September 2001 - VOLUME 22 - NUMBER 9
B e a r i n g t h e B u r d e n of I M F a n d W o r l d B a n k P o l i c i e s
Against the Workers
By Vincent Lloyd and Robert Weissman
How IMF and World Bank Policies
Undermine Labor Power and Rights
After a decade of economic reform along lines advised by
the International Monetary Fund (IMF) and World Bank, Argentina has plunged
into a desperate economic crisis.
The economy has been contracting for three years, unemployment is shooting
up, and the country is on the brink of defaulting on its foreign debt
To avoid default, Argentina has negotiated for a new infusion of foreign
funds to pay off the interest on old loans and obligations, and to forestall
a pullout by foreign investors.
Traveling down that road took Argentina to the gatekeeper for such loans:
the IMF. In August, the IMF agreed to provide a new $8 billion loan for
Argentina, intended to forestall default. That followed a nearly $40 billion
January bailout package with a $14 billion IMF loan as its centerpiece.
But like the loans Argentina has negotiated with the IMF and World Bank
over the last decade and like all other such loans from the IMF
and Bank the new monies came with conditions.
Among them are requirements that Argentina: promote labor flexibility
removing legal protections that inhibit employers from firing workers;
revamp its pension system to generate new savings by cutting
back on benefits for retired workers; slash government worker salaries;
privatize financial and energy operations of the government.
These requirements, and others, infuriated the Argentine labor movement,
which responded in March with general strikes that stopped economic activity
in the country. In August, with the latest loan package, tens of thousands
of workers took to the streets in protest.
That the IMF would demand such terms is no surprise. A Multinational
Monitor investigation shows that the IMF and World Bank have imposed nearly
identical mandates on dozens of countries. Based on reviews of hundreds
of loan and project documents from the IMF and World Bank, the Multinational
Monitor investigation provides detailed evidentiary support for critics
of the international financial institutions who have long claimed they
require Third World countries to adopt cookie-cutter policies that harm
the interests of working people.
Multinational Monitor reviewed loan documents between the IMF and World
Bank and 26 countries. The review shows that the institutions loan
conditionalities include a variety of provisions that directly undermine
labor rights, labor power and tens of millions of workers standard
of living. These include:
Critics respond that the measures inflict needless suffering, worsen
poverty and actually undermine prospects for economic growth. The policies
reflect, they say, a bias against labor, and in favor of corporate interests.
They note as well that these labor-related policies take place in the
context of the broader IMF and World Bank structural adjustment packages,
which emphasize trade liberalization, orienting economies to exports and
recessionary cuts in government spending macroeconomic policies
which further work to advance corporate interests at the expense of labor.
The Incredibly Shrinking Government Workforce
Typically, this means that the government should spin off certain functions
to the private sector (by privatizing operations), and that it should
cut back on spending and staffing in the areas of responsibility it does
The IMF/Bank support for government downsizing is premised, first, on
the notion that the private sector generally performs more efficiently
than government. In this view, government duties should be limited to
a narrow band of activities that either the private sector cannot or does
not perform better, and to the few responsibilities that inherently belong
to the public sector.
In its June draft Private Sector Development Strategy, the
World Bank argues that the private sector does a better job even of delivering
services to the very poor than the public sector, and that the poor prefer
the private sector to government provision of services.
A second rationale for shrinking government is the IMF and Banks
priority concern with eliminating government deficits. The institutions
seek to cut government spending as a way to close and eventually eliminate
the shortfall between revenues and expenditures, even though basic Keynesian
economics suggests that slow-growth developing nations should in fact
run a deficit to spur economic expansion.
In most countries, rich and poor, the government is the largest employer.
In poor countries, with weakly developed private sectors, the government
is frequently the dominant force in the nations economy. Sudden
and massive cuts in government spending can throw tens or hundreds of
thousands out of work, and contribute to a surge in unemployment, and
to a consequent reduction in the bargaining power of all workers.
In Nicaragua, for example, the Chamorro administration that followed
the revolutionary Sandinista government worked with the IMF to slash the
public sector. In the first three years of the new regime, the number
of government employees plummeted from 290,000 to 107,000 (resulting in
loss of employment for more than 9 percent of the Nicaraguan labor force).
Through 1999, the government eliminated more than 18,000 additional jobs.
The dramatic two thirds reduction in the size of government was driven
in part by a concerted government effort to strip out the Sandinistas
from government jobs, according to Marie Clarke of the Quixote Center,
but was also directed and required by the IMF and World Bank in a series
of loan agreements through the 1990s and in the present decade. A 1991
World Bank Economic Recovery Credit was designated to assist with downsizing
and restructuring the public sector. Continually reducing the size
of government has been a consistent benchmark criteria included in IMF
and World Bank loans, with specific cutbacks designated as evidence of
Nicaraguas adherence to structural adjustment conditions.
Nicaragua is presently undergoing a second generation of
structural reform programs, including yet another round of government
cutbacks. Unemployment now stands at 14 percent, but combined unemployment
and rampant underemployment totals 50 percent.
Other countries have witnessed similar emaciation of the public sector
under IMF and World Bank tutelage:
Privatize, Privatize, Privatize
Privatization is a core element of the structural adjustment policy package.
Blanket support for privatization is an ideological article of faith at
the IMF and Bank.
The range of IMF and Bank-supported or -mandated privatizations is staggering.
The institutions have overseen wholesale privatizations in economies that
were previously state-sector dominated including former Communist
countries in Central and Eastern Europe, as well as many developing countries
with heavy government involvement in the economy and also privatization
of services that are regularly maintained in the public sector in rich
countries, such as water provision and sanitation [see Privatization
Tidal Wave, page 14], healthcare, roads, airports and postal services:
Labor unions do not offer blanket opposition to all privatization. Particularly
in the case of Central and Eastern Europe, but also in many developing
countries, unions have agreed that privatization of some government operations
may be appropriate. But they have insisted on safeguards to ensure that
privatization enhances efficiency rather than the private plunder of public
assets, and insisted that basic worker rights and interests also be protected.
But those safeguards by and large have not been put in place.
Unfortunately, trade unions proposals regarding the form
of privatization, the regulatory framework and treatment of workers were
usually not listened to during the massive privatization wave in Central
and Eastern Europe, notes the International Confederation of Free
Trade Unions (ICFTU) in a report published in advance of the fall 2001
IMF and World Bank meetings. The IMF and Bank acknowledge some of their
mistakes in Central and Eastern Europe, ICFTU notes, but similar
mistakes may well be repeated in Central and Eastern Europe and in other
The ICFTU report highlights the case of Pakistan, where the military
government is planning, with World Bank assistance, a major privatization
initiative. The Banks support for the initiative comes despite
the potential for abuse in privatizing natural monopoly services, especially
given the lack of democratic control, and the refusal of the authorities
to negotiate with trade unions affected by the privatization program,
ICFTU notes. The Bank does candidly admit that a risk exists that
Pakistans economic reform and devolution plan could be hastily
implemented and captured by powerful interest groups, but makes
no suggestion as to how to avoid such an eventuality.
The Freedom To Fire
The theory behind labor flexibility is that, if labor is treated as a
commodity like any other, with companies able to hire and fire workers
just as they might a piece of machinery, then markets will function efficiently.
Efficient functioning markets will then facilitate economic growth.
Critics say the theory does not hold up. Former World Bank chief economist
Joseph Stiglitz described the problem to Multinational Monitor: As
part of the doctrine of liberalization, the Washington Consensus said,
make labor markets more flexible. That greater flexibility
was supposed to lead to lower unemployment. A side effect that people
didnt want to talk about was that it would lead to lower wages.
But the lower wages would generate more investment, more demand for labor.
So there would be two beneficial effects: the unemployment rate would
go down and job creation would go up because wages were lower.
The evidence in Latin America is not supportive of those conclusions,
Stiglitz told Multinational Monitor. Wage flexibility has not been
associated with lower unemployment. Nor has there been more job creation
in general. Where labor market flexibility was designed to
move people from low productivity jobs to high productivity jobs,
according to Stiglitz, too often it moved people from low productivity
jobs to unemployment, which is even lower productivity.
Indeed, some of the IMF and Bank documents treat labor flexibility almost
as code for mass layoffs. For example, a structural benchmark
in Nicaraguas dealings with the IMF is that the country continue
to implement a labor mobility program aiming at reducing public sector
In its recommendations to the new Mexican government of Vicente Fox,
the World Bank has spelled out just how far-reaching its promotion of
labor flexibility is. The Bank encourages Mexico to phase out a wide array
of worker rights and protections: the current system of severance
payments; collective bargaining and industry-binding contracts; obligatory
union memberships; compulsory profit-sharing; restrictions to temporary,
fixed-term and apprenticeship contracts; requirements for seniority-based
promotions; registration of firm-provided training programs; and liability
for subcontractors employees.
Spreading The Wage Gap
These initiatives usually occur in the public sector, where the government
has authority to set wages and salaries, and where the rationale is to
reduce government expenditures. (A different logic is applied to managers,
however, where the assumption is that higher salaries are needed to attract
quality personnel and to provide incentives for hard work.)
Sometimes the IMF and World Bank-associated wage freezes or reductions
do apply to the private sector, as in cases where the minimum wage is
frozen or reduced.
Sometimes the overarching policy is referred to as wage flexibility
and is undertaken in connection with labor market reforms.
The institutions have elaborate justifications for opposing wage supports.
An April 2001 World Bank policy working paper, for example, concludes
that minimum wages have a larger effect in Latin America in the United
States including by exerting more upward influence on wages above
the minimum wage and promotes unemployment.
Pensions: Work Longer, Pay More, Get Less
The thrust of the World Bank and IMFs proposals in this area has
been for lower benefits provided at a later age, and for social security
In Nicaragua, for example, one of the performance criteria for continued
IMF support has been the adoption of drastic pension reforms, including
raising the retirement age, increasing the minimum contribution period
to receive benefits, and upping the level of employee contributions.
A 1999 informal World Bank report on Nicaraguas social security
system concluded, The parameters of the system need to be re-defined
and a mandatory, defined contribution system based on individual capitalization
accounts introduced. The Bank recommended these accounts be managed
by private companies determined through an international competitive
Drawn up under World Bank supervision, Nicaraguas new pension system
is designed to increase contribution rates, raise the retirement
age, standardize eligibility requirements, reduce replacement rates, increase
collection efficiency and tighten eligibility for disability benefits.
Under the new system, Nicaragua has satisfied its IMF performance criteria:
payroll contributions have nearly doubled, mandatory length of service
to receive a pension has been increased by nearly 10 years, and the retirement
age has been raised by nearly a decade.
Again, the policies foisted on Nicaragua have been pushed around the
The ICFTU reports that the World Bank has been involved in pension reform
efforts, increasingly driving toward privatization, in over 60 countries
during the past 15 years.
Dean Baker, co-director of the Washington, D.C.-based Center for Economic
and Policy Research, says the Banks support for social security
privatization is not based on the evidence of what works efficiently for
pension systems. The single-mindedness of the World Bank in promoting
privatized systems is peculiar, he says, since the evidence
including data in World Bank publications indicates that
well-run public sector systems, like the Social Security system in the
United States, are far more efficient than privatized systems. The administrative
costs in privatized systems, such as the ones in England and Chile, are
more than 1500 percent higher than those of the U.S. system.
Baker adds that the extra administrative expenses of privatized
systems comes directly out of the money that retirees would otherwise
receive, lowering their retirement benefits by as much as one-third, compared
with a well-run public social security system. The administrative expenses
that are drained out of workers savings in a privatized system are
the fees and commissions of the financial industry, which explains its
interest in promoting privatization in the United States and elsewhere.
Wither Labor Rights?
None of the documents reviewed by the Monitor show IMF or Bank support
for government takeover of services or enterprises formerly in the private
sector; they virtually never make the case for raising workers wages
(except for top management); they do not propose greater legal protections
And on-the-ground experience in countries around the world shows little
concern that implementation of policies sure to be harmful to at least
some significant number of workers in the short-term is done with an eye
to ameliorating the pain. Worker safeguards under privatization, for example,
repeatedly requested by labor unions around the world, are rarely put
For former Bank chief economist Joseph Stiglitz, as well as unions and
worker advocates, the IMF/Bank record makes it imperative that basic worker
rights be protected. If there are to be diminished legal protections and
guarantees for workers, and if IMF and Bank-pushed policies are going
to run contrary to worker interests, they say, then workers must at the
very least be guaranteed the right to organize and defend their collective
interests through unions, collective bargaining and concerted activity.
But the Bank has stated that it cannot support workers freedom
of association and right to collective bargaining.
Holzmann also raised a second problem with freedom of association.
While there are studies out and we agree with them that trade
union movements may have a strong and good role in economic development
there are studies out that also show that this depends. So the
freedom by itself does not guarantee that the positive economic effects
Shortly after the 1999 seminar, labor organizations met with the World
Bank and IMF. According to a report from ICFTU, World Bank President James
Wolfensohn reiterated Holzmanns point, saying that while the Bank
does respect three out of the five core labor rights (anti-slavery, anti-child
labor and anti-discrimination) it cannot respect the other two (freedom
of association and collective bargaining) because it does not get
involved in national politics.
ICFTU reports that this statement was greeted with stunned disbelief by many present.
Vincent Lloyd is an intern with Multinational Monitor. Robert Weissman is the magazines editor. This article is based on a review of IMF and World Bank documents. Full citations and excerpts from relevant documents are posted at http://www.essentialaction.org/labor_report