GreenGrade Stories - The unspoken reality of two garment hubs – Bangladesh & Cambodia

Posted 2014-01-27 10:44:58 UTC by GreenGrade Staff Member

Executive Summary

The retail industry contributes to wealth generation and employment in developed and developing countries and is known for its extensive global reach and high level of price competition which puts downward pressure on prices throughout the supply chain. Today the working conditions in global supply chains have come under heavy scrutiny due to insufficient monitoring of both social and environmental conditions. Most reputation-conscious buyers only associate with factories with adequate compliance standards. Non-compliances, especially in the area of child labour and health and safety usually lead to immediate and permanent delisting from a retailer’s supply books.

In this empirical study, the factors causing non-compliance in the garment sector of Bangladesh and Cambodia is discussed. Both countries have access to large workforces of low-wage labourers making them attractive options for western buyers.The countries have distinct culture and history but our reports highlighting their non-compliances have usually found quite similar issues. Therefore, it is worth understanding the major factors triggering such non-compliances. This report focuses on the political situations, the role of International Funding Schemes and Socio-economic factors of both Bangladesh and Cambodia that could be the cause of not adhering to the code. 

The media highlights the unfortunate conditions of the factories situated in these countries but fails to analyse the vicious cycle leading to these conditions. This study is based on our experiences working with our client’s factories based in both countries and a literature review of various available reports and articles. The reading list has been added at the end for further understanding of the dynamics creating such ethical non-compliance. 

Political Mechanism

Cambodia and Bangladesh are infamous for continuous strikes and high levels of corruption. Both these factors have an adverse impact on the country’s garment sector. The political situation of a country has a significant contribution to the industries stability and success.

Though the countries are different when it comes to their political structure and history still they manage to produce similar consequences. For example: According ETI Base Code 2.1 under the “‘Freedom of association and the right to collective bargaining are respected’ the workers, without distinction have the right to join or form trade unions of their own choosing and to bargaining collectively.” The majority of garment workers in both the countries do not get to exercise this right to its optimum.

In Cambodia though there is a high level of unionization still these trade unions fail to represent the workers due to their motives being highly politicized or being more involved with court cases, arbitration and disputes. At the extremes if the union leaders gain extra fame then those unions are more vulnerable and the leader face life threat (tragic case of Chea Vichea in 2010) that does not serve to protect workers lives or promote their interest in the workplace.

On the other hand Bangladesh government does not encourage formation of unions. The few existing unions are either affiliated with the ruling or the opposition party. Most of these unions are known for being corrupted and workers have a feeling that these unions favour the employers more than representing the factory workers. News and stories highlight that the workers who do associate with unions usually become victims of assault, harassment and also life threat. In 2012, Aminul Islam who was a prominent union leader was killed which spread a fear among the workers to join unions. 

Recently due to political unrest in the country, it has been facing raged demonstration from workers on the issues of minimum wage and standard of working conditions. In a report, researcher Bjorn Claeson (2010) stated that the main reason of mounting labour unrest is due to lack of a recognized labour union.  

International Funding Agencies

Since the 1980’s, both Cambodia and Bangladesh have been under the structural adjustment program imposed by International Financial Institutes. The rise of structural adjustment and neo-liberalism had a debatable impact on the developments of the state. In simple terms, countries like Cambodia and Bangladesh were going through major macro-economic problems during 1980’s comprised of high inflation rates, low growth rates and large balance of payment deficits. The only viable options for such countries were to seek assistance from International Monetary Fund and World Bank. 

Certain conditions needed to be fulfilled by these countries in order to obtain this assistance. The two types of programmes attached were: Stabilization involving short-term measures to restore balance of payments and Structural adjustment measures for long-term implementation ‘to restructure the economy and generate economic growth’. Essentially this includes reduction in public expenditure, devaluation and steps to intensify production of internationally tradable goods. Reports suggested such conditions only increased the inequalities in the country.

In 1999 IMF/World Bank launched Poverty Reduction Strategy Papers (PRSP) and the post-Washington Consensus these aimed at promoting investment in ‘human capital’ and a “country-driven” approach to poverty reduction. The critics to these new conditions suggest that these were the ‘treatments’ to an already epidemic disease.

The predictions of World Bank and the IMF on Structural Adjustment Programs (SAPs) were proved wrong in contexts of social welfare and economic conditions. Removal of subsidies from food and basic goods inflated the prices and made them inaccessible to the poor. Also this shifted government spending from social investment to debt servicing. These elevated poverty in the low-income countries. The 

notion of trade bringing significant benefits to developing countries is arguably correct but it has to develop strategies that endorse supply responses and facilitate pro-poor growth of the country. 

Bangladesh realised its potential as a garment exporter when it underwent the structural adjustment program in the 1980’s and became export-oriented nation. Around the same time Cambodia integrated their export-led growth through rapid liberalization and further integration in the global economy. Both these countries were export driven and focused on economic growth to qualify for further debt relief initiatives. 

Since the implementation of PRSP’s the UNDP has stated the inequalities reducing in both these countries. The reduction in their inequality is noticed but the reduction in comparison of their total export growth is still questionable. It is important to understand that UNDP acts as a custodian to the PRSP’s regional policy controllers. A report published by UNDP accessed their relationship with PRSPs. The UNDP has the expertise and therefore facilitates the PRSPs macro framework that allows space to foster pro-poor expenditure. Though it is a discussion on its own that will not be tackled in this report but the only point that is crucial in our study is that PRSP is part of a process that is political and technical and employs dynamic activities that sway with the economic situation. Therefore, it is not justifiable to report that these countries are doing better on the human development index due the PRSP and other international programmes. 

The Multifibre Arrangement* (MFA) is another factor which has a significant impact on the garment industry of both Cambodia and Bangladesh. The MFA was revoked in 2004 and the garment trade was liberalized which intensified the price-competition. Usually the quotas imposed on large exporters benefited the low-income exporters but this termination questioned the stability of growth and poverty reduction in the garment-exporting low-income countries like Cambodia and Bangladesh. Keeping in mind, the oligopolistic nature of retail sector in developed countries and labour-intensified industry in the developing country an interesting overview could be drawn.

Stolper-Samuelson Theorem predicted that liberalization usually reduces the output prices, which consequently reduce the workers’ wages. Now a drop in wage pushes the cost of production down that in turn leads to growth of production and export. This mechanism has been famous as ‘race to the bottom’ and ‘immiserizing growth’.

After 2004, the garment exports of both countries grew rapidly. In Cambodia the number of firms grew and which in turn increased employment. This led to high productivity in the nation and this supported the bolstering wages.

Then in 2009 United States and European Union removed restrictions against garment imports from China and Vietnam. This surged the competition even more among all the eastern Asian countries exporting garments. At the same time, recession hit the global economy and the cotton prices went up increasing the cost of production. In 2010, Cambodia’s export suffered a great deal due the above-mentioned factors and several others.

 

Even though the growth in the garment sector in both countries increased in a declining rate still they maintained their price-competiveness. This contradicted the pessimistic views of economist on the post-MFA era. The size of the global market expanded letting the entry of new firms. The main reason of the productivity growth in a liberalized market was possible due to frequent firm turnover as well as the efforts of surviving firm.

Also IMF promoted Trade Integration Mechanism to ease the short-term balance of payment difficulties. After IMF finished the 2nd review of Bangladesh PRGF Arrangement in 2004, they approved activation of the Trade Integration Mechanism that eased the short-term balance of payment difficulties.

Dynamics of Vulnerability and Dependence

The era of neo-liberal economy promoting globalisation created dependency on the global market. Such dependencies exposed these Least Developed Countries to a vulnerable environment. Various external and internal factors are responsible for affecting every stakeholder of this sector.

The above figure is drawn to explain that vulnerability pertains among all the economic actors in countries like Bangladesh and Cambodia. From the last section it is clear that the national governments are vulnerable to International Financial Support and foreign investors to sustain their economic growth. Then the business houses and factory owners are vulnerable to their position in the supply chain. They are exposed to a market where they have to beat their counter-parts to maintain their business. The end of the supply chain is the factory workers and their organisations that are highly vulnerable to every economic change. They are exposed to poor working conditions and risk of losing jobs, which is dependent on the global market and their demand. 

One of the usual challenges of the garment sector is their lack of ethical compliance related to overtime and adjacent violations. Most of the factories have a production bottleneck to be met.

It is unfortunate that the factories are indirectly compelled to prioritise shipment fulfilments over ethical compliance due to the risk of penalty, monetary loss as well as sourcing relations with the buyers. In most cases, these factories fail to adhere to their customer’s ethical requirements due to outstanding violations, which would have occurred while satisfying the same customer’s shipment requirement. 

The other major factor causing overtime and other ethical violation in this factory is overbooking orders up to 20% of their actual capacity, which is a regular practice among the garment factories. We have noticed that factories located in both the countries overbook orders approximately by 10-15%. In 2011, few of the factories in Bangladesh even exceeded their capacity by 25%.

The major challenge we identified was during recessionary periods, the buyers try to negotiate the price with the factories and this undermines the incentive of the factory trying to restrict the practice of overbooking to reduce the risk of overtime. In the year 2011 and 2012, this was a major drawback for our client’s factories located in both the countries that had to solicit more orders and therefore overbook when needed in order to keep their own margins but yet again they face greater risk of buyer changes which leads back to overtime and seven day work.

The biggest hit for Cambodia was during 2008 financial crisis. This crisis originated in the US, which was also the biggest buyer of garments and foot-wear produced in Cambodia. This economic situation had a major adverse effect on the dollar dependent country. The demand went down due to recession and the factories had to face a great loss. One important fact that needs to be discussed repeatedly is the structural adjustment undergone by these countries leading them to be highly export-oriented and dependent of foreign markets.

Social and Cultural Impact

Cambodia and Bangladesh are among the most religious countries of the world. About 95% of the population of Cambodia are Theravada Buddhists and 85% of the population of Bangladesh is Bengali-Muslim.  Two major celebrations in Cambodia are Pchum Ben and Water Festival but almost every month the calendar is tight with either cultural or international holidays.

Bangladesh being a predominantly Islam country they celebrate the joyful festival of two Eids, Eid-ul-Fitr and Eid-Ul-Azha along with the month of Ramazan and other religious festivals. Similar to Cambodia, even the Bangladeshi calendar is tight with national holidays and cultural celebrations.

It is worth noting that Cambodia and Bangladesh’s culture, law and human capital contributes to a significant challenge to any business owner. The figure below represents the productivity of both the countries around the year. About 23% of the year is occupied by national holidays in these countries

Moreover, the factories witnesses low workforce attendance on the first day of work after a major national holiday. From our observance and experience, the attendance stabilises only after 14 days but it is estimated that there is overall a loss of 8 – 14% of the productive days on an average, every year. If a working day falls in between some major holiday then only 40% of the workforce shows up and produces 20% less of their usual output. Also productivity drops preceding a major holiday. 

An interesting identical problem faced in both the countries is the issue of loyalty among workers. The factories do not expect the workers to stay more than couple of years and usually the reason of job rotation is concerned with better job offers or family reason. The monthly migration levels are around 10-11% in Bangladesh and 5-8% in Cambodia. 

The similarity in labour force characteristics between these nations is that the garment sector is female dominated. Most of these women are young and unmarried with little education and belongs to the rural population. 

The Labour turnover in respect to most of these young women is linked to the socio-economic characteristics of both the countries. They have a ‘hierarchically structured society’ with the strong notion of men being the bread-winners of the family and women being the household carers. Though women are granted equal constitutional rights still according to the social norms men have higher authority over women. This influences the women to dedicate most of her time to her family after marriage.

In order to support their families before marriage, these women migrate to other towns and start working at the factories at a very young age with low wages. Factory owners use this situation in their advantage and prefer employing young women for easy control and low price. These women leave the factory at the event of their marriage. The employers choose to let these workers go after marriage and recruit new younger ones. Also most women leave the job after marriage due to their dislike of workplace stress and hazard.

The other probable reasons of high Labour turnover rate are due to the wages. Once the workers have sufficient experience and skills then they get easily attracted to jobs in other factories with better wages. 

Conclusion

Today, the garment industry is highly debated around the world. Tragic incidents of Rana Plaza and Tazreen in Bangladesh followed by continuous lockouts in Cambodia have put this industry under close supervision in the international arena. This sector though contributes more than 80% of the export revenue to their respective industry still suffers due political, international and socio-economic reasons.

Over the years the garment sectors have expanded but if the existing issues keep persisting in these nations then it will be worth observing how they maintain their position in the international garment sector. This report dealt mainly with the dynamics in their respective political structure, effect of international funding services and cultural and social norm that has and will keep having an enormous role to play in this sector.

The garment sector would continue to flourish only if all stakeholders: buyers, suppliers, factories and government could address the inter-linked issues and improve the country’s reputation. The international media has been criticising the sweatshops, fire and building safety measures and more but very few of them report the reasons forcing such unethical and non-compliant behaviour of the factories situated in developing countries. Such non- compliance and pressure on labour standards is created by the increasing competition among global suppliers on the basis of pricing or labour cost in order to cater to a small group of powerful buyers.

Therefore, globalisation did promote these countries and gave them the necessary recognition on the world economy but at the cost of competing in a highly vulnerable environment. The different code of conducts established by international organisations and retailers or any other effective solutions can only achieve some success if they are in accordance to the price- competition and buyer-pricing dynamics. 

Glossary

BDT- Bangladeshi Taka

BGMEA – Bangladesh Garment Manufactures & Exporter Association

ETI – Ethical Trade Initiative

GMAC – Garment Manufacturers Association

IMF – International Monetary Fund

MFA- Multi fibre Arrangement

PRSP – Poverty Reduction Strategy Papers

SAP- Structural Adjustment Program

UNDP – United Nations Development Programme

Reading List

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Anner, M., Bair, J and Blasi, J. (2012). Buyer Power. Pricing Practices and Labor Outcomes in Global Supply Chains. Available at: http://www.colorado.edu/ibs/pubs/pec/inst2012-0011.pdf

Asuyama, Y., Chhun, D., Fukunishi, T., Neou, S and Yamagata, T. (2010). Firm Dynamics in the Cambodian Garment Industry: Firm Turnover, Productivity Growth, and Wage Profile under Trade Liberalization. Available at: http://ir.ide.go.jp/dspace/bitstream/2344/930/1/ARRIDE_Discussion_No.268_asuyama.pdf

Bargawi, O. (2005). Cambodia’s Garment Industry – Origins and Future Prospects. Economics and Statistical Analysis Unit Working Paper 13, London. Available at http://www.odi.org.uk/sites/odi.org.uk/files/odi-assets/publications-opinion-files/2513.pdf

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