There is meagre evidence to support the World Bank’s assertion that deregulation reduces income inequality


For the second time in less than a month, the World Bank has used its major publications to minimise the phenomenon of growing inequality in many countries, or to claim that the problem can be resolved by freeing up private business to do what it wants - the opposite of what most analysts conclude.

The first example was a report on Poverty and Shared Prosperity published at the beginning of October, which used a very selective analysis of some recent income data to announce that inequality has been declining in most countries.

The second was the launch on 25 October of the Bank’s annual Doing Business report, which for the past 13 years has advocated a broad deregulatory agenda.

Always seeking new angles to justify its promotion of reduced regulation on business, the 2017 edition of Doing Business (DB) asserts that “economies with more business-friendly regulations tend to have lower levels of income inequality” (page 11).

The claim is made in the overview section of DB on the basis of three figures and two paragraphs of narrative, with only the DB database and one other World Bank source provided as reference. The report states that results on the association between DB scores and inequality “differ by regulatory area” but it only mentions two, starting a business and resolving insolvency, for which it found a negative correlation (i.e. higher DB scores associated with less inequality).

Presumably the Bank also found examples of lack of or positive correlation in the other areas its DB index covers, which altogether cover ten categories and 45 sub-indicators. The latter include, for example, a total tax rate indicator where the best scores are given to countries with the lowest level of taxes and social contributions (such as payments for social security) that businesses must pay. The Bank chose not to divulge information for the other indicators.

DB 2017 continues the practice of not including measures of labour market flexibility in the index although it still collects the data. The Bank suspended the DB labour indicator in 2009 following objections voiced by trade unions, several governments and the International Labour Organization (ILO) against its use to pressure countries to weaken workers’ protection.

The report does include a narrative annex on labour market regulation, which states that labour regulations can “reduce the risk of job loss and support equity and social cohesion” (page 87).

However, it gives far more space to claims that regulations such as limits on fixed term contracts with minimal benefits and severance pay requirements are a cause of informality.

DB 2017 references three World Bank-authored studies from several years ago in support of this contention. It does not mention the extensive review of economic literature in the Bank’s more recent World Development Report 2013: Jobs, which examined claims that labour regulations push people out of the formal economy and otherwise negatively affect job creation.

The WDR 2013 found that “most estimates of the impacts [of labour regulations] on employment levels tend to be insignificant or modest” (page 261).

In an attempt to show its relevance to another widespread social concern, gender discrimination, DB 2017 adds gender components for three of its indicator sets – starting a business, registering property and enforcing contracts – on the grounds that “several studies highlight the importance of equal opportunities for women entrepreneurs” in fostering economic development (page 3).

As this annual ’flagship’ World Bank report typically does, DB celebrates both countries that are top performers by virtue of their low levels of regulation and those that showed the biggest improvements in making their regulations more business-friendly.

Eight of this year’s DB “top 10 improvers” cited in the Bank’s press release – Kazakhstan, Kenya, Belarus, Serbia, Georgia, Pakistan, United Arab Emirates and Bahrain – have demonstrated poor and in some cases worsening performance in terms of respecting workers’ rights, according investigations by the International Trade Union Confederation (ITUC).