**Plcy, Planning, and Rese.rch**

**Mcroeconomic Adjustment and Growth**

Senegal is in the grip of a long-tern economic crisis. Senegalese industry suffers from a highly adversarial system of industrial and labor relations, excessive govemment regulations in some areas and inadequate government support in others, and many misperceptions about **the** ethnically diverse labor force and cnterprise ownership. Terrell and Svejnar conclude that:

* Senegal needs to adopt a social compact that would replace the current adversarial system with more cooperation among labor, industry, and the government. Linking a part of worker compensation.(for example, the wage supplement) to specific individual or group performance indicators would increase worker motivation.

* Protection generates inefficiency. This inefficiency is not an economic rent reflected in higher wages. Recent policies aimed at reducing protection should improve productivity.

> * Popular hypothesis is that the more firms in developing countries are exposed to world markets, the more productive they become. Terrell and Svejnar round that the extent of an enterprise's export orientation had no bearing on its productive efficiency.

* The unwillinigness of firms to invest in physical and human capital - combined with labor market and other govemment regulations - seems to have contributed to Senegal's decline in total factor productivity.

**C** urrc.it regulations contribute to the underuse of labor. Relaxing regulations about (paid) hours of work, layoffs, and the use of temporary (daily) workers would, along with transfer payments, improve the welfare of all parties.

* Some form of collective action or govemment intervention may be needed to provide the training that firms do not provide for fear of later being raided by other firms.

* No particular type of ownership has been linked with higher productivity, so policies geared toward changing enterprise ownership or providing preferentiai treatment toward certain types of ownership should be based on a careful examination of specific cases, not general rules (such as privatization, Senegalization, or preferential treatment of foreign capital).

* The average contribution of inon-Africans has been high, but their gradual exodus appears to have benefited Senegal's economy.

> * Special consideration should be given to retraining displaced workers within existing firms rather than outside of them, as the return (in terms of eamings) is higher on firm-specific experience than on general experience.

* The burdens of rising unemployment and limited hiring of young workers are borne mostly by older industrial workers who must support ever larger extended families and would thus benefit from economic growth. Output growth would also probably increase workers' eamings.

This paper is a product of the Macroeconomic Adjustment and Growth Division, Country Economics Department. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Raquel Luz, Room N I I - 059, extension 61760 (124 pages with tables).

Thc PPR Working Paper Scrics disseminates the findings of work under way in thc Bank's Policy, Planning, and Rescarch Complex. An objectivc of **thc** scrics is to get these findings out quickly, even if prcsentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official policy of thc Bank.

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