Bangladesh’s Disaster: Perspectives on the Political Economy
By Rehman Sobhan
In May 2013 an 8 storied building, Rana Plaza, located in the suburbs of Dhaka, collapsed killing 1133 workers and injuring another 1800. This was the worst industrial disaster in recorded history. A great deal of discussion has already taken place over a tragedy which unfolded over many days in real time not just before us but all over the world. As a result Rana Plaza has been established as a globally recognized event. More to the point, for many of those assembled here the fall out from the event has, as far as I can see, not really ended.
This paper attempts to explore the underlying dynamics of the crisis rather than to look at the immediate event manifested in the collapse of the building and the enormous human tragedy associated with the disaster. I will argue that the immediate outcomes of the Rana Plaza disaster were really symptoms of a much deeper crisis within our system not just within Bangladesh but also as part of the globalization process. If we really aspire to address this problem, in terms of finding longer term responses to the disaster, we need to understand the underlying problems which have surfaced from the rubble of Rana Plaza.
In my understanding of the underlying dynamics of the Rana Plaza tragedy seven key issues merit discussion. I will very quickly run through these issues:
• The first issue views the tragedy as the outcome of failures of governance in our society.
• Secondly, we need to understand the political dimensions of the crisis which interface with the failures of governance.
• Thirdly we need to look at Rana Plaza as the ultimate manifestation of some of the deep injustices which have come to characterize Bangladesh society today.
• Fourthly we need to move into the domain of economics in order to understand the dynamics driving a highly competitive industry operating at the front line of the globalization process.
• Fifthly, and this is an issue which has not been adequately discussed anywhere, we need to scrutinize the very unjust workings of the present global economic order as it impacts on the Bangladesh garment industry and its workers.
• Sixthly I will try to share with you some preliminary thoughts on what can be done about dealing with the sources of the crisis through bringing about a longer term structural transformations within the industry.
• We will finally move beyond the domestic dimensions of the crisis to take a longer term perspective towards what may be done to reconstruct the global economic order where Rana Plaza provides a window on the workings of the system at a global level.
1. Governance failure
There are several governance issues which have surfaced which have been widely discussed. We may summarize some of these issues.
• The structure was built on illegally appropriated land.
• The clearance process for approving the building plan was defective since the land itself was once submerged.
• The construction work was shoddy and carried through without any serious regulatory oversight.
• The approval process, oversight and work on the floor expansion of Rana Plaza was deficient. The way in which the generators were located and the consequent load factor which the building had to bear were not exposed to scrutiny within the prevailing building codes.
• The final Rana Plaza building structure which collapsed was completely outside the international compliance requirements demanded by the global community.
• There were serious regulatory failures relating to both the construction codes and regulations under the Factories act.
These regulatory deficits reflected the complete failure of any process of oversight and inspection over this particular facility. Interestingly enough we not only witnessed the failure of governance on the part of the Bangladesh state but also of the international sector. The global buyers who were required to demand compliance from the companies where they buy their product remained conspicuously missing in action in discharging their oversight responsibilities at the lower tiers of the production chain. Finally, the top most oversight organization within the RMG industry itself, the BGMEA, which also has a significant responsibility, failed to take serious cognizance of the prevailing sub-standard working conditions in large numbers of units operated by their own members.
2. The political dimensions of Rana Plaza
We may begin to address the political dimension by taking account of the antecedents of one of the prime players in the Rana Plaza event, the gentleman who has contributed his now globally famous name to this disaster. Sohel Rana, I assume is not appearing in public these days. His career path serves as a metaphor of how the political game in Bangladesh is played at the grass roots level. A person who could come from nowhere and become an enormously rich person, through performing certain services for the various political parties at the local level, is just one of many who are inhabiting the political landscape at the grass roots level across the broad spectrum of Bangladesh politics.
It is people such as Rana who interface with the governance process to get things done to their advantage where necessary. They use the leverage which comes from having a powerful godfather who represents the forces which are movers and shakers in Bangladesh politics today. It is these leaders who provide the political muscle behind the local players such as Rana who can thereby draw upon their backing to pressurize the regulatory agencies to bend the rules whenever it is needed. Thus, the interface between mal-governance and mal-politics emerges as a critical factor in shaping the underlying governance dynamics which contributed to the Rana Plaza disaster.
3. Societal injustice
To understand the malfunctions of the governance process we need to explore the broader issue of the nature of the society where such manifestations of mal-governance expose themselves. We need here to understand the unjust social and global order within which those who do business function. Their compulsion of exporters to meet their export orders supersede any humanitarian concerns which might have made them sensitive to the concerns of their workers. Thus, even when the owners of the factories located at Rana Plaza noticed the conspicuous deficiencies in the structure, they still compelled their workers to go back to work so they could meet pending export orders. We may recollect one of the real life tragedies of the event where one of the many injured women who was asked why she entered the building even when very dangerous cracks in the structure were noticed by all the workers waiting to enter the building said,
“What could I do? We were threatened by the factory overseers that if we did not go back to work we would be immediately discharged. I have small children to feed and schools fees to pay, I could not afford to lose my job”.
The plight of this working woman encapsulated the social compulsions within which most of the workers in this industry actually work, where they can be hired at will because they are part of a system built around the casualisation of the labor force. Such a system, within a more sophisticated economic discourse, is termed labor market flexibility. This, in practice, means a person can be hired by an export firm when the market is favourable and the order books are full. When there is a downturn the same worker can be fired at will. Such firms can be very competitive because they carry light overheads in terms of long term obligations demanded by law owed to a contractually hired worker.
4. Remaining competitive in a globalized world
The workers at Rana Plaza represented one part of the real world governing the lives of ordinary people working at the bottom of the production chain. They worked for wages which left them below the poverty line. Some of my colleagues at Centre for Policy Dialogue (CPD) reviewed the wage data for the industry which showed that the average level of wages for the industry provided an income which has below the official poverty line used by the government of Bangladesh (GoB). Thus, while we take pride in the 4 million workers provided with employment by the RMG sector we must keep in mind that we are still compensating these workers at barely above subsistence levels.
This evidence on the condition of the workers moves us to the core of the problem – the competitive process within globalization. Here again my colleagues at CPD reviewed some of the relevant evidence for me. I asked them to investigate the price of a shirt when it is retailed in New York at K mart or Wal Mart for an approximate price of US$25 and to then work backwards to deconstruct this price so as to track its cost components from the time that the raw materials for the shirt enter the production chain in a factory to the point where it is placed on the shelves of Wal Mart in New York. I present before you a set of numbers provided to me by our researchers at CPD:
• The RMG exporter within the country ultimately retains about 28% or 29% of the value of the final retailed product.
– This price is a made of the input cost for such items as fabrics or yarn for knitwear material which is about 15/16%.
– Further costs include the wage bill, the operating costs of the factory, including rental of factory space, local transport, administrative overheads including the profit margin. All these operating costs come to around 8%
– Another 2% or 3% may be subtracted from this operating cost if the local export firm accesses their orders through a local buying house who will be extract a margin of around 2.6%.
– Where the export firm subcontracts part of its order to companies such as these working at Rana Plaza these subcontractors are paid less than 1% or may be even 0.5% of the final retail price.
5. The working of an unjust global order
Our calculations remain approximate and deserve more intensive research investigation. What we need to explore in depth is where the balance of around 63% of the final $25 price at which the shirt is retailed by Wal Mart, ends up. This 63% is possibly appropriated by Wal Mart and similar corporate enterprises who buy garments from countries such as Bangladesh. The retail chains partly cover real costs of shipment, storage and marketing the product. What we do not know is the actual spread of this cost and the net surplus retained by Wal Mart from the transaction. Unfortunately and indeed surprisingly this issue of the distribution of value along the production and marketing chain is rarely discussed either in the global negotiations between the buyers and sellers or the international development community whether at the WTO, World Bank or in consultations between Bangladesh and the US government. We, thus, do not know how much of this 63% which is appropriated by Wal Mart constitutes real cost and how much constitutes a political or institutional rent arising from the unjust structures which underwrite globalization as it operates today.
This discussion on the value chain is important because its provides some insight about the tight margins within which domestic entrepreneurs operate within a highly competitive globalized industry. The profit margins of the owner have to come out of the 8% left to them within the global system. One way in which many of Bangladesh’s globally competitive exporters, directly contracted to supply the major global retail chains keep down costs, is to sub-contract part of their orders to RMG enterprises with low operating costs and even lower compliance practices who are exposed to minimal regulatory oversight either nationally or globally. The prime contractor contracted to supply Wal Mart usually pays the sub-contractor 0.5% to 1% of the final retail price. What happened at Rana Plaza is more easily understandable if we locate its underlying political economy within this value chain.
A sub-contractor who is left to survive on 1% has to meet their rental for their factory space, cover operating and labour costs and extract their own profit margin. It is, thus, hardly surprising if the sub-contractor both underpay their workers as well as remain unwilling or incapable of constructing their own factory premises. Rather, they prefer to reduce their capital and operating costs by hiring lower rental premises built with dubious construction standards.
Such cost cutting, through risk prone initiatives which mostly impact on their workers, appears to be built into the Bangladesh business model for its RMG sector. If we are to move away from such an inhumane model we must not just explore the political economy underlying our RMG sector but the political economy of the global supply chain which ultimately influences market dynamics of this particular industry.
6. Longer term responses to Rana Plaza
How can we respond to the various dimensions of the circumstances which have led us into the Rana Plaza disaster?
• We must begin by putting in place a better governance system where, at the very least, the compliance measures which are already on the table, which are being widely discussed, must be effectively enforced. Working on the wider ramifications of Rana Plaza does not absolves anyone from the responsibility of meeting minimal compliance standards. The immediate issue to be examined is whether such compliance processes will be adequately funded? Funds are being promised by the buyers, some by international agencies but is this going to become a permanent transfer of resources to Bangladesh to ensure that the substandard structures are not only brought upto standard but remain so? It is not clear if the external funding support is intended as a permanent source of support or will remain a one off intervention which will be serviceable until the media moves away from Rana plaza to some other global disaster somewhere else.
• Another key question arises over whether the mechanisms of oversight which have to be enforced over the RMG sector will be consistent with the workings of our system of governance. We should remember that the failures of oversight in governance relating to Rana Plaza was itself part of a much broader crisis of regulatory and governance failure bedevilling the country. A system which is poorly regulated, if at all, originates in the overall malgovernance of our society.
• Will the RMG sector become an island of good governance and accountability in an ocean of malgovernance and inadequate regulation? Thus, when we address the issue of oversight we need to address the following questions:
– Will we establish any oversight mechanism over the regulators in the days ahead?
– Is there a chain of accountability starting from top to the bottom where each person along the chain will be held responsible for failure down the line?
– Will inspectors remain as poorly compensated as they have been so far which drives them to extract rents from the people who they regulate? In our prevailing circumstances we have to look at the very nature of a system where we are dependent on the field inspection reports of poorly paid regulators who operate within an asymmetric incentive structure where the people who are regulated have a great deal to be gained from not being regulated. Unless we change the incentive structures of the people who are responsible for regulation the governance crisis will not go away.
– Finally, will BGMEA step in and assume responsibilities, which it should have assumed in the first place? Such an intensive oversight within the RMG sector itself may compensate for state regulatory failure. But the BGMEA will have to reconstruct and equip itself to perform such a role over the long term. Within the prevailing composition of its membership structure, which is heavily populated by the very companies most in need of regulation, this may be a tall order.
• The above questions need to be continually asked by civil society which has hithertoo remained a bystander in addressing the concerns of the RMG sector. The concerned segments of civil society will, themselves, have to undergo a crash course not just on the economics of the RMG sector but the political economy of Bangladesh. At this initial stage civil society, may at best try to exercise some oversight over the many commitments made from various sources, both government and private, home and abroad and report on how far these commitments are met in the days ahead. Public interest litigation, which has played a modestly effective role in seeking compliance with the law, can also play a role. However, we should not look to civil society to compensate for systemic failures or ensure better governance.
Civil society in Bangladesh again has many irons in the fire. To apply themselves effectively to the problems of the RMG sector civil society will need discharge its own oversight responsibilities over a longer time period rather than as a short term media intensive exercise. To sustain such a longer term commitment, will, in the real world of civic activism be a challenge.
7. Structural change for a more just society
In the longer term all of us have to address the inequitable nature of the system which remains at the heart of the problem. Over the years we failed to institutionalize a system of collective bargaining through trade unions. What immediately struck many people who witnessed the Rana Plaza events was the inherent weakness and vulnerability of, individualized workers who were standing outside Rana plaza feared enter the building due to its visible structural deficits. Had there been a collective body speaking for all the workers at that time there is no way that any employer could compel them to enter a factory in danger of collapse.
If we are dealing with 3000 individuals, each thinking of their survival, they will always be vulnerable. Our first challenge will be to empower the workers by investing them with the right of collective bargaining.
I personally would aspire to realise more substantive structural change through transforming all the people working in the RMG industry into stakeholders in that industry, where workers are recognised as integral to the profitability of the company. Such an arrangement may be established through:
– Ensuring that workers in each enterprise receive their 5% share in profits as is now mandated under the provisions of the Factories Act.
– The next step would be to invest workers with an equity interest in the company whereby employers will recognize their workers as partners in the company. In turn, workers will remain loyal to the company where they work rather than constantly change jobs in search of better terms of work. Workers as partners have a stake in the efficiency, profitability and growth of this industry.
8. Moving towards a more just world order
Finally what can be done about reconstructing the industry at the global level? Here several issues are involved including at the governmental level. The US government has taken issue with the government, mostly under pressure from the major US trade unions who are important partners in the ruling coalition. Bangladesh has been exposed to the embarrassment of being advised by the US government that we should look after our worker’s rights. Such a concern should be our own national responsibility. No one should have to advise us from outside that we have certain obligations to our own workers. This responsibility should be assumed by our own government and civil society.
At the same time the global community should not be innocent of its own responsibilities. We should engage with the US and other governments in North America and Europe over their own policies towards Bangladesh’s exports and the workings of the international system. For many years we have been fighting without result for duty free access to the US market. We pay a 15% duty for RMG goods entering their market which generates around $720 million revenue for the US exchequer. This revenue is, under prevailing market conditions, ultimately paid by the workers of Bangladesh’s garment industry. In order to remain competitive in the US market our RMG buyers who pay a 15% duty on their exports need to reduce their offer price to Wal Mart by 15% which is then extracted from the wage share of workers. Since the US government offers less than $200 million a year as ODA to Bangladesh we are expose to the paradox of a net transfer of resources from Bangladesh, a least developed country, to the budget of the world’s wealthiest country.
Now if in the US government is very anxious, on humanitarian grounds, to do something for our workers I have suggested in a number of fora that the 720 million dollars collected by them as revenue should be used as a contribution or investment by the US government in underwriting the costs in the RMG sector of upgrading the working conditions and to ensure better compliance in the RMG enterprises. This would be a positive humanitarian gesture by the US with great functional value for the industry. A joint team from both sides could oversee the administration of this fund to ensure its effective use.
Ideally Bangladesh should aspire to a situation where we obtain market access to the US on a duty free basis. Withdrawing our GSP facility as a symbolic gesture, it is not a big deal. But in the event that we want to diversify our exports to the US which are heavily dependent on RMG exports we should work out some overall arrangements on the wider issue of duty free access for all our exports.
We can further address an important aspect of the international system. We had been offered GSP facilities for a large range of our exports to the US other than RMG. But we also have universal duty free access to the EU market under the Everything but arms (EBA) facility. But both GSP and EBA in the EU remain provided at the political discretion of these governments. If we can maintain politically serviceable relationship with these regimes, we will continue to receive such trading privileges. Such a politically discretionary trading relationship is unacceptable to any self respecting sovereign country, even an LDC. All developing countries need to operate in a global system where market access is not used as an instrument of political patronage where we are given access to markets as a form of political rent. Such a political trading system remains both inefficient and unjust.
Finally we need to address what we can do about the 63% appropriated by Wal Mart. Few scholars have addressed this issue. Domestic political groups do not discuss this, nor do the US or the EU government, neither does WTO or the US, ILO address where that 63% is going. What we therefore need to do is to initiate a serious study about how this 63% is distributed where we can also to assess the institutional rents originating in an unequal trading relationship being appropriated.
What can we do about such an unequal relationship? How can we get a bigger share of the rent? One possibility is to take a cue from Wal Mart who wants to enter the retail chain system in India. Can Third world exporters learn from Wal Mart to set up their own retail outlets in the US to directly market their products over there? If a 63% margin is at stake it would be good business to apply our minds as to how our exporters and workers can access a share of this rent. Perhaps our bigger export houses can even initiate negotiation to become shareholders of Wal Mart. Then we would not only draw upon a bigger share of the 63% appropriated by them but also share in Wal Mart’s astronomical profits.
By Special Arrangement with : Observer Research Foundation
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