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# **Box 3. How consultation helped pave the way for labor market reforms in Colombia**

Colombia’s far-reaching labor reforms, passed in 2002, were, from the outset, deeply political and generated intense opposition from strong and powerful interest groups. Formal sector workers with the most to lose were vocal and active in their opposition through strikes and other means. Fierce opposition also emerged from other organized players who derived substantial benefits from the status quo: unions of the large public and private agencies that administered “parafiscal” taxes and services (a key non-wage labor cost imposed on employers to finance social welfare programs for the general population, amounting to 8 percent of payroll), which together managed about $750 million per year and employed nearly 25,000 people throughout Colombia; unionized blue collar workers who directly benefited from the social services; and member of congress, mayors, state governors and other career politicians who used the agencies for patronage and other political purposes. These groups also mobilized other more powerful groups not directly affected by the reforms but with considerable disrupting power, including the teachers’ union, university students, and pensioners. Meanwhile the main beneficiaries of reform, the unemployed and informal workers, were too dispersed and too weak to lobby for reform.

Managing the opposition required efforts to slowly build consensus through stakeholder discussions. The government established a “discussion table” in 2000 with representatives from the most important groups—government, the main labor unions, key business federations, the main political parties, and academia. Their wide-ranging views made initial discussions of the reform contentious and confrontational. Agreeing on a diagnosis and solution proved challenging. To make the case for reform, the reform team presented the underlying economic analysis and empirical evidence. But selling the story proved difficult: interest groups rejected the evidence, questioned the underlying model, and successfully stigmatized the reforms as leading to unemployment and a reduction in income. Despite the difficulties, the continuity and conviction of a core group of technocrats proved crucial in keeping the discussions going.

The consultation process not only helped build awareness. It also exposed key players to reform ideas, and helped reach compromise on a set of proposals that were politically feasible and allowed for quick congressional approval. While many of the original proposals remained in tact, bargains were reached on two of the most controversial elements of the reform package. First, the payment of parafiscal taxes was made more flexible rather than reduced, as originally proposed and defeated in an earlier attempt in 2001. With some restrictions, the law exempted payment of such taxes for new blue collar workers for a maximum of four years, and for students under 25 years of age working part-time. And second, while the 2001 bill contained a provision for deepening the “salario integral”, an instrument that allows employers to hire workers under a contract that does not oblige them to pay certain non-wage costs, the 2002 package of reforms was passed without this provision. While the reform package did not include any direct provisions to compensate losers, it included a host of broader social protection measures, including the contemplation of an unemployment insurance scheme, the strengthening of public pension and health programs, and the creation of a micro-credit program for small enterprises. The main lesson from Colombia’s experience: it can take years of slowly “selling” a reform until an initiative actually gains momentum and is passed.

_<u>Source:</u>_ <u>Echeverry and Santa Maria 2004.</u>