Friday, April 26, 2013

Understanding the Bangladesh Tragedy with Political Science

. Friday, April 26, 2013




Matt Yglesias is being raked across the coals for this. It's understandable. The best time to parrot an econ 101 line is not immediately following a tragedy. Yglesias now understands this. But neither is this the best time to completely denounce neoliberalism or engage in the sort of extreme wishful thinking through which it is suggested that Bangladesh could (or even should) have levels of labor protection equivalent to the U.S. That is quite literally impossible: Bangladesh's GDP per capita is about $2,000 per year. Taken together, U.S.-level unemployment protections, retirement accounts, safety regulations, and other programs which benefit labor are more costly than that. So it's impossible.

Let's take this situation as it is. Bangladesh is not a bastion of neoliberalism. It has only recently, and after a long struggle, been able to consolidate a democratic regime (hopefully) which is in any case quite corrupt. Bangladesh is one of the poorest countries in the world, but it has been able to grow fairly rapidly over the past few decades by exporting textiles and people to the rest of the world: exports and remittances are about 12% of the economy. Roughly 40% of the labor force is "underemployed", working only a few hours per week for very low wages. It is a poor country, which means it has low domestic savings, so to generate the sort of domestic investments it needs to continue to develop it must import capital and in particular foreign direct investment. Most of that goes into the production of textiles.

It is commonplace to hear folks say that multinational corporations encourage a "race to the bottom" in labor and environmental standards: if you regulate them, the thinking goes, they will go to another jurisdiction. To get the capital they need to develop, poor countries must therefore deny worker protections. Here's an application of the argument to Bangladesh. The story has a nice logic to it, but it is false.

This question has been studied quite a lot by political scientists. The state of the art in the literature (much of the best of which has been done at UNC by Layna Mosley) is as follows: multinational corporations tend to improve labor standards, and exposure to multinational production chains tend to raise countries' de jure labor (and environmental) standards. Through the pressure of global civil society advocacy groups, "California effects", and other processes, standards tend to go up rather than down. But quite frequently de facto implementation of these standards does not keep up with the de jure enaction of them. This is especially true when multinational corporations subcontract with local firms: MNCs almost always have higher standards than local firms, especially if the MNC is from a highly-developed country (i.e. not China). As countries develop, local labor practices tend to improve to meet the standards.

Remember, these are poor countries. The local standards tend to be very low before multinationals come in. The capacity of governments to engage in inspection and enforcement is weak. Often, corruption is rampant. (These are basically other ways of saying that the country is quite poor.) This is not a problem that invoking the neoliberalism bogeyman can fix, however, nor would it be likely to improve if the country was shut off from the global economy. The problem was not created by neoliberalism -- it existed already -- and the best hope for rapid improvement it will come from participation in the global economy rather than autarky. State capacity cannot improve until incomes are higher, which requires growth, which requires participation in the trading system. Over the past two decades, since it has begun producing for export in earnest, Bangladesh has grown at about 6% per year; it has a long ways to go, but shutting itself off would be the wrong move. It is on the path to development, at long last.

Enforcing the laws already on the books is a necessary step. But it is hard to ask multinational corporations to take responsibility for more than their own production floors. They do not have the local authority to do this, and I don't believe anyone wishes to grant it to them. This is the governments' job. If the government does not have the capacity to perform it, they may ask for outside help from the ILO or other NGOs which operate internationally. (Keep in mind that enforcement requires resources, which means additional taxes. Practicably speaking, some of these costs would be borne by labor.) If the government does not have the interest to do so, then the entrenched power structure needs to be overturned. The best chance for this happening is by increasing the market power of foreign capital and domestic labor -- the groups which would both prefer higher standards -- and eroding that of domestic capital -- the group which, according to recent example and careful political science research, most prefers low standards. Thus, various suggestions to boycott products made from Bangladesh, or otherwise isolate the country economically, would almost certainly make the problem worse rather than better.

It appears that the Bangladesh garment factory was locally-owned, and had been subcontracted to do production for MNCs. The building was in violation of many laws -- the problem wasn't de jure but de facto -- and it appears that the owners will be arrested and prosecuted (as they should be). The multinationals, for their part, had engaged international third-party inspectors under E.U. code to validate the safety of the factories. The factories themselves passed inspection, but the building which housed them was not examined by the foreign inspectors.

This is, sadly, pretty predictable from the point of view of political science research. And that research gives us some indication of what needs to happen to improve the situation: consolidate the democratic regime in Bangladesh, reduce the influence of local capital owners, try to maintain rapid economic growth, and have some measure of patience. It takes a long time for poor countries to become rich countries. It will take a lot longer if well-meaning folks on the left cut out their best means of development.

UPDATE: In the comments, Latinamericanist provides some links to research on the effectiveness of international advocacy groups that are worth looking at.

12 comments:

Vladimir said...

Is it too cynical to suggest that MNCs explicitly prefer the subcontracting approach because they can have their cake and eat it too. They can lobby for dejure changes in labour law, have suppliers sign codes of conduct etc. but themselves maintain sufficient distance to evade the responsibility legally and practically--if not ethically-for what happens on the workshop floor. Surely a MNC could take advantage of the low wages for labour by operating these facilities directly or perhaps where practical forging partnerships with other MNCs. The point isn't for MNCs repatriate jobs or demand changes in labour laws that governments don't have the administrative capacity to enforce, rather we need to find a mechanism that provides still greater improvements for labour in LDCs.

Kindred Winecoff said...

Thanks for the comment. I don't think it's cynical at all, although I'd probably put it a bit differently. MNCs favor subcontracting because it means that they don't have to invest so much in acquiring local knowledge. It means that they don't have to micro-manage everything.

Most especially, it means that they don't have to tie their investment to a country which may have an unreliable political system. Once you build a factory in Bangladesh you are stuck there: you can't move the factory. But if a local builds a factory and you contract with them, then if something goes wrong you're not out as much. You can just hire somebody else in another place.

De facto improvement in labor rights happens when labor gets market power. Labor gets market power when they have good outside options. So we should probably focus on improving the outside options rather than any particular regulation or enforcement mechanism.

LFC said...

On a quick reading of the post, I'd be inclined to put more emphasis on the (unused) clout of MNCs w/ host govts. If MNCs really wanted the Bangladesh govt to at least try to enforce and implement the safety and other laws it has on the books, the MNCs could say to the govt: We are leaving Bangladesh and moving all our sub-contracting and direct garment ops to countries X Y Z which actually enforce their laws. Goodbye. The MNCs don't say that to the Bangladesh govt b.c their concern for profits trumps their concern for working conditions and standards. The optics are bad for the corps. when a tragedy like a bldg collapse or fire occurs but the rest of the time few people in the rest of the world pay much attention. So more consumer pressure in rich countries shd/cd be put on MNCs to prod them to exert pressure of their own on the Bangladesh govt. and other host govts. (I suppose a boycott of a particular kind might in theory be effective here, but unfortunately it would probably have to be such a comprehensive boycott that it would not be practical.)

Of course, action by the workers themselves
may be the most effective prescription -- and some of that may be occurring. I don't mean to simplify a complicated reality, but political and judicial mechanisms (it will be interesting if there are in fact prosecutions and resulting real penalties) must have a role here, I would think...

LFC said...

p.s. I think few people are suggesting isolating B'desh economically. The question is *how* to increase the power of domestic labor and reduce that of domestic capital in a poor country w a small-ish but presumably quite powerful domestic capitalist elite.
I know a little about B'desh, and have some personal ties/interest in B'desh, but I don't know the answer to that question.

LFC said...

correction:
"class" not "elite"

Kindred Winecoff said...

LFC,

"The MNCs don't say that to the Bangladesh govt b.c their concern for profits trumps their concern for working conditions and standards."

I don't know that this is fair. The factories that the MNCs subcontracted were examined by foreign third-party inspectors, and were passed. It was the building which housed the factories that was deficient. It was may seem like a subtle difference, but putting the blame on MNCs effectively makes them responsible for the quality of a country's entire infrastructure. This is not practical.

The real problem, it seems clear, is that the state is weak/corrupt/disinterested and local capital has a lot of power. The best solution to this is to increase the supply of capital -- ie more foreign investment, not less -- which will give labor more options. More options = more power. More power = high wages and/or safer conditions. And because foreign capital from countries with high domestic standards (ie US and EU) is associated with higher standards when they produce abroad (California effect etc) this could be a fairly rapid process, particularly if the foreign capital is directly invested.

But only if the capital is allowed in. Requiring first world standards/wages means that it won't be: there is no reason to produce in Bangladesh under such a regime.

Latinamericanist said...

I often disagree with you, but this is an excellent analysis. I do think there may be more of a role for Western activists than you allow.
To the degree to which things have already improved (i.e. the international inspectors you mention) I'd argue that it's also a function of international pressure on MNCs. There's some literature that suggests that "anti-sweatshop" activism is quite helpful in that respect, with relatively few downsides: http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.1.247

Moving to the polisci side of things, Murillo and Schrank argue that "boomerang effect" type pressure by US unions helped improve de jure labor law in Latin American countries with low democratic accountability:
http://cps.sagepub.com/content/38/8/971.abstract
Schrank's later work with Michael Piore (non-academic but very good version: http://bostonreview.net/BR31.5/pioreschrank.php ) suggests that Western governments, NGOs, and MNCs can play a key role in encouraging improved regimes of inspection.
So I do think there is a strong case to be made for Western activism based on the polisci/soc literature on labor rights and inspections. I agree, though, that this needs to happen in a way that doesn't cut off Southern growth via stealth Northern protectionism.

Kindred Winecoff said...

LA,

Thanks for the compliment and the links. I briefly mentioned advocacy but I know that literature less well than some of the other stuff. So the links are helpful. I'll update the post to point to your comment.

The worry I always have is about selection effects. For example, regarding your second link, I have no doubt that this had some positive effect in the cases studied. But I wonder whether it had a detrimental effect elsewhere by discouraging multinational production from occurring at all. This could work through a simple channel: if local capital has political power it may prefer to not sell to the US rather than accede to the demands.

That is, except under exceptional cases regulation always generates some deadweight loss. In a dynamic system the amount of DWL is unobservable (although it might be estimable). Perhaps the DWL is trivial in some cases but it will not be in all cases. Perhaps the DWL will be borne mostly by exploitative local capital in some cases, but not in others. It's hard to know ex ante and maybe even ex post.

As you say, there is no simple binary solution. I do think that international advocates should be working with local labor to determine the factors which will improve labor's bargaining power, and suggest policy accordingly.

LFC said...

Just to say also thks to Latinamericanist for his/her comment.

Also, for the record, I don't think factory workers in Bangladesh shd be paid what factory workers in, say, a unionized U.S. auto plant make. Such a suggestion is plainly divorced from reality and I have not made it. I do think, however, that there may well be some room for improvement on the ~18 cents per hr which is the figure I've heard for what Bangladesh garment workers make. (I realize this has to be balanced vs potentially driving away foreign investment, but if there is a slowly rising wage floor everywhere, not just in B'desh, via organizing and pressure, then that possibility can prob. be avoided.)

Kindred Winecoff said...

It doesn't just have to be balanced against the interest of MNCs. I also has to be balanced against the interest of 40% of the population that (per the CIA World Factbook entry on Bangladesh linked above) barely work and exist at a tenuous subsistence level. Bangladesh has a population of 150 million. That's a lot of people for whom even 18 cents an hour ($1.80/day or so) would likely constitute a noticeable improvement in their standard of living. And not a ton of it can be redistributed domestically, since per capita income is only about $6/day.

Their lives are at risk in these factories. That's awful. But their lives are almost surely at greater risk outside of these factories (and that's awful too). The quickest way for this to change is to move towards full employment. To the extent there is a tradeoff between increasing the wages of the workers who already have jobs vs extending new low-wage job opportunities to those who don't currently have them, the moral calculus becomes less clear. I'd probably side with the policy that moves the country towards full employment the most quickly on Rawlsian grounds: the worst-off are not those who currently have low-wage jobs.

LFC said...

Kindred,
Yes.
$1.80/day (assuming a 10-hr workday) is indeed probably above what a lot of Bangladeshis are subsisting on. And I might go for the move-toward-full-employment option too, to the extent there is a trade-off of the kind you suggest.

I think I'd also want to get, if available (and it may not be) some first-hand evidence about whether low-wage factory employment is universally preferred -- or to what extent it is preferred -- to subsistence existence via, say, fishing or farming making less than $1.80/day.

If I were faced w the unpalatable choice of fishing at say (plucking a figure from the air) $1.15/day or garment work at $1.80/day, I might choose fishing. On the other hand I'd probably prefer garment work to driving a rickshaw through exhaust-polluted streets or begging on the streets or starving in an alley (which I saw when I was in B'desh briefly ~20 yrs ago). (Gender matters here too, as a higher prop. of garment workers are female, I believe.)

Kindred Winecoff said...

Yes, no reason to think preferences are homogenous. But in terms of the broader society it's worth thinking in terms of dynamics. Subsistence farming/fishing does not generate growth, while utilizing capital in production does, and this compounds over time. So you might work in a garment factory at $1.80/day rather than fish so that your children have a better choice than you had.

A Chinese factory laborer in 1984 probably had it as bad or worse than a Bengali laborer today, but had the society chosen fish over factory the intertemporal result would've been tragic.

Understanding the Bangladesh Tragedy with Political Science
 

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