The Bangladeshi garment industry gives us an elegant example of the collective action problem. This is where it is generally rational for everyone to act together but individually rational for everyone, acting individually, to do their best to undermine that general action. An obvious example of this is taxation – sure, we’d all like better government services.
But we’d also rather prefer not to be having to pay for them ourselves. It might even be rational for us to vote for higher taxes but then we’ll all cheat (OK, “manage our tax bill”) so as to reduce the effect upon ourselves of what we’ve just voted for.
Equally, people in a cartel (when people cooperate to try to control prices) will find that perhaps they can indeed make an agreement to limit output, or to raise prices. But there will always be the incentive for the individual to cheat, to offer more than their quota, very slightly lower prices, so as to profit from the engineered solution.
Here we’ve something a little different. The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) is arguing that the minimum wage for garment workers should rise.
This sounds like a slightly odd thing, that a producer should be insisting that one of their major costs should rise. However, I’ve met Mr Rahman who is arguing for this and he’s a smart chap, knows what he’s doing. The problem the BGMEA has to face is that there’s significant consumer pressure for wages in Bangladesh to rise.
We might think that, in the context of wages in general in the country, Tk5,300 is a pretty good starting wage (before training, before overtime and so on). That’s not how it seems to many in other much richer countries – there are people quite seriously arguing that it should be Tk30,000 a month.
Effectively we face exactly the same collective action problem but without a government with enough power to force the equalising solution on all
So, in order to keep the customers happy, something any and every business tries to do, the thought occurs that perhaps wages should indeed rise. But a manufacturer who does this on their own is going to find themselves losing business. The major brands won’t – whatever nice noises they make about it all – raise the prices they will pay for garments.
So also, in fact, consumers won’t increase the price they’ll pay in the shops. Yes, of course, they are being hypocritical those consumers but then that’s human beings for you.
Thus an individual manufacturer cannot raise wages on their own. Well, no, that’s not quite true. There are people who do, but they do something else as well. They take people with a few years of experience elsewhere in the industry, employ them to do more complicated work or at higher productivity rates.
That’s fine but that’s not something that everyone can do, there are still going to be those entry level positions at entry level wages elsewhere in the industry.
Raising wages in order to lose the work itself also doesn’t sound like a very good way of raising worker incomes either, does it?
So, if individual action cannot or will not solve this then what can? One is general market pressure – when there are no more people who can be pulled in off the paddy to make garments then wages will simply have to rise. And there’s certainly some of that going on too. It’s just not happening fast enough for those western campaigners.
The other thing is collective action. Everyone raises wages, all prices from the garment factories rise, the buyers and the western consumers just have to accept the price rises too.
Which is what is being argued for. Make the government force us to raise wages. That means that all of us must indeed raise those wages – there are enough journalists looking at this, enough campaigners, enough activists, even enough industry and government inspectors, that routine flouting of the new pay rate at known manufacturers (ie, those with the sort of name which means foreigners will contract directly with them) will be quickly found out and therefore stopped.
It all works – we please those consumers by raising the headline minimum wage. But we manage to do it without those who flout the new law gaining a competitive advantage. Simply because none of the players large enough to make a difference are going to be able to flout the new pay rates.
That is, the BGMEA is asking the government to impose, by law, something that isn’t in the rational self-interest of any individual manufacturer but might well be of all producers collectively. Keeping the consumers and campaigners happy while making sure that no one manages to steal a march over their competitors.
It is indeed the collective action problem in a nutshell and as so often the way to deal with the necessity of universal obedience is for government to make it the law, to force everyone to do it to make sure that everyone does indeed do it.
We might then wonder, well, if it’s this easy why don’t we just continue? Make that minimum wage Tk30,000 a month, hey, why not Tk100,000? The answer being that no government does in fact have enough control to make it stick. For there are other garment manufacturers in other countries who would not be subject to the same rule. Effectively we face exactly the same collective action problem but without a government with enough power to force the equalising solution on all. Thus we can do this a little bit but we don’t have complete freedom of action.
It is odd to see producers arguing that government must force them to increase wages but as above, the exigencies of the collective action problem can lead us to some pretty strange places.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.