TCS Daily

Sweatshops and the Olympics

By Jan Arlid Snoen - August 30, 2004 12:00 AM

OSLO -- The Olympics in Athens were not only a competition for gold medals. They were also part of a different battle over corporate image of sportswear companies. Self-styled anti-sweatshop groups took the opportunity to try to steal some of the limelight through the Fair Play at the Olympics campaign, targeting companies such as Nike, Puma, Adidas and Fila.

No anti-globalization book seems to be complete without a few anecdotes about the deplorable wages and working conditions in the export industries in poor countries. High-profile multinationals, not least in the sportswear industry are often targeted for criticism. Although many of the anecdotes are true, they are just that -- anecdotes. When measuring the impact of globalization on the welfare of people in poorer countries, the important question is how representative these stories are, and what yardstick is used. Are workers better off when they are engaged in the global economy than otherwise would be the case? The anti-globalizers often win the emotional argument, because they are good storytellers and trick us into accepting a yardstick that in the short and medium term is completely unrealistic -- the standards of the rich capitalist countries. Even though defenders of globalization and capitalism would benefit from becoming better storytellers, only cool-headed research can answer the question of what actually benefits the poor.

All the same, let me start with an anecdote from the book Open World, written by the leftist British journalist Philippe Legrain. He visited the Nike factory at Trung An in Vietnam, fearing the worst, but found what he described as something more similar to Kew Gardens than a shoe factory. The wages are double the local average, working hours are reasonable and overtime limited to 200 hours a year. Working conditions are much better than in other Vietnamese factories and monitored on a regular basis by PwC and the local university. Nobody below 18 years of age is allowed to work in the shoe factory. The Nike factory has raised living standards in the whole area, making amenities such as motorbikes and televisions commonplace. For every story about deplorable working conditions, there are more under-reported happy stories like this.

Edward Graham, in his book Fighting the Wrong Enemy, and his colleagues at the Institute for International Economics in Washington, have presented research that strongly indicate that companies involved in the international economy, whether they are multinationals or companies producing under contract with multinationals or simply local export-oriented companies, tend to pay higher wages than domestically oriented companies. Graham found that multinationals paid their workers in developing countries double the average industrial wages. The International Labor Organization confirms that wages in export processing zones are higher than in the villages were the workers come from. The U.S. Department of Labor has found that wages in typical export industries in poor countries, such as shoes and clothing, are higher than in alternative employment, such as agriculture. Tons of other evidence point in the same direction.

The multinationals and the export industry does not pay higher wages and improve working conditions only because of their good heart, even though corporate social responsibility and the quest to achieve a better image in Western markets plays a role. They can afford paying higher wages because their workers and factories are more productive than the domestically based. Higher productivity have many causes, such as better equipment, work-place organization, quality management, on the job training and better motivated workers, as well as the quality of government, regulations and infrastructure in the country where the production is based. Through the force of the invisible hand, competition makes sure that most of the gains from higher productivity eventually lead to higher wages.

Some explain the higher wages in foreign owned companies by pointing out that these are concentrated in high-wage industries, or attract more highly educated workers. There is some truth in this. In order to isolate the impact of foreign ownership per se, we have to look more closely into comparable companies. A particularly compelling study has been made by Robert Lipsey and Frederik Sjöholm, using data for all Indonesian manufacturing plants with more than 20 employees in the period 1975-99. Foreign owned companies paid wages 44 percent above average for blue-collar workers and 68 percent higher for white-collar workers. Adjusting for all other factors than ownership, such as education level, industry and region, the researchers were left with a residual of 20 and 12 percent respectively. Thus foreign ownership per se accounts for a non-trivial higher wage level.

The Indonesian panel data also allowed Lipsey and Sjöholm to study the effect of takeovers. They found that wages in plants taken over by foreigners after two or three years increase at least 17 percent (blue-collar) and 33 percent (white-collar) more than in other plants. Interestingly they also found that the plants that moved from domestic to foreign ownerships also employed many more blue-collar workers, but less white-collar workers. Thus multinationals were not sucking up the highly skilled, leaving the rest of the economy worse off, but instead kept fewer of them and paid them higher wages.

Moreover, multinationals can provide better working conditions because this often pays, even in the short run. The Georgetown University economist Theodore Moran presents research in his book Beyond Sweatshops (Brooking Institution, 2002) confirming the better working conditions in the export industry. He explains that "purely as a matter of self-interest, investors with more skill-intensive operations showed signs of becoming more attentive to the needs to attract and maintain a more contented and better-trained work force. These investors sought out worker-friendly services in worker-friendly environments, paying zone rents that were triple those elsewhere for the superior conditions".

The globalization sceptic Dani Rodrik in 1996 studied how important labour standards affected Foreign Direct Investment, and concluded that low labour standards may be a hindrance, rather than an attraction, for foreign investors. Moran also concludes that lower labour standards are not to any significant extent used to gain competitive advantage. Contrary to frequent claims, there is no "race to the bottom" in labour standards. The trend is towards ever stricter standards, both in rich and poor countries, although compliance may be patchy in many poorer countries.

Of particular concern has been the right to unionize, as many believe this is a precondition for securing fair wages and good working conditions. Without analyzing the truth of this assumption, there is no or little evidence that foreign trade is anti-union. For sure, there are examples of anti-union laws and practises, not least in Export Processing Zones, but the overall picture is much rosier. In a major review of international labour standards in 1996, the OECD concluded that not a single of the 75 most important trading nations had curtailed union rights since the beginning of the 1980s. In 17 countries such rights had been improved. The OECD also failed to find any connection between the right to form unions and collective bargaining and export increases. Thus unionization seems to play a negligible role in international trade.

Jan Arild Snoen's book on globalization (in Norwegian) was published in the spring by the think tank Civita in Oslo.


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