07-5

Working Paper Series

The Debate on Labor Standards and International Trade:

by Gnseli Berik & Yana van der Meulen Rodgers

GEM-IWG
The International Working Group on Gender, Macroeconomics, and International Economics
www.genderandmacro.org

The International Working Group on Gender, Macroeconomics and International Economics (GEM-IWG) is an international network of economists that was formed in 1994 for the purpose of promoting research, teaching, policy making and advocacy on gender-equitable approaches to macroeconomics, international economics and globalization. The Program on Knowledge Networking and Capacity Building on Gender, Macroeconomics and International Economics, which was inaugurated in the summer of 2003, has two objectives: first, to engage with fellow economists in order to enhance capacity building in research, teaching, policy making and advocacy in this area; second, to strengthen the intellectual links among practitioners in networks working on similar issues.

The working paper series is designed to create an international forum for scholarly and policy-oriented work on these issues. The goals of the series include: To increase the visibility of and centralize access to work in the area of gender, macroeconomics and international economics. To make research immediately available to the community, up to a year or more prior to the conclusion of the lengthy review and publication processes of standard academic journals; To increase the international supply of this research by providing a publication venue for interested researchers, including Program graduates. Criteria for Acceptance. The IWG-GEM working paper series publishes papers of high quality that have the following characteristics: Make an important contribution to the field of gender, macroeconomics and international economics; Build upon and adequately reference the appropriate literatures; Are clearly written and accessible to a broad international audience; Present clearly the core arguments and methodology. Submission. To submit a paper to the working paper series, please go to the GEMIWG website, www.genderandmacro.org.

The Debate on Labor Standards and International Trade: Lessons from Cambodia and Bangladesh *

Gnseli Berik and Yana van der Meulen Rodgers

ABSTRACT This study examines the nature and enforcement mechanisms of labor standards in two Asian economies (Cambodia and Bangladesh) that are experiencing strong pressures to cut labor costs and improve the price competitiveness of their textile and garment exports. Analysis of survey, interview, and compliance data indicate differing trajectories in compliance with basic labor standards. While problems persist in Bangladesh, compliance has improved in Cambodia following a trade agreement with the United States that linked positive trade incentives with labor standards enforcement. These contrasting experiences present important lessons for the debate on enforcing standards that protect female workers in formal-sector jobs.

Gnseli Berik is Associate Professor in the Department of Economics and the Gender Studies Program at the University of Utah. Her recent research is on international trade, gender wage inequality, and working conditions in Asia (Bangladesh, China, Korea, Taiwan); debates on labor standards; and gender inequalities in training for the skilled trades in the U.S. She is an associate editor of the journal Feminist Economics.
Yana van der Meulen Rodgers is Associate Professor of Women's and Gender Studies at Rutgers University. She teaches courses on quantitative methods in feminist research, gender and economic development, and the economics of the family. Her research interests lie in the economics of gender, the economics of children, and development economics.

* Corresponding author: Yana Rodgers, Department of Womens and Gender Studies, Rutgers University, 162 Ryders Lane, New Brunswick, NJ 08502. Email yrodgers@rci.rutgers.edu, Tel 732-932-1151. The authors gratefully acknowledge Indira Hirway, Joyce Jacobsen, Mmtaz Keklik, Shaianne Osterreich, Farah Siddique, and Yumiko Yamamoto for helpful comments, Nursel Aydiner-Avsar and Kulkunya Prayarach for research assistance, and the United Nations Development Programme for financial support.

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The Debate on Labor Standards and International Trade: Lessons from Cambodia and Bangladesh

I. Introduction Accession to the World Trade Organization and the liberalization of capital and commodity flows face many countries in Asia. In addition, world-wide forces of competition in textiles and apparel production have intensified following the expiration of the Multi-Fibre Agreement (MFA) trade regime in 1994 and the Agreement on Textiles and Clothing (ATC) at the end of 2004. The MFA, in place from 1974, guaranteed protected markets for poor countries and made it possible for a number of low-cost producing countries to launch export-oriented textiles and apparel industries that generated significant export earnings and employment, primarily for women workers. In the post-ATC world, these economies are involved in competition with each other and with the dominant producersChina and Indiato increase exports. The prospect of job losses and downward pressure on wages and working conditions are among the adjustments in store for the exquota countries. A major policy question is whether and how textile and garment exporting countries can resist a decline in labor standards while protecting jobs in an increasingly competitive environment. We address this question by providing a detailed analysis of the predicaments of Cambodia and Bangladesh. Garment production is the main source of wage employment for women in Cambodia and Bangladesh, where over two-thirds of the workforce in the garment sector is female. As a result, the growing competition with China and the structural shifts in these economies pose substantial challenges for female workers. In the first two years after the ATC ended, however, neither country saw a decline in export values or experienced net employment losses in textiles and garments. Quite the contrary, their exports and share of major markets have increased. This positive development is

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widely attributed to the effects of trade rules that shielded Cambodia and Bangladesh from the full effects of the ATC expiration. Specifically, import restrictions imposed on China in 2005 by the EU and the US have limited competition in several major categories of apparel. Given that these restrictions will expire at the end of 2008, there is continued risk of job losses and downward pressure on wages and labor costs for Cambodia and Bangladesh. This paper uses survey, focus group, and compliance data to demonstrate that Cambodia and Bangladesh have taken different trajectories in response to increased trade competition. In Cambodia, results from a series of factory inspections indicate that labor standards have been improving in recent years. In contrast, downward pressure on labor costs in Bangladesh has resulted in the persistence of poor working conditions and violations of the countrys labor laws and its international commitments. The main explanation for the difference between these two countries is an innovative labor standards program in Cambodia that appears to have helped boost both exports as well as employment conditions. The program, known as Better Factories Cambodia, developed out of a bilateral trade agreement that the US negotiated with Cambodia in 1999. The agreement linked expansion of Cambodias US market access to improvements in labor standards, relied on the International Labor Organization to serve as the monitoring agent, and adopted rigorous transparency measures in reporting factory inspection results. Our objective is to revisit the debate on labor standards in the development literature in the context of these contrasting trajectories. The debate has been marked by sharp division on the usefulness of global enforcement of labor standards as a means for improving wages and terms of employment in a world of liberalized trade and capital flows. While some see trade sanctions as a necessary mechanism, many have expressed strong opposition to trade-linked enforcement of labor standards. This opposition is based on fears of job losses in developing countries as they push for higher workplace standards. A trade-incentives approach, similar in principle to that of Cambodias

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trade agreement with the US, offers a promising alternative to overcome the potential trade off between jobs and working conditions associated with the trade-sanctions approach. When simultaneously implemented in several competitor countries, and supported by complementary domestic policies, we argue that this approach could provide an effective strategy for raising the global floor under working conditions and worker pay. II. The Labor Standards Debate Given Chinas dominance in world markets for textiles and garments and its poor compliance with its own national legislation on labor rights, a major concern in the post-ATC era is the erosion of labor standards in Chinas competitors, including Cambodia and Bangladesh. This concern is based on the microeconomic argument that emphasizes the costs to employers for complying with legislation that protects workers (Nataraj et al. 1998; Rodgers and Berik 2006). In an environment where capital is mobile, employers who compete on the basis of labor costs may relocate production to countries with weaker worker protections, hence putting added pressure on employers that offer stronger labor rights. The alternative argument is that the erosion of labor standards is not inevitable and competitiveness may be gained on the basis of improved working conditions. By promoting better labor relations and cooperation on the job and increasing worker effort, better labor standards are likely to generate productivity increases that could pay for their increased costs (Palley 2004). In addition, higher labor standards offer greater political and economic stability and macroeconomic benefits. They enable a redistribution of income toward workers, and thereby raise global demand and contribute to growth (Marshall 1994). Some further argue that these private and public returns may be easier to realize in an economy where there is a balance between domestic- and export-oriented production, compared to a fully open, highly exportoriented economy (Palley 2004, 2006).

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These arguments are examined in empirical studies that use various indicators of labor standards and measures of trade competitiveness or foreign direct investment. Much of the literature focuses on core labor standards of the International Labor Organization (ILO) that are enshrined in eight conventions.1 Studies that focus on the relationship between labor standards and comparative advantage or export success find either no relationship or a positive relationship, with the caveat that these results can be sensitive to variations in model specification and in the labor-intensity of exports (Kucera and Sarna 2006).2 In addition, studies that investigate whether improved labor standards deter foreign direct investment generally do not find such adverse effects.3 While there is no direct evidence supporting the contribution of greater domestic orientation to improvements in working conditions, doubts have been raised as to whether less export orientation can help Asian economies to achieve stable growth (Felipe and Lim 2005). With few exceptions, empirical studies of labor standards have not focused on the anti-discrimination core labor standard. Those that do have measured gender discrimination in terms of womens access to jobs, and thus have not examined discrimination in job placement and wages (Kucera 2002; Busse 2002). In a parallel body of scholarship, a number of authors have focused specifically on the implications of trade-enforced labor standards for women workers. At issue is the usefulness of globally-enforced labor standards in improving the livelihoods of women workers employed in export-oriented sectors of low income countries. Several authors support global enforcement of labor standards while recognizing that enforcement through a social clause in trade agreements or at the World Trade Organization (WTO) is not sufficient for improving womens working conditions and raising absolute and relative pay.4 For example, Cagatay (1996) argues that such improvements will not result from market forces alone, and that women workers benefit from labor market regulation and union activity. Yet much of womens work lies beyond the scope of the market, and within the market their work often lies in informal units beyond the reach of regulation,

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thus calling for a broader set of policies and political agendas. Hale (1996) goes a step further in arguing that the standards embraced in discussions of trade-linked social clauses would serve as a minimum baseline, and additional work by international alliances is needed to fully incorporate the needs of women in developing countries. Furthermore, prioritizing gender equality in an open economy may also necessitate measures that slow the speed with which firms can leave a country in response to womens higher relative wages (Seguino 2006, Seguino and Grown 2006). Improved enforcement of labor standards and full employment policies can help provide women with more job security, and assist women in gaining access to a wide range of better-paying jobs in occupations that have traditionally been male-dominated. Complementing this approach with industrial policy and investments in new technology can further help to diversify exports and spur productivity growth. Others oppose a social clause approach on grounds that any global enforcement of labor standards will inevitably result in job losses for women workers. In particular, Kabeer (2004) argues that enforcement of labor standards with trade sanctions could cause either lower employment or job transfers to the informal sector (which has no labor standards), and so is likely to widen inequalities in the labor market. Like Kabeer, Razavi (1999) views keeping export-oriented jobs as a policy priority over concern for working conditions, no matter how poor these conditions are. Implicitly, both authors interpret the pursuit of (and compliance with) core labor standards in outcome terms, with high penalties for failure to achieve them, rather than as a process. They also tend to overlook the international nature of a global enforcement mechanism, which would likely reduce the incentive for firms or buyers to move. Razavi is also doubtful that many poor countries can succeed in raising productivity through upgrading export products and matching the increases in productivity with higher wages. Even if a country is successful in upgrading products and technologies, she cautions that the upgrade may be accompanied by a shift in employment opportunities toward men.

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Both Kabeer and Razavi argue in favor of broad-based social policies that raise living standards for large numbers of women without jeopardizing their employment, and moving away from a narrow focus on labor standards in the formal sector. They do not entertain the possibility of crafting a complementary set of policies within which improved labor standards could be a key target. Some researchers argue that the debate over a social clause has been rendered moot as members of the WTO rejected an active role for the organization in enforcing global labor standards in 1996, and the WTO has not pursued close collaboration with the ILO on this issue since then (Burda 2007).5 In view of the enforcement-vacuum created at the level of international organizations and the growing consumer pressure for goods to be produced under decent working conditions, corporate self-regulation through codes of conduct has become widespread since the mid-1990s.6 With pressure from non-governmental organizations and the negative consequences of media exposure in the case of non-compliance, most major retailers and manufacturers now have their own compliance programs. Each program establishes a set of guidelines under which a factory must operate and is administered by company-employed inspectors or by independent audit companies. Even if corporate codes of conduct continue to spread, relying on companies to self-regulate compliance is not sufficient, especially in light of strong consumer demand for low-cost clothing, the lack of agreement among corporations and monitoring groups over a common set of labor standards, and the large number of factories and sub-contractors that remain outside the scope of private monitoring efforts. Government enforcement and funding for viable enforcement structures remain a top policy priority. When accompanied by productivity-enhancing industrial policy, such a strategy could result in labor costs that are consistent with higher labor productivity. The strategy can also attract foreign direct investment that seeks social stability fostered by compliance with fundamental worker rights. Ensuring export market access to low-income countries through trade

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rules can arguably form another key component in a complementary set of policies to improve labor standards without loss of jobs. To identify policy options that seek to improve working conditions and raise wages of women workers in export-oriented manufacturing, the remaining sections show that a particular kind of labor standards enforcement program in Cambodia has helped to alleviate some of the trade offs facing women workers in textiles and garments. In contrast, leaving labor standards enforcement to a combination of market forces and poorly-paid public sector inspectors in Bangladesh has resulted not only in the persistence of poor working conditions, but also in the continued risk of job loss in a trade environment of intensified competition. We argue in favor of a trade-incentive approach similar to that implemented by Cambodia.7 Contrary to the punitive, tradesanctions mechanism, the trade-incentive approach sets in motion a process that relies upon transparent monitoring of working conditions, and offers a promising alternative means for expanding employment and improving working conditions. When simultaneously implemented across low-income countries and complemented by domestic policies, this approach could provide an effective strategy for raising the global floor in working conditions. III. Manufacturing Garments for Export in Cambodia and Bangladesh Cambodia and Bangladesh are among the poorest Asian economies. Cambodias population is fairly small, at 14 million people, and it has a Gross National Income per person of $380 (World Bank 2007). Since opening up its investment and trade regimes in the early 1990s, greater economic integration has become more of a reality and Cambodia has seen increasing inflows of Foreign Direct Investment and international trade flows. Cambodias garment exports have grown rapidly since the early 1990s, thanks in large part to the binding MFA restrictions on larger exporting countries that helped small garment producers such as Cambodia gain access to large markets overseas (Kolben 2004). Another element that proved instrumental in Cambodias export

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performance was access to a large workforce consisting of low-wage female labor. In response to the rapid growth of garment exports from Cambodia, the US negotiated a bilateral trade agreement with Cambodia. Signed into effect in January 1999, the US
Cambodia Bilateral Textile Trade Agreement set quantitative limits on Cambodias clothing exports with conditions for increasing the quotas subject to substantial compliance with Cambodias national labor laws and internationally-recognized core labor standards. This unique bilateral trade agreement used trade incentives for enforcing labor standards, and it relied on the ILO to serve as the monitoring body. The trade agreement expired late in 2004, coinciding with the end of the Agreement on Textiles and Clothing, but the factory monitoring program has continued and expanded in scope. With a population of 142 million in 2005, Bangladesh is one of the most populous countries in Asia and has a Gross National Income of $470 per person in current US$ (World Bank 2007). Bangladeshs garment industry was created in the late 1970s and took off in the early 1980s after a major structural adjustment program emphasized export-orientation. Garment exports made up one percent of Bangladeshs total manufactured exports in 1981 (United Nations Industrial Development Organization 2005). At the time, textiles accounted for 93 percent of exports, over half of which were destined for developing country markets. Over the next two decades, Bangladeshs dependence on garments increased substantially, while at the same time the destination shifted dramatically toward industrial country markets. As in Cambodia, garment manufacturers in Bangladesh have relied on a large supply of low wage female labor, an important part of laborintensive production destined for the high-volume, low-margin segment of the world market. Low wages and generally low adherence to the countrys own labor regulations and international labor conventions provided the basis for low labor costs. To the surprise of skeptics who expected most small Asian exporters to record export declines following the end of the ATC in 2004, Cambodia and Bangladesh have managed to increase

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their exports of ready-made garments to the United States. Cambodia, often considered a disadvantaged producer of garments, has seen an increase of 50 percent in the value of garment exports into the US since 2004. As shown in Figure 1, trade took off rapidly after 1996 and has grown steadily. Textiles make up a very small share while ready-made garments, both knitted and non-knitted, make up the lions share of US imports from Cambodia. Large jumps in the value of apparel imports from Cambodia also occurred in 1999 and 2000 following the Bilateral Trade Agreement. The increase in US imports from Cambodia is viewed as a sign that buyers value the efforts of Cambodian factories to enforce labor standards (Adhikari and Yamamoto 2006). Figure 1 also indicates that in 2006, Bangladesh had increased its textile and clothing exports to the US in value terms by 47 percent compared to 2004. Both Cambodia and Bangladesh also saw a small increase in their share of the US market rather than the expected decrease. Between 2003 and 2006, Cambodias market share of total US textile and garment imports rose from 1.5 percent to more than 2 percent, and Bangladesh recorded an increase from 2 to 3 percent. In contrast, however, China has seen a tremendous increase in its share of total US textile and garment imports in just a two-year period, from 15 percent of the US market in 2003 to more than 25 percent in 2006 (US International Trade Commission 2007). The improvement in market access for Cambodia and Bangladesh within the European Union is not as strong (Figure 2). In the early 2000s, Cambodias exports to the EU stagnated somewhat until 2004. The lack of a similar bilateral trade agreement as that with the US may help to explain the stagnation. Clearly, the end of the ATC had an impact on the EUs imports from Cambodia and Bangladesh, with a decline in total value and market share for both countries in 2005. Yet by the end of 2006, EU garment imports were back up, especially for Bangladesh. Thus, by the end of the first two years after the expiration of the ATC, neither country experienced a decline in garment exports to its major markets. Quite the contrary, both increased

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their exports and gained market share. The price competition that intensified in 2005 gave way to gains in unit value for both countries in 2006. Yet the trade environment that contributed to this positive development will change soon, when global competition in garments is expected to intensify following Vietnams membership in the WTO in 2007 and the end of import restrictions on China in 2009. These changes put womens employment, wages, and labor standards in both Cambodia and Bangladesh at continued risk. IV. Labor Standards in Cambodia and Bangladesh Cambodia. Cambodias Constitution and the 1997 Labor Code encompass a comprehensive set of labor regulations that reflect the ratification of the ILOs core standards. Cambodia has gone on record as ratifying all eight of the ILOs conventions considered to represent the core labor standards. Cambodias ratification record is among the best in Asia, with only a few economies having ratified all eight of the fundamental standards (ILO 2007). Having these rights on the books does not mean they are enforced, and in most areas of the 1997 Labor Code, the government appears to have placed low priority on enforcement (US Department of State 2006). For example, workers in Asian countries have fewer trade union rights compared to other developing regions, and among Asian countries, Cambodia ranks roughly in the middle in the exercise of trade union rights (Kucera 2004; Rodgers and Berik 2006). Not surprisingly, labor regulations are viewed by only a small share of firms as a major or severe obstacle to their investment decisions in Cambodia. As indicated by World Bank surveys on the investment climate, fewer than 6 percent of firms interviewed considered labor regulations a major or severe obstacle, compared to a global average of 12 percent (World Bank 2006). In contrast, relatively high levels of corruption, disorder, economic uncertainty, and uncompetitive practices dampen Cambodias investment climate. Important institutions in the regulatory regime are still weak and key business-related codes, such as bankruptcy and arbitration laws, have not yet been

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implemented (US Department of State 2006). The investment climate data show fairly clearly the need to fight corruption in Cambodia, which will serve not only macroeconomic objectives but will also help to improve the enforcement of labor standards. Corruption is viewed as the main reason why enforcement of Cambodias 1997 Labor Code has been so difficult (Kolben 2004). Low-paid labor inspectors purportedly accepted bribes for under-reporting code violations, extensive cronyism between the government and industry contributed to poor enforcement of the Labor Code, and weak unions existed more to mobilize political support for particular leaders than to promote the needs of workers. Further evidence suggests that the costs of administrative hurdles and corruption total as much as 7 percent of the total value of sales (US Agency for International Development 2005). Almost 300,000 people in Cambodia work in the garment industry, and about 90 percent of Cambodias workforce in apparel production is female (USAID 2005). This proportion is even higher than the average of 75 percent female in garments across Asian economies (Rodgers and Berik 2006). Most of these women originate from the rural sector. Within the garment sector, a minority of women have more than a primary school education, which helps to explain why they predominantly obtain jobs as sewing machine operators and other positions in production areas that are less capital intensive. Men in the garment sector are more likely to obtain higher-paying positions in management and in more capital-intensive areas of production. Even for the same occupation categories, womens relative lack of educational attainment helps to explain why they achieve lower ranking positions, such as junior-level controllers, while men work as senior-level controllers (Adhikari and Yamamoto 2006). In terms of relative wages, as recently as 2003, the female to male wage ratio stood at 67 percent after controlling for gender differences in age and experience (World Bank 2004). This average ratio varied considerably across occupation groups and also within education categories.

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High concentration indicators in industrial survey data for Cambodias textiles and garment sector suggest that individual establishments in textiles and apparel have more market power relative to establishments in other sectors, and by implication, more negotiation power in employeremployee relations. Further information in Kolben (2004) indicates that almost all textile and garment factories are foreign-owned, with ownership origins in Taiwan, Singapore, Thailand, and Malaysia, and with ownership patterns that reflect considerable factory movement from country to country in search of low-cost labor. Owners strong bargaining power, combined with weak enforcement of labor regulations and an environment of corruption, contributed to very poor working conditions before the 1999 trade agreement came into effect. Textile and garment workers experienced numerous violations of worker rights supposedly guaranteed in the Labor Code, ranging from long working hours, forced overtime, illegal pay deductions, lack of safe and sanitary working conditions, and denial of the freedom to associate and bargain collectively (Kolben 2004; Hall 2000). The labor disputes that did occur after promulgating the Labor Code mostly involved worker demands for standards to which they were already legally entitled (US Department of State 2006). Bangladesh. While Bangladesh has ratified seven out of the eight core ILO conventions, and has extensive national labor laws that protect workers, enforcement is poor. The prevalence of child labor in the garment sector has almost disappeared in recent years following concerted efforts put in motion as a result of US trade pressure and ILO actions.8 Yet there is weak enforcement of trade union rights and anti-discrimination legislation. Bangladesh had among the weakest union rights in Asia in the mid-1990s (Rodgers and Berik 2006). Export Processing Zones continue to advertise the absence of union activity as a way to attract foreign direct investment (Export Promotion Bureau 2007). A very small percentage of workers (mostly male) belong to unions, which function as extensions of political parties and are therefore limited in their effectiveness as representative of workers interests (Kabeer 2004). The results of the World Bank Investment Climate survey of firms

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that do business in Bangladesh are consistent with this picture. Compared to firms elsewhere, a smaller percent of the workforce is unionized in Bangladesh, fewer days are lost to strikes and other labor disputes, and fewer firms view Bangladeshs labor regulations as a major obstacle (World Bank 2006). As in Cambodia, non-labor aspects of competitiveness are perceived as more important obstacles. For example, problems with electricity supply and corruption are identified as major obstacles by 73 percent and 58 percent of firms, respectively.9 In 2003, an estimated 1.8 million workers, about 60 percent of whom female, were directly employed in the garment sector (Bangladesh Bureau of Statistics 2004). The sector offers better pay for women workers compared to their few alternatives outside of manufacturing (Kabeer and Mahmud 2004), though it is a low-wage sub-sector of manufacturing. Gender segregation of employment, the lack of job alternatives for women on any significant scale, and absence of effective union activity are the likely contributors to low pay in the sector. The hyper-specialization of Bangladesh in garment exports has been accompanied by not only a high female share in the sector but also an extreme concentration of womens employment in the sector. 10 Over time, this concentration has increased and garments became the source of over 90 percent of manufacturing sector jobs for women in 1997 (the last year in the employment data series) (UNIDO 2005). Moreover, at least from 1988 to 1997, when there was a rapid expansion of demand for female labor, real earnings in the sector declined. Crowding of women in the sector, the rapid female labor supply response to the expansion, the lack of effective minimum wages in Bangladesh, and weak enforcement of labor laws in general, are likely to have contributed to this erosion of real earnings. The trend has likely continued after 1997, since the minimum wage was not raised and union activity has been feeble or non-existent.11

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V. Impact of Monitoring Program in Cambodia The US
Cambodia trade agreement produced a labor standards compliance program called Better Factories Cambodia (called the ILO Garment Sector Project until 2005, when the ILO renamed it to reflect a stronger focus on remediation and training). This program includes not only technical assistance and capacity building for strengthening the enforcement capability of Cambodias government, but also direct monitoring and inspections of all garments factories by ILO personnel. The program was initially funded with a fairly modest budget of $1.4 million, of which the US government paid $1 million, the Cambodian government paid $200,000, and the Garment Manufacturers Association of Cambodia contributed $200,000 (ILO 2005). Program implementers kept costs down primarily with their local hiring of factory monitors who were paid salaries that were low by international standards but high enough by local standards to avoid the risk of bribery (Polaski 2006). An extension of the program in 2003 with these same three funders saw the Cambodian government paying a higher proportion (27 percent) of the total cost, and subsequent funding announcements indicate that by 2009, the Cambodian government will provide the highest portion of funding (ILO 2005, Better Factories Cambodia 2006). To the extent that the Cambodian government is borrowing from international donors to cover these costs, this funding structure implies that Cambodia is bearing the implementation costs in the form of higher debt as well as upfront costs. In contrast, international buyers, who have enjoyed the benefits of what in effect became a type of reputation insurance, paid none of the initial costs and will pay only a small portion in the future (Polaski 2006, Better Factories Cambodia 2006). Better Factories Cambodia has implemented a number of new training programs, including a training course that helps newly employed workers to understand their rights and also helps employers to improve on their existing training methods. The program has also organized training

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sessions for human resource managers and trade union leaders on topics such as employment contracts, working conditions, and worker recruitment. As a further innovation, Better Factories Cambodia has sponsored and launched a new soap opera on national television called At the Factory Gates. The main objective behind the television show is to educate new female workers, as well as the general public, about worker rights in the garment factories, dispute resolution, and ways to handle workplace issues. The series aims to educate in a way that is easy to understand, with scenes starring some of Cambodias most well-known actors in actual factory settings. The series are also shown as a component of the Better Factories Cambodia training sessions for new workers. The idea to educate the Cambodian public about worker rights through a soap opera is supported with a growing scholarly literature on the success of using education-in-entertainment programming (Singhal and Rogers 1999).12 Summary reports from the factory inspections are posted on-line for the years 2001 through 2006 (www.betterfactories.org). These reports provide a good opportunity to obtain more information on the impact of the factory monitoring program on working conditions, employment outcomes, and factory closures in the garment industry. To date, seventeen of these synthesis reports have been made publicly available. To generate the inspection reports, all factories were divided into five groups, and each group had an initial visit by ILO inspectors and then up to four additional follow-up visits. Analysis of the first eight reports in Polaski (2006) indicates that during the first visit, the ILO monitors typically found fairly good, although not perfect, compliance with several core labor standards (no child labor and no discrimination by sex), but compliance with health, safety, wage, and hour regulations was poor. A small number of factories were cited for major violations of workers rights to form unions and bargain collectively. During the initial visits, ILO inspectors made suggestions for improvements, and in the follow-up visits inspectors recorded whether factories had implemented the suggestions. Polaski finds that factories showed the greatest

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responsiveness in correcting wage payment infractions, while they demonstrated some but far from complete success in correcting problems with health, safety, and overtime regulations. Tabulations of factory inspection results in the more recent reports indicate some improvement in working conditions in Cambodias garment factories, with fairly good compliance with minimum wage and overtime pay regulations as a result of the repeat factory inspections. Table 1 shows inspection results from the seventeenth synthesis report covering a total of 212 factories that were visited during May-October in 2006. The highest compliance rates are for correct payment of overtime wages and minimum wages, with at least 92 percent of factories paying the correct wages for regular and piece-rate workers. Yet compliance drops rapidly for occupational safety issues, such as installing needle guards on sewing machines, and restricting overtime hours to just two hours per day. The synthesis report also cites no evidence of forced labor, and strong improvements over time in employers efforts to raise worker awareness of labor laws and workplace entitlements. However, there is still some evidence of discrimination: 23 factories (out of 212 inspected) engaged in some form of gender discrimination, and 13 factories engaged in some form of anti-union discrimination (ILO 2006b). Tabulations of data from the factory inspection reports indicate a fairly high rate of closure for factories (17 percent) following their first inspections in 2001. Between 2001 and early 2006, a total of 240 factories went through an initial inspection, and 40 of those factories closed.13 These results suggest that the gains in labor standards for women who remain employed may be partially offset by job losses for women in factories that are forced to close. That said, it is not possible to determine from the synthesis reports the exact reasons for factory closures. The factories may have closed even without the labor standards enforcement program due to their inability to compete in the new post-ATC world trade environment.

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Another important consideration in assessing the impact of more stringent enforcement of labor standards is the opening of new factories. While the inspection reports cite the number of factory closures, they do not indicate whether factories that first enter the inspection cycle are newly created factories or existing factories that are new to the inspection cycle. Other evidence from Cambodias National Institute of Statistics indicates that the number of garment factories operating in Cambodia increased on net by 28 between 2004 and 2005 (ILO 2006a). This source also indicates that while foreign ownership is increasing, domestic ownership is falling, suggesting that the factory closures are primarily Cambodian-owned operations and that in the period leading up to the end of ATC, Cambodia became a choice site for FDI.14 Employment data also indicate a rise in the number of jobs in the garment industry. The total number of workers in garments has risen steadily every year, from approximately 110,000 in 2000 to 285,000 in 2006 (ILO 2006a). This rise includes an increase of 10.4 percent between 2004 and 2005, suggesting that womens employment opportunities have continued to grow during the period of increased enforcement of labor standards and the end of the ATC. VI. Weak Monitoring: Persistence of Noncompliance in Bangladesh Studies that span two decades indicate the persistence of the same set of working condition problems in Bangladeshs garment sector.15 Poor employer compliance with the countrys own laws and with international conventions it ratified is further confirmed by compliance evidence collected by the Fair Labour Association (FLA) as well as a 2006 focus group discussion with workers in Dhaka. We compiled data on the observance of labor standards from reports generated through unannounced factory visits of FLA monitors to factories in Bangladesh in 2004.16 The focus group was conducted in July 2006 with eleven garment workers in a Dhaka basti (slum) in the framework of a project sponsored by the United Nations Development Programme, with one of the authors participating.17

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Figure 3 shows how various types of labor standard violations in garment factories in Bangladeshi Export Processing Zones (EPZs) are distributed relative to China, the rest of Asia, and other regions.18 Unlike Cambodias monitoring program which seeks transparency in reporting, the FLA public reports disclose the identity of only the company (buyer) and not the factories. This reporting mode is arguably less conducive to achieving improvements in labor standards than the fully transparent approach (Polaski 2006). There are reasons to believe, however, that the compliance record of FLA-monitored factories is better than other factories in Bangladesh and at least as good as other EPZ factories in the country. First, comparative research on earnings and working conditions indicates that EPZ factories offer superior conditions compared to non-EPZ factories (Kabeer and Mahmud 2004). Second, participation of companies in the FLA monitoring program is voluntary and their suppliers consent to periodic monitoring by the FLA. Both the buyer and the factory would have a vested interest in compliance with the FLA code of conduct, even if the supplier is not shamed through public announcement of monitoring results. The major labor standard violation was non-compliance with wages, hours of work, and overtime compensation codes, which accounted for 32 percent of all violations in Bangladesh (Figure 3). These are the categories of labor standards where ILO-monitored compliance in Cambodia yielded improved results. Bangladeshs record was consistent with the Asia region as a whole but lower than Chinas 38 percent and 37 percent in other regions. The factory tracking charts produced by monitors indicate a wide range of problems concerning wage and hour violations in Bangladeshi suppliers: violation of Bangladeshi EPZ regulations on wage breakdown and minimum wage, delay in wage payment, non-payment of overtime, excessive hours of work, mandatory overtime, continuous work without a day off, and non-transparency of payment statements. The Dhaka focus group discussion also highlighted delayed wage payments, punitive deductions of pay,

18

GEM-IWG WP 07-5

and hours of work in excess of legal working hours. It was common for workers to work 72 hours per week and only take two days off per month. FLA inspectors found violations of health and safety regulations and lack of code awareness in the workplace as the second most frequent set of problems in Bangladesh as well as elsewhere. Since the inspected factories in Bangladesh were large, with employment ranging from 1,338 to 3,300 workers, health and safety code violations present serious risks. Factory tracking charts indicate poor fire safety equipment and evacuation procedures, poor ventilation and poor maintenance of equipment, inadequate and unsanitary toilet facilities, non-use of protective gear, and excessive heat on the factory floor as common problems. A major contributor to such violations is the rapid growth of the industry in the 1980s and 1990s, which has left little time for expansion of proper infrastructure and adjustment of regulatory mechanisms. Many factories continue to operate in residential buildings not intended to accommodate factory production. This state of affairs results in fires and building collapses in garment factories (FLA 2005). FLA inspectors also found limited awareness among workers and supervisors of the FLA code of conduct, and insufficient posting of the FLA code, which is intended to serve as an awareness-raising tool in the factories. Harassment or abuse of workers and violations of rights to unionize tied for third place in factory inspections in Bangladesh, and these problems were more prevalent in Bangladesh than elsewhere (Figure 3). Verbal abuse, monetary fines and penalties for failure to achieve production targets, and restrictions in access to toilet facilities were some of the common harassment problems. The FLA inspections further reveal continued problems of physical abuse, which were also documented in surveys of garment workers conducted by the Bangladesh Institute of Development Studies in 1990 and 1997 (Zohir 2001, 2003). According to these surveys, workers were beaten in the factory, albeit the incidence had declined over time in non-EPZ factories. In the Dhaka EPZ in 1997, however, a much higher proportion of the surveyed female workers (14 percent) reported

19

GEM-IWG WP 07-5

being hit by supervisors compared to workers in non-EPZ factories. Workers in the 2006 focus group also reported verbal and physical abuse in response to their inability to meet hourly productivity targets set by supervisors. Workers indicated that even if they could meet the targets in the first two hours, they could not keep up the pace for the entire day, because the quotas were increased each time they met the target. Since the rights to unionize and bargain collectively are suspended in the EPZs, the violations of union rights in Bangladesh in Figure 3 refers to effectiveness of the Workers Welfare Committee in the factory, rather than restrictions on union activity. The FLA inspection reports indicate that while the inspected factories had a Workers Welfare Committee, either workers were not aware of its existence or the Committee was not trusted by workers because it was completely staffed by management or perceived representatives of management. Workers in the Dhaka focus group who were employed in non-EPZ factories reported that there was no union presence in their factories. The common practice was to pay higher wages to a worker who was seen to instigate for higher pay. While gender discrimination appears not to be a common violation according to the 2004 FLA inspections, workers in the focus group indicated the prevalence of gender differentials in pay for the same job as sewing machine operator. They reported that men were paid a base wage of 2,000 Taka compared to 1,500 Taka for women, and that the overtime rate was also higher for men. Among the regulations that specifically address working conditions of women, maternity leave provision is a right largely on the books.19 Bangladeshi law provides for 12-weeks of maternity leave, which is employer-financed as in most other countries in Asia (Nataraj et al. 1998). In practice, however, it is rare for women workers to exercise their legal rights to full maternity leave. Their reluctance stems from onerous requirements to obtain the six-week leave prior to delivery as well as male co-workers lack of support for maternity leave as a worker right.20 A recent survey found that 53 percent of respondents thought that their employer did not provide maternity leave (Chowdhury

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Repon and Ahamed 2005). Workers in the Dhaka focus group indicated that there was no maternity leave in their factories. If pregnant, a worker quit her job to have the baby, and when she was ready to go back she would seek a new job. Furthermore, a recent waiver of working-hour restrictions by the government has made it possible for factories to legally keep women workers past 8:00 pm and extend the working day from 10 to 12 hours. Yet de facto night work and overtime were common prior to the waiver, so the waiver only legalizes these established practices (Chowdhury Repon and Ahamed 2005). In cases when workers walk long distances to work due to inadequate transportation, overtime and night work may cause hardship for workers and expose them to violence during the commute. VII. An Agenda for Improving Labor Conditions in Export Manufacturing To the surprise of skeptics who expected most small Asian exporters to record export declines following the end of the Agreement on Textiles and Clothing, Cambodia and Bangladesh have both managed to increase their exports of ready-made garments to the United States and the European Union. However, the temporary nature of the relatively protected trade environment that enabled this export growth after the end of the ATC suggests that there is continued risk of employment loss and erosion of labor standards. The Better Factories Cambodia monitoring and training program may offer greater protection to jobs in Cambodia in this transitional phase. Buyers are likely to continue sourcing from Cambodia, given the appeal of Cambodias reputation as a location with decent working conditions. In contrast, Bangladeshs reliance on the market for monitoring labor standards provides little else but the discipline of the market when Bangladesh faces the full force of international competition in 2009. Our study supports an argument for addressing these risks in low-income, export-oriented economies. The argument encompasses a complementary set of policies that include a tradeincentives approach for improving working conditions and expanding employment in the new

21

GEM-IWG WP 07-5

global order of intensified competition with China. As the centerpiece of a trade strategy for jobs with decent working conditions, we propose forging trade arrangements under the Generalized System of Preferences (GSP) that reward compliance with national labor regulations and internationally-recognized labor rights with increased export market access. Under the GSP, the EU and US can offer market access to the least developed countries, such as Cambodia and Bangladesh, at lower tariff rates and even duty free, conditional on a developing countrys achievement of certain conditions, such as improvements in labor standards.21 This paper has provided evidence that linking export quota expansions with adherence to national labor laws and international conventions, coupled with independent monitoring by the ILO, has served as a viable enforcement mechanism in Cambodia. Inspection reports indicate considerable progress in improving work conditions as a result of the inspection process and repeat factory visits. In the post-ATC trade regime where quotas can no longer be used to regulate trade, reduced tariffs or duty free market access under the GSP or a similar scheme could be used to reward progress in working conditions. If the GSP is implemented with a credible monitoring program in a large number of the least developed countries that are potential competitors, it can be an effective tool for lifting the global floor under wages and working conditions. As an initiative that is global in scope, this proposal calls for revisiting the GSP to transform it into an instrument that truly benefits developing countries. Revisions include removing the obstacles to the application of GSP, creating an international institutional structure for the implementation of the GSP, and supporting developing country efforts to improve labor standards.22 A specific issue to be addressed at the international level is the creation of a mechanism for funding the monitoring component of the trade-incentive approach. International agencies and brand name buyers ought to share the cost of monitoring, since improved working conditions are an important global public good and buyers reap the benefits of expanded sales by consumers eager to spend on sweat-free products made under

22

GEM-IWG WP 07-5

decent working conditions. Moreover, suppliers at the end of the global value chain in garments operate in a highly price competitive environment, and if burdened with the added cost of workplace reforms and wage increases, they may not undertake sustainable improvements in working conditions. This strategy for labor standards enforcement also necessitates complementary domestic policies. Expansionary macroeconomic policies are necessary to improve non-labor aspects of export competitiveness. In both Bangladesh and Cambodia, non-labor components of costs and supply bottlenecks hamper competitiveness and create non-negotiable costs, making labor costs the only true variable cost. Bangladesh has experienced persistent problems with infrastructure (especially electricity supply), insufficient financing, and high reliance on imported inputs in the context of cumbersome trade and customs regulations, all of which have added to higher costs, reduced productivity, and weakened export competitiveness. Investments in infrastructure, such as highways and port improvement, as well as organizational improvements in firms, are likely to cut non-labor costs and reduce lead-time in ready-made garment exports. This argument is consistent with evidence in Dollar et al. (2005), who show that reduction of these infrastructural bottlenecks are associated with higher growth and accumulation at the firm level. Another component in the strategy for better labor standards is to pursue industrial policy that diversifies export products and moves toward higher quality exports. Ideal targets would be goods that are price inelastic and have low income elasticity. This approach would make higher wages and better working conditions possible, given the higher markups in the markets for such products. Whether this strategy could be implemented on a large enough scale in poor economies and whether it would generate sufficient jobs to replace the low-skill, low-paid jobs are issues of contention (Razavi 1999). There is international evidence that upgrading products generates more jobs for men, who tend to be more skilled or are considered more skilled by employers (Elson 1996).

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In Bangladesh, the limited upgrading of technology and the diversification of garment production since the late 1990s have increased the demand for skilled labor and reduced the demand for helpers, who are almost exclusively women (Zohir 2003). Faster growth of knitwear exports in the post-ATC era is also likely to shift the gender composition of garments employment away from women to men who constitute a higher share of knitwear workers. This problem calls for the state to vigorously pursue anti-discrimination measures in firms training and hiring policies. Industrial policy is also necessary for Cambodias continued success in improving labor standards. While Cambodia has secured its access to niche markets that value socially responsible production, improvements in productivity are crucial for attracting new investment, competing in world markets for massproduced garments, and diversifying into other areas of manufacturing in order to create new employment opportunities. In closing, we do not see a trade-incentive mechanism as the magic bullet for improvement in working conditions in low-income, export-oriented economies. We do, however, see trade incentives as a promising route when coupled with strong independent monitoring and when complemented by domestic policies that promote productivity and fairness. Breathing new life into the GSP and revisiting global governance of trade are essential not only for improvements in labor standards, but also for reshaping trade policy in a manner that benefits developing countries.

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GEM-IWG WP 07-5

Bibliography Adhikari, Ratnakar, and Yumiko Yamamoto. 2006. Flying Colours, Broken Threads: One Year of Evidence from Asia after the Phase-out of Textiles and Clothing Quotas. Report. Colombo: UNDP Regional Centre. Bangladesh Bureau of Statistics. 2004. Report on the Labor Force Survey 2002-2003. Dhaka: Bangladesh Bureau of Statistics. Barry, Christian and Sanjay Reddy. 2006. International Trade and Labor Standards: A Proposal for Linkage. Cornell International Law Journal 39 (3): 545-639. Better Factories Cambodia. 2006. Better Factories Cambodia Quarterly Newsletter. No. 5 (July). Brown, Drusilla, Alan Deardorff and Robert Stern. 2004. The Effects of Multinational Production on Wages and Working Conditions in Developing Countries, in Robert Baldwin and L. Alan Winters (eds.), Challenges to Globalization: Analyzing the Economics. Chicago: University of Chicago Press, pp. 279-326. Burda, Julien. 2007. Chinese Women after the Accession to the World Trade Organization: A Legal Perspective on Women's Labor Rights, Feminist Economics 13(4), forthcoming. Busse, Matthias. 2002. Do Labor Standards Affect Comparative Advantage in Developing Countries? World Development 30 (11): 1921-32. Cagatay, Nilufer. 1996. Gender and International Labor Standards in the World Economy, Review of Radical Political Economics 28 (3): 92-101. Chowdhury Repon, A.R., and M. Syeed Ahamed. 2005. Social Economic Costs of Post-MFA: Workers Perspectives. Bangladesh Institute of Labour Studies, and International Labour Organization. Working Paper. Cooke, William, and Deborah Noble. 1998. Industrial Relations Systems and U.S. Foreign Direct Investment Abroad, British Journal of Industrial Relations 36 (4): 581-609. Dollar, David; Mary Hallward-Driemeier; and Taye Mengistae. 2005. Investment Climate and Firm Performance in Developing Economies, Economic Development and Cultural Change 54 (1): 1-31. Elliott, Kimberly Ann and Richard B. Freeman. 2003. Can Labor Standards Improve Under Globalization? Washington DC: Institute for International Economics. Elson, Diane. 1996. Appraising Recent Developments in the World Market for Nimble Fingers, in Confronting State, Capital, and Patriarchy: Women Organizing in the Process of Industrialization, Amrita Chhachhi and Renee Pittin (eds). New York: St. Martins Press, pp. 35-55. European Commission 2007. Eurostat External Trade Database. Available at http://epp.eurostat.cec.eu.int/. Export Promotion Bureau. 2007. Bangladesh EPZ. Available at http://www.epb.gov.bd/bangladesh_epz.htm.
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Fair Labour Association (FLA). 2005. 2005 Annual Public Report. Available at http://www.fairlabour.org/2005report/ Felipe, Jesus, and Joseph Lim. 2005. Export or Domestic-Led Growth in Asia? Asian Development Review 22 (2): 35-75. Flanagan, Robert, and William Gould, eds. 2003. International Labor Standards: Globalization, Trade and Public Policy (Stanford: Stanford University Press). Hale, Angela. 1996. The Deregulated Global Economy: Women Workers and Strategies of Resistance, Gender and Development 4 (3): 8-15. Hall, John. 2000. Human Rights and the Garment Industry in Contemporary Cambodia, Stanford Journal of International Law 36: 119-74. Hossain, Hameeda; Roushan Jahan; and Salma Sobhan. 1988. Industrialization and Women Workers in Bangladesh: From Home-based Work to the Factories in Daughters of Industry: Work Skills and Consciousness of Women Workers in Asia, Noeleen Heyzer (ed). Kuala Lumpur: Asian and Pacific Development Centre. International Labour Organization (ILO). 2007. APPLIS Database. Available at http://www.ilo.org/public/english/standards/index.htm. __________. 2006a. Cambodia Garment Industry: One Year Later. Report. Geneva: ILO. Available at http://www.betterfactories.org. __________. 2006b. Seventeenth Synthesis Report on Working Conditions in Cambodias Garment Sector. Report. Geneva: ILO. Available at http://www.betterfactories.org. __________. 2005. Fifteenth Synthesis Report on Working Conditions in Cambodias Garment Sector. Report. Geneva: ILO. Available at http://www.betterfactories.org. Jenkins, Rhys; Ruth Pearson, and Gill Seyfang. 2002. Corporate Responsibility and Labour Rights: Codes of Conduct in the Global Economy. London: Earthscan Publications. Kabeer, Naila. 2004. Globalization, Labor Standards, and Women's Rights: Dilemmas of Collective (In)action in an Interdependent World, Feminist Economics 10 (1): 3-35. Kabeer, Naila, and Simeen Mahmud. 2004. Globalization, Gender and Poverty: Bangladeshi Women Workers in Export and Local Markets, Journal of International Development 16 (1): 93-109. Kolben, Kevin. 2004. Trade, Monitoring, and the ILO: Working to Improve Conditions in Cambodias Garment Factories, Yale Human Rights and Development Law Journal 7: 79-107. Kucera, David. 2004. Measuring Trade Union Rights: A Country-level Indicator Constructed from Coding Violations Recorded in Textual Sources, ILO Policy Integration Department Working Paper No. 50.
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__________. 2002. Core Labour Standards and Foreign Direct Investment. International Labour Review 141 (1-2): 31-69. _________and Ritash Sarna. 2006. Trade Union Rights and Exports: A Gravity Model Approach. Review of International Economics 14 (5): 859-882. Lim, Hoe. 2001. The Social Clause: Issues and Challenges. Report. Turin: International Labor Organization, Bureau for Workers Activities. Marshall, Ray. 1994. The Importance of International Labor Standards in a More Competitive Global Economy, in International Labour Standards and Economic Interdependence, W. Sengenberger and D. Campbell (eds.). Geneva: International Institute for Labour Studies, ILO. Nataraj, Sita, Yana Rodgers, and Joseph Zveglich. 1998. Protecting Female Workers in Industrializing Countries. International Review of Comparative Public Policy 10: 197-221. Neumayer, Eric, and Indira de Soysa. 2005. Trade Openness, Foreign Direct Investment, and Child Labor, World Development 33 (1): 43-63. Organization for Economic Cooperation and Development (OECD). 2000. International Trade and Core Labour Standards. Paris: OECD. __________. 1996. Trade, Employment, and Labour Standards: A Study of Core Workers Rights and International Trade. Paris: OECD. Palley, Thomas. 2006. External Contradictions of the Chinese Development Model: Export-Led Growth and the Dangers of Global Economic Contraction, Journal of Contemporary China 15 (46): 69-88. __________. 2005. Labour Standards, Democracy and Wages: Some Cross-Country Evidence, Journal of International Development 17: 1-16. __________. 2004. The Economic Case for International Labour Standards, Cambridge Journal of Economics 28: 21-36. Polaski, Sandra. 2006. Combining Global and Local Forces: The Case of Labor Rights in Cambodia, World Development 34 (5): 919-932. Razavi, Shahra. 1999. Export-Oriented Employment, Poverty and Gender: Contested Accounts, Development and Change 30 (3): 653-83. Rodgers, Yana, and Gunseli Berik. 2006. Asias Race to Capture Post-MFA Markets: A Snapshot of Labor Standards, Compliance, and Impacts on Competitiveness, Asian Development Review 23 (1): 5586. Rodrik, Dani. 1996. Labor Standards in International Trade: Do They Matter and What Do We Do About Them? In Emerging Agenda for Global Trade: High Stakes for Developing Countries, Robert Lawrence, Dani Rodrik, and J. Whalley (eds.). Washington, DC: Overseas Development Council.
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Seguino, Stephanie. 2006. Taking Gender Differences in Bargaining Power Seriously: Equity, Living Wages, and Labor Standards, in Edith Kuiper and Drucilla Barker (eds.), Feminist Perspectives on Gender and the World Bank (London: Routledge), pp. 94-116. Seguino, Stephanie, and Caren Grown. 2006. Gender Equity and Globalization: Macroeconomic Policy for Developing Countries, Journal of International Development 18 (8): 1081-1104. Singhal, Arvind, and Everett M. Rogers. 1999. Entertainment-Education: A Communication Strategy for Social Change. Mahwah, NJ: L. Erlbaum Associates. Sum, Ngai-Ling, and Pun Ngai. 2005. Globalization and Paradoxes of Ethical Transnational Production: Code of Conduct in a Chinese Workplace, Competition and Change 9 (2): 181-200. United Nations Industrial Development Organization (UNIDO). 2005. Industrial Statistics Database 2005 (INDSTAT 3). Vienna: UNIDO. United States Agency for International Development. 2005. Measuring Competitiveness and Labor Productivity in Cambodias Garment Industry. Report Prepared for USAID by Nathan Associates Inc. Washington, DC: USAID. United States Department of State. 2006. 2005 Investment Climate Statement Cambodia. Report. Washington, DC: US State Department. United States International Trade Commission. 2007. Interactive Tariff and Trade Data Web. Available at http://dataweb.usitc.gov/. World Bank. 2007. World Development Indicators Database. Washington, DC: World Bank. Available at http://www.worldbank.org. __________. 2006. Enterprise Surveys Database. Washington, DC: World Bank. Available at http://rru.worldbank.org/EnterpriseSurveys/. __________. 2004. A Fair Share for Women: Cambodia Gender Assessment. Washington, DC: World Bank. Zohir, Salma Chaudhuri. 2003. Emerging Issues in the RG Sector of Bangladesh: Insights from an enterprise survey. Paper presented at the Seminar on A Value Chain Analysis of the RMG Sector in Bangladesh: Beyond MFA, Bangladesh Institute of Development Studies and OXFAM GB Bangladesh Programme. __________. 2001. Social Impact of the Growth of Garment Industry in Bangladesh, The Bangladesh Development Studies 27 (4): 41-80.

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Table 1. Number of Cambodian Factories in Compliance with Selected Labor Standards Number of Factories Total Factories Inspected Correct OT Wage for Regular Workers Correct OT Wage for Piece-Rate Workers Correct OT Wage for Casual Workers Minimum Wage for Regular Workers Minimum Wage for Piece-Rate Workers Minimum Wage for Casual Workers 18 Days of Annual Leave Payment for Maternity Leave Voluntary Overtime Paid Sick Leave Provide Personal Protective Equipment Install Needle Guards on Sewing Machines Overtime Limited to Two Hours per day 212 201 197 197 197 195 157 142 138 104 87 72 59 51

Percent of Factories 100% 95% 93% 93% 93% 92% 74% 67% 65% 49% 41% 34% 28% 24%

Source: ILO (2006b). Factories were inspected in the Better Factories Cambodia program in May through October of 2006.

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Figure 1. US Textile and Garments Imports from Cambodia and Bangladesh (1000s US$) Panel A: From Cambodia

Panel B: From Bangladesh

Source: USITC (2007). Trade categories include HTC codes 50 (silk yarns and fabrics) through 63 (other made-up textile articles).

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Figure 2. EU Textile and Garments Imports from Cambodia and Bangladesh (1000s of Euro) Panel A: From Cambodia

Panel B: From Bangladesh

Note: EU is the EU-25 as specified in the source data. Source: European Commission (2007). Trade categories include HTC codes 50 (silk yarns and fabrics) through 63 (other made-up textile articles).
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Figure 3. Code of Conduct Violations in Clothing Factories Monitored by the Fair Labour Association, 2004

Note: The number of violations in each country or region is indicated in parentheses. Source: Fair Labour Association (2005).

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Endnotes
1

These conventions prohibit child labor (No. 138 and No. 182), eliminate forced labor (No. 29 and No. 105), prohibit discrimination (No. 100 and No. 111), and ensure freedom of association and collective bargaining (No. 87 and No. 98).
2

See Rodrik (1996), Organization for Economic Cooperation and Development (1996, 2000), Busse (2002), Flanagan and Gould (2003), and Kucera and Sarna (2006).
3

See Rodrik (1996), Kucera (2002), Cooke and Noble (1998), Palley (2005), and Neumayer and de Soysa (2005).
4

Following conventional norms, we refer to the social clause as a legal provision in an international trade agreement that seeks to eliminate the worst forms of worker exploitation in export producing countries. Under such a clause, importing countries could prevent exporters with unacceptable labor standards from receiving preferential trade terms under the Generalized System of Preferences or Most Favored Nation status, or they could impose punitive trade sanctions through higher tariffs, more restrictive non-tariff barriers, or outright bans (Lim 2001). Most discussions of the social clause are based on the core ILO conventions.
5

For further discussion on how the World Trade Organization is distancing itself from discussions of a social clause, see Sum and Ngai (2005).
6

For a comprehensive review of issues related to codes of conduct, see Jenkins et al. (2002).

See Barry and Reddy (2006) for an argument, which is similar in spirit, in favor of linking labor standards to trade, primarily through positive trade incentives. See Elliott and Freeman (2003) for a summary of this successful program in the late 1990s. The ILO, along with UNICEF and the Bangladesh Garment Manufacturers and Exporters Association, funded and oversaw the monitoring of the joint effort.
9 8

By contrast, only 8.4 percent of firms in Bangladesh identified labor regulations as a major or severe obstacle.
10

This portrait of gendered employment and wage trends is based on authors calculations using UNIDO (2005).
11

The minimum monthly pay for an entry-level garment worker was raised in October 2006, but owing to the political turmoil in late 2006 and early 2007, the policy has yet to be implemented.
12

This approach is being used in other countries such as China, Mexico, and India to try to affect social change in such areas as HIV and AIDS prevention, family planning, environmentally-sound behaviors, and attitudes about the status of women.
13

This number reflects tabulations of data from the first sixteen reports; the seventeenth report changed in format and did not include the number of factories that closed.
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14

This point is consistent with evidence that multinational firms tend to pay higher wages and have better working conditions than domestically-owned firms in developing countries (Brown et al. 2004).
15

See Hossain et al. (1988), Zohir (2001), and Chowdhury Repon and Ahamed (2005).

16

The FLA is a multi-stakeholder organization that combines the efforts of industry, universities, and consumer, labor and human rights organizations to improve labor standards in factories that supply goods for FLA-affiliated companies. In addition to the core labor standards, the FLA uses key terms of employment criteria and a code awareness criterion (which records workers and managers awareness of the FLA workplace code of conduct in the factory) as the basis for monitoring. The companies make a commitment to promote labor standards in their suppliers (and apply the higher standard if the national laws differ from the FLA codes). FLA companies have to convey the expected standards to their suppliers, monitor them, work on remediation when violations are identified on independent monitoring visits by the FLA, and make public reports. Factories that produce for FLA-affiliated companies are likely to have a better compliance record than suppliers overall.
17

The focus group discussion on July 11, 2006 took place in a workers home in Rayerbazar Basti, Dhaka. The ages of workers ranged from 14 to 35, with an average age of 19 years. Years at garment work ranged from a quarter year to 17 years, with an average of almost 4 years. This demographic profile is consistent with results of surveys of the Bangladesh Institute of Development Studies (Zohir 2001, 2003). Country level data were compiled by the authors from the tracking charts generated in each factory visit. Our figure reports whether or not a code violation was observed, not its severity. In cases where a factory was in violation of multiple provisions of a given FLA code (such as health and safety), we recorded it as a single case of non-compliance. In the four factory visits in Bangladesh in 2004, there were 31 code violations documented out of a total of 265 violations in clothing factories worldwide. This method of tallying the violations differs from the FLAs, which records each instance of non-compliance of a given FLA code as a separate violation.
18

19

The violations on child labor and forced labor in Figure 3 do not indicate egregious violations. In Bangladesh, child labor violations involved lack of documentation of age or noncompliance with laws on employment of workers between the ages of 14 and 18. The inspectors also documented employment of workers without a contract and the lack of policy for voluntary resignation, which constitute forms of forced labor according to FLA codes (FLA 2005).
20

Data to support this assertion are found in a 1984 study, as summarized in Hossain et al. 1988.

21

Since 1984, the US GSP has made eligibility for duty free imports conditional on a countrys progress toward ensuring internationally recognized workers rights, which includes most of the core standards of the ILO, but also wages and hours-related provisions. However, the program has been limited in scope, accounting for about 2-3 percent of US imports, because of limitations on benefits (for example, exclusion of certain productssuch as textiles and clothing). There is some evidence that using the GSP does promote labor standards (Elliott and Freeman 2003). The EU

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currently provides duty free access to Cambodia and Bangladesh under its GSP (which is called Everything But Arms.)
22

One of the major obstacles that prevent the least developed countries from benefiting from GSP is the rules of origin requirements that the EU or the US routinely apply to imports from these countries. These requirements stipulate that, in order for a country to take advantage of GSP tariffs, a certain minimum percentage of value added has to originate in the exporting country. It is difficult for countries like Bangladesh or Cambodia to meet these requirements in garments production given the limited capacity of their textile industries. Removal of these origin requirements would ensure that a least developed country indeed obtains market access when it demonstrates progress toward improved labor standards and is granted the GSP tariffs.

35