Governance by Contract? The Impact of the International Finance Corporation’s Social Conditionality on Worker Organization and Social Dialogue

What are the effects of market incentives made by public financial institutions on worker organisations and social dialogue according to ILO key labour standards?

Project Summary

In the context of the global financial and economic crisis, the International Labour Organisation (ILO) has identified the encouragement and protection of independent worker organisation and social dialogue as being of particular importance. In its Global Jobs Pact, it argues that participatory mechanisms are vital in times of heightened social tension and are critical to recovery.

However, the capacity of treaty-based international organisations to effectively promote social and environmental sustainability has been questioned. In reply to the difficulty to comply to formal transnational regulations, new forms of governance have emerged that include market incentives to promote compliance with voluntary standards.

While a great deal of research exists on “private” governance on this model, such as corporate codes of conduct or certification and labelling schemes, less attention has been paid to regulatory approaches in which public international financial institutions make assistance or investment conditional on compliance with technical and normative standards set by other international agencies. The most significant example of this kind of approach is the International Finance Corporation IFC), the private sector lending and investment arm of the World Bank.

Over 1750 loans have been made in the past years that include this contractual condition. This research project seeks to evaluate the effectiveness of this type of contractual governance mechanism with respect to the ILO’s key labour standard of freedom of association.

It will furthermore permit an assessment of the degree to which contract conditions on labour standards have affected worker organisation and social dialogue in IFC client firms, and to describe the means by which labour organisations have – or have not – been able to leverage labour standards conditionality in pursuit of goals related to the principle of freedom of association.

Academic Output

Working Paper

Governance by Contract? The impact of the International Finance Corporation’s Social Conditionality on Worker Organization and Social Dialogue

This paper explores the effect of transnational private regulation on labour standards through the lens of a study of the International Finance Corporation’s ‘performance standards’ system. Taken together, these two factors suggest that a realistic global evaluation of the potential of TPLR to improve the lives of workers in developing economies demands not only a broadly quantitative research strategy that allows a wider range of cases to be taken into consideration, but also a better understanding of the degree to which the enforcement of transnational private regulation schemes relies on local actors, and workers in particular.

Our findings show that the impact of the IFC’s performance standards system on worker agency is marginal at best. While IFC client businesses are more likely to be unionised than similar non-client businesses, no reason was found to believe that this was a result of the application of the scheme. While generalization on the basis of this relatively small-scale study of a single regulation scheme is obviously hazardous, we suggest that the failure of the IFC scheme to have any significant impact on worker agency may be due to the contractual legal structure which is such that the supposed beneficiaries of private regulation have no direct capacity to make claims for the enforcement of their ‘rights’.

Executive Summary

This study considers the question of the relationship between private labour regulation and workers’ capacity to take collective action through the lens of an empirical study of the International Finance Corporation’s (IFC) ‘performance standards’ system of social and environmental conditionality. The study covered some 150 IFC client businesses in four world regions, drawing on data made public by the IFC as well as the results of a dedicated field survey that gathered information directly from workers, managers and union representatives.

The study found that the application of the performance standards system has had remarkably little impact on union membership and social dialogue. In those few cases where change could be causally linked to the standards, the effect depended on the presence of workers’ organizations that already had the capacity to take effective action on behalf of their members. The study also uncovered some prima facie evidence of breaches of freedom of association rights occurring with no reaction from IFC. The study concludes that the lack of impact is largely due to the private contractual structure that supposedly guarantees standards compliance.

Research Team

Jean-Christophe Graz
University of Lausanne

Conor Cradden

Frank Hoffer
Associated Member

Layna Mosley
Associated Member
University of North Carolina at Chapel Hill

Fiona Murie
Associated Member
Building and Woodworkers International

Christoph Scherrer
Associated Member
Universität Kassel






Host Institution