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Responding to the crisis: implications of the Asian experience.



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RESPONDING TO CRISIS: IMPLICATIONS OF THE ASIAN EXPERIENCE

David Peetz Trish Todd

Griffith University University of Western Australia

We report the results of a study of how Malaysia has adjusted to the financial crisis of 1997, focusing particularly on the relatively muted rise in unemployment. The impact on Malaysian employees has been moderated by the buffer provided by foreign workers, the tight prior state of the labour market, the cost of retrenchments, the going notions of ‘acceptable behaviour’ and, where they existed, the bargaining strength of unions. The notions of acceptable behaviour have to be seen in the context of the broader engagement of employers and unions in bipartite and tripartite cooperation in the face of the financial crisis, including at the industry and national levels. Companies found alternatives to retrenchment, including in-sourcing, training, temporary transfers to other employers, ‘temporary layoffs’, adjustments to pay increases and absorbing reductions in profits. However, divisive tendencies still exist. The critical policy question for Malaysia is for how long the enhanced cooperation that has been evident will be sustained. For Australia, this experience indicates that corporate adjustment practices are matters for choice: retrenchments may not be inevitable, and the Malaysian experience may be useful in contributing towards codes of good practice elsewhere.

This paper examines the labour market response of an Asian economy to the financial crisis of the late 1990s, and examines the reasons for that response. Our focus is on the Malaysian experience. This is not just because it is of interest in its own right, but also because we wish to know if in a globalised economy there are alternatives to the patterns of behaviour demonstrated in in western Anglophone countries such as the US, Australia and New Zealand. In the latter countries it is not unusual for firms to respond to any real or anticipated decline in profits by ‘downsizing’ - reducing the size of the workforce through redundancies. There is a growing body of evidence that downsizing is frequently counterproductive for the firms involved as well as damaging for the employees who have been retrenched; that there is a ‘survivor syndrome’ amongst employees left behind that comprises adverse patterns of morale, trust, stress, insecurity, commitment, risk aversion, and the quality of production; and that problems of poor productivity may be exacerbated rather than overcome (eg Filipowski 1993; Cascio 1993; Littler et al 1997; Sebbens 1998). If there are alternatives, there would be significant implications for private practice and public policy.

Our study is part of a larger project on globalisation and employment relations in Asia, conducted by several researchers across a number of countries under the auspices of the International Labour Organisation. Fieldwork for this study was undertaken in August 1998 and March 1999, and therefore the period covered by this study followed after the financial crisis that hit much of Asia in the second half of 1997. Interviews were conducted with officials from national and industry level organisations, including the Ministry of Human Resources, National Productivity Commission, Malaysian Institute of Economic Research, Malaysian Trade Union Congress (MTUC), and the Malaysian Employers Federation (MEF), employer associations and unions. We also conducted interviews at sixteen firms across four industries: banking, automobile and components manufacturing, electronics manufacturing, and hotels. Participant firms were selected through two processes. First, the ILO and subsequently the authors approached the Ministry of Human Resources to obtain their cooperation in arranging a schedule of meetings with managers and employee representatives in four industries. The Ministry was provided with a set of criteria for selecting firms, including: mostly foreign-owned companies, joint ventures or companies that supply

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to foreign-owned companies; a mix of union and non-union workplaces; and mostly (though not exclusively) ‘leading edge’ companies or companies with reasonably strong market positions. There was ongoing consultation between the authors and the Ministry over the choice of firms and some firms were specifically suggested to the Ministry by the authors. Second, the authors directly approached several companies to participate in the project. In all cases we spoke to an ER manager (in one case the assistant HR Director); in most unionised workplaces we also spoke to workplace union delegates or ‘committees’; in some workplaces we were also able to speak to other managers, such as the managing director, and/or to rank and file employees. Documentary material (annual reports, collective agreements, etc) was also obtained from most organisations. To maintain the confidentiality of information provided to us and for purposes of consistency, we have used fictitious names for the companies concerned.

The generalisability of the findings is limited by several factors : the fact we have investigated only four industries and have only studied three to five firms in each industry; limits to the depth with which we have been able to undertake the research, given the tradeoff between the number of firms that can be studied and the amount of time that can be spent at each firm; and the method of selection which might impart some bias to the choice of firms. The firms that it is always hardest to obtain access to for research purposes are those where there is bitter conflict under way at the time of the research. Thus there is a danger that the degree of cooperativeness indicated in the vignettes may be an over-representative of the overall degree of cooperativeness through the economy. Interviews with union, employer and government officials from the industry and national levels provide, we hope, some counterbalance to this potential bias.

This paper is organised as follows. We first discuss the labour market effects of the financial crisis.

Labour market effects of the financial crisis

In the early to mid 1990s the Malaysian economy enjoyed high growth (averaging 8.7 per cent in the period 1992-96), moderately low inflation (3.8 per cent over 1992-96) and low unemployment (2.5 per cent in 1996). However, there was a misallocation of resources to unproductive activities and excessive loans growth (over 25 per cent in each of 1995, 1996 and 1997, double the rate through 1992-94) especially to the property sector and consumption loans ( Ariff et al 1998:6). The ringgit was overvalued, in some estimates by 15-20 per cent by mid 1997 ( Ariff et al 1998:11). In mid 1997, following currency crises in Thailand, Indonesia and Korea, and in the context of substantial overinvestment in the property sector ( Ariff et al 1998:6), the Malaysian economy was severely affected by a sudden and sharp depreciation of the ringgit, which virtually halved in value from RM2.48/$US1 to RM4.88/$US1 between April 1997 and January 1998. It eventually revived to RM 3.65/$US in March 1998 but then fluctuated until currency controls and tighter regulation of the Kuala Lumpur Stock Exchange were imposed in September 1998 (Ariff et al 1998:1). GDP at market prices had grown by 7.8 to 9.4 per cent for each year from 1993 to 1997. In 1998 it fell by 5.2 per cent, a turnaround of 13 per cent on the preceding performance.

Unemployment rose from 2.6 per cent in 1997 to 4.9 per cent in 1998 (Ministry of Finance 1998:lxi). The labour market crisis appeared to reach its worst points in the first half of 1998. The Ministry of Human Resources has been collecting data on retrenchments for many years, but only since early 1998 has the provision of data by companies been mandated. Monthly figures are highly variable. However, it is possible to estimate trend retrenchments using a Henderson 5-point moving average. As Figure 1 shows, trend retrenchments peaked in March 1998 and July 1998 but there has been a steady decline since then. By February 1999 trend retrenchments were at less than half the level of seven months earlier.

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Figure 1 Trend retrenchments, Feb 1998-Feb 1999 (Henderson 5-point moving average)

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1000 2000

3000 4000

5000 6000

7000 8000

9000

Feb-98 Mar-98 Apr-98 May-98 Jun-98 Jul-98 Aug-98 Sep-98 Oct-98 Nov-98 Dec-98 Jan-99 Feb-99

Source: Ministry of Human Resources and authors’ calculations

The Ministry of Human Resources estimates that there were 80,000 retrenchments from the start of the crisis to February 1999. Unions suspect that this is an underestimate.

A widespread employer strategy has been to get rid of foreign workers first. In all, about 11 per cent of retrenched workers were foreign, with foreign retrenchees being concentrated in general (unskilled), semi-skilled and agricultural occupations. These figures understate the impact of recession on foreign workers because the most common approach was simply to not renew the contracts of foreign workers.

There is universal agreement that construction and automobile manufacturing, in that order, have been the industries worst affected by the crisis. However, the majority of job losses in construction are not recorded as retrenchments because they involved either independent contractors or, more commonly, workers (both Malaysians and foreigners) on fixed term contracts that were not renewed (and hence they did not receive retrenchment benefits). Manufacturing accounted for over half of recorded retrenchments.

One unusual aspect of this recession by comparison with other countries is that the downturn has had the most severe impact on the most highly educated employees. As Figure 2 shows, the number of registered unemployed without post-school qualifications increased by a much lesser amount than the number with post-school qualifications. This mainly reflected the greater difficulty that more senior employees had in obtaining re-employment, particularly senior managers in the financial sector where there is ongoing restructuring in addition to the directed effects of the financial crisis.

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Figure 2 Registered unemployed by education level, 1992-1998

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20

40

60

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100

120

140

1992 1993 1994 1995 1996 1997 1998

(July)

Registered unemployed (index 1992 = 100)

Below LCE/PMR

LCE/PMR

MCE

MHSC, Diploma, Degree

Source: Ministry of Human Resources and authors’ calculations

Overall, even allowing for understatement of retrenchments, the level of retrenchments is considerably less than what one might expect from a 5 per cent drop in GDP and a 13 per cent turnaround in GDP growth rates. Likewise, the rise in the unemployment rate (2.4 percentage points) is less than might be expected in industrialised countries in similar circumstances. (For example, a similar rise in unemployment in Australia was brought about by a ½ per cent drop in GDP and a 4½ percentage point turnaround in GDP growth rates between 1989 and 1991.) There are several reasons for this, as discussed below.

Why has the rise in unemployment been moderated?

The first reason for the moderation in unemployment is that foreign workers represent a substantial buffer, enabling demand shocks to be partly absorbed by sending foreign workers home. The number of legal foreign workers was estimated to have fallen from 1.5 million to 700,000. 1

Second, retrenchments are financially and administratively costly due to government regulations.

Retrenchment benefits are relatively generous, making it more costly for firms to retrench staff and forcing them to consider other options. The Employment Act 1955 requires ten days retrenchment pay per year of service for employees with less than two years’ service, and 20 days per year for those with three or more years of service. Most employers observe a straight one month’s retrenchment pay per year of service. Some organisations pay more than this, usually as a result of collective agreements. Moreover, in order to retrench workers companies must give one month’s advance notice to the Ministry and fill in a series of forms which require them to explain the alternative mechanisms they have investigated and implemented, including temporary lay- offs, pay cuts and VSS. In the view of some government officials, this may be enough of a disincentive in itself for some employers. Last-in-first-off principles are consistently applied to retrenchments, limiting employers’ ability to choose who they lose (and possibly forcing them to forego new, more ‘flexible’ employees). Even though with VSS employees ultimately decide who goes, VSS gives

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employers more scope to tap on the shoulder less productive employees and encourage them to take a package and leave.

Third, the labour market in recent years has been relatively tight across most occupations. Firms which lay off workers and then experience an upturn in demand could face difficulty in recruiting staff. Related to this, then, was an expectation that the financial crisis was a temporary phenomenon from which the country would eventually recover (though the notion of ‘temporary’ here nonetheless encompasses several years). Self-interest reinforces the cultural importance of avoiding retrenchments and may in part explain the greater hesitancy by companies to retrench during the current crisis compared with their reaction in the mid 1980s.

Fourth, there is substantial moral, industrial and political pressure on firms not to respond to a downturn by retrenching staff. In government-owned organisations there is direct pressure to avoid retrenchments, particularly as retrenchments in government-owned flagship companies may undermine confidence in the economy. In unionised companies there is pressure from unions to avoid retrenchments and only permit voluntary redundancies (referred to as ‘voluntary separation

More than this, however, there is some professed acceptance amongst a significant part of the managerial and capitalist elite that it is inappropriate to retrench staff when there is no social security system to provide for the jobless. It is also generally considered that the highest paid should at least share the burden, and in some instances a belief that they should bear a greater part of the burden. These values reflect in no small part notions of mutual or familial responsibility that can be observed in many Asian cultures and which have been manifested in life-long employment practices in countries such as Japan, Korea and China. The seniority based increment structure is a reflection of this ideology. Indeed, MNCs from some countries bring with them a wariness of retrenching workers, since such behaviour conflicts with corporate values. Hence, a number of respondents observed that Japanese MNCs operating in Malaysia were much less likely to retrench people than American, British or Australian MNCs. For example, Nippon Electronics (Mal), one of our case study companies, had never retrenched an employee in 30 years of operation in Malaysia. Instead, Japanese-owned MNCs often go to considerable lengths to avoid retrenchments.

The high cost of retrenchments is itself a reflection of, and acts to reinforce, the social value given to employees’ job security.

The cultural importance of avoiding retrenchments is not just an Asian historical legacy. It also reflects conscious policy choices by government. One informant described how Malaysian companies used to follow ‘British’ practices but they are now much more inclined to follow Japanese and other Asian practices. The Government’s ‘Look East’ policy is a significant element in this re-orientation. Some case study companies (eg Luxury Assemblers) had followed an aggressive approach to retrenchments in the 1987-89 downturn but had declined to lay off staff in the 1997-99 downturn, saying that they had learnt from the mistakes of the previous downturn and that there had been a change in managerial style (and personnel) since then. Government bureaucrats attempt directly or indirectly to persuade companies to avoid retrenchments or direct them through staged processes which might never get to the point of retrenchment. Larger companies go to the Ministry first before taking any action, in order to avoid bad publicity. Ministers praise companies, such as Luxury, which succeed in avoiding retrenchment and urge others to emulate them. A tripartite committee, mentioned below, was established to devise guidelines on handling retrenchments.

This does not mean that retrenchments have been universally avoided - the figures cited earlier clearly indicate otherwise. The propensity to retrench varies not only according to the depth of the downturn in demand facing a firm, but also according to whether it is union or non-union, is linked or not linked in some way with the government, has the capacity to discontinue peripheral (foreign

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and contract) workers, and (in the case of MNCs) is owned by a parent company from an Asian or an Anglophone country - all of these being factors that influence the management style of the company.

National and industry level adjustments

To outside observers it may seem surprising, given a long history of anti-union state practices and legislation, to report that there has been a considerable strengthening of tripartite relationships since the financial crisis. This is an especially notable development, because experience elsewhere suggests that such a direction is by no means a guaranteed response to rapidly deteriorating circumstances, especially when unions only represent a small proportion of workers. At the national level, the MTUC was appointed to the National Economic Advisory Committee, charged with developing the National Economic Recovery Plan. A tripartite committee - a subcommittee of the National Labour Advisory Council (NLAC) - was established to deal with the retrenchment issue and draw up guidelines on the handling of retrenchments. The Prime Minister in July 1998 publicly thanked the unions for their support - quashing the threat to consensus and at least one person’s liberty arising from escalating tensions between other Ministers and the union movement. Labour leaders thought these were the early signs of a more genuine approach to consultation by the Prime Minister than in the past (though many others remained sceptical). Subsequently, the Prime Minister appointed the secretary of the MTUC to the Senate. While this is not in itself an institution with substantial power (it is similar to the UK House of Lords) it does provide the opportunity for the MTUC to have easier access to the Prime Minister and other Ministers. Employer organisations, accustomed to a situation in which unions have been largely excluded from the decision-making process, give the impression of feeling somewhat marginalised by this development.

The impact of this changing relationship is illustrated by what appears to be a shifting government policy towards the proposed ‘dollar fund’. This is a fund proposed by unions to finance unemployment benefits for people who have been retrenched without access to retrenchment benefits (eg where the firm has gone broke and been unable to pay retrenchment benefits). The idea was that employers and employees would each contribute RM 1 per month to the fund as a form of social insurance. Retrenched employees would receive a form of unemployment benefit for a defined period. The dollar fund is strongly opposed by employers and was originally not supported by the government. Whereas in August 1998 it appeared that this proposal, which came from the union movement, was going to be consigned to the round file, by March 1999 it was apparent the Government was giving serious consideration to it.

Another illustration of the closer links between government and unions: in the NEAC the Government proposed a national wage freeze and a moratorium on collective agreements. The unions opposed this, saying the capacity to pay wage rises should be determined on an enterprise by enterprise basis. The proposal was dropped. 2

Generally speaking recessions are seen to weaken the industrial and political power of organised

labour. So why would labour’s influence strengthen in a Malaysian recession? Part of the answer may lie in the need of government for political legitimacy. Bhopal (1997) has argued that Malaysian unions gained increased power during the recession of the mid to late 1980s because the government’s political position was slightly weaker than usual and that this was reflected in the government agreeing in 1988 to allow unions in the electronics industry. It may be the case again that, in the face of this more recent financial crisis, and in the context of the conflict between Anwar Ibrahim and the Prime Minister, the government feels a greater need for support from organised labour to enhance its legitimacy.

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At the industry level, there has been considerable cooperation between unions and employers in minimising the dislocation arising from retrenchment. Most particularly this has occurred through the establishment by the MTUC and the Federation of Malaysian Manufacturers (FMM) of a task force that is now dealing with retrenchments and vacancies. (The MEF is not working as closely with the unions, but even they detect an increase in cooperation). This joint committee was established prior to the financial crisis to deal with other issues. FMM was the first employer association to establish a joint committee with MTUC. There is a register of companies planning to retrench staff. Firms that are planning to retrench workers liaise with other firms to see if they can take their workers. The MTUC also produces a list of retrenched workers for whom they are seeking employment. Thus the FMM ‘becomes a matchmaker’ between displaced workers and jobs.3

Changes at the workplace

At the enterprise level, there has been substantial variation in experience, but generally speaking in unionised companies management pursued discussions rather than confrontations with unions. Some firms decided not to retrench even though it could be justified, and some offered more than the (already generous) minimum redundancy payments. Others have been more ruthless. On average though it appears that there has been a surprising amount of good faith in the way that potential retrenchments have been dealt with.

How then do companies adjust to labour surpluses? One method is in-sourcing: performing in-house functions that were previously contracted out. Second, firms will take advantage of the lull to train up their employees. Certainly the opportunity cost of training is low at such times.

Third, employees may sometimes be temporarily transferred between different operations of a company, or even between companies. For example, Nippon Electronics, one of the case studies, transferred surplus employees to another Nippon company. Respondents referred to a ‘Japanese club’ of companies that would arrange for temporary transfers amongst themselves.

Fourth, companies may have ‘temporary layoffs’ in which they may pay redundant workers a proportion of their normal base salary to stay at home. Luxury Assembly, another case study company, was a leader in this respect, and it was followed by Midrange Assembly.

Fifth, there may be adjustments to remuneration. This is discussed shortly.

Finally, of course, firms will absorb a reduction in profits or even a temporary loss - on the basis that their obligations are not only to their shareholders but also to their employees, and in the belief that a short term loss may be less costly than problems associated with recruitment of additional employees later on when the economy is more buoyant.

Adjustments to remuneration

Pay for Malaysian employees comprises a number of elements:

• a base salary for the occupation;

• an incremental scale, whereby employees move each year to higher increments within the pay band for their occupation. The incremental scale is broad and pervasive. Long serving employees on a lower classification often receive higher pay than new employees on higher classifications (an example is given later in relation to banking);

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• various allowances, eg for attendance;

• overtime;

• a contractual bonus, which does not vary from year to year, and which is usually expressed in terms of the number of months of normal salary for an employee. In the unionised sector the contractual bonus has been averaging about 1.5 months pay and is often paid around festival time;

• a contingent, non-contractual bonus, or ex- gratia payment, which is at the discretion of the company and which may be related in some way to the profit or performance of the organisation or individual. Some employees receive both a contractual and a contingent bonus, but the contingent bonus is more common in the non-union sector than in the union sector, while the opposite applies to the contractual bonus.

There are several ways in which remuneration can be, and to varying degrees has been, adjusted in response to the crisis.

First, overtime freezes are the most common remuneration-related response to the recession. They also have a significant impact on workers’ pay levels. For some manufacturing employees overtime can represent a quarter or more of weekly pay.

The second most common responses are the deferral or non-payment of bonuses, or sometimes the deferral of scheduled pay increments (by up to six months) or the negotiation of smaller increments. Where increments are deferred, they are sometimes only on ‘loan’: the company may have to make it up later on through back pay.

There are important differences between the union and non-union sector. Amongst unionised employees, cuts in bonuses are infrequent, as contractual bonus obligations are almost always adhered to. The staggering of bonus payments is more common, but still only affects a minority of unionised companies (for example, only two out of thirty firms with CAs in the electrical products manufacturing industry staggered bonuses). The abandonment of bonuses is more common in non-union firms.

Third, the negotiation of new collective agreements (CAs) can be deferred. This mechanism is only relevant where existing CAs, which usually have a three year duration, have expired. Deferral is common in, for example, the hotel industry. Where CAs are negotiated they would be expected to contain lower wage increases than would otherwise be the case. This is shown in developments in banking CAs, discussed later.

The fourth possibility is a reduction in base hourly or monthly rates of pay. But actual wage reductions for non-managerial employees were very rare amongst unionised employees. They occurred occasionally in non-union workplaces. Pay cuts can only be obtained by consent of the employees affected. This consent must be in writing and may lead to workers being interviewed by labour inspectors before the go-ahead is given. It is rarely given in unionised firms.

According to Ministry figures, 795 companies implemented pay cuts of some type in the period August-December 1998, compared to 2148 that had implemented retrenchments. Pay cuts have not necessarily been applied across the workforce. In firms where retrenchments had taken place, an average of 14 workers had been retrenched, and in firms where pay cuts had been implemented, an average of 28 employees had experienced pay cuts. By contrast, temporary layoffs affected an average of 122 employees in firms where they had been implemented.

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We mentioned above how it is generally considered that the burden of adjustment should not fall most heavily on the lowest paid and is sometimes accepted that it should fall most heavily on the highest paid. Several informants told us about significant cuts in managerial salaries in response to the recession. According to the Ministry, in some cases senior executive salaries were cut by up to 50 per cent. In Fivestar Hotel, one of our case studies, unionised employees experienced no cuts in base pay whereas managerial employees experienced cuts on a sliding scale with the largest cuts (10 per cent) applying to the most senior managers. Almost no managers complained at Fivestar because, based on the experience of other companies, they had expected worse.

One interesting facet of restructuring has been this. In many firms, pay cuts (in the form of abandoned bonuses, increment freezes or hourly rate reductions) are unevenly distributed in a firm -that is, they have been concentrated amongst managerial employees while unionised workers have had their base pay protected. Yet if those firms are still forced to retrench, job losses generally apply universally across the firm - they are not disproportionately concentrated in the unionised workforce, even though that group has had its pay protected.

Fifth, where contingent remuneration schemes exist they may provide some wage flexibility. Sometimes such schemes have been abandoned as unaffordable in the context of the economic slowdown. It appears that there has been an increase in the use of productivity-linked remuneration in the non-union sector, but much slower growth in the unionised sector. The National Economic Recovery Plan (NERP), released in August 1998, refers to the encouragement of these payment systems. In banking, an industry wide agreement negotiated late in 1997 provided a skeletal framework for negotiating productivity-linked wages. However, following the onset of the effects of the financial crisis, the banks have not pursued the issue, as they seem concerned that anything aimed at increasing 'productivity' in the current context could be interpreted as code for 'retrenchments'. Further developments may await the negotiation of the next collective agreement in the industry. Union resistance to productivity-linked remuneration is even stronger outside of banking.

To obtain a more detailed perspective on some different approaches that have been taken, we report on the experiences of three of our case study firms.

Case study 1: Quality Assembly

Quality Assembly (Malaysia) Bhd assembles, sells and provides after-sales service on overseas-designed motor vehicles built with local and overseas components. It was established 100 years ago as, remarkably enough, a grocery store, and was subsequently involved in the manufacture of bicycles and then motorbikes before moving into vehicle assembly. It is listed on the Kuala Lumpur Stock Exchange. Its largest shareholder is a parent company, Quality Assembly Limited, based in Singapore, which only has a minority shareholding in Quality Assembly (Malaysia) Bhd. The national retirement income fund holds a smaller shareholding. Some 1330 people are employed by Quality, including 270 executives. The non-managerial workforce are divided fairly evenly between the assembly side of the operation and the trading (sales) side.

Quality was seriously hit by the financial crisis. In total, monthly sales fell by 70 per cent between July 1997 and November 1998, with most of the fall occurring in the first half of this period. A pre-crisis operating profit of RM 200 million was turned to an operating loss of RM 20 million in the 1998 FY. Since November 1998, there has been a small improvement. However, it would be surprising if sales returned to their previous levels when the economy is recovered. The price of imported components has risen sharply as a result of the depreciation of the ringgit and so there will be a permanent increase in the relative price of Quality’s products, once stocks imported before the crisis are exhausted.

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A chronology of events is as follows.

• In August 1997, the first signs of a downturn were being felt, recruitment was frozen, employees were encouraged to make savings in utilities (power, water etc) and other expenses were cut (the annual dinner and sports meeting were cancelled).

• In September 1997 overtime was reduced and assembly activities thereby slowed.

• In October 1997 overtime was abolished. Cuts were made in petrol allowances paid to employees with company cars, and on expenditure on business travel and outstation allowances.

• In November 1997 the importation of CKD parts was halted.

• In December 1997, with still further reductions in assembly, excess employees were redeployed to other departments or to maintenance.

• On 1 April 1998 the assembly plant was closed for three months and 435 employees temporarily laid off.

It is this last step that is of most interest. Some 435 assembly employees were laid off. During this period they were paid 75 per cent of their base salary. In addition they received their RM 50 per month attendance allowance. Other benefits set out in the collective agreement remained intact. While laid off, they were able to seek and obtain work elsewhere, and a number were successful in doing so. The temporary lay-off was initiated by HR management and negotiated with the unions over three meetings involving ‘hard bargaining’. In the end it was fully endorsed by the unions and indeed union representatives are positively enthusiastic about the management style of the company and the terms of the lay-off agreement. The unions had been kept informed of business developments, they were consulted at every step prior to the lay-off, and information was openly shared between management and the unions.

Employees still received their two month contractual bonus and 100 per cent of base pay for public holidays. With all other benefits being maintained, employees taking ‘medical leave’ (sick leave) would still be entitled to 100 per cent of their base pay for any period of the lay off for which they produced a doctor’s certificate. Despite the financial incentive for employees to do this, the only cases of medical leave taken during the lay-off were two employees involved in motor vehicle accidents. A sharp drop in medical leave did not so much reflect malingering during ordinary working hours as a recognition by the employees that the company had been doing everything reasonable for the employees and they therefore should not seek to exploit the situation when they did become ill. As it was, workers had already faced substantial reductions in pay from the loss of overtime, so the 75 per cent base pay rate was more like about half of their normal income.

Seventy maintenance workers were still needed during the shut down. To avoid inequity with and resentment of assembly workers who were receiving 75 per cent base pay for doing no work, it was agreed that maintenance employees would receive 100 per cent of base pay while on maintenance duties but only had to do 75 per cent of a normal workload ( ie would be paid as five days for working slightly under four). These employees were free to seek alternative employment after normal working hours.

While unionised employees still received their annual increment, managerial employees did not. Both managerial and non-managerial employees received contractual bonuses, but not the ex gratia bonus.

At the end of the three month lay-off, production resumed at approximately half normal capacity, the level at which it still was at the time of writing. All but ten employees returned to the company, despite the opportunities available for taking up alternative employment in the meantime. This low

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attrition rate might be understood by the reported comments of one worker during the shutdown: ‘when you look at this deal and the way [Quality] has treated us over the years, we should help them

During July and August 1998 there was therefore still considerable idle time. Many returning employees were used for building maintenance work such as painting. External contractors that had previously been used for this activity had been terminated, and there is little likelihood that such contractors will be reinstated. Thus an activity previously outsourced was now undertaken in-house.

The Managing Director (MD) of Quality said that the company’s actions were undertaken ‘with the objective of keeping the [Quality] family intact for as long as possible, as it regards every one of its 1400 employees as family’. While it appears that a sense of obligation to its employees was one of the most important reasons for the approach that was taken, several other factors also worked in its favour. There was an expectation that sales would revive to some extent - though, as mentioned, no expectation that they would return to previous levels. The company would face the risk of having to recruit and train new workers in a tightening labour market if it had laid off a substantial number of employees. Perhaps more importantly, if Quality assembled cars without adequate sales it could face major cash flow problems, as each assembled car required local components to be bought and attracted government duties, regardless of whether it was sold. Stopping assembly achieved savings in these respect and in areas such as power and other non-labour costs. There are also, of course, significant expenses associated with paying retrenchment benefits. For employees with three or more years of service, retrenchment benefits are more costly than a 75 per cent salary for three months. For the small number of employees who found new jobs, retrenchment benefits did not need to be paid. But it needs to also be recognised that the direct cost to the company of its extensive labour hoarding strategy goes well beyond the three months of salary at 75 per cent. The company has been overstaffed since late 1997 and is likely to continue in that position through at least the rest of 1999 and possibly beyond that.

Certainly, there appeared to be a shift in the company’s approach to its employees following the change of management in 1994. This MD was perceived by others in the company as understanding how workers felt and how terrible it was to have no job. This in turn was attributed to his coming from a financially poor background. It was also claimed that ‘Asian culture’ influenced the company by giving emphasis to notions of familial responsibility. The company also appeared to have learned from the previous downturn of 1985-1987. Half the staff were lost in retrenchments then.

Case Study 2: Fivestar Hotel

Fivestar Hotel is located in an urban area near Kuala Lumpur. It is part of the multinational Fivestar Chain, based in the US. There are six Fivestar properties in Malaysia, which between them employee over 1500 full-time employees. The Fivestar Hotel is managed by the Fivestar Global Chain but it is owned by a local company which also owns or co-owns four of the five other Fivestar properties in Malaysia. The head office of the Malaysian Fivestar group is located in Kuala Lumpur itself. The Asia-Pacific head office is in Singapore. The sales strategy is described as being that every guest should have a pleasant time and want to come back.

Fivestar has been seriously affected by the financial crisis. Corporate travel, meetings and dinners have been severely cut back. Revenue fell by about 50 per cent, resulting from a drop in occupancy rates of about a quarter and a drop in prices of about one third that arose from price wars in the industry. Fivestar has 320 full-time employees and 50 casuals.

The response to the financial crisis and the accompanying severe fall in revenue was to put the greatest burden of adjustment on senior management. No retrenchments or voluntary redundancies have taken place. At one stage it was thought that this would occur but the owner of the hotel (not

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the Fivestar management) decided against it. It appears that he did not wish to wear the odium of retrenchments. Management tried to negotiate some pay cuts but this was successfully resisted by the union. Employees have instead faced three types of adjustment costs.

First, no new CA has been negotiated, even though one was due at the start of the year. Neither the union nor management wished to open negotiations.

Second, payment of the contractual bonus has been staggered. The full bonus was due to be paid in January, in time for the festival season. Instead, 50 per cent was paid in January, 25 per cent in March and 25 per cent in April.

Third, the employer contribution to the national retirement income fund, previously 15 per cent, has been cut to the statutory minimum level of 12 per cent.

A much heavier burden has been placed on management employees, who have all experienced pay cuts. These pay cuts were differentiated according to pay levels, such that managers on pay bands of:

• RM 1500-3000 received a 3 per cent cut; • RM 3000-7000 received a 6 per cent cut; • RM 7000-10000 received a 10 per cent pay cut.

In total some 80 Fivestar managerial employees were affected by these cuts. Interestingly, these cuts were accepted without question by all but one of the managers concerned, and some said they had expected worse, given that cuts of 15 to 25 per cent had been common in other hotels and in some cases they had reached 50 per cent.

Managers also received no bonus, whereas in previous years these had been worth one to four months salary. In recognition of these sacrifices, administrative employees are being asked to only work one Saturday a month, instead of the previous four.

Several activities had previously been contracted out, including elements of public area cleaning, engineering and banqueting. These outsourcing arrangements were developed during labour shortages but are now proving expensive. It is expected that outsourcing will be phased out.

With no retrenchments despite the crisis, there is strong pressure to be much tougher on non-performers. Some 15 employees have been dismissed in the past year, including the ‘queen of absenteeism’ and the ‘king of absenteeism’. This is seen by HR as reflecting a change in managerial approach, rather than a change in the labour market, but it is difficult to see the latter as having no influence on this trend.

Case Study 3: Brake Bhd

Brake Berhad assembles brakes and clutches, 90 per cent of which is supplied to one company. It is a fully owned subsidiary of an Australian multinational corporation which has three main divisions - automotive parts, plastic products and building materials - and employs 4800 people across 12 countries. In the early 1990s the MNC sought to expand its activities into the Asian region by targeting ‘young’ markets at an early stage of development. Brake Bhd commenced production in 1992 as a Malaysian/Australian joint venture and is now fully Australian-owned. The Australian parent company’s influence is principally in terms of technology and the subsidiary’s budget. Initially a Malaysian was appointed General Manager but subsequently an Australian manager was placed in the Malaysian plant with part of his brief being to standardise company practices. Brake Bhd is now serving as a training base for employees of the company’s new plant in Thailand.

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As its main customer’s sales grew so did Brake Bhd’s. However, with the slump in demand for cars Brake Bhd suffered a 60 per cent decline in production in 1998 resulting in a trading loss. In early 1999 they were still operating substantially below full capacity although there had been a modest upswing in demand.

Brake Bhd reacted very quickly to the economic downturn and their response was developed in close consultation with the Australian Head Office management. In November 1997 Head Office directed Brake Bhd to halt their planned capital investment of approximately $16 million in new equipment; simultaneously Brake Bhd began a cost reduction exercise and eliminated overtime. Following the major slump in demand in January 1998 Brake Bhd immediately retrenched 28 of their 85 employees. The ‘last on, first off’ principle was applied to avoid losing the more experienced employees and the company hired a placement agency to assist skilled staff to find new jobs. Whilst management saw this as ‘good management’ of a crisis situation and acknowledged that morale had been affected, employees felt that it had reflected very poorly on the company.

Like the other companies in the car industry the economic crisis is viewed by Brake Bhd’s management as a temporary downturn in business. At the corporate level the decreased sales within the Asian subsidiaries of the automotive division has been offset by increased sales in their North American and Australian operations (1998 Company Annual Report). The Malaysian subsidiary’s management are optimistic about the future anticipating new investment in the factory, diversification of their products and the possibility of organising production regionally as a consequence of forthcoming decrease in tariffs.

Conclusions

Brake Bhd, with its quick retrenchments, represents a sharp contrast to the other two case studies. It is interesting because it is an Australian-owned MNC. In addition, we do not wish to convey the impression that all is sweetness and light in Malaysia in response to the financial crisis. Many companies have behaved more ruthlessly than Brake Bhd. Many people have suffered severely and there has been no comprehensive social security system to fall back onto. Yet we cannot help but conclude that things could have been much worse for Malaysian employees.

One of the notable aspects of the Malaysian experience has been the strengthening of formal and informal tripartite relationships since the financial crisis. We found several manifestations of this. At the industry level, there has been considerable cooperation between unions and employers in minimising the dislocation arising from retrenchment, especially through the MTUC-FMM task force dealing with retrenchments and vacancies. At the enterprise level, there has been substantial variation in experience, but generally speaking in unionised companies management has pursued a consultative approach with unions, notwithstanding confrontationist methods adopted by what appears to be a minority.

The levels of unemployment and retrenchments that arose through the financial crisis were considerably less than what we might expect. The buffer provided by foreign workers helped push the burden away from Malaysian employees. In addition, though, several factors combine to increase the power or workers in confronting the prospect of retrenchment: the prior state of the labour market, the cost of retrenchments, the going notions of ‘acceptable they existed, the bargaining strength of unions. The notions of acceptable behaviour have to be seen in the context of the broader engagement of employers and unions in bipartite and tripartite cooperation in the face of the financial crisis. Retrenchments could not be avoided altogether. But retrenchments were much less likely to occur where the downturn in demand was not severe, where the firm was unionised, where the firm was linked in some way with the state (including as a supplier to government), or where the firm was from an Asian-based MNC.

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Instead, companies found other ways of adjusting to labour surpluses. Some in-sourced activities that they previously outsourced. Some occupied their employees’ time with training. Some arranged temporary transfers to other employers. Some staged ‘temporary layoffs’ in which employees were paid a proportion of their normal wage and even allowed to obtain work elsewhere. Some made adjustments to pay increases. Virtually all absorbed a reduction in their profits or even a temporary loss.

We have noted the tendencies towards cooperation evident at the national, industry and enterprise levels. We must also acknowledge the divisive tendencies that still exist: the slowness of earnings growth in the context of rising inflation, the cutbacks in employment, and the cuts in pay and conditions suffered by some employees. The equity with which these issues have been handled at the enterprise level will have a strong influence on the impact they have on employee motivation. For Malaysia, the critical policy question is for how long the enhanced cooperation that has been evident during the financial crisis and its aftermath will be sustained. We wonder whether the government will continue to involve the unions in central policy issues, whether employers will consider there are gains from continuing cooperation with unions into the future, not just as a passing phase during economic crisis. While Government regulation has been important, managerial culture and union presence have proved the most important variables in explaining how well protected the interests of particular employees have been during the crisis: in many of the workplaces we visited workers would have suffered much more from the recession if management had adopted an approach which gave immediate priority to short-term bottom-line results over wider and longer term considerations, and/or if workers had not been organised into unions. The Malaysian government has been seen as anti-union for a long time. But the financial crisis has led to some major reconsiderations of strategies by many parties. We will eventually see whether it just represented a cyclical stage in tripartite relations, to be followed by a reversion to more traditional patterns of mistrust, antagonism and occasional suppression, or whether it represents part of a ‘paradigm shift’ in Malaysian industrial relations, an institutional break that emerges from particularly forceful conjunctions of social or economic events and powerful alliances of some of the participants in industrial relations, and alters the institutional dynamics surrounding the employment relationship (Price and Bain 1989). Such institutional breaks or paradigm shifts are infrequent, but external crises associated with globalisation are the sort of mechanism that provides the impetus for them.

This development has important policy implications for developing and developed countries. Across many countries it is clear that there is considerable scope for improvement in the way that retrenchments are handled at the enterprise and workplace level. In Australia, a proposal for a code of conduct in labour adjustment was mooted in a report to the government and found expression in Accord VII, but died in the context of, oddly enough, the campaign against unfair dismissals legislation. The Malaysian experience indicates that corporate adjustment practices are matters for choice: retrenchments may not be inevitable. Adjustment practices are influenced by a variety of factors, including the pattern of state regulation, the bargaining power of workers (through unionisation and the state of the labour market), the dominant cultures of the countries in which companies are operating, and the dominant cultures of the countries from which companies originate, all of which influence management style. The Malaysian experience may be useful in contributing towards codes of good practice elsewhere.

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Table 1 Labour adjustment mechanisms in sixteen case study firms

Section 1: Banking

Western Bank Local Bank Conglomerate Bank East Asia Bank

Ownership MNC

(UK-owned)

Malaysian - owned and influenced by government body

MNC (part of Malaysian-owned conglomerate)

MNC (owned elsewhere in East Asia)

Size 35 branches (2100

employees)

76 branches (2500

employees)

100 branches (2500

employees)

25 branches (1900 employees)

Influence of parent Strong, but adapt policies to local conditions -

Limited influence of group Broad directives - little impact on HR/IR

practices

Union presence Strong industry union for clericals, moderately influential IHU for officers, weaker IHU for managers

Strong industry union Industry union, though outnumbered by non-members in non-clerical grades

Strong industry union

Profit environment moderately reduced profit due to financial crisis moderately reduced profit due to financial crisis

major fall in profit due to financial crisis major fall in profit due to financial crisis

Employment levels/ flexibility 30% reduction before financial crisis

May be forthcoming redeployments due to merger

10-15% reduction across the group during financial crisis

No staff cuts.

Labour adjustment mechanisms VSS before financial crisis, no retrenchments during

crisis, bonus still paid

no retrenchments, pay rise for executives delayed no retrenchments in bank (but retrenchments

elsewhere in group), cut in contingent bonus for non-union employees,

executive privileges frozen

contingent bonus not paid, no retrenchments, large cuts in overtime

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Section 2: Automobile and component manufacturing

Volume Car Company Quality Assembly Midrange Assembly Brake Berhad Glass Company Ownership Joint venture (Mal

Govt 47%, Japanese MNC 16%, public shares 37%)

Public company listed on KLSE, parent company in Singapore

Malaysian family business with

investments in other industries

MNC (Australia) Joint venture (Mal Govt 30%, Japanese MNC 49%, public shares 21%)

Main product Car production Car assembly Car assembly Brakes and clutches Glass products

Size 5700 employees 1330 employees 400 employees 48 employees

(4800 globally)

2 production sites in Malaysia, 1940

employees

Influence of parent Mal Govt: tariff protection, preferential employment for

Malays Japanese MNC:

technical advice & training

No influence on

HR/IR practices, some influence on product decisions. Foreign car

companies influence production and design

Influence on

remuneration of

management. Foreign car companies

influence production and training

Very influential on technology, budget, management systems, safety.

Japanese MNC

influence on

management systems, training

Employee representation

Weak in-house union Two industry unions representing trading and production

employees. Moderate influence

In-house union, little influence Non-union. JCC meets monthly

Industry union, not very influential

Government impact As a State initiative, dominant political context. Tariff policy critical

Local content policy, tariffs favouring

national car project

Local content policy, tariffs favouring

national car project

Government’s requirement for local content forced MNC to produce in

Malaysia rather than export from Australia

Taxation; restrictions on foreign expats.

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Profit environment 40% decrease in demand Monthly sales fell by 70%, small

improvement since

Massive fall in

demand

Slump in demand, 60% decrease in

production. Modest subsequent upturn

Drop in demand, 30% decrease in

production. Costs increased by ringgit devaluation

Employment levels/ changes Falling through

attrition

Small reduction

through attrition during the financial crisis

60% reduction during financial crisis 40-45% reduction during financial crisis

15-20% reduction during financial crisis, continuing reduction through attrition

Labour adjustment mechanisms No retrenchments, reduced line speed,

seconded employees to suppliers,

insourcing, no bonus paid, no overtime

Temporary 3-month closure of assembly plant with 75% of base pay still paid. Insourcing, no

overtime, cuts in

travel allowances, redeployment of production employees

Non-renewal of

contract workers, retrenchment of

foreign workers, temporary 3-month closure of assembly plant with 75% of base pay still paid. Redeployment of production workers

33% retrenched, overtime frozen, no increment paid

Retrenchment of foreign workers, VSS for local workers, reduction in bonus paid, no annual

increment paid to management, insourcing

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Section 3: Electronics manufacturing

Nippon Electronics Micro Drive Elecomp

Ownership MNC (Japanese) MNC (US) MNC (US) MNC (US)

Main product Cathode ray tubes Key computer component Drives and disks Heads for drives

Size 2000 in NE

(one of 20 subsidiaries, with total employment in

Malaysia of 30,000)

5500 in Penang (8500 through Malaysia, 65,000 globally)

2700 (5300 globally)

1800 (4000 globally)

Influence of parent Main influence on

accounting and technical sides. No retrenchment policy throughout Asia Training, morning

assemblies, etc.

Highly influential. Drove process for HRD approach.

Generally permits

autonomy, except when Drive Malaysia fails to meet performance

benchmarks. No influence on ER.

Very little influence on ER.

Employee representation

Non-union (due to self-labelling as ‘electronic’). JCCs (mainly OHS) Monthly assemblies.

Non-union. No representative forums. Quarterly employee assemblies.

Non-union. No representative forums. Small group lunches with MD.

Non-union. No representative forums. Small group lunches with MD.

Profit environment Fall in demand (mostly exported). Decline in Asian market, but growing globally.

Minimal impact from financial crisis.

Falling sales due to global market changes, though Malaysian plant is more profitable than others.

Global fall in demand, not directly due to financial crisis. Facing crisis of technology - future

uncertain.

Employment levels/ changes Falling slowly through attrition.

Major expansion in

Malaysia.

Falling slowly through attrition. Falling significantly.

Labour adjustment mechanisms No retrenchments. Insourcing. Increase

training time. No payment on variable bonus.

Redeploy labour between companies.

Reduced increments due to slower market growth -still higher increase than industry. Reducing use of foreign workers as locals become available.

No retrenchments. Insourcing (work formerly done in Philippines). Reduced increments. Reduced bonus. Encourage use of leave.

800 layoffs (30%) through voluntary separation. Major cut in overtime. Reduce working days per week. Reduced bonus. Compulsory leave.

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Section 4: Hotels

Fourstar Hotel Fivestar Klang Resort Hotel

Ownership Large Malaysian-owned conglomerate Owned by local company which owns four Fivestar Hotels; managed by US MNC Fivestar chain.

Part of large Hong-Kong based MNC conglomerate

Main market Domestic, some international Domestic, some international >90% international

Size 270 full-time employees (plus 20-30 casuals) 320 full-time employees (plus 50 casuals) at Fivestar Klang; 1500 employees in 5 properties across Malaysia

700 full-time employees (plus 200 casuals) at Resort; 8 hotels in and near Malaysia.

Influence of

parent

Corporate HR section, but property operates with high autonomy. International Guest Service Standard driven by parent.

Influence on other areas weaker (eg work organisation: multiskilling slow to implement).

Moderately high devolution to Resort. Decision making

decentralised; regional HR Director only gets involved in major issues.

Employee representation Weak in-house union. 60-65% of eligible employees unionised.

Industry union. 50% of eligible employees unionised. Industry union, fairly autonomous and activist.

95% of eligible employees unionised.

Profit environment

Revenue fell by over half due to financial crisis and oversupply. Currently operating at a loss.

Revenue fell by half due to financial crisis and oversupply. Not adversely affected by financial crisis. Small improvement in high

occupancy rates due to fall in RM.

Employment levels/ flexibility Employment fall of 30%. Employment falling through attrition. Stable.

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Labour adjustment mechanisms

Labour attrition. Two employees retrenched. CA extended. Bonus not paid 1998. Some work intensification (eg increased hours for clerical employees).

Labour attrition. No retrenchments, no VSS (owner opposed). Poor performers removed. CA extended. Contractual bonus staggered. Reduced employer contribution to employee provident fund (from 15% to 12%). Tiered pay cuts for managers: • 3% cut for

Some work intensification.

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REFERENCES

Ariff, Mohammed, Chung, M.Y.H., Kadir, A.W.A., Ean, O. G, & Lae-Imm, E. T. (1998) Currency Turmoil and the Malaysian Economy: Genesis, Prognosis and Response , Malaysian Institute of Economic Research, Kuala Lumpur.

Bhopal, M (1997) ‘Industrial Relations in Malaysia - Multinational Preferences and State Concessions in Dependent Development. A Case Study of the Electronics Industry’ , Economics and Industrial Democracy , 18(4), 567-597.

Cascio, W F (1993) ‘Downsizing: What Do We Know? What Have We Learnt?’, Academy of Management Executive, 7(1), 95-104.

Filipowski, D (1993) ‘Downsizing Isn’t Always Rightsizing’, Personnel Journal, November, 71.

Littler, C. R., Dunford, R., Bramble, T. and Hede, A. (1997) ‘The Dynamics of Downsizing in Australia and New Zealand’, Asia Pacific Journal of Human Resources , 35(1), 65-79.

Ministry of Finance (1998) Economic Report 1998/99, Kuala Lumpur.

National Economic Action Council (NEAC) (1998) National Economic Recovery Plan: Agenda for Action, Economic Planning Unit, Prime Minister’s Department, Kuala Lumpur.

Price, R & Bain, G S (1989) ‘The Comparative Analysis of Union Growth’, in Recent Trends in Industrial Relations Studies and Theory, 8th World Congress, International Industrial Relations Association, Brussels, 99-110.

Sebbens, T D (1998) ‘Rising Tides, Leaky Boats: The Influence of Downsizing on Wage Levels’, paper presented to sixth International Employment Relations Association Conference, Wollongong, July 1998.

ENDNOTES

1 interview with Ministry of HR, March 1999. 2 interview with MTUC, August 1998. 3 interview with FMM, August 1998.