IFI leaders talk jobs, but staff push labour deregulation

3 July 2012

International financial institutions (IFIs) increasingly recognise the negative impacts of austerity on labour markets, but a disjuncture remains between their public pronouncements and their policies and practice.

In a speech before the June UN Rio+20 conference (see Update 81), IMF managing director Christine Lagarde called on world leaders to put jobs at the forefront of any strategy to tackle the ‘triple’ environmental, economic and social crises.

An April paper by the International Trade Union Confederation (ITUC), IMF involvement in labour market and social protection reforms in European countries, suggests the IMF is changing its public position on labour market regulation but not its practice (see Update 80, 78, 74). It includes an analysis of a report produced by the IMF for a joint conference with the International Labour Organization (ILO), held in Oslo in 2010. According to the ITUC, the Fund “described how even a temporary spike in unemployment would cause long-term economic and social damage” and spoke positively of measures like support for aggregate demand, reduced work-time, provision of unemployment benefits, and acceleration of jobs recovery through wage subsidies or payroll tax holidays.

lacks in academic rigour and relevance to the real world euro-zone economy

The ITUC paper’s examination of IMF conditions on loans to European countries, however, finds that “the loan programmes did not include the type of measures listed by the IMF at the Oslo conference as policies that would have a positive impact in reducing unemployment and its costs. The reform measures adopted in fact usually had the avowed aims of making economies more ‘competitive’ or reducing budget deficits, or both.”

For example, a March loan to Greece of €130 billion ($162 billion), of which €28 billion came from the IMF (see Update 80), included the condition that “staffing plans should be consistent with the target of reducing public employment by 150,000 in end-2010 – end-2015”, an equivalent to a 22 per cent reduction of the public sector labour force. In December 2011, the IMF predicted that these reforms would bring general government employment to 12 per cent of the labour force, which is 3 per cent lower than the Organisation for Economic Co-operation and Development (OECD) average. The loan agreement also included reducing minimum wages by 22 per cent compared to the level of January 2012, and that “clauses in the law and in collective agreements which provide for automatic wage increases, including those based on seniority, are suspended”. The ITUC paper expresses concern that “during the two years of application of the IMF’s lending programme in Greece, unemployment doubled, from 10 per cent in the first quarter of 2010 to 21 per cent in the first quarter of 2012”, whilst “access to unemployment benefits were made more restrictive and pensions were decreased”.

The IMF has also faced criticism elsewhere. In early May, because of public opposition and increasing unpopularity of austerity measures, the government of Romania obtained agreement from the IMF to restore public wages back to their 2010 level. The wages had been targeted for a 25 per cent reduction as part of the austerity package.

Owen Tudor, from the UK Trade Union Congress, noted in June that “in Romania, the IMF advocated measures to liberalise employment protection legislation on the basis of the World Bank’s Doing Business Report, even though the World Bank had by that stage instructed its own staff not to use the rankings in that way” (see Update 81). He concludes that the IMF’s approach “certainly doesn’t look like evidence-based policy making: more like an ideological fixation. And it is blighting the lives of millions of European workers.”

In early May, workers in Nicaragua demonstrated against IMF proposals for labour market reforms which include increasing the retirement age to 65 and outsourcing, which would harm workers’ rights, according to Gustavo Porras, secretary general of the trade union Frente Nacional de los Trabajadores.

Meanwhile, a June IMF staff discussion note, Fostering Growth in Europe Now, proposes several measures of labour market deregulation as a way to return to growth. The study claims that “staff simulations show that large-scale labour, product market, and pension reforms … could boost output by 4.5 per cent over the next five years.” The proposed labour reforms include increasing retirement ages, cutting public-sector jobs, eliminating wage indexation, freezing minimum wages, dismantling or weakening sector-level collective bargaining, reducing unemployment benefits, relaxing dismissal procedures, shrinking severance pay and reducing payroll taxes. The paper notes, however, that the reforms may cause a “temporary rise in unemployment and potentially high social costs”.

Peter Bakvis from the ITUC noted that the study’s figures depend “on economies operating at full capacity, which currently is clearly not the case”, and that “only one-third of the gain, that is 1.5 per cent, would result from the proposed labour market and pension reforms.” Bakvis criticised the authors for supporting their conclusions with a “‘forthcoming’ and unverifiable IMF staff paper”. He concludes that the staff discussion note “lacks in academic rigour and relevance to the real world euro-zone economy” and “seems to be a repeat performance of the ‘message-driven’ research practices” criticised by an evaluation in 2011 (see Update 77).

ILO principles

Both the Bank and the IMF have yet to conclude an inter-organisational agreement with the ILO regarding the Declaration on Fundamental Principles and Rights at Work (FPRW), according to an ILO paper published in late March. The FPRW requires states to uphold freedom of association and collective bargaining, and eliminate forced and child labour. According to the ILO paper, the IMF is demonstrating some awareness of the need to pay attention to countries’ obligations deriving from ILO standards, but it does not include FPRW in its policy documents, whilst across the World Bank Group “references to and the inclusion of FPRW vary widely”. The International Finance Corporation (IFC), the Bank’s private sector arm, revised its lending requirements in 2006 to better incorporate FPRW and has jointly launched the Better Work campaign with the ILO. However, the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA), the Bank’s middle-income and low-income arms, respectively, have not developed a coherent approach to FPRW according to the ILO, while “the principles of freedom of association and collective bargaining have been approached cautiously, with reference instead being made more generally to workers’ organizations and national law”.

The ILO paper adds that leaders at the G20 summit in 2011 called on the World Bank Group, IMF and other international institutions to demonstrate greater coherence of multilateral action to strengthen the social dimension of globalisation. The authors hope that “the current revision of the World Bank’s operational safeguard policies [may offer an] opportunity to enhance coordination and achieve further coherence in promoting development consistent with FPRW.”

The IMF and the Bank are also being called upon to expand their emphasis on the UN Social Protection Floor (SPF) Initiative, which would ensure access to basic income security. A May statement from the L20, the trade union leaders from G20 countries, called on the G20 to: “establish a global SPF fund co-financed by G20 governments, the World Bank and multilateral development banks”, “increase cooperation between the IMF and ILO to support countries in creating the fiscal space for the implementation of the SPF”, and “create an interagency mechanism … to promote the implementation of the SPF at global, regional and national levels”. It also proposes the integration of the SPF into the Bank’s Social Protection Strategy 2012-2020.