Cambodia wages battle for competitiveness

Photo by: Tracey Shelton

An employee sews at a local garment factory.

LABOUR leaders say more than 80,000 of Cambodia’s garment workers plan to take to the streets today for a five-day strike to protest against the country’s newly established minimum wage.

The dispute is one that has played out across the region in recent months. China’s coastal provinces have been hit with a wave of strikes that has made international headlines, and Vietnamese garment factories have seen work stoppages as well.

In Bangladesh, home to the lowest garment-sector wages in the region, an 80 percent increase in the minimum wage was not enough to stave off protests and rioting by workers who say the new minimum – US$43 – remains unacceptably low.

In Cambodia, the wage was increased by $5 in July to $61 a month. Though Garment Manufacturers Association in Cambodia officials say there is no possibility for a new round of negotiations at this time, the dispute in Cambodia underscores a dilemma facing a number of developing countries that depend on low-cost garment exports: how to keep costs low and competitiveness high while at the same time providing workers with basic livelihoods.

“The win-win situation is to raise both productivity and wages,” said Chikako Oka, a fellow at the London School of Economics who has studied the Cambodian garment sector. “A trickier question is which one comes first and whether one follows the other.”

The wage conundrum

The garment sector has been an engine of the Kingdom’s prodigious economic growth since the 1990s, accounting for 70 percent of Cambodian exports in the first six months of 2010 and up to 90 percent in recent years. As of July, there were 297,000 workers employed in the garment industry and another 48,000 in footwear.

These figures alone do not reflect the industry’s importance to low-income Cambodians – the United Nations estimated last year that 1.6 million Cambodians depend on the garment sector for remittances. The industry was battered by the economic crisis in 2008 and 2009, when the UN estimated that 60,000 jobs were lost.

Tuomo Poutiainen, the International Labour Organisation’s chief technical adviser for its Better Factories Cambodia programme, said the effects of the crisis were still shaping wage negotiations throughout the region. Many workers are agitating for a higher minimum wage in part because of debts incurred as they lost their jobs or overtime hours as orders plunged, he said.

In Cambodia, workers have also been hit with high levels of inflation that have dwarfed wage gains. Since 2006, when the wage was last revised upward, Phnom Penh’s Consumer Price Index has risen 36 percent, including a 51 percent increase in food and beverage prices, according to the National Institute of Statistics.

These figures have led some economists and rights workers to call for more frequent adjustments of the minimum wage, so that increases are felt in real terms. In a 2009 study, Kang Chandararot of the Cambodia Institute of Development Study estimated that the basic monthly needs of garment workers, including an assumed monthly remittance of $15, were roughly $72. He suggested a proportionate increase in the minimum wage, noting the beneficial effect of remittances on Cambodia’s rural economy.

But although the minimum wage has been set at $61, the take-home pay for most workers exceeds this figure. GMAC secretary general Ken Loo said the most recent industry data showed an average monthly wage of $94, as workers benefited from bonuses for attendance, performance and seniority.

“I don’t understand why they are so bent up on this minimum wage issue, because most of the workers, with the exception of very, very few, those that maybe just joined the industry – most of the workers are not drawing minimum,” Loo said. He estimated that the number of workers earning the minimum pay was below 20 percent, though workers earning above the base level will likely benefit from the minimum wage increase on a pro-rated basis.

Life in the garment industry is undoubtedly arduous, with many workers on the job 10 hours a day over a six-day work week. But in an industry where education levels are low and perhaps 90 percent of workers are women, garment factory wages may be the best option for many; according to the World Bank, Cambodia’s gross national income per capita last year was $650, or about $54 a month.

The fight to compete

Cambodia’s garment industry benefited from trade preferences earlier this decade, but with Vietnam’s accession to the World Trade Organisation in 2007, the removal of trade safeguards on Chinese producers last year and the emergence of the low-cost Bangladeshi industry, the pressure to compete is increasing.

The Kingdom’s producers have struggled in part with the high cost of electricity – more than double that in Vietnam – and the need to import fabric, though worker productivity is also a concern. Productivity measurements vary, but Poutiainen said it is “generally acknowledged that the productivity levels in Cambodia are lower than the neighbours and competitors”.

Despite this, base wages in recent years have remained close to the regional average. Cambodia’s 2007 minimum wage of $50, calculated in terms of Purchasing Power Parity, was $156. This fell below the PPP$204 per month in China, but ahead of Indonesia, Vietnam, India and Bangladesh.

Cambodia has also maintained a good reputation with companies that favour “ethical sourcing”, Oka said, thanks to its favourable record on labour compliance. A 2007 study on the Cambodian garment sector funded by the United States Agency for International Development lauded this record, but noted that a focus only on labour standards “potentially diverts attention from more systemic issues regarding the sustainability of Cambodian garment exports” as regional competition intensifies.

An increased focus on productivity may do more to increase the incomes of the Kingdom’s garment workers than minimum wage increases, said Mona Tep, director of Cambodia’s Garment Industry Productivity Centre.

She suggested an increased use of the performance incentives and bonuses that form a significant percentage of take-home pay for workers in Vietnam and elsewhere. So far, however, use of these measures has been limited, and more recently, Poutiainen said, anecdotal evidence suggests “a decrease in the application of incentive schemes” as factories look to cut costs.

Another challenge to productivity improvements is the high percentage of foreign factory owners and managers in the Kingdom, researchers say. The relative lack of Cambodians in management positions may diminish workers’ motivation by dimming their assessments of their prospects for advancement, and cultural and language differences can lead to miscommunications that slow down production.

“Chinese supervisors tend to talk loudly when they interact with workers doing their jobs. However, [this] can lead workers to feel that they are being insulted,” the ILO noted earlier this year.

Foreign managers on temporary assignments may also have limited incentive to increase productivity, Mona Tep said. Increased training opportunities for Cambodian managerial candidates, she added, could solve this problem and redirect wages paid to foreign workers into Cambodian hands - foreigners were 2 percent of the garment sector workforce but 10 percent of the wage bill in 2007, the USAID study said. Training for “value-added” activities that many factories currently don’t perform, including specialised design, printing and embroidery, is another potential source of revenue and productivity increases.

The question of whether minimum wage increases should proceed or follow rising productivity remains open to debate. Kang Chandararot argues that minimum wage gains can lead to greater productivity, generating greater job satisfaction and better health among workers. Loo said, however, that wages should be dictated by market forces and should come only after productivity gains.

The increase in labour costs that will come with the minimum wage bump “may not be ideal for the industry at this point”, he added, with the Kingdom already struggling to compete with low-cost exporters. The average unit price of Cambodian garment exports to the US in the first five months of this year was nearly double that of Chinese exports, and was slightly greater than the unit costs of Vietnamese and Bangladeshi exports as well, despite a lack of high-end garments produced here.

Debate over the minimum wage is sure to play out further among academics and on the streets of Phnom Penh this week. But in any case, Mona Tep said, this is only one element in the larger challenge of preserving the Cambodian garment sector.

“We need to focus on a bigger picture,” Mona Tep said. “Minimum wage is one thing, but how can we become competitive – that’s the most important question, because if all the factories go away, what’s a minimum wage for?”

Photo by: Tracey Shelton An employee sews at a local garment factory. LABOUR leaders say more than 80,000 of Cambodia’s garment workers plan to take to the streets today for a five-day strike to protest against the country’s newly established minimum wage. The dispute is one that has played out across the region in recent months. China’s coastal provinces have been hit with a wave of strikes that has made international headlines, and Vietnamese garment factories have seen work stoppages as well. In Bangladesh, home to the lowest garment-sector wages in the region, an 80 percent increase in the minimum wage was not enough to stave off protests and rioting by workers who say the new minimum – US$43 – remains unacceptably low. In Cambodia, the wage was increased by $5 in July to $61 a month. Though Garment Manufacturers Association in Cambodia officials say there is no possibility for a new round of negotiations at this time, the dispute in Cambodia underscores a dilemma facing a number of developing countries that depend on low-cost garment exports: how to keep costs low and competitiveness high while at the same time providing workers with basic livelihoods. “The win-win situation is to raise both productivity and wages,” said Chikako Oka, a fellow at the London School of Economics who has studied the Cambodian garment sector. “A trickier question is which one comes first and whether one follows the other.” The wage conundrum The garment sector has been an engine of the Kingdom’s prodigious economic growth since the 1990s, accounting for 70 percent of Cambodian exports in the first six months of 2010 and up to 90 percent in recent years. As of July, there were 297,000 workers employed in the garment industry and another 48,000 in footwear. These figures alone do not reflect the industry’s importance to low-income Cambodians – the United Nations estimated last year that 1.6 million Cambodians depend on the garment sector for remittances. The industry was battered by the economic crisis in 2008 and 2009, when the UN estimated that 60,000 jobs were lost. Tuomo Poutiainen, the International Labour Organisation’s chief technical adviser for its Better Factories Cambodia programme, said the effects of the crisis were still shaping wage negotiations throughout the region. Many workers are agitating for a higher minimum wage in part because of debts incurred as they lost their jobs or overtime hours as orders plunged, he said. In Cambodia, workers have also been hit with high levels of inflation that have dwarfed wage gains. Since 2006, when the wage was last revised upward, Phnom Penh’s Consumer Price Index has risen 36 percent, including a 51 percent increase in food and beverage prices, according to the National Institute of Statistics. These figures have led some economists and rights workers to call for more frequent adjustments of the minimum wage, so that increases are felt in real terms. In a 2009 study, Kang Chandararot of the Cambodia Institute of Development Study estimated that the basic monthly needs of garment workers, including an assumed monthly remittance of $15, were roughly $72. He suggested a proportionate increase in the minimum wage, noting the beneficial effect of remittances on Cambodia’s rural economy. But although the minimum wage has been set at $61, the take-home pay for most workers exceeds this figure. GMAC secretary general Ken Loo said the most recent industry data showed an average monthly wage of $94, as workers benefited from bonuses for attendance, performance and seniority. “I don’t understand why they are so bent up on this minimum wage issue, because most of the workers, with the exception of very, very few, those that maybe just joined the industry – most of the workers are not drawing minimum,” Loo said. He estimated that the number of workers earning the minimum pay was below 20 percent, though workers earning above the base level will likely benefit from the minimum wage increase on a pro-rated basis. Life in the garment industry is undoubtedly arduous, with many workers on the job 10 hours a day over a six-day work week. But in an industry where education levels are low and perhaps 90 percent of workers are women, garment factory wages may be the best option for many; according to the World Bank, Cambodia’s gross national income per capita last year was $650, or about $54 a month. The fight to compete Cambodia’s garment industry benefited from trade preferences earlier this decade, but with Vietnam’s accession to the World Trade Organisation in 2007, the removal of trade safeguards on Chinese producers last year and the emergence of the low-cost Bangladeshi industry, the pressure to compete is increasing. The Kingdom’s producers have struggled in part with the high cost of electricity – more than double that in Vietnam – and the need to import fabric, though worker productivity is also a concern. Productivity measurements vary, but Poutiainen said it is “generally acknowledged that the productivity levels in Cambodia are lower than the neighbours and competitors”. Despite this, base wages in recent years have remained close to the regional average. Cambodia’s 2007 minimum wage of $50, calculated in terms of Purchasing Power Parity, was $156. This fell below the PPP$204 per month in China, but ahead of Indonesia, Vietnam, India and Bangladesh. Cambodia has also maintained a good reputation with companies that favour “ethical sourcing”, Oka said, thanks to its favourable record on labour compliance. A 2007 study on the Cambodian garment sector funded by the United States Agency for International Development lauded this record, but noted that a focus only on labour standards “potentially diverts attention from more systemic issues regarding the sustainability of Cambodian garment exports” as regional competition intensifies. An increased focus on productivity may do more to increase the incomes of the Kingdom’s garment workers than minimum wage increases, said Mona Tep, director of Cambodia’s Garment Industry Productivity Centre. She suggested an increased use of the performance incentives and bonuses that form a significant percentage of take-home pay for workers in Vietnam and elsewhere. So far, however, use of these measures has been limited, and more recently, Poutiainen said, anecdotal evidence suggests “a decrease in the application of incentive schemes” as factories look to cut costs. Another challenge to productivity improvements is the high percentage of foreign factory owners and managers in the Kingdom, researchers say. The relative lack of Cambodians in management positions may diminish workers’ motivation by dimming their assessments of their prospects for advancement, and cultural and language differences can lead to miscommunications that slow down production. “Chinese supervisors tend to talk loudly when they interact with workers doing their jobs. However, [this] can lead workers to feel that they are being insulted,” the ILO noted earlier this year. Foreign managers on temporary assignments may also have limited incentive to increase productivity, Mona Tep said. Increased training opportunities for Cambodian managerial candidates, she added, could solve this problem and redirect wages paid to foreign workers into Cambodian hands - foreigners were 2 percent of the garment sector workforce but 10 percent of the wage bill in 2007, the USAID study said. Training for “value-added” activities that many factories currently don’t perform, including specialised design, printing and embroidery, is another potential source of revenue and productivity increases. The question of whether minimum wage increases should proceed or follow rising productivity remains open to debate. Kang Chandararot argues that minimum wage gains can lead to greater productivity, generating greater job satisfaction and better health among workers. Loo said, however, that wages should be dictated by market forces and should come only after productivity gains. The increase in labour costs that will come with the minimum wage bump “may not be ideal for the industry at this point”, he added, with the Kingdom already struggling to compete with low-cost exporters. The average unit price of Cambodian garment exports to the US in the first five months of this year was nearly double that of Chinese exports, and was slightly greater than the unit costs of Vietnamese and Bangladeshi exports as well, despite a lack of high-end garments produced here. Debate over the minimum wage is sure to play out further among academics and on the streets of Phnom Penh this week. But in any case, Mona Tep said, this is only one element in the larger challenge of preserving the Cambodian garment sector. “We need to focus on a bigger picture,” Mona Tep said. “Minimum wage is one thing, but how can we become competitive – that’s the most important question, because if all the factories go away, what’s a minimum wage for?”