A WEEK IN ECONOMICS (06/05/13 – 12/05/13) EXPLOITING A CAPTIVE MARKET

, Business

Week-in-Economics

The death toll from the attacks on September 11th 2011 in the US was 2977. The death toll from the collapse of Rana Plaza factory complex in Bangladesh on the 24th April 2013 was 1127.  It is unlikely that the latter will reside in the consciousness of the world citizenry for more than a few months whereas 9/11 is regarded as a game changer in international relations and politics. Such is the disparity in how the world perceives actions and lives. The former was considered an act of war by belligerent individuals; the latter is regarded as a very bad accident. Both acts however are considered as criminal acts.

Consequently, bringing the criminals to justice was paramount. UN Resolution 1368 (2011), released a day after the attacks, urged “…all States to work together urgently to bring to justice the perpetrators, organizers and sponsors of these terrorist attacks and stresses that those responsible for aiding, supporting or harbouring the perpetrators, organizers and sponsors of these acts will be held accountable.” The US led alliance went into Afghanistan to do just that. In Bangladesh, Sohel Rana, the owner of the collapsed factory, has been arrested. Now he has become the garment industry version of Osama bin Laden: reviled and scorned with millions calling for his punishment.

Attacks on Afghanistan led to the removal of the Taliban and the entry of democratic government. Bin Laden was eventually found and punished. But the USA has yet to be victorious in the so called War of Terror: a war that ironically they fashioned and sustained. Drone attacks in Yemen, Afghanistan and Pakistan have been justified as means to destroy terrorist infrastructure. Yet the lost of innocent lives and growing resentment in those nations serves to increase anger against the USA. Acting in such a short term way ignores long term consequences.

The families of the victims of Rana Plaza also want justice. Perhaps, collectively, the country wants justice for the deaths of so many people, and blame has quickly been ascribed to Sohel Rana, now the poster child of corruption and apathy. Unfortunately, subjecting one or a few figures to such revulsion is similarly short termist. Just as with terrorism, there are complex factors that can lead such horrendous events. With terrorism, one of the possible causes is belligerent actions by the USA. With the collapse of the factory, one of the possible causes is the cheap prices paid by the end buyer of the garments.

Consumers want cheap clothes. Companies want to provide a price that will lead to the greatest amount of profits. Market forces act to ensure there is an accepted price that can lead to satisfaction of both parties. The problem for companies that are at the mercy of consumer perceptions is that a lower price may eat at their profits. Therefore to save money, cutting costs paying for the factors of the production (land, labour or capital assets) is desired.

One of the best ways of doing that, especially for such a labour intensive industry as garments, was to exploit a captive market of labour. Bangladesh was such a market. Its labour cannot be regarded as slave labour (as expressed by the Pope) as they have a choice to stay or go. But they are captive labour as they need to work otherwise they will descend into poverty. Countless commentators have spoken following the tragedy of the need for Western companies such as Walmart to stay in Bangladesh in order to pay workers a wage alleviating their poverty. The workers also want them to stay because they have no other avenue for valuable employment. In this situation, it is up to the company to think beyond costs and consider human dignity.

The workers in Bangladesh cannot complain strongly, whereas Chinese workers could. As China’s economic condition improved, workers demanded higher wages and better working conditions. They were more educated and could seek out other jobs. Big companies then sought cheaper alternatives following the increase in worker demands, many moving to Bangladesh. The 4 million workers that work in the Bangladesh garment industry do not have the luxury.

This captive market is not new. Industrialisation in the 18th Century meant the creation of factories which brought in workers from rural areas to work in appalling conditions with low wages and long hours. The steel factories of Andrew Carnegie, industrialist and philanthropist, imposed 12 hour days and low wages on its workers in a bid to expand further. Moreover, avoidable tragedies occurred similar to Rana Plaza. The Triangle Shirtwaist Factory fire in New York in 1911 was a garment factory in which 148 workers died in a factory fire.

Changes in the manufacturing sector in the US followed after witnessing such tragedies and worker discontent. Appropriate labour laws were issued, and working conditions improved. Workers lives improved. A crucial point to be a realised is that change was possible, and it occurred, so the question that should be asked is: Is it imperative for Western companies to pay low wages or can they increase the wages?

The answer is a resolute yes, but the political pressure is not there. Already there are movements to change the way garments are produced in Bangladesh but this has caused rifts between companies. The will is not there but companies like Walmart, Gap, Tescos, H&M, etc can change the future of the millions of workers that work in Bangladesh. To think simply: how much profit do these companies make? How much money goes into the pockets of higher management and shareholders? How much loss would occur if a worker gets 500 taka more (approximately 5 pounds) on their monthly salary? And how much extra are we willing to pay for the clothes we buy.

In the end, western companies have arbitraged between the higher values of a good in the west with that of the lower costs needed to produce it. This gap needs to be reduced, and perhaps it would mean lower profits for the company and high prices paid by the end customer, but those who allowed production to the buyers themselves have some responsibility for the tragedy that occurred.

The American politician Barney Frank said “Capitalism works better from every perspective when the economic decision makers are forced to share power with those who will be affected by those decisions.” The workers that worked in that factory were integral to the production of the goods. They deserved a say in how the goods should be produced, but they were considered as workers, not as human souls. They were. Just like a clothing company’s higher management, shareholders and the average consumer.

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