Friday, July 16, 2010

Factor Price Equalization, Part II

. Friday, July 16, 2010

This NYTimes article, which features a quote by Barry Eichengreen, focuses on the shift of textile manufacturing from China to places like Bangladesh:

It is the sort of place to which foreign manufacturers may increasingly turn, if the rising wage demands of factory workers in China prompt companies to seek new pools of cheap labor elsewhere.

Already, in factories behind steel gates and tall concrete walls, tens of thousands of workers, most of them women, spend their days stitching T-shirts, pants and sweaters for Wal-Mart, H&M, Zara and other Western retailers and brands.

One of the Bangladeshi companies here, the DBL Group, employs 9,000 people making T-shirts and other knitwear. Business has been so good that the company is finishing a new 10-story building with open floors the size of soccer fields, planted with row after row of sewing machines.

Eichengreen adds on his Twitter that China should be worrying that this trend will continue. Maybe it should, but China is moving up the value-added production ladder very rapidly. It may be willing to lose some textile jobs so long as it is adding semi-durable and technological jobs. Importing consumer non-durables from places Bangladesh could help keep inflation down a bit and help steer investment to more lucrative production. Such as providing inputs to manufacturing in Bangladesh, as the article points out. Yes, China still has hundreds of millions of under-employed, but many of those were never going to work in sweatshops anyway. China should be a bit worried... but not mortified.

In recent posts I noted that a rise in China's exchange rate would not necessarily benefit American import-competing manufacturers, since production would simply shift to other developing countries. Consider this another data point supporting that claim.

Also note that workers in Bangladesh have already gained more bargaining power than they had before the trade came, and that multinational corporations have (at least sometimes) sided with the labor movement. Local corporations, however, have resisted:

In January, H&M, Wal-Mart, Gap, Tesco and other Western clothing buyers asked the Bangladeshi government to raise the minimum wage and reset it every year, although the group did not specify what the wage should be. A spokeswoman for H&M, Malin Bjorne, said the company was willing to pay more for clothing to help support higher wages. It is unclear whether other companies would do the same.

But factory owners here argue that a big increase in wages would make them uncompetitive against Vietnam and other big producers, which have higher labor costs but also have better infrastructure and are more efficient producers. If that happened, Bangladesh’s China opportunity could prove all too fleeting, they say.

“If it’s 5,000 taka, I would close all my factories,” said Anisul Huq, a former head of the Bangladeshi garment industry’s trade group and a factory owner whose customers include H&M and Wal-Mart. “Even if it’s 3,000 taka, lots of factories will close within three or four months.”

Here we see the "California effect" and the "race-to-the-bottom" in play at the same time. Sort of. These countries are practically at the bottom already, so it's not clear how much further they can go. And even though some manufacturing is shifting around looking for the lowest wages, it appears that overall wages and working conditions are going up everywhere MNCs go. Yesterday China, today Bangladesh, tomorrow Vietnam?


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Factor Price Equalization, Part II




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