Many multinational companies now require their suppliers comply
with global standards ranging from safety to labor conditions to
minimum wage levels. Such requirements are not required by local law.
Indeed, they usually dramatically exceed local practice. These rules and
regulations have the same practical impact as traditional governmental
regulation. A manufacturer that does not comply with Wal-Mart's
environmental standards may be shut out from the U.S. market.
Governments
play little to no role in such agreements. They are negotiated and
enforced by private parties: companies and activist groups. This new
form of regulation has sparked controversy. Recently, economists Jagdish
Bhagwati and Amrita Narlikar have accused activists of bamboozling
retail companies into taking responsibility for safety at garment
factories, a burden that should rest on the factory owners. Exit doors
existed, the scholars wrote, but managers closed them.
Can or will companies police themselves?
Outside Opinion: Private regulation on the rise - Chicago Tribune
I think this is an example of the Coase theorem in action, to the limited extent it can help in these situations. Walmart knows that if it absolutely flunks basic environmental regulations from its international suppliers, it will face serious backlash, so it enforces them itself.
ReplyDeleteMore cynically, maybe Walmart is just doing this to avoid a populist backlash that would prompt governments to make stricter regulations themselves.
I believe companies will find it to their benefit to police itself. In order to prevent other liabilities, punishments from government, and backlash from suppliers, companies will find it a good investment to simply police itself before something goes array. Although it may be costly to police itself, it will be far cheaper than backlash, liabilities, and punishments would cost. It's like prepaid insurance, and companies can be just as risk averse as individuals.
ReplyDeleteI think the author brings up a good point.. these regulations come about largely from media attention. I believe they said that a company that is featured (negatively) in the media has its stocks decline 0.7 points daily, for every day that it is featured. Many of these regulations come from public outrage, or when normal citizens hear about tragedies such as the Bangladesh factory collapse. With more whistle-blowing environmental and human rights activists looking to expose terrible working conditions abroad, we will continue hearing about U.S. companies involved in worker's scandals abroad.
ReplyDeleteI think this could be prevented by more stringent public regulation. The private regulation that Wal Mart or Apple makes seems to be reactionary, meaning that it only occurs after wide-spread complaints. Exposed poor working conditions cause public outrage in the U.S., which causes multinational companies to change their policies. Imagine if all subsidiaries of U.S.-based companies were held to the same regulations abroad? Although this is an extreme example, it shows how far the regulations in the U.S. and abroad are apart. While in economics we talk about comparative advantage often, we have to realize that sometimes we are describing taking advantage of foreign workers in countries that do not enforce labor laws strictly.
This reminds me of an example from my SIP research on private military companies (for profit companies hired by governments to provide any and all types of military services). A major issue is regulation of these companies, however, nearly all writing doctrine and regulatory practices were outsourced to these for profit firms--and believe it or not but regulation (or the lack there of) is still an issue! While article focuses on a different type of structure of this type of regulation, I still find it somewhat dangerous for companies to implement powerful regulations, as they usually lead in somehow to the benefit of the company while costing the consumer.
ReplyDelete