Bangladesh Burning

From the Wall Street Journal 9/28/12

The factory fire in Dhaka sprang from a particular political economy.

By JOSEPH STERNBERG

The garment-factory fire in Bangladesh last weekend that killed at least 112 workers was a horrific tragedy. Emergency exits were padlocked. Fire equipment couldn’t reach the blaze through dense, overcrowded roads.

Accidents of this type are often due to more than just industrial causes. The political economy usually contributes, too. This disaster is a case in point.

Seemingly unappreciated in much of the reportage of the fire is the odd fact that a country of Bangladesh’s population—approximately 150 million—is so utterly dependent on a single industry in which it has no natural advantage. Garment exports earn around $19 billion per year, accounting for 80% of total exports and around 17% of total economic output. Clothing is Bangladesh’s only manufactured product of any note.

Such single-mindedness might be understandable in a newly developing economy. But Bangladesh is not “newly developing,” it is merely inefficiently and insufficiently developing. The country has been making a concerted push into textiles for nearly three decades. This has not led to the sequential flowering of other industries, as economic theory would predict.

It turns out that the policies that created the garments boom now stifle the development of other businesses. This causes knock-on problems such as low wages and poor working conditions that have contributed to a string of factory fires in recent years.

ReutersA scarf of a garment worker is seen in the burnt interior of garment factory Tazreen Fashions, after a devastating fire, in Savar.

Despite some limited progress over the past decade, Bangladesh’s economic policies are stuck in the subcontinent’s socialist past. Government meddling is pervasive, and so is corruption.

Applied tariffs in general are higher than neighbors India, Pakistan and Sri Lanka, the World Bank noted in a report earlier this year. Dhaka produces five-year plans (we’re now into the sixth) heavy on discredited import-substitution and light on economic freedom.

Garment manufacture is about the only industry exempted from these rules, which is why is it the country’s only consistently successful industry. For this, Bangladeshis can thank a combination of typical policy malfeasance among developed countries and rare policy brilliance from Dhaka.

In 1974, the U.S., Europeans and others crafted the Multi-Fiber Agreement, or MFA, to restrain the import of ultra-cheap textiles from the likes of Japan, Korea and Hong Kong, the garment powerhouses of the era. Under the MFA, those producers adhered to an export quota system, leaving other countries to pick up the production slack.

Dhaka quickly liberalized investment and trade in the garment industry to attract clothing companies searching for new production bases in countries with advantageous quota allowances. The industry has boomed ever since, even past the MFA’s expiration in 1994—boosted in part by continued favorable access to the European Union.

But other industries have never been similarly favored, at home or abroad, so they haven’t developed. Garment manufacturers enjoy duty-free imports of inputs such as fabric and machinery; everyone else pays high duties. Clothing companies receive preferential tax rates; these have only recently started becoming available to other industries.

Most pertinent to last weekend’s fire, the garment industry effectively enjoys special labor rules, including a ban on unionization, and regulated pay rates that depress wages in the name of competitiveness. In this respect, Bangladesh is identical to China and other East Asian tiger economies that repressed domestic demand to steer more capital and energy into exporting industries—except that Dhaka hasn’t had the wit to push the economy further up the value chain.

This heavily skews investment toward the garment industry at the expense of other fields, such as the business-process outsourcing that has been a cash cow for India and Sri Lanka. One consequence is that Dhaka’s policies funnel ever more members of a rapidly urbanizing population into a single industry where wages and conditions are abysmal.

It’s no wonder wage protests have grown more frequent in recent years. The government has effectively blocked avenues of advancement for individual workers by hindering development of alternate industries.

Meanwhile, Dhaka has created a monster industry that now threatens to “devour” the government. The Associated Press reported this week on the interconnection between policy makers and the garment industry: Garment magnates sit in parliament; labor activists accuse government security services of complicity in the alleged murder of a union organizer earlier this year (the official investigation is ongoing).

This is a classic recipe for regulatory capture: a relatively weak government and a big industry with a lot on the line. Note that already there is talk that any safety or wage redress must be balanced against the importance of garments to the national economy.

Labor activists the world over are scolding global companies for tolerating such terrible conditions in Bangladesh. The ire is misplaced. Companies such as Wal-Mart, WMT +0.77% aware of the reputational risks of sweatshop sourcing (and perhaps even run with a kernel of moral sensibility) run themselves ragged trying to monitor working conditions in the factories from which they buy. But determined factory owners abetted by local authorities can always fool inspectors.

Instead, consider the ecosystem in which such tragedies occur. This was but the deadliest bog fire in a swamp created by long-running trade protectionism abroad and retrograde industrial policy at home. Rather than blaming globalization for Bangladeshi workers’ ills, how about pressing Dhaka to give them more of it—more investors, in more industries, bringing more opportunities?

Mr. Sternberg edits the Business Asia column.

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