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 report.

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:

• 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.
• 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 threshold.
• 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.
• 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.
• 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 regulation.

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 ILO.

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.