Cheap labour + government aid = corporate profits?


Recently published reports in the UK and US highlight how low wage employers are being subsidised by the social welfare system in what is effectively a transfer from taxpayers to shareholders. While this link is clear within developed countries, it is possible to argue that a similar, albeit less direct, effect is also occuring in developing countries.

This blog post will explore whether corporates headquartered in the developed countries effectively receive similar subsidies as a result of paying low wages in developing countries. Is foreign aid actually funding corporate profits?

Research by Citizens UK and the University of California Berkeley’s Center for Labor Research and Education has recently emphasised the extent to which low wage earners rely on state provided assistance. In the UK, taxpayers are estimated to provide £11bn per year in assistance to low wage earners to make up for inadequate pay from their employers. Meanwhile in the US, this subsidy is estimated to be a staggering $153bn per year.

Paying below the “living wage” has meant that states have had to step in to ensure an adequate standard of living for many of their citizens. This behaviour benefits the corporates and their shareholders as it means that their direct costs are kept low, enabling greater profitability while the true costs are borne by the rest of society.

While this is a very concerning practice in developed countries, it’s important to think about similarities in developing countries. With the the second anniversary of the Rana Plaza collapse being marked last week, many consumers have been asking apparel companies “Who made my clothes?”.

In a similar vein, the analysis below asks whether foreign aid provided to developing countries where these goods are produced is effectively subsidising those same companies who profit from their low paid labour force.

Follow the money

One of the major challenges of globalised supply chains is understanding the web of linkages between different actors and the impact that each can have. However as consumer awareness of labour practices in developing countries has increased, companies such as H&M and Inditex (owner of brands including Zara and Massimo Dutti) have been more forthcoming about where their products are manufactured.

By combining this information with World Bank data on countries receiving foreign aid, an interesting picture emerges, as shown in Figure 1. This chart illustrates the locations where H&M and Inditex base their manufacturing, compared to the level of net foreign aid received by each country. For Nestle, the chart indicates countries where the food company sources part of its supply chain.

Figure 1: Net aid received per country and suppliers by brand (2013)
Cheap Labour
Sources: World Bank, H&M, Inditex, Nestle, CURRENTLY UNDER DEVELOPMENT.
“Rank” refers to overall rank within full list of countries in terms of amount of net aid received in 2013.

What is immediately of interest in Figure 1 is that the three companies in question operate in many of the world’s largest aid receiving countries. More specifically, H&M manufactures in 7 out of the 10 biggest recipients of foreign aid.

It is unsurprising that these companies choose to operate in poor countries where wages are low. However the question remains as to whether these countries would require the level of aid they receive if the developed country corporates paid higher wages. Put differently, could foreign aid be put to better use than enabling these companies to pay lower wages? If that is the case, aren’t these companies being subsidised by foreign aid in the same way as low wage payers in developed countries?

To be clear, the causality in this case is not as apparent as in the case of developed countries and the linkages are complex. Further, this analysis should in no way be interpreted as suggesting less aid provision to the countries mentioned. Rather, the suggestion here is that corporates operating in poor countries could have a significantly greater positive impact on the communities where they source their products if they paid higher wages.

For example, if higher wages were paid to workers in these countries, would the multiplier effect from the additional consumption have a significant positive effect on the overall economy? If that was the case, could foreign aid be put to better use to speed up the development of these countries?

“Decent life”

The alternate way of interpreting this data is to view corporates as part of the solution to alleviating poverty in developing countries. After all, these companies are providing employment to workers in their supply chains.

Further, corporates can argue that they can use their positions of power to push for positive social change. For example, take H&M CEO Karl-Johan Persson’s view that the company is trying to use its position to improve working conditions and pay in the world’s poorest countries. As reported in The Guardian:

He has also on several occasions personally visited the prime ministers of Bangladesh and Cambodia to press for better wages, but recognises that some governments are fearful of losing business to other countries if pay levels become uncompetitive. To seek more effective solutions, the company has been working with the Fair Wage Network to help it meet its goal of ensuring all 850,000 textile workers who produce its products have improved pay structures for fair living wages in place by 2018.

Regardless, as commented by Lucy Siegle, the quality of life for workers in developing countries is yet to improve significantly:

A 2013 study of the main apparel-producing countries by the Center for American Progress found deflation in all but China in the decade up to 2011 and concluded that garment workers were unable to maintain a “decent life”. The reality is that we wear clothes produced by exploited garment workers – predominantly young women – every minute of every day.

If corporates are truly to play a constructive role in developing countries, they need to accept their responsibility to pay a living wage to their employees, recognising the contribution made to overall company profits. Similarly, consumers need to understand that low prices usually equate to low wages for workers in the supply chain. Furthermore, shareholders should understand that their demands for higher profits will likely have a negative impact on the most vulnerable workers in developing countries.

By accepting these shared responsibilities, developed country corporates, consumers and investors can help further the development of developing countries. Foreign aid will still have an important role to play, but hopefully it won’t exist to simply plug a hole caused by low wage paying corporates.

Cheap labour + government aid = corporate profits?

2 thoughts on “Cheap labour + government aid = corporate profits?

  1. Thanks and interesting point on eco footprint. The challenge is having greater clarity on any potential causal relationships. We live in a very complex world, but hopefully we can all collectively work to understand it better.


  2. Very smart thinking again. Out of the box, as a good blogger should do. Because no one else seems to bother.

    It makes me thinks of something I ‘discovered’ October last year.

    Bahrein, Qatar, Kuwait, UAE, United States and Belgium are six countries bombing ISIS in Iraq. They all show up in the ‘Top 10’ of the per capita ecological footprint of countries:

    Denmark and Sweden take part in this campaign, though only by means of logistical help. Both also make that Top 10.

    Other coalition members Canada, The Netherlands and Australië one can find at positions 11, 12 and 13 of this infamous hit(…)parade.

    Liked by 1 person

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