Market Analysis

Lessons from Bangladesh

What’s the best way to prevent another catastrophic factory collapse?

Until April 24, “Bangladeshi garment worker” probably wasn’t your first answer if someone asked you what the world’s most dangerous occupations are—miner, oil rig operator, firefighter, secret agent, North Korean tour guide or Russian NGO worker probably topped the list instead. Yet for years, unknown to many in the Western hemisphere, over four million Bangladeshi have toiled in overcrowded buildings where fire and collapse are woefully regular occurrences. The factory collapse at Rana Plaza—death toll 1,127—is only the latest in a series of avoidable disasters. But unlike the dozens of fires over the years, the deadly collapse made headlines globally, raising awareness—and everyone agrees it can’t happen again.

So, what are people doing about it?

Several European retailers—many of which had contracts with the collapsed factory—have pledged to conduct regular health and safety inspections and fund building improvements at factories they’ve contracted throughout Bangladesh and the developing world. Many North American retailers are progressing on a similar pact, and others have announced solo efforts to monitor and improve working conditions up and down their supply chain. Which is all great—Western capital and know-how can do a great deal—but it’s likely insufficient. Major retailers contract with only about one-fifth of Bangladesh’s factories. Other factories produce goods for small and independent retailers who likely don’t have the resources to conduct inspections and fund improvements—they largely have to accept the factory owners’ descriptions of building safety and working conditions on faith.

The rest of Bangladesh’s factories largely subcontract work from the larger facilities—helping fill orders from Western retailers, often without the retailer’s knowledge. Factories at Rana Plaza did a fair amount of subcontract work. Let’s say a Bangladeshi factory agrees to provide a Western company with 10,000 cotton shirts at $4.50 apiece. If they don’t have the capacity to fill the order, they’ll engage another factory to fill the shortfall—likely at a discount, so they can pocket the spread. As a result, working conditions at the subcontractors are often the most deplorable—they’re under huge pressure to keep operating costs as low as possible. Even if the retailers are super vigilant about health and safety at their contracted facilities, subcontractors could very well escape notice.

In order to truly reduce the risk of another industrial catastrophe and improve working conditions, Bangladesh has to fix the issues that enable the existence of hundreds of overcrowded, shoddily constructed factories—namely corruption, a shadowy and inefficient permitting process and weak enforcement of building codes. Bangladesh ranks 129th and 130th on the World Bank’s Doing Business report and the Heritage Foundation’s Economic Freedom Index, respectively—and the subrankings of these reports speak volumes. For example, according to the World Bank, it takes the average business 201 days and 125.5% of per-capita income to complete the construction permitting and inspection process, 404 days and over 5,000% of per-capita income to obtain electricity and complete all the necessary inspections, and 245 days to register property. That’s an insane amount of red tape! But in a nation that’s only 27% free from corruption (per the Heritage Foundation), would-be factory owners can likely grease a few palms, slide some cash under the table and sail right through—and get permits and pass inspections regardless of the quality of construction. With weak institutions and a weak judiciary, there are few consequences for folks who don’t play by the rules—and therefore little to no incentive to behave.

That’s how you get towers with stacked factory floors that can’t support a high volume of people and equipment, stairwells that lack fireproof doors and act like chimneys if there’s a fire, exposed cables and wires that can easily combust, substandard ventilation—and hundreds more workers than a code would typically allow. This isn’t unique to Bangladesh—unenforced building codes were also responsible for collapsed Chinese schools in 2008. Laos, Cambodia, Vietnam and Sri Lanka—fellow garment manufacturing sites—also have similarly clunky permitting processes and entrenched corruption.

So Bangladesh has to clean itself up—and that change likely has to come from within. Factory workers have already started protesting their horrible working conditions en masse—something that seldom happened before Rana Plaza, as most garment workers saw hard factory life as an improvement over subsistence agriculture. So far, the government’s responded by pledging to raise wages and improve labor protections (i.e., foster more advocacy). Those are helpful steps, but they don’t address working conditions—and workers are demanding safety. Positively, as Bangladesh is a democracy, the government has every incentive to improve conditions and stamp out corruption. Otherwise, frightened and frustrated workers will elect officials more sensitive to their plight.

Yes, it goes without saying improved conditions likely push up manufacturing costs—but that won’t automatically cause garment manufacturing to migrate away from Bangladesh. As long as that nation maintains a comparative advantage, it will get international business. For example, less-developed African nations might seem a logical garment manufacturing destination, but high shipping costs and complex cross-border trucking procedures in these largely landlocked nations would likely make it more expensive for Western firms to source garment production there than a safer Bangladesh. Then again, Bangladesh likely won’t produce low-cost garments forever. With better construction comes more advanced factories, and with that comes productivity gains—and as that happens, Bangladesh likely moves on to producing more advanced goods. Just as Taiwan, South Korea, Japan and even the UK and US have. Rising production costs needn’t kill jobs—working conditions, incomes and overall quality of life can improve in kind.

The key is having the institutional framework for this to happen—strong property rights, the rule of law and low corruption. Bangladesh doesn’t have these. But now, at least, the world’s aware, and private businesses globally are doing what they can to help improve the country’s working conditions. Now it’s time for the government to follow their lead.

If you would like to contact the editors responsible for this article, please click here.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.