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Chapter One REALIZING LABOR STANDARDS     Archon Fung, Dara O'Rourke, and Charles Sabel This past fall, Nike was accused of using child labor in Cambodia. Not long before, Adidas was accused of using prison labor in China and sweatshop workers in El Salvador. Timberland, which trumpets its socially responsible business practices, was accused this year of employing 16-year-old girls in China, working them 98 hours per week, paying only 22 cents per hour, and all the while exposing them to toxic chemicals. New Balance has been criticized recently for anti-union practices and now produces the majority of its shoes in China, where independent unions are illegal.     Even "buying American" can mean paying for sweatshop labor. There are an estimated five thousand illegal, unregistered sweatshops in Los Angeles alone that label their products "Made in the USA." Only a few years ago, a company producing clothing for Mervyn's, Montgomery Ward, and BUM International, and selling their U.S.-labeled products on the racks of Macy's, Robinsons-May, and Filene's department stores, was found to employ Thai immigrant women who were working in virtual slave-labor conditions. And this company had recently passed a Department of Labor (DOL) inspection.     These conditions are repellent, and they have provoked a diffuse but insistent protest movement for international workers' rights. Resembling earlier social movements--for civil rights, women's equality, and environmental protection--the movement for workers' rights has already caught the attention of the public worldwide, and has provoked responses from multinational corporations, international organizations like the International Labor Organization (ILO) and the World Bank, and domestic regulatory authorities. And it has led to important but fragile cooperation between student groups, nongovernmental organizations (NGOs), and established trade unions.     Here, we propose a strategy for strengthening labor standards--norms that describe acceptable conditions of work and wages--that builds on, and connects, these disparate efforts. We call this approach "Ratcheting Labor Standards" (RLS). It charts a course beyond conventional top-down regulation based on uniform standards, and reliance on voluntary initiatives taken by corporations in response to social protest. A public debate has already emerged about how workplaces in the global economy should operate. The central aim of RLS is to create a transparent environment for that debate. RLS would do two things. First, it would use monitoring and public disclosure of working conditions to create official, social, and financial incentives for firms to monitor and improve their own factories and those of their suppliers. Second, it would create an easily accessible pool of information with which the best practices of leading firms could be publicly identified, compared, and diffused to others in comparable settings. We argue that the combination of firm-level incentives and an infrastructure for pooling results would help to set provisional minimum standards of corporate behavior, upon which competition--driven by social and regulatory pressures--would generate improvements that then "ratchet" standards upward.     Consider how RLS would work in the apparel industry. Firms operating in international markets, like Nike or the Gap, would be required to adopt a code of conduct and to participate in a social monitoring program. A firm would select a monitor from among NGOs or auditing companies that provide this service. The monitor would score the firms it regularly inspects according to their compliance with a code of conduct and their ability to correct violations. The monitor would report its findings to the firm and to the certifying agency to which the firm is a member.     The monitor would also report its findings to a "super monitor," an umpire constituted by international organizations such as the World Bank and the ILO, together with NGOs and international confederations of trade unions. This umpire organization would monitor the monitors, conduct inspections to verify their integrity, assure the comparability of monitoring data and methods, and make results accessible to the public.     By creating an umpire that opens social auditors and firms to public scrutiny, this framework would extend and transform many current efforts to advance labor standards. Firms that depend on consumer loyalty would be eager to earn high grades. They would pressure less visible suppliers, and suppliers of suppliers, to follow suit. Activists, consumer groups, financial analysts, journalists, and many others would use RLS information to identify leaders and laggards in labor practices, press for improvements, establish norms of acceptable behavior, and pressure the monitors themselves to improve their auditing methods and to make their standards more demanding. Eventually NGOs, trade unions, or regulatory agencies might become monitors in this system. This would allow them to demonstrate the quality and reliability of the services they provide and to learn systematically from their peers.     Stepping back, the large purpose of RLS is to secure the most ambitious and feasible labor standards for workers given their economic development context . Standards emerge by comparing similarly situated facilities. The labor practices of a facility in Vietnam might be compared to one in Indonesia, but not initially to a European or North American facility. In this way, RLS encourages the incremental realization of demanding labor standards over time without imposing a uniform--and potentially protectionist--standard upon diverse contexts. By publicizing workplace conditions and practices, RLS enables society to sort out the abhorrent from the acceptable and shift its production methods from the former to the latter. New Opportunities Two recent developments in the organization of work account for many of the shortcomings of traditional strategies for dealing with the problem of labor standards, even as they create new regulatory opportunities: first, the increasing decentralization of production into tiered networks of supply chains that span the globe; second, the related recomposition of what is often called the informal sector .     It is no longer easy to determine where products as simple as baseball caps and sweatshirts or as complicated as computers and automobiles are made. That is because most name-brand manufacturers now market products that are co-designed and produced by networks of contractors and subcontractors. These networks obstruct accountability as much by their flux as by their intricacy. Manufacturers of products such as garments regularly switch countries, or even continents, as they switch suppliers. Far too many manufacturers hide behind these sprawling chains of ownership to deny responsibility for the factories that produce their goods.     But even as regulators lose oversight, corporations have markedly increased their ability to monitor suppliers. Relations between customers and suppliers were traditionally arms-length attachments made and broken solely on the basis of prices, which were often just a reflection of wage levels. Under contemporary globalization, these relationships are increasingly based on careful and continuous assessments of firms as potential partners who must provide not only cheap labor, but also product and process improvements that increase competitiveness for the whole production chain. The most sophisticated firms manage their supply chains by ranking suppliers according to their capacities as co-developers and their ability to meet quality, logistical, and diversity goals. Suppliers must show increasing capabilities to maintain and increase their status in these hierarchies. Now focused on increasing profit and product quality, these supply-chain practices can potentially be used to improve labor standards. In contemporary footwear production, for example, the largest supplier is a Taiwanese firm called Pou Chen. This conglomerate produces for, among others, Nike, Reebok, Adidas, Fila, Puma, and Timberland. Because of consumer awareness and advocacy pressures, the brands now work closely with Pou Chen to improve labor conditions in their factories. They send their own internal compliance staff to evaluate Pou Chen facilities and hire external auditors to measure whether Pou Chen is meeting their codes of conduct. Some brands then rank these suppliers--including Pou Chen's competitors--by measures that reflect labor and environmental conditions. Though incorporating social considerations into contemporary supplier management strategies is still rare, a central goal of RLS is to make it more widespread. * * * The second important development is the persistence, and often the expansion, of the informal sector: women piece-workers stitching baseball covers in their homes, street vendors selling piece goods on behalf of large distributors, skilled artisans working wood, stone, metal, or plastic with simple machines, brickmakers supplying small construction sites. Although exact numbers are hard to come by, evidence suggests that informal-sector workers in general, and women workers who are based at home in particular, account for a significant share of employment in export industries in developing countries.     Transformations of global supply chains have also recast these activities in ways that both obstruct familiar forms of accountability and open the way to new ones. Competition from world-class firms and from the import of secondhand products from richer economies can push weak domestic producers into the informal sector and increase competition there. This undoes the unwritten rules of the informal sector--the social conventions and practices framing wages, business relationships, and working conditions--diminishing whatever social accountability there was.     But improbable as it seems at first glance, this effect may be partially offset by changes connected to new supplier relations. The same logistical and quality standards that govern global production generally govern subcontracting from the formal sector to the informal sector today. Customers in the formal sector usually use their superior bargaining power to make informal-sector producers pay the costs of failing to meet quality and timeliness requirements.     But the most ambitious and capable among the informal producers see that they can get ahead by mastering the same disciplines of process control, monitoring, and innovation that yield such large returns for their partners in the formal sector. Already, operators in the informal sector are becoming familiar with relevant technical protocols, just as many of them gained expertise in secondhand machinery long ago.     The distance between the formal and informal sectors is thus not as great as it at first appears. Many informal producers are not only connected to global production chains through their goods, but also potentially through organizational practices that bridge the formal/informal divide. These connections may allow the most able informal firms to cross that gap in time. Those that do may be subject to regulatory mechanisms that are emerging in the formal sector. New Ways to Regulate     Labor and environmental regulators have noted these structural changes and have developed programs that take into account the organization of modern supply chains, the vulnerabilities for firms that result from them, and new forms of public pressure generated in part by the new regulatory regime.     One example that underscores the growing importance of supply-chain dependencies is the Labor Department's decade-old "No Sweat" program, which has raised labor standards compliance in the garment sectors of New York, San Francisco, and Los Angeles. Much of the work of cutting, sewing, and packaging clothing is done by immigrants in sweatshops employing one to two dozen workers. Thousands of fly-by-night operations have long scoffed at inspections, sanctions, and other familiar methods to ensure compliance.     But when retailers and manufacturers adopted "lean retailing" and "just-in-time" production techniques to lower costs, reduce cycle times, and shrink inventories, they also opened themselves to clever regulators in two ways. First, regulators could stop business along the entire supply chain by stopping it at any one point. The obscure "hot cargo" provision of the 1938 Fair Labor Standards Act gave them the power to do just this. This provision makes it unlawful for any person "to transport, offer for transportation, ship, deliver, or sell in commerce ... any goods in the production of which any employee was employed in violation" of the Act.     Second, because "lean retailing" methods increase communication and control between firms, regulators could use this leverage to make large firms responsible for the behavior of their smaller suppliers. So, when regulators catch small firms in violation of labor law, they now often use their power of delay to compel retailers and large manufacturers to sign "Compliance Monitoring Agreements," under which firms agree to monitor, usually through third-party social-auditing firms, the compliance of their small supplier shops. By 1999, nearly half of contractor shops in New York, San Francisco, and Los Angeles were covered by such agreements, and shops covered by such agreements tend to comply with wage and hours regulations more often than those that are not. Three innovations in environmental regulation offer further lessons for labor regulators.     The Massachusetts Toxics Use Reduction Act (TURA) builds on capabilities for self-monitoring and continuous improvement that firms must regularly acquire in order to compete. The act requires hundreds of firms that produce or release certain amounts of listed toxics to develop "Toxics Use Reduction Plans." In preparing these plans, engineers, managers, and workers typically work in teams to review possible ways to reduce the plant's reliance on toxic inputs, its generation of toxic by-products, and the danger of toxic releases to the environment. Studies suggest that this mobilization of local knowledge and expertise generates far more effective pollution prevention and toxics reductions than regulators would have thought feasible. Indeed, many plans yield not only environmental improvements but also financial savings; though firms are not required to implement their plans, many do so because of the compelling advantages that legally imposed self-examination reveals).     A related Massachusetts program called "Environmental Results" also encourages firms to develop their own compliance and improvement strategies, but aims at thousands of dry cleaners, printers, photo developers, and auto-body operations. What makes the program relevant here is that, for regulators, these small enterprises are equivalent to operations in the informal sector: government agencies are often unaware of their existence and lack the resources to inspect them. Instead of traditional inspection, regulators pursue outreach and capacity-building. Working through industry associations to locate and contact these small businesses, regulators provide each firm with workbooks detailing the steps necessary to reach environmental compliance. Firms are then required to certify to regulators that they have followed these steps. Evaluators estimate that this program has increased the number of firms known to regulators fivefold, and that it has accomplished substantial reductions in the emissions of hazardous and smog-producing air pollutants?     Other related environmental strategies produce information that allows the public to make well-targeted demands for corporate reform. Perhaps the oldest and best known is the U.S. Toxics Release Inventory (TRI). Begun in 1988, the TRI requires some 23,000 facilities to report annually their releases of some 650 chemicals to a publicly accessible database. This information is used by ordinary citizens, activists, journalists, and managers, among others, to identify firms that pollute heavily. These "dirty" companies often become the subject of bad publicity, punishment in financial markets, and direct citizen action. Firms both respond and pre-empt these critics by reducing their use and release of TRI chemicals. Though causation is difficult to assign, some evidence shows that TRI has contributed to some of the 1.5 billion pound (that is, 45 percent) reduction in releases of listed chemicals between 1988 and 1998. Though the TRI is the largest of these "information-based" disclosure efforts, programs that rely on publicity, information, and citizen response have also been initiated in Western Europe, Indonesia, the Philippines, and other countries.     The "No Sweat" regulatory program depends on the threat of severe penalties--a threat that is now more credible because of the high costs of supply-chain disruption. But TRI, TURA, and "Environmental Results" (via the participation of publicity-sensitive trade associations) depend on the concern of citizens for their environment. Is there similar public concern for the welfare of (often distant) workers? Ethical Consumerism     The most direct evidence of public concern about harsh labor conditions comes from surveys of consumer preferences and willingness to pay premiums based on the social and ethical character of firms and their production processes. In 1999, Marymount University's Center for Ethical Concerns conducted a telephone survey of U.S. consumer attitudes about garment production. Three-quarters of the respondents reported that they would avoid shopping at a retailer whom they knew to sell garments made in sweatshops. Eighty-six percent report that they would pay an extra dollar on a twenty-dollar garment if they could be sure that it was made under non-sweated conditions. Similarly, a survey conducted in 1998 found that "80 percent of respondents said that they would not buy products made under poor conditions or that they were willing to pay more if they knew the items were made under good conditions."     Environics International conducted a massive study of international opinion on these questions in 1999. The survey asked 25,000 individuals in 23 countries for their attitudes about corporate social responsibility. Though respondents from North America and Western Europe felt more strongly than those from developing nations, large minorities everywhere felt that major companies had responsibilities as ethical and social leaders. In North America, 51 percent of respondents reported punishing a company for being socially irresponsible in the past year, while 39 percent of Northern European respondents claimed to have done so.     The emergence of ethical consumerism includes not only labor and product concerns, but also investment choices. Over the past decade, socially responsible investing has grown dramatically and far outpaced the expansion of investment generally. Between 1995 and 1999, the total assets in mutual funds utilizing "social screens" that exclude firms that produce tobacco, manufacture firearms, or degrade the environment grew almost tenfold, from $162 billion to $1.5 trillion . At the end of 1999, one out of every eight dollars under professional management in the United States was part of a portfolio claiming to be socially responsible. Corporations and NGOs     Skeptics may doubt that survey responses translate into choices at the shopping mall, but high-profile multinational corporations take the polling data seriously. Prodded by the opinions it reveals, as well as by activist campaigns, boycotts, campus protests, and media exposés, companies like Nike, the Gap, and Levi's act as though they assume consumers care about social conditions and consequences of production processes. Labor and environmental considerations have been added to the long list of dimensions on which they compete for a share of the market.     Some of these firms have responded directly to public pressure by incorporating labor and other social priorities into the protocols by which they manage production in their supply chains. All of the main garment, shoe, and toy companies--Nike, Reebok, Adidas, Levi's, Disney, Mattel, the Gap--now have programs in place that combine codes of conduct, in-house assessment, and assistance from third parties to monitor supplier compliance with these codes.     The public, however, is skeptical about the sincerity and effectiveness of these efforts, and given the continuing scandals, rightfully so. This skepticism has led to the proliferation of independent monitoring and third-party social certification programs in the United States and Europe. Consulting and financial auditing firms such as Ernst & Young, PricewaterhouseCoopers (PwC), SGS International Certification Services, Cal Safety Compliance Corporation, Bureau Veritas Quality International, and Det Norske Veritas have recognized this growing market and begun to offer themselves as social inspectors. PwC and Cal Safety conducted over six thousand and ten thousand social audits last year, respectively.     But skepticism and critiques of the audits performed by these firms--audits paid for, after all, by client companies--has led to the establishment of third-party systems for evaluating and certifying monitors and for systematically comparing factory performance. A growing number of NGOs compete in this certification market. For example, the Fair Labor Association (FLA), convened by the Clinton administration in 1996, is the most advanced but quite controversial. The FLA will certify its first external auditors in early 2001 and hopes to begin the auditing which will lead to certifying sweat-free brands by the end of the year. SA8000, created in 1997 by the Council on Economic Priorities (CEP), is patterned on the ISO family of standards and requires corporations to hire certified auditors to evaluate the conduct of individual factories. The Clean Clothes Campaign, made up of a coalition of activists across Europe, plans to establish a foundation that will certify monitors, collect funds from member firms, and then pay monitoring organizations directly. The Worker Rights Consortium (WRC), developed by the United Students Against Sweatshops (USAS) in 1999, focuses on forcing out information, creating verification systems, and being proactive about inspections. The WRC differs from the other models in that it will explicitly not certify company compliance with a code of conduct or standard. (Continues...) Excerpted from CAN WE PUT AN END TO SWEATSHOPS? by ARCHON FUNG, DARA O'ROURKE, AND CHARLES SABEL. Copyright (c) 2001 by Joshua Cohen and Joel Rogers. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.