The casualties at Rana Plaza have prompted a far-reaching discussion of the economics and the ethics of the global garment manufacturing supply chain. Earlier this week, Keith Bradsher of the New York Times described the scramble among retailers to identify new low-cost garment manufacturing locations in the developing world, a scramble that has taken on new urgency as Bangladesh’s reputation has been tarnished. Indonesia, which has a GDP per capita (PPP) two-and-a-half times as high as that of Bangladesh and a government that has improved markedly in recent years, has been gaining momentum. Bradsher reports that many elite brands had harbored concerns about Bangladesh’s reliance on high-rise factories, a reflection of rising land values in prime manufacturing districts, which are in turn a reflection of transportation bottlenecks that threaten the reliability of shipments.
One of the sources Bradsher interviewed, Rubana Huq, managing director of the Mohammadi Group, published an op-ed in today’s Wall Street Journal detailing the challenges facing Bangladeshi garment manufacturing firms. In it, she describes the cost components of a shirt that is sold at the wholesale price of $6.75: $4.75 is spent purchasing fabric, $1 is spent purchasing labels and accessories specified by the retailer, and the last $1 is divided among “cutting and making” (includes wages), capital expenses, securing credit for future inventory, and profits.
Imagine an order for 400,000 shirts is spread over a four-line (meaning four rows of sewing machines, each row with 50 workers) factory of 1,600 square meters. Those 400 workers produce 3,077 pieces per day. The wage cost works out to about 38 U.S. cents per shirt. Another 15 cents goes to sending the shirt for a fine washing spin. Rent and utilities for the factory floor works out to about 11 cents per shirt, and head-office and marketing costs for the factory are 11 cents.
As for the remaining 25 cents, that will just about cover repaying a 10-year bank loan at 18% interest, which the factory owner has used for set-up costs along with a home and car. All is at a delicate equilibrium, until the owner feels compelled to give in to a firmly worded request from the retailer for an additional discount, or a demand to air-freight, at the manufacturer’s expense, some boxes of shirts that suffered a two-week production delay and now won’t be accepted by the retailer if they are any later than they already are.
In light of these very narrow margins, Huq suggests that a substantial increase in the statutory minimum wage will prove problematic. The Bangladeshi government has actually proposed a retroactive increase in the minimum wage, which will prove extremely burdensome to garment manufacturing firms locked into supply contracts. If Bangladeshi garment manufacturing firms didn’t face competition from Indonesia and other low-cost locations, they’d presumably have enough pricing power to raise prices and to finance upgrades in safety standards and much else. Adam Davidson’s latest column for the New York Times Magazine argues that just such an outcome is possible, because there aren’t many good alternatives to Bangladesh as a hub for garment manufacturing:
Many in Bangladesh fear that if the country becomes too expensive a place to make clothes, countless sewing machines will be sent to new factories in Nigeria, Kenya or Ghana. But Vijaya Ramachandran, an economist at the Center for Global Development, who recently studied the industrial prospects of sub-Saharan nations, says this outcome is unlikely. African countries may have a steady supply of unskilled labor, but a higher cost of living should keep them from competing with Bangladesh.
Ramachandran and I tried to figure out what countries might inherit Bangladesh’s T-shirt phase. Other than Burma, a long shot, Ramachandran couldn’t think of any. For now, Bangladesh might be where this centuries-long T-shirt journey ends, which means that their race to the bottom may be rooted in a misunderstanding. The country’s manufacturers can afford to take a step or two up the value chain. Not only can they pay their workers more, treat them better and house them in safe and clean factories, but there is also a significant economic incentive to do so.
The problem with Ramachandran’s line of analysis, however, is that countries more affluent than Bangladesh, like Indonesia, can also pick up the slack, as many of these countries are unevenly developed, and so they still have scope, and an appetite, for an increase in labor-intensive manufacturing. India, which has a GDP per capita (PPP) twice as high as that of Bangladesh, has many regions that are just as poor, and which are desperate for labor-intensive manufacturing work. In Why Growth Matters, the economists Jagdish Bhagwati and Arvind Panagariya recommend (somewhat ironically post-Rana Plaza) that reform its labor laws to match recent progress made by Vietnam and Bangladesh:
With the wages in China reaching levels at which it is likely to be forced out of these sectors, India is well positioned to become the world’s manufacturing hub. But if the costs of employment remain as they are, that opportunity is likely to be seized by a large number of smaller countries, such as Vietnam and Bangladesh. These countries allow firms to hire and fire workers under reasonable conditions and maintain a balance between the rights of both workers and employers. As a result, large firms in sectors such as apparel can be found aplenty in both countries and both have also seen significantly faster growth of the sector and done extremely well on the export front.
It should go without saying that not everyone believes that Bangladesh has done a good job of balancing the rights of workers and employers, yet it is true that employment in garment manufacturing has been a driver of poverty alleviation in Vietnam and Bangladesh alike, and that the unevenness of India’s economic development — with growth concentrated in knowledge-intensive services and other sectors that are not very labor-intensive while most workers remain in a moribund agricultural sector — is a profound problem. Garment manufacturing could facilitate the transition from low-productivity agriculture to higher-productivity export-oriented manufacturing, and it’s hard to imagine that India will keep screwing up on this front forever. So I’m inclined to think Huq is closer to the truth about Bangladesh’s (vulnerable) competitive position than Davidson and Ramachandran.
Alan Tonelson, an economic policy analyst who has long been critical of free trade, has an op-ed in Bloomberg View which makes the case that the best way forward for Bangladesh and other developing countries is a reimposition of the quotas established under the Multifibre Arrangement, which expired in 2005. His basic argument is that quotas took the pressure off of manufacturing firms in exporting countries, as they could be confident that they wouldn’t be undercut by foreign rivals:
[W]ithout quota-granted guaranteed market access, cost-cutting became all the more important for smaller exporting countries simply to preserve their new gains. As U.S. trade data demonstrate, most of the freed-up customers were won by the huge Asian producers that enjoyed big natural and government-created cost advantages. For example, China’s share of U.S. apparel imports rose to 33.44 percent from 26.07 percent during the first two years of quota-free trade (2005-07) alone. Indonesian and Vietnamese sales boomed, too.
Significantly, Bangladesh also excelled, and like China, Indonesia and especially Vietnam, its market share has continued to grow, reaching 5.25 percent last year, despite the sluggish U.S. economy.
Unfortunately, however, much of the surge in Bangladeshi exports can be attributed to that country’s reliance on rock-bottom wages and firetrap factories, with the tragic consequences we recently witnessed. Worse, the dynamics of today’s quotaless apparel trade practically guarantee that better, costlier work conditions in Bangladesh will simply drive much production and jobs elsewhere. That is what occurred in higher-cost garment exporters such as Turkey and South Africa, as well as smaller Western Hemisphere and African producers — most of whose U.S. exports have fallen in absolute terms since the quotas ended in 2005.
I’m extremely skeptical about the wisdom of this approach, which would, among other things, raise the cost of apparel in the consuming countries. I have no intrinsic problem with higher apparel costs, particularly if they reflect changing consumer tastes and preferences, but Tonelson is explicitly counseling the repoliticization of global trade in apparel, a process that can easily be gamed by, for example, domestic manufacturers seeking to raise prices. That said, Tonelson’s op-ed deserves praise for having introduced a broader historical perspective into the discussion.