The price of cutting costs

The price of cutting costs

The collapse of the eight-story Rana Plaza  building in Dhaka has claimed more than 1,100 lives of garment workers and injured more than 2,500 people.

 In a more recent incident in China, more than 100 people have perished in a fire in a poultry firm. Similar incidents are all too common in India and most other developing countries in Asia and Africa.

Even more tragic is the fact that many of these ‘accidents’ were totally avoidable and hence those are not really accidents beyond control. In the Dhaka building, the inspectors had noticed cracks the day before and instructed people to vacate the building. But the garment workers were ordered to come back for work the next morning when it collapsed. In China, many gas cylinders were stored inside the premises and exits were not clear for workers to get out. The most important questions in the aftermath of such tragedy are: who are to blame and what should be done to avoid such calamities due to flagrant violation of safety norms? 

Reportedly, the owner of the Rana Plaza is a leader of the ruling political party in Bangladesh. Though stringent fire safety norms and construction codes exist in Bangladesh — as elsewhere — the same are blatantly violated  in most of the developing countries. In China, it is even more difficult to know who the real owners of the different enterprises are. Illegal construction of additional floors, that too with sub-standard materials, allowing factories to operate with heavy machinery (with the resultant excessive weight, vibrations and noise)  in buildings meant for residential and office purposes and flouting of fire safety norms are standard practices, specially among those with political or financial clout. 

The more tricky question centres around the role of the buyers of the product – in the Dhaka case, the global big retailers. Some are putting the blame on globalisation which has led to purchase from the cheapest global source, irrespective of whether the low price comes at the expense of safety norms and labour rights. This intense global competition, allegedly, has resulted in the so-called ‘race to the bottom’ with respect to environment, safety and labour standards.   

There is no doubt that the big retailers could have done more to improve things, if they collectively wanted. Here, the important rider is ‘collective’. Individually, each is competing with others and hence benefits from any cost cutting exercise by the supplier. Thus, individually, they have no interest in enforcing safety standards or legitimate worker benefits in the factories of the vendor. They are under no legal compulsion to do so, either. Even the moral compulsion is weak. They are helping to create additional jobs which are no worse than many of the jobs created in the rest of the economy. The surge in the growth of the Bangladesh economy,  employment and poverty reduction owes much to the huge growth of garments exports from Bangladesh (in size next only to China’s) as a result of globalisation.

Collective action

Some ‘collective’ action on the part of the global retailers is finally taking place, as a result of public pressure in their home countries following such a massive tragedy. In the aftermath, more than 30 EU retailers have recently signed a legally binding agreement to finance safety improvements in their production facilities in Bangladesh. US retailers like Gap and Walmart have, however, refrained from signing any legally binding agreement for the fear that it may lead to huge legal liabilities in future if something goes wrong in the vendor factories. Instead, they have preferred to announce that they would tighten their own system of inspection and enforcement of safety and labor standards in the factories without accepting any legal liability.   

Ultimately the responsibility for enforcing the safety and labuor standards has to rest with the local government. They would be glad (politically and financially) to pass the blame and the cost on to foreigners if they are willing to accept financial responsibility for  violation of rules in the local factories. In the short run the foreign retailers may accept some responsibility as they can not quickly switch their source of supply and the public pressure to do something remains high in the aftermath of the huge tragedy. But in the longer run, they would look for less costly options. The buyers would go to countries which would sell them goods without passing the cost of non-enforcement of standards to them. In that case, the local country and its poor workers would be worse off. The MNCs would maintain their profits by switching their source of supply.  However, the threat of such a  ‘collective’ flight  of buyers may finally force the local government to tighten its act.  Massive loss of jobs and social unrest is the last thing that politicians would want.
 Some believe that the root cause of violation of rules is the low price as a result of hard bargaining  by big (foreign) buyers. In case of China, despite the possibility of summary punishment for violators of rules (instead of a lengthy legal process as in India), the violators in the good books of officials can escape punishment and no global pressure unduly bothers the Chinese leadership. The simple truth is that one would violate rules, if profitable and allowed to do so. Fixing responsibility and stringent punishment for violators are critical. That is what happens in most of the developed western countries. Otherwise, more such avoidable tragedies would continue to recur in our part of the world.  

(The writer is a former professor of economics at IIM, Calcutta)