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date: 20 August 2017

Labor and the Global Political Economy

Summary and Keywords

What does current scholarship suggest about the relationship between the rights of workers in the developing world and the global economy? Contemporary multinational production includes both direct ownership of manufacturing facilities abroad and arm’s length subcontracting and supply chain relationships. Thus far, political economists have paid greater attention to the former; there are various reasons to expect that multinational firms may have positive, rather than negative, effects on workers’ rights. For instance, some multinationals are interested in hiring at the top end of local labor markets, and high standards serve as a tool for recruitment and retention. Multinationals also could bring “best practices” from their home countries to their local hosts, and some face pressure from shareholders and consumers—given their visibility in their home locations—to act in “socially responsible” ways. Hence, while directly owned production does not automatically lead to the upgrading of labor standards, it can do so under some conditions.

Supply chain production is likely more mixed in its consequences for workers. Such production involves arm’s length, subcontracted production, in which multiple potential suppliers typically compete to attract business from lead firms. Such production often includes more labor-intensive activities; minimizing costs (including labor costs) and lowering production times can be key to winning subcontracts. We may therefore expect that subcontracted production is associated with greater violations of labor rights. It is worth noting, however, that research regarding the consequences of supply chain production—and the conditions under which such production may lead to improvements for workers—is less advanced than scholarship related to foreign direct investment.

The governance of labor rights in a supply chain framework is marked by several challenges. It is often difficult for lead firms, even those that wish to protect worker rights, to effectively monitor compliance in their subcontractor facilities. This becomes more difficult as the length and breadth of supply chains grow; private governance and corporate social responsibility have therefore not always lived up to their promise. Rather, achieving labor protections in a supply chain framework often requires both private and public sector efforts—that is, governments that are willing to privilege the rights of workers over the rights of local factory owners and governments that are willing to enact and implement legal protections of core labor rights. Such government actions, when coupled with private sector–based capacity building, codes of conduct, and regular monitoring, offer the most promise for protecting labor rights within global supply chains. Finally, governments of developed countries also may play a role, if they are willing to credibly link working conditions abroad with market access at home.

Keywords: labor rights, worker rights, global supply chains, multinational production, private governance

Workers, Firms, and the Global Economy

Does economic openness benefit workers in low- and middle-income countries? Answering this question requires addressing the implications of trade and financial flows for economic growth, income distribution, and social well-being and considering how international economic factors interact with domestic political processes. Examining the consequences of multinational production for developing country workers suggests that the development and growth of regionaland global supply chains offers opportunities for firms to engage with foreign markets. At the same time, however, competition for participation in supply chains can create competitive “race to the bottom” pressures. Under what conditions, then, can we expect participation in global production chains to bring benefits to workers in low- and middle-income countries? And under what conditions will such benefits accrue instead to lead firms based in developed countries or to elites—factory owners, for instance—in developing nations?

Our current state of knowledge on the links between labor rights and the global economy is reviewed here, while noting that scholars of international and comparative political economy have yet to treat supply chain production systematically, either in terms of its consequences for worker rights or in terms of its character more generally. This discussion begins with an overview of multinational production; next, it explores the relationship between directly owned production (effected by foreign direct investment) and labor rights. There exist several mechanisms by which multinational production may lead to improvements in worker rights, although the operation of these mechanisms is by no means guaranteed. This discussion also investigates the broader phenomenon of supply chain production, which includes a variety of arms’ length relationships among firms, and where the possibilities for improvements in worker rights are likely more limited. Finally, the role of host country governments in the protection of labor rights is discussed: despite the rise of private governance efforts in the realm of labor rights, public authority remains important to effecting improvements in workers’ conditions and rights.

Multinational Production: An Overview

Foreign direct investment (FDI) has long been a feature of the global economy: during the first era of economic globalization, a range of European firms established extractive and productize facilities abroad. While much of this investment was located in other wealthy countries, a significant portion was destined for Latin America, Asia, and Africa (e.g., Franko, 1974; Stopford, 1974). In the contemporary era, FDI again features prominently. In 2015, global FDI flows were estimated at $1.8 trillion; while some of this activity represented cross-border merger and acquisitions, much of it represented new productive activities. Although developed countries accounted for more than half of global FDI—in contrast to 2014, when developing countries received 55% of global direct investment flows—a significant portion of this investment ($765 billion, a record amount) was destined for developing nations. Over the longer term, the pattern has been that developing countries have become more important, relevant to their wealthy counterparts, as destinations for FDI. The prominence of developing countries as investment destinations reflects the general trend in the liberalization of policies related to incoming direct investment (Pandya, 2016), as well as the production and consumer market opportunities in such destinations. Developing nations also have grown in importance as sources of outward direct investment, a trend that became particularly pronounced during the global financial crisis. These nations accounted for 28% of global direct investment outflows in 2015 and 39% in 2014. Developing country multinationals often invest in other low- and middle-income locales, frequently in close proximity.

A large literature has reviewed the determinants of FDI flows, which include economic as well as political factors. Scholarship in international political economy has focused on the role of political institutions, such as democratic governance and the rule of law, in attracting multinational firms. Others have investigated the extent to which bilateral investment treaties and preferential trade agreements—either as a complement to or a substitute for domestic political institutions—serve to increase the confidence of foreign direct investors. Still others have examined the conditions under which voters and political parties favor liberalization of FDI rules.1

Directly owned investment, however, is only part of the story: much of contemporary global production occurs in facilitates not directly owned by hierarchically structured multinational corporations but instead by firms of various sizes and ownership structures participating in arm’s length transactional relationships with lead global firms. Lead firms may undertake some stages of the production process via directly owned affiliates abroad, but they frequently outsource many activities. This mode of entry may reflect differences across industries—subcontracting is generally more prevalent in labor-intensive industries, while FDI occurs more in capital- and technology-intensive industries—as well as varying concerns about property rights and investor protections in host economies (Henisz & Williamson, 1999; Johns & Wellhausen, 2016).

Lead firms exercise varying degrees of control and influence over other participants in the global supply chain (Gereffi & Mayer, 2010).2 They often subcontract with a range of firms, often in distant and diverse locations, for the production and purchase of inputs.3 Subcontracting allows the diversification of production locations and reduces the risk related to any single subcontractor. Production processes may involve a series of subcontractor relationships, so that lead firms may have little idea of the ultimate origins of their products.4 Subcontracting firms also have incentives to diversify; many larger subcontractors produce for a range of lead companies. Branded products from different multinationals may therefore be produced on different assembly lines in the same facility (e.g., Locke, 2013).

While multinational corporations and their directly owned affiliates were estimated to employ 71 million individuals in 2014—compared with 21 million in 1990—a far greater number of individuals are employed in firms (often domestically owned) that subcontract production for multinationals; provide natural resource, agricultural, and manufactured component inputs for multinationals; or effect retail distribution and sales for multinationals (see also Organisation for Economic Co-operation and Development, World Trade Organization, & World Bank Group, 2014). Still others, often at the base of the value chain, work in informal employment settings but nonetheless produce inputs used in goods that ultimately are traded internationally. The exact size of this global value chain–related employment is difficult to estimate (Shepherd, 2013; Shepherd & Stone, 2013), but one International Labour Office (2015) analysis suggests that 20% of the world’s workers work in global supply chains.5 In developing and emerging economies, these supply chain–related workers are concentrated in manufacturing industries.

To take perhaps the most visible example, Nike Inc. reports that its apparel, equipment, and footwear products are produced in 666 factories worldwide; these facilities are located in 44 countries, and they employ just over one million workers in total.6 Factories that subcontract for Nike typically produce for other global brands as well. The facilities vary in size; footwear factories typically are larger (and more capital intensive) than apparel contractors. For instance, Nike lists 170 contractor facilities in China, employing an average of 1,245 workers; 33 facilities in Thailand, with average employment of 1,105 workers; and 42 facilities in Indonesia, with an average of 4,729 workers per factory. Vietnam nicely illustrates this type of production: it is second only to China in the number of Nike contractor factories. Nike works with 81 Vietnamese facilities, employing an average of 4,817 workers and ranging in labor force size from 68 to 23,888 workers.

Some of these contracting firms are themselves large and multinational in ownership and production. The largest Nike contractor in Vietnam, Vietnam Chingluh Shoes Company, is a subsidiary of the Taiwan-based Chingluh Group, which operates 14 manufacturing facilities in China, Indonesia, and Vietnam, contracting production for several global brands, including adidas, Nike, Reebok, and Mizuno. Similarly, Hansae Vietnam, the largest Nike contract apparel facility in Vietnam, is based in South Korea. In Vietnam, its largest overseas operation, it employs over 20,000 workers in several facilities. Hansae sources fabric via its Shanghai office; employs assembly workers in Indonesia, Burma, Guatemala, and Nicaragua; and, since 2008, operates a design facility in New York. Meanwhile, Freetrend Vietnam Industries, another large Nike contract manufacturer (with approximately 20,000 workers in Vietnam), was founded in Vietnam in 1996. It began contracting with various global brands, including Nike, in 2004; Freetrend has since expanded its operations to include several locations in Vietnam as well as factories in China and Indonesia.

These patterns are not unique to footwear and apparel or to Vietnam (Berliner, Greenleaf, Lake, Levi, & Noveck, 2015). In the electronics sector, Foxconn is the world’s largest electronics contracting manufacturer, with clients including Apple, Blackberry Limited, and Nokia. Foxconn has more than one million direct employees, and, as of 2011, it was the largest private employer in China. While Foxconn is based and operates several large factories in China, it also owns facilities in Brazil, Hungary, India, Mexico, and Turkey, among others. Still other subcontracting firms are smaller, with operations based in only one country. As in the case with the Nike suppliers, some of these subcontractors are themselves foreign owned: a South Korean electronics firm may set up a foreign-invested operation in Vietnam, which then supplies a U.S.-based lead firm. In such instances, global production generates FDI as well as trade flows, but the FDIs are made not by lead firms but instead by firms elsewhere in the supply chain. And, given the complexity of much global production, many steps often exist between the production of an input and its final sale by a lead firm.

Foreign Direct Investment and Worker Rights

How does contemporary multinational production affect workers in low- and middle-income countries? During the 20th century, the right of workers to organize, bargain collectively, and strike has become a fundamental legal right in most societies (although it is not always observed in practice), and it is widely accepted as a core right globally (Hassel, 2008). “Core labor rights,” as defined by the International Labour Organization (ILO) and embodied in its 1998 Declaration of Fundamental Principles and Rights at Work, also include the elimination of all forms of compulsory and forced labor; the prohibition of discrimination in employment and pay based on race, gender, ethnicity, or religion; and the elimination of child labor (or, at least, “the worst forms of child labor”—ILO Conventions 138 and 182). These rights are largely procedural, rather than substantive; process rights often are viewed as necessary (albeit not sufficient) for achieving outcomes such as appropriate wages, compensation for overtime, and worker health and safety (Kerrissey & Schurhke, 2016; Mosley, 2011). Although such labor standards can, under some conditions, increase inequality among workers within a polity (Christensen & Wibbels, 2014), they aim to ensure a minimum floor for the treatment of all members of the labor force.

Scholars and activists, however, have long worried that the capacity of firms to locate production and sourcing overseas—to exit or to threaten exit—increases the voice of capitalists at the expense of workers. Multinational firms’ threats of exit, which are most credible in labor-intensive, low-technology production and in manufacturing and some services rather than in extractive industries, appear to give great voice (Hirschman, 1970) to capital at the expense of labor. Silver’s (2003) longer-run historical analysis, for example, notes that when workers begin to assert their collective voice vis-à-vis employers, employers respond by moving production to an overseas, and nonunionized, location. The cycle then repeats, with workers first quiescent, then assertive and organized, and finally abandoned by footloose capitalists.

While neoclassical factor-based economic models focus on differences in productivity as the drivers of differences in wages, the relative costs of labor (and countries’ resulting comparative advantages) are due not only to initial endowments but also to various public policies that can serve to enhance labor’s productivity, alter the costs of hiring and firing workers, and raise or lower the wages and other benefits enjoyed by workers. For instance, if some governments impose higher minimum wages and more stringent working hour limitations, the costs of labor in those jurisdictions will increase. Or if labor unions in some countries are well organized and able to bargain for higher pay and more generous benefits, production costs will likewise increase.

The role of governments in affecting the relative costs of labor—either by passing new legislation or by enforcing (or failing to enforce) existing rules—leads to concerns about cross-national competition to attract investment. Multinational firms offer tax revenues and employment creation to developing countries; their executives often are well connected politically to local elites and government officials. Some firms are tempted to relocate production from high-labor-cost jurisdictions to low-labor-cost locations. If governments want to retain or attract these firms, they will have incentives to weaken their labor laws.7

What does the empirical record indicate about the extent to which the globalization of production is, in fact, detrimental for workers? Myriad reports detail violations, in specific companies, sectors, or production chains, of workers’ basic rights, including forced overtime, child labor, hazardous working conditions, and the capacity to unionize or strike. These abuses include collapses and fires in apparel factories in Bangladesh and forced and uncompensated overtime at China’s Foxconn, a subcontractor for Apple. Similar reports of violations have occurred for many years; they are especially prevalent in labor-intensive sectors, where managers’ incentives to cut labor costs are greatest, and in firms that supply or are affiliates of Western brands, where activists are most likely to shine a negative spotlight on firms such as Nike (Amengual, 2010; Locke, 2013). Indeed, sweatshops and maquiladoras feature prominently in the race-to-the-bottom narrative.

The empirical record, however, suggests that a systematic link between foreign direct investment (FDI) and government policy outcomes is limited. In the interplay among governments, multinational corporations (MNCs), and labor, multinational firms sometimes have positive, rather than negative, effects on workers’ rights. Some multinationals are interested in hiring at the top end of local labor markets (Distelhorst, Hainmueller, & Locke, 2016; Shepherd, 2013); high standards allow them to recruit and retain the most skilled among local workers. Multinationals also could bring “best practices” from their home countries to their local hosts, and they may face pressure from shareholders and consumers—given their visibility in their home locations—to act in “socially responsible” ways. Indeed, some research finds that, all else being equal, the presence of FDI in developing countries is associated with greater protection of collective labor rights (Mosley, 2011).8 That research draws on data on collective labor rights violations for 86 low- and middle-income nations, for the 1985–2002 period, conducted at the national (rather than sectoral or firm) level of analysis. While workers in low- and middle-income countries often may work long hours in unsafe conditions or experience the denial of their rights to organize, bargain collectively, and strike, directly owned multinational production may not be to blame.

This argument is consistent with research, much of it based in economics and industrial organization, that asserts that MNCs tend to offer higher wages and better working conditions than their domestically owned counterparts (Flanagan, 2006; Moran, 2002). Multinationals, which are more efficient and productive than their domestically focused home country counterparts (Helpman, Melitz, & Yeaple, 2004), hire at the top end of local labor markets. In seeking to hire and retain the best workers, to prevent labor unrest,9 and to reward higher productivity, multinationals often offer higher wages and better benefits. Numerous studies therefore document the existence of a multinational wage premium. We also can expect that MNCs often bring their “best practices” (or, at least, “better practices”) with them when they operate abroad (Haskel, Pereira, & Slaughter, 2007; Jordaan, 2009). Under some conditions, MNCs will even lobby host country governments to raise their standards, leveling the playing field between domestic and foreign firms (Garcia-Johnson, 2000; Prakash & Potoski, 2007). The positive linkage between labor rights and FDI also is in line with related research (Braun, 2006; Busse & Braun, 2003, 2004; Neumayer & De Soysa, 2006) that finds that child labor and forced labor reduce FDI flows, all else being equal. Similarly, Flanagan’s (2006) analysis, which considers wages, working hours, safety, and gender discrimination, reveals that labor conditions are generally unrelated to FDI flows: racing to the bottom does not appear to be an effective strategy for attracting FDI.10

This said, multinationals are themselves evolving, in ways that may affect labor rights outcomes. Multinationals continue to perform some production in-house and to directly employ workers in a range of locations. But compared with FDI of the 1990s or early 2000s, today’s MNCs are characterized by greater diversity in their countries of origin and in the political institutions and labor standards in place in those countries. As direct investment from emerging market countries (e.g., Brazil, China, and India) has grown, so has the existence of lead firms—and large supplier firms (Gereffi, 2014)—based in developing countries. Some of these firms have acquired affiliates in advanced economies (International Labour Office, 2015; United Nations Conference on Trade and Development, 2014), potentially inverting the traditional model of firms based in high-standards countries bringing their practices to their affiliates in weaker-standards jurisdictions.

Moreover, some contemporary multinational firms operate less as hierarchical entities, with direct control and standardized practices emanating from corporate headquarters (Garcia-Johnson, 2000), and more as parallel entities under a common financial ownership (e.g., Kristensen & Zeitlin, 2005). Holding companies often have little interest in common firm-wide human resource or labor standards. And owing to the growing use of indirect foreign ownership, transit investment through third countries, and investment round-tripping, many multinational firms are characterized by complex ownership chains. The United Nations Conference on Trade and Development (2016) estimates that 40% of multinational firms can claim more than one “home” country, rendering the application of international investment agreements and other regulatory standards more difficult. The complexity of ownership not only creates empirical challenges (e.g., Kerner, 2014; Wellhausen, 2015), it also suggests that the diffusion of standards and practices from home country headquarters to host country affiliates is unlikely to occur in a straightforward manner, if at all.

Furthermore, the market for internationally sourced products is shifting, with consumers in middle-income developing countries occupying a larger role. These consumers may have less interest in postmaterialist concerns related to ethical production and sourcing, again blunting a mechanism by which labor rights were protected in the past. These trends each suggest that workers in developing countries face growing challenges to achieving core rights and decent working conditions.

Supply Chains and Subcontracting

What does arm’s length production in global supply chains imply for the rights of workers? While political economists have thus far devoted less attention to the consequences for domestic outcomes of supply chain production, economic sociologists have long considered the structure of global value (or commodity) chains, how these structures vary (e.g., consumer- versus producer-driven chains; see Gereffi, 1994), and how such structures have evolved.

The global value chains literature rightly draws our attention to the fact that, since the late 1990s , nearly all economic sectors have experienced growth in the number of production stages (International Labour Office, 2015).11 Fragmented production processes create disconnect between the geography of public regulatory structures (typically, national, subnational, or local) and the scope of production. Even where government authorities have some ability and willingness to protect labor rights, the capacity of firms to relocate (or threaten to relocate) their sourcing to other jurisdictions allows for regulatory arbitrage.

Additionally, in market-based relationships between lead firms and subcontractors or between domestic producers of inputs and their foreign-based customers, price competition can loom large. Winning and keeping subcontracted production requires the ability to produce a given quantity of an object by a given deadline at a predetermined price. The demands of lead firms can change quickly over time, especially for mass consumer products with short life cycles—apparel and electronics (see Locke, Rissing, & Pal, 2013), for instance. The rise of supply chain, arm’s length production appears to have brought with it significant intensification of threats to workers’ rights.

For instance, cost and time pressures can generate violations of workers’ rights (i.e., Appelbaum & Lichtenstein, 2016; Barrientos, Gereffi, & Rossi, 2011; Distelhorst et al., 2016; Ruwanpura & Wrigley, 2011), particularly for items whose production uses labor intensively. Workers may be asked to work excessive overtime, perhaps without sufficient compensation, and managers may worry that allowing workers the right to organize or strike will generate demands for higher wages and create difficulties in meeting deadlines. Where employers can draw from a large pool of surplus labor (Rudra, 2008), they may have even less reason to protect the core rights of their workforce.

Hence, we may expect that subcontracted (compared with directly owned) production is associated with greater violations of labor rights (see Mosley, 2011).12 Similarly, increased trade flows—often a proxy for subcontracted activity—especially where labor-intensive sectors are concerned, predicts a greater occurrence of labor rights violations (Neumayer & De Soysa, 2006). Other studies similarly reveal a linkage between forced labor and the export of unskilled labor-intensive goods (Busse & Braun, 2003).13 Moreover, global supply chain workers—unlike their multinational employee counterparts—do not appear to earn a wage premium. Domestically owned firms engaged in assembly for global value chains do not earn significantly higher wages than workers in equivalent domestically focused firms; supply chain participation appears to have no (positive or negative) systematic effect on wages (International Labour Office, 2015; Shepherd, 2013).

Governing Labor Rights

The change over time in the structure of production, itself partly endogenous to the nature of political institutions,14 has created a functional governance problem. While production typically crosses political jurisdictions, intergovernmental institutions are either unwilling or unable to address labor issues. The International Labour Office (ILO) acts to set standards and norms through its conventions and to provide some technical assistance to national governments, but its material resources and its direct enforcement capabilities are very limited (Mosley, 2011). At the same time, the World Trade Organization (WTO) has taken the view, since the late 1990s, that it is a second-best organization for the governance of labor-related issues. Such a view allows the WTO to avoid conflict between developed and developing country members, the latter of which often view discussions of labor standards as veiled attempts at trade protection.

At the bilateral level, developed country governments have increasingly linked labor and human rights with market access via preferential trade agreements. Rights-based conditionality allows developed country governments to demand more of their trade and investment partners. For instance, from 1984, U.S. legislation mandated that all new trade agreements address internationally recognized workers’ rights; agreements have done so in a variety of ways (Kay, 2011). The U.S. government also has included labor rights conditions in its unilateral trade privileges for developing nations (administered via its Generalized System of Preferences, or GSP, program), investment guarantees, and financing through the Overseas Private Investment Corporation and its 2012 Model Bilateral Investment Treaty. Other developed country governments also have engaged in such linkages. In the mid-1990s, the European Union revised its GSP program so that countries with “domestic legal provisions” that gave effect to the ILO’s conventions on freedom of association and collective bargaining (Conventions 87 and 98), and the minimum working age (Convention 138) would receive additional reductions in trade barriers. The reform also included provisions for the withdrawal of GSP privileges from countries that engaged in any form of forced labor. The European Union’s reductions in trade barriers associated with labor rights were further expanded in 2006 (the so-called GSP Plus scheme), and its GSP system was revised again in 2010.

These linkages may be sincere in their intention, or they may serve to appease—and offer trade protection to—domestic interest groups (Hafner-Burton, 2009; Lechner, 2016). At least under some conditions, it appears that these provisions can affect states’ behavior (Hafner-Burton, 2005, 2014; Kim, 2012). Such conditionality, however, relies on ex post enforcement by partner governments. Governments are not necessarily willing to rescind trade benefits, especially when Preferential Trade Agreement (PTA) partners are strategically important or when powerful domestic firms stand to lose from the suspension of trade and investment ties (e.g., Spilker & Böhmelt, 2013).

Given the difficulties associated with public sector–based governance of labor issues, many activists and scholars have focused their attention on private sector–based governance (Büthe & Mattli, 2011; Mosley, 2009). Beginning in the mid-1990s, a series of high-profile cases brought to light harsh working conditions and collective labor rights violations (most visibly, via the anti-sweatshop movement; see Bartley & Child, 2014; Seidman, 2007), as well as concerns about environmental degradation and the treatment of indigenous peoples, in a range of countries and industries. In response, and motivated by possible reputational harm, many multinational firms made public commitments to corporate social responsibility (Gereffi & Mayer, 2010). The emerging “market for virtue” was one in which industries, NGOs, and intergovernmental organizations created corporate codes of conduct and social responsibility programs (Bernhagen & Mitchell, 2010; Organisation for Economic Co-operation and Development et al., 2014, Prakash & Griffin, 2012) and in which firms issue regular reports on their (and often their suppliers’ and subcontractors’) labor-related practices and outcomes (Bartley, 2007; Distelhorst et al., 2016; Seidman, 2007; Vogel, 2005).

The rise of private governance in global supply chains brought with it a range of concerns regarding effectiveness and compliance. Some initiatives involve a commitment to general principles but little in the way of direct monitoring or enforcement. For example, the United Nations Global Compact, launched in 2000, encourages corporations to commit publicly to environmentally related, human rights–related, and labor rights–related goals; it relies mostly on self-reporting by its more than 8,000 participating firms (Lim & Tsutsui, 2012). Additionally, third-party auditors, who monitor implementation of many private codes, conduct visits that usually are announced and occasional; they may have incentives not to reveal problems to the firms that hire them. Moreover, the diversity of codes of conduct and auditing protocols may allow firms to engage in “forum shopping” and to privilege some aspects of the codes (such as excessive working hours) at the expense of others (such of freedom of association; see Anner, 2012). Furthermore, the multiplicity of codes means that supplier factories, which often produce for multiple brands, may suffer from “monitoring fatigue” and “compliance limbo” (Locke et al., 2013).

These concerns notwithstanding, the corporate social responsibility movement has enjoyed some successes, particularly among lead firms that produce branded, higher-end products (also see Gereffi, Humphrey, & Sturgeon, 2005; Gereffi & Mayer, 2010);15 among foreign-owned (versus domestically owned) supplier firms; and among suppliers that have longer-term relationships—and therefore greater incentives to invest in meeting a given lead firm’s standards—with lead firms (Barrientos & Smith, 2007; Locke, 2013; Locke et al., 2009). Distelhorst et al. (2016) report that Nike’s efforts to encourage “lean production” practices among its supplier factories—an effort aimed at improving efficiency and profitability—also were associated with significant reductions in labor code violations.

More generally, though, private governance has accomplished far less than many activists had hoped, and it has been insufficient to effect significant improvements in labor conditions in many developing countries (e.g., Appelbaum & Lichtenstein, 2016; Distelhorst, Locke, Pal, & Samel, 2015). Consumers and shareholders are often less attentive to labor issues than activists may hope (Hainmueller & Hiscox, 2015). While some lead firms may have a genuine desire to improve conditions throughout their supply chains, this desire often conflicts with the competitive pressures of the contemporary global economy. Moreover, while lead firms may be effective at monitoring policies and outcomes within their directly owned facilities, they are much less able to do so when they subcontract all or part of their activities to other firms, many of which, in turn, engage in subcontracting of their own.

For instance, in Bangladesh and Pakistan, factories that were the sites of fires and collapses in 2012 and 2013 had been inspected and deemed to meet lead firms’ standards. While the audits identified problems, the inspections did not result in factory closures, in the removal of lead firms’ business from these locations, or in the necessary safety improvements.16 Similarly, Locke et al.’s (2013) analysis of electronics firm Hewlett-Packard and its suppliers in the Czech Republic and Mexico concludes that “freedom of association in the electronics industry remains a persistent challenge, and for this issue, there is no substitute for effective government enforcement of national labor laws” (p. 544). In another study of labor code compliance in the electronics industry, Distelhorst et al. (2015) find that it is the strength of civil society and of regulatory institutions—rather than auditing, capacity building, or supply chain features—that explains outcomes.

Similarly, Amengual and Chirot’s (2016) analysis of the Better Work program in Indonesia—a transnational, public–private effort to improve labor rights—finds that the program is effective only under certain conditions—specifically, when “labor unions mobilize to activate state institutions” and “when transnational regulators have support to resolve ambiguities in formal rules in ways that require firms to engage with constraining institutions” (p. 1056; also see Amengual, 2010; Bolle, 2014). To take another example, the International Finance Corporation now includes a set of performance standards in all of its loan contracts; borrowers that violate these standards put their financing at risk, and one of these standards includes freedom of association. Particularly in industries and countries without independent union movements, however, workers often are unaware of the performance standard mechanism; the standard is meant to facilitate labor unions, but, absent unions, workers are unlikely to learn about the standard (Graz, Cradden, & Pamingle, 2015; see also International Trade Unions Confederation, 2011). More generally, Locke et al. (2013) note that private and public regulation can interact in different ways, depending on the technical capacity and political will of national governments as well as on activity by lead firms and local NGOs. It becomes worthwhile to consider, then, whether and under what conditions workers have agency (see Mosley & Singer, 2015).

On the labor side, the rise of supply chain production has brought with it some efforts at transnational agreements between labor unions and multinationals. The “new labor transnationalism” (Evans, 2014; Kay, 2011) features Global Framework Agreements (GFAs), concluded between the management of a multinational corporation and one or more global union federations. GFAs apply throughout the multinational firm’s directly owned affiliates and subsidiaries; most also apply to subcontractors and perhaps to suppliers. The use of GFAs expanded dramatically in the 2000s, with over 100 agreements signed by the end of 2013 (Sydow, Fichter, Helfen, Sayim, & Stevis, 2014). Like other forms of private sector–based governance, however, the utility of GFAs remains to be seen: the vast majority of GFA activity is based in Europe. Sydow et al. (2014) report that only 17 of the GFAs they catalogue involve non-European multinational corporations. Where framework agreements are in place, their effectiveness is thus far mixed: the labor conditions contained in the agreements are more likely to be applied when unions mobilize pressure against the firm. In other instances, without such mobilization, nonimplementation or partial implementation of the agreement is commonplace (Sydow et al., 2014). This pattern again illustrates that many of the measures that could protect workers in global supply chains are conditional on the existence of organized labor: in developed countries without strong union movements, GFAs with multinationals are less likely to occur in the first place. And in host countries without an organized labor presence, it is more difficult to pressure MNCs to comply with GFAs.

The challenges of private governance remind us, then, that an essential, but frequently overlooked, determinant of labor-related outcomes in global supply chains is the national government. To what extent do the key political actors in a given production location have incentives to pass labor laws and regulations that meet international standards, to devote resources toward monitoring and enforcing such standards, and to cooperate with other governments to avoid “races to the bottom” in the area of workers’ rights?

Taking Stock: Keeping the State In

How, then, could scholars of comparative and international political economy contribute to understanding the implications of global supply chain production for labor rights outcomes? Existing research as well as the current nature of global production suggest that it is essential to engage in firm-level analyses, especially of developing country supply chain partners, and that the role of governments in affecting outcomes should not be overlooked.

First, comparative political economists have so far paid little attention to supply chains. Johns and Wellhausen (2016) posit that supply chain partnerships affect the relationship between multinational firms and host country governments: governments are less likely to breach contracts with foreign firms, they argue, when those firms have relationships with local suppliers. Domestic suppliers (and, to a lesser extent, domestic purchasers) typically are willing—collective action problems notwithstanding—to expend political capital in the hope of protecting their supply chain partners’ property rights.17 Manger (2012) suggests that the formation and features of North–South preferential trade agreements are largely a function of supply chain considerations: lead firms based in the North, which desire cheaper and more regular access to inputs produced in the South, lobby their governments to conclude trade agreements. And Jensen, Quinn, and Weymouth (2015) attribute the decline of antidumping claims for trade protection, which typically increase with currency undervaluation, to the rise of supply chain relationships between U.S. and foreign firms.

These exceptions notwithstanding, scholars of comparative and international political economy have devoted little attention to the impact of supply chain–based production on domestic political and social outcomes or to the role of developing country firms in supply chain relationships.18 This stands in contrast to the large literature aimed at analyzing both the causes and the effects of foreign direct investment; that work focuses on large, diversified multinational investors, typically based in rich countries. These firms, while they are important to outcomes in host as well as home countries, represent only a slice of production activity in the contemporary global economy. While it is difficult to collect firm-level data in developing nations, especially where labor-related behaviors and attitudes are concerned, doing so allows us to move away from a national or sectoral level of empirical analysis (e.g., Mosley, 2011) and to gain a clearer understanding of the specific conditions under which supply chain participants will act to improve (or diminish) worker rights (e.g., Malesky & Mosley, 2016).

Second, despite the transnational nature of much global production as well as the presence of various private governance initiatives, domestic political interests and domestic political institutions continue to be a central factor in determining outcomes for workers. We must be attentive to both government capacity (do the resources exist to identify and address violations of labor rights?) and government willingness to act (does the government choose, given its own interests, to protect the rights of labor, sometimes at the expense of employers?). While many private sector– and intergovernmental organization–based efforts have targeted government capacity (e.g., Locke, 2013), Berliner, Greenleaf, Lake, and Noveck’s (2015) cross-sectional time series analysis suggests that the effect of state capacity on respect for workers’ rights is conditional on political will. Specifically, state capacity has a positive and significant effect on labor rights when governments are more democratic and when left-leaning governments are in office, but not otherwise (also see Amengual, 2010; Distelhorst et al., 2015; Distelhorst et al., 2016).

Broadly, democracies should be more likely to protect workers—and to represent the interest of workers—than their nondemocratic counterparts (Mosley, 2011). On average, they will be more inclined to ensure that the gains from openness accrue not only to local factory owners or to foreign entities but also to local workers. Additionally, democratic and democratizing countries with strong domestic labor movements and those governed by left-leaning executives and legislators should be more inclined to protect core labor standards (e.g., Murillo & Schrank, 2005; Huber, Huo, & Stephens, 2016; Ruwanpura & Wrigley, 2011) and to facilitate labor’s capturing of the gains from industrial upgrading (Barrientos et al., 2011; Shepherd, 2013). Indeed, in their analysis of IMF loan programs, Caraway, Rickard, and Anner (2012) find that democratic countries with stronger domestic labor movements are more likely to demand and to receive loan programs with less intrusive labor-related conditions. Furthermore, competent and impartial bureaucracies, especially labor inspectors, also are important to generating compliance with domestic labor laws (Piore & Schrank, 2008).

At the same time, alliances among host country governments, local elites, and foreign capital are not new (e.g., Evans, 1979), and when such coalitions exist, the consequences for workers are often negative. Nondemocratic regimes have incentives to prevent organized labor from becoming a domestic political force, and the arrival of foreign direct investment can aid in this, as Gallagher (2007) argues with respect to contemporary China. Indeed, as long as the government prioritizes revenue generation and local economic development, workers’ rights improvements will be difficult to effect (Berliner, Greenleaf, Lake, Levi et al., 2015). In other instances, labor unions are coopted by nondemocratic governments, and rank-and-file workers experience few benefits from elite-driven labor market institutions (Caraway, 2008; Robertson, 2007).

To return to the example of Bangladesh, the centrality of the ready-made garment sector to Bangladesh’s economy and the tight connection between political elites and factory owners have resulted in a political system that greatly limits the legal protections and the practical voice of workers. Such a system means that while union members have the right, under the Accord on Building and Fire Safety, to participate directly in the inspection process, not all factories have union representation. A right to engage in industrial action, which has been an important means by which garment workers in developing countries have improved their conditions (International Labour Office, 2015), is not at all guaranteed. While pressure from the European Union and the United States19 has contributed to greater union creation and recognition in Bangladesh, many union locals have been denied the right to register,20 and union members continue to report dismissals, intimidation, and physical harm that comes in response to their collective activities.

Despite legal changes in Bangladesh’s labor code, then, it remains to be seen whether these will generate substantive improvements in practice (also see Berliner, Greenleaf, Lake, & Noveck, 2015; Berliner, Greenleaf, Lake, Levi et al., 2015), especially in light of government officials’ and employers’ hostility toward trade unions.21 Consistent with such concerns, in June 2015, the country’s finance minister stated, in a meeting with garment exporters, that inspections under the auspices of the Accord and the Alliance were an attempt to retard progress in that sector. He went on to describe the private sector efforts as “a noose around the neck” of Bangladesh’s development.22 We ought therefore to ask about the conditions under which national governments are most—and least—likely to offer de facto as well as de jure protection to workers in global value chains.

At the same time, a focus on governments should not ignore the fact that countries vary in the structure of their labor markets, in their comparative advantages, and in their industry profiles (Organisation for Economic Co-operation and Development et al., 2014). The most effective mechanisms for improving labor rights in global supply chains may vary across industries (Barrientos et al., 2011) and among firms in the same industry (Dallas, 2015) as well as across countries and over time. For instance, in the electronics sector, short product life cycles generate marked fluctuations in the demand for product (and therefore for workers). Producer firms want the flexibility to hire workers when demand is high but also to fire them when demand is low; when demand is high, employers often want to compel their employees to work overtime. Hence employers often prefer to hire temporary workers (Locke et al., 2013; Distelhorst et al., 2015). The resulting concern for the rights of temporary (or “agency”) workers in electronics may be quite different from the concerns in the garment,23 automobile, or natural resource sector (International Labour Office, 2015).

Finally, labor markets also vary markedly across time and across countries, and that variation will affect the preferences of workers as well as workers’ ability to express their preferences vis-à-vis governments and employers. Shepherd and Stone (2013) report that participation in global supply chains generates increased demand for workers, especially skilled employees; this also could allow them to effect improvements in labor standards. But many workers are employed outside the formal labor market or move between the formal and the informal sector. Informality typically results in more precarious working conditions; as such, individuals typically do not have formal labor contracts, protection via the employment code, or membership in labor unions. But considering the extent to which the informal sector serves as a “safety valve” in many low-income countries—allowing economic opportunities where formal employment opportunities are somewhat limited, providing a supply of low-cost and unregulated labor for the lower rungs of supply chains, and preventing greater labor market competition in the formal sector—we can expect informality to persist in many locations (Milner and Rudra, 2015). Indeed, experimental evidence from Ethiopia suggests that many workers ultimately prefer informal or entrepreneurial to industrial work (Blattman & Dercon, 2016).

In summary, the protection of workers’ rights in global supply chains is difficult to achieve. Appropriate protections for labor require that the incentives of participating firms (foreign or domestic) and host country governments align. This alignment is more likely in industries, activities, and time periods in which the demand for workers—or for workers with particular skills—exceeds the available supply of workers, rendering workers more able to insist upon sharing some of the gains (Shepherd, 2013).24 For example, as shortages of skilled as well as unskilled labor emerged in coastal China in the early 2010s, these workers became better able to effect improvements in their wages and working conditions. The state is not necessarily a solution to the problem of workers’ rights in global supply chains. Indeed, governments often are part of the problem, given the incentives they have to serve the interests of investors and factory owners at the expense of local labor. If we want to understand the conditions under which workers are better or worse protected in these supply chains, however, governments’ incentives and interests must remain a key part of the causal explanation.

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Notes:

(1.) See Pandya (2016) for a comprehensive review of this scholarship.

(2.) In this discussion, “global supply chains,” “global value chains” and “global commodity chains” are used interchangeably. For a discussion of contemporary global value chains, see Dallas (2015) and Gereffi (2014).

(3.) In estimating the reach of global supply chains, the International Labour Office includes purchasing (of inputs) as well as subcontracting (“outsourcing”) and foreign direct investment (“offshoring”). Domestic firms that sell intermediate goods to subcontractors or lead firms are therefore considered part of global supply chain activity.

(4.) For a discussion of the various ways in which lead firms engage in sourcing, see Bartley and Child (2014); Gereffi, Humphrey, and Sturgeon (2005); and Gereffi (2014).

(5.) The International Labour Office estimates that, in 1995, 16.4% of workers were involved in global supply chains.

(6.) Nike at http://manufacturingmap.nikeinc.com/ provides data on each Nike manufacturing facility. In terms of direct employment, Nike reports nearly 32,000 employees in the United States, as well as an additional 30,000 in other locations.

(7.) This parallels earlier concerns about the structural dependence of states on capital. See Przeworski and Wallerstein (1988).

(8.) Other statistically significant correlates of collective labor rights include trade openness regime type, income per capita, country size (population), and labor rights outcomes in a country’s geographic region.

(9.) Robertson and Teitelbaum (2011) report that, in developing and transition nations, higher levels of FDI predict greater levels of worker protest.

(10.) Payton and Woo (2014), however, argue that the FDI–labor rights linkage evolves over time: in order to attract investment, governments weaken labor laws, so that the anticipation of FDI worsens rights. But once foreign direct investors arrive, labor rights practices improve. Here, the distinction between rights in law and rights in practice is key.

(11.) The largest number of production stages exists in transportation equipment, textiles and garments, metals, and electronics. See International Labour Office (2015), Figure 5.7.

(12.) Similarly, Shepherd (2013) reports that domestically owned firms engaged in assembly for global value chains do not pay higher wages than domestically oriented firms, a finding that contrasts with the “multinational wage premium” for employees of foreign-owned subsidiaries.

(13.) Flanagan (2006) and Moran (2002), however, argue that there is little significant link between trade activity and labor standards; Neumayer and De Soysa (2006) report a negative relationship between trade openness and child labor.

(14.) Henisz (2000) argues, for instance, that firms’ choice of entry mode depends on the political hazards they face in the host country. Also see Kerner and Lawrence (2014).

(15.) This reflects, in part, the fact that certain firms are more vulnerable than others to activist campaigns. For instance, Bartley and Child (2014) find that large, branded firms with positive corporate reputations were significantly more likely to be targeted by activist campaigns.

(16.) See, for instance, “Factory Audits and Safety Don’t Always Go Hand in Hand,” National Public Radio, May 1, 2013. Available at http://www.npr.org/2013/05/01/180103898/foreign-factory-audits-profitable-but-flawed-business.

(17.) Johns and Wellhausen (2016), however, consider only domestic (host country), rather than foreign, supply chain relationships.

(18.) Note that studies using supplier factory audits, as in Locke (2013) and Locke, Rissing, and Pal (2013), rely on data from such firms. In Locke’s analysis, however, it is lead firms (e.g., Hewlett-Packard, Nike) that are the central agents.

(19.) The case of Bangladesh also reveals differences, in terms of export destinations, in pressure for labor rights upgrading in supply chains (Greenhill, Mosley, & Prakash, 2009). European-based firms have been more willing than their U.S.-based counterparts to sign the Bangladesh Accord on Building and Fire Safety.

(20.) In 2015, 56% of union registration petitions were denied, compared with 19% in 2013. Available at http://prospect.org/article/bringing-labor-rights-back-bangladesh.

(21.) Available at http://www.thenation.com/article/207841/two-years-after-rana-plaza-are-bangladeshs-workers-still-risk. With regard to Bangladesh, it also is worth noting that the program addresses a single industry in a single country; while firms sourcing in Bangladesh may invest in factory improvements, they also may instead decide to locate production elsewhere. This relocation would reduce employment opportunities in Bangladesh and perhaps generate new dangers for workers in other garment-producing countries.

(23.) A similar dynamic can exist in the garment industry, especially the “fast fashion” segment. See Barrientos, Gereffi, and Rossi (2011) on the Moroccan apparel sector.

(24.) Note that gains to skilled workers via global supply chains also could lead to greater inequality among workers in a given economy. Tewari (2010) makes this argument about the Indian garment sector, for example.