Conor Cradden    30 April 2018

I’ve just read the April 20th draft of the 2019 World Development Report on The Changing Nature of Work. Duncan Green of Oxfam has already given a useful overall assessment of an earlier draft that you can read here. Duncan picks up in particular on the report’s absolute neglect of questions of power and its rather magical thinking about what might be possible in terms of the creation of social safety nets. An even more critical analysis is posted here by the ITUC’s Peter Bakvis, a longtime World Bank watcher. Peter doesn’t mince his words on the topic of the report’s attitude to labour regulation, but I think he’s still being too diplomatic.

I’ve already taken issue with the Bank’s overall approach based on a look at the concept note that was released in February. Among the other questions I raised in that piece was why the bank has chosen to focus on work and employment in 2019. They know perfectly well that next year is the International Labour Organization’s 100th anniversary and that it will be producing a major report on the future of work. Given that the raison d’être of the ILO is to agree international law on labour and employment, producing a report whose main aim is to attack labour regulation adds insult to injury. What’s even more insulting is that the argument in the report is so breathtakingly bad. The World Bank has a poor record when it comes to work and employment, but this is a new low. Having produced a report that is intellectually dishonest where it is not simply incompetent, the authors have managed the extraordinary feat of rolling their tanks onto the ILO’s lawn only to fire off a series of squibs that are not so much damp as soaking wet.

It’s hard to get into the detail of what the authors do wrong without very quickly running into the thousands of words, so this sort of analysis is not well-suited to a social media format. The short version below is extremely compressed and doesn’t give examples of how the authors do what they do. This is kind of important—a lot of what I want to highlight is the inherent dishonesty of the method—so please take a look at the long version if you can.

The short version

The report is a long-winded way of saying that when it comes to the economy, any regulation is bad regulation. The authors appear to have sought out evidence to support a pre-existing policy position rather than seeking to draw conclusions based on an open-minded reading of all of the available research:

  • They introduce policies they want to attack with a negative framing based on dubious historical evidence.
  • Where the evidence is weak or inconclusive they nevertheless allude to the existence of important causal relationships where it suits their argument to do so.
  • They cite only the research findings that are coherent with their line, even when findings that point the other way are to be found in the very articles they cite.
  • They gloss over—or perhaps just don’t understand—critical distinctions between different types of regulation.
  • They seem unable to recognize that while complying with regulation often has costs, it may also have enormous benefits.

The long version

The report is dominated by the old neoliberal trope that market and business regulation of any kind, but especially labour regulation, must be avoided if at all possible. The authors use three rhetorical strategies to pad out their exceptionally weak basic argument that rules are inherently economically damaging.

We always said it was a bad idea anyway

The first and most intellectually dishonest strategy the authors employ is what we could call negative framing followed by motivated reasoning. This involves the following steps:

  • introduce a well-established policy in such a way as to make it clear that it was never a good idea in the first place;
  • observe that the policy is not working or is subject to question; and
  • use a highly selective reading of the evidence to ‘prove’ that the policy does indeed have damaging effects.

There are two really good examples of this in the draft, the first about contributory pension schemes, the second about labour regulation in general.

Paragraph 352 claims that the (reputed) father of the contributory pension scheme, 19th century Chancellor of Germany Otto von Bismarck, only introduced the wage-based scheme because his original plan for a purely state-funded system proved to be unworkable. What’s more, the pension was payable from age 70, while average life expectancy at the time was 45. So not only was the policy one that Bismarck would not have adopted if he could have avoided it, the demographic context at the time was completely different. No wonder, then, that such schemes are “increasingly challenged” in advanced economies and “never matured” in the developing world.

The evidence in this case is a single study of pension reform in Ethiopia. In 2011, the Ethiopian government introduced a requirement for firms to operate a contributory pension scheme. The study found that after the scheme was introduced, employment among low-skilled workers fell. So QED, right? Contributory pensions schemes are a tax on wages and hurt those they are intended to help so “rethinking this model is a priority” (paragraph 398).

What the Bank’s authors don’t tell us, however, is that the same study also found that the pension reform was associated with increases in investment per worker and capital intensity, as well as with a statistically significant increase in labour productivity, a positive trend in total factor productivity and improved retention rates for more highly skilled workers. This seems to be pretty pertinent evidence. Oddly enough, the authors of the paper on pension reform in Ethiopia do not themselves conclude that there is a need to abandon contributory pension schemes. They suggest instead that the negative employment effect could be dealt with by reducing contribution rates for lower-paid workers or small firms.

The other main example of negative framing is the treatment meted out to labour regulation. The section in the report entitled Protecting Workers opens with the slightly bizarre claim that “In many countries, labor regulations were adopted at the time of colonialism” (paragraph 411). So already we have the suggestion that labour regulation of any kind is culturally alien to formerly colonized states. The authors then claim that the regulation that most developing countries have ended up with is of the Napoleonic ‘civil law’ type. This only leaves out certain small, insignificant economies like South Africa, India, Pakistan and Bangladesh. In any case, according to the usual single paper cited as evidence, countries with civil law traditions have labour regulation that is ‘significantly more stringent’ than that typical of the anglo-american common law tradition. This regulation was of course “ill-fit to many countries’ reality from the start”. The result is that it “fails to protect most workers”.

What follows this historically and jurisprudentially dubious account is a fabulous piece of motivated reasoning. The authors’ determination to go out of their way to cherry-pick the evidence is almost admirable. In paragraph 414 they state that regulation is an added cost to firms. They follow with a tour de force of argumentative sleight of hand. The statement “Technology adoption is negatively associated with the strictness of labor regulations, specifically with burdensome dismissal procedures” is referenced to a recent World Bank paper on ‘Labor policy and digital technology use’. But if you actually read that paper, what immediately jumps out from its findings is the sentence “a higher statutory minimum wage is significantly, positively associated with the extent of digital technology use by businesses”. Up to now, remember, the authors have made no attempt to distinguish between different types of labour regulation. It’s all just regulation. So the minimum wage must be regulation, mustn’t it? And the higher the wage, the more ‘burdensome’ it must be for employers.

So have the authors just made a mistake? Well, no, because they qualify their upfront general claim by adding “specifically with burdensome dismissal procedures”. The paper they refer to does indeed also find that the harder it is to dismiss workers, the lower the take-up of digital technology. The explanation for this is that if firms aren’t easily able to dismiss workers who aren’t already familiar with digital tech then they’ll use it less. Being a World Bank paper it doesn’t ask whether measures to encourage and help firms to train their existing workers in new technology might be a good idea, but that’s beside the point here. The point is that the WDR authors would have us believe that ‘regulation’ is a single thing that always has negative effects. They make no attempt to assess the balance of evidence, deliberately avoiding any reference to findings that contradict the line they want to push. As in the case of pension reform in Ethiopia, they cannot claim ignorance of this evidence because it is there in the same paper that they cite in support of their argument.

Healthier-looking policy

The second tactic the authors use is the ‘shampoo marketing’ argument. Hair care products companies don’t ever make claims like ‘this product will improve the health of your hair’ because they would be virtually impossible to prove. Rather, they make claims that are verifiably true but that suggest a causal connection between product and effect without explicitly saying that there is one. A typical claim would be something like ‘in a survey, 8 out of 10 users agreed that this product gave them healthier-looking hair’. The implied argument, the one the consumer is intended to believe, is that the users agreed that their hair looks healthier because it is healthier and that it is healthier because of the effect of the product. But this is not what the business actually says. The claims made by the business simply allude to the effectiveness of its products without making any direct claims about effectiveness that could potentially be challenged. If the consumer wants to believe that the product works then that’s on them.

The World Bank authors do exactly this, alluding to causal connections between policy and outcome while avoiding making any actual claims about the connection that might demand positive proof. For example, in paragraph 237 the authors state that “Countries with heavier regulations have larger unofficial economies”. They do not say that there actually is a causal connection between regulation and informality, even though that is what the context clearly implies we are intended to believe. The burden of proof is delegated to the single paper cited in support. This is a 2002 study based on 1999 data from 85 countries. The study, whose lead author is one of the co-directors of the WDR project, analysed the association between a measure of the bureaucratic difficulty of starting a business and the size of the informal (or ‘unofficial’ as they call it) economy. Bureaucratic difficulty is measured on the basis of 3 variables: the number of bureaucratic procedures, the time they take and their cost. The paper makes no attempt to assess the complexity or difficulty of completing the procedures, nor does it define what counts as a single procedure, although it does work through the example of the procedures required in France. It excludes any exemptions or measures to expedite the registration of firms intending to engage in exporting. It observes that very few procedures are to do with labour and fewer still concern safety and health or the environment.

So, the evidence for the damning conclusion “Countries with heavier regulations have larger unofficial economies” is a single research paper using 20 year old data that found an association between the required level of form-filling and official stamp-seeking and the size of the informal economy. Having made their sweeping initial claim, the authors retreat into the specifics of the extremely limited available evidence, stating that “complex and costly procedures to start a business discourage entrepreneurs”. This gives them a get-out clause in case anyone should ask whether they ought to be making such very general claims on the basis of such very limited evidence. They can say that they were simply referring to the findings of the paper, available for all to read.

In this particular case they don’t use the tactic very well because their get-out clause is not in fact a legitimate conclusion from the evidence cited in the paper. The research made no attempt to assess the complexity of procedures, it just counted them. But then of course what the authors actually say is little more than a statement of the bleeding obvious which is likely to go entirely unnoticed in the light of the resounding and portentous claim that precedes it. The icing on the cake is the last sentence in the paragraph in which the authors say “Removing burdensome regulations may provide incentives for certain firms to formalize, although there is limited evidence of this.” Such limited evidence, in fact, that they can’t find any to cite.

There’s another good example of the shampoo marketing argument in the section of the report on High-Growth Firms. Opening the section, paragraph 290 repeats the tired old statistic that there are a lot more businesses in France that have 49 employees than have 50. Taking a tone of weary amusement (“For firms in France, 49 is a magic number”), the authors explain that the reason that firms are deterred from creating jobs is the ‘burdensome’ regulation that kicks in once firms reach 50 employees. It gives the example of the need to set up a joint committee on health, safety and working conditions.

After a short paragraph that claims (without citing any evidence) that money spent encouraging small and medium sized firms to create jobs is mostly wasted, we get this in paragraph 292: “Poverty is lower in countries with business-friendly regulations and institutions in place.” The authors don’t make any attempt to define what they mean by business-friendly regulations and institutions. We are simply left to draw the obvious conclusion that any requirement to set up a joint OSH and working conditions committee is not business-friendly. The overall rhetorical effect is an argument that joint worker-management committees about OSH and working conditions increase poverty. But if challenged on this point, the authors could simply say that that’s not what they said.

Napoleonic regulation and other improbable diagnoses

The third and least sophisticated tactic used by the authors is deliberate ignorance (although this might also be actual ignorance or perhaps just incompetence, it’s hard to tell). This involves confidently stating something that suits their argument but that the slightest questioning will show is just nonsense. I assume the idea is simply to hope that they get away with it.

There’s lots of this. My favourite is the claim about most of the world’s developing economies struggling under the yoke of culturally inappropriate Napoleonic labour regulation. But to be serious, one of the most truly disgraceful things about this report is the depth of the authors’ ignorance about regulation itself. For them, ‘regulation’ is a monolithic social institution that is simply the opposite of the market. If it limits managerial choices, it’s regulation and it’s bad. They make no attempt to distinguish between (say) bureaucratic firm registration requirements and rules about environmental protection. They entirely fail to recognize the critical difference between enabling or process rights like rights to unionise and bargain collectively and substantive outcome standards like minimum wages or working time regulation. They grudgingly accept that rules are necessary in some cases (they say this once in paragraph 412), but otherwise repeatedly describe regulation as ‘burdensome’, ‘stifling’, ‘undue’, ‘stringent’ or ‘heavy’. They do not discuss the nature of regulation, what might make for effective rules or how we can go about drawing them up.

One of the worst errors they make is in paragraph 411. Here the authors boldly assert that “labor regulations apply only to formal work and favor subordinate, full-time wage and salary employment”. This is simply untrue. Labour regulations apply to all dependent employees (and many self-employed workers too, but let’s stick with employees for the sake of simplicity). Informal workers are those employed by employers who have neglected to properly register their businesses, pay tax and so forth. Informal work is not unregulated, it is what happens when businesses are operating unlawfully and avoiding their duty to comply with regulation. As for the suggestion that all labour regulation ‘favours’ certain types of standard work this is just ridiculous. In what way do safety rules favour full time employment? In what way does regulation about wage theft, or anti-discrimination rules, or rights to form trade unions favour salaried employment?

None of this is to say that there may not be good reasons in many countries to take a hard look at the law and at enforcement practice to see how it can be improved. But to argue that labour regulation should be abandoned because it only applies to formal work is risible.

What’s worse (yes, it can get worse) is that as well as arguing that labour regulation is useless because it doesn’t apply to enough workers, the authors also argue that it is too stringent and burdensome. In fact, capitalists are apparently so oppressed by labour regulation that there is a need to ‘level the playfield’ in their favour (paragraph 454). The principal difficulty, it seems, is that labour regulation makes employing workers expensive (of course, so does the irksome and old-fashioned convention of paying wages—maybe we should do away with that as well). As we’ve already seen, one of the authors’ most consistent blind spots is the possibility that that expense may be balanced by benefits to workers, businesses and society. You have to be a particularly pig-headed kind of orthodox economist to refuse to recognize that that the theoretical net impact of ‘regulation’ as an abstract category of social practice is indeterminate; that what counts is the nature of that regulation, how it is enforced and, as a consequence, the impact that it has in practice. It doesn’t take a complicated study to show that complex and expensive business registration procedures are a deterrent to entrepreneurs. But before doing anything about cutting out that regulation you have to understand whether it has a purpose and a function that balances out the potential downside. No-one would deny that in many cases it doesn’t, but just assuming that it is unnecessary and economically damaging because it is not a market mechanism is short-sighted and deeply unscientific.

It’s the politics, stupid

This question of assessing whether particular types of regulation are actually useful or not is at the heart of the problem we have faced in global policy-making for the last 30 years. The problem with the neoliberal orthodoxy is not neoclassical economics itself, but the inability or unwillingness to understand and accept its limits. The WDR authors will undoubtedly be familiar with the concept of Pareto optimality. This is a situation in which it is not possible to change the distribution of resources to improve the situation of some without worsening the situation of others. They are probably not aware that the economist and sociologist Vilfredo Pareto, who came up with the idea, used the concept to illustrate the limits of economic analysis. If you have a situation of Pareto optimality then decisions that have an impact on the distribution of resources cannot be made without going beyond the possibilities offered by the kind of means-end utility maximization analysis offered by orthodox economics. You have to decide that some people are going to lose out in order that others gain. If you leave this decision to ‘the market’ then what you’re doing is asking those who stand to lose if they want to lose (answer: no) and those who stand to gain if they want to gain (answer: yes) but providing no way of adjudicating the matter other than getting the two groups to fight it out. But if one group of actors has access to greater resources than the other—and this is by definition what the situation involves—then any resolution that’s eventually found is unlikely to be fair if it even changes anything at all.

In a more general sense, what the Bank’s authors fail to do is recognize that economic activity involves political decision making: making choices between alternatives that are not susceptible to a simple calculation of utility. This might be why they’re just unable to process situations in which there is clearly a choice to be made, like the Ethiopia pensions case.

It truly defies credibility to believe that the Bank would be willing to publish a flagship report that is such a cynical piece of propaganda. The fact that it is merely a draft is no excuse. The methods the authors use to construct their argument show that there is no chance of redeeming this dangerous and shoddy piece of work.