A hidden blow for the workers of the world

Doug Muir pointed out to me that something interesting happened in 2009, to the attention of pretty much nobody. That something got the World Bank to change how it reports on countries’ labor regulations ... and by so-doing, remove a long-standing anti-labor bias at the Bank.

The World Bank has a set of indicators called the “Doing Business.”  It measures how easy it is to do things like start a business, get a loan, etc. One of the indicators used to be “Employing Workers.”  The index penalizes countries that establish minimum wages above a quarter of average wages, set maximum weekly hours below 66, require any advance notice for dismissal or specific procedures for job termination.

The index is problematic. First, when you dig down into the data, you can find some odd judgment calls: the United States, we’re told, has no restrictions on night work and no mandatory notice period for dismissal ... which I suppose is true in some states, but not most. Saudi Arabia gets a perfect score despite regulations that ban women from particular professions.

Second, labor unions have protested that the index assumes, without much empirical backing, that labor market regulations are all cost and no benefit. The unions are correct on this point: the empirical evidence is very much lacking that the Bank’s indicator has any consistent effect on employment levels or growth. 

But nobody cares about unions, and so nothing happened until 2009, when somebody introduced this paragraph into a supplemental spending bill in the U.S. House of Representatives:

SEC. 1626. REFORM OF THE ‘DOING BUSINESS’ REPORT OF THE WORLD BANK.

(a) The Secretary of the Treasury shall instruct the United States Executive Directors at the International Bank for Reconstruction and Development, the International Development Association, and the International Finance Corporation of the following United States policy goals, and to use the voice and vote of the United States to actively promote and work to achieve these goals:

1. Suspension of the use of the “Employing Workers” Indicator for the purpose of ranking or scoring country performance in the annual Doing Business Report of the World Bank until a set of indicators can be devised that fairly represent the value of internationally recognized workers' rights, including core labor standards, in creating a stable and favorable environment for attracting private investment. The indicators shall bring to bear the experiences of the member governments in dealing with the economic, social and political complexity of labor market issues. The indicators should be developed through collaborative discussions with and between the World Bank, the International Finance Corporation, the International Labor Organization, private firms, and global unions.
2. Elimination of the “Labor Tax and Social Contributions” Subindicator from the annual Doing Business Report of the World Bank.
3. Removal of the “Employing Workers” Indicator as a “guidepost” for calculating the annual Country Policy and Institutional Assessment score for each recipient country.

(b) Within 60 days after the date of the enactment of this section, the Secretary of the Treasury shall provide an instruction to the United States Executive Directors referred to in subsection (a) to take appropriate actions with respect to implementing the policy goals of the United States set forth in subsection (a), and such instruction shall be posted on the website of the Department of the Treasury.

Within 90 days, the Bank dropped the indicator. It’s still being tracked, but it’s no longer included in the international rankings, which means nobody cares.

There is a mystery here. Somebody inserted that provision, but it was done very quietly and even development professionals didn’t pick up on it at the time. Oh, they noticed that the indicator was dropped, but not that it was in response to a legislative threat from the United States. It was a very discreet threat, buried 1600 paragraphs down in a supplemental appropriations bill. Obviously this was only a meaningful threat in the context of the last Congress — today the Bank would be able to ignore this, confident that the Republicans would strip it out. But in the summer of 2009 someone was able to push back against the Bank and force it to abandon, in Doug’s words, “a pretty aggressive anti-labor position which was already having noticeable effects across the developing world.” The Bank would say it was anti-regulation rather than anti-labor, which is not completely unfair, but ignore that for the moment.

Who was the responsible party? Some staffer? A senator? President Obama? I would like to know.

Comments

[Doug M.]

I note in passing that the Bank is still sulking about this. The "Employing Workers" metric was still used in the last report, but it wasn't included in calculating a country's score.

The party responsible seems to have been either Barney Frank or someone on his staff. Yeah, he'll be missed all sorts of ways.

Doug M.

[Bernard Guerrero]

What's the difference? If I'm interested in whether the labor environment is going to cost me or not, the metric is still there. Are people actually shifting FDI around based on nothing more than a single (arbitrary) composite score?

[Doug M.]

The difference is that many governments care about their overall score -- "Over the last five years, Stanistan has risen from 90th to 45th in the World Bank Ease of Doing Business Index!" So they'll undertake "reforms" in order to improve their rankings.

Which is the whole point of the exercise, to be sure -- but the Hiring Workers indicator rested on fairly shaky ground. There is research to show that making it easier to hire and fire workers affects employment (among other things), but the Bank had structured the indicator so that it was monotonically anti-regulation. This was really stupid, and people got legitimately ticked, especially when the Bank went into "We're the World Bank, so we don't have to listen to you" mode.

Anyway, to bring it back: most would-be foreign investors aren't going to focus too strongly on a single indicator (out of 11) unless it's really alarmingly bad.

Doug M.