The Indian Economy Blog

Prashant had linked to Nitin’s and Ravikiran’s thoughtful remarks on the riots in the Honda factory in Gurgaon. Outlook magazine has an update on the subject. As usual, this story seems to be in danger of becoming fodder for tired political arguments:

“Is this just an isolated incident, as Prime Minister Manmohan Singh claims, or yet one more sign that MNCs are being allowed to violate Indian trade union laws in the guise of welcoming foreign investment, as CPI MP Gurudas Dasgupta asserts? “All MNCs have different labour problems, but their nature is the same,” says Sachdeva, who has been leading trade unions for over three decades now. “The competition is stiff so they want to cut costs, and it is the workers who have to bear the burden of this—he is their first target when it comes to cutting costs.”

In spite of well-documented instances of abuse, my overwhelming impression is that large foreign corporations in India generally do pay better than the local shops and are much warier of stepping on the wrong side of the law (of course, there are always some fly-by-night operators). In a post responding to the Washington Post cited above, Josh Marshall made that point,

“… Rotten working conditions for far under a dollar an hour may be bad. But the conditions may be less onerous and the pay at least marginally more generous than what some of these people would otherwise be making in the agricultural sectors of their national economies. And maybe that’s why the company owners are able to get people to work at what seem to us to be inhumane conditions. (As a general matter, people in the West underestimate the sheer wretchedness of agricultural labor and the endemic nature of rural poverty.)

In any case, that’s the argument. And while I think it somewhat discounts the related issues of rural overpopulation and mechanization, on balance it’s a strong argument.

There is one thing, however, that this line of reasoning misses: political violence. Which is, after all, the grand-daddy of extra-economic inputs.You can’t make a solid argument that wages in other countries have found their natural level if one of the major ‘inputs’ is organized political violence to keep wages low and labor activism inert.

To put it more concretely, one part of a real market in labor is the ability for people to protest conditions, either actively (through organizing) or passively (through quitting or refusing to work). But if people who try to form labor unions are murdered then that whole theory falls apart.”

The Outlook article suggests that Honda actively worked to stop the workers from forming a union. So, Honda does seem to fail this test. But I think Marshall’s (or Yglesius’s) general argument is a good one. And in general, MNCs do improve living conditions - even if it is only an incremental improvement in some cases.

I must also admit here that I am not exactly wild about what Unions represent in India. And while I shouldn’t base my opinion on anecdotal evidence, my exposure to trade-unions in West Bengal and the havoc it had wrecked on the business environment, the work ethic and the school system in Bengal has made me a sceptic on their ability or inclination to be a positive force in the long term. They are a necessary evil; but their effectiveness as an honest broker have been badly compromised in India.

The other point that I wanted to make was about labor in the unorganized sector (carpet making factories, bangle making factories etc.). The real abuses do not happen in MNCs, but in these factories - away from the glare of the cameras. The idea of a union would be a joke in most of these places. Without a systematic and organized effort by the government to police these entities, we won’t able to do the labor there any good. But unfortuanately bangle factories do not have sex appeal where as agitating about Pepsi will always get you good press.