Race to the Bottom

from the book

When Corporations Rule the World

by David C. Korten

published by Kumarian Press, 1995


While competition is being weakened at the core, it is intensifying among smaller businesses, workers, and localities at the periphery as they become pitted against one another in a desperate struggle for survival. What the corporate libertarians call "becoming more globally competitive" is more accurately described as a race to the bottom. With each passing day it becomes more difficult to obtain contracts from one of the mega-retailers without hiring child labor, cheating workers on overtime pay, imposing merciless quotas, and operating unsafe facilities. If one contractor does not do it, his or her prices will be higher than those of another who does. With hundreds of millions of people desperate for any kind of job the global economy may offer, there will always be willing competitors. Faced with its own imperatives, the core corporations can do little more than close their eyes to the infractions and insist that they have no responsibility for the conditions of their contractors.

Modern Slavery

Descriptions of the working conditions of millions of workers, even in the 'modern and affluent" North, sound like a throwback to the days of the early industrial revolution. Consider this description of conditions at contract clothing shops in modern affluent San Francisco:

Many of them are dark, cramped and windowless.... Twelve-hour days with no days off and a break only for lunch are not uncommon. And in this wealthy, cosmopolitan city, many shops enforce draconian rules reminiscent of the nineteenth century. "The workers were not allowed to talk to each other and they didn't allow us to go to the bathroom," says one Asian garment worker . . . Aware of manufacturers' zeal for bargain-basement prices, the nearly 600 sewing contractors in the Bay Area engage in cutthroat competition-often a kind of Darwinian drive to the bottom.... Manufacturers have another powerful chip to keep bids down Katie Quan, a manager of the International Ladies Garment Workers Union in San Francisco, explains, "They say, 'If you don't take it, we'll just ship it overseas, and you won't get work and your workers will go hungry.'"

In 1992 a [Department of Labor] investigation of garment shops on the U.S. protectorate of Saipan found conditions akin to indentured servitude: Chinese workers whose passports had been confiscated, putting in eighty-four-hour weeks at sub-minimum wages.

The line between conditions in the South and the North as defined by geography becomes ever more blurred. Dorka Diaz, a twenty-year old textile worker who formerly produced clothing in Honduras for Leslie Fay, a U.S.-based transnational, testified before the Subcommittee on Labor-Management Relations of the U.S. House of Representatives that she worked for Leslie Fay in Honduras alongside twelve- and thirteen-year-old girls locked inside a factory where the temperature often hit 100 degrees and there was no clean drinking water. For a fifty-four-hour week, she was paid a little over $20. She and her three-year old son lived at the edge of starvation. In April 1994, she was fired for trying to organize a union.

When the black women who toiled over knitting machines in a Taiwanese-owned sweater factory in South Africa for fifty cents an hour made it known that with the election of Nelson Mandela they expected "a union shop, better wages and a little respect," the Taiwanese owners responded by abruptly closing their seven South African factories and eliminating 1,000 jobs. Low as the wages were, the cost of labor in South Africa is twice that of labor in Brazil or Mexico and several times that in Thailand or China. Noting that prospective foreign investors have turned wary of South Africa, the New York Times suggests, "There are doubts about the Government's long-term commitment to capitalism, about whether Mr. Mandela can contain the expectations of the impoverished majority." In the world of big money and multimillion-dollar compensation packages, greed is a worker who wants a living wage.

In many Southern countries, to say that conditions verge on slavery is scarcely an exaggeration. China has become a favorite of foreign investors and corporations seeking cheap labor and outsourcing for offshore procurement at rock-bottom prices. Business Week described the prevailing conditions of Chinese factory workers:

In foreign-funded factories, which employ about 6 million Chinese in the coastal provinces, accidents abound. In some factories, workers are chastised, beaten, strip-searched, and even forbidden to use the bathroom during work hours. At a foreign-owned company in the Fujian province city of Ziamen, 40 workers-or one-tenth of the work force-have had their fingers crushed by obsolete machines. According to official reports, there were 45,000 industrial accidents in Guangdong last year, claiming more than 8,700 lives.... Last month ... 76 workers died in a Guangdong factory accident.

Although the Chinese government reportedly is trying to tighten up on standards, it has faced enormous problems of unemployment since its decision to free up market forces. Tens of millions of rural workers are streaming to the cities. Urban unemployment stood at 5 million in mid-1994, a 25 percent increase in a year. Two million workers lost their jobs in Heilongjiang province in 1993 alone. Millions more urban workers face pay cuts, and half of the government-owned enterprises that employ approximately half of the urban workforce are losing money, creating prospects of massive layoffs and plant closings. Government efforts to tighten up on standards in this "free-market miracle" are also hampered by skyrocketing rates of crime and corruption.

In Bangladesh, an estimated 80,000 children under age fourteen, most of them female, work at least sixty hours a week m garment factories. For miscounting or other errors, male supervisors strike them or force them to kneel on the floor or stand on their heads for ten to thirty minutes.

It isn't only in the garment industry. In India, an estimated 55 million children work in various conditions of servitude, many as bonded laborers-virtual slaves-under the most appalling conditions. Each child has his or her own story. A few months after his rescue from forced labor, Devanandan told a reporter that he had been coaxed to leave home by a promise of wages up to $100 a month for working at a loom two hours a day while going to school. When he agreed, he found himself locked up in a room where he ate, slept, and was forced to work knotting carpets from four in the morning till late evening for pennies in pay.

Former Indian Chief Justice P. M. Bhagwati has publicly testified to observing examples of boys working fourteen to twenty hours a day: "They are beaten up, branded [with red-hot iron rods] and even hung from trees upside down." The carpet industry in India exports $300 million worth of carpets a year, mainly to the United States and Germany. The carpets are produced by more than 300,000 child laborers working fourteen to sixteen hours a day, seven days a week, fifty-two weeks a year. Many are bonded laborers, paying off the debts of their parents; they have been sold into bondage or kidnapped from low-caste parents. The fortunate ones earn a pittance wage. The unfortunate ones are paid nothing at all. The carpet manufacturers argue that the industry must have child laborers to be able to survive in competition with the carpet industries of Pakistan, Nepal, Morocco, and elsewhere that also use child laborers.

As we rush to enter the race to the bottom in a globally competitive world, it is sobering to keep in mind just how deep the bottom is toward which we are racing.

The Limits of Social Responsibility

Within the apparel industry, a few socially concerned firms such as Levi Strauss, Esprit, and The Gap are attempting to live by their values. They are proving that a responsible, well-managed company need not tolerate the worst of the conditions described above, but they face the same competitive pressures as others in their industry. Almost inevitably, such firms find themselves developing split personalities. In the end, they finance their public good works and the good pay and conditions of their headquarters staffs by procuring most of the goods they sell through contractors that offer low wages and substandard working conditions.

Consider specifically the case of Levi Strauss, a company widely acclaimed as a leader in the realm of corporate responsibility. In April 1994, the Council on Economic Priorities gave Levi Strauss an award for its "unprecedented commitment to non-exploitative work practices in developing countries." In 1984, the company was named one of the hundred best companies to work for in America. In June 1992, Money magazine ranked it first among all U.S. companies for employee benefits. Bob Haas, chief executive officer (CEO) of Levi Strauss, was featured in the August 1, 1994, cover story of Business Week titled "Managing by Values," which emphasized his belief that social responsibility and ethical practice are good business.

In 1985, Bob Haas, as CEO and a member of the Levi Strauss family, led a $1.6 billion leveraged buyout of the company, taking it private specifically to prevent a takeover by outside speculators. The fact that 94 percent of the stock is in Haas family hands has given the company more flexibility in maintaining its social commitment than a publicly held company might have in an era of hostile takeovers.

Under Haas's leadership, Levi Strauss has set strict standards with regard to the work environment. As evidence that they mean it, the Levi Strauss board of directors voted unanimously to close out $40 million a year in production contracts in China in protest of human rights violations. When the company found that its contractor in Dhaka, Bangladesh, was hiring girls as young as eleven as full-time seamstresses, it worked out an agreement by which Levi Strauss would continue to pay the wages of these girls while sending them to school and paying for their uniforms, books, and tuition. When they reach age fourteen, the minimum employment age set by International Labor Organization standards, they will return to work. By the standards of the industry, Levi Strauss is a candidate for sainthood. But it is sobering to see how constrained even a Levi Strauss can be.

Although Haas asserts that Levi Strauss has made every effort to keep as many of its production jobs in the United States as possible, during the 1980s, it closed fifty-eight U.S. plants and laid off 10,400 workers. According to Haas, if the company had made its decisions on purely economic grounds, its remaining thirty-four production and finishing plants would all have been closed in favor of overseas production.

Even at its plants in the United States, the core-periphery phenomenon is evident. When the authors of The 100 Best Companies to Work for in America visited the Levi Strauss plant in El Paso, Texas, they found that Money magazine had ranked the company number one on the basis of the benefits enjoyed by its headquarters staff, not by staff at its plants. The benefits received by the El Paso production workers were little different from the marginal conditions at other local textile factories. The authors decided not to include the company among the 100 best in the book's revised edition.

Spreading Cancer

We have focused here on U.S.-based multinationals, because their dysfunctions seem to be spreading through the world like a cancer. By way of 1994, a binge of corporate restructuring in Europe, similar to that in the United States, had pushed Europe's unemployment rate to 10.9 percent. Even these rates, high as they are, may mask a much deeper dysfunction. In Belgium, unemployment was 8.5 percent in 1992, but 25 percent of the workforce was living on public assistance. Persistent joblessness is resulting in growing social unrest, exacerbating racial tensions, and sparking a vicious backlash against immigrants. Joblessness is especially acute among youth, whose unemployment rate s twice that of the general population and still rising. On March 25, L994, 50,000 students marched down a Paris boulevard, "taunting police and chanting slogans demanding jobs." A survey of 3,000 European teenagers found them "confused, vulnerable, obsessed with their economic futures.

Pointing out that the unemployment rate in Europe has averaged about 3 percentage points higher than in the United States, The Economist cautioned "no trade barrier will keep out the technological changes hat are revolutionizing work in the rich world; and a trade war is sure o destroy more jobs than it saves. It counseled Europe to respond by emulating the United States to reduce the social safety net benefits that give the unemployed little incentive to seek work," minimum wages that cost young workers their jobs," employer social security contributions hat reduce demand for labor, and "strict employment-protection rules" hat discourage firms from hiring by making "it hard, if not impossible, ~ lay off workers once they are on the payroll." To those who point out hat the quality of jobs in America has deteriorated as a consequence f such policies, The Economist has a ready answer:

Too many [of the jobs being created in America], say the merchants of gloom, are part-time, temporary and badly paid. The real wages of low-skilled workers have fallen over the past decade. Yet in comparison with Europe, this should be seen as a sign of success, an example-of a well-functioning labor market-not a failure. As manufacturing has declined, America and Europe have both faced shrinking demand for low-skilled labor. In America, the relative pay of these workers was allowed to fall, so fewer jobs were lost. European workers, by contrast, have resisted the inevitable and so priced themselves out of work."

In short, Europe's unemployment problem is a result of overpaying the poor, taxing the rich, and imposing regulations on European firms that limit their ability to get on with serious downsizing. The Economist editorial pointed to moves by various European countries to reduce minimum wages, cut payroll taxes, and loosen employment-protection laws as signs of hope for Europe. Business Week offered similar counsel:

To ensure it remains competitive once the down-cycle wanes, Europe must be willing to see more of its low-value-added manufacturing jobs move to Eastern Europe and elsewhere.... And it must reduce farm subsidies while continuing to hammer away at high wages and corporate taxes, short working hours, labor immobility, and luxurious social programs. If Europeans don't follow these prescriptions, this recession may be doomed to be more than just a cyclical one.... Putting up trade barriers will only insulate Europeans from the discipline they need to maintain.

Although they are running a bit behind the United States, the evidence suggests that European companies and governments are increasingly heeding this advice, which means that the unemployment, racial tension, and social unrest currently plaguing Europe are almost certain to spiral upward. We may presume that The Economist will then praise Europe for its success.

Although Japan, with unemployment below 3 percent, continues to be the full-employment champion of the industrial world, there is evidence that the commitment there to lifetime employment has begun to break down and that a growing number of Japanese are experiencing the pinch of joblessness. A series of economic shocks has leaf Japanese managers to look to the United States for lessons on increasing efficiency. According to Michael Armacost, former U.S. ambassador to Japan:

Japanese business leaders-who just a few years ago thought they had nothing further to learn from us-are examining American business practices with renewed interest and emulating some with interesting results.... Daiei, one of the country's largest chain stores, says it will seek to reduce retail prices by 50 percent over three years.... Wal-Mart Stores recently established links with two of Japan's supermarket chains.... Japanese executives are now studying America's experience with corporate downsizing, merit-pay packages and investment practices.

Armacost goes on to urge American trade negotiators to focus on pushing for regulatory reforms to accelerate these processes.

With or without U.S. tutelage, it is already happening. Domy Co., a discounter, is importing Safeway cola for sale in Japan at forty-seven cents a can, undercutting the price of local beverages by 55 percent. It sees great potential for imports of Safeway lemon-lime soda, cookies, and bottled water. The Japanese government has relaxed size limits on new retail outlets as well as limits on store hours and business days- with the consequence that retailers are seeking the wide-open spaces of the suburbs, and strip malls are springing up throughout the countryside. Retailers are turning to cheap imports, with China as a preferred source. The burgeoning discount retailers have become the darlings of the Japanese stock market. Faced with price cutting based on low-cost imports, Japanese companies have been restructuring to increase their efficiency.

In January 1995, an accord was announced between the United States and Japan under which U.S. investment houses would have the right to participate in the management of Japanese pension funds. Wall Street investment managers may soon be positioned to give the Japanese lessons in their home territory on the money game, predatory finance, corporate cannibalism, and managed competition.

The trend toward concentration in the retail sector is spreading rapidly to other countries, partly as a consequence of changes in trade rules that open domestic markets to the large retail chains. On January 14, 1994, only two weeks after the North American Free Trade Agreement (NAFTA) went into effect, Wal-Mart announced its move into Canada, which began with the purchase of 120 Woolco discount department stores from Woolworth Canada. Business Week called it "a full-scale invasion of the Canadian market." Investors rushed to sell holdings of Canada's major retail chains, which were believed to be ill-equipped to meet Wal-Mart's price competition. Canadian retailing consultant John Winter predicted that by the late 1990s, "half of the Canadian retailers you see up here now may not be in business.

With the signing of NAFTA, U.S. retailing giants were poised to quickly "conquer retailing" in Mexico as well, but according to Business Week, "Mexico's army of bureaucrats, steeped in protectionist habits, is plaguing them with mountains of paperwork, ever changing regulations, customs delays, and tariffs of up to 300 percent on low-priced Chinese imports favored by the discounters. Mexico thought that it had a free-trade agreement with the United States to become the major low-wage supplier of the U.S. market. It seems to have balked when confronted with the reality that U.S. retailers intended to use NAFTA to open Mexico to goods produced by even lower paid Chinese workers.

The complaints of the U.S. retailing giants aside, we might conclude that the Mexican government showed better sense in putting up a few roadblocks to slow the assault of the mega-retailers than it did in spending millions to promote NAFTA in the first place.

The dream of the corporate empire builders is being realized. The global system is harmonizing standards across country after country- down toward the lowest common denominator. Although a few socially responsible businesses are standing against the tide with some limited success, theirs is not an easy struggle. We must not kid ourselves. Social responsibility is inefficient in a global free market, and the market will not long abide those who do not avail of the opportunities to shed the inefficient. And we must be clear as to the meaning of efficiency. To the global economy, people are not only increasingly unnecessary, but they and their demands for a living wage are a major source of economic inefficiency. Global corporations are acting to purge themselves of this unwanted burden. We are creating a system that has fewer places for people.

When Corporations Rule the World