The World Bank should be defunded

Australia is currently being shocked on a daily basis with the revelations in our Royal Commission on Banking, which show that our financial services sector (banks, insurance companies, financial planning, etc) is deeply corrupt, with criminal behaviour clearly rife. Hopefully, many of the top executives and board members of these firms will be prosecuted and do time. Another ‘bank’ that has totally lost any sense of moral compass, not to mention effectiveness, is the World Bank. Its behaviour over the years has been scandalous. Earlier this year we learned that its so-called ‘Doing Business’ strategy deliberately manipulated its reporting to undermine a democratically elected government (Chile). And, last week (April 26, 2018), the World Bank released the Working Draft of its upcoming – World Development Report 2019: The Changing Nature of Work – where it attempted to pressure governments into widespread labour market deregulation, which if carried through would further disadvantage workers and further redistribute national income towards profits. The World Bank has outlived its purpose. It is now a seriously dangerous international institution and progressive governments should set about defunding it.

The World Bank has long been criticised for its role in undermining democracy in the less developed world.

For my previous analysis of the World Bank, please see this blog post – World Bankspeak – how to hide the failure of a mission! (May 29, 2017).

In essence, the World Bank does much more harm than it does good and should be disbanded.

It has a long list of ‘funded projects’ that allow large infrastructure projects that will benefit ‘first-world’ capital (Wall Street) at the expense of the local populations.

For example, large dams have been built by displacing sustainable, indigenous communities and degrading the local natural ecosystems.

In recent years, its role in the climate change debate has demonstrated clearly that it puts the interests of corporations by continuing to fund carbon-intensive and polluting projects.

This analysis – What are the main concerns and criticism about the World Bank and IMF? (August 23, 2005) notes that:

There are also concerns that the World Bank working in partnership with the private sector may undermine the role of the state as the primary provider of essential goods and services, such as healthcare and education, resulting in the shortfall of such services in countries badly in need of them. As an increasing shift from public to private funding in development finance has been observed recently, the Bank’s private sector lending arm – the International Finance Corporation (IFC) – has also been criticised for its business model, the increasing use of financial intermediaries such as private equity funds and funding of companies associated with tax havens.

Overall, the Bank has completely lost touch with its original mission, which I outlined in the blog post cited above. It is now an institution that uses its access and financial power to undermine national interests in favour of capital.

No progressive government should ever fund its operations.

The ‘Doing Business’ scandal

The World Bank introduced its Doing Business initiative in 2002 which it claims:

… provides objective measures of business regulations and their enforcement across 190 economies and selected cities at the subnational and regional level.

It generates “5 indicator sets” across “133 economies”.

One right-wing commentator, with a background in the financial sector, described as “one of the institution’s greatest contributions of the past 50 years” (Source).

He also noted that “The United States, as the institution’s largest shareholder, should be proud of what these indicators have accomplished”.

Reflect on the World Bank’s own claim that was providing “objective measures” to ease business development.

In fact, the indicators have long been criticised by progressive organisations including trade unions, not-for-profit agencies concerned with welfare, and other international organisations (including the ILO).

They have argued that the indicators are just a smokescreen for the World Bank’s deregulation agenda, which has shifted power to corporations and undermined workers’ rights and conditions.

The ILO argued that the indicators are able to be manipulated by pro-business lawyers in the way that the survey is responded to.

One law firm that have been involved in this process are the Panama Papers stars (Mossack Fonseca).

The article by ILO economists Janine Berg and Sandrine Cazes – Policymaking Gone Awry: The Labor Market Regulations of the Doing Business Indicators – which came out in 2008 in the Comparative Labor Law & Policy Journal (Vol 29, No 4) concluded that:

1. The World Bank DB indicators is “a widely used reference for measuring the economic effects of labor market regulations” despite there being “little evidence to support the policy view that labor market deregulation will improve economic performance and create more jobs”.

2. “the index is based on a partial and crude understanding of how labor markets and their institutions function as well as the purpose of labor law”.

3. “empirical evidence emanating from the index is of limited use.”

4. “Worse, the indicators send misleading policy messages that invite simplistic and potentially erroneous policy conclusions.”

The article goes on to provide a comprehensive critique of the DB indicators and methodology and highlights the ideological nature of the results.

In citing that article, the 2011 IMF Working Paper – Labor Market Regulations in Low-, Middle- and High-Income Countries: A New Panel Database – attempted to differentiate its own indicators in this field from the World Bank DB indicators.

It said:

The main difference from our new database is that the DB database is based on experts’ assessments of the severity of laws and regulations, and the coding of indicators is based in large part on survey questionnaires completed by local law firms. Partly reflecting their subjective nature, the DB indicators, especially those pertaining to the “Employing Workers” component, have been criticized …

Effectively, the IMF is admitting here that the ILO economists were correct.

In 2013, an independent panel created by the World Bank board examined the DB controversy and recommended sweeping changes (for example, scrapping the rankings for individual nations). The Board essentially ignored the advice.

Most recently, the New York Times article (January 13, 2018) – Chile Slams World Bank Amid Charges of Political Bias – reported that the outgoing president of Chile, Michelle Bachelet accused the World Bank of rigging the indicators to help undermine her centre-left government.

The Bachelet government was defeated at the March 11, 2018 elections after being elected in 2014 with more than 62 per cent of the vote. Her popularity plummeted not the least because of a financial scandal involving her family.

A key issue in that election was the state of the economy and the right-wingers claimed it was the tax changes that the Socialist government had introduced (increased corporate taxes, increased tax rates on higher income earners, increased excises on bads like tobacco, and crackdown on tax evasion).

The alternative view was that terms of trade changes (falling copper prices) undermined economic growth.

Deliberating on that conflict is not the topic of this blog post.

The issue for this blog post is that the right wingers made a big deal of the poor outcomes that the World Bank had published under its Doing Business indicators for Chile.

Earlier this year (January 12, 2018), Paul Romer, then the World Bank’s Chief Economist, blew the whistle on the objectivity of the indicators during an interview with the Wall Street Journal (paywalled).

You can read about his criticisms on his own home page – Doing Business – Updated 1-16 and then his partial backtrack as the heat rose on him – My Unclear Comments about the Doing Business Report

Romer essentially demonstrated that the World Bank’s rankings were anything but ‘objective’ but were politically-biased “tainted by the political motivations of bank staff”.

He indicated that while the index ranking for Chile fell in 2017, “business conditions did not get worse in Chile” while the Bachelet government was in power.

His attempts at backtracking on those statements failed and two weeks later he was forced to resign his position at the World Bank.

Romer had earlier stated that during his tenure at the World Bank (Source):

I’ve never in my professional life encountered professional economists who say so many things that are easy to check and turn out not to be true … Imagine a field of science in which people publish research papers with data that are obviously fabricated. When someone points this out, the Internal Justice Bureau steps in [and] says that the concerns do not meet the burden of proof required for them to take action. Nothing happens.

World Bank – World Development Report 2019

Apparently “work is school” and so workers don’t need to earn a living, socially-inclusive wage because they are learning things. That is the view of the World Bank

Not daunted by the scandals and criticism that the World Bank is associated with t

On April 26, 2018, the World Bank released the Working Draft of its upcoming – World Development Report 2019: The Changing Nature of Work.

Couched in various generalisations about the changing nature of work and the need to address inequality, the Bank uses this Report to continue to advance its ideological agenda for further widespread deregulation of labour and product markets.

The Report says “the threat to jobs from technology is exaggerated … Doomsday scenarios on robots impoverishing workers continue to strike a societal nerve” but will not eventuate.

Okay. We agree.

But they claim that the nature of work is changing with technology and this requires higher levels of human capital to ensure that unskilled workers do not fall behind.

The solution (among other proposals from the World Bank) include:

1. Cutting “minimum wages for the kind of workers where it is more likely to have negative effects”.

2. They want wages cut so firms can hire workers more cheaply – a race to the bottom.

Interestingly, they claim that as a first step they want to tighten “the link between labor productivity and wages”.

If they were serious in that regard then there would be a massive increase in real wages to compensate for the gap between labour productivity growth and real wages growth that has widened since the 1980s.

In other words, they are not serious about that.

3. “Firms could be accorded more flexibility in managing their human resources” because “rules on firms’ hiring and dismissal decisions are too onerous, they can also create structural rigidities that carry higher social costs in the face of disruption” – – so push all the risk onto the worker.

4. “The provision of financial protection to workers in the case of livelihood disruptions can also be reformed. Severance pay is the most prevalent form of this protection in most low and middle-income economies that have not implemented unemployment benefit schemes … severance pay is an ineffective instrument for income protection” – so push all the risk onto the worker.

5. “To ensure sufficient protection while preserving work incentives, unemployment benefit systems would rely both on individual savings and redistribution … Savings could be drawn upon in case of unemployment or for retraining. If people do not draw on all their savings, the remainder would be available upon retirement” – so push all the risk onto the worker.

6. “the design of contracts can become simpler as to accommodate growing diversity” by stripping away protections and processes that safeguard workers’ rights.

The problem is that there is scant evidence that any of the things they want to hack into actually restrict employment and growth.

Even, the OECD, a long advocate of deregulation began to recant somewhat in the face of overwhelming evidence that these views are erroneous.

In the 2006 Employment Outlook it concluded, after an exhaustive examination of the research literature, that “The level of the minimum wage has no significant direct impact on unemployment” and “Highly centralised wage bargaining significantly reduces unemployment”.

And more specifically, if you go back to 2013, to the World Bank’s own – World Development Report – you will see they recognise that, on the one hand, economists see “labor market regulations and collective bargaining are sources of inefficiency that reduce output and employment”, whereas, on the other hand, “these policies provide necessary protection to workers against the power of employers and the vagaries of the market. They can even contribute to economic efficiency by improving information, insuring against risks, and creating conditions for long- term investments by both workers and firms.”

They conclude that:

Advocates of both views can find examples to support their positions … A careful review of the actual effects of labor policies in developing countries yields a mixed picture. Most studies find that impacts are modest – certainly more modest than the intensity of the debate would suggest … Across firm sizes and country levels of development, labor poli- cies and regulations are generally not among the top three constraints that formal private enterprises face …

In most countries that have been studied, job security rules and minimum wages have a small effect on aggregate employment …

In developing countries, collective bargaining does not have a major impact …

That was then.

As the neoliberal management at the World Bank has intensified so has its message.

As to the role of labour market regulations, they certainly assist workers to participate in productivity growth to some extent. We have seen that as deregulation has been introduced, the capacity of workers to enjoy real wages growth has been reduced.

That is one of the reasons that real wages growth is so flat in many nations now and why profit shares have risen.

But if the World Bank proposals were introduced, the profit share in the nations that adopted the changes would increase even further and the incentives for workers to invest in education and training would fall.

The World Bank claims that while workers would receive less income from their labour income, governments could bolster redistribution through the taxes and transfers system by increasing consumption taxes (which fall disproportionately on low income earners) and a guaranteed minimum income.

Apparently, they believe that “closing loopholes in indirect taxation and collecting taxes on global corporations – are sufficient to cover the needs of financing a new social contract”.

So this is a sort of perverse version of ‘tax the rich, to fund public welfare’, which even the Left wheels out.

The argument not only erroneously claims that currency-issuing governments are financially constrained but also promotes a rather strange dichotomy concerning the role of the state, especially in poorer nations.

On the one hand, the World Bank seems to think that the state is powerless and requires widespread privatisation, outsourcing etc to provide basic services to the people.

But, on the other hand, it thinks that the government has the capacity to rein in the sort of legal dodges that companies use to evade taxes.

It is also perverse because it recognises that the tax increases it prefers are regressive yet they consider these taxes should be a central part of a scheme to supplement workers’ incomes after they are forced to take lower wages. Ridiculous.

Finally, consider the “work is school” notion, which the World Bank floats as a smokescreen to show it cares about the well-being of workers.

No-one doubts that the skills that will be required in the workplace in coming decades will require different talents and aptitudes relative to the old industrial skills that marked the growth period in the Post World War 2 period.

Technology has been changing for decades and labour forces adjust (with some dislocations) to the changing skill requirements.

But that adjustment has been aided significantly by the rise of mass education and public training capacity through technical schools, and within paid-work environment (apprenticeships, etc).

We also know that during the period of full employment (before the neoliberals convinced governments to create a sort-of permanent pool of involuntary unemployed (and now, underemployed), firms were forced to offer training to develop job-specific skills when they offered employment.

Not only has that capacity been diminished by the entrenched labour underutilisation but also governments have been under attack to reduce the quality of public education and apprenticeship systems have been compromised (if not significantly undermined).

The World Bank has been among the leaders attacking government fiscal deficits, which in many poorer nations are necessary to offer a broad education and training environment.

If “work is school” then governments should ensure everyone who wants a job has one. Yet the World Bank is happy to advocate a UBI.

It should be advocating a Job Guarantee and higher spending on public education.

Conclusion

Institutions such as the IMF and the World Bank that grew out of the Post World War 2 consensus between nation states to manage the Bretton Woods fixed exchange rate system and the need to reconstruct Europe and build prosperity in poorer nations have long outlived their role.

They have morphed into using their financial power over weaker nations to push a neoliberal agenda which prioritises the needs of international capital at the expense of the well-being of citizens in those nations.

Both institutions should be defunded and a new international institutional framework created.

I wrote about that in this series of blog posts:

1. Reforming the international institutional framework – Part 1 (August 3, 2016).

2. Reforming the international institutional framework – Part 2 (August 4, 2016).

3. Reforming the international institutional framework – Part 3 (October 20, 2016).

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.