of the sections of workers excluded from the labour market. Further, it had led to inflation, causing adversity in terms of the real wages of the lower segments of workers. The analytical frame advocates the treatment of labour as a commodity in the name of freedom of choice and the individual liberty to bargain. In its articulation of sympathies for the excluded and the deprived is the assertion that the determination of wages must be left to market forces and marginal product. The need for flexibility in place of rigidities caused by policy interventions in the labour market and the unsustainability of growth of capital is the underlying concern throughout the analysis.

Quite contrary to this, Solow (1990), who may not differ with Hayek in his admiration for the free market, argues that higher wage rates are reflective of the idea of fairness, which has an impact on the motivation and thus on the efficiency of workers. He argues that labour as a commodity has this peculiar character of being vested in human beings and therefore the quality of this commodity is mediated by the motivation of workers. If workers feel that the going wage rates are unfair, it could hamper efficiency levels and thus prove to be counter-productive from the point of view of the producers. Another dimension is the effort of producers to retain highly skilled workers since replacement costs could be higher. It is therefore advantageous for the producers to pay workers a wage above the market wage. Solow believes in the inevitability of social regulation seen in the cooperative behaviour among different segments of workers. Collective action of workers for Solow, unlike for Hayek, is not a problem but very much part of the ordinary process of the market. However, Solow simultaneously holds that this social regulation ceases under conditions of high levels of unemployment, which already hints at the emergence of Hayek’s flexibility during the contraction phase.

Thus, within a free-market logic, both the arguments – first, of Hayek, that a higher than market wage is unsustainable and

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u ndesirable since it hinders the interests of the larger society, and second, of Solow, that a labour market is a social institution and therefore to pay higher wages to workers advances the interests of the producers and does not necessarily hamper the prospects of other workers in society – seem to have a sound logic and rationale. How do we reconcile these apparently conflicting approaches to the labour market? These perspectives, it may be argued, reflect two different phases of capitalist development. While Solow’s optimism is driven by the expansionist phase of capitalism where increasing returns could be expected by employers, Hayek’s pessimism is shrouded by the loss of the manoeuvring power of capital during the contracting phase of the same system. As a consequence, it is to the difference in the underlying phases of capitalism that Hayek presents a static notion of efficiency and Solow offers a dynamic concept of efficiency.

If Hayek’s and Solow’s analyses are to be reconciled from the standpoint of labour standards, then the challenge before capitalism is to ensure sustenance of the expansionary phase so that labour can be valued high. How can capitalism possibly engage with the problem of uncertainty underlying competition in the course of this expansion? This question requires an analysis of the relations between competition for expansion of accumulation, business cycles, uncertainties and labour standards.

In this context it is pertinent to discuss William Lazonick’s innovative business organisation model and Michael Piore and Charles Sabel’s flexible specialisation model, both of which address the above-mentioned problems while simultaneously proposing two different “high road” models of industrial relations. Both these models present different solutions to the daunting problem of accumulation, competition, business cycles and uncertainties in capitalism. By analysing both these approaches, which claim to preserve “high-road” labour relations while resolving the problems of capitalism, we bring forth the paradoxes underlying capitalist development.

2.2 The “High Road” Models of Labour Relations

Innovative Business Organisation Strategy: Lazonick (1991) a nalyses the role of a business organisation in advancing the

o bjective of accumulation. He begins with the premise that a “high road” strategy of industrial relations and the objective of accumulation can be reconciled if a business organisation adopts an innovative business strategy. In this context, he compares the analyses of business organisation by Alfred Chandler and Oliver Williamson (1981).

Chandler argues that business organisation plays an important role by achieving vertical integration of the production process, as a consequence of which producers achieve higher productivity and speed economies, which then help them convert high fixed costs into low per unit costs.

Williamson on the other hand looks at the role of business organisation from the standpoint of reducing transaction costs. In a competitive economy where price is a given, business organisation helps the producer make adaptive sequential decisions, thereby equipping him with coping strategies that identify possible ways of reducing the cost of production.

Lazonick argues that the role of business organisation and the quality of labour relations are determined by the choice of business strategy. He points out that the two types of business strategies mentioned above can be characterised as an innovative business strategy and an adaptive business strategy, respectively. When an organisation chooses an adaptive strategy, it may increase the amount of human and physical resources applied to productive activity and it may add to its capital stock. However, unlike an innovative organisation, the adaptive organisation does not enhance the productive capabilities of these resources. An adaptive business strategy tries to minimise the costs of production or cut costs to maximise profits instead of increasing the productive capacities of existing factors and inputs. Lazonick identifies his strategy for achieving “high road” industrial relations as being closer to Chandler’s approach. He points to the large companies operating in Japan to illustrate his innovative business organisation model.

Lazonick maintains that the basic economic problem every decision-maker in a firm faces in choosing an investment strategy is the uncertainty of realising a financial return. He points out that there are two types of uncertainties.

  • (i) Productive Uncertainties: These uncertainties are faced by innovative business organisations which invest in research and development with the objective of evolving a new product or a new process that would give it an advantageous position in the market. These uncertainties are further classified into product and process-based uncertainties. When an investment is made in evolving a new product, the investor is not sure of being able to evolve such new qualities as would have some utility for a large number of buyers of the product. Similarly, when an investment is made in evolving a new process for producing an existing product, an investor is not certain of evolving such a process as would give him an economic advantage over his rivals.
  • (ii) Market Uncertainties: Market uncertainties refer to the uncertainties faced by an investor as a consequence of fluctuations in the cost of production and the returns he can expect owing to fluctuations both in the supply of factors and demand for the final product.
  • Lazonick maintains that an innovative firm will have higher fixed costs since it invests more in research and development, and in human resources. Through higher economies of scale, it may outdo low capital competitors. However, since low capital competitors can lower the prices of their goods by cost-cutting strategies, the innovative firm needs to gain control of a sufficient market share.

    This control over a significant proportion of market share is achieved in two stages of value creation and appropriation.

    (i) Value Creation: By transforming previously unknown technologies into product and process innovation, product uncertainty is overcome. Technological change overcomes previous limitations on human skills. There is more extensive specialised division of labour as a consequence of which there is greater coordination, which leads to maximisation of collective productive power. This is realised in the form of speeding up the flow of work – speed economies.

    (ii) Value Appropriation: Through vertical integration, a business organisation develops backward and forward integration of its activities. It develops an assured supply of quality raw materials through backward integration and mass distribution facilities that reach customers far and wide by forward integration. These are aimed at securing the existing demand for its commodity, thereby ensuring a sufficient market share. Thus vertical integration leads to the development of organisational capability that can overcome competitive uncertainty brought about by supply and demand uncertainties.

    Success of the innovative strategy means opportunities for gaining significant market power. Investing in innovation makes existing technologies obsolete and thus secures an oligopolist position for the innovator. More so in the context of the Intellectual Property Rights (IPRs) regime. Once the innovator firm secures sufficient market share, it may resort to predatory pricing to increase competitive uncertainties for adaptive firms. By doing so, the innovative firm gets rid not only of product but also competitive uncertainties.

    This control and dominance, according to Lazonick, has deep implications for the “high road” labour strategy that the business organisation can adhere to. In the context of labour markets, a cognitive problem, a behavioural problem and an asset specificity problem are seen as requiring solutions. The cognitive problem is a knowledge problem because a business organisation lacks the possibility of knowing the future. The behavioural problem is the problem of opportunism manifested in shirking of work and such activities, and the asset specificity problem has to do with the opportunistic behaviour of employees who choose to work with other firms offering higher wages and emoluments when investments have been made in developing skills among them. Lazonick argues that an innovative business organisation offers “high-powered incentives” by linking the success of the organisation to the returns and benefits of the workers. Usually the investment in human resources is higher in innovative firms and they provide long-term career opportunities to their employees. The employees in an innovative firm may not evince opportunistic behaviour because they have long-term incentives in their organisation securing a price maker or oligopoly status as a consequence of which they reap benefits. In the case of an adaptive firm, the “high powered” or long-term incentives are absent because it has no possible control over the market. These business organisations suffer greater uncertainties and they shift these to the employees by engaging in cost-cutting strategies to adjust to changing market conditions. As a consequence an adaptive firm has no scope to give its employees any long-term prospects, which, in turn, increases opportunistic behaviour among its employees. This process builds adverse relations between the business o rganisation and its employees. Thus the innovative business o rganisation, according to Lazonick, provides an important strategy for achieving “high road” labour market practices and resolving the adverse relation between capital accumulation and labour.

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    However, a high fixed cost business organisation with dedicated technology and skills in itself could be a liability in the phase of contraction of capitalist development. Another “high road” labour market strategy attempts to grapple with the complex issues ignored by Lazonick’s model. Industrial Districts Strategy: The second model of high road labour relations strategy is presented by the industrial districts literature as a flexible specialisation model. The high fixed cost, vertical integration model requires sustained demand for the fixed costs to be recovered. However, under conditions where the life cycles of the commodities produced become very short due to the changing tastes of consumers or due to an increase in the rate of innovations, high fixed cost investments, vertical integration and mass production become a source of liability and risk in itself. Far from leading to an innovative business organisation model, such industries may be forced to resort to the cost-cutting measures, victimising l abour. As an alternative, therefore, an innovative improvisation of small-scale production is seen as having the potential to d eliver high road labour market practices. Pyke, Becattni and Sengenberger (1990) point out that “the crucial characteristic of an industrial district is its organisation. That is to say that economic success for the industrial district has come not so much through advantageous access to low cost factors of production – cheap labour, land or capital – as from a particular effective s ocial and economic organisation based on small firms” (3). They take the experiments of industrial districts in Italy to illustrate their model.

    Small firms develop strong networks among themselves and through specialisation and subcontracting share the labour and other fixed costs to promote collective capabilities to face the u ncertainties of a fast-changing market. Some of the characteristics of these networks are that they: (i) Belong to the same industrial sector; (ii) are geographically bounded; (iii) enhance entrepreneurial dynamism; (iv) provide protection from domination of and dependence on large firms; and (v) build collective competitiveness through trust and cooperation.

    Beginning with the 1970s, scholars observe an expansion of small-scale industries in several parts of Europe. They argue that this has happened because small firms are capable of being better shock absorbers of economic cycles (8-9). They contend that a lthough large firms still enjoy a lot of influence and power and will not disappear, there will certainly be a change in their

    o rganisational complexion. It is observed that there is growing decentralisation, devolvement and disintegration of large firms as part of the process of grappling with the growing uncertainties of economic cycles.

    The industrial districts model provides a method for smallscale firms to overcome the disadvantages they suffer vis-à-vis large-scale corporations. It is maintained that the “small firm can become ‘big’ through collective organisation and concerted a ction. The main problem for small firms is not being small but being lonely. What this metaphor means is that small firms as i ndividual entities, acting on their own, are in a poor position to compete. They lack the resources and the economies of scale and scope normally available to large companies; and they lack the political voice necessary for influencing their economic and p olitical environment” (11).

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    Subcontracting and dividing up of orders allow individual companies to accept orders beyond their normal manufacturing capacities, and collaborating at different phases of production c ycles help them jointly develop the most appropriate technical specifications and designs. Firms can also collaborate to train l abour for the district as a whole. Whereas in a competitive environment small firms unable to afford to train their own labour will compete strongly to take as much as they can from an ever diminishing pool, in a regime of cooperation and trust, the same firms will combine their resources to ensure a collective provisioning of skills and services. The cooperation then takes the form of “good neighbourliness” – lending of tools, helping out with spare parts, passing on advice, assistance in emergencies and so on.

    Based on the above understanding, Pyke, Becattini and S engenberger (1990) distinguish between two broad approaches of enterprises, industries and regions in responding to the challenges of international competition.

  • (i) The first termed as the “low road” to industrial restructuring seeks competitiveness through low labour costs and a deregulated labour environment. It is believed that cost-cutting will boost productivity and profits, and create new employment. However, the problems with the model are that “poor wages and terms of employment hinder the firm in acquiring and keeping the qualified labour needed for efficiency and flexibility; and they rarely induce the firm to invest in its labour force to make it more productive. So in the absence of better performance and alternative possibilities, further cost-cutting may become inevitable, resulting in a vicious downward-spiralling cycle.”
  • (ii) An alternative to such destructive competition is the “high road” of constructive competition, based on efficiency enhancement and innovation through cooperation. Each small firm in the industrial district specialises in one of the vertical stages of production and they together act like a single enterprise. Through its economic gains, this model contributes to enhancement of wages and improvement of social conditions. It safeguards workers’ rights and provides for adequate social protection. This model claims that to make labour more productive, labour standards are required. They are required to curb destructive downwarddirected competition in wages and working conditions; and promote constructive competition through cooperation and its subprocesses of participation, joint resource utilisation and joint conflict resolution. Cooperation is needed for exchanging information and thereby achieving common efficiency. It cannot be sustained without a trusting relationship among firms and b etween employers and workforces; we know from studies that a mutual understanding or agreement not to undercut wages and violate laws is often required to maintain trust. Collectivity e nhances the competitiveness of the small firms that are part of the network by collectively providing for the necessary research and development and design costs, the costs involved in the training of skilled labour, and the necessary scale of operations to maintain expensive capital equipment. This model also has the advantages derived from geographical proximity, and synergy effects derived not only through reduced transportation costs and transaction costs but also from continuous communication.
  • Internationalisation of Cooperative Model: In both the above models we observe that business organisations try to overcome the uncertainties and disadvantages that are part of the p rocess of competitive capital accumulation and preserve high road labour relations. The first model deals with the advan tages of engaging in high fixed costs, large-scale production, which through product and process innovation e nhances productivity and through vertical integration derives scale advantages. This model deals with the expansionary phase of capitalism. It anticipates a large and sustained demand in the market.

    The second model addresses the uncertainties and disadvantages faced by business organisations in times of a slump. This model therefore talks in terms of pooling and cooperation b etween small-scale production units facing different types of uncertainties associated with shrinking markets and the shortening life cycles of commodities. Under such conditions, where the first model is likely to fail, small-scale undertakings can have greater advantages in achieving innovation or retaining market dominance.

    The second model projects itself as an indigenous and decentralised development that challenges the monopolisation tendencies triggered off by large corporations under the first model. This claim however seems quite hollow for two reasons.

    One, the opportunity to forge non-competitive structures in this cooperative capitalism is not open to all but is restricted by geography, number of participants and so on. While developing a challenge to large-scale corporations, it does not resolve the problem of monopolisation. This model reinforces a different kind of cooperative and collective dominance vis-à-vis actors who are not part of the industrial district.

    Two, we observe that in response to the growing challenge of small-scale industries, large-scale industries have responded by diversifying their products and by resorting to outsourcing of production. The first method restricts the shift of market dominance from single large corporations to a cooperative and collective market dominance by small firms to limited commodity segments. The second method develops structures and organisational forms of production that reinforce the unequal relations between small-scale and large-scale enterprises. Far from small enterprises contributing to decentralisation of production, they contribute towards fulfilling the accumulation objectives of large-scale corporations.

    The optimism evinced in the industrial districts model of Pyke, Becattni and Sengenberger is further heightened by Piore and Sabel (1984), who go much beyond in exploring the possibilities of cooperative production. For Pyke, Becattini and Sengenberger, the relevance of cooperative production between smallscale actors is to the e xtent of challenging the monopolisation tendencies of large-scale industries and promoting decentralised regional d evelopment. However, for Piore and Sabel the project is much larger and more promising as they maintain that through the internationalisation of the flexible specialisation model, the rich north and the underdeveloped south can both mutually benefit in overcoming uncertainties thrown up in the course of competitive accumulation without victimising labour.

    Piore and Sabel see possibilities of prosperity in the international flexible specialisation model which they say integrates the economies of the north with the south. In the post-oil crisis scenario, they argue, rising costs of production and stagnating markets in the north provided the context for international flexible specialisation, changing the technological paradigm and regulatory system. The new context made it advantageous for the large-scale, vertically integrated mass-production technologies of the north to outsource their production to the small-scale, craft-based, multi-product technologies of the south. Production of multiple commodities with a low fixed cost commitment, it is maintained, can help cope with the problems of uncertainties caused by business cycles in any single commodity market. This advantage cannot be enjoyed by specialised dedicated, high fixed costs, large-scale technologies which are associated with the vertically integrated Fordist mass-production models that require sustained demand until they recover their fixed costs. This model not only helps the large-scale industries cope with the uncertainties caused by business cycles but also increases the productivity levels of third world capital and labour. This new accumulation initiated by international flexible specialisation also opens up the possibility of new demand being generated in the poor economies, helping the rich economies grapple with the problem of stagnating demand for commodities in their own markets. This model thus looks at the process as mutually beneficial to the north and the south.

    To be successful, this model requires

  • (1) Expansion of demand in the poor economies along with e xpansion of productive capacities, leading to the sustainable i ntegration of developing and developed markets.
  • (2) Stabilising the global economic environment by standardising the institutional mechanisms dealing with determination of exchange rates and controlling inflation. This leads to less uncertainty in the global trade environment, leading to expansion of global trade.
  • (3) Cooperation between developed countries for achieving appropriate productive capacities by agreeing to ration the available global investment opportunities among themselves.
  • The proponents of this framework point out that post-oil crisis conditions of uncertainty force vertically integrated, dedicated specialisation, mass-production technologies to cut costs, c ausing a reduction in wages, sweat labour, exploitation and the breakdown of innovation due to the high costs of retooling. The flexible specialisation model prevents these and leads to a more labour-friendly regime. Regional conglomeration or industrial districts operating through guilds, cooperatives and unions; federated enterprises such as the zaibatsu system in Japan; s olar firms and ancillary models; and the factory-workshop models in Europe are seen as some of the production forms that mirror the decentralisation and cooperation of the flexible specialisation model.

    The experience suggests, however, that there is no systematic pattern either in the disappearance of vertically integrated, dedicated specialisation, mass-production based business organisations or in rising productivity levels of capital and labour in all the poor nations engaged in subcontracted or outsourced

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    p roduction. The latter process was envisaged to translate into general development of developing economies as a whole by P iore and Sabel. A deeper probe is called for, which has led to the rise of a new framework of analysis focusing specifically on governance structures and their relation to development called the GVC analysis.

    In the models that have been presented, the problem of labour relations, accumulation and the choice of the social mode of production is addressed as a relation between the producer’s sustained capacity to control an enhanced value based on increased productivity and reduced costs. This is achieved either through innovation in a vertically integrated large-scale business organisation or production based on mutually beneficial cooperation among small producers within a nation or networking between large and small producers internationally (between rich and poor economies), which leads to an absolute improvement in the value controlled by each of the producers in relation to their own initial position. The GVC analysis deals with the problem of labour relations as a consequence of the relative control over value exercised by producers within different forms of production networks. In this, the problem of unequal control over value by different producers of a common production network operating through cooperation or coordination is crucial in determining the quality of labour relations. The control over value that a producer can exercise is determined by the independent value addition capacities of each of the producers in a particular production network, which is likely to influence the relative shares in the value generated. With reference to networks of production i nvolving different types of producers and production systems, the focus of the GVC analysis is on the relative improvements brought about by new organisational and technological forms of production that determine the prospects for high road labour market practices.

    Thus while the models presented above discuss the possibilities of maintaining high road labour relations through enhancing surplus owing by shifting between different modes, the GVC model discusses the possibilities of high road labour relations by enhancing the share of surplus within different modes.

    3 Value and Social Modes of Organising Production
    3.1 Global Value Chains and the Appropriate Path to Development

    Gary Gereffi, John Humphrey and Timothy Sturgeon argue in what is considered a path-breaking work that globalisation of production and trade have led to the growth of industrial capabilities in several developing countries because of vertical disintegration by transnational corporations that are

    redefining their core competencies, to focus on innovation and product strategy, marketing, and the highest value added segments of manufacturing and services, while reducing their direct ownership over “non-core” functions such as generic services and the volume production. Together, these two shifts have laid the groundwork for a variety of network forms of governance situated between arm’s length markets, on the one hand, and large vertically integrated corporations on the other…the evolution of global-scale industrial organisation affects not only the fortunes of firms and the structure of industries, but

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    also how and why countries advance or fail to advance – in the global economy. Global value chain research and policy work examine the different ways in which global production and distribution systems are integrated and the possibilities for firms in developing countries to enhance their position in global markets” (Gereffi, Humphrey and Sturgeon 2005: 78-79).

    The organisational structure of cross-border production sharing is seen as being explained by institutional factors. If separation of ownership is possible, then cross-border production sharing is possible. Where it is not, multinational corporations and foreign direct investments in vertically integrated business

    o rganisations are seen to be the more likely organisational form. The mode of organising production, it is argued, flows from weighing the benefits from vertical integration against the benefits from outsourcing of production. Although acknowledging the rationale of the transaction costs approach, one would o bserve vertically integrated organisations where inter-firm interactions are faced with a high (i) risk of opportunism; and (ii) costs of coordination.

    The scholars however maintain that the network actors i nvolved in modes of organisation associated with inter-firm i nteractions evolve methods and mechanisms to avoid high t ransaction costs through (i) repeat transactions with built-in reputation incentives; and (ii) regulation of behaviour based on social norms.

    It is also maintained that in-house production may not always be advantageous or beneficial, especially if the producers

    (i) are able to retain competencies of complimentary firms by using it for purposes; (ii) that are difficult to replicate; (iii) are engaged in production of inputs which are infrequently used; (iv) have to invest heavily in imparting skills to in-house workers; and (v) have a competitive advantage in focusing on core competencies.

    Based on these calculations, GVC characterised as “buyerdriven chains” are generated. Buyer-driven chains denote how transnational corporations and other international buyers use explicit coordination to help create highly competent cross-border, inter-firm networks. These networks act as an industrial organisation which becomes the supply base on which globalscale production and distribution systems can be built without direct ownership. According to the scholars, these networks play a more significant role in the existing global process of coevolution of industrial organisation than vertically integrated organisational forms.

    They argue that “from transactions costs to global commodity chains to organisational theory – market-based relationships among firms and vertically integrated firms (hierarchies) make up opposite ends of a spectrum of explicit coordination”, and the network relationships comprise an intermediate mode of value chain governance. They go on to develop typologies of n etworks that are possible, each based on the different requirements of global buyers. (1) markets: involving repeated transactions; (2) modular value chains: suppliers make products to a customer’s specifications; (3) relational value chains: managed through reputation, family or ethnic ties; (4) captive value chains: high degree of monitoring and control by lead firms of transaction-dependent supplier; and (5) hierarchy: vertically i ntegrated business organisation.

    Based on three variables, namely, (i) Complexity of transactions; (ii) Ability to codify transactions; and (iii) Capabilities in the supply-base, the degree of explicit coordination and power asymmetry in the value chain governance is determined. The analysis maintains that

    in captive global value chains, power is exerted d irectly by lead firms on suppliers, which is analogous to the direct administrative control that top management at headquarters might exert over subordinates in an offshore subsidiary or affiliate of a vertically integrated firm (or hierarchy in our framework). Such direct control suggests a high d egree of explicit coordi nation and a large measure of power asymmetry with the lead firm (or top management) being the dominant party. In relational global value chains, the power balance between the firms is more symmetrical, given that both contribute key competences. There is a great deal of explicit coordination in relational value chains, but it is achieved through a close dialogue between more or less equal partners, as opposed to the more unidirectional flow of i nformation and control between unequal partners as in captive global value chains and within hierarchies. In modular global value chains as in markets switching customers and suppliers is relatively easy. Power asymmetries remain relatively low because both suppliers and buyers work with multiple partners (Gereffi, Humphrey and Sturgeon 2005: 88).

    The more general inference drawn from this research is that “increasing capabilities in the supply base have helped to push the architecture of gvc away from hierarchy and captive networks and toward the relational, modular and market types” (Gereffi, Humphrey and Sturgeon 2005: 96).

    The next section tries to look at these processes and the prospects for improving the quality of labour relations differently, and builds a critique of the GVC analysis.

    4 From Value Chains to Value Cycles

    The trajectory of the intellectual discourse presented above needs to be briefly summarised and also structured for addressing the purpose before us, namely, explaining the various

  • o rganisational forms of engaging in production and the quality of labour relations in them. We began by discussing two a pproaches to labour, by Hayek and Solow, both of which came from admirers of free markets yet present very different perspectives – one which handles labour like a commodity and a nother which characterises labour as a social institution whose efficiency is determined by social appreciation of fairness of wages (and maybe other conditions). We asked the question whether these perspectives represent two different phases of a certain system of production.
  • We then moved on to analyse different forms of business
  • o rganisation, (i) the innovative vertically integrated business organisation; and (ii) the industrial districts model that address these different phases and found that in both the phases there are organisational forms and strategies that can achieve high road labour practices. However, we identified that in both these models there is the emergence of technological or regional cooperation-based non-competitive structures.
  • From here we progressed to a model called the internationalisation of flexible specialisation which is a globally b eneficial model where the north and the south can mutually

    92 benefit from technological innovations and cross-border production n etworks.

    Following this, the GVC literature was discussed. This describes different forms of networks that exist globally in the present context and goes on to identify variables that determine governance structures, stating that it is the competences of suppliers that d etermine their power in these networks.

    Reading backwards we infer that four of the five models presented in the GVC analysis seem to be based on a non-competitive category called the lead firm. This category seems quite familiar, perhaps, similar to the innovator that Lazonick proposes based on Chandler’s version of how business organisations achieve market dominance. The innovator, in fact, originates from what Gereffi and others call an integrated firm. And from hereon, there are different organisational forms that modes of organising production can take, modular, relational and captive network relations between the lead firm and others, which perhaps is a valid presentation of the hierarchy of power relations. And the market like always is a mythical category or is actually a qualified network of one of the models already presented, depending on the nature of the power relations between the actors. But the core questions that need to be addressed are why does the innovative business organisation of Lazonick become a lead actor in Gereffi eventually? How can these multiple forms of relations of the lead actor with its networks be explained and what are the inferences we can draw from it with respect to labour market practices?

    It is perhaps far more meaningful to argue that the explanations for the existence of different social modes of production must be looked for in the production process itself rather than in the uncertainties explanation or in the institutional process e xplanation. It can be argued alternatively that different forms of organising production can be better explained by what could be termed a commodity value cycle rather than a commodity value chain. A commodity value cycle is an analytical category that r efers to an almost generic process where every commodity has a life cycle in which it begins by being highly valued and then moves on to diminish in value due to a combination of reasons. More specifically, the s ocially necessary labour time for the production of a commodity secularly declines, causing a decline in value. Every innovation i nvolving enhancement of productive c apacities earns its innovator super-normal profits. However, in due course the value of the commodity declines. If profitability or surplus for producers must remain high in the face of the declining value of commodities, exchange relations in the mode of o rganising production must change. Thus, as the value of a commodity diminishes, especially diminishes gradually and incrementally, it causes changes in the social organisation of production, aimed at keeping profits high for the producers. It is in this course of the diminishing value of a commodity that the social mode of production moves away from the vertically integrated innovator model. We find that this shift in the first phase could take the form of a modular and relational lead firm and supplier relations quite similar to the industrial districts model arising. A further reduction in the value of a commodity may bring about the captive suppliers model which may have similarities with what are called cost-cutting or sweatshop business organisations. To look at the different forms or modes of

    may 30, 2009 vol xliv no 22

    production as emanating from a single process leads us to the inference that the coexistence of different modes of business organisation is an intrinsic necessity of the process of accumulation faced with the challenge of declining value life cycles.

    Each mode of s ocial organisation of production represents a phase the value c ycle of a commodity can sustain. It is the value of a commodity that determines the sustainability of a particular mode of social organisation of production and not the social

    o rganisation of production that determines the value of commodities in a system whose fundamental motivation is profit-making. Therefore, as the social valuation of a commodity decreases, the returns to the producer can be sustained only if the social organisation of production takes on more naked and extreme forms of exploitation. This model of understanding also makes explicit the superfluity of the claim that e nhancement of the core competence of suppliers makes them less prone to domination of the lead firm. It can be asserted that these multiple forms of organising production essentially represent the nature of social relations between societies forging production network relations themselves. It is because of these relations that particular social modes of production become material realities between particular societies. It is the nature of unequal social relations that permits unequal relations of power between different actors. What holds true between producers at least analytically holds true to the relationship between employers and employees. And therefore we may associate the location of modular and relational networks to regions with relatively evolved civil societies while the location of captive networks would be in nations with uncivil social relations.

    5 Conclusions

    If some element of truth exists in Smith’s observation that competition and the rise of civil society are interlinked processes, then monopolisation and domination, the characteristic features of high road labour relation models, must logically lead to uncivility in the social organisation. If GVC are only a phenomenal form of the value cycles of commodities, the coexistence of low and high roads of labour relations is inevitable. This is not to say that the structure of the relations between actors in GVC is a rigid and unchanging one. The specific regional and social locations of captive networks could change, some specific industrial groups in some countries which were in the captive mode of networks could change to better modes. However, when GVC are treated as a whole, as a system, we observe that unequal relations between actors is inevitable and persistent.

    While these inequalities in production networks between producers of different nations are linked to the control of value on the one hand, the other side of this process is linked to the level of social development and its definition of subsistence for labour. Subsistence, in turn, is determined by both quantitative and q ualitative factors.

    Demand and supply of labour in classical explanations have played only a partial role in determining wages. It is well accepted that changing conditions of production in rural production systems set off by the entry of capital causes a breakdown of erstwhile social relations of production and triggers a rise in circulation of labour because of proletarianisation. This process is

    Economic & Political Weekly

    may 30, 2009 vol xliv no 22

    f ollowed by deskilling of labour and an excess supply of unskilled labour causing a deterioration in the value of labour power, seen in informalisation and the deterioration of labour relations (Guy Standing 1985). However, the quantitative explanation of wage determination presents only the impact of technical conditions on the determination of value of labour power. It does not bring into debate the social conditions – social norms, state regulation and collective action – which are equally important. The quantitative explanation therefore does not completely capture the qualitative dimensions influencing the quality of labour relations. It does not, for instance, explain the behaviour of an intolerant contractor burning alive workers who demanded their wages in Kerala3 (The Hindu 2009). It does not explain trade union leaders mobilising workers being implicated in false criminal cases in new industrial towns, which has its roots in the increasingly fragmented and conflicting nature of social relations (Vijay 2003). It does not explain the death of Shankar Guha Niyogi and the quality of capital in nexus with a mafia4 (The Hindu 2005). It does not explain the brutality unleashed by the state on workers in G urgaon.5 And this brings into analysis the quality of society i tself. The fixing of wages is also determined by social mediation in which a society asserts what its subsistence wage is.

    Marx argues that

    if the owner of labour power works today, tomorrow, he must again be

    able to repeat the same process in the same conditions as regards

    health and strength. His means of subsistence must therefore be suffi

    cient to maintain him in his normal state as a labouring individual. His

    natural wants, such as clothing, fuel, and housing vary according to

    the climatic and other physical conditions of his country. On the other

    hand, the number and extent of his so-called necessary wants, as also

    the modes of satisfying them, are themselves the product of historical

    development, and depend therefore to a great extent on the degree of

    civilisation of a country, more particularly on the conditions under

    which, and consequently on the habits and degree of comfort in which

    the class of free labourers has been formed. In contradistinction there

    fore to the case of other commodities, there enters into the determina

    tion of the value of the labour power a historical and moral element

    (Marx 1977: 168)

    An increase in the availability of unskilled workers is a quantitative explanation for a decline in wages and other conditions of workers but together with this, the absence of a socially-defined, norm-based minimum in low road labour relations is due to the lack of such a society for certain sections of workers.

    Rural distress witnessed after structural adjustments have a ccentuated circular and oscillatory migration processes. These patterns of mobility do not merely cause excess supply of workers but also social, cultural and political displacement of people. These processes have led to vulnerabilisation of disadvantaged social groups. Vulnerabilisation, in turn, contributes to the generation of uncivil social relations. The growth of uncivil social relations (Gudavarthy and Vijay 2007) has its explanation in the search for labour markets that can engage in the production of commodities at the lower end of value cycles. While high road labour market strategies suffer from a fragmented perspective of labour standards, ignore the persistent problem of different types of monopolisation and the externalisation of social costs6 which seem to sustain the high quality standards in the labour market, the commodity fetish framework of analysis of Gereffi and others suffers from a fragmented view of powerlessness. These c ompetence to move up the value chain suggests appalling ignoa pproaches quite conveniently avoid the embarrassing ques-rance of the socially degenerating nature of relationship between tions about the quality of relations between labour and produc-capital in the poor economies and the poor (Vijay 2003). The ers by focusing on relations between producers as if it is they growing evidence of increasing inequality between nations and who are exploited because of their powerlessness. In fact, within nations lays to rest any such presumptuous construct of powerlessness of producers leads to the initiation of social pro portionality of relation between development of capital and processes that cause vulnerabilisation, which then permits pro-d evelopment of people (Jomo and Baudot 2007). Objectives of ducers to shift the power lessness on to socially unequal, uprooted overall social development and poverty reduction in underand excluded, unorganised and insecure, disenfranchised and developed economies ridden with vulnerabilities and insecuriun-free workers (Vijay 2005). It is indeed true that the modes of ties, traditional and new social hegemonies, structural dependsocial organisation of production are dynamic. However, it is not encies and crude and cruel forms of coercion operating in an changes in i nformation, codes or competence that make it dy-u nequal structure of accumulation and value cycles require more namic but the changing nature of social relations. To presume than mere innovation, or cooperation of capital, or improvement

    that an entire society moves up when a specific actor builds of competencies.


    1 It would be useful to juxtapose two approaches by contemporary protagonists of free markets to read the history of capitalist development with Marx’s own understanding for conceptual clarity.

    Douglass North interprets the entire historical processes of capitalism as development of mutually beneficial transactions. The process of development is constitutive of the efforts of individual economic agents who explore the benefits of altering institutions and converge into organisations to achieve this objective. The existence of equivalent exchanges causes mutual benefits when efficient institutions are chosen in place of inefficient ones. And capitalism has developed because it is socially beneficial while other systems of production and distribution relying on inefficient institutions perish. Thus, the explorations and possibilities for enhancing efficiency explain the rational choice of individuals constitutive of a society that compels certain old forms of economic relations to give way to the emergence of certain new forms of economic relations.

    Evolutionary economics on the other hand proceeds by assuming that development is a path of trial and error, learning and adaptation. In the course of evolution of economic systems, the external conditions determined by factors both on the demand and supply side are ever changing. Economic systems have to negotiate these changes by learning to adapt themselves to them. The economic systems that can adapt to the changing conditions survive while others perish. Thus, the capacity to cope with an autonomous risk and uncertainty performs a role analogous to the process of natural selection, where only the fittest survive. Capitalism as an economic system has developed since it is the fittest system with an innate capacity to cope with change and adapt itself to change, while the older forms could not (Nelson and Winter).

    2 Ronald H Coase in his “Nature of the Firm” argues that underlying the emergence of hierarchy at the workplace are the differences in behavioural choices of individuals. The risk takers become capitalists and the risk averters become workers. It is as a consequence to their own choices that the capitalists derive decision-making powers and get higher returns in the form of profits while the workers settle for secure incomes and thus end up obeying the orders of the capitalists. Thus, the emergence of classes is a result of choices.

    3 Sasi and Vijay, Tamil migrant workers from Tiruchirappalli, were burnt to death by a construction contractor they were working for in Kochi on 21 February 2009 when they asked for payment of their wages. . Two other workers, Andrews and Suresh, were critically injured in the same incident (The Hindu, 23 February 2009).

    4 Shankar Guha Niyogi, a trade union leader in Bhilai was shot dead by Paltan Mallah, a contract killer, on 27 September 1991. The accused


    included two industrialists. The trial court in Durg convicted six persons. Five of the accused, including the industrialists, were given life sentences and Mallah was sentenced to death. In 1998, however, the Madhya Pradesh High Court acquitted all the accused. The Supreme Court in 2005 upheld the acquittal of five and Mallah’s death sentence was converted into life imprisonment (The Hindu, 21 January 2005).

    5 The workers of Honda Motorcycle and Scooter India went on strike on 25 July 2005. This protest had its roots in an assault on a worker by a manager (in December 2004) for mobilising a trade union in the unit, which was followed by the sacking of 54 workers in June 2005. The protesting workers were brutally beaten up (The Hindu, 26 July 2005 and Prol-Position 2005).

    6 For a discussion on how the definition of externality itself is biased towards the objective of accumulation see Warren and Schmid (1980).


    Ajay, Gudavarthy and G Vijay (2007): “Antinomies of Political Society: Implications of Uncivil Development”, Economic & Political Weekly, Vol XLII, No 29, 21 July, 3051-59.

    Gereffi, Gary, John Humphrey and Timothy Sturgeon (2005): “The Governance of Global Value Chains”, Review of International Political Economy, 12:1, February.

    Hayek, Friedrich (1980): 1980s Unemployment and the-Unions: The Distortion of Relative Prices by Monopoly in the Labour Market (London: Institute of Eco nomic Affairs (IEA)).

    Jomo, K S and Jacques Baudot (2007): Flat World, Big Gaps; Economic Liberalization, Globalization, Poverty and Inequality (New York: Orient Longman, Zed Books), Third World Network in association with United Nations.

    Knorringa, Peter and Lee Pegler (2006): “Globalisation, Firm Upgrading and Impacts on Labour”, Review of Economic and Social Geography, 97:5, 470-79.

    Lazonick, William (1991): Business Organisation and the Myth of the Market Economy (New York: Cambridge University Press).

    Marx, Karl (1904): A Contribution to the Critique of P olitical Economy, reprinted in 1978 (Harmondsworth: Penguin Books).

    – (1977): Capital: A Critique of Political Eco nomy, Vol 1 (Moscow: Progress Publishers).

    Meek, Ronald (1973): Studies in Labour Theories of V alue; Smith, Ricardo and Marx (London: Lawrence and Wishart).

    Piore, Michael J and Charles F Sabel (1984): The Second Industrial Divide: Possibilities for Prosperity (New York: Basic Books).

    Prol-Position (2005): Website address: Pyke, F, G Becattini and W Sengenberger (1990):

    I ndustrial Districts and Inter-Firm Cooperation in Italy (Geneva: International Institute for L abour Studies).

    Solow, Robert (1990): Labour Market as a Social Institution, Cambridge: Basil Blackwell.

    The Hindu (2005): Website address: 2005/07/26/stories/2005072611530100.htm, 26 July.

    – (2009): Website address: 02/23/stories/2009022358750400.htm, 23 February.

    Vijay, G (2003): “Changing Policy Regime and Labour; A Case Study”, Economic & Political Weekly, Vol XXXVIII, No 31, 2 August.

    – (2005): “Migration, Vulnerability and Insecurity in New Industrial Labour Market”, Economic & Political Weekly, Vol XL, No 23, 28 May-4 June.

    Warren, J Samuels and A Allan Schmid (1980): Law and Economics: An Institutional Perspective (Dordrecht: Kluwer Academic Publishers).

    Williamson, Oliver E (1981): “The Economics of Organisation: The Transaction Cost Approach”, American Journal of Sociology, Vol 87, No 3, 548-77.

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