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Economic Recovery, Made in Bangladesh?

Photographer | CNBC

A couple of years ago, I was in an industrial park in Port-au-Prince, Haiti, as a textiles executive pitched me on becoming a rich T-shirt manufacturer. It was easy, he said, to teach basic sewing to even the most poorly educated farmers. If I could spend $500,000 on used sewing machines (he knew a guy), rent a concrete building with no air-conditioning and hire a few dozen peyizan (Creole for "peasants") for around $3 per day, I could recoup my investment within two years. And if it didn't work out, he noted, I could sell the equipment to an entrepreneur in another poor nation.

Nearly every rich country has gone through a "T-shirt phase" — an economic period in which there are a significant number of poor farmers who, rather than toil on unproductive land, accept harsh work conditions and low wages in textile and apparel factories. Britain started its T-shirt phase in the late 18th century; the United States had two — New England in the 19th century, then the South in the 20th. During the last 80 or so years, many Asian countries — first Japan, then Korea, Taiwan and China — progressed from the T-shirt phase into broader economic development. Cambodia, Vietnam, parts of India and Sri Lanka are passing through this now. But Bangladesh, where an eight-story apparel factory tragically collapsed last month, killing hundreds of workers and devastating the country, is in the midst of a particularly confusing T-shirt phase. The question is whether it will emerge into a more developed economy, like its many predecessors, or remain stuck, like Haiti.

(Read More: Bangladesh Factory Banned by Wal-Mart Still Makes Wrangler Shirts)

According to the comprehensive "Ashgate Companion to the History of Textile Workers," a study of 21 countries over 350 years, nearly every nation suffered through its T-shirt phase differently. Argentina's brutal encomienda system literally worked indigenous laborers to death. The Hapsburg monarchy's T-shirt phase coincided with its own collapse. Japan's progress was slowed by a world war; Germany's was all but destroyed by two. New England's textile workers had it relatively good; if conditions didn't improve, they could threaten to leave for the frontier.

All these countries, however, experienced the same broad phenomenon. Lex Heerma van Voss, an editor of the "Ashgate Companion," told me that the T-shirt phase lasts only as long as there are large populations of farmers with few options. This is known as a "race to the bottom." Factory owners compete by offering low prices, which are accomplished by paying workers tiny wages. Cutting costs by a few pennies per shirt may sound trivial, but mass-market brands find that even a slight increase in price destroys demand. And those pennies at wholesale become dollars at retail.

(Read More: Bangladesh Urges No Harsh EU Measures Over Factory Deaths)

But once the factories have absorbed all these desperate farmers, they need to find a new competitive advantage. That usually involves making better products. When the T-shirt phase ends, a "race to the top" usually begins. Factories often shift to finer clothes, like dress shirts, which require skilled workers. This phase often involves the growth of unions and rising wages. It's typically followed by one in which factory owners, forced to pay more, seek out ever more profitable lines of business. That can mean the move to low-end electronics assembly, then auto plants and maybe even airplane manufacturing. At the high end of the spectrum, you begin to see what the U.S. manufacturing economy is going through now — expensive products, like medical devices, which are often made by machines that are operated by highly skilled workers.

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Bangladesh is in that moment when the race to the bottom coincides with the beginning of a race to the top. Munir Quddus, dean of the business school at Prairie View A&M University in Texas, remembers living as a teenager in Bangladesh, in the '70s, when it was one of the poorest countries on earth. Since the arrival of textile manufacturing, in the late 1970s, the country's poverty rate has fallen to less than 40 percent from 70. The average Bangladeshi went from living on about $1 a day to more than $5. But while there have been modest improvements in some factories ("They have air-conditioning," Quddus says), there are still thousands of decrepit ones with minimal oversight. Quddus also points out that roughly 10 percent of Parliament seats are occupied by factory owners, and others have strong political ties. This includes Sohel Rana, the owner of the factory building that recently collapsed.

Bangladesh has become the world's second-largest apparel exporter, growing from next to nothing to $18 billion a year. "It could be a $40 or $50 billion superpower," Quddus told me. That will require a coordinated race to the top. The government would have to support factory inspections and safer conditions, which would inevitably raise prices — and could send wholesalers elsewhere. Cambodia responded to angry worker strikes by raising its minimum wage to $78 a month, about double of that in Bangladesh. The average Cambodian T-shirt now costs an American wholesaler around $2.50, which is 82 cents more than one coming from Bangladesh — a huge differential in the apparel trade. Mike Flanagan, a retail-sourcing consultant, told me that if Bangladesh raised its prices even 50 cents, the results would be devastating. "There won't be four million garment-making jobs in Bangladesh," he wrote in an e-mail. "There probably won't be 4,000."

(Read More: Retail's Expensive New Problem: Sourcing When Tragedy Strikes)

Many in Bangladesh fear that if the country becomes too expensive a place to make clothes, countless sewing machines will be sent to new factories in Nigeria, Kenya or Ghana. But Vijaya Ramachandran, an economist at the Center for Global Development, who recently studied the industrial prospects of sub-Saharan nations, says this outcome is unlikely. African countries may have a steady supply of unskilled labor, but a higher cost of living should keep them from competing with Bangladesh.

Ramachandran and I tried to figure out what countries might inherit Bangladesh's T-shirt phase. Other than Burma, a long shot, Ramachandran couldn't think of any. For now, Bangladesh might be where this centuries-long T-shirt journey ends, which means that their race to the bottom may be rooted in a misunderstanding. The country's manufacturers can afford to take a step or two up the value chain. Not only can they pay their workers more, treat them better and house them in safe and clean factories, but there is also a significant economic incentive to do so.

Contact World Economy

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