How can Transaction Cost Economics Theory be used to help Bangladesh's Government save their Garment Industry?
Daryl Chen
California Baptist University

Abstract Bangladesh is one of the developing countries of the South Asian region, with the population near about 122 million. The country's main export sector is in the garment industry. In 2010, the country decided to raise the minimum wage due to the public's outcry of unfair wages and working conditions. In this research paper, we will look at how the increase of minimum wage has affected the country's economy and what could be done to improve the outcome.

Introduction Bangladesh is one of the developing countries of the South Asian region, with the population near about 122 million. Many of the 122 million are garment factory workers whose incomes rely on the garment industry growth and the ability to offer cheaper costs than other countries in the world. Bangladesh is a developing country, which would be consider by most as an old terminology, a third world country, and it's Ready Made Garments (RMG) sector of the textile industry has been known as the biggest earner as an export and the foreign currencies that come as the result of it. The country's Gross Domestic Product (GDP) is greatly contributed by its textile industry. In 2010, the country raised the minimum wage. The fallout was the unforeseen result and halted the country's growing economy. The country's export sector slowed and foreign companies began to start taking their businesses elsewhere to other countries, such as Vietnam and China. We will examine the impact of the minimum wage raise and the possible solution to improve the aftermath of it.

Literature Review
Step#1
The Transaction Cost Economics (TCE) theory has traditionally been the most outsourcing theory. The TCE theory provides decision-making tools in order to help organizations determine which of their operations should be outsourced (Bromiley, P. & Harris, J. 2006 p. 3-6). If chose to outsourced, the TCE theory helps to prepare the companies in implementing the required and needed organizational changes to help solve the possible problems stemming from outsourcing (Macher, J. & Richman, B. 2005). The characteristics of the TCE allow for its implementation both at the relationship management phase and at the reconsideration phase. Another extremely useful feature of the TCE theory is that it can be used for the analysis and selection of outsourcing contracts, which are often of great complexity.
Step#2
Bangladesh is a developing country, and it's Ready Made Garments (RMG) sector of the textile industry has been known as the biggest earner as an export and the foreign currencies that come as the result of it. The country's GDP is greatly contributed by its textile industry. The main key factor which has allowed Bangladesh to become a most favorite sourcing destination to international buyers is their garments workers (Kohsla, N. 2009 p. 3-7). Out of the population of 122 million, many are garment factory workers who earn their Taka by working countless hours without proper pay such as overtime, and without healthcare coverage at the work site (Kohsla, N. 2009 p. 5-7). Taka(Tk) is the official currency of Bangladesh and since 2006, the the garment workers were only paid Tk 1662.50 per month which is equivalent to US $22 (Saxena, S. Salze-Lozac'h, V. 2010 p. 5). In November of 2013, the country raised their minimum wage to Tk 5,300 which is equivalent to US $68 per month. The increase in wages occur due to protests throughout the country by the disgruntle workers who feel they are under paid (Saxena, S. Salze-Lozac'h, V. 2010 p.5). The recent 77% minimum wage increase to $68 a month for Bangladeshi garment workers has a tremendous impact on all stakeholders involved in the industry. Firstly, many smaller factories are starting to face bankruptcy, as the industry is forced to compete directly against low-cost apparel exporters, such as India, Sri Lanka, and Cambodia. Public attention has forced customers to inspect their suppliers’ conditions and many foreign investors have become wary of their investments. In fact, the Bangladesh Knitwear Manufacturers and Exporters Association estimates 25-50% of Bangladesh’s 1,900 knitwear factories will close as a result of inspections or buyer concerns. Countless garment workers will lose their jobs, and those that do retain them will still not meet the $100 a month minimum needed to cover bare necessities, as measured by the Bangladesh Institute of Labor Studies (Stewart, K. 2014 p. 3-5). A further examination of the settlement shows that the Tk 5300 total is composed of multiple parts: Tk 3000 for basic pay, and the remaining Tk 2300 broken into house rent, medical, transport and food subsidy. Only the Tk 3000 portion is subject to a 5% yearly increase, which is below the annual inflation of 7-12% (Sketch, A. 2014 p.2-3). To clarify, this settlement has already set the stage for future protests given Bangladesh’s current macroeconomic conditions. The poor working conditions in Bangladesh has always been known as inhumane. On April 24th, 2013, the Rana plaza which is an eight story garment factor collapsed. Over 1,100 people were killed and many more were injured, due to poor structuring of the building, which can be traced back to the need for making profits and not caring about working conditions for the factory workers. The Rana Plaza disaster has brought Western public attention to the poor conditions and wages in Bangladesh factories. Several companies, including The Walt Disney Company, have suspended their operations. Two organizations composed of Western clothing brands and retailers also recently emerged to ensure minimum standards of safety for garment workers but have largely been unsuccessful, as their coverage only protects 2,200 of the 5,000 garment factories (Sketch, A. 2014 p.4-8). The end result may be that many customers will look to supply from countries that are less publicly sensitive and can demonstrate better working conditions. Step#3 The Awami League appears to have succeeded in negotiating a middle ground between the unions, workers and factory owners, which will help the party in the general elections in early 2014. The garment industry is significant to Bangladesh, representing over 75% of export earnings and 15% of GDP. Around 4 million (comprised of 85% women) of the 157 million total population are employed as garment workers, and many factory owners enjoy a separate status as prominent politicians. However, the party has only provided a short-term solution to what is a deeper-rooted problem in the garment industry, simply that Bangladeshi factories are far less productive than their counterparts. According to Hossain, R . (2015) the government can improve the industry’s productivity and as a result, provide a soft landing for the industry’s move into higher margin products by providing government-backed financing for factories making productivity improvements (new machines, facilities). Low interest rates would provide a soft landing for factories as they readjust their operations and become more competitive with the global market. Subsidizing mandatory training. Factories that take government loans to buy new machinery must undergo regular mandatory training for all their employees and managers. The goal is for factories to recognize the importance of investing in workers and decreasing worker turnover. Creating partnerships with foreign companies that invite foreign managers to teach best practices and manage abroad as well as send Bangladeshi managers to study abroad. In Cambodia, around 90% of factories are owned by Chinese, and other foreigners. These factories have extensive experience managing in an environment where labor costs significantly more, and as a result, extracting the most value from staff is consistently employed. Bangladeshi managers, on the other hand, only have experience managing low-cost workers and dealing with their country’s constant political chaos. As the industry moves to higher value products, the knowledge sharing through these partnerships will help train middle management in global best practices.
Step #4 By studying the TCE which model is to outsource to other countries globally, can the Bangladesh government improve the country's garment industry economy, which has fallen since the increase of the country's worker minimum wage?
Discussion
Claim By analyzing the TCE model and characteristics, the Bangladesh government can realize that most of the international companies should outsource to cut down costs and improve their profits (Macher, J. & Richman, B. 2005 p. 3-5). Based on this assumption, the Bangladesh government can find out what the other countries can offer better pricing for production of the garments to the international companies.
This is to gauge what the competition offers in the world's garment market, follow by evaluation of the country's own strength and weaknesses of the garment industry.
Reason
The increase in the minimum wage has weaken the strength of the garment industry, which was based on the garment factory workers wages being low compare to others. The increase in wage did solve the problems of workers protesting and improved the country's citizens well being. The government of Bangladesh must find the balance between it's strength of the garment industry which is low wages of it's industry's workers and the political unrest of the country due to low wages of it's workers. No matter the cost, the government must work with the unions to lower the wages from it's recent increase to Tk 5,300 but not low enough where workers cannot live and survive off of the wages earned. I proposed the amount of Tk 4,000 which is equivalent of 51 U.S. dollars. This will solve the problems of the economy possibly falling due to it's export of ready-made-garments industry and it's workers being unsatisfied of their wages.
Evidence
By decreasing the country's minimum wages to Tk 4,000, Bangladesh can improve its ready-made-garments sector and their economy overall. The country’s clothing industry has the advantage of scale: it has 5,000 factories, compared with 2,500 in Indonesia and 2,000 in Vietnam. And unlike clothes put together in China, India and Sri Lanka, those stitched in Bangladesh enjoy duty-free access to the European Union. The government must capitalized on these advantages and not lose out the international garment business to other competitor countries. In the past five years the price of the average garment has fallen by 12% in local-currency terms. In that period the factory owners’ return on investment has plunged from an average of 50% to 20%. Foreign investors have began to seek out better pricing by going to competing countries such as Vietnam and Myanmar. Countries that weren't previously consider a competitor such as Ethiopia have emerge as the new destination for cheap labor. Countries in Africa have began to strive to be the main source as the supplier in the garment industry because it does not not require lots of expensive infrastructure or a skilled population that can supply and maintain fancy machines, and it does use lots of low-skilled labor. By comparison, a garment worker in china can earn from 150 to 300 U.S. dollars but such worker in Ethiopia will earn only 21 U.S. dollars. The big gap in the wage cost have attracted many companies to look for outsourcing in African countries which is the characteristic of the TCE. The Bangladesh government and it's people must realize this and come together to stay as the second leading garment supplier in the world. Both sides must meet in the middle and settle on the minimum wage of Tk 4,000. Limitation Raising the minimum wage to Tk 4,000 does have limitations to it's effectiveness. First, according to Stewart, K. (2014) it is barely enough for the workers to support their respective families. Couple that with the poor work environment which isn't safe to work in, the workers will be dissatisfy with the decrease in their wages. Evident by the Raza plaza incident, the work safety regulations in the country are at best, deemed unsafe (Sketch, A. 2014). To change the conditions of the work environment takes time and currently, time isn't in Bangladesh's favor. The Bangladesh government must see that and have to legislate regulations that improve safety at the garment factories. The workers must reconize the economic crisis and the importance of the need for the foreign companies investments in the garment industry. Conclusion Bangladesh has a population total of 122 million, and many of them are garment factory workers, who earn their Taka by working countless hours without proper pay such as overtime, and without healthcare coverage at the work site. Amid turmoil, the country decided to raise their minimum wage, which affected the once attraction for foreign investments in the garment industry negatively. With the competitors from around the world lurking at the Bangladesh's ready-made-garment industry decline, the Bangladesh's government must find a way to improve it's relationship with the country's citizens as well as lower the wages in the industry to maintain it's calling as the low wage destination for the ready-made-garment industry. By lowering the minimum wage to Tk 4,000 and improving it's regulations on work safety, the government can continue attracting foreign investors in the garment industry and satisfy the workers seeking better living conditions. In the future, the government must introduce new legislations to improve work conditions as well as the pay wage. The government must study other theories besides the TCE to find solutions for their economy and work environment issues.

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