Wednesday, July 10, 2013

The "red herring" with uniform labor standards

The horrific disaster at Savar in Bangladesh which claimed more than 1100 lives has re-ignited the debate on whether there should be mandatory stricter safety and working condition standards in factories and sweatshops in developing countries. While everyone agrees that there should indeed be stricter standards, the means to its realization is a matter of dispute.

In the context of demand for stricter standards for Bangladesh, Paul Krugman writes,
If we do this for Bangladesh, and only for Bangladesh, it could backfire: the business could move to China or Cambodia. But if we demand higher standards for all countries — modestly higher standards, so that we’re not talking about driving the business back to advanced countries — we can achieve an improvement in workers’ lives (and fewer horrible workers’ deaths), without undermining the export industries these countries so desperately need.
While logically unexceptionable, this could prove to be the thin end of the wedge. Who determines what is "modestly higher standards"? At a time when developed economies are struggling and protectionist sentiments are widespread, any effort at harmonization of labor standards would invariably become highly politicized. Industry lobbies in the US and Europe will try to push through higher standards, so as to reduce their competitiveness gap. The larger countries like China and India may even agree for some higher standards - both because they already have better labor standards and also it is likely to find domestic support - in return for concessions elsewhere that suit their interests.

But Bangladesh and smaller nations, especially from Africa, with aspirations to emulate the East Asian labor-intensive exports-led growth model, are certain to be adversely affected. With firms trying to engineer labor out of the production chain using technology and innovation, there is already a not insignificant possibility that the East Asian model may not be replicable. The labor cost differential is critical to sustaining this model for exports like textiles and toys. In the circumstances, a well-intentioned movement to harmonize labor standards is likely to play into the hands of vested interests in developed countries and be detrimental to the interests of smaller developing countries.

Textile exports from these sweatshops have been instrumental to the rapid progress made by Bangladesh in recent years. From its beginning from scratch in the eighties, the sector today employs 4 million workers, 80% being women, forms three-quarters of export earnings, and is over a sixth of the GDP itself. By any yardstick, it has been one of the true successes from outside East Asia. To paraphrase Krugman, these 4 million "bad" jobs are better than "no" jobs.

The movement towards better standards have to come from within each of these countries and from among the western clothing retailers who buy these products. For sure external pressure and support can contribute towards this. But a WTO-style move towards a harmonized minimum global labor standards is most certain to do more bad than good.

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