Giving Workers the Business: World
Bank Support for Labor Deregulation
by Peter Bakvis
Multinational Monitor magazine,
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
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
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:
0. 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
0. 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
0. 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.
0. 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.
0. 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
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
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
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
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
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
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
In May, the new government withdrew the
labor ordinance and proposed a restoration of the tripartite reform
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
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
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.