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Monday, June 05, 2006

Sweatshops

There is a lot of support for the idea that sweatshops are better than the alternative in many developing countries:

In Praise of the Maligned Sweatshop, by Nicholas D. Kristof: Africa desperately needs Western help in the form of schools, clinics and sweatshops. Oops, don't spill your coffee. We in the West mostly despise sweatshops as exploiters of the poor, while the poor themselves tend to see sweatshops as opportunities. ...

On a street here in the capital of Namibia, ... I spoke to a group of young men who were trying to get hired as day laborers on construction sites. "I come here every day," said Naftal Shaanika, a 20-year-old. "I actually find work only about once a week."

Mr. Shaanika and the other young men noted that the construction jobs were dangerous and arduous, and that they would vastly prefer steady jobs in, yes, sweatshops. Sure, sweatshop work is tedious, grueling and sometimes dangerous. But over all, sewing clothes is considerably less dangerous or arduous — or sweaty — than most alternatives in poor countries.

Well-meaning American university students regularly campaign against sweatshops. But instead, anyone who cares about fighting poverty should campaign in favor of sweatshops, demanding that companies set up factories in Africa. ... [T]hat would fight poverty far more effectively than any foreign aid program. ...

The problem is that it's still costly to manufacture in Africa. The headaches ... include red tape, corruption, political instability, unreliable electricity and ports, and an inexperienced labor force... The anti-sweatshop movement isn't a prime obstacle, but it's one more reason not to manufacture in Africa. ...

So companies like Nike, itself once a target of sweatshop critics, tend not to have highly labor-intensive factories in the very poorest countries, but rather more capital-intensive factories ... in better-off nations like Malaysia or Indonesia. And the real losers are the world's poorest people.

Some of those who campaign against sweatshops respond ... by noting that they aren't against factories in Africa, but only demand a "living wage" in them. ... One problem ... is that it already isn't profitable to pay respectable salaries, and so any pressure to raise them becomes one more reason to avoid Africa altogether. ...

I haven't studied the research in this area extensively, but a colleague that has agrees with this position. Do you? Here's a summary of his views:

Comments to the Faculty Senate Ad Hoc Committee on Trademark Licensing, by Prof. Bruce Blonigen February 1, 2001: ...What I want to do today is to first outline what seems to me to be a popular perception of multinational firms and their role in globalization. Then I want to explain how the evidence from many studies does not support this view and, in fact, offers a much different view. Then, I want to talk about how these two views suggest very different things about how the University should approach the issues of trademark licensing in the world apparel industry.

A common view of multinational firms and globalization that I have seen in the press, and from what I have heard from students, is often taught in many classes at the University of Oregon, is of competitive, profit-seeking firms that have the ability to be footloose and, thus, locate production in countries that offer the lowest wages, the poorest environmental standards, and the lowest taxes. These firms have no regard for the welfare of its workers or the community and country in which they happen to locate. Once they enter a given country, they are able to push wages and working conditions even lower because they now have the upper hand in bargaining position. Inexplicably, countries compete for these firms in a race to the bottom, where the "winning" country gets the multinational because it has the lowest wages, working standards and environmental conditions.

I could add more detail, but this seems to capture the essence of the common view. As an economist, I certainly believe that firms try to maximize profits. But I think that the rest of the common view is inaccurate. In fact, the evidence is that we are witnessing a much more positive outcome from increasing investment by multinational firms around the world, including less-developed countries.

The first thing that everyone always focuses on with multinational firms is the wages of the workers. So, let's focus on that first. A new wave of research has had access to plant-level data on manufacturing production from less-developed countries. The researchers have obtained data on every single manufacturing plant in Chile, Mexico, Colombia, Taiwan, Venezuela, Turkey and more new countries are being added every year. Every single one of these studies comes to the same conclusion: Controlling for all other plant-level characteristics, foreign-owned plants pay higher, often substantially higher, wages than locally owned firms.

Note first, this is examining the universe of all manufacturing plants in a country and is the overall effect, which is much more powerful than previous case studies that either document a few "good" or "bad" foreign-owned plants. Second, note that the relevant comparison is between the wages at foreign-owned plants versus local-owned plants, not how these wages at foreign-owned plants compare to U.S. wages or some other metric that is not directly comparable. In the end, the stark conclusion is that no matter which country you look at, multinational firms pay higher wages.

There are a number of reasons why multinational firms would do this. First, these multinational firms often have much better technology than local firms, which makes their workers more productive and valuable. Second, they can use higher wages to attract better workers. Third, as related to me by a former Intel executive, high wages can lead to lower costs if it means higher productivity from the workers because of better nutrition and health care. All of this is consistent with profit maximization on the part of firms.

Economics research has also uncovered other channels by which multinational firms benefit the countries in which they locate. First, there may be spillovers in technology from multinational firms to local firms - they learn about better technologies, which make them more productive. Multinational firms often provide extensive training of workers, who may then form their own enterprises or go work for local firms. Third, multinational firms often may use much more environmentally friendly production techniques because it is already used by the firm in industrialized countries and is cost-effective to continue in the less-developed country. Thus, the competition by countries for multinational firms may actually be a race to the top, because of the benefits that accrue to countries from the presence of multinational firms.

So this is the view of multinational firms that I wanted to relate to you today, which I think is based on some solid evidence: Multinational firms are more often than not an agent for positive change in their host countries, providing higher incomes, better technologies that can spillover to local firms, and a better trained workforce. This contrasts with the common view of multinationals as forces that need to be reined in and closely watched.

The apparel industry is special in that many multinational firms contract with foreign plants, rather than own them. This may dampen some of the positive aspects, but presumably it will not completely eliminate them. For example, studies find that apparel firms that contract with multinational firms pay at least the average industry wage and almost always well above most countries' established minimum wages. At the very least, we know that demand by the multinational firms will increase demand for workers and raise general wage levels, which is an improvement from prior conditions.

So, what do these two very different views of multinational firms mean with respect to the University's policies on trademark licensing in the global apparel industry? I think the common view leads to taking a very adversarial relationship with the University's licensees and argues we need to ally with watchdog groups. The alternative view I have just presented is to encourage and enhance the positive impacts that licensees can have on these countries; in other words, a much more constructive relationship.

I make these distinctions because I think the two organizations the University has joined in response to these issues, the Worker's Rights Consortium and the Fair Labor Association, split across these two viewpoints. The WRC believes that it is counterproductive to even engage in a conversation with the multinational firms, whereas the FLA is intended to combine efforts of all interested parties to come up with constructive long-term solutions to encourage the positive aspects we often see from multinational firm presence in less-developed countries. ...

In summary, we should keep in mind that the poverty of these countries is not due to the multinational firms. In fact, rather than blaming these firms for the country's poverty in a "guilt by association" reaction, we need to realize that the evidence is that these firms bring a positive change to these countries. Licensees are already paying market or above-market wages. If we think this still does not meet some criterion (often bandied about as a "living wage") then the licensors need to share the lost profits with the licensees and consumers need to bear higher prices for these products. The alternative is to raise the bar too high for these firms to bear by themselves and see them leave these countries - a scenario in which the workers in the less-developed countries likely lose the most. ...

    Posted by on Monday, June 5, 2006 at 08:28 PM in Economics | Permalink  TrackBack (0)  Comments (18)

          

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