Why has the World Bank changed its views on tax and labour standards?

Added 30 Apr 2009

Author: Alex Wilks
Published: 2009-04-30

The World Bank has just announced a major change of policy on investment. It produces every year an influential annual report and ranking exercise which emphasises minimising costs to business. That those costs fall on workers, ordinary citizens, the environment did not seem to bother the Bank until now. The importance of the Bank's analysis and details of the changes it has announced are outlined in my other article of today.

But why did the Bank make this change, and why now?

It follows a long-standing campaign by trade unionists. That was not enough, though. The real reason seems to be that the House Financial Services Committee weighed in with criticisms, and threatened to withold payments to the World Bank's IDA window if the Doing Business indicators and report was not changed. Now that the Democrats are in the ascendancy on Capitol Hill and in the administration, and the trade unions are seen as key allies, the Bank could no longer resist the pressure.

The House Financial Services Committee this week issued a release on the matter. It points out that the Committee "held a hearing to examine the approach to worker rights in the Doing Business Report, during which the Committee received strongly critical testimony of the report from representatives of the AFL-CIO, the International Trade Union Confederation, and the Carnegie Endowment for International Peace. In June, the Financial Services Committee approved legislation authorizing $3.7 billion for the World Bank Group that included a call for reforms to the labor and paying taxes aspects of the Doing Business Report".

Committee chair Barney Frank, a longstanding World Bank critic, did not stop there. "Frank also spoke directly to IMF Managing Director Dominique Strauss-Kahn and World Bank President Robert Zoellick about his concerns with the Report, particularly given its increasing global mandate and scope, and the many channels through which Doing Business is being given force".

2008 report by the Bank's Independent Evaluation Group Doing Business: An Independent Evaluation (PDF) added to the discomfort of Bank senior management. This report argued, undeniably, that "Since regulations generate social benefits as well as private costs, what is
good for an individual firm is not necessarily good for the economy or society as a whole. Therefore, policy implications are not always clear-cut, and the right level and type of regulation is a matter of policy choice in each country". As "data are provided by few informants,
with some data points for a country generated by just one or two firms" the analysis is badly skewed. The evaluation report concluded that it was "of particular concern [that] the paying taxes indicator relies exclusively on a single firm to provide both the underlying methodology and the data for 142 countries". That firm is PricewaterhouseCoopers.

Michael Klein, the smart German who is the mastermind behind Doing Business must be smarting indeed that this report he initiated and championed is now being questioned and unpicked.

I am digging for further insights into the back story of exactly how this step forward was achieved. I have hints that there were a tough set of discussions inside the Bank. Once I find out more and determine what can be published I'll post again, as it is always interesting to determine how change takes place in large institutions such as the World Bank. Meanwhile feel free to add your views and insights as comments here.

Note: Eurodad staffer Nuria Molina also gave evidence on the World Bank last year to Barney Frank's House Financial Services Committee. Her points were on economic policy conditionality, but Eurodad's concerns about one-sided, deleterious World Bank advice and pressure to reform overlap with those of the unions, even if the transmission mechanisms are slightly different.