Global Policy Forum

By Jeff Ballinger

It has recently been revealed that World Bank officials in Indonesia were "cooking the books" throughout the 1990's to make former president Suharto look good. This disturbing news ought to usher in a new era of openness about other aspects of the Bank's work. Since taking charge in 1997, President James Wolfensohn has made a point of consulting with non-governmental groups, most notably during a trip to Jakarta earlier this year. His admission to the large crowd of activists there that "mistakes were made" was important; now it is time to examine what the mistakes were and how Bank officials can start to put things right. Clearly, misleading reports on the overall health of the Indonesian economy should come at the top of the list, along with official studies downplaying the deleterious effects of the Suharto family's businesses. But what about the practice of coaching Indonesian officials to "insulate" themselves from pluralist pressures and to suppress independent trade unions?

These aspects of the Bank's work were made strikingly clear to me by a top development official in Jakarta in 1990, in response to my complaints about below-subsistence wages and the denial of worker rights. "You're not in the paradigm," he informed me. In 1994, I bumped into the same guy in Central Asia. He told me that, in retrospect, he would have to agree that critics of the reigning orthodoxy were right; he offered the explanation: "We didn't think they (Suharto and his cronies) would demand control of everything." About the same time, the Bank put out a very self-congratulatory book, commissioned by Larry Summers, currently Deputy Secretary of Treasury.

In The East Asian Miracle, the World Bank team of economists hails the "High Performing Asian Economies" (HPAEs) and sketches out how the suppression of worker rights was a key component of their success. There has been no effort to conceal this study; it is prominently featured on the World Bank's web site and is available in paperback from the bank for $23.95. In Chapter 4, the study embraces what it calls the "Labor Trade-Off".

In Japan, Korea, Singapore, Taiwan and China (and to a lesser extent Malaysia), governments restructured the labor sector to suppress radical activity in an effort to ensure political stability. Governments abolished trade-based labor unions and pushed the creation of company- or enterprise based unions.

Labor movements in Indonesia and Thailand, while not subjected to systematic restructuring, were nonetheless routinely suppressed.

Singapore courted foreign investment in labor-intensive manufacturing by suppressing independent unions and assuring investors industrial peace."

One of the key advantages derived from the suppression of labor unions, the authors explain, is the freeing of government bureaucracies to implement the economic austerity measures and wrenching structural adjustments that open the doors to private investment. This benefit is referred to as "Insulating the Economic Technocracy." The study says,

"While leaders have been authoritarian or paternalistic, they have been willing to grant a voice and genuine authority to a technocratic elite and key leaders of the private sector."

The study goes on to say that "insulation," which enables technocrats to operate without interference from "politicians and interest groups," has been achieved in the field of labor as follows:

"Reorganization of labor from industrywide unions into company unions" has similarly reduced the marginal benefit and increased the marginal cost of collective action. Thus, in contrast with workers in many other developing economies, workers in the HPAEs are more likely to refrain from work stoppages and other disruptions and from lobbying the government for mandated wage increases. Because employers faced fewer demands from labor they, too, have had less incentive to press demands on the technocracy.

Finally, the World Bank team embraces the obvious, stating that the principal benefit of wage suppression is "higher profits" for private firms. The East Asian Miracle credits more than 50 members of the World Bank staff, as well as about two dozen economists from universities and think tanks around the world, for carrying out and commenting on the study. There was not one dissenting voice on the subject of suppressing labor.

Just how much influence foreign companies have in places like Indonesia can be seen in recent events there. In the past few weeks, Indonesia's military-backed regime has intensified its efforts to subdue workers fighting for a living wage. For the first time in memory, troops fired rubber bullets into an angry crowd of protesting shoe workers in Surabaya, East Java; days later there was a threat to "cripple" the movement of Muchtar Pakpahan, after the recently-freed union leader announced a plan for a protest march in the capital. So much for the promise of Suharto's hand-picked successor, B.J. Habibie, to distance himself from the intimidation tactics of his predecessor. Some U.S. companies have - in public -- opposed the courageous efforts of independent union activists or praised Indonesia's armed forces for maintaining "stability." Others may even share some responsibility for cases such as that of the imprisoned labor activist Dita Indah Sari. Only weeks before her arrest, the twenty-four year old law student had organized thousands of factory workers, many from a Reebok-producing facility near Jakarta - in a protest march demanding a raise in the minimum wage.

The track record of American companies cries out for a clear, unequivocal stand in favor of a living wage and increased government acceptance of the principles of freedom of association and the right of collective bargaining. Both Reebok and Nike, for example, are members of the San Francisco-based Business for Social Responsibility (BSR) and both had representatives at a meeting in Jakarta, just before Suharto was booted from office. In all, twelve major U.S.-based garment and footwear producers met in Jakarta under the aegis of BSR. The company representatives refused to meet with an Indonesian trade union delegation whose members wanted to discuss the punishing effects raging inflation had on workers making American branded products. The unprecedented joint appeal -- from the government sanctioned All-Indonesia Workers Union and its bitter rival, the Indonesian Workers Prosperity Union -- is itself an indication of the desperate plight of workers there.

How does the financial community view the footwear giants? Nike has now been declared a model by Jardine Fleming, a British investment firm based in Hong Kong. In a report called "Tracking Nike's Footprints Across Asia," issued in early 1997, the firm attributed Nike's success to choosing factory sites in countries with the cheapest labor and the most authoritarian governments. Nike first used plants in Japan in the 1960s. When labor costs there climbed a decade later, it moved to Taiwan and South Korea which were largely under military rule and where wages were suppressed. When those countries began to democratize and labor unions gained strength in the late-'80s, Nike shifted production to Indonesia, which had been in the grip of the quasi-military Suharto regime since 1967, and Communist-controlled China. Nike avoided the Philippines, where democracy of sorts has existed since the late 1980s, and downgraded production in Thailand when that country's democracy movement gathered strength in 1992.

Goldman Sachs bought in to the action in 1997, taking a 7.1% stake in Yue Yuen, the Hong Kong-listed arm of Pou Chen, the largest Nike sneaker maker in the world. According to the Far Eastern Economic Review, Yue Yuen is "the largest and most profitable Hong Kong industrial company." Typical of Asian plays of this magnitude, Goldman's lawyers were shunted aside; according to the Review, they expressed "reservations that Yue Yuen had no clear title to the land in the Pearl River Delta where 90% of its sports shoes are produced." So much for arguments that U.S. business involvement in a corrupt and repressive country help foster the rule of law.

Cooking the books to make the corrupt Suharto regime -- and the Bank's own work -- look better had disastrous consequences; so did the promulgation of anti-democratic guidelines for leaders of developing countries desirous of emulating the success of the HPAEs.

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