Asia's global value chains -- Part 3

“Social downgrading” in Asia’s GVCs

While Asia’s GVCs can foster economic upgrading, they can also result in “social downgrading”, as international trade union leader John Evans has argued. Social downgrading can take many forms in Asia, such as human trafficking, forced labor, child labor, and denial of labor and other human rights.

How does it happen? Sometimes there are no appropriate laws and regulations in place. Very often, even when the laws and regulations exist, they are not effectively enforced. Further, special economic zones are usually very light on laws and regulations, meaning that foreign investors are pretty free to do whatever they want. And most unfortunately, in many cases the victims are “undocumented” migrants (meaning illegal) who are powerless to defend themselves.

In this section, we examine two cases, Malaysia's mistreatment of its migrants, and the collapse of "Rana Plaza" in Bangladesh, a building that housed clothing factories, and killed more than 1100 workers.

Malaysia’s poor migrants

Many of the migrants who work in Malaysia's electronics goods industry, are victims of "forced labor", as thoroughly documented by Verite, an NGO, in a study financially supported by the US Department of Labor.

Listen to some of their voices:

"The contract that we signed, it was written in English. The agent asked us to sign, and that was it. They explained it, but once I reached Malaysia, things were totally different from the agreement." Male Bangladeshi worker in Klang Valley.

"The whole house has three rooms. There are over 40 people living here. It is overcrowded. There is no place to even walk around." Female Burmese worker in Klang Valley.

"They never give the passport back to workers. I feel very angry because they won't let me have my passport." Male Nepalese worker in Klang Valley.

"The agent is not very good. My friend who didn't get paid, went and talked to her. Then my friend was beaten and also dismissed from her job." Female Burmese worker in Klang Valley.

Forced labor has been defined by the International Labor Organization (ILO) as work for which a person has not offered him or herself voluntarily and which is performed under the menace of a penalty applied by an employer or a third party. Victims of forced labor are involuntarily trapped or coerced in their jobs.

"Involuntariness" can involve deception about the nature of the work, forced overtime, limited freedom of movement and communication, degrading living conditions or no freedom to resign in accordance with legal requirements. "Coercion" or the menace of penalty can include sexual or physical violence, threats against family members, food or sleep deprivation, withholding of wages, confiscation of identity papers or travel documents, and so on.

The Verite study found that forced labor is widespread in Malaysia's electronics industry which employs hundreds of thousands of foreign migrant workers, who are mainly women.

The electronics sector is a key driver of Malaysia's economy, accounting for one-third of exports. It produces mainly semiconductors, computer peripherals, and consumer electronics.

Malaysia has now become a major global manufacturing hub for the electronics industry. Some 87% of investment in the industry comes from foreign sources, principally multinational companies from the US, Japan, Europe, Taiwan and Korea. They usually operate in special economic zones which offer many benefits like duty free import of raw materials, tax breaks, advanced infrastructure, and IT. These zones are also very light on regulation.

Some 32% of foreign workers surveyed by Verite were assessed to be victims of forced labor (as were 28% of all workers). Another 46% of all workers were deemed to be on the threshold of forced labor, due to the presence of one or more forced labor indicators. In other words, three-quarters of all workers covered by the study were subject to forced labor or on the threshold.

Recruitment fees, which most foreign workers paid, often exceeded legal limits. These workers usually had to borrow money to pay these fees, thereby putting them and their families in a situation of vulnerability.

One in five workers in the study were deceived about their wages, hours, overtime requirements or pay, provisions regarding termination of employment, or the nature or degree of difficulty or danger of their jobs. These workers had little ability to change or refuse their jobs upon arrival.

Virtually all foreign workers interviewed reported that their passports were held by their employer or their broker/agent, something which is against the law in Malaysia. Most reported that it was impossible or difficult to get their passports back when they wanted or needed them. This means these workers are unable to move around freely and safely.

Many foreign workers experienced appalling living conditions. Foreign workers are in a state of virtual bondage, as they are tied to their employers and jobs through their work permits, which require the sponsorship of a particular employer. Almost half reported experiencing harassment from immigration officials, police or volunteer citizen security corps -- often times they were subject to financial extortion from these groups.

Many electronics workers in Malaysia are now employed directly by third-party employment agents, rather than the company owning their factory. These labor intermediaries manage the full employment life cycle of recruitment, hiring, deployment, management and repatriation on behalf of client companies. These workers were found to be more vulnerable to forced labor conditions than directly hired workers.

The Malaysian government has the aspiration to climb the global value chain, and break out of its "middle income trap". It is striving to move its semiconductor industry beyond basic operations such as assembly, testing and packaging to higher-value added activities.

But the competitiveness of the industry is derived from low labor wages, rather than high skills, thanks to cheap migrant labor. Indeed, Malaysia is a leading destination for foreign migrant laborers in Southeast Asia. Estimates range upwards from 4 million (25-30% of Malaysia's total work force), with half coming from Indonesia and many undocumented.

Malaysia will never achieve its ambition of reaching high income status whilst ever it bases it development strategy on low-wage, low-skilled factory jobs performed by foreign workers.

Please don't think that this Verite report is a one-off anomaly. Many other reports on Malaysia's treatment of migrants have come up with similar conclusions, reports by the International Labour Organisation, International Trade Union Confederation, the UN, and Amnesty International.

GVC mixed blessings for Bangladesh

April 24, 2015, marked the two year anniversary of the Rana Plaza building collapse. It was one of the worst industrial disasters in history, and one of the worst examples of poorly regulated and managed GVCs. Where does Bangladesh stand today?

Bangladesh is one of Asia's very poorest countries, with an annual GDP per capita of merely $1600 in purchasing power parity terms. Poverty is endemic. Some 43% of the population live on less than $1.25 a day, while 77% live on less than $2 a day. Its population of 158 million is densely packed into this small country which is often afflicted by natural disasters.

In many ways, Bangladesh seems a country with little hope. It is ranked one of the world's most corrupt countries by Transparency International -- 145th out of 174 on its Corruption Perceptions Index. It also has poor competitiveness according to the World Economic Forum, which places it 109 out of 144. The plight of the country's women seems desperate. Bangladesh has one of the world's lowest rankings for female economic participation and opportunity, educational attainment, and health and survival, also according to the World Economic Forum.

And yet, seemingly against the odds, things have been improving in this country, born a little more than four decades ago following the Bangladesh Liberation War. Economic growth has averaged more than 5% since 1990. The share of the population living in poverty has fallen sharply. Life expectancy has leapt from 60 to 71, while infant, child and maternal mortality rates have improved dramatically.

One key factor in Bangladesh's improved conditions, especially for women, has been its success in hooking onto GVCs as an exporter of "ready-made garments" (RMG), thanks in large part to its free access to the EU market. The EU is by far Bangladesh's largest export market for RMGs, followed by the US.

RMGs account for over 80% of Bangladesh's total exports, and more than 10% of GDP. The industry employs some 4.2 million people, of whom about 80% are women. It thus contributed greatly to the empowerment of women in this very traditional society. It also indirectly supports as many as 40 million Bangladeshis, about 25% of the population. Bangladesh's clothing industry is only second to China's in size

But the dark side of Bangladesh's participation in garment GVCs was brought to the attention of the whole world in April 2013, when Rana Plaza, a building housing several RMG factories, collapsed killing 1138 workers, mainly young women, and left many more injured. It was one of the worst industrial accidents in history, and came close on the heels of the Tazreen factory fire of November 2012, in which 112 people died.

Who was responsible for this tragic disaster?

In the words of Philip Jennings, General Secretary, UNI Global Union, "Many were complicit: the international brands that turned a blind eye to glaring problems in the factories where their garments were made; the factory owners who knowingly put their workers at risk in order to keep costs low; and the Bangladeshi authorities who made no effort to enforce their own health and safety laws".

The many red faces were pressured into responding. A Sustainability Compact was thus forged, committing the Government of Bangladesh, in cooperation with the EU, the US, the ILO and the private sector to bring about the necessary changes in the garment sector. It has three pillars -- respect for labor rights, structural integrity of buildings and occupational safety and health, and responsible business conduct.

Some improvements have been made to Bangladesh's labor law regarding freedom of association and collective bargaining. Over 300 new garment industry trade unions have been registered, doubling the total number, although only 5% of garment workers are union members. Over 2,500 safety inspections have been carried out in garment factories, with 32 factories having unacceptable conditions being closed. More than 250 inspectors have been trained. And the Bangladesh government has raised the minimum wage.

The Rana Plaza Donors Trust Fund was established by the International Labour Organisation in January 2014 in order to collect voluntary contributions to finance the compensation awards. But it took until June 2015 for companies to make sufficient payments to meet the target of $30 million. This means that full compensation can be paid to the families of the 1138 workers who were killed, and the more than 2000 who were injured in the collapse of the Rana Plaza building in April 2013. As international trade unionist John Evans said, “The victims of Rana Plaza have waited far too long for this news”. One welcome development is the support by the G7 countries for an ILO-coordinated “Vision Zero Fund” to prevent and reduce work-place accidents in GVCs, and to strengthen access to remedy, including the National Contact Points of the OECD Guidelines for Multinational Enterprises.

And it took over two years for the Bangladeshi police to file homicide charges for the Rana Plaza collapse. Some 42 people were charged including building owner Sohel Rana; the former mayor of the local council, Refat Ullah; the owners of the five garment factories located in the complex; and dozens of local council officials and engineers. It is however a remarkable step in a country where past industrial accidents have rarely faced prosecution.

How much have things changed? Not enough is the consensus assessment.

The EU notes that, despite the achievements, "much more must be done. The EU renews its expectation towards Bangladesh's authorities to ensure the outstanding areas of the Compact are implemented in law and in practice".

On the occasion of the second anniversary of the Rana Plaza collapse, Human Rights Watch, an NGO, published a stinging report.

Based on its interviews with more than 160 workers from 44 factories, "workers report violations including physical assaults, verbal abuse -- sometimes of a sexual nature -- forced overtime, denial of paid maternity leave, and failure to pay wages and bonuses on time or in full. Despite recent recent labor law reforms, many workers who try to form unions to address such abuses face threats, intimidation, dismissal, and sometimes physical assault at the hands of factory management or hired third parties."

A global trade unions assessment of the Compact is similarly harsh, while recognising some progress made:

"Much remains to be done by the Government of Bangladesh and the garment industry, not only as to fire and building safety, but basic respect for the law -- both national and international standards ... In our view, a severe climate of anti-union violence and impunity prevails in Bangladesh's garment industry. The violence is frequently directed by factory management. The Government of Bangladesh has made no serious effort to bring anyone involved to account for these crimes..

This is due to "a combination of a serious lack of political will, failure of intra-governmental coordination, high levels of corruption and the extraordinary dominance of the garment industry (and others) in government institutions."

Another lively debate has been the extent and nature of corporate social responsibility of the brands that sourced their products from Bangladesh, notably Benetton, Bonmarche, the Chidren's Place, El Corte Ingles, Gap, H&M, Joe Fresh, Monsoon Accessorize, Mango, Matalan, Primark, and Walmart. The emerging consensus is that such brands should be accept responsibility for their whole GVC, and cannot wash their hands of what their subcontractors do.

As OECD Secretary-General said, "global businesses must look beyond the bottom line and "go responsible" ... they must act responsibly through their supply chains." But the reluctance of much of the business sector to play the game responsibly is evident in the comments of Winand Quaedvlieg, chair of the investment committee of the Business and Industry Advisory Committee to OECD, "an over-extensive interpretation of responsibilities along the supply chain would be counterproductive".

The ultimate lesson is that for countries to make the most of their GVCs requires a combination of good governance, respect for labor and other human rights, and responsible business conduct. In poor and weak democracies like Bangladesh, this will require many years of social and political activism, struggle and pressure. Even today in our advanced countries, these ideals are all too often out of reach, as we experience increasing inequality and poverty, along with growing capture of the state by big business.

Concluding comments

The emergence of Asia’s GVCs has been a great boon for the region’s development. But the 2008 Lehman shock marked a turning point. Asia’s excessive reliance on GVCs was brought into sharp focus, as was the region’s failure to fully exploit the opportunities offered by GVCs and the challenge of climbing the value chain.

Asia must now seek a path of more balanced growth by removing the pro-GVC policy bias, promoting growth of the domestic economy and seeking market opportunities in Asia and other emerging economies, as well as Western markets. Asia must also graduate from being a passive home to GVCs, and make stronger efforts towards economic upgrading and ultimately creating GVCs. At the same time, it should strengthen domestic governance and promote responsible business conduct conduct to mitigate the tendency toward social downgrading. After all, the ultimate goal of development is “human development”.