(Final Paper for seminar PPS 325.G: Institutional Design for Managing Environment)

This paper deals with Colombia’s adoption of a "productivity movement" program as a means to achieve increased international competitiveness of Colombian companies. It is only recently that the country initiated this program and it might be too early to make a definitive evaluation of its performance. However, with the help of the AIC framework, this paper attempts to point out current and potential problems the program could face in the course of implementation and to propose recommendations for addressing such problems.

The "productivity movement" originally started after World War II when, under the Marshall plan, European countries attempted to learn from the good practices of American companies that seemed to result in a high level of productivity (JPC-SED homepage). In theory, improved productivity of companies should lead to: (1) stronger competitiveness of their goods and services in domestic and international markets (which primarily benefits companies/managers); (2) higher salaries and better working conditions (which benefit employees); (3) lower prices and better quality of goods and services (which benefit consumers); and, in the long run, (4) more job opportunities (which benefit the economy as a whole).

The most outstanding example of successful adoption of the productivity movement is probably that of Japan. Japanese companies developed and adopted original methods for improving productivity of production processes and management in general. Some tools developed in Japan such as "Total Quality Control (TQC)" and the "Just in Time" (JIT) system are now internationally recognized. Since its establishment in 1955, the Japan Productivity Center (JPC), a private non-profit organization, has played an important role in disseminating the productivity movement among Japanese companies. The organization also provides technical assistance for developing countries through various channels including the Japan International Cooperation Agency (JICA), the bilateral donor agency in charge of Japan’s technical cooperation programs.

Like other developing countries, Colombia is attempting to promote exports to accelerate economic growth. As part of its activities aimed at enhancing the international competitiveness of Colombian industries, the government has launched a "national policy for productivity and competitiveness", in which it is trying to introduce the productivity movement to Colombian companies.

Several regional productivity centers have been established since 1996. Among them, the Pacific Productivity Center (CPP) in Cali, the second largest city of the country, is the largest in scale and most influential. In 2001, the government decided to consolidate the CPP into a National Productivity Center (CNP) which henceforth will be expected to function not only as a regional productivity center but also as the coordinating body for the productivity movement in the country as a whole.

The Ministry of foreign trade (MINCOMEX) is the principal government agency in charge of supervising CNP. The National Planning Department (DNP) has also a stake in the CNP through the Colciencias, the institution in charge of scientific and technological development of the country. CNP’s management reports to a general assembly and an oversight council consisting of representatives of private companies, workers, the academic circles, regional productivity centers, and the government. Thus, although CNP is a public institution, its statutes reflect the intent that it should be managed like a private sector organization. CNP currently has about 40 staff members including about 20 external associated consultants.

CNP’s activities include providing consulting services to Colombian companies, holding seminars for them, publishing materials regarding productivity improvement, and conducting research (such as measurement of the economy’s productivity). Approximately 200 Colombian companies participated in CNP’s programs in 2001 and this number will increase to 5,000 in five years according to its action plan.

CNP’s activities are largely financed by public expenditures. Colombian companies are assessed so-called "parafiscal" levies (earmarked taxes) to finance public services such as the Colciencias and SENA (an organization under the DNP in charge of providing technical training for workers). Part of the funds collected by SENA is channeled to CNP.

Japan’s technical assistance has played an important role in the development of the Colombian productivity movement to date. Technical experts from the JPC were dispatched to the CPP several times and helped the Colombian side formulate the plan establishing the CNP. In addition, Colombian personnel are given opportunities to learn about Japanese experiences with the productivity movement through JICA’s training programs held in Japan. The Colombian government is expecting to obtain further Japanese cooperation on a larger scale and for a longer term to support the program.

Finally, it should be noted that there are several public institutions other than CNP that are concerned with the improvement of productivity. These institutions include SENA (see above), the technological development centers which are sector-specific centers under the Colciencias, and other regional productivity centers. .

Applying the AIC framework, some problems can be pointed out regarding the above-stated situation, all of which are mutually connected.

First, at the appreciated environment level, it is questionable whether all stakeholders are appropriately involved with the program. In the case of Colombia, the government took the initiative of promoting the movement as a means to increase the international competitiveness of Colombian industries. This is quite different from the case of Japan where the movement developed as a voluntary undertaking of private parties (companies, workers, and customers). Due to this difference, companies eligible for CNP’s services are limited to exporters and "potential" exporters, while, in principle, all companies could benefit from the movement. Furthermore, as the MINCOMEX puts emphasis on strengthening international competitiveness, it might give the impression that the aim of productivity improvement is essentially to reduce prices and improve quality of Colombian products on the international markets. If this turns out to be the case, the employees of the companies involved will have little incentive to participate in the program because they won’t expect their wages and working conditions to improve. In short, to the extent that the government is perceived to have initiated the movement in a top-down manner primarily for its own purposes, the legitimacy of the program becomes doubtful.

The lack of active involvement of the private sector is also reflected in CNP’s overambitious action plan. For example, it sounds quite optimistic to expect that 5,000 companies will participate in its programs in five years, especially considering CNP’s limited number of staff.

Thus, it is recommended that a wider range of stakeholders be involved in generating a more appropriate common vision as to how productivity improvements would benefit the economy as a whole. Representatives of the managers of a representative sample of companies (not limited to exporters), their employees (and unions), and consumers (and their associations) should be involved. Based on this process, the functions and objectives of CNP should be re-assessed and re-defined as necessary. Although the government should still participate in the process, its role should be limited to one that supports the voluntary efforts of the private sector in order to avoid unnecessary political interference. In addition, if the government is to be involved, MINCOMEX should not be the only body concerned; rather, a steering committee consisting of relevant bodies such as MINCOMEX, the DNP (the Colciencias), the Ministry of development, and the Ministry of labor would be more suitable.

It should also be noted that, by allocating considerable resources towards encouraging the productivity movement, the government might be foregoing the opportunity to take more effective measures for promoting exporting sectors. In particular, the government could do what the private sector cannot do by itself: that is, provide companies with an enabling environment more favorable towards productivity improvement. For instance, foreign direct investment (FDI) tends to promote exports and induce productivity improvement through spillover effects. The government could dismantle existing obstacles to FDI by stabilizing the political and macroeconomic situation and introducing a more favorable regulatory framework. Above all, top priority should be devoted to overcoming the country’s notorious reputation associated with poor security and drug trade that is presumably discouraging FDI flows.

Second, it is questionable whether there is sufficient demand for CNP’s services. As CNP obviously cannot force companies to request its services, its success largely depends on how well it establishes successful relationships with them as part of its influenceable environment. To analyze this point, it is relevant to consider first the applicability of Japan’s experience with productivity improvement to the institutional circumstances of Colombian companies; and then to examine how it would apply to CNP.

Currently, CNP’s activities largely rely on Japanese technical assistance. It is most likely that Japanese experts are trying to introduce in Colombia Japanese practices regarding production control or management techniques. However, even though these practices may have been effective in the Japanese environment at specific times, there is no guarantee that they would work in the Colombian business culture.

One of the important elements of Japan’s productivity movement was the long-term relationship between economic agents to achieve common goals. The devastation caused by World War II must have contributed to generating a spirit of solidarity that led to cooperative efforts to rebuild and develop the economy.

For example, TQC is thought to have been an effective tool for Japanese companies especially until the 1980s. Under this practice, not only was the manager involved in raising productivity, but also the employees. The bottom-up approach was the basic idea here: employees were seen as best placed to identify problems in daily operations and contribute to their solution. Managers thus did not regard employees as being under their control or acting at their command; instead they adopted a more participative management style which gave employees incentives to perform appropriately. What enabled this relationship was employees’ strong consciousness of belonging to their company and commitment to their jobs, which can be illustrated by their frequently extraordinary overtime. This custom was reinforced by the wage system where the longer an individual worked for a company in his career, the higher his salary would become and therefore, changing jobs frequently would not pay.

The business culture in Colombia is quite different and as a result, TQC might not be very effective in Colombian enterprises. First of all, workers and especially those in blue-collar jobs, tend to realize that labor is something they are obliged to provide based on their contract and that overtime at the expense of their private life does not pay. Second, employees’ commitment to the company’s objectives and their jobs is also weaker because the labor market is more flexible; people tend to change jobs more frequently and the wage practices are devised accordingly. And third, the power of labor unions is considerable and often leads to conflictual situations between labor and employers. Under such a situation, managers might hesitate to introduce TQC and instead rely on ISO9000, a "Western" practice that tries to "fix" the operational processes so that even inexperienced workers can manage to carry out the tasks. In other words, if sufficient commitment of workers is not expected, it might be a good idea for a manager to put them under a stricter hierarchical environment.

Another example is the Just-in-Time (JIT) system. Although this system helped Toyota improve its own productivity, its subcontractors must have significantly suffered from the irregular orders from their parent company. The tolerance of the subcontractors or their respect for the long-term and stable business relationship made the system workable. If such a relationship is not customary in the Colombian business culture, managers will prefer a more market-oriented relationship with their suppliers rather than the JIT system based on long-term subcontracts. In other words, the best way for companies to interact with their influenceable environment can differ depending on the business culture to which they belong.

a. Provision of services that meet clients’ demand

These examples show that, in introducing foreign ideas, thorough consideration is necessary as to whether they are truly useful for the country and what kind of adaptation is required for them to be most effective. It follows that there is a limit to what Japanese experts can contribute; and CNP has to be responsible for devising the desirable tools for Colombian companies. In addressing this challenge, the current situation where CNP’s activities are largely financed by public subsidies is problematic because CNP is able to continue operating whether or not it provides services demanded by its clients. Actually, it is reported that the larger companies tend to rely on expensive international consultants for advice on productivity improvement. Thus, the relatively small companies which cannot afford such professional consultation are the primary recipients of CNP’s services.

Two apparently conflicting recommendations are relevant to address the situation. First, in the short run, it might be justified for CNP to rely on subsidies; during this period, it should accumulate the experience of working with Colombian companies and try to identify strategies and approaches that could be successfully applied to them and collect good practices that could be further disseminated. At the same time, CNP should train consultants who can serve local companies without the help of foreign consultants. These measures should lead to enhancing CNP’s reputation and increased demand for its services. To ensure this re-orientation of CNP, it is advisable that disbursement of subsidies be built into a performance contract to be enforced by the government. Second, in the long run, CNP should achieve financial autonomy by being able to collect revenues for its services. This will create mutual obligations between CNP and private companies and ensure that what the former provides is what the latter demand.

At the controllable environment level, the organization of CNP should be designed so that it can flexibly reflect the changing demand from the private sector. It is also desirable that CNP’s staff be hired and managed free from political pressure so that they would be more fully committed to the task of improving the productivity of Colombian enterprises.

 

b. Caring about client needs

As there are now other public institutions engaged in improving the productivity of companies (see above), it is essential for CNP to meet (or even exceed) its clients’ expectations. In fact, as various Ministries established these institutions with their own objectives, the situation has become quite complex. Companies in need of advice are not necessarily aware of which institution they should contact. It is advisable that the rationale for the existence of these institutions be reconsidered among the stakeholders. If there is little demand for some of these institutions, they should be abolished or merged with other institutions. In addition, to reduce the transaction costs for companies, each institution should be able to introduce other institutions to its clients whose needs fall outside its own specialty. Such mutual support should particularly be expected from CNP, considering its responsibility as a national institution (rather than any attempt at depriving other centers of their potential clients).

The third problem is that CNP and the Colombian government have failed to understand one of the important elements of CNP’s appreciated environment, namely the Japanese technical assistance. While Colombia is requesting the Japanese government to expand its support for CNP’s activities, the fact is that JICA remains cautious about expansion. The basic idea behind JICA’s attitude is that, facing a severe budget constraint and a change in the orientation of Japanese cooperation towards social issues, it is now considering productivity projects as less attractive. Although it could be possible for JICA to maintain the current level of cooperation, the targeted numbers of Japanese technical experts and Colombian trainees to be sent to Japan shown in official documents are obviously excessive.

The Colombian side is partially responsible for this miscommunication. The Colombian side (particularly the government) seems to have been more interested in drawing a beautiful picture of the future of the productivity movement rather than in ensuring sound implementation of the program. It might be a case that, due to short-term job assignments in the public sector, those who are in charge of planning the program in a top-down manner will not assume responsibility for its implementation.

To address this situation, what is essential is that management of CNP should focus more on implementation of the program. As already proposed, the interference of government should be minimized so that shortsighted planning is avoided and long-term benefits of the clients are seriously sought. On this basis, there are two lines of recommendations for the problem. On the one hand, the Colombian side should not count too much on Japanese technical assistance. Since such assistance is after all in their appreciated environment, CNP and the government should have more ownership for their productivity program. At least they should prepare a contingency plan as to how they would deal with the program in case no further cooperation would materialize. It is also relevant to ask the question whether the resources used for attracting foreign aid, which is volatile in nature, could be used for more productive purposes.

On the other hand, frank communication between the Colombian and Japanese sides could improve the situation. In other words, the former could bring the latter into its influenceable environment to some extent. Once it is realized that a new large-scale cooperation project is politically difficult, both sides could collaborate to devise a more realistic way of cooperation. For example, making use of the budget available to the experts for current cooperation, study tours to other Latin American countries (such as Brazil) could be designed, which does not require a long approval process. Also, JICA could help organize a network of productivity institutions within the region in light of the recent expansion of the South-South cooperation budget for JICA. These types of assistance are more economical than a large-scale project with many Japanese experts. In fact, to the extent that the applicability of Japan’s experience is questionable, learning from the experience of other countries in the region with a similar culture could turn out to be an even more effective way of empowering the CNP and thus achieving productivity improvement.

Improving productivity is obviously beneficial to the various parties in the economy. However, how best to effectively achieve this goal is less obvious. This paper’s analysis based on the AIC framework seems to suggest that Colombia’s current approach, characterized by relatively strong control of the government, is not very promising. The country’s top-down approach results in excluding some potential beneficiaries, while the quality of CNP’s services may be questionable as a result of its lack of incentives towards listening to its clients’ voice. A greater voice and more voluntary involvement by the private sector seems to be essential for CNP’s success.

It is true that productivity improvement of some companies will benefit other parts of the economy through lower prices and better quality of their products. This argument of externality might justify government’s strong intervention in favor of the productivity movement. However, unlike cases of pure externalities such as pollution, in this case it is the companies themselves who largely enjoy the benefits of productivity improvement. Thus, they should have themselves the incentive to improve their productivity and there isn’t much of a case for the public sector to impose new managerial or technical practices on them. In fact, it is highly probable that some companies know better than the public sector what works in the specific Colombian business culture.

Thus, if it is to succeed, CNP has to be familiar with its clients’ knowledge of productivity improvement methods, and the extent to which there is a demand for further expertise so as to be able to disseminate the kinds of good practices that will be relevant to a wide range of companies in the country. It is also important for CNP to encourage fair distribution of the benefits from productivity improvement among management, labor, and consumers in order to ensure the continuous involvement and support of these key stakeholders.

The government should realize that, after all, productivity improvement has more to do with the Colombian people’s quality of life than a narrow concept of international competitiveness. Thus, the role of the government in the productivity movement should be at most that of an equal partner of the private sector. And rather than intervening in the daily activities of CNP as the implementation agency, the government should focus more on improving the enabling environment for companies, which it is best placed to do. In particular, it should be noted that some of the above-stated recommendations for institutional changes, such as CNP’s financial autonomy, would require the government’s active support.

The role that Japanese technical assistance can play might be limited in the future. However, with closer consultation between the two countries, creative cooperation should be possible.

To conclude, CNP, the government, and the Japanese side could contribute to the program most effectively by maximizing their own "productivity". The recommendations provided in this paper are aimed at facilitating this process by redesigning the interrelationship between stakeholders. It is hoped that this new Colombian institution will be flexible enough to consider (and hopefully accept) this paper’s proposals so that it will achieve its objective of contributing to productivity improvement of the country’s economy.

-El Centro Nacional de Productividad (CNP) homepage at http://www.cnp.org.co/home/home.asp.

-Valerian Khagay (2000), Institutional Design: Restructuring a Former State-owned Enterprise. Final paper for PIDP seminar on Institutional Design of Managing the Environment, Fall 2000.

-Japan Productivity Center for Socio-Economic Development homepage at

http://www.jpc-sed.or.jp/index.html.

-El Ministerio de Comercio Exterior (MINCOMEX) (2001), Politica Nacional de Competitividad y Productividad.

-El Ministerio de Comercio Exterior (MINCOMEX) homepage at http://www.mincomex.gov.co/.

-El Nacional de Planeacion (DNP) homepage at http://www.dnp.gov.co.

-Felipe Quintero (2000), Colombia National Innovation System: current options for funding and policy orientation. Final paper for PIDP seminar on Policy Analysis of Development, Fall 2000.