Entrepreneurs normally become wealthy by exploiting the capital and production of the labour force. Whilst that may be true in terms of financial wealth, I believe that having an extremely imbalanced economy in which an elite minority controls a poor majority will create a host of problems, leading to low qualities of life for entrepreneurs despite their wealth. Paying higher wages to workers would reduce the financial wealth of entrepreneurs but would increase their quality of life in the long term as Bangladesh is lifted out of poverty. An even better scenario would be if the entrepreneurs created or supported social enterprises, to avoid wealth being extracted for the benefit of an elite minority.
Why did Savar happen?
The recent tragedy at Savar in Bangladesh in which over 1,100 people died got me thinking because there was a bank housed in the same building which sent its staff home, however, the garments factories did not.
Why was this? I can only guess that it was in the pursuit of profit.
If the factories were to close, production would have ceased and deadlines may not have been met. The owners could possibly have been worried about losing future contracts or maybe they could have been liable to pay damages for late delivery, breach of contract or non-performance. In addition, each day in which physical premises are not utilised by a business represents wasted rent and overhead costs. Possibly staff would have had to have been compensated for not working.
In the pursuit of maximising shareholder wealth, financial profits were prioritised ahead of staff welfare.
In economic terms, this was clearly a mistake on this occasion. The earning capabilities of the owners will be £nil if they’re imprisoned and their business in ruins.
But what about all the other garments factories which exploit their labour forces in terrible conditions for miserable pay on a daily basis?
Shareholder wealth is not the whole story
I have nothing against the traditional capitalist business model in which entrepreneurs employ capital to maximise wealth for shareholders. This model can be used to generate wealth and to help nations to grow and to keep pace with an increasing population. However, a society which cannot feed, house and clothe a significant proportion of its population will suffer from major problems.
Looking only at shareholder wealth, therefore, ignores the non-pecuniary poverty of entrepreneurs. In a country such as Bangladesh, even if factory owners and entrepreneurs are wealthy in terms of money, they are poor in many ways: they have to suffer from economic and political instability, poor infrastructure, high risk/rate of crime, courts which don’t function, corruption at every level and in every section of society and bureaucracy etc etc. Life is not comfortable at all and I have heard many complaints.
Potential benefits from higher wages
I’ve not yet studied the economics of social enterprise or the triple bottom line, but would be interested to see the impact on entrepreneurs from paying higher wages to staff and looking after their welfare. In my mind, I would like to think that the entrepreneurs would gain overall.
Direct impact on entrepreneur’s business: Potentially, higher costs from higher wages and running costs may outweigh any increase in productivity from satisfied/motivated staff.
Indirect impact from wider society:
- Higher wages will lead to an increase in consumer spending overall. For example, £100 earned by 1 person may spend £40 whereas £100 earned by 100 people will see £1 spent each.
- The poor spend a disproportional level of their income on the basic goods and services needed to survive. Consequently, as their income levels rise, they will also spend more to first, fulfil their needs, and they will eventually start spending on non-essential items and luxuries. The rich on the other hand, save large proportions of their wealth and much of it will not even benefit the country as it will be saved or invested overseas.
Effectively, by reducing the profit extracted by entrepreneurs, wealth is spread more equally through society. This should lead to more economic flows from consumers to businesses and back to workers again and the multiplier effect would take hold. I would expect both consumption and investment to increase without being funded by debt. Higher GDP/growth would increase tax revenues which could be used to invest in infrastructure, education and paying higher public salaries to eliminate corruption. Export led industry would help to control the balance of payments and support imports. In the long term, this would ultimately help society to improve as a whole, the benefits to be enjoyed by every citizen, regardless of their wealth.
It would take a long time and would obviously need a lot of political upheaval as well, but perhaps the children of the entrepreneurs would reap the benefits, as well as the rest of society.
I would also like to consider the Asian Tigers who had export led growth miracles which improved their economies and plight of the poor significantly, whilst initially employing many in sweatshops. They generally moved on to higher tech industries and the skills and wealth of workers generally increased. However, the key issue is that they generally had partially/fully functioning states with civil servants, bureaucrats, politicians and state led companies all working together for the good of their nations (although there were some tyrants and some sectors of society suffered) and significant investment in infrastructure, including FDI. Also, many companies in the Asian Miracle were not focussed on making profits but were solely focussed on increasing output and therefore, wealth, which is why they amassed great levels of debt.
In the case of Bangladesh, the very people who could help the economy seem to be the worst and siphon off the wealth off the nation through their corruption, so unfortunately it would appear to be impossible to apply the lessons from the Asian Miracle with the current regimes.
In an ideal world, entrepreneurs could be persuaded to extract less profit, and this could be used to pay higher wages.
Muhammad Yunus would like to see a higher level of minimum wages in export led industries. This should be based on a living wage with which people can support their families. However, its possible that entrepreneurs would seek to protect profits and reduce the labour force whilst increasing workloads or potentially accelerate the mechanisation of production processes where feasible. In a country such as Bangladesh, I understand that there may be many companies who flout the existing regulations and the illiteracy of the workforce and incompetency/corruption of authorities makes it difficult to enforce.
One possibility could be to encourage social enterprises which operate on sound business principles, but without profit extraction. The profits are ploughed back into the business or community. Could charities/NGOs such as BRAC create or support businesses that would compete with and defeat the major profit making garment factories? Apart from political obstacles, the main problems would appear to be the cost of investment to create factories and then to hire talent to plan/implement strategy, win contracts and to run operations. But I would like to think think that both could be surmountable with enough donations or volunteers. They could potentially start with small operations and increase in scale as more orders are sourced.
Note: this blog is written without any research and I would really like to find out about the profit margins in particular!