Tim Nicolle

Employment conditions in global supply chains and ethical sourcing strategies are big news. Yet the more we try to squeeze out undesirable or unfair working practices – sometimes the worse we make the problem. Long term regulation is not the right answer.

On the one hand, this is a game of “whack-a-mole” and on the other hand, regulation has a variety of other costs which can lead to undesirable outcomes over the medium to long term.

“Whack-a-mole” is a fairground game where players use a mallet to hit toy moles that appear at random through holes in a large board – the point being that whenever one mole is hit, another pops up – and the game never ends.

The UK garment industry: article in the Financial Times

It may be a surprise to many – but this story starts in the UK.

A recent in-depth article in the FT covered working conditions in garment factories in the UK (specifically in the network of contractors and subcontractors surrounding the English city of Leicester). The article is behind a paywall, but it sets out the results of an in-depth investigation by an FT journalist into working conditions for factory workers in the UK garment industry.

Here is a link to an opinion piece that summarises the findings and puts them into context: Link to the FT comment.

Quoting from the FT article:

“The cheap bit of that equation is what poses problems in a country [UK] with a minimum hourly wage for over 25s of £7.83. It stretches credulity that companies can consistently retail £6 and £7 dresses — such as the ones from Leicester that our correspondent bought online — made in ways that comply with labour laws. Asked to cost these and two other cheap garments, one Leicester manufacturer came up with revealing findings. Even with zero margins, he would not be able to make three out of the four economically.”

The article highlights how:

  • Onshoring of garment production (back from Asia) is a real trend, as fast fashion looks to source goods on short lead times with small production runs. Sourcing such items on this basis from Asia is difficult.
  • Booming garment manufacturing in and around Leicester is driving suppliers to expand and recruit – but retailers are in a cost-conscious mode at the moment as they are dealing with all manner of threats to their business models – and where, online, prices are a big driver of demand.
  • The result is an under-class of workers, operating in potentially unsafe conditions and being paid far below the UK minimum wage (which is illegal).

Comparing Leicester to Bangladesh

Five years ago, global supply chains in the garment industry received a major wake-up call when a building collapsed in Dhaka, Bangladesh (Rana Plaza). Over 1,000 workers were killed and a spotlight was shone on the conditions that workers face on the front line – workers who make the clothes that we walk around in every day.

The reaction of the authorities to the Rana Plaza disaster was reasonably swift, and involved a coordinated effort between government, garment industry associations and leading garment buyers.

Bangladesh now has one of the toughest compliance regimes in the world, albeit there are plenty of backstreet sub-contractors still working on CMP (“cut-make-pack”) sub-contracts for the big guys who have demonstrable compliance.

There are a variety of consequences that have flowed from the implementation of compliance regimes:

Good things have come from regulation

The regulations in Bangladesh set out minimum standards for worker representation, audits of conditions (including wages, time off, overtime arrangements, facilities), confidential random interviews with workers to validate compliance, engineers to check buildings, strict rules around fire protections and so on.

This has led to:

  • greater awareness among stakeholders of the issues, and an open discussion of the rights and wrongs of the industry (government, international retail buyers, factory owners, workers)
  • a spotlight shining on the country and its industry, driving increased vigilance
  • better conditions for many workers

But regulation has a cost

Reaching for the regulatory rule book and policing the market is the sticking plaster that we all instinctively reach for. Capitalism cannot be trusted to factor social costs into a manufacturing equation.

But there are consequences of regulation:

  • Debt: Many manufacturers in Bangladesh have ended up taking on large amounts of external debt as they had to invest in new plants and upgrading existing plants. This creates (in turn):
    • stress on the banking system; and
    • leads factories to a position where they have become price-takers not price-makers (they cannot afford for their lines to be working below capacity, as otherwise they default on the debt they have taken on; and this is an opportunity for price-pressure that is exploited by some buyers);
  • Inequality increases: the rich get richer (via so-called “regulatory capture”);
    • regulatory capture is the name given to the process of creating entry barriers to an industry via regulation (as this makes it harder and more expensive for new entrants to set up)
    • and the result is that entrepreneurs and smaller companies go out of business – and, in emerging markets especially, this exacerbates inequality and reduces the “trickle-down” of wealth through the layers of society, exactly the opposite of what is really wanted, in fact;
    • this is a real issue in practice (the BGMEA, the leading group representing the interests of garment exporters in Bangladesh) informally reports that the number of their members has dropped from over 4,000 in 2012 to 1,500 today. That is a good thing in that many of the factories that have shut were operating a dangerous or undesirable model, but a bad thing in that power and wealth is starting to accumulate amongst a smaller group of leading families and individuals.
  • Loss of competitiveness: but most importantly, there has been upward pressure on prices, leading to a loss of competitiveness for the country’s products as a whole;
    • in Bangladesh, the garment industry accounts for 90% of export volumes;
    • garment exports stopped growing as price-sensitive new orders were placed in alternative lower-cost locations perhaps with less stringent regulations, (2017 H1, garment export volumes actually shrank)
    • or, more worryingly, supply chains shifted to locations where there may be less chance of being caught out by a scandal; accidents happen all the time – it is just that we don’t always hear about them;
  • Corruption can be rewarded: and there are opportunities for corrupt and bad practices in those same local markets to obtain rewards (as ethical players are priced out), exactly as described in the article about Leicester’s garment industry

Moreover, although we might wish to judge, from our privileged seats in the West, one of the consequences of the regulatory attention in Bangladesh has been less employment in the garment industry in a country where the alternative options can be rather limited.

Capitalism finds it’s own level

Just like water, capitalism finds it’s own level. Human nature is what it is.

As we know from the banking industry (all too well), unbridled capitalism can result in undesirable / unacceptable social costs; it can mean that weaker stakeholders (eg: employees in the garment industry, depositors and customers in the banking industry) may need additional protections through regulation.

But regulation is expensive, generates other kinds of costs and market distortions (see what has happened in Bangladesh above), and sourcing can end up just moving elsewhere, where maybe we cannot see what is really happening.

So the answer is not just regulation but a combination of two things:

  • a balanced view, where we have to accept the least-worst outcomes rather than focussing on ideals and where the odd scandal or mistake is not seen as representative of an entire country, industry or, indeed, the buying practices of a given retailer; and
  • vigilance to keep the system honest, with transparency in the supply chains and balanced reporting of situations where lines are being crossed.

There will always be people who work out how to game the system – and the game in this respect is a game of “whack-a-mole”. We knock down the mole in one place only for him to pop up in another. As pricing pressure continues to increase, the temptation to source more cheaply from less well-policed environments increases as well. You pay your money and you take your choice.

The cost of an ethical approach

Ethically-run retailers (like ethically-run banks) are at a price disadvantage. It is really important that the price disadvantage is compensated for by appropriate marketing and an appropriate level of balanced media support for those who are working hard to get things right. Policing the system is not free – but regulating is not a long-term answer. It may be a necessary in the short term to force change, but then it needs to fade into the background.

It is important to note that there are steps now taking place in Bangladesh to reduce the amount of regulation, now that the house has been (largely) put in order. The spotlight will continue to shine on working practices across the industry, and this means that there are opportunities for the disadvantaged to complain, and for the local and international media to provide some level of surveillance.

This is the right answer – because high level of policed regulation is expensive, and its work has been done for now – and (of course) a high level of policing can always come back.

So what’s the answer?

These are difficult issues to manage.

  • On the one hand, we want to be sure that the goods which we purchase are sourced in ethical ways; and
  • On the other hand, we all tend to vote with our pockets.

The answer is not long-term regulation.

Regulation can be used short term to shine a spotlight where it is needed and to force behaviour change.

The answer in the long term is to ensure that the spotlight continues to shine.

Which brings us back to Leicester in England, the comparison with Bangladesh – and the global game of “whack-a-mole” involved in ensuring that standards in supply chains continue to improve.

It is important to be realistic that this is a global issue, and not one that is confined to a few newsworthy locations in South Asia or elsewhere.

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