Bank, Fund sidestep labour standards: Promote violation of workers’ rights

23 November 2006

The World Bank’s 2007 Doing Business Report rewards countries with low levels of labour protection and the IMF’s World Economic Outlook (WEO) urges labour market deregulation. Organised labour, developing country governments and US senators have called for the institutions to respect the standards of the International Labour Organization.

Doing Business, released in September, ranks 175 countries on how “business friendly” they are.  The annual report, first published in 2003, is used as a guide both for foreign investors and for governments prioritising so-called ‘investment climate reforms’.  According to the report, Georgia is the “top reformer”, followed by Romania and Mexico. The three “boldest reforms” include Mexico’s increase in investor protections, Georgia’s flexible labour rules and Serbia’s easing of export-import procedures. The most business-friendly economy is Singapore, followed by New Zealand and the United States.

The September 2006 WEO reiterated the standard IMF bilateral advice: “ensuring significant structural flexibility, including in labour markets, while establishing effective social safety nets will prove increasingly important”. Labour market flexibility refers to reforms to make it easier to hire and fire workers as well as limits on collective bargaining and rights to unionise. The WEO recommended these changes for Japan, the Latin American region, emerging Asian economies, and industrial countries. IMF Article IV consultations, annual country-level reports on the state of the economy, give the same advice, most recently to France, Korea, Serbia and Poland.

the World Bank and IMF to force countries to do away with various kinds of workers’ protection

The International Confederation of Free Trade Unions (ICFTU) has documented how Doing Business has been used by the World Bank and IMF to “force countries to do away with various kinds of workers’ protection”. For example, a recent Bank economic memorandum to Colombia demanded that the government make hiring and firing decisions more flexible in order to improve its Doing Business ranking.  In South Africa, the IMF’s Article IV report recommended “streamlining” hiring and dismissal procedures, which would have required doing away with affirmative action rules that post-apartheid governments put in place in order to correct the legacy of several decades of racial discrimination.

Guy Ryder, general secretary of the ICFTU, said ”the World Bank and the IMF need to work more closely with trade unions, civil society organisations, and UN bodies such as the ILO to develop policies that support the decent work agenda.”

A letter in October from six US senators to Bank president Wolfowitz notes that countries with inadequate labour protection are ranked high in Doing Business, contradicting ILO standards.  The senators cited Saudi Arabia’s best possible score on the ‘employing workers’ index, despite its prohibitions of freedom of association, the right to organise and collective bargaining, all violations of ILO labour standards.  They also “fail to see how praising countries for failing to guarantee a minimum wage and overtime pay lifts people out of poverty”  and called on the Bank to coordinate all future public statements regarding labour with the ILO.

The senators join calls for Bank and Fund coherence with ILO standards emanating from developing country governments. In her statements at both the spring meetings of the IMF and World Bank in Washington and the annual meetings in Singapore, Felisa Miceli, the Argentine minister for the economy, pressed the institutions to “see compliance with core labour standards not only as ethically imperative but also as necessary to avoid a race to the bottom to attract investment.” Miceli continued, “Before advocating for additional labour ‘flexibility’ (frequently just an elegant way of asking for less protection) staff should … consult the ILO.”

In its analysis of Doing Business, Latin American NGO D3E pointed out that “the way in which companies manage (or not) their social and environmental impact is not taken into account”.  Author Carolina Villalba concludes that the Bank’s objective is to promote large investments aimed at exporting commodities which create “comparatively few job opportunities but have high social and environmental impacts”.

Labour market failures?

The push for removal of labour protections has been based on empirical studies that link stringent labour market regulation to unemployment. The IMF’s April 2003 WEO said “the causes of high unemployment can be found in labour market institutions.” However, this contradicts the findings of the Bank’s World Development Report 2006 (see Update 48), which found that the effect of employment protection legislation on employment is “ambiguous” and that countries should not reduce such legislation without improving social protection and job creation schemes.

Aside from the WDR 2006, there have been comprehensive deconstructions of the empirical evidence behind studies which suggest that labour protections create unemployment. These rejections of the conventional wisdom include analysis by US think tanks the Center for Economic Policy Analysis, the Center for Economic and Policy Research and the National Bureau for Economic Research.

New research from the Work Foundation, a UK-based non-profit research and consultancy organisation, finds that “the reality is that countries with very different labour markets have performed equally well suggesting that there is no single route to full employment.” In comparing the UK with other European countries it finds that deregulation is not the only answer, and that “the combination of moderately tight labour law, strong trade unions and collective bargaining, and relatively generous levels of unemployment benefits is compatible with strong employment performance.”

In contrast to Bank and Fund policy, the IFC, the independently managed private sector financing wing of the Bank, “recently entered into a partnership with ILO to develop tools to support best practice in global supply chains.” President of the Bank Paul Wolfowitz was reported to have met Juan Somavia, director-general of the ILO, during his October trip to European capitals to discuss how the ILO and the World Bank might work together. It is unclear how the ILO will respond to the Bank’s overtures.

The debate on so-called policy coherence between international financial institutions and the ILO was spawned by the February 2004 World Commission on the Social Dimension of Globalization report, called A Fair Globalization: Creating Opportunities for All. Commissioned by the ILO, it looked at how to deal with the social dimensions of international economic policy. The report stated: “In practice, the multilateral system is underperforming in terms of ensuring coherence among economic, financial, trade, environmental and social policies to promote human development and social progress” and recommended the formation of a global parliamentary group that would integrate oversight of all multilateral agencies.