Indonesia Case Study Shoes and Poverty Part II:

Readings: Please take a look at the discussion questions for this section (there are also some at the end of this module) before reading these (mainly) news stories. The purpose of these readings is to look at an important controversy that affects mainly poor young women workers in countries like Vietnam, Cambodia, China, Indonesia and Bangladesh. We want to think about the benefits and costs of these factories for the poor, and in particular the issues raised during protests by students and workers in the late 1990s. Sachs (2005, pp. 10-12) summarizes the view of most economists, but it is important to consider a range of views, in particular the role of these factories in helping or hurting the $1/day poor in countries like Bangladesh and Indonesia (see also the ABC 20/20 News segment that contrasts the perspective of economists in exporting countries with those of student activists). Overall it seems that these factories raise the living standards of their workers, but working conditions sometimes leave something to be desired. A key issue for us is whether these workers or $1 or $2 a day poor. If these workers are poor, raising wages will reduce poverty. If they are not poor, raising wages could reduce the number of jobs, increase the power of supervisors over their workers and sometimes encourage factories to move elsewhere (from Indonesia to Vietnam for example). This would reduce opportunities for young women from rural villages to escape poverty by going to work in these factories. Other questions to be kept in mind are why so many of these workers are women, and what happens when wages are increased.

Finally, we focus in on the cost of living in these countries and how this effects our assessment of who is poor. We read newspaper articles such as the one reproduced below and see wages paid to factory workers of just $2.50 a day. These seem to be impossibly low wages (about 20 cents an hour). How can anyone buy clothes, rent an apartment pay for food and medical care and show up for 12 hours of work almost every day. The answer is partly that things are cheaper in these countries. In Tangerang during 1997-98 for example you can rent an apartment (shared probably) for $10 a month, you can buy a soda for 15 cents and rice and vegetables for 17 cents. One way to translate this wage into terms we understand is to ask how much it would take, on average, to buy all this stuff in the United States. It turns out that a $1 in Indonesia (converted into local currency, the rupiah) buys about $4.30 worth of stuff—purchasing power is greater there by a fact of four simply because the prices of things urban workers buy is lower. So this means $2.50 a day really buys what $11 would buy here in the United States. Of course, $11 a day is still a really low wage but it is better than $2.50 a day. Most factory workers also get meals, transportation allowances and free medical care at the factories which, along with overtime pay, further raises there living standards. This explains why these workers are able to send money home, save to buy land and build houses, play the arisan, etc. The 4.3 number comes from the World Bank estimates, but they may not be trustworthy, so we look at the costs of living data put together by St. John’s sweatshop activists Jim Keady and Leslie Kretzu—they went shopping and Tangerang put prices of things they bought up on their web page (they did not look a rents however).

Jim and Leslie’s hard work allows us to check the World Bank numbers to see if these purchasing power adjustments seem plausible. Since the $2.50 wage rate reflects what NIKE contractors have to pay, we refer to this as the market exchange rate wage. This same wage rate buys what $11 would buy in the United States, we call this second purchasing power wage rate the $PPP wage rate (PPP stands for purchasing power parity, i.e. equal purchasing power wage rate). Both wage rates are important, depending on where you live of course. Why do we have to go to all of this trouble? Because the World Bank economists use purchasing power parity dollars to compute the $1/day and $2/day poverty rates all over the world. This means to see if a family is poor we have to convert their income into $PPP just to see if they are poor or not. Why do this? Because there are still as many as a billion people living on less that $1/day (and almost 2.6 billion living on less than $2/day). The idea behind Millennium Development Goal #1 is help them first. This is also the focus of this course. But to help them, we first have to find out who they are and where they are.

Nike To Raise Employee Wages After Workers Stage Protests (WSJ Interactive Edition News Roundup April 27, 1997)

Nike Inc. said on Saturday that it would raise the wages it pays to employees at a factory in Indonesia after a group of workers there burned cars and ransacked offices on Friday, saying the company wasn't paying them a $2.50 a day minimum wage. Earlier Saturday, officials ordered the factory to shut down. Speaking from Miami on Saturday night, Nike spokesman Jim Small said the wage dispute was resolved, with employees winning a 11% pay increase. However, the new salary figures would vary depending on each worker's pay scale, and Nike said it wouldn’t pay more to contract with the factory as a result of the higher wages. There was no immediate confirmation from Indonesia that the dispute had been resolved. Mr. Small added that, before the strike, workers already were making more than the minimum wage and that pay in Indonesia has increased threefold in the last two years. After the last raise, workers were upset because they had been expecting a 10.6% increase, but were given a 7.25% raise. "There's concern what that does to the market, whether or not Indonesia could be reaching a point where it's pricing itself out of the market," he said.

Almost half the factory's 10,000 employees took part in Friday's demonstration at Tangerang, an industrial town outside Jakarta, according to Indonesian media. It was the second protest in a week against PT Hardaya Aneka Shoe Industry, which owns the factory that makes shoes under contract for Nike. A factory official, who spoke on the condition of anonymity, said the plant would stay closed Saturday and Sunday, normal working days, although production would restart Monday. And on Friday, nearly 3,000 employees at a South Korean company making shoes in Vietnam for Nike staged a one-day strike to protest their salaries and working conditions.

Nike, headquartered in Beaverton, Ore., and its competitor Reebok have denied accusations that they pay Indonesian workers too little and tolerate poor working conditions and other abuses at Indonesian factories run by contractors. Both Nike and Reebok have taken foreign reporters on tours of the factories, which appeared clean and orderly. Nike refused to let the U.S. civil-rights leader Jesse Jackson visit a factory in another town near Jakarta in July. Labor activists claim that Nike's factories in Vietnam exploit and abuse workers, sexually harass female employees and use corporal punishment for disciplinary purposes.

Two women workers in Indonesia were hospitalized after Friday's protest at a factory in Tangerang, a busy industrial center just west of Jakarta, the newspaper Republika reported. Nike contractor PT Hardaya Aneka Shoe Industry runs the factory. The workers said the company had failed to pay the new government-mandated minimum wage of $2.50 a day, which took effect April "They are ignoring the rights of the workers to get a decent salary," said Jusuf Makatita, a local union leader. In southern Vietnam, just outside Ho Chi Minh City, about 3,000 workers unhappy with their contract staged a one-day walkout at a Nike factory in one of the largest strikes in the country's recent history. It was the second strike at the factory in less than a month. Workers at the South Korean-owned Sam Yang Co. walked out Friday after being told by management they would be fired if they didn't sign a new binding contract, according to the state-run Labor newspaper.

The employees returned to their jobs Saturday, and union and management representatives were meeting to discuss a settlement. The employees are demanding higher wages, a safer working environment, more holidays and an annual bonus for Vietnam's lunar new year. Sam Yang's employees earn about $40 per month — well above the national average--but they say they deserve more to compensate for the demands placed on them. There was no apparent connection between the rampage in Indonesia and the strike in Vietnam. In Tangerang, protesters burned two cars, one of which belonged to a government labor official, and smashed windows, doors and furniture at the factory, according to news reports. A security guard was beaten when he tried to stop the vandalism, Republika said. Several police officers and soldiers were treated for minor injuries.

On Tuesday, some 13,000 company employees held a six-mile-long protest march to demand higher wages. Indonesia, which allows only one government-controlled labor union, has been accused of holding down wages in order to attract foreign investment. Independent labor organizers have been arrested, beaten and sometimes killed. The government acknowledges that its minimum wage is sufficient to pay for only about 90% of a single person's living expenses.

A Closer Look At a Nike Factory by *Frank Denton, Wisconsin State Journal; Forum, Pg. 1B, 7/30/00

In this age of cynicism and alienation, Americans are more likely to become actively involved in local issues than in faraway affairs. Think globally, act locally? Nah, how can one make much of a difference? Kusniah, age 21, and Tumarni, 22, can tell you. As the two women took a lunch break from their jobs making outsoles for Nike athletic shoes in the huge Astra Graphia factory in this Javanese town, they talked about how much they like their jobs. "It's nice working here," Tumarni (many Indonesians have only one name) said through an interpreter. "They take care of our welfare and working conditions." "It's nice here," agreed Kusniah. "They take care of everything." "Here" is a factory that could have been a "sweatshop" if it were not for American public pressure on Nike to improve wages and working conditions for the Third World workers who make its shoes. As American manufacturers faced with high wages and poor labor supply in this country look overseas for plentiful, willing and – by U.S. standards – cheap labor, there has become almost an assumption of "sweatshop" pay and conditions. Particularly among those whose simplistic politics require a corporate demon. A writer for the weekly paper Isthmus last week wrote blithely about "Nike Sweatshops" in Indonesia and tied them to "U.S.-sanctioned despots or U.S.-sponsored violence."

I came to Tangerang to see for myself. As part of a delegation of editors organized by the Pew Fellowships in International Journalism, we were free to choose any factory to visit and any employees to interview, and we used our own interpreter. Nike, in fact, owns no factories in Indonesia, but instead contracts with 27 factories owned by Indonesian and other Asian investors. Nike does impose on these contractors its own code of conduct: "A safe and healthy workplace, free from harassment or abuse; fair and full compensation, including all benefits mandated by law; recognition of freedom of association and collective bargaining; pay and promotion based solely on your ability to do your job; safe limits on total hours or consecutive days that you can be required to work." The requirements, given to each employee on laminated cards, are monitored by Nike officials on site and checked annually by the international accounting firm PricewaterhouseCoopers.

The average take-home pay for a Nike-contract worker in Indonesia is $786 a year, which doesn't sound like much from a U.S. perspective but which, within the Indonesian economy, is almost twice the $408 minimum wage and substantially above the $509 average income nationally. A dollar goes a very long way in Indonesia. In addition, workers get social security benefits, free health care, uniforms, at least one free meal a day and a holiday bonus higher than the government mandate of one month's salary. One factory provides free housing for 13,000 workers. During my visit to Indonesia, Nike began requiring its contract factories to offer free, after-working-hours education to their workers, with pay increases recommended for graduates. The Tangerang factory with 5,355 workers is modern and clean, better than some I have seen in the United States. Its managers brag about improved indoor air quality and the replacement of smelly and possibly toxic solvent-based adhesives with water-based adhesives. As a result, in a country with an economic crisis, 30 percent unemployment and 60 percent of the people living below the poverty line, jobs here are very desirable. "Tons of people are waiting at the gate every morning," hoping jobs will open up, a factory spokesman said.

Kusniah and Tumarni consider themselves very lucky. They said that without these jobs they would be working in the rice paddies like their parents or scrapping by as vendors in the informal economy. They are represented by a union, and two union officials said the jobs here are "much better" than the women would find elsewhere in the Indonesian economy. The union representatives privately asked me the reason for our visit, and I explained the public concern in the U.S. about Third World "sweatshops," the role of the press in informing the public and the resulting pressure on big companies like Nike. They urged us to come back any time. In fact, the Nike representatives in Indonesia are up front in saying that it was American public pressure that pushed Nike to require its contractors to improve pay, benefits and working conditions over the past three years. Would Nike have made these improvements otherwise? I asked Tammy A. Rodriguez, a corporate-responsibility compliance official for the firm in Indonesia. "Probably not as quickly," she answered, "probably not to the degree."

Tony Nava, general manager for Nike in Indonesia, added, "All these issues have really pushed us." He said the other big sport-shoe brands, Reebok and Adidas, probably have responded similarly. On the other hand, Nava suggested the factories that make "non-branded" shoes, the knockoffs that show up in discount stores, still might deserve the "sweatshop" label. "The rest of the industry is pretty bad," that is, more like many other workplaces in this Third World country. But when corporate responsibility can be directly connected to a company's highly visible name, like Nike, public involvement and pressure work. Whatever you think of tactics like the five-day sit-in in UW-Madison Chancellor David Ward’s office last February, the people in the corporate offices are paying attention. Just ask Kusniah and Tumarni.

Nike-Funded Study Finds Abuses At Indonesian Contract Factories

By SHU SHIN LUH Staff Reporter of The Wall Street Journal February 22, 2001

Limited access to medical care, fondling of assembly-line workers by factory managers and forced overtime are widespread among Nike Inc.'s Indonesian contract factories, according to a candid report funded by the international sporting-goods giant to be released Thursday. Workers in one Jakarta factory told researchers from the nonprofit organization Global Alliance that female job candidates were asked for sexual favors to gain employment. At another factory, a manager threw a book at a worker when she was slow to bring materials to the sewing division. And most of the 4,004 factory workers interviewed said they feel coerced to work overtime even though Indonesian law says it should be voluntary.

Nike, which has been accused of buying from ill-managed sweatshops and being evasive in its responses to criticism, plans to ask for independent verification of the problems raised by the report. The company also is promising to make it easier for workers to report abuses. The report, a third in a series, set out to learn more about factory workers' aspirations in their careers and family life. But in the course of interviews with workers Global Alliance researchers uncovered compliance violations. The report was solely funded by Nike's $7.8 million research grant to Global Alliance. Both Nike and Global Alliance officials reiterated that the group isn't a monitoring organization.

Global Alliance's reports on Thai and Vietnamese workers in Nike contract factories released last year came under fire from labor activists world-wide. The group was criticized for focusing on "soft" issues such as education and skills training instead of investigating compliance violations such as harassment and overtime abuses.

In the past, critics saw Nike's relationship with Global Alliance more as a salve to public opinion than an effort to improve working conditions. "They had taken the most important issues -- the questions about current workplace conditions -- off the table," said Dara O'Rourke, a professor at the Massachusetts Institute of Technology and one of Nike's harshest critics. "We weren't sure what it was or what Nike gets out of it if it didn't do monitoring."

"It's good that they added in compliance issues," Mr. O'Rourke added. For this report, Global Alliance conducted hour-long interviews with 6% of the 53,810 workers at nine factories, including seven footwear factories, a sports-equipment factory and an apparel factory. Nike buys goods from 35 factories in Indonesia. It doesn't own a stake in these factories. Workers' and factories' participation in the survey were voluntary. Dusty Kidd, Nike's vice president for corporate responsibility, said the factories surveyed tended to be ones already attentive to workplace conditions and employee health issues.

Even so, 56% of the 4,004 workers interviewed on factory sites told researchers they witnessed supervisors abusing their co-workers verbally. And 15.7% of workers said they observed sexual touching. Another 13.7% said they saw physical abuse. In one factory, managers punished tardy workers by making them clean toilets or run around the factory grounds. Physical abuse tends to escalate, workers told researchers; when managers are under pressure to meet production goals.

According to the report, workers also said they believed two deaths in two factories were work-related and tied to the denial of medical attention. While most factories have on-site health clinics, close to 90% of interviewed workers expressed concern about these facilities, saying they believed medication wasn't always available. Workers also said it was difficult to get time off to visit the clinics. Many women said they couldn't get the two-day menstrual leave to which they are entitled under Indonesian labor laws.

While the findings came as no surprise to Nike, Mr. Kidd said they were "troubling. No worker should be subject to some of the working conditions reported in this assessment.... But we now have a baseline to work with." In a 40-page response to Global Alliance's report, Nike said it plans to ask one of the monitoring groups accredited by the Fair Labor Association, a U.S.-based consortium of labor activists, corporations and government officials brought together by the White House, to independently verify incidents of compliance violations. A grievance process should be in place to allow workers to file complaints without fear of retribution. Some factories in Indonesia, Mr. Kidd said, already have this forum. Compliance issues are easier to monitor at footwear factories where Nike is often the sole contractor, said Tammy Rodriguez, Nike's senior corporate responsibility manager in Indonesia. At apparel factories, Nike is often one of half a dozen contractors, giving it less leverage to implement change. Five years ago, Nike began taking steps globally to improve the work environment, shifting footwear manufacturing from petroleum-based solvents to safer water- and detergent-based processes. Other changes have been put in place, Mr. Kidd said, partly because of the negative publicity the company received.

Mr. Kidd's department was formed in 1996. It hired a health management firm to address health concerns with factory clinics. Nike has six full-time staffers in Indonesia who investigate compliance issues. However, Ms. Rodriguez acknowledged it is almost impossible to monitor each worker in every factory every day. Critics who slammed Nike's past evasiveness in disclosing workplace conditions haven't seen the report yet, but from what they have been told they cautiously commended Nike for its transparency. Still, they worry that the public has no tools to hold Nike accountable for its promises to improve. Global Alliance "can't make Nike do anything because they're not a monitoring organization," said Bama Athreya, deputy director of the International Labor Rights Fund, which sits on the FLA board with Nike. "Why not invite local NGOs [nongovernmental organizations] trained in monitoring to come in and do a code-of-conduct investigation?"

But both Nike and Global Alliance say their relationship is a productive one. "We look at other dimensions of workers' needs," said Kevin Quigley, Global Alliance's executive director. "While it's hard for an environment with harassment to have any kind of developmental program, we want to go beyond just compliance. There are many organizations that already do monitoring."

Write to Shu Shin Luh at shu.shin.luh@awsj.com Updated February 22, 2001

Footwear Is Fleeing Indonesia , Rising Competition from Vietnam

Questions Nation's Economic Development May Not Be a One-Way Street

By Sadanand Dhume And Maureen Tkacik Staff Reporters of The Wall Street Journal

Since graduating from high school nine years ago, Sundari has spent her entire working life at PT Doson Indonesia , a Korean-Indonesian joint venture that makes shoes for footwear giant Nike Inc. As a supervisor, the slender 27-year-old makes 800,000 rupiah ($90) a month plus overtime, a respectable wage in a country where less than $2 a day is the norm. Two rings on her fingers, a delicate wristwatch and a touch of lipstick mark her faint brush with prosperity.

But that's about to end. This month, Sundari and her estimated 7,000 co-workers will be out of work as Nike scales back its presence in Indonesia, "This is where our lives are," says Sundari, nodding toward the vast factory floor where hundreds of blue-shirted workers cut, stitch and glue sneakers. "It will be hard to find work." The Doson factory closure is only one example of the precipitous decline of Indonesia's footwear industry, which has been buffeted by deteriorating business confidence in the country. At its peak in 1996, Indonesia exported 250 million pairs of shoes valued at nearly $2.2 billion. Last year, it was $1.5 billion and falling.

The drop is best illustrated by Nike, which accounts for about half the sports shoes made in Indonesia. Though Nike insists that it remains committed to Indonesia, the figures tell a different story: Since 1996, Indonesia's share of Nike footwear-production volume has shrunk to 30% from 38%, and the Doson closure could push it to 26%. Meanwhile, Vietnam's share has shot to 15% from 2%. Nike's brisk jog from Indonesia has implications that go beyond this country of 210 million people, Southeast Asia's largest. Here the company connotes, not exploitation of Third World workers, but the explosion of labor-intensive exports that helped propel Indonesia to the front ranks of Asia's so-called miracle economies.

But Indonesia's recent experience shows that the path to development is not a one-way street, and it calls into question the once-popular "flying geese" theory of economic development, according to which less-developed countries (say, Indonesia , Thailand and Malaysia) follow richer nations (Japan and Korea) up the production hierarchy on an inevitable path to industrialization.

Indeed, the shoe business moved from Japan in the 1960s to Korea and Taiwan in the 1970s, and to China and Indonesia in the 1980s. This time, however, the industry's departure suggests something other than progress. "The footwear industry is a litmus test of whether Indonesia can maintain its 1990s success of export-oriented, labor-intensive industries," says Hal Hill, an expert on Indonesia's economy at Australian National University. "If it can't do it in footwear, you've have got to wonder whether it can do it in similar industries" like electronics and garments.

Nike isn't the only company looking at the exits. Rival Reebok International Ltd. recently shuttered a factory in Bandung, West Java. Up-and-coming brands such as Germany's Puma AG aren't even considering Indonesia. C.K. Song, secretary-general of the Korean Chamber of Commerce in Jakarta, recently warned of a large-scale emigration of Korean businesses -- 37 have left in the past year, he says, most in garments and textiles. Indonesia's biggest problem is political turmoil, which events have shown can do as much as economic mismanagement to undermine stable macroeconomic policies, free trade, imports of high technology and investment in education. "You have rumors of expatriates having their houses torched, of machete fights breaking out on factory floors," says John Shanley, a footwear analyst at New York's Wells Fargo Securities. "Whether they're true or not, no one wants to find out."

Indonesia has itself to blame for such chaos. Ruled for 32 years until 1998 by the dictator Suharto, Indonesia failed to build such key institutions as a functioning judiciary, and is unable to lay down clear and consistent policies. "In the past you would seek redress from the Suharto family or from a general," says Dr. Hill. "Now what do you resort to?" Many say government policy is compounding Indonesia's problems, by effectively unleashing labor unions whose power was restrained under Suharto, and implementing regulations have raised wages and made it harder to fire workers. In Tangerang, where Doson operates, the minimum wage rose 40% this year, to 589,000 rupiah a month. That has made not just low-wage China and Vietnam more appealing; some of the shoe industry has moved to Thailand, where wages are higher than in Indonesia but the investment climate more hospitable. Worse, for Indonesia, there's no evidence that better-paying, higher-tech jobs are replacing the jobs Indonesia is losing -- something central to the flying-geese model.

Labor activists accuse Nike of shifting business to China and Vietnam because it prefers to work in countries where workers aren't free to organize. Joko Haryono, the 39-year-old head of Doson's union, says the factory was closed because its workers had been the most aggressive in pushing demands such as a 500-rupiah increase in lunch allowances and a broader application of company incentives to meet targets. Doson President Seung Jin Yang declined to be interviewed.

Nike denies that unionization, wages or government regulations figured in the termination of its relationship with Doson. Country manager Jeff DuMont says only that the decision was motivated by "overall factory-performance issues compared to others." He says Nike still employs 120,000 people in the country, half of them in footwear, and has no plans to leave Indonesia.

Shoe Production Facts Indonesia: Worker Profiles for NIKE Indonesia Workers (note: the information on its workers is provided by NIKE Corporation as posted on its website in 2000 and 2001 and seems to based on 1998-1999 exchange rates-- for alternative but not really that contradictory information see the article by Frank Denton and the data reported by ex St. John’s soccer coach Jim Keady and Leslie Kretzu who went to Tangerang to try and live on Nike wages and reported their experience on the now gone www.nikewages.com website.

Jumarni, KMK Global Sports: Jumarni smiled timidly when she explained her participation in an arisan, a regular gathering where friends, family, and neighbors, participate in the Indonesian version of a group lottery. There are eight fellow workers who participate in Jumarni's arisan group who each contribute Rp 100,000 (US$12.20) every month to take their chance at winning the Rp 800,000 (US$97.50) monthly "jackpot." The twist arisan provides from other lotteries is that in this Indonesian version a participant can only win once and is culturally expected to enter their contribution every month, even if they have already won. Therefore, arisan is held more for social reasons and is a way for friends to get together, build relationships, and even save for the "jackpot" day.

Jumarni works at KMK Global Sports, a factory producing Nike shoes located in Tangerang, West Java. Born in Lampung, Sumatera 23 years ago, she finished senior high school and then went to work at KMK Global Sports based on her sister's recommendation who used to work there. Jumarni spoke of the changes she's noticed in the factory working environment compared to when she first joined the factory in 1996. Although she works in the sewing department where chemicals are not used, she told us that she noticed that the strong smell of chemicals throughout the factory is now gone.

Jumarni takes the bus provided by the factory to get to and from work, and has access to free clinic at the factory. With a basic salary of Rp 320,000 (US$39), overtime, and other allowances, she earns an average of Rp 700,000 (US$85.40) per month. Jumarni spends Rp 42,000 (US$5.12) a month on her rented room, and her other regular monthly expenses for food and toiletries is approximately Rp 100,000 (US$12.20) and Rp 50,000 (US$6.10) respectively. She doesn't always send money to her parents back home, but when she does she usually sends Rp 200,000 (US$24.40). Asked if she had a TV, Jumarni shook her head and replied that she did not want one, as her radio cassette player was all she needed.(to protect the identity of this individual, the name has been changed)

Rini, KMK Global Sports: Rini is a new recruit at KMK Global Sports, a factory manufacturing Nike shoes in Tangerang, West Java. She finished her senior high school studies in Tegal, Central Java and found a job in the factory with the assistance of her neighbor who happened to be a driver of one of the factory buses. Rini works in the stock-fitting department and her eight-month length of service entitles her to a basic monthly salary of Rp 307,000 (US$37.40) which amounts to an average income of 500,000 (US$61) per month with overtime, bonuses and other allowances. Her room rental costs her Rp 60,000 (US$7.30) per month, and most of her spending (Rp 200,000 or US$24.40) goes to food, groceries and toiletries. Apart from contingency expenses which vary from month to month, Rini puts aside Rp 200,000 (US$24.40) to participate in an arisan* and intends to use her winnings to buy a new TV set. As both Rini's father and mother are fully employed (her father has a small kerosene stove business and her mother runs a traditional kiosk) Rini only sends money home on special occasions.

Rini, 23 years old, has several friends at the factory but many of her other friends are either still back home helping their family businesses or working in other factories. Although she doesn't meet her hometown friends often, she told us that she does not want to join her friends working at other factories because she believes that her factory offers better work conditions. (Note to protect this individual, the name has been changed.)

Every week, after the Friday Muslim prayer, Sujarko often joins the weekly general labor union meeting which is open to all employees. He enjoys observing the meetings which usually cover issues such as workers' concerns and other work related issues. Sujarko, who works in the assembling department, said that KMK Global Sports factory provides free clinic for all workers. He also told us that there have been significant changes in the indoor air quality at the factory. The strong smell of the solvent-based cement (or glue) is gone and has been replaced by water-based solvents. He said that a lot of improvements have been made since Nike increased its involvement in the factory.

Sujarko gets along well with his fellow workers but has a special attraction to one who works in a different department. Luckily for Sujarko, his special attraction is also his wife. Together, they rent a house for Rp 75,000 (US$9.20) a month and have equipped it with a TV, a radio and a gas stove. Most of his family's regular monthly expenses go to food, groceries and toiletries which usually amount to Rp 300,000 (US$36.60) per month. His basic monthly salary is Rp 328,000 (US$40). Including overtime, bonus and allowance, he receives an average income of Rp 680,000 (US$83) per month. With a double income, Sujarko and his wife are currently building a house in their village. (Note to protect this individual, the name has been changed.)

Anton Syafei, Nikomas Gemilang: 28 year old Anton Syafei is not new to footwear manufacturing. After finishing elementary school, Anton worked at a factory producing export quality shoes in his hometown Bandung, West Java for several years. He was married at 20 and his wife gave birth to a baby boy a year later. In October 1996, Anton decided to join his friend who was employed at Nikomas Gemilang, a producer of Nike shoes located in Tangerang, West Java. At that time, he could not afford to move his family from Bandung to Tangerang, (about a three-hour drive) and had to leave both his family members behind in Bandung. When asked why he moved, he replied because he wanted a change, an improvement, and Nikomas provides a higher salary, a clean mosque, three free meals per day at the canteen and access to the free factory clinic even for his wife and child.

When Anton first started working at Nikomas, he lived at the factory dormitory, where he was provided with three meals a day every day, even on his day off. Once Anton earned enough money to send for his family, he rented a house for Rp 50,000 (US$6.10) per month and now he and his wife live together with their son in the Tangerang area. As he does not live at the provided dormitory anymore, he now receives a transport allowance of Rp 45,000 (US$5.50) per month. Since his house is near the factory, he is able to use 44% of the transport allowance he now receives to help subsidize his other regular monthly expenses. Those expenses include electricity of Rp 5,000 (US$0.61), his child's transportation, school fees, and snacks of Rp 44,500 (US$5.40), and groceries and toiletries of Rp 250,000 (US$30.50). Anton's regular work hours are 07.00 to 15.30 Monday to Friday, and 07.00 to 12.00 on Saturday. The factory requires overtime until 17.00 Monday to Friday and sometimes requests workers to work longer when there is an export target to reach. Although the factory allows him to decline his overtime if he has other things he wants to do, Anton prefers to work this overtime because his wife is unemployed and he can use the extra income.

His basic monthly salary is Rp 320,000 (US$39) and with overtime, bonuses and allowance, he receives an average income of Rp 515,000 (US$62.80) per month. With a child that just started going to school and increasing monthly expenses, Anton rarely sends money back home. He prefers instead to buy his family extra accessories like a TV set, a radio cassette player and even bicycles for the child and himself. Anton, who currently works in the cementing department, also talked of the changes he noticed in the working conditions at the factory and the continuous improvements. He appreciates the cleanliness of the toilets and the regular factory fire drills – a practice that Anton claims to be fun and refreshing for the workers. (Note to protect this individual, the name has been changed.)

Tyas Hendarti, Astra Graphia Tbk Divisi Industri Sepatu (P.T. ADIS): After working at a toy factory, Tyas Hendarti from Kutoarjo, Central Java, decided to switch jobs and now works at P.T. ADIS, a factory manufacturing Nike shoes in Tangerang, West Java. When asked why she left the toy factory, she replied because P.T. ADIS is bigger, and it also offers transportation whereas the toy factory did not. She goes home to Central Java at Lebaran (the annual Muslim holiday) to visit her family. Many of her friends are still in the village, but are now married. Now in her seventh year at P.T. ADIS, Tyas receives a basic monthly salary of Rp 387,500 (US$47.20) and, including overtime and bonuses, takes home an average income of Rp 450,000 (US$54.90) per month. The factory provides all workers with a free clinic facility, a bus that takes Tyas to and from work and also provides her with free lunch and additional snacks twice a week. She rents a room for Rp 40,000 (US$4.90) per month, and after deducting for electricity (Rp 5,000 or US$0.61), monthly groceries and toiletries of approximately Rp 150,000 (US$18.30), she has enough money left over to participate in a Rp 100,000 (US$12.2) arisan* and to occasionally send money of Rp 75,000 US$9.10) to her siblings. Tyas, 23, who currently works in the sewing department, was only able to finish junior high school and is glad that Nike, in co-operation with the factory, opened the Nike school so she can continue her studies. Due to the time of her classes, she is often unable to work overtime, but she doesn't mind because she wants to complete her studies. Tyas told us that physics is her most difficult subject while English is her favorite. (Note to protect this individual, the name has been changed.)

*A regular social gathering whose members contribute to a group lottery and take turns at winning the jackpot.

Retno Sumirat, Nikomas Gemilang: Retno Sumirat was born 23 years ago in Solo, Central Java. In 1995 when she received her junior high school diploma, Retno flew to Saudi Arabia to work in a day care center for four years. When her contract ended and she returned to Indonesia, her uncle helped her find a job at Nikomas Gemilang, a factory producing Nike shoes located in Tangerang, West Java. Retno, who works in the cutting department, has been living at the factory dormitory since she started working there in 1999. She currently earns a basic monthly salary of Rp 309,000 (US$37.70) and takes home an average income of Rp 450,000 (US$54.80) per month including overtime and bonuses. The factory provides three free meals a day, Monday to Sunday, for all workers and all have access to this benefit even on their day off. Retno's regular monthly expenses usually go towards additional food, clothing and toiletries that amount to approximately Rp 140,000 (US$17). She also has entertainment expenses of Rp 50,000 (US$6.10) and regularly puts aside Rp 140,000 (US$17) per month for her savings account. She also participates in a Rp 120,000 (US$14.60) arisan* as she wishes to buy land with the winnings. Even though she is the eldest of four, Retno does not always send money home because her parents are working and her two siblings are already independent. She knows a friend from back home who is working at a factory manufacturing a global brand like Nike but she does not want to join her because she is confident that her current working conditions at Nikomas are better. Many of her friends are still back in her hometown village working in traditional commerce or as traditional weavers.

Sujarko, KMK Global Sports: When Sujarko was 13 years old he left school to look for work. In 1990, after three years of being unemployed, Sujarko got a factory job through his uncle, who worked at the KMK Global Sports factory (a producer of Nike shoes) in Tangerang, West Java. Sujarko has now been with KMK for 10 years and one of his goals is to complete his high school studies at the Nike school classes provided free of charge at the factory. The classes are held three times a week in either morning or afternoon sessions. Sujarko claimed that keeping up with the schoolwork was not a problem, but sometimes staying awake in class was challenging. Every week, after the Friday Muslim prayer, Sujarko often joins the weekly general labor union meeting which is open to all employees. He enjoys observing the meetings which usually cover issues such as workers' concerns and other work related issues. Sujarko, who works in the assembling department, said that KMK Global Sports factory provides free clinic for all workers. He also told us that there have been significant changes in the indoor air quality at the factory. The strong smell of the solvent-based cement (or glue) is gone and has been replaced by water-based solvents. He said that a lot of improvements have been made since Nike increased its involvement in the factory.

Sujarko gets along well with his fellow workers but has a special attraction to one who works in a different department. Luckily for Sujarko, his special attraction is also his wife. Together, they rent a house for Rp 75,000 (US$9.20) a month and have equipped it with a TV, a radio and a gas stove. Most of his family's regular monthly expenses go to food, groceries and toiletries which usually amount to Rp 300,000 (US$36.60) per month. His basic monthly salary is Rp 328,000 (US$40). Including overtime, bonus and allowance, he receives an average income of Rp 680,000 (US$83) per month. With a double income, Sujarko and his wife are currently building a house in their village. (Please note that in the interest of protecting the identity of this individual, the name has been changed.)

Why do Nike shoes cost so much?

The cost of labor for Nike products varies slightly by model, volume and source. As a general rule, labor represents about 15 percent of the price Nike pays the factory for the product. Because Nikes cost is about 25 percent of retail cost, labor accounts for about 4 percent of the retail cost. The breakdown is roughly as follows: Consumer pays: $65 Retailer pays: $32.50 to Nike, and then doubles the price for retail. Nike pays: $16.25 and then doubles the price to retailers for shipping, insurance, duties, R&D, marketing, sales, administration and profits.

According to NIKE, the $16.25 price paid the factory includes:

Materials: $10.75

Labor: $2.43

Overhead + Depreciation: $2.10

Factory Profit: $0.97

Total Costs: $16.25

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(note: the following letter to the editor from a U. of Michigan student and SOLE (student organizing for Labor and Economic Equality) member posted on the web in December 2000 under the headline: “Facts support labor activists' argument”)

To the Daily:

The Daily article on Nov. 11 presented the libertarian views of Ohio University Economics Professor Richard Vedder. Vedder asserted that sweatshops have played a role in many developing countries and he also said that governments should not restrict development in countries like Indonesia where garment workers earn 15 cents an hour.

Vedder, who made a number of false historical and empirical statements, erroneously assumed that Students Organizing for Labor and Economic Equality and other anti-sweatshop activists are asking the U.S. government to enforce a worldwide minimum wage. But after hearing the cold hard facts about the anti-sweatshop movement, Vedder expressed his agreement with SOLE's demand that the University and companies using our logo enter a voluntary contract with provisions including full public disclosure of factories, women's rights and a living wage. He learned that SOLE is in favor of investment and development, but against the paying of misery wages to children and young women.

Under close scrutiny of the economics of sweatshops and the policies that United Students Against Sweatshops and SOLE are asking universities to adopt, Vedder conceded to virtually every point that anti-sweatshop academics and activists offered on last Wednesday night. SOLE members picked apart Vedder's unsupported economic claim that consumers will be worse off if Nike or Russell pay their workers a living wage. By analyzing the collegiate apparel market, SOLE showed Vedder exactly what would happen if firms pay their workers a living wage:

1) The price of your favorite Nike jersey will not rise - the marginal increases in labor costs would be an insignificant percentage of total production costs.

2) Employment of garment workers will not decrease - Companies cannot substitute capital for labor in this extremely labor intensive industry and firms certainly don't want to cut back on its supply of goods at this point.

3) Millions of dollars will be shifted from economic profits of firms to workers - with tremendous market power in this industry, firms would take a loss in profit and not pass on the increased labor costs to consumers.

4) Consumers and firms will also benefit - as a better paid workforce will produce higher quality garments and at a faster rate - economists call this efficiency wage theory.

While conservatives often accuse progressive activists of making only moral arguments and not pragmatic economic arguments, SOLE showed last night that our policy suggestions to the University make sense within a centrist-to-right neo-classical economic framework. SOLE cares about workers rights, economic development and sound economic policy. We should all continue to ask the critical questions, because facts, not hyperbole, will guide us to the correct and just outcomes.

Peter Romer-Friedman, LSA junior

Indonesia Case Study Part II: Discussion Questions

1. a) If workers receive just $2.50 of the $60 retail cost of a pair of NIKE shoes, why are these shoes cost so much? What are NIKE shoe buyers paying for, mainly? Why don’t competitors such as Kmart and Walmart sell similar shoes at much lower prices and lure away NIKE’s customers? b) Suppose these shoes did become much cheaper so people bought more pairs? How would this affect workers in Indonesia and Vietnam? Knowing this, will you now buy your shoes at Kmart? (see their ad below—cheap shoes!) (b) Anti-sweatshop groups often point out that the 120,000 Indonesian workers NIKE subcontractors employ together make less each year than NIKE pays Michael Jordan or Tiger Woods for endorsements. Do these NIKE outlays make sense? Would not buying Nike shoes reduce the earnings disparity between garment workers and sports stars? Would it improve the lives of Indonesian workers? How might student monitoring of shoe and garment factories improve the lives of workers without increasing poverty in Indonesia and elsewhere?

2. According to the WSJ article about Nike and Reebok plants, the 1997 minimum wage in Indonesia was about $2.50 at market rates or $11 per day in purchasing power parity (ppp) dollars ($2.50*4.3). (a) Why is the wage higher when we consider U.S. prices or purchasing power? Why is the PPP factor higher in Vietnam and India than in Indonesia? (about 5:1 compared to 4.3 for Indonesia) Is the PPP or market exchange rate wage most important to Nike? Which wage matters most to NIKE workers? (some NIKE employees may enjoy the low rents Indonesia, but not many: explain in light of #1 above. b) In what sense are Indonesian shoe factory wages "high" and in what sense are they “low.: (Hint: Viet Nam and Cambodia, $1 day poverty and wages for migrant farm and construction workers). c) Follow this link to the Indonesia global poverty monitoring* page. Assuming footwear workers make about $40 per month (about $175 per month in $PPP or U.S. Prices) what roughly what % of Indonesians spend less than these workers (hint: $2/day is about $65 per month, PPP). d) EC: Does the Tangerang shopping data presented by Jim Keady & Leslie Kretzu appear consistent with the PPP ratio of 4 used to convert Indonesian to U.S. prices?**

3. a) What can students and independent monitors like Jim Keady and Leslie Kretsu do to improve working conditions in Tangerang and other Garment and footwear factories in Asia, if they place a high priority on reducing poverty? (hint: the 1911 NY Triangle Shirt Waist fire) (b) What is likely to happen if student groups and the Indonesian government try to raise shoe factory wages, the efficiency wage hypothesis is true and Indonesia is competing with Cambodia, Vietnam and Bangladesh? What are the risks of Indonesia’s new higher national minimum “living” wage? C) Peter Romer-Friedman, college student and “SOLE” member, argues below that raising wages will not increase the cost of shoes because workers work harder when they are paid more (the so-called “efficiency wage” hypothesis). If SOLE is right, what would happen if wages suddenly doubled in Tangerang footwear factories (they did in the late 1990s)? What would happen to employment in footwear factories? Among workers, NIKE, consumers etc. who would lose? Assuming managers and monitors do not increase supervision of line chiefs, is sexual harassment other forms of abuse likely to increase or decrease after raising the minimum wage?

4. (a) What percentage of footwear workers are women? Why do so many women work in this industry? Why might young Indonesian or Bangladeshi women be willing to work for less than men? Does this mean these industries are exploiting Muslim women? How does the opportunity to work in these industries change the status of women from rural villages? (b) What is an “arisan?” What is its purpose? One worker expects to buy land with winnings from an arisan (about $100), how could this be possible? c) Are most of these footwear workers educated, or uneducated; married or unmarried? Why is this important? Two of the NIKE workers profiled above are married—what is one couple saving to do? Does it appear that most workers leave these plants, perhaps to return to their villages? (hint: 2/3 of all workers are under 30). d) Surveys show garment factory workers tend to marry at about 22 compared to 16 for those who stay in village. Why do young men and women to delay marriage? How does this affect rural villages? Is this consistent with what Sterba saw when he visited his Java village?

5). a) What does Keady argue Indonesian workers would do if they did not have a job in a footwear factory? When he refers to $1 day poverty, and in general why does Keady understate the daily wage of footwear workers (hint: overtime and transportation-attendance bonuses). (c) What is new minimum wage in Indonesia? Compare this with what workers said they need to get by (700,000 rp per month)? Now that workers have the higher wage they want, what is their new worry (just like U.S. or UK workers)? Outline an optimistic and the pessimistic scenario for these Indonesian workers. www.onlineopinion.com.au/view.asp?article=1630

For up to day poverty data, go to www.worldbank.org/research/povmonitor/ and select Indonesia. The $1/day poverty line is $32.74 per month (really $1.08 per day in 1993 prices). The $2/day povery line is double that or about $65.48 per month. Try them both and choose all the survey years. This will tell you how many people in Indonesia make less than $2/day. Try the same experiment for $200 per month which is a very conservative estimate of what these factory workers make at $PPP wagea rate.

**EC hints: For example, a bottle of coke costs __ cents, bottle water __ cents a chicken can be had for $1.33 in Tangerang (a suburb of Jakarta) —how much do similar items cost in the U.S.? If you get a chance, check some clothing and school supply prices at a discount store or on Fordham Road (the Fordham store is bit pricey—good quality though, I am sure). Then take the ratio of this price to Tangerang prices. Is it more or less than 4?