The World Bank recently issued a White Paper on rethinking social protection systems to extend coverage. While at first glance this is an honourable goal, the proposals in Protecting All: Risk-Sharing for a Diverse and Diversifying World of Work would do little to achieve this aim. The paper proposes a rollback of existing rights and protections for workers, both in terms of social security and labour market protections. Leo Baunach, Evelyn Astor and Stephen Kidd argue that this approach would increase inequality and undermine poverty reduction.
The World Bank is the largest multilateral institution devoted to promoting development. Unfortunately, its promotion of the Washington Consensus, pension privatisation, poverty targeting and other failed policies have caused immense damage to developing countries. No matter, the authors say: “Rather than an indication of poor development progress,” the lack of social protection coverage in developing countries means that it will be easier to implement the untested and inequitable framework presented in the White Paper (pg. 31).
Universal coverage, or not?
At first glance it may seem that the Bank has bought into the idea of universal coverage, through a mix of tax-financed and contributory schemes. However, a closer examination suggests that the Bank’s commitment to poverty targeting remains intact and its apparent acceptance of universal coverage appears no more than a façade. The paper proposes a minimum income guarantee for all residents within a country as one option but goes on to state that it should be available to those ‘in need,’ a euphemism for ‘the poor.’ While it claims that the minimum income guarantee should be an entitlement, it does not address the challenge that the Bank’s favoured means of identifying ‘the poor’ – the proxy means test – is highly flawed and typically excludes more than half of those who are eligible. We are left, therefore, with the question about how the Bank proposes to identify those ‘in need’ since no low- or middle-income country has yet managed to do this successfully. Indeed, when the paper proposes a ‘tapered universal basic income’ – in effect a poverty targeted benefit that is gradually withdrawn from people as incomes increase – it appears to use the false assumption of ‘perfect targeting’ when undertaking simulations, thereby undermining the validity of their findings.
Even when promoting universal coverage through a combination of tax-financed and contributory methods – with the tax-financed benefit gradually withdrawn from those receiving the contributory scheme – the Bank does not address the evidence that these schemes are still much more complex than flat universal benefits and, therefore, generate higher levels of exclusion. Figure 1 shows the exclusion errors in Mexico’s social pension which was meant to be accessible to all those not in receipt of a social insurance pension. Yet, despite its theoretical universal coverage, the use of pension-testing meant that it excluded around 40 per cent of eligible older people without a contributory scheme (the Mexican government has now, however, in a progressive move, made the social pension fully universal).
So, while the Bank may claim to support universal coverage, it has still not made the definitive step to unreservedly back universal benefits as the only means of guaranteeing access to everyone. And, of course, in its country operations, it is still strongly advocating against universal schemes and in favour of poor relief.
Taking the social out of social insurance
A key premise of the paper is that, in order to finance a minimum safety net of last resort to the poorest and most vulnerable, governments should scale back widescale public social insurance schemes, lower the size of social insurance contributions (which tend to be financed, at least partially, by employers), and put greater emphasis on privately-managed mandatory and voluntary individual savings and insurance schemes.
The Bank particularly emphasises the need to reduce the scale of existing social security schemes and eliminate their redistributive capacity, putting an emphasis on promoting ‘actuarially fair social insurance’ where a strong link between individual contributions and benefits is established. This almost completely erodes the ‘social’ part of social insurance by reducing the role of solidarity and genuine risk-sharing. Indeed, the Bank argues that risk-sharing should be the role of tax-financed schemes and social insurance should be replaced by what are, in effect, funded, private – but still mandatory – savings. This follows the same model of pension reform promoted by the Bank throughout the 1990s and which has been shown to fail numerous times.
Evidence shows that contributory schemes without the solidarity (sharing) element can disadvantage low income earners and those with insufficient contribution histories, which are disproportionately women and people in precarious jobs. The primacy of private contributory or savings schemes (mandatory or nudged) would be particularly disadvantageous to low and lower-middle income workers who would likely receive meagre benefits because of low personal contribution levels. Instead, this would benefit the well-off.
A regressive financing model
The financing model for social protection put forward in this paper would dramatically reduce the size of social security contributions, including those from employers, and would put a disproportionate emphasis on regressive taxation measures. In particular, it emphasises increasing regressive Value-Added Taxes (VAT). These taxes severely affect low income earners with higher propensity to consume and a lower ability to save.
The Paper even raises the idea of a consumption tax to finance health and pensions coverage for lower-income workers while reducing the required payroll tax for workers with “above-average incomes” (pg. 106). Such a model disproportionately penalises the poor and reduces redistribution within tax and social security systems, thereby widening inequalities.
Increased VAT and consumption taxes risk offsetting the support proposed to low income earners through social assistance. While the Paper adds that VATshould be complemented by improved collection of more progressive and underexploited revenue sources, it is unclear why the Bank put forward the proposal in the first place instead of financial transaction taxes, capital gains taxes, property taxes, or inheritance taxes. And, it is unclear why it does not also examine increasing income taxes among the wealthy – which have dropped dramatically in recent years in many countries – or corporation taxes. Or, is this because, again, these would hit the wealthy more.
Alongside labour market deregulation and the suppression of minimum wages, the Paper places the primary burden of contributions on individual workers. The Paper acknowledges the problem of declining labour share of income but does not consider how that represents a problem for shifting the burden onto individual workers already struggling with wage stagnation and a smaller piece of pie. The Paper claims that reliance on individual savings accounts for unemployment would “rebalance responsibilities” between workers and firms (pg. 182). With basic social assistance in place, funded by general taxation, the Paper argues that “it is reasonable to expect nonpoor people to rely mainly on their own efforts to achieve consumption smoothing” (pg. 111). There is even a proposal to introduce co-pays or other cost-sharing for unemployed workers using active labour measures and services to find work. However, the Paper does not recognise that the vast majority of people in low- and middle-income countries are living on less than US$10 PPP per day, which many would propose as a realistic international poverty line.
Flexicurity: Doing the same thing and expecting different results
According to the Paper, minimum wage increases should be limited and crucial labour market regulations such as hiring and firing rules should be reduced in order to lower labour costs and incentivise job creation in the formal economy. The Paper encourages the developing world to adopt the ‘flexicurity’ model that was once championed by the OECD. However, the OECD has since abandoned the concept and the White Paper must acknowledge that flexicurity has “lost its luster because many reforming governments have quickly pursued flexibility but have been slow to deliver the promised security” (pg. 19).
The Paper’s fixation with reducing ‘burdensome labour regulation’ is reminiscent of the long-time promotion of labour market deregulation in the Bank’s Doing Businessreport. The White Paper goes on to show a graphic that ranks countries by flexibility on one axis, and protection on the other. It is heavily based on the Employing Workers Indicator from Doing Business. The indicator was suspended from use in the report in 2009 under heavy criticism. The Bank announced that the Employing Workers Indicator “does not represent World Bank policy and should not be used as a basis for policy advice or in any country program documents that outline or evaluate the development strategy or assistance program for a recipient country”.
Among the countries in the upper-right quadrant of high flexibility and high protection are Qatar and Lesotho, which are hardly examples of robust protection. Despite a lack of protections for workers, both are examples of action to plug the regulatory gaps that enable non-standard employment with unsafe conditions and low wages. It took years of international trade union pressure for Qatar to end the kafala system of modern slavery and begin steps to respect the basic rights of migrant workers. In Lesotho, a ground-breaking agreement this year between garment companies, trade unions and women’s rights organisations created a system to address rampant gender-based violence and harassment in the country’s garment sector.
Also in the high flexibility, high protection area of the graph is Denmark. The Danish model spawned the first wave of flexicurity by the European Commission and the OECD. In 2013, the OECD improved its statistical methods for measuring employment protection legislation and flexibility, which places Denmark at around the average. Explaining the change, Ronald Janssen writes that “the true peculiarity and advantage of the Danish system lies in the fact that Denmark invests heavily in both passive and active labour market policies. It does not lie with employers having the possibility of easy firing.”
In addition to private management of individual savings accounts, the Paper proposes outsourcing of the functions of labour inspectors – particularly to create digital tools for complaints. Supposedly, this will “balance the loss of bargaining power” experienced by workers in non-standard arrangements. Meanwhile, the Bank advocates for moving from tripartite social dialogue between employers, workers’ organisations and governments. In its place, the Bank proposes a ‘pentapartite’ arrangement in which non-standard workers, such as those who are temporary and outsourced, are separate from other employees, and small and medium enterprises are separated from other employers. Trade unions today frequently represent temporary, outsourced and informal workers – just as associations of small and medium enterprises are regularly part of tripartite social dialogue. The Bank does not have a track record of supporting social dialogue and tripartism in the first place, and the proposal seems aimed at clearing away labour market institutions that stand in the way of a brave new world of work.
What is actually needed is better observance of the freedom of association and right to collective bargaining, not fragmentation. Stronger unions and collective bargaining will also address the issue of market concentration, which the Paper acknowledges is a growing problem.
The Paper takes a general approach of portraying an insecure future of work as an inevitable force of nature, the result of “diversification” of forms of work rather than policy choices and business behaviour that has proliferated misclassified, temporary and precarious work. This portrayal of inevitability is a convenient cover for the Paper’s promotion of labour market deregulation that would make the world of work more insecure and difficult for working people. The Paper also seems to want the erasure of workers as a category, arguing that people increasingly mix income from labour and profits from capital. A concluding section has a telling title: “labour market policies for the human capitalist” (pg. 238).
Research has shown that labour market flexibility does not necessarily increase aggregate employment, and moreover shown that deregulation can contribute to the decline of labour share of income and, in turn, income inequality. Weak labour market institutions, including low minimum wages, can have detrimental effects on workers’ economic security and seriously constrain productivity and overall economic growth.
Empirical cases of Brazil, Indonesia and South Africa – cited in previous World Bank publications – have also demonstrated how minimum wage increases can increase employment, reduce informality and support overall economic growth. Thanks to trade union advocacy, Indonesia has made huge progress on universal social security and health systems.
The evidence base to support the policy prescriptions is selective and not fully reflective of existing academic research, including the Bank’s own Balancing Regulations to Promote Jobs. The White Paper also seeks to reinterpret 2013 World Development Report, which found that “Across firm sizes and country levels of development, labor policies and regulations are generally not among the top three constraints that formal private enterprises face. Excessive or insufficient regulation of labor markets reduces productivity” (pg. 26).
Pursuing the lowest common denominator
The Bank claims that regulations are costly for firms and inhibit the formalisation of the informal economy. There is much existing evidence to challenge this viewpoint. To reduce the allegedly burdensome rules for firms, the Paper proposes a uniform set of minimum protections for all contracts that would substantially lower protections for most workers.
Everyone should be entitled to a comparable set of rights and protections, in terms of social security and in the labour market, but the World Bank’s proposal to ‘level down’ these rights and protections to the lowest levels would be deeply damaging. The policy model put forward by this paper disproportionately advantages employers – who will benefit from lower labour market regulations including reduced employment protection legislation and lower minimum wages, and no obligation to pay social security contributions.
Private for-profit insurance providers would also benefit from increased enrolment and public subsidies. The Paper proposes subsidies to the private sector without a focus on raising working conditions and ending discrimination. Workers, on the other hand, would be disproportionately penalised if the World Bank promotes these policies. They would have substantially fewer protections in their employment contracts, including employment protection legislation and little (or inexistent) minimum wages, they would experience substantially higher consumption taxes and have less comprehensive social protection coverage, with the exception of social assistance benefits available for the lowest income earners. These recommendations could significantly increase workers’ financial insecurity and exacerbate existing income inequalities and low-quality jobs that do not support development and economic growth.
A holistic and fair approach
Tackling poverty and inequality requires more than just a safety net. It requires first and foremost measures to strengthen decent work, including minimum living wages, collective bargaining, employment protection and robust labour market institutions. Social protection systems must be extended, and they need to consist of both adequate, non-contributory ‘floors’and contributory social insurance that can ensure fair, effective risk pooling for everyone, in line with the standards of the International Labour Organization – not one or the other. Such systems must be fairly financed, with employers and high earners paying their fair share. If the Bank is serious about protecting all, it needs to offer different policies going forward.
About the authors
Leo Baunach is the Director of the International Trade Union Confederation and Global Unions Office in Washington, which advocates for reforming multilateralism and a development model that benefits working people everywhere.
Evelyn Astor is an advisor on Economic and Social Policy at the International Trade Union Confederation, specializing in social protection, wages and employment policy.
Stephen Kidd is a Senior Social Policy Specialist at Development Pathways.