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Cablegate: Bangladesh Rmg Sector Labor Unrest - Causes And

VZCZCXRO1980
RR RUEHCI
DE RUEHKA #4412/01 1991134
ZNR UUUUU ZZH
R 181134Z JUL 06
FM AMEMBASSY DHAKA
TO RUEHC/SECSTATE WASHDC 9852
INFO RUEHLM/AMEMBASSY COLOMBO 7505
RUEHIL/AMEMBASSY ISLAMABAD 1199
RUEHKT/AMEMBASSY KATHMANDU 8609
RUEHLO/AMEMBASSY LONDON 1491
RUEHNE/AMEMBASSY NEW DELHI 9212
RUEHCI/AMCONSUL CALCUTTA
RUCPDOC/USDOC WASHDC 1589
RHHMUNA/CDR USPACOM HONOLULU HI
RUEKDIA/DIA WASHDC

UNCLAS SECTION 01 OF 04 DHAKA 004412

SIPDIS

SIPDIS

STATE PASS USTR

E.O. 12958: N/A
TAGS: ELAB ETRD ECON PHUM BG
SUBJECT: BANGLADESH RMG SECTOR LABOR UNREST - CAUSES AND
PREDICTIONS

REF: A. DHAKA 3258
B. DHAKA 3132
C. DHAKA 3053
D. DHAKA 3002
E. DHAKA 2089
F. DHAKA 1740

1. Nearly two months after labor unrest exploded into
violence outside of Dhaka, the ready-made garment (RMG)
industry has largely returned to normal. Agreements
negotiated between industry and labor groups must still be
implemented, with a decision on the most contentious issue --
raising the statutory minimum wage -- due by mid-September.
Small incidents, sometimes wholly unrelated to the industry,
continue to spark occasional conflict at individual
factories. All factories within the Dhaka Export Processing
Zone (DEPZ) have resumed operation, although investors remain
concerned about security. International buyers'
representatives continue to monitor developments closely,
while resisting sellers' pleas for higher prices to offset
expected wage increases. End summary.

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2. On May 22, simmering disputes at the Universal Sweater
Factory in Savar, northwest of Dhaka, erupted into violence,
quickly spreading to nearby factories and ultimately spilling
into the DEPZ, roughly a mile away (Ref D). The violence
continued the following day, spreading to factories in and
around Dhaka, before finally being brought under control late
on May 23. Sporadic outbreaks of violence continued over the
next few weeks, at one point prompting investors to
completely suspend their operations in the DEPZ.

Underlying Causes
-----------------

3. There were many theories about the causes of the
violence, some plausible, some farfetched (Ref C). Two
dominant explanations have emerged, supported by several
underlying factors.

4. First, worker frustration over wage issues finally
erupted. Although government's failure to raise the legal
minimum wage became the rallying cry for labor organizations,
for many workers the issue was not so much the amount of
wages as the failure of many factory owners to pay wages on
time and to pay required overtime rates. In the knitwear
sector, where most workers are paid by the piece, workers
protested the practice of some factories of announcing the
piece rate only at the time of payment, rather than in
advance. Piece rate workers were also frustrated by the lack
of an "overtime" mechanism to reflect long hours during
production surges. These piece rate issues were at the root
of the dispute at Universal Sweater (Ref B).

5. The second factor that has emerged is the role of
Zahedul Islam Zahed, a leader of BNP's labor wing. Known to
some as the "Mafia leader of Savar," he has a rough
reputation as an illegal toll collector and labor agitator
who plays both sides of the fence, stirring worker unrest
then collecting bribes from factory owners to restore labor
peace. Many now believe that he and other "musclemen" and
extortionists took advantage of the May 22 protests to
generate continued worker agitation over the following weeks.
Zahed's role became conspicuous after he led several violent
labor demonstrations in and around the DEPZ. He was arrested
June 20 and remains in custody pending a formal charge sheet.
Coincidentally, calm returned to the area not long after his
arrest.

6. Other factors created conditions that allowed an
otherwise routine factory dispute to turn violent. May is
traditionally a high volume month in the industry as
companies rush to meet seasonal buying trends. As a result,
many factories were requiring significant overtime, in many
cases operating seven days a week. Workers understand that
pressures on the industry during this period give them more
leverage for pressing any demands.

7. Increased problems in the power sector also played a
role. Rolling blackouts (known locally as "load shedding")
interrupted production at many factories, creating further

DHAKA 00004412 002 OF 004


pressures on delivery schedules. Load shedding also affected
workers and their families in their homes, adding to general
irritation and anxiety. (Note: Lack of power had already
triggered violence elsewhere, in Kanshat (Ref E), prompting
concessions from government officials. End note.)

8. Workers also felt under pressure from rising prices for
everyday essentials as annualized inflation approached seven
percent. Although average wages are more than double the
legal minimum wage, workers clearly felt rising prices were
significantly undermining their standard of living.

9. Workers had also become increasingly concerned about
working conditions in their factories, especially after
several workers died in two factory fires (Ref F). The
collapse of a former factory undergoing renovation,
reminiscent of the collapse of a garment factory a year
earlier in Savar, further heightened worker concerns about
the safety of their factories and frustrated over lax
enforcement of workplace safety codes.

10. Rapid new investment to meet strong market demand
following the end of the Multi-Fiber Arrangement has also
contributed to rising worker tensions. Our contacts in the
industry tell us that many new factory owners, while
successful businessmen generally, have little experience in
the garment industry. As a result, they are prone to under
price their products and agree to unrealistic delivery terms.
This in turn creates financial pressures, leading to late
payment of wages, pressure to work uncompensated overtime,
and in some cases outright fraud in the accounting of worker
hours. Rapid expansion coupled with geographic concentration
has also created labor shortages, particularly in the
Savar/Dhaka area, driving up wage costs for skilled labor
(i.e., workers who have completed their three-month
apprenticeship) and prompting some owners to make unrealistic
promises in order to attract labor.

11. Garment workers were not the only protestors; indeed,
most of the protesters on May 22 and 23 were men, even though
women make up nearly 80% of the workforce in the garment
industry. Spontaneous crowds form easily in Bangladesh, with
simple traffic accidents enough to spark an unruly mob.
Construction workers, day laborers and bystanders all joined
in, swelling crowds and contributing to the violence and
property damage. It is also noteworthy that the violence
remained localized to the Savar/Dhaka EPZ area, where about
10% of the country's garment factories are located.

The DEPZ Difference
-------------------

12. Although labor unrest affected companies both inside
and outside the DEPZ, deliberate agitation and provocation
seemed to play a larger role in the EPZ. In one case,
workers became violent at one of four Youngone factories in
the DEPZ when word spread that a mid-level manager had struck
and injured a pregnant worker. The incident never happened
and was traced to a deliberate rumor that spread rapidly in
the highly charged atmosphere that followed the May 22-23
outbursts. The situation snowballed when Youngone shut the
factory to restore order. Workers, who are not paid when the
factory is closed, began agitating at the other Youngone
plants, eventually forcing all to close for several days.
The factories reopened a week later and there has been no
further problem.

13. The protests led by Zahed were also organized outside
the DEPZ, but then led by him to the DEPZ. In a few cases,
foreign investors, especially Korean owned firms, seemed to
be singled out for agitation.

14. A few other plants in the DEPZ also experienced
sporadic worker protests and were forced to suspend
operations for a few days. These particular factories had a
history of worker complaints, and the issues (timeliness of
wage payments and questionable behavior of middle management)
appeared to have merit. Negotiations between management and
the workers resolved these individual disputes within a few
days, although the press often sensationalized these disputes
as part of a broader upheaval in the DEPZ. Significantly,

DHAKA 00004412 003 OF 004


these disputes did not spread to other factories within the
EPZ, despite efforts by some workers to enlist support from
workers in other factories.

15. Wage demands were less of an issue at factories within
the EPZ for two reasons. First, the rules governing
factories in the EPZs set wages in dollars, which has helped
prevent erosion of real wages. Workers did successfully
press for the exchange rate to be calculated monthly, rather
than yearly, to better account for depreciation of the taka
against the dollar.

16. The other factor was the 2004 labor law, which provided
for a transition to collective bargaining and freedom of
association within the EPZs. Under the law, the transitional
Workers Rights and Welfare Councils (WRWC) are allowed to
negotiate a defined set of issues with management, which do
not yet include collective bargaining over wages. Confusion
among workers over the scope of their collective bargaining
rights within the EPZs, compared to the demands of their
colleagues outside the zone, contributed initially to worker
unrest within the DEPZ when they felt management was ignoring
demands which from management's perspective, were not yet
subject to negotiation. Intervention by BEPZA, labor groups
and in some cases, members of the WRWCs themselves helped
clarify worker rights and keep demands realistic.

Outside the DEPZ, Agreements Buy a Respite
------------------------------------------

17. Within days, leaders of the two major industry groups
met with various groups of labor leaders to address worker
concerns and restore labor peace. The Bangladesh Garment
Manufacturers and Exporters Association (BGMEA) and the
Bangladesh Knitwear Manufacturers and Exporters Association
(BKMEA) signed three separate but substantially similar
agreements on June 11, June 12 and June 22 with nine, 39 and
16 labor unions respectively.

18. Key points of the agreements were:

-- Establishment of a minimum wage board to revise the
existing minimum wage and address other wage related issues,
including overtime and piecework. The board must complete
its work within three months.

-- Amnesty for workers picked up in blanket arrests (cases
against those actively involved in property damage would not
necessarily be dismissed); job reinstatement.

-- Immediate reopening of factories; issuance of appointment
letters and IDs for all workers.

-- Acknowledgment of workers' right to form trade unions.

-- Paid maternity benefits.

-- At least one day off each week.

-- Improved workplace facilities, including improved health
clinics; better monitoring and enforcement by BGMEA/BKMEA.

19. Although the agreements have bought a temporary
respite, unrest could resume if workers decide the agreements
are not being implemented in good faith. Already, two worker
groups have held public forums to complain that not all
workers have been rehired and to demand a taka 3000/per month
minimum wage (about $43).

20. Clearly the actions of the wage board will be critical
to the direction of the industry. Rising consumer prices and
the perceived success of their May protests have raised
worker expectations for a significant increase in the minimum
wage. Disappointment could well trigger further protests.

21. While even a 150% increase in the statutory minimum
wage would barely bring the statutory minimum in line with
the prevailing minimum wage, factory owners fear it would
likely have a ripple effect on their entire wage structure,
adding to their overall costs. Given the thin margins in the
industry, owners worry that they will be unable to pass these

DHAKA 00004412 004 OF 004


cost increases through to their buyers.

New BEPZA Leadership Engages
----------------------------

22. As the crisis unfolded, the BDG quickly settled on
BEPZA as the prime scapegoat, and replaced the executive
director (Ref A). In typical government fashion, the new
director, Brigadier General Ashraf Abdullah Yousuf, learned
of his appointment from television reports at his home in
Chittagong.

23. Ambassador and EconOff met with BG Yousuf a few weeks
after his appointment. Although he has no experience in the
industry, he seemed to quickly understand the important role
he could play by example. While BEPZA's authority is limited
to oversight of the EPZs, the Executive Director is accorded
significant respect by the industry associations. Yousuf
held a series of meetings with investors, labor groups and
members of the WRWCs first to understand each side's concerns
and then to facilitate solutions. Unlike his predecessor,
who was perceived by labor to be biased in favor of
investors, Yousuf seems genuinely to view his role as that of
an honest broker. He told Ambassador he would like to reach
out to international labor organizations for assistance with
training labor representatives and expressed a willingness to
meet with AFL-CIO's Solidarity Center when its director
returns from leave later this summer.

Buyers Help Concentrate Attention on Solutions
--------------------------------------------- -

24. Major international buyers were quick to express their
concerns over unrest in the industry and the social
responsibility and worker welfare issues it highlighted.
Buyer concerns were at least a contributing factor in the
speed with which the BDG, BGMEA and BKMEA moved to address
worker concerns. Buyers did not panic, however. The largest
buying groups maintain offices in Bangladesh, and understood
the context surrounding worker unrest. For now, at least, no
buyer has reduced orders to Bangladesh as a result of the
unrest.

25. Buyers have also rebuffed industry suggestions that
they help support higher wages through higher prices for the
products they purchase. At a buyer's conference organized by
BKMEA to promote its actions to address worker concerns,
buyers representatives were blunt that the industry must
confront the core issues affecting its margins and
competitiveness: unreliable and inadequate power, roads,
ports and other infrastructure, corruption, and political
unrest that disrupts production.

Comment
-------

26. Bangladesh and its garment industry will remain
volatile as the current government's term expires and
interest groups and political parties gear up for elections
in January 2007. In this context, should government and
industry fail to deliver on their promises to labor,
especially on the issue of wages, further labor unrest is
likely.

27. Industry's somewhat naive request for price support
from buyers to offset wage increases is understandable, if
misplaced. The industry's strong comparative advantage in
labor costs, even with wage increases, is substantially
undermined by structural weaknesses in the broader business
environment over which individual businesses have little
control. These structural issues, rather than labor
relations, are the bigger threat to the industry in the
medium term and will be a significant factor in determining
whether Bangladesh can continue to compete globally when
safeguards against China are removed by the US and EU in 2008
and if upcoming revisions to the EU's GSP system remove
benefits currently enjoyed by Bangladesh.
BUTENIS

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