Saturday, January 17, 2009

Kristof on sweatshops

This topic is sure to come up during the semester: labor standards and international trade agreements.

Nicholas Kristof, columnist for the NY Times, had a good piece in Thursday's Times (it ran in today's Star News).

Click here for the editorial and click here for his follow-up.

Where's the economics?
Will labor standards help or hurt development efforts?
Hint: consider the marginal rate of technical substitution.


  1. I'd tend to agree that sweatshops (meaning manufacturing labor) aren't necessarily a bad thing. Like Kristof states, they are actually an improvement for many citizens. Labor standards, however, may hurt or help depending on how they are implemented. In countries with low wages where firms have come in and offered to pay the American minimum wage (another problem with the whole exchange rate thing here), there have been disastrous results. The new, vastly improved wages of factory workers can widen the gap between the lower and upper classes. In many countries, earning an American minimum wage equivalent would place a person in the upper class. It also may lead to labor strikes in other industries that may not actually be able to afford to pay their workers more. On the other hand, there have been success stories. In Costa Rica, the textile industry has greatly helped the local work conditions and economy. Though they didn't greatly increase wages (there was a marginal increase, however), the factories were held to American labor standards for safe and appropriate working conditions. This lead to laws which made these conditions permanent in the country. Although the industry has actually moved out of Costa Rica to other, lower cost countries (Vietnam is the current hotspot), this type of labor standards increase is what could help.

    As for Dr. Schuhmann's comment on the marginal rate of technical substitution, I'm assuming this refers to the change in capital/labor balance. The greater the expenditure on labor, in this case, the less can be spent on capital improvements. This could become an issue with expansion, although I would think it would depend on the country. In countries where the company is required to work through a domestic subsidiary, one might encounter this problem more. Countries where the firm can exist outside the country but operate domestically might not present the same growth problem because they are often based in more developed countries so the costs would be borne in the developed country.

  2. I beleive this issue is rife with misconception, considering when one (particularly here in America) thinks of poor labor standards, a sweatshop is the first word that comes to mind.I'm sure it would shock many an American to know that sweatshops are in fact not the nadir of poverty,but instead a large step-up in terms economic growth.That being said, this is a prime example (as we discussed in class) of having growth, the implementation of a manufacturing plant, before you can concieveably have development. I agree with Drew that labor standards should be implemented on a country-by-country basis. Potential developers should take into account current economic conditions, and both the official exchange rate, and the PPP exchange rate when deciding wages. As for whether or not to implement labor standards in Cambodia, I think the answer is clear. Provided the implementation of a manufacturing plant, carefully planned fair labor standards could serve to greatly improve the lives of the current trash-toiling citizens of Phnom Penh. Americans want all the people of the world to immediatly live like them, but the truth is that some countries have to start at the bottom.As Kristof points out in this article, a sweatshop is actually a sign of growth, and shows promise for economic development.

  3. Whenever the issue of sweatshops is discussed multination corporations (MNCs) always come to my mind most specifically "Nike, Inc.". Nike is such an interesting case when it comes to sweatshops because they have always been the "poster child" (if you will) for anti-sweatshop propaganda. What most protestors don't understand about Nike is that from 1988-1996 it helped to bring the minimum wage up in Indonesia from $1 a day to $2 a day. Although, this of course doesn't seem like much of a pay raise for most Americans it was for the people in Indonesia. Nike has at least tried to improve their conditions at sweatshops by implementing certain "codes of conduct" and a way in which to measure the standards at most of their sweatshops. I believe one of the most interesting quotes on the subject is from Johan Norberg, a scholar on globalization, he wrote that, “the most persistent demand Nike hears from the workers is for an expansion of the factories so that their relatives can be offered a job".

    MNCs in developing nations are a double sided coin because with them the issue of sweatshops, child labor, and working conditions is raised. However, not only do they supply jobs for people outside of garbage dumps, they often times generate construction and transportation in countries.
    I agree with Chris's comment that "Americans want all the people of the world to immediately live like them". The key word here is "immediately". Americans want other nations to have working conditions and laws equal to theirs, although this is a very altruistic thought, it is unrealistic. Americans should look to their own nation's industrial history or perhaps pick up a copy of "The Jungle" written by Upton Sinclair. They then might realize that working conditions in the states during the 1900s where not fair from sweatshops conditions today in developing nations. This was a part of our countries stream of growth and maturity in the industrial sector, just as sweatshops in developing nations are today. Perhaps sweatshops are, although not pleasant, an integral and inevitable part of a countries economic growth.
    Like Kristof said, "would I want to work in a", but I would argue that they are a lesser of two evils. Immediately improving labor standards in countries maybe too unrealistic and as Drew pointed out could have negative effects. Politicians need to invest in more realistic solutions. Gradual improvement and looking at the "big picture" when dealing with sweatshops would be more logical.

  4. I mostly agree with everyone else on this. Demanding that other nations have the same working conditions as a rich nation like us in order to trade is not only unfair to American consumers who want to trade but greatly hampers development. It would be very hard for a poorer nation like Colombia to magically pull resources out of a hat to improve working conditions and fight corruption, yet that is what our new President and others expect. Environmental and Labor standards were the so called "main determinant" of their rejection of the Central American Free Trade Agreement, which passed anyways(while the Colombian has not). Most of the world cannot afford to have working conditions like ours, especially in places like Africa. So are we going to tell them that they are not good enough to trade with us, because that's exactly what it is. Aid is a waste, especially when open markets can create such growth. First there must be trade to create growth, then new excess resources can be allocated to improving working conditions and wages. Demanding higher standards to trade is putting the cart before the horse.

    Economically though, this does present a problem. Wages equalize when there are no barriers to trade. A person making socks in the U.S. can not expect to make a U.S. living wage, while someone in Mexico is willing to do it for a Mexican living wage. The freer the trade the greater the problem becomes. The problem is further compounded when a company in a poorer nation is able to operate at a lower cost and compete above the rest because of a lack of environmental and labor standards, including low wages. The only solution can be a "reallocation of the worlds resources." The labor intensive manufacturing and possibly agriculture sectors should shift to these low wage and low educated countries. If the U.S. wanted to spur development worldwide free trade, without nearly impossible standards, would be the best way, but it would take a great deal of change in the manufacturing/service markets.

  5. OK guys, great discussion so far. A couple of points:

    Let's remember our principles. When talking about labor standards and minimum acceptable wages, keep in mind the effect of price controls. Minimum wage laws are a price floor. Result? Efficient? Fair?

    Brandon's comment clearly brings up the principle of comparative advantage. Free trade does indeed result in the most efficient outcome - biggest economic pie - which should result in the most growth. Now we have to consider the equity implications and how/where/who gets the benefit of that growth. i.e. does this translate to development?

    As some of you have already noted, when trying to figure out if a given policy will pass the benefit/cost test, we have to be mindful of unintended secondary effects. By artificially increasing the wages or working conditions of one segment of the labor market, but not others, what will transpire in other markets? Basic supply and demand should be enough to get us started. And as I alluded to above, an understanding of marginal rates of technical substitution between types of inputs may be necessary to understand the consequences.