Wednesday, December 16, 2009

Hidden Costs of Low Wages

In the globalisation debate, much is made of jobs being outsourced to developing countries. Less attention is paid to the downward pull on wages in countries that manufacture clothing and other products for the developed world.

Harpers Magazine did an admirable job in its latest issue of putting a human face on the garment trade in Cambodia with an article titled "Shopping For Sweat, The High Cost of a Two Dollar Shirt. The reporter who wrote the article, Ken Silverstein traveled to Cambodia to visit factories which assemble articles of apparel that are bought in the United States.

Although the jobs brought to Cambodia were clearly an asset to the country, it was clear after reading "Shopping For Sweat"that the system needs fine tuning. When Americans look for the cheapest dry goods they can buy, there is a trickle down effect that is transcontinental.

It is hard for westerners to translate into terms we can understand what a paycheck computed at 38 cents an hour would look like to a Cambodian garment worker. The cost of living is vastly different. The standard of living is lower. If Cambodians are flocking to such jobs, they are probably being paid well. Right?

As different as Cambodian society is, there are still common denominators with the west, such as inflation. One statistic cited in the article was the fact that an average Cambodian working in an apparel factory earned $45.00 in 2000 and $56.00 in 2009. During this time, the US dollar (in which Cambodians are paid) had lost 37% of is value. This means that real wages dropped during that time, with a noticeable drop in living standards. Even a grateful factory worker will eventually notice such a development.

Many countries favoured by manufacturers who go overseas are authoritarian regimes. Cambodia, Vietnam and China do not have well enforced laws protecting workers. Indeed, the attraction of such countries is often the prospect of a docile workforce. Often, the government will present this feature of their country as a selling point.

Workers who do get a favourable wage package run the danger of losing their jobs when the factory moves to a country where labour and environmental las are less stringent. Not only do workers underbid each other. There is an international competition that keeps wages down.

Americans do care about how workers are being treated. There are companies that boast that their workers are treated well and paid a living wage. In response to this, in 1999 Reebok, Nike and three other companies founded the Fair Labor Association, a group which promised to monitor working conditions and labour practices. Firms were hired to monitor factories and interview workers.

How did this work? According to Harpers, the effort was more cosmetic than it was substantial. Harpers reported as follows on the success of firms that monitored labour practices.

"For workers at apparel
plants, though, the benefits have
proved elusive. A recent academic
study—whose lead author, Richard M.
Locke, is the deputy dean of MIT’s
business school—reviewed Nike’s own
data and found that conditions had
“stagnated or deteriorated” at 78 percent
of the company’s supplier factories
between 1998 and 2005."

Which is not to say that monitoring
is inherently useless. When factory
inspections are genuinely independent,
unannounced, and thorough, they can
uncover serious abuses. But one gets
what one pays for, as the old saying
goes; and since the apparel companies’
dues pay for the monitoring firms that
inspect their plants, they tend to get
the lax policing that they want."

Harpers described workers who live in garbage dumps, as well as workers who had to spend their free time foraging for food. It created a picture of workers whose standard of living is being eroded by inflation and international competition. There is little doubt that the best intentions of western consumers have been circumvented for the sake of cheap apparel.

What can be done? How can westerners protect and expand the gains of the workers in Cambodia and elsewhere?

I believe that a tariff on goods from countries with limited freedom of collective bargaining and worker's rights could help, not as a punitive measure but as a corrective one. If every shipment of apparel from Cambodia or elsewhere had perhaps a 20% tarriff on it, then the money could be held in an account that would build wells, roads and other amenities that might make life better for factory workers and for other Cambodians. Rather than be seen as punitive, such a tariff would put all manufacturers in the same boat. No one would be able gain an unfair advantage by underpaying workers. To avoid corruption, the aid could be administered under western supervision. Some of the tariffs collected could go to creating an economic ripple effect by encouraging businesses that are built around a core of apparel and other kinds of factories.

Whether in America or abroad, well paid workers can create economic opportunities for others. Henry Ford decided quite wisely that if he would pay his workers well enough to afford a car, that he could become rich building cars for his workers. Prosperity begets prosperity.

The Americans who manage overseas factories are, for better or worse the America that many people see. If we export a managerial style that contributes to comfort and prosperity, it will create good will that will benefit America.

Saving a buck in the short run does not necessarily turn a profit in the long run. This is a lesson that is useful not only in Cambodia, China and Vietnam. It is a lesson that can and should be applied here at home. And the sooner we start, the better off we will be. Sphere: Related Content

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