Made in Bangladesh: Profiting from poverty

Some terms in our vocabulary are all powerful. When used they have a numbing effect and can overpower any argument. ‘Win-Win’ is one of them. Make any scenario a win-win and what is there not to like about it?

Multinational companies know this. They make use of this term when they outsource their manufacturing to developing countries where labour is cheap and plentiful. It brings down their cost of production, makes it possible for consumers to buy more for less, and workers in developing countries earn wages, which beats joining the ranks of unemployed. No one loses and everyone benefits – the perfect win-win scenario in a global marketplace. And these arguments have worked for them, including for the garment industry.

This explains how Bangladesh became the top destination for garment retailers in the world. It has one of the highest population densities and offers amongst the lowest minimum wage levels in the world. It is a perfect place for retailers to off load their labor intensive manufacturing work. Walmart (US), Gap (US), H&M (Sweden), Mango (Spain), Zara (Spain), Loblaws (Canada), Primark (UK), Benetton (Italy), Tchibo (Germany), and others are all here. Many of their garment product lines, which are sold in high-end stores worldwide, are manufactured in Bangladesh. Only a few have their own factories, instead most contract their manufacturing to garment factories in Bangladesh.

To earn more profits, many of these companies switched to fast-fashion, bringing out more seasonal lines of fashionable clothes. Every time consumers visit their shops, they found new merchandise to buy, thus pushing up sales. Over time consumers started to demand it, and did not want to wait long for new merchandise. To meet his demand, the retailers push the factories hard to maintain a faster turn-around of readymade garments. This would not have been possible without a flexible supply chain, which could manufacture the clothes quickly and ship them out in time, and do so without raising costs. Bangladesh along with India, Pakistan, China and Vietnam provided the cheap manufacturing base these companies were looking for. But the unit labor cost in Bangladesh is among the lowest (roughly half of China), and the retailers rolled. In the 2012 study done by McKinsey on apparel sourcing in Bangladesh, all the participating companies named price attractiveness as the first and foremost reason for purchasing in Bangladesh.

There are roughly 4500 garment manufacturing factories in Bangladesh employing over 4 million, and 80% of them are women. The contracted manufacturing arrangements to the local factories serve the retailers well. They do not have to make any long-term investments in the factories and can switch to other factories, if they fail to deliver orders in time. Factory owners, not wanting to lose business, are under pressure to keep their prices low and outputs high. They end up driving their labour force hard and for long hours. Worker safety and conditions do not matter; what matters is the ability to get the garments ready as per the changing designs and specifications of the retailers, and ship them out in time. Unsure of meeting expectations of retailers and winning repeat orders, factory owners do not invest in or improve their factory conditions, and end up compromising in all areas including wages, terms of contract, and health and safety of workers.

It should come as no surprise that the profits of big retailers, many of whom billions of dollars in turnover, are increasing while the conditions of workers remain dismal. An average worker in the garment factory earns $38 a month, after the wages were doubled in 2010 when workers protested against low wages and rising inflation. The World Bank defines extreme poverty as those living on less than $1.25 a day which amounts to the same wages as received by these garment workers. These workers put in long hours without benefit and in unsafe working conditions but are not able to escape extreme poverty. The Millennium Development Goals (MDGs) set by the United Nations in 2000 seek to cut extreme poverty by half by 2015 and many of these factory workers would fall in the category being targeted. It is ironical that many big garment retailers such as Gap, Mango and others are part of the UN Global Compact where companies commit to aligning their operations to meet labor standards and work towards achieving MDGs.

It is not that these retailers cannot afford paying decent wages or offer greater margins to factory owners so that they do not cut corners. The manufacturing costs in the garment industry are roughly 10-15% of the actual price that buyer pays. It is common for price mark ups to be 5 to 10 times when product moves from one end of the global supply chain (factory gate) to other (store window). For instance, polo shirts are brought by the retailer Mango for USD 4.45 each in Bangladesh and sold in its branded stores in Britain for USD 40-45. Adding mere 10 cents to the price of each garment produced in Bangladesh would go a long way in improve wages and providing better worker conditions. But this is not to be as retailers bargain for mere ‘cents’ at the factory gate so that they can translate into millions of ‘dollars’ at the retail.

The big fashion retailers spend millions in advertisements and public relations to make them appear to be socially responsible but in practice they are profiting by trapping millions of most easily exploited workers who do not have other sources of employment, especially women, into extreme poverty.

Using the win-win argument, big retailers justify that workers are getting wages that are better than those working in other sectors, and is a reason workers are willing to put long hours in dangerous work conditions. And if any of them decide to leave there would be thousands of other unemployed workers who would gladly fill in their places. But is the situation where retailers get to earn big profits by pushing production costs low and not invest in workplace safety while the workers get a pittance more a win-win? The most recent tragedy in Bangladesh killing over 1100 workers because of unsafe factory conditions are tragedies that are happening with greater frequency, when this win-win argument goes unquestioned by everyone.

Retailers often point to their inability to take action to improve conditions. This could not be far from truth. The garment export industry is big in Bangladesh and wields enough power on the government. If anything it is the government, which is afraid of offending the retailers as it is a 19 billion dollar-a-year export industry, with a 13 percent share of GDP and earns almost 80% of its export earnings. For Bangladesh, the garment industry has simply become - too big to fail and each successive governments end up making the turf even more attractive to the big retailers. It is the not the inability of the retailers but the strong hold they have on the government which prevents stronger labor laws to emerge and for conditions to improve.

Until this recent workers tragedy, the government did not even allow garment workers to form trade unions without prior permission of the factory owners. This was done primarily to meet the conditions of the retailers and the demands of factory owners. The local factory owners are equally well represented in the government, and around 10% of them are Members of Parliament and have vested interests in keeping the status quo. This nexus between too big to fail retailers, corrupt government officials and factory owners, explains why government is powerless to make systemic changes in the industry. The changes happening are mostly knee jerk responses to tragedies as they occur and when global media reports on them.

In view of increasing tragedies in Bangladesh, retailers such as Walt Disney have moved out and some others are slowly pulling out. Since this labor intensive production is not moving back to the West, it may shift to the next best destination where labor is plentiful and governments can be influenced, or the retailers will make some compromises and come up with other ways to protect their margins.

Around 24 retailers including H&M, Loblaws, Marks and Spencer, Primark, Benetton and others have relented to sign an accord to improve fire and building safety in Bangladeshi factories which they were refusing to sign before this tragedy occurred citing costs and accountability issues. The binding agreement is a minimal one and would require retailers to pay some amounts towards factory improvements after independent inspections. It is not surprising that even these minimal changes are coming after spate of negative publicity in western media and are little more than quick fixes to check against extreme tragedies. What is surprising is how these retailers managed to operate for so long without concerns for most basic requirements like safer factories. Retailers such as Walmart still refuse to sign to the accord and instead call for self-regulation.

A point is often made that to remove poverty one has to love profits. Example is given of China where conditions at the start of their manufacturing prowess were similar but improved as more and more manufacturing came to be done there. And eventually people in Bangladesh would get richer too and their working conditions will improve. While wages in China have improved, the model by which companies profit by squeezing workers as much they can and crushing their voices has not. The spate of suicides in recent years by workers in Foxconn, which produces the iPhone for Apple because of long hours and poor working conditions is a grim reminder. Foxconns’ assembly costs are estimated to be less than 5-10% of the final price of the iPhone sold for over $600. Apple earns over $300 profit per iPhone and it sells millions of them generating extreme profits. It could easily pay more to improve working conditions and still make extra-ordinary profits. But this does not happen. Big companies whether in Bangladesh or China use their dominant positions to drive the costs down with little regards to safety and conditions of workers.

The prescriptive policies where poorer countries are forced to undervalue their national assets and place a higher value on foreign investments have caused large-scale unemployment, loss of productive capacities, and labor migration in developing countries, including Bangladesh. The structural adjustment policies pushed by the World Bank and the International Monetary Fund in the 1980s led to downsizing of public sector institutions and enterprises in Bangladesh. Many state-owned enterprise and domestic industries were closed or privatized. The manufacturing sector suffered and led to retrenchment of the work force and massive de-industrialization of Bangladesh putting it into the path of low-technology manufacturing.

Furthermore, the systemic undercutting of peasant agriculture in Bangladesh led to farmers flocking to cities in search of work, and added to growing unemployment in the cities. The work force was no longer organized and were left voiceless as unions were broken up and required permission of factory owners to be set up, making the workers more vulnerable to exploitation. Desperate to earn livelihood, these workers did not question the wages or working conditions in the private factories. And this cheap and plentiful labor provided the basis of the billion dollars readymade garments industry where retailers exported low-paying dangerous jobs to Bangladesh and took profits out of the country. The conditions of the workers deteriorated and the country lost much of its productive capacity. It is a far cry from the win-win argument used by the multinational retailers.

How much more do the workers in Bangladesh and other countries have to suffer and add to bottom lines of the multinational retailers before they can get decent wages and a safer workplace? And will they ever?

* Vikas Nath is an international development expert

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