Many supplier firms are finding themselves vying for orders, which reduces their bargaining power

Many supplier firms are finding themselves vying for orders, which reduces their bargaining power

Broad-based policies are essential to improve poor garment industry working conditions and promote a better balance between the economic and social benefits of global supply chains, a new report suggests.

The International Labour Organization's (ILO) new annual flagship report 'World Employment and Social Outlook 2015', reveals that the globalisation of the garment sector has created a vast number of productive employment opportunities in developing economies.

This is particularly the case for vulnerable workers, such as unskilled women, youth and migrants. Since the sector requires a relatively low-skilled workforce and limited capital investment, it is often the first tier in the industrialisation process of developing economies, the report explains.

However, the study highlights that the vast majority of this employment generated takes place under poor working conditions.

With the exception of China-based retailing, many emerging and developing economies have found themselves trapped in the lower tier of production, unable to move up the supply chain to more knowledge-intensive tasks.

Lead firms in the garment supply chain tend to be large retailers or design houses that are concentrated in the US, the EU and Japan, which respectively account for 47.3%, 22.2%, and 6.9% of global imports in the garment sector, the report notes.

These firms will largely source from China, Vietnam, Indonesia, Mexico, Bangladesh, India, Cambodia, Pakistan, Sri Lanka and Turkey. However, some have recently started to source from suppliers in Africa, such as Swedish retailer H&M, which has begun sourcing from garment factories in Ethiopia.

A need for balance
The report, however, points out that many supplier firms are finding themselves vying for orders, which reduces their bargaining power. The creation of supplier firms in more countries, particularly following the end of the quota based trading system, has increased the competition and bargaining power advantages of lead firms.

Figures show, the profit margins of suppliers in Bangladesh, for example, fell from 24% in 1995 to 7% in 2004. Similarly, in Vietnam, a typical profit share of garment manufacturers ranges from 10-15%.

A high share of short-term contracts and highly variable working hours is also prevalent across the garment sector, partly attributable to the need for suppliers to be able to respond quickly to volatile demands.

So, while global supply chains tend to be associated with higher productivity in some countries, they are not necessarily associated with higher wages or improved working conditions, the report points out.

Additionally, knowledge and technology transfer can be an important spillover from global supply chain participation. However, the wage premium for higher skilled workers is not obvious across sectors.

A report late last year from The Boston Consulting Group (BCG) suggested the tipping point on pay and human rights in global apparel is on the horizon. Yet one industry observer is certain that low-income workers are likely to dominate the global garment-making workforce for a long time yet.

In Vietnam, for example, a country given one of the fastest growth forecasts between now and 2050 by PwC, a week-long strike at a factory in March, exposed a looming pension crisis and worker shortage in a country that many see as a key sourcing alternative to China.

Two weeks earlier, similar strikes took place in China at the factory's Guangdong sister plants.

Strikes are rare in Vietnam because the country's economy is growing fast enough - and the government has mandated sufficiently high wage increases - for workers to find jobs easily. But the management of the Social Insurance Law shows how much work is still required by government and firms to keep workers’ trust.

Where improvements have been made with respect to working conditions and pay, workers’ involvement has played an important role, the ILO report suggests. Financial or continuity commitments from lead firms can also provide an important channel through which to improve labour relations and working conditions in supplier firms.

The report offers the Bangladesh Accord on Fire and Building Safety has an example of a commitment by lead firms to providing suppliers with incentives to make improvements in safety condition such as continuity or increases in orders.

Supply chain policy considerations
The report highlights the growing role of global supply chains in terms of job creation, and suggests that in order to enhance productivity, economic development and creation of decent work, broad-based policy measure directed at specific sectors, firms and categories of workers are essential.

"Policies to enable better integration of global supply chains with domestic sectors is essential to maximize spillover effects, such as diffusion of knowledge, technology and best management practices," authors noted.

"In addition, well-designed labour regulations and well-functioning labour market institutions to match skill demands between sectors and improve compliance are essential to translate economic benefits into better working conditions. Social dialogue at the firm, sector, national and international levels is also crucial in this regard, as it may secure both productivity improvements and enhanced worker rights."

Trade and investment agreements can also be instruments in the promotion of coherent policy frameworks, the report suggests, including with respect to international labour standards. In particular, those that aim to align standards can set the framework for regional and global supply chain development. Indeed, an increasing number of developed and developing countries are entering into trade and investment agreements that integrate labour provisions.

Social dialogue, the report says, is also crucial for shaping an enabling environment to provide better links between economic and social benefits in the global supply chain.

In the garment sector, international buyers have increasingly been engaging in social dialogue at the regional and international levels to promote respect for labour standards and mitigate tensions along the supply chain. The ILO points to its 'Better Work Programme', which supported the Government of Vietnam in designing reforms to the law that open up space for freedom of association and collective bargaining.

So, while global supply chains can actively contribute to economic growth, the report is keen to point out that the quality of employment and social upgrading requires additional effort.

"Both labour regulations and enforcement are needed at the bottom of supply chains. More generally, the implementation of international labour standards, starting with fundamental standards, is crucial to ensuring parallel development of economic and social benefits throughout the supply chain. This is the path to upward, rather than downward, convergence."