Deputy Undersecretary Sandra Polaski
Talking Points as Prepared for Delivery
Better Factories Cambodia 10th Anniversary
Better Work Conference
November 19, 2009
- I was involved in the original inception and development of the Cambodia Better Factories project, and I consider it to be one of the most successful policy innovations that I have ever seen. And so it is a great pleasure and source of satisfaction for me to be here celebrating the 10th anniversary of that program with some of the other major architects, most notably Senior Minister Cham Prasidh and Ros Harvey.
- The Better Factories Cambodia project demonstrated that the relationship between trade, economic growth and strong labor protections can be constructed as a virtuous circle, with each reinforcing the other.
- This successful and path-breaking program was the result of strong cooperation and problem-solving involving Cambodia, the United States government, including both the Dept. of Labor and the Dept. of State, and the ILO.
- Eventually, the success of the program attracted critical international support, including notably from the IFC and donors that included AFD, New Zealand and others.
- It was a case of learning by doing we had many actors who wanted to achieve meaningful progress for Cambodia its government, economy, firms and especially its workers. We solved each challenge as it arose and the net result is a coherent strategy that can be examined, learned from and replicated.
Two distinct phases
- In order to understand the key public policy lessons, it is important to remember that the project had two distinct phases.
- At the beginning, it was constructed as a positive trade incentive, with additional market access provided by the U.S. to Cambodia each year in response to demonstrable improvements in labor rights and working conditions the previous year.
- However as the project involved, it became clear that it provided tangible economic and policy benefits even without the extra market access incentive. As you know, the Cambodian government and the private sector decided to continue the program after the quota system ended.
- As I discuss the lessons learned from the program, I will emphasize that the key structures of the program were created in the context of positive market incentives (that is, the quota bonuses) but survived the end of the quota system because of the tangible and substantial benefits that they provided to the participants.
- This is an important point, because there was a time when some observers claimed that the Cambodia model was successful only within and because of the quota system. Time has demonstrated that conclusion to be incorrect.
Key elements of success
- There are four core elements that underpin the success of the Cambodia approach. They are 1) the alignment of the incentives facing the different actors in the Cambodian garment sector, both public and private; 2) full, transparent reporting on the conditions in the sector's workplaces; 3) the integrity and credibility of the monitoring system; and 4) universal participation by all firms in the sector.
- At the initial stages of the model, the quota incentive was used to align the economic incentives facing the government, investors, international buyers, employers, and workers.
- Because the positive incentive of annual increases in the quota was based on positive improvements in working conditions, private garment manufacturers benefited through increased sales and exports and the government benefited through a growing economy and revenue when workers benefitted.
- Because the quota determinations were made annually, there was a clear and close relationship between the decisions made by factory owners regarding compliance with Cambodian labor law and respect for workers' rights on the factory floor and greater market access.
- So initially, it was the promise of increased market access that aligned incentives. However as I discuss the other critical elements, I will identify how that alignment achieved through a major economic benefit gradually came to rely on other forces to keep the alignment in place.
Transparent reporting on conditions in factories
- The second essential element of the model that deserves close attention is transparency the way the factory conditions were monitored and the information was transmitted to all potential market participants.
- The practice that was developed in Cambodia and which I would argue is essential to the success of the model is that reports on the findings of the ILO monitor were published on the internet, by factory, with the factory being named. This did not happen immediately: after initial factory inspections, managers were given a period of months to remedy any problems identified. After a follow-up visit, the results found after that period of remediation were made public. This placed the emphasis on improving conditions, with the risk of exposure being not the object but only a credible deterrent to continued non-compliance.
- We know that access to information is a requirement for markets to operate efficiently. What the Cambodia model demonstrated was that information about factory conditions in a small developing country could provide information that in effect allowed the country to arbitrage the difference between its level of development and labor costs compared to the expectations of consumers and publics in much wealthier countries.
- The credible information about workers' conditions in Cambodia allowed international buyers to insure and protect their reputations and brand value by placing order with suppliers that were know to comply with labor standards.
- This was a form of risk insurance, not available elsewhere, that attracted buyers and investors to Cambodia, expanding the sector and with it the export and jobs that were critical to the small economy.
- At the same time, the composition of the sector changed, with firms that chose to comply with labor laws and international standards attracting increased orders and growing, while those that pursued a strategy of non-compliance or "sweating" lost orders and many eventually went out of business.
- As the monitoring system and its reputation became established, it gradually took over the role of aligning economic incentives in favor of better working conditions.
Integrity and credibility of the monitoring system
- The third essential element of the model is the unprecedented level of integrity and credibility it achieved. This was due in part to the very nature of the ILO, which of course has a well-established reputation among employers, workers and governments and is seen as expert, credible, and independent in judging workplace standards. However it was also a result of sound choices made by the ILO staff at the beginning and through out the process.
- The most notable early choice is the one I already mentioned, to publish the results of the monitoring in a transparent way, on the internet, reporting on the conditions in factories by name.
- This was essential to align the incentives facing each individual factory. It prevented free rider problems.
- The ILO also instituted a number of mechanisms to guard against corruption and prevent compromises of the information found.
- The high level of integrity created an additional positive incentive or financial benefit for the factories. Many buyers were able to reduce or eliminate 3rd party inspections of their suppliers because of the reliability of ILO monitoring.
- Estimates of the cost of the ILO monitoring program are about $3 per worker per year, compared to third-party monitoring costs of up to $50 per worker per year.
Full, sector-wide participation
- The final element of the program that I want to mention which was critical to its success of the program is universal participation.
- From the beginning, the Cambodian government wisely decided to require that all firms benefiting from the textile agreement with the U.S. should participate in the Better Factories project. Even after the quota system expired, the government has maintained this essential requirement.
- The benefits of sector-wide participation are many. First, at the most obvious level, it ensured that all factories were judged on compliance with the national labor laws and internationally recognized worker rights. Compliant factories were not vulnerable to be underbid by factories operating illegally.
- Second, the sector-wide participation meant that the reputation of Cambodia and its apparel industry as a whole gained global respect and attracted expanded investments and orders. The huge growth in the sector much of it after the end of the quota system would not have occurred if only a subset of garment firms were covered.
- Sector-wide participation also protected the integrity and transparency of the reporting. If only some firms joined the program, they would be subject to greater transparency than factories outside the program, which would create perverse incentives for non-participation.
- What we are seeing as Better Work expands to other countries is that this sector-wide participation may be a sine qua non for success. I would be happy to explore that further in the discussion period.
Lessons for public policy
- These core elements were essential to the success of the Cambodia Better Factories model, for the reasons I mentioned.
- They are important as analytical foundations for how and why the program works to put it in Better Work parlance, what are the drivers of the program and its success.
- They are also important as guideposts for other governments, firms and donors that want to apply the lessons from the Cambodia model.
- We believe we have an excellent model in Better Work and we look forward to working with the ILO and IFC and other partners to apply it and achieve great successes in other developing countries.