[OPE-L] World Bank Support for Labor Deregulation

From: glevy@PRATT.EDU
Date: Thu Dec 21 2006 - 09:10:11 EST

     Multinational Monitor

     JULY/AUG 2006

     VOL 27 No. 4

     Giving Workers the Business: World Bank Support for Labor Deregulation
     by Peter Bakvis

      A living wage, modest restraints on working hours and rules
requiring notice be given before workers are fired all interfere
with the "ease of doing business," according to a leading World Bank

      The Bank's annual Doing Business report - the institution's highest
circulation publication - considers countries that establish minimum
wages above a certain very low level, set maximum hours of work at
levels respecting international labor conventions, or require any
advance notice for dismissal or specific procedures for job
termination to have rules that hinder their investment friendliness,
and it ranks these countries below countries with inferior worker
protections. Countries can improve their rank when they do away with
these and various other kinds of labor regulations.

      The Doing Business report is highly influential. The Bank alleges it
has inspired dozens of policy changes around the world. "The lesson
is what is measured gets done," says Caralee McLiesh, an author of
Doing Business 2007.

      That's exactly what worries union leaders. Representatives of the
international trade union movement have met with World Bank staff
responsible for the publication, including the vice president for
private sector development, to raise concerns about the implicit
message of Doing Business that labor market deregulation has only
benefits and no costs. Bank staff have told trade unionists that
Doing Business does not intend to give any indication of what is an
appropriate level of labor regulation and that those who use Doing
Business data on labor regulation, such as by way of country
rankings, to promote removal or decrease of regulations, are
"misinterpreting the data."

      Nonetheless, World Bank and International Monetary Fund (IMF)
country-level policy reports and recommendations use Doing Business
indicators on labor regulation to do exactly that - to propose
reducing or doing away with various types of labor regulations.

      The Ease of Firing Workers

      Starting with Doing Business in 2004, issued in October 2003 as the
first edition of an annual World Bank publication, labor and
employment regulations have been one of the five original themes
used to evaluate countries' "ease of doing business." By the third
edition, Doing Business in 2006, the number of themes covered had
been expanded to eight.

      Almost as soon as the first edition of Doing Business was launched,
International Confederation of Free Trade Unions (ICFTU)-affiliated
organizations in developing and transition (former Soviet or Eastern
bloc) countries reported that World Bank country offices were using
the "hiring and firing workers" indicators of Doing Business to
publicly challenge client-country governments to reduce or eliminate
various types of protection for workers. The Bank offices did this
through public statements or at meetings, where they compared the
country's hiring and firing indicators with those of other
countries, frequently countries in the same region (or using
regional averages), and asserted that higher indicators constituted
obstacles to investment and should be corrected by reducing the
level of protection.

      The ICFTU/Global Unions expressed their concerns about the Doing
Business labor indicators in a number of verbal and written
communications, including a letter on the Doing Business report sent
to the World Bank's president, five twice yearly statements for the
World Bank/IMF spring meetings in which the subject was raised, and
a detailed analysis of the publication's labor market indicators
sent to Bank staff and executive directors.

      The statements and analyses produced by trade unions pointed out
several implicit and potentially harmful policy implications of the
hiring and firing indicators. These declared countries to be less
friendly to business if the legally established work week is less
than 66 hours, if the legal minimum wage exceeds 25 percent of GDP
(gross domestic product) per capita, or if they put any restrictions
on part-time work such as requiring full social protection.
Additional bad marks are given to countries that do not allow
employers to terminate labor contracts at their own total
discretion, or that establish any sort of requirement for advance
notice, priority rules or severance payment in case of dismissal,
either individual or collective.

      The World Bank calculates these hiring and firing indicators without
any reference to the kind of industrial relations or social
protection schemes that might exist in the country. By implying that
the removal of such protections has only benefits, i.e. making the
country more investment-friendly, but no costs, even though no
cost-benefit analysis of removing the regulation has been done,
Doing Business has been informing countries that across-the-board
labor deregulation is a win-win approach. The first edition of Doing
Business advised countries to imitate the "deregulation experience"
of several developing countries that had undertaken "a general
reform toward reduction of the scope of employment regulation."

      The certainty of its advice notwithstanding, the Bank has not
provided any evidence from developing countries to support its
assertions that developing and transition countries that adopt
specific labor market deregulation measures will obtain more
investment and employment.

      And Doing Business has simply ignored the negative consequences of
labor market deregulation, including:

        a.. Long working hours (Doing Business has stated that the maximum
legal working day should be no less than 12 hours) result in
higher levels of workplace injuries and fatalities.
        b.. The minimum wage level Doing Business considers acceptable (25
percent of GDP per capita or less), means that most Sub-Saharan
African countries would have minimum wages of less than $30 per
month - less than the World Bank's own $1 a day extreme poverty
        c.. Since part-time jobs are disproportionately held by women
workers, already frequently subject to inferior wages and
benefits, the rule that full social protection should not be
granted to part-time workers particularly penalizes women.
        d.. The elimination of all forms of protection against contract
termination without cause or unfair dismissal would increase
workers' vulnerability to abuse, particularly among groups that
have traditionally been victims of discrimination.
        e.. In the absence of government-provided unemployment benefits,
often nonexistent in developing countries, advance dismissal
notice or severance pay requirements (defined by Doing Business as
obstacles to investment) constitute the only form of income
protection workers have.
      The 2006 edition of Doing Business includes the suggestion that
"rather than requiring high severance payments ... middle-income
countries can introduce unemployment insurance." However countries
that do so are also penalized by the Doing Business indicators if,
as in most countries, unemployment insurance is financed through
payroll taxes.

      Work All Day, Work All Night

      Bank representatives acknowledge that the indicators consider labor
regulations to be obstacles to investment, but say they do not
constitute a judgment as to whether the level of regulation is good
or bad. An appropriate level of regulation could in fact be higher
than 0.

      In a July 2005 meeting, the Doing Business team told the ICFTU that
it did not advise countries to carry out labor deregulation on the
basis of their hiring and firing indicators relative to those of
other countries and stated that anyone who did so was
"misinterpreting" the indicators. Moreover, they said, it was not
appropriate to present the information derived from the indictors in
terms of country rankings.

      The World Bank apparently changed its mind on the issue of country
rankings, however, since the 2006 edition of the Doing Business
report launched in September 2005 contained, for the first time, an
"ease of doing business ranking" for all 155 countries surveyed. The
2005 edition had only included a table with the "top 20 economies on
the ease of doing business." In addition, the Bank's Doing Business
website began providing rankings of all countries for each component
indicator, including "hiring and firing."

      Simeon Djankov, the lead author of Doing Business, continues to
assert that those who use the indicators to push for labor market
deregulation are misinterpreting the indicators. He emphasizes that
nowhere in the "Hiring and Firing Workers" chapter of Doing Business
was any assertion made as to what was an appropriate level of labor

      He does not explain why, if this was the case, the Doing Business
website presented country indices for hiring and firing and the
other criteria by including the country's rank alongside the "best
performer" and the "worst performer" in each category. In 2006, for
the category "hiring and firing," for example, the best overall
performer was indicated as being Palau. Palau, which is not a member
of the International Labor Organization (ILO), wins points from the
Doing Business report for a permitting up to 24 working hours per
day, up to 7 working days per week, and requiring zero mandated
annual leave for an employee with 20 years seniority.

      In the 2007 edition of Doing Business, launched in September 2006,
Palau was displaced as best performer in the category of labor
regulation by the Marshall Islands. Palau and Marshall Islands have
in common that both are tiny Pacific Island nations, both have
almost no worker protection rules, and neither is a member of the

      Doing Business in Practice

      Doing Business is in fact being used by World Bank and IMF staff to
push for policy changes in countries, always in the direction of
reduced labor regulation. Case studies of how the report is being
used show both that little attention is paid to the underlying data
on the purported benefits of deregulation, and virtually no concern
evidenced for the costs.

      Bolivia: In October 2005, the World Bank issued a Country Economic
Memorandum (CEM) for Bolivia which cited Doing Business by noting
that "the firing costs for labor - in terms of weeks of salary - are
modest in relation to those of some countries (e.g., Brazil and
Colombia) but higher than average in Latin America." Because
Bolivia's "difficulty of hiring index," as calculated by Doing
Business, was higher than the regional average, the Bank's CEM
proposed that firms which establish operations in the country's free
trade zones should be "exempted from some of the more burdensome
provisions of the Labor Code."

      The CEM actually acknowledged that the Bank had no idea as to
whether the "burdensome provisions" that it suggested eliminating
actually harmed investment and growth. The CEM's authors even
appeared to express skepticism about employers' complaints: "Many
firms are quick to complain about the Labor Law. It reduces their
flexibility and productivity, but the relevant question here is how
much it impedes private investment and forces firms into the
informal sector, and that has not been estimated." Not only did the
Bank not know what the negative impact on Bolivian workers would be
of eliminating the provisions firms found burdensome, it did not
even know whether it would actually result in increased investment.

      Colombia: The second edition of Doing Business, launched in
September 2004, hailed Colombia as one of the two "world's most
successful investment climate reformers over the past year ... [for
] increasing the flexibility of labor laws." The "Hiring and Firing
Workers" chapter of Doing Business in 2005 lauded Colombia and
Slovakia for their "bold" labor reforms which, it predicted, would
produce "the largest payoffs" compared to more modest reforms in
other countries "in reducing unemployment."

      Barely a year later, the World Bank apparently decided that being
one of the world's top two labor law reformers was just not good
enough. In a November 2005 Country Economic Memorandum for Colombia,
the Bank declared that "Labor market inflexibility and the high cost
of labor contribute strongly to informality and unemployment. ...
[M]ore reforms are needed." The source of the Bank's newfound
concern about Doing Business in 2005's top-scoring reformer was the
2006 edition of Doing Business, which had done new calculations and
decided that Colombia's hiring and firing indicators were still too
high. The CEM noted that, according to Doing Business in 2006, these
indicators were higher in Colombia than in OECD (Organization of
Economic Cooperation and Development, the grouping of rich nations)
countries and called on Colombia to "make hiring and firing
decisions more flexible."

      A November 2005 Bank report offered a reality check on the labor
market reforms celebrated by Doing Business in 2005. The report
concluded, "the impact of the reform may have been positive.
However, making this link is not an easy task." In other words, the
Colombian labor market deregulation measures that Doing Business
confidently predicted would be hugely successful in inducing job
creation turned out to have had so little impact that the World
Bank's researchers were not sure they had any effect at all.

      Ecuador: In Ecuador, the World Bank's April 2005 Investment Climate
Assessment cited the fact that Ecuador's "flexibility of firing
index," as calculated by Doing Business, was higher than in some
other South American countries. The Bank invoked the high indicators
to recommend a wide-ranging series of measures, including
elimination of profit-sharing and employer-provided retirement
schemes: "Ecuador should consider measures aimed at reducing
rigidities in its labor markets, particularly with regard to firing
restrictions, mandatory profit sharing and employer-subsidized
retirement." The Bank made these recommendations even though it
found that only 14 percent of Ecuadorian firms rated government
labor regulations as a source of major problems.

      Although International Monetary Fund staff usually acknowledge that
they have no expertise on labor issues, the IMF also invoked the
Doing Business hiring and firing indicators for Ecuador and made its
own proposals for labor deregulation in its March 2006 Article IV
Consultation Staff Report.

      Lithuania: The World Bank's May 2005 Investment Climate Assessment
for Lithuania examined the Doing Business rigidity of employment
index for the country, and found that Lithuania's level was "about
the average for Europe and Central Asia." It complained, however,
that "Lithuania has much greater rigidity than the leader in the
region, the Slovak Republic."

      Among the features of Lithuania's labor legislation that the World
Bank found problematic was a requirement that "labor contracts be in
writing and based on a model set out by law." Equally troublesome
for the Bank was that when Lithuania became a European Union member
in 2004, it took actions "boosting the minimum wage and setting high
standards for health and safety of workers." According to the Bank's
investment climate assessment, provisions such as these "may, in the
short term, reduce Lithuania's attractiveness to foreign and
domestic advisors alike," as compared to the regional deregulatory
leader, Slovakia.

      For reasons not explained in the 2006 edition of Doing Business,
Slovakia, the world's "top reformer" of Doing Business in 2005
(followed by second-place Colombia) because of its "bold" labor
reforms, had lost most of its luster by the time the new edition
came out. In the report's 2006 edition, the Bank had recalculated
Slovakia's rigidity of employment index and increased it from 10 to
39, only slightly below Lithuania's.

      News about Slovakia's demotion from its former status as the model
to emulate in terms of labor deregulation only made its way slowly
to the Bank's sister institution, the IMF. Eight months after Doing
Business in 2006 had discarded the idea that Lithuania needed to
deregulate its labor market in order to catch up with the regional
leader, the IMF published an Article IV Consultation Staff Report in
May 2006 which continued to invoke Doing Business in insisting that
the task of improving Lithuania's business climate "remained
unfinished." The Fund called in particular for the removal of
restrictions on overtime work and temporary work contracts.

      Nepal: In January 2005, Nepalese trade unions and employers,
supported by the government and the ILO, agreed on a labor law
reform process that would make job termination rules more flexible,
while also establishing a social security system, improving health
and safety standards, and ratifying all of the ILO conventions on
core labor standards. However, the tripartite process for reform was
abruptly cut short when the country's monarch seized absolute power
in February 2005 and suspended civil rights, imprisoned many trade
unionists and outlawed union assemblies. Given the influential role
that the World Bank plays in Nepal because of its important program
there, Nepalese unions urged the Bank to use its influence and
encourage the king to re-establish democratic rule and support
continuation of the tripartite labor reform process.

      Instead of defending the reform process under democratic
institutions, local World Bank staff told unions and the ILO that
Nepal needed to immediately bring down the country's hiring and
firing indictors and particularly the high "difficulty of firing
index" as calculated by Doing Business. The Bank even threatened to
reduce financial support to the king's regime, not for refusing to
restore civil rights, but in case he did not promulgate a labor
reform which drastically reduced protection against dismissal,
curtailed the scope of collective bargaining in favor of individual
work contracts, and restricted trade union action.

      In January 2006, the World Bank's country director for Nepal
confirmed in writing the threat to reduce financial support if the
Doing Business-inspired labor reform was not implemented: "To the
extent that labor law reform continues to constitute a priority area
of reform that would determine HMGN's [His Majesty's Government of
Nepal] ability to access budget support from the World Bank, HMGN
may wish to work with its own tight deadline [i.e. immediate
implementation of the labor ordinance]. ... I do not recall saying
that we felt 'agreement' among tripartite constituents was essential
to ensure effective implementation of reforms."

      The Nepalese king did as urged and promulgated the labor ordinance
advocated by the World Bank in mid-March 2006. The draconian labor
law changes he decreed contributed to making relations with trade
unions even worse.

      Unions joined in the pro-democracy movement that ultimately forced
the king to give up his dictatorial powers and reinstate parliament
in late April, but not before a last wave of repression resulted in
hundreds of detentions and several deaths.

      In May, the new government withdrew the labor ordinance and proposed
a restoration of the tripartite reform process.

      South Africa: The IMF's Article IV Consultation Staff Report for
South Africa, issued in September 2005, dealt with the country's
labor regulations and noted that, on the basis of the Doing Business
indicators, "South Africa scores particularly high in difficulty of
hiring and dismissal procedures" as compared, for example, to the
OECD average. The report recommended, among other proposals relating
to labor matters, "further streamlining dismissal procedures" as a
way to "make a significant dent in unemployment." The Article IV
Report for South Africa backed up its recommendation with a Selected
Issues report that included a full chapter on the role of labor
market regulations in South Africa and devoted several paragraphs to
the Doing Business indicators.

      However, the IMF's reports on South Africa failed to mention that
the higher hiring and firing indicators for South Africa than in
OECD countries were explained in part by the country's affirmative
action programs, adopted by post-apartheid governments to overcome
the legacy of decades of racial discrimination in the labor market.
South Africa's labor laws include regulations to avoid situations
where all of the nonwhite employees of a firm would be the first to
lose their jobs in case of retrenchment and also provide recourse
for workers who feel they have been unjustly dismissed.

      For both of these types of labor provisions, South Africa received
bad marks from Doing Business. Doing Business gave South Africa bad
marks in its "Grounds for firing" category.  This category defines
rules establishing that "the employer may not terminate employment
contract without cause" and "the law establishes a public policy
list of 'fair' grounds for dismissal" as business-unfriendly.

      A One-Sided Approach

      Country-level staff of the World Bank and IMF are using the Doing
Business indicators to drive a one-sided approach to labor market
reform in developing and transition countries. They have used Doing
Business to push countries to bypass tripartite consultation
mechanisms for reforming labor laws. Despite the publication's
implicit endorsement of the core labor standards, World Bank and IMF
staff have used Doing Business to encourage countries to eliminate
measures that have been put in place to implement core labor
standards, such as programs to end discriminatory practices.

      The "misinterpretation" of Doing Business - if that is indeed what
is taking place - is probably due in large part to the simple coding
formula which, according to the authors, explains the report's
success as the World Bank's best seller. The authors claim that they
have no intention of indicating what is an appropriate level of
labor regulation.

      However, by designating as the world's "best performer" in terms of
hiring and firing the country which has the least amount of labor
market regulation, the message of Doing Business cannot be clearer:
the less labor regulation a country has, the better it is.

      Peter Bakvis is director of the Washington Office of the
International Trade Union Confederation (ITUC)/Global Unions. The
recently created ITUC is the product of a unification of the
International Confederation of Free Trade Unions with the World
Confederation of Labor and some previously non-affiliated national
trade union bodies.
            A Different View from the Bank
            The simplistic message of Doing Business that labor
deregulation is an automatic win-win situation contrasts with
some other World Bank publications that have more seriously
examined labor market issues. One example is the World
Development Report 2006: Equity and Development (WDR 2006). It
found, "Unlike the markets for many commodities, labor markets
generally are not competitive. ... This can lead to unfair and
inefficient outcomes when the bargaining position of the
workers is weak." WDR 2006 stated that, left to themselves,
private markets often result in underpaid workers, hazardous
working conditions, discrimination against vulnerable groups
and "also do a poor job of protecting workers against the risk
of unemployment."

            While cautioning that excessively rigid work rules can lead to
segmentation of the labor market, the World Development Report
2006 stated that appropriate market regulation "can improve
market outcomes and lead to significant equity gains."
Speaking specifically about employment protection legislation
(EPL), which Doing Business suggests can be eliminated without
cost, WDR 2006 warned that "reducing EPL needs to be
complemented by greater worker protection that is not linked
to specific jobs."

            - P.B.

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