The new social contracts

Fire and collapse in Bangladeshi factories are no longer unexpected news, and sweatshop scandals are all too familiar. Conflicting moral, legal, and political claims roil about them. But there have been positive moves, and there is a promise of more. The best hope for progress may be in the flexibility and power of individual contracts.

Accord and discord

Bangladesh factory disasters are only the latest chapter. The problems, at least to some, seem obvious: merchandise is made in a developing country without the safety, labor, environmental, or human rights standards expected in the developed world. Human trafficking, child labor, forced labor (slavery?), and unsafe conditions are among the most egregious problems. Disasters of tragic proportions occur every few years, or a horrifying practice comes to light. Companies scramble to contain the public relations fallout and sometimes contribute money for victim compensation or facility improvements.

Aside from the obvious, and the collective handwringing, agreement about the issues is in short supply. Companies disagree on how to compensate victims and improve conditions: the refusal of the US-led effort on Bangladesh, called the Alliance, to join the European effort, called the Accord, is a case in point, but the disagreements are not limited to Western buyers. The NGOs disagree with the businesses, and those in the developing world of course have their own views.

Some argue that attempts to export Western standards is a form of cultural and economic imperialism, an effort to raise the cost of goods made in the developing world to make Western-made goods more attractive: a disguised protectionist move benefiting overprivileged workers and powerful developed countries. Other evidence suggests that jobs available outside the maligned garment factories in Bangladesh are even worse, involving dangerous welding work or child prostitution. Or that without the factories, a lack of jobs will push people into crushing, perhaps fatal, poverty.

The flexibility and pluralism of contract

Satisfactory public solutions, given the disparate viewpoints, collective action problems, and more powerfully, jurisdictional and political limits, seem distant. Efforts like the removal of Bangladesh from its “most favored nation” status in the US can only go so far. Individual contracts, while hardly a perfect solution, offer some promise, and at the moment, perhaps the best hope. That is because of their flexibility: their ability to accommodate different goals, commitments, standards, and models.

One model is the ordinary two-party contract where the buyer (say, a large Western clothing retailer) contracts to buy goods from a manufacturer (say, a factory in a developing country). The factory owner promises to adhere to standards set out in the contract. Other provisions govern recordkeeping and inspections. The parties have almost unlimited freedom. They can take on whatever legal and moral commitments they like and not the ones they don’t. But this model is expensive. Bespoke contracts are even more costly than custom-made suits or high couture.

Molecular federalism

Instead, the retailer and the manufacturer might opt into a three-dimensional regime. Their contract might obligate both parties to be a member of or be certified by an organization that promulgates standards and that monitors its members or clients for compliance. Such an organization acts like a substitute for a state or a regulator. Picture the organization at the apex of a pyramid. Then parties can opt into this regulatory regime through their contracts, forming the base of the pyramid, generally without regard to borders. It doesn’t matter if they’re located in the US, Bangladesh, China, or wherever — which is important now as companies move to new places. These flexible private regimes can be thought of as an extraterritorial federalist system, but on a small scale — “molecular federalism.” Just as companies can move to Delaware for corporate law, companies can choose an organization that gives them the standards and the monitoring that they think appropriate.

In consumer industries, there is a further check: the companies don’t choose just what they want. They need to satisfy their customers; hence the recent moves to “fair trade” fashion. And there is further good news as corporate lawyers and boards bring the moral impetus into the boardroom under the leadership of the American Bar Association. The beauty is that the ABA movement is led by people already inside the boardroom. They can get corporate policies adopted and, we’ll hope, eventually implemented in actual supply contracts.

Legal and political jujitsu

Those contracts are crucial because they allow a kind of political and legal jujitsu. In many jurisdictions, plenty of laws protect labor, the environment, safety, and so on. The laws are not enforced, and efforts to get them enforced may be seen by the government as unwelcome agitation that could land the agitators in jail. But the contracts change the dynamic, as Blair et al. found in China: attempts to get better working conditions are flipped from being anti-business and anti-government agitation and become efforts to help the factory hold onto its contract and to keep the jobs in the community.

These are hopeful moves. Progress seems possible, and that is the main point. There is no room for Pollyannas, though. Each of the ideas mentioned above comes with pitfalls. Some will argue against them. Even at their best, careful analysis, drafting, and judgment will be required to manage the legal risks. But, again, the possibility of progress is the point. When matters seem hopeless, doing nothing is safe and convenient. Rafts of PR firms can handle scandal. Little or no legal liability faces companies with good lawyers. Legal and moral windowdressing can be mounted as easily as holiday displays. But contract allows a way forward, and companies will do right to use their supply contracts as a tool for change.

Featured Image Credit: ‘Welder, Indian Steel Factory’. Photo by Jay Hariani, CC by SA 2.0, via Flickr.