World Bank Should Scrap Ideologically-driven Ratings

World Bank Should Scrap Ideologically-driven Business Regulation Ratings

Brussels, 23 January 2018 (ITUC OnLine): Following an acknowledgment by the World Bank’s chief economist that the institution’s “Doing Business” (DB) report unjustly downgraded the policies of the outgoing Bachelet government in Chile, ITUC General Secretary Sharan Burrow called on the Bank to end its association with the controversial report:

“Doing Business has led to the adoption of damaging measures to weaken or eliminate business regulations in many countries, including those that protect workers and provide social protection. It has been used to pressure governments that don’t buy into the report’s pro-deregulation agenda. It is entirely inappropriate for the World Bank, as a publicly-funded multilateral institution, to endorse and promote a right-wing platform of weakened regulations and reduced taxation on business around the world.”

World Bank Chief Economist Paul Romer apologised to Chile for changes to the DB methodology that resulted in the country receiving considerably worse rankings while the socialist government of President Michelle Bachelet was in power than these allocated during the preceding conservative government. According to media reports quoting Romer, the changed DB rankings did not reflect modifications in Chile’s regulations but rather, “had the appearance of being politically motivated”. The outgoing government was criticised by the conservative opposition for supposed anti-business regulations during last year’s election campaign, which the conservatives won.

Originally inspired by the “Index of Economic Freedom” developed by the conservative Heritage Foundation in the 1990s, DB has been mired in controversy for its anti-regulation policy bias since it began in 2003. The first edition encouraged countries to take part in the “deregulation experience” through actions such as the “reduction of the scope of employment regulation”.

The ITUC, many other organisations and some governments criticised the Bank for using DB to pressure governments to adopt measures such as lower minimum wages and elimination of obligations to give advance notice of mass dismissals. During the Great Recession in 2009, the Bank accepted to suspend the publication’s labour market flexibility indicator, although DB continues to compile and publish data for it.

Romer is not the first critic to call attention to the appearance of manipulation of the DB country scores. The International Labour Organization, academic analyses and even a 2011 IMF working paper have pointed out the “subjective nature” of the indicators and their susceptibility to manipulation by the corporate law firms that provide the data from which the scores are calculated. The firms on which DB relies have included such dubious actors as the Mossack Fonseca group, made famous during the Panama Papers scandal in 2016.

In 2013, an independent panel established by the World Bank’s executive board recommended several changes to DB and its status within the Bank, including the elimination of country rankings and permanently deleting both the labour market flexibility indicator and the tax rate indicator. The latter penalises countries that require business to pay taxes or make contributions to pensions and other social protection schemes that exceed a low threshold. However, Bank management rejected almost all the recommendations made by the independent panel.

The only recommendation the Bank accepted was to transfer supervision of DB from the private sector development department to the development economics group, in the hope that Bank’s research unit would result in more professional rigour, but that turned out to be a vain hope.

For example, the latest edition of DB includes the claim that labour market deregulation “can be particularly beneficial to employment creation”. This assertion flies in the face of the findings of the Bank’s “World Development Report 2013: Jobs”, which includes an extensive analysis of research on the claimed impact of employment protection and minimum wage rules on job levels. It found the impact “to be insignificant or modest”.

Sharan Burrow stated: “The World Bank should be embarrassed that its ‘flagship’ report, Doing Business, rejects evidence-based analysis and, by all appearances, has allowed itself to be manipulated for political ends. Bank management should decide once and for all that Doing Business has no business in the World Bank.”

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