In The News

Cambodia’s Garment Sector and the Global Economic Crisis

July 8, 2009

In Cambodia, the garment sector is certainly where the global economic crisis is having the most impact. As an essential pillar of the country’s economy, it accounts for about 80 percent of all exports and, until recently, employed more than 300,000 employees. In the last few months, experts say between 40,000 to 60,000 garment workers have lost their jobs. Since it is estimated that a single garment worker helps support about five people in his/her home village, the social and economic impact of the downturn is a big concern for countless factory owners, the government, and, of course, the workers themselves.

One of the questions often raised in an attempt to mitigate the impact of shrinking international demand and ensure that Cambodia will remain globally competitive, is whether labor compliance (one of Cambodia’s oft-cited comparative advantages) will be sufficient to ensure a future for the sector.

Across the garment industry globally, Cambodia is famous for its Better Factories program, a labor compliance program for the garment industry run by the International Labour Organization (ILO) since 2001, when a trade agreement between the United States and Cambodia linked access to U.S. markets to improved working conditions. The program has been a model of cooperation between the ILO, the Royal Government of Cambodia, the Garment Manufacturers Association in Cambodia, and unions. The objective is to support the development of the Cambodian garment sector by guaranteeing a level of labor compliance that gives a competitive edge to the local factories. The program provides regular and independent reports on factory working conditions according to national and international standards and helps factories to improve working conditions and productivity. These standards serve as a guarantee and a key criterion of international buyers’ sourcing strategies.

So, if compliance to labor standards is always mentioned by international buyers and most factory owners as a basic and necessary condition to attract large, well-known international buyers, does labor compliance really make a difference?

I had the opportunity to interview a few international buyers responsible for sourcing garments in Bangladesh last year, just before the economic crisis. The case of Cambodia was mentioned regularly as an alternative to Bangladesh, China, and Vietnam. When asked about their selection criteria, these buyers from well-known brands unanimously declared that compliance to national standards of working conditions was a basic requirement. They said, a factory that did not meet this criterion would automatically be disqualified as a source for exports to the U.S. or the EU.

The fact that Cambodia can offer this “guarantee” was definitely seen as an advantage by these buyers. However, they also insisted that labor compliance was only the beginning of a supplier’s selection process and that many other elements had to be taken in to account. It is important to note that all of them, for example, expressed concern about the risk of labor unrest. They perceived, rightly or not, there being a higher risk for unrest in Cambodia than in other countries. The additional costs and, more importantly, the uncertainty of delivery associated to this risk were mentioned as factors that could outweigh the benefits provided by a good labor compliance image. Clearly, if the label of “good compliance” is appreciated by international buyers, it is not sufficient in itself in determining their buying decisions as the prime sourcing criteria. Key factors remain: price, quality, lead time and, at the end of the day, price again.

Recent industry figures show that the garment sector in Bangladesh may ride out the global financial crisis better than Cambodia. According to figures from the Ministry of Commerce, garment exports from Cambodia dropped by nearly 20 percent in the first two months of 2009, compared with the same period last year. A closer analysis shows that the situation varies depending upon export markets. Exports to markets other than the U.S., the EU, and Canada have actually grown, but the overall situation remains worrying. Bangladesh and Vietnam have actually seen their exports to the U.S. continue to grow during the same period. In a country that relies on the garment sector for almost 80 percent of its exports, the situation is critical. It is therefore not surprising to see some factory owners in Cambodia questioning the importance of labor compliance as a comparative advantage for the country’s industry. They are also becoming skeptical about the declared commitment of international buyers to labor compliance and claim that higher labor standards haven’t stopped retailers from demanding ever lower prices.

It is difficult to know where the Cambodian garment industry would stand if it didn’t have the reputation of not only complying with labor standards but being able to “prove” it, thanks to the Better Factories monitoring. The question today is whether the “labor compliance” label will help Cambodian garment factories mitigate the impact of the international crisis. The reality is that if compliance to labor standards is a must and has definitely helped keep Cambodia on the map of international buyers, more efforts must be made to improve the competitiveness of the country and the productivity of its factories. This is an on-going process that the government, the private sector, and partners like ILO are deeply involved in.

At a time of economic crisis, the challenge of linking good labor compliance to increased productivity and competitive costs is more important than ever. Facing this challenge requires the commitment of all partners (government, employers, and unions), as well as of buyers and consumers to ensure that Cambodia can build on its successes. It also implies that the commitment of a whole industry to higher labor conditions will be backed up by a general improvement of the business environment. Without continuous efforts to reduce the cost of doing business in Cambodia, the cost in money and time of administrative tasks, the uncertainty of the delivery time, etc., the advantage of having a positive “labor compliance” label runs the risk of being cancelled out by its inability to be competitive.

Véronique Salze-Lozac’h is The Asia Foundation’s Regional Director for Economic Programs in Cambodia. She can be reached at vsalze-lozach@asiafound.org.

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