Do global value chains lead to forced labour?

Malaysia is a country which has experienced tremendous economic growth from the 1970s onwards, moving to upper-middle income status in the mid-1990s (Felipe 2012). One of the key industrial sectors that led its transition out of an agrarian society to an industrial one was the electronics industry. Malaysia was one of the first developing countries that inserted itself into the vast global value chain of the electronics industry.

Malaysia was one of the earliest locations where multinational corporations established offshored factories in the country’s free trade zones in the early 1970s. This led to a creation of a set of domestic firms, which specialised as suppliers of parts and components to a large number of multinational corporations in the country. While there was significant growth and some upgrading during the 1980s, the industry and importantly domestic firms have experienced stagnation since the late 1990s. The electronics industry in Malaysia has been unable to upgrade further and move up the global value chain (in value added terms) for many years (Rasiah et al 2015). Critically, it faces competition with new production locations such as Viet Nam and India.

A major reason behind the failure of the electronics industry in Malaysia to grow further is its deep embeddedness in the global value chain. Malaysia entered the electronics industry global value chain with very little domestic capability of its own. Rather, the industry was created with an excessive openness to foreign investment and multinational corporations. Multinational corporations did not only bring production to Malaysia, they also brought with them a set of interests, which were taken up by the Malaysian government as policies, to maintain the industry as low cost and labour intensive.

One of these policies has been the maintenance of low wages in the industry. As the Malaysian economy grew and wages rose during the 1990s, domestic workers were no longer interested in the low paid factory jobs offered by multinational corporations in the electronics industry. The solution to this problem, which was backed by large multinational corporations with large factories in the country, was an influx of low paid foreign workers. Today, foreign workers are a significant feature of the electronics industry in Malaysia. While there are no exact numbers, there are estimates that up to 60% of the workforce in large factories are foreign workers (personal interview 2015). The majority of these workers hold temporary contracts and are hired by labour agencies, which are poorly regulated and whose networks are not transparent (Simpson 2013).

The demand for low paid workers, has also, tragically, led to a high incidence of forced labour (Verite 2014). In its damning report, which was commissioned and funded by the United States Department of Labor, Verite (2014) found that a third of the 501 workers it interviewed were in a situation of forced labour. This report raises serious questions about how an upper middle-income country which hosts major electronics firms with global reputations, such as Intel, Hewlett-Packard, AMD, and Motorola (note: the report does not name which firms were found to have forced labour), has found itself in a situation of forced labour amongst its foreign workers. It also raises questions of how global value chains are implicated in the incidence of forced labour.

For Malaysia, there are various factors at play. An excessive openness to foreign investment has led to the inability of domestic firms to upgrade in the electronics industry. The large and significant presence of multinational corporations has essentially led to a crowding out of domestic innovation and capabilities. More significantly, multinational corporations in Malaysia are interested in maintaining the production location as low cost and labour intensive as possible (Raj-Reichert 2016). While this would normally contradict with characteristics of an upper middle-income country, Malaysia has, however, artificially maintained low wages with the influx of foreign workers (Malaysia is reported to have the largest number of foreign workers in South-East Asia (The World Bank 2013)). This is being done through a network of labour agencies that are poorly regulated, largely non-transparent, and which have historical roots of informal worker recruitment dating back to the 1970s (Chin 2002).

The combination of a fast paced order and delivery schedule of the electronics industry global value chain and government policies, that have failed in innovative upgrading and that have resorted to maintaining a large multinational corporation dominated low cost labour intensive industry, are significant factors which have led to forced labour in the electronics industry in Malaysia.

References:

Chin, CBN (2002) The ‘host’ state and the ‘guest’ worker in Malaysia: Public management and migrant labour in times of economic prosperity and crisis, Asia Pacific Business Review, 8 (4), 19-40.

Felipe, J (2012) Tracking the Middle-Income Trap: What is it, who is it, and why? Asian Development Bank Economics Working Paper Series.

Raj-Reichert (2016) ‘How global value chains contribute to the middle-income trap: a case study of the electronics industry in Malaysia’, Presentation at ‘The Political Economy of the Middle-Income Trap: Towards “Usable” Theories in Development Research” 24 February 2016, King’s College London.

Rasiah, R, Crinis, V, and Lee, H-A (2015) Industrialization and labour in Malaysia, Journal of the Asia Pacific Economy¸ 20 (1) 77-99.

Simpson, C. (2013) ‘An iPhone tester caught in Apple’s supply chain’, Bloomberg News.http://www.bloomberg.com/bw/articles/2013-11-07/an-iphone-tester-caught-in-apples-supply-chain#p1 (accessed 9 September 2015).

Verité (2014) ‘Forced labor in the production of electronic goods in Malaysia: A comprehensive study of scope and characteristics’. Amherst: Verité.

World Bank (2013) Migration and remittance flows: Recent trends and outlook, 2013−2016, Migration and Development Brief 21, Migration and Remittances Team, Development Prospects Group (Washington DC).

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