May 7, 2013

The Way Forward in Bangladesh

Its hard-working people have suffered far too long under the weight of its bankrupt public institutions.

The most recent report from Bangladesh, at this writing, confirms that the death toll from the recent collapse of Rana Plaza, a garment factory in a suburb of Bangladesh’s capital, Dhaka, is over 620 and still climbing. The Rana Plaza catastrophe comes on the heels of a smaller Bangladesh tragedy at Tazreen Fashions that claimed the lives of 112 people in 2012.

Most of the individuals killed in these two fires were impoverished women from the rural part of the country who earned the statutory minimum wage of $38 per month—a figure that had recently been raised by 80 percent. Mohammed Sohel Rana, the owner of Rana Plaza, now faces a potential death sentence; the day before the plaza’s collapse, he had been informed that the building had developed cracks and should be evacuated, but he sat on this information. Bazlus Samad Adnan, the owner of New Wave Style, one of Rana Plaza’s largest contractors, sits in jail as well on lesser charges.

Major purchasers of goods produced in Bangladesh face fierce competition in their home markets, and enter into contracts with Bangladeshi firms that have strict timetables for delivery and strict quality control measures. But firms—like the fashion company Benetton, which subcontracted “orders from one of the manufacturers in Rana Plaza”—ended up paying a high public-relations price in the wake of the disaster. As a result, it has set aside funds to help the families of the deceased.

  epstein  
  Illustration by Barbara Kelley

That stop-gap measure is not viable in the long term. The number of deaths in Rana Plaza is clearly intolerable. But just and universal condemnation of the catastrophe does not translate into a social consensus on the correct path forward on social and legal reform.

 A Construction Nightmare With a Simple Solution

No one is arguing that Rana Plaza was safe for occupation the day that it collapsed. Its architect said that it was not built to handle the industrial equipment installed. There were evident cracks on the exterior of the building that marked it as unsafe for continued use. In part, the cracks resulted from the illegal addition of another three stories on top of the original building motivated by huge demand for low wage labor from Chinese and other foreign buyers.

At present, Bangladesh employs about 3.6 million garment workers in about 4,000 separate establishments. Bangladesh’s garment business today generates about $20 billion in sales for the export market, up from about $7 billion in 2005. That tidy sum constitutes 80 percent of Bangladesh’s export trade, and is its major source of hard currency. No Plan B is waiting in the wings.

What next? Bangladesh does not need to pass new laws to deal with the situation. It needs only to enforce expeditiously and uniformly the safety rules currently on the books, by immediately shutting down any building not in compliance with minimum safety standards. The credible threat of a shut down should have an instant effect on factory safety.

Any government ordered shut down puts contracts in jeopardy and idles hundreds of workers as well. It is highly unlikely that any thinly capitalized Bangladeshi firm could survive the economic dislocation of a shutdown. In order to stave a shut down off by improving factory safety, the savvy firm will have to raise its asking price from foreign purchasers like Benetton and may have to lower wages to remain competitive. The latter move will generate predictable protest, but safety is a quid pro quo for the wage reduction.

In the end the Bangladeshi market will contract modestly unless and until the factories and firms develop other techniques to offset those costs. This strong regulatory measure is perfectly consistent with sound market principles. No market works well when an owner’s fraud exploits the ignorance of his workers, which is just what happened before the tragedy at Rana Plaza. No market works well with such a huge information deficit in that highly unstable economic environment. Consistent public enforcement of these safety laws can assist individual property owners and employers who otherwise find it difficult to make credible commitments on safety issues to workers. No matter how poor they are, people always care about personal safety.

The Folly of Broader Reforms

This direct solution also has huge advantages over the more ambitious proposals bandied about today. Pope Francis was shocked with the $38 per month minimum wage, which he equated with “slave labor.” But the wages, however low they seem by Western standards, offer major advantages over the alternatives. How else could some 3.6 million individuals in Bangladesh stream into these factories for work? Indeed, pushing up the minimum wage could have a perverse effect if it turns out that the best solution, as noted above, calls for a mix of greater safety and lower wages.

Minimum wage laws interfere with the interaction of supply and demand, and can thus cause collateral dislocations not found with more focused safety regulations. And such effects are likely to be magnified in a country like Bangladesh where such a substantial percentage of the labor force receives only the minimum wage.

Proposals from the European Union are also likely to make local matters worse, not better. As the New York Times reports, the EU may use indirect pressure to bring about “immediate safety improvements” by introducing changes in “Bangladesh’s duty-free and quota-free status to encourage more responsible management by the country’s garment industry.”

But these external threats are fraught with political dangers of their own. Any system of external constraints hits all factories in Bangladesh alike. So long as some fraction of the local factories are out of compliance, shipment of goods from all of the factories will be barred, which can mean instant ruin for firms in a thinly capitalized industry.

Nor can these external controls be turned off with a simple flip of the switch. Italy, Germany, France, Spain, and Belgium are all substantial clothing exporters, whose sales totaled about $73 billion last year. Any ban in imports to the EU will translate into undeserved economic protection for those EU countries—and the incentive to keep those trade barriers indefinitely. Any EU ban will thus drive more Bangladeshis back into poverty, to live and die in squalor beyond the reach of any building code.

The same objection applies to the Walt Disney Company’s decision to pull out its business from Bangladesh, as well as Pakistan, Belarus, Ecuador, and Venezuela after March 31, 2014. That decision allows Disney to avoid political heat from activists who object fiercely to the low wages and dangerous working conditions in the non-union workforces of those countries. But what may be good for Walt Disney and its huge customer base is not good for the desperate workers of Bangladesh.

The Labor Movement in Bangladesh

Most importantly, just as the Bangladesh’s Triangle Shirtwaist fire of 1911 (which took 146 lives) continues to galvanize the United States labor movement over 100 years later, the same will likely happen with the Rana Plaza collapse and the nascent and bitterly controversial labor movement rising in Bangladesh today. The familiar charges exert a powerful emotional appeal. “If these [workers] were able to organize, this wouldn’t have happened,” said Kalpona Akter, an activist with the Bangladesh Center for Workers Solidarity. “If they had unions, as soon as they saw the cracks they could have raised their voice.”

Perhaps. But even if that claim is taken at face value, the dangers of this approach should be all too apparent. It is not as though the only thing that a union does once it gains its dominant position is to advocate for the safety of its workers, even if that item is at the top of its agenda. Unions also bargain over wages, work rules, seniority, pensions, benefits, and other conditions of employment. In dealing with these issues, they exert a monopoly clout that can easily raise wages and reduce productivity. In a market with many firms, they can exert that force only if they are prepared to take retaliatory action against the firms that refuse to bow to their conditions. And they can only do so if they induce the government to take measures to restrict the entry of non-union firms that could underbid them.

The conditions in Bangladesh are ripe for labor agitation, which in fact occurred last year in the country as workers from hundreds of factories walked off their jobs in protest demanding yet another increase in the minimum wage. That action prompted a nasty retaliation by Bangladesh’s industrial police, who were charged with controlling labor unrest and resorted to using tear gas, rubber bullets, and water cannons.

Ironically, that labor agitation was itself one of the contributing causes to the collapse at Rana Plaza. Quite simply, the occurrence of such disruptions—and the threat of future ones—places enormous strains on the firms that have to deliver goods to foreign purchasers in order to remain in business. The threat of a repeat protest has led many firm bosses to step up the pace of work in the factories, which in turn means longer shifts, more workers, more extensive use of heavy equipment in order to make up for lost production, and stockpiling goods. That maneuver turned into a fatal insurance policy against future labor disruptions.

The threat of massive labor market turmoil strengthens the case for the effective public enforcement of state building codes. These codes are directed only toward safety issues, and do not touch the hot-button topics of wages and working conditions. Yet, if Bangladesh could only make good on this one public commitment, it would take the safety issue off the table, which would in turn remove from local unions the one key issue that makes their activist campaign so credible in the eyes of workers.

Whether that can be done is quite another matter in a country that seems to be rife with corruption, on the one hand, and short on experienced administrators, on the other. But make no mistake about it: The available reform alternatives in Bangladesh are flawed. Either that country gets its administrative act together, or the situation will continue to spin out of control until the country is no longer able to compete in the garment industry. Should that happen, it will lead to hardship for the many workers in that nation. The people of Bangladesh, who have worked so hard, have suffered far too long under the weight of its bankrupt public institutions.


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


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