The Multinational Monitor

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
How IMF and World Bank Policies
Undermine Labor Power and Rights

By Vincent Lloyd and Robert Weissman

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 payments.

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:

• Civil service downsizing;
• Privatization of government-owned enterprises, with layoffs required in advance of privatization and frequently following privatization;
• Promotion of labor flexibility — regulatory changes to remove restrictions on the ability of government and private employers to fire or lay off workers;
• Mandated wage rate reductions, minimum wage reductions or containment, and spreading the wage gap between government employees and managers; and
• Pension reforms, including privatization, that cut social security benefits for workers.
The IMF and Bank say these policies may inflict some short-term pain, but are necessary to create the conditions for long-term growth and job creation.

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
Perhaps the most consistent theme in the IMF/World Bank structural adjustment loans is that the size of government should be reduced.

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 maintain.

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 Bank’s 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 nation’s 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 closure or downsizing of state-owned banks “yielding a total reduction from 9,100 employees in 1990 to 3,500 in 1993” was the first in a series of financial sector reforms resulting in smaller government payrolls and greater foreign ownership of Nicaraguan businesses, according to a Nicaraguan report to the IMF.

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 Nicaragua’s 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:

• In Kenya, the government plans to cut nearly 50,000 employees from 2000-2002.
• In Uganda, by early 1997, the size of the civil service was cut in half to 150,000, and the government set a target of 58,100 by June 1997.
• In Yemen, a 1999 IMF document reported plans for a civil service reform initiative expected to reduce public payrolls by 20 percent.
• In Zambia, 20 percent of the public sector was laid off in 1998 and 1999. IMF loan documents set a goal of reducing government employment from 110,000 (in year 2000) to 10,000 to 12,000.

Privatize, Privatize, Privatize
The civil service downsizing included in IMF and World Bank conditionalities is frequently bound up with privatization plans: under IMF and Bank instruction, governments agree to lay off thousands of workers to prepare enterprises for privatization. But privatization itself is frequently associated with new rounds of downsizing, as well as private employer assaults on unions and demands for wage reductions.

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:

• In Argentina, according to the World Bank, “virtually all public services and federally owned enterprises” have been privatized, including postal services.
• In Ecuador, the government reports that bids have been or are being invited for private operation or ownership of urban sewage and water systems, seaports and oil refineries, among other facilities.
• In Malawi, a massive privatization effort has included the “outsourcing, privatization or liquidation of specific services and agencies of the four largest ministries (Health and Population, Education, Transport and Public Works, and Agriculture and Irrigation,” according to a government submission to the IMF, and “the government also intends to increase private sector participation in the roads sector.”
• In Nigeria, public enterprises set for the auction blocks have included the national airways, power generators, and oil refiners. In a 1999 IMF document, the government stated it would study privatization of customs clearance at major ports.
• In Uruguay, ports and roads have been privatized.

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 regions.”

The ICFTU report highlights the case of Pakistan, where the military government is planning, with World Bank assistance, a major privatization initiative. The Bank’s 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 Pakistan’s 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
Another core tenet of IMF and Bank lending programs is the promotion of “labor flexibility” or “labor mobility,” the notion that firms should be able to hire and fire workers, or change terms and conditions of work, with minimal regulatory restrictions.

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 didn’t 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 Nicaragua’s dealings with the IMF is that the country “continue to implement a labor mobility program aiming at reducing public sector positions.”
But the essence of the problem from the point of view of labor is that the IMF and Bank’s version of labor flexibility is synonymous with stripping away legal protections for workers. In Honduras, more labor flexibility is being introduced because “collective contracts at large enterprises often act as straightjackets,” according to a World Bank document. In Ecuador, the use of temporary contracts is touted in an IMF document as a means to improve labor flexibility.

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
Few things more clearly run contrary to workers’ interest than wage reductions. Wage freezes, wage cuts and wage rollbacks are all commonplace in IMF and World Bank lending programs, as is “wage decompression” — increasing the ratio of highest to lowest paid worker.

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.

• In Argentina, the August 2001 bailout monies was conditioned on a 13 percent wage reduction in the public sector.
• In Belarus, according to IMF documents, the government is working at “liberalizing” the labor market in order to “increase the flexibility” of wages, particularly at state-owned enterprises.
• The Nigerian government reported in an 1999 IMF document that 1998 wage increases “had been partially rolled back.”
• In Turkey, the government agreed in 1999 IMF loan documents to work to limit public sector and minimum wage increases to the inflation rate. This position was reiterated in 2000 and 2001.
• Wage decompression is pervasive in IMF and Bank loan documents, and has been a condition applied in Ghana, Kenya, Uganda and Zambia, among many others. In Mozambique, under IMF guidance, the government highest-to-lowest government salary ration went from 9.6:1 in April 1998 to 13.2:1 in August of that year, and the government announced plans to “top up” civil service salaries and expand the ratio to 17:1.

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
Pension and social security reform has emerged as a high priority of the IMF and Bank in recent years, with the World Bank taking the lead.

The thrust of the World Bank and IMF’s proposals in this area has been for lower benefits provided at a later age, and for social security privatization.

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 Nicaragua’s 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 bidding process.”

Drawn up under World Bank supervision, Nicaragua’s 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 world:

• In Bolivia, under World Bank instruction, the government in 1996 privatized its pension system, replacing a defined benefit, publicly managed system with a defined-contribution, privately managed system of individual capitalized accounts.
• A 1998 IMF document stated that in Turkey “a sweeping reform of the social security system is obviously needed,” and detailed Turkish plans to raise the minimum age for retirement, extend the minimum contribution period to receive a pension, and increase the level of contributions required. In a 1999 IMF report, Turkey indicated its new social security law achieved all of these goals, surpassing even the proposals in the 1998 document. The 2000 report announced a plan to undertake a new round of reforms, involving social security privatization.

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 Bank’s 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?
Few labor advocates argue that privatization should never occur, or that no government lay off is ever necessary, though many would argue in almost all cases against certain IMF and Bank policies, such as reductions or mandated freezes on the minimum wage, and privatization of Social Security.
But among the most striking conclusions from the Multinational Monitor investigation of IMF and World Bank documents is the near-perfect consistency in the institutions’ recommendations on matters of key concern to labor interests.

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 for workers.

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 into force.

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.
Robert Holzmann, director of social programs at the World Bank, told a seminar in 1999 that the Bank could not support workers’ right to freedom of association because of the “political dimension” and the Bank’s policy of non-interference with national politics.

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 are achieved.”

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 Holzmann’s 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 magazine’s editor. This article is based on a review of IMF and World Bank documents. Full citations and excerpts from relevant documents are posted at