Understanding the Bangladesh Tragedy with Political Science

Matt Yglesias is being raked across the coals for this. It's understandable. The best time to parrot an econ 101 line is not immediately following a tragedy. Yglesias now understands this. But neither is this the best time to completely denounce neoliberalism or engage in the sort of extreme wishful thinking through which it is suggested that Bangladesh could (or even should) have levels of labor protection equivalent to the U.S. That is quite literally impossible: Bangladesh's GDP per capita is about $2,000 per year. Taken together, U.S.-level unemployment protections, retirement accounts, safety regulations, and other programs which benefit labor are more costly than that. So it's impossible.

Let's take this situation as it is. Bangladesh is not a bastion of neoliberalism. It has only recently, and after a long struggle, been able to consolidate a democratic regime (hopefully) which is in any case quite corrupt. Bangladesh is one of the poorest countries in the world, but it has been able to grow fairly rapidly over the past few decades by exporting textiles and people to the rest of the world: exports and remittances are about 12% of the economy. Roughly 40% of the labor force is "underemployed", working only a few hours per week for very low wages. It is a poor country, which means it has low domestic savings, so to generate the sort of domestic investments it needs to continue to develop it must import capital and in particular foreign direct investment. Most of that goes into the production of textiles.

It is commonplace to hear folks say that multinational corporations encourage a "race to the bottom" in labor and environmental standards: if you regulate them, the thinking goes, they will go to another jurisdiction. To get the capital they need to develop, poor countries must therefore deny worker protections. Here's an application of the argument to Bangladesh. The story has a nice logic to it, but it is false.

This question has been studied quite a lot by political scientists. The state of the art in the literature (much of the best of which has been done at UNC by Layna Mosley) is as follows: multinational corporations tend to improve labor standards, and exposure to multinational production chains tend to raise countries' de jure labor (and environmental) standards. Through the pressure of global civil society advocacy groups, "California effects", and other processes, standards tend to go up rather than down. But quite frequently de facto implementation of these standards does not keep up with the de jure enaction of them. This is especially true when multinational corporations subcontract with local firms: MNCs almost always have higher standards than local firms, especially if the MNC is from a highly-developed country (i.e. not China). As countries develop, local labor practices tend to improve to meet the standards.

Remember, these are poor countries. The local standards tend to be very low before multinationals come in. The capacity of governments to engage in inspection and enforcement is weak. Often, corruption is rampant. (These are basically other ways of saying that the country is quite poor.) This is not a problem that invoking the neoliberalism bogeyman can fix, however, nor would it be likely to improve if the country was shut off from the global economy. The problem was not created by neoliberalism -- it existed already -- and the best hope for rapid improvement it will come from participation in the global economy rather than autarky. State capacity cannot improve until incomes are higher, which requires growth, which requires participation in the trading system. Over the past two decades, since it has begun producing for export in earnest, Bangladesh has grown at about 6% per year; it has a long ways to go, but shutting itself off would be the wrong move. It is on the path to development, at long last.

Enforcing the laws already on the books is a necessary step. But it is hard to ask multinational corporations to take responsibility for more than their own production floors. They do not have the local authority to do this, and I don't believe anyone wishes to grant it to them. This is the governments' job. If the government does not have the capacity to perform it, they may ask for outside help from the ILO or other NGOs which operate internationally. (Keep in mind that enforcement requires resources, which means additional taxes. Practicably speaking, some of these costs would be borne by labor.) If the government does not have the interest to do so, then the entrenched power structure needs to be overturned. The best chance for this happening is by increasing the market power of foreign capital and domestic labor -- the groups which would both prefer higher standards -- and eroding that of domestic capital -- the group which, according to recent example and careful political science research, most prefers low standards. Thus, various suggestions to boycott products made from Bangladesh, or otherwise isolate the country economically, would almost certainly make the problem worse rather than better.

It appears that the Bangladesh garment factory was locally-owned, and had been subcontracted to do production for MNCs. The building was in violation of many laws -- the problem wasn't de jure but de facto -- and it appears that the owners will be arrested and prosecuted (as they should be). The multinationals, for their part, had engaged international third-party inspectors under E.U. code to validate the safety of the factories. The factories themselves passed inspection, but the building which housed them was not examined by the foreign inspectors.

This is, sadly, pretty predictable from the point of view of political science research. And that research gives us some indication of what needs to happen to improve the situation: consolidate the democratic regime in Bangladesh, reduce the influence of local capital owners, try to maintain rapid economic growth, and have some measure of patience. It takes a long time for poor countries to become rich countries. It will take a lot longer if well-meaning folks on the left cut out their best means of development.

UPDATE: In the comments, Latinamericanist provides some links to research on the effectiveness of international advocacy groups that are worth looking at.

How Not to Write an Abstract

We've been blogging about trade and trade networks a decent amount lately, so I was interested to see a new NBER working paper titled "Multinational Firms and the Structure of International Trade". I clicked through and read the abstract, which is:

This article reviews the state of the international trade literature on multinational firms. This literature addresses three main questions. First, why do some firms operate in more than one country while others do not? Second, what determines in which countries production facilities are located? Finally, why do firms own foreign facilities rather than simply contract with local producers or distributors? We organize our exposition of the trade literature on multinational firms around the workhorse monopolistic competition model with constant-elasticity-of-substitution (CES) preferences. On the theoretical side, we review alternative ways to introduce multinational activity into this unifying framework, illustrating some key mechanisms emphasized in the literature. On the empirical side, we discuss the key studies and provide updated empirical results and further robustness tests using new sources of data.

Got it? No? Me either. The point of an abstract is to give a precis of the article's scope, method, and findings. This abstract mentions that there are findings ("provide updated empirical results and further robustness tests") but doesn't say what they are. Neither does it mention what empirical design it uses other than that there is a review of literature. It lists a few questions asked by that literature, but does not answer them.

I've read this abstract four or five times now, and all I want to know is what the structure of international trade is, and I can't tell.

I guess I'll actually have to read the thing.

FDI, Regulation, and Shifting Power Centers: China and Rio Tinto

On July 5th, without warning or explanation, Chinese officials arrested four Rio Tinto employees, one of them an executive and Australian citizen.  Later, China's state run media reported the arrests were connected with allegations that Rio Tinto obtained confidential documents revealing China's bargaining strategy for negotiating iron ore prices with the multinational mining firm.  Australian officials are particularly concerned since the detainees were given no access to outside communication and Chinese officials did not divulge any information about their whereabouts or the charges they face to Rio Tinto or the Australian government.

The ensuing diplomatic breakdown between China and Australia illustrates two points about the nature of foreign direct investment (FDI) today.

1) Power asymmetries are shifting.  

Most academic work on FDI treats developed (read OECD) countries as price makers and developing countries as price takers.  In other words, highly developed countries act on behalf of their multinationals by securing legal protection for multinationals' FDI in other countries.  This is mainly done through the use of Bilateral Investment Treaties (BITs).  The literature treats developing countries (China included) as grateful for whatever FDI they can get, and therefore willing to submit to OECD standards of legal protection for businesses.  

The problem with this view is that FDI sourcing patterns are shifting.  As the Chinese economy can support regional trade and FDI growth as well as export FDI to Africa and elsewhere, China doesn't need to cower to western demands for business protection.  Indeed, China never really has.  

Bottom line: predictions of convergence towards one standard of FDI legal protections depends upon the preferred regulatory level of key players.  China's rise underscores the possibility of multiple and competing regulatory regimes.

2)  The link between home country and multinational must be tested:

The focus on regulatory regimes like BITs assumes that home countries act as agents for their multinationals and that home countries discriminate against multinationals based on the multinational's home countries.  Talk that the recent events in China will lead to a backlash against Chinese multinationals looking to directly invest abroad depends upon the idea that countries will retaliate against Chinese-owned firms as well as the Chinese government.  And, the Chinese experience is an easy test of this link because many Chinese firms are in part owned by the Chinese government.  It is not entirely clear that this link holds more generally or consistently.