THE fire that gutted the Kentex footwear factory in Valenzuela City on May 13 resulted in the death of 72 workers. All belonging to the lower-income classes, these workers were not even trained in fire safety by their employer, thus, denying them any chance of survival. In addition, the company allegedly paid salaries well below minimum wage, as well as withholding pensions, health benefits and other forms of social security.
According to reports, the workers may have been contracted by an illegal and unregistered hiring subcontractor. The company, thus, claims that the subcontractor should be held responsible for the violations. However, the Department of Labor and Employment (DOLE) asserts that this cannot be used as a valid excuse. For all intents and purposes, both the factory owners and the sub-contractor seemed to have connived in breaking the law.
In a recent statement, President Aquino blamed the local government unit of Valenzuela City for granting Kentex a business permit and certificate of occupancy, despite its noncompliance to safety standards, such as securing a fire-security inspection certificate. However, as the militant groups would point out, the DOLE should be equally held liable for the incident for failing to monitor and, thus, allowing the establishment to operate, even as it violated a number of labor laws. For whatever these views are worth, both sides seem to agree that a stricter and tighter enforcement of both local and national laws would be sufficient to prevent the recurrence of this incident.
But is legal enforcement a sufficient solution? What these arguments fail to consider is that a stringent enforcement of these laws would open another can of worms. I am referring to the issue of unemployment. In fact, in Valenzuela City alone, 13,000 establishments, not 23 as earlier reported, have apparently violated fire-safety regulations. More firms may, likewise, be delinquent as only 83,000 out of the 300,000 establishments in the National Capital Region have been checked for fire safety standards. Because many firms are likely breaking these fire safety rules, strict laws and their enforcement are expected to dissolve these firms, leading to a major dip in employment, as well as a greater burden to the poor.
What is more important here is that fact that workers are willing to offer their services, even if the work conditions are deplorable and firms are violating the laws. One can blame this behavior to poverty but this is highly correlated with wealth inequality. Under all conditions, persistently high inequality, as in the case of the Philippines, limits social mobility and leads to powerlessness. In the absence of better options, poor workers choose the most readily available job and opt to take the bitter pill.
In the case of the country and, particularly, this footwear company, inequality stands out because of two reasons.
First, while economic growth has been achieved recently, the rate is not high enough for all sectors to benefit. With limited growth, only a few sectors are likely to prosper. For instance, the productivity agricultural sector has not changed significantly over the years and continues to remain low. Hence, given various forms of investment incentives given to industry and the gains from sector’s growth, the owners of the more capitalized industries are able to secure their wealth.
Second, the high-income social units can collaborate in exploiting the poor by creating intricate systems—in the form of oligarchies or dynasties—designed to violate and circumvent the laws. This can be seen both in the local and national units of the government. For instance, the alleged Napoles gang is an obvious case for the latter, while the purported Binay “family” can be the example for the former. Whatever the means, capital is to be weighed heavier than labor. In Valenzuela City conniving firms apparently kept wages down and reduced whatever expenditures that can raise labor standards. In this way, their capital is invested only in ventures that will yield a higher return, but always at the expense of labor and the poor.
In this situation, the rule of law will not be sufficient. After being caught, violators easily strike back as long as there are workers willing to take their bait. Moreover, the law can be enforced in a way that only a select number of firms can meet the legal requirements. This leads to the creation of “legal” oligopolies that can reduce available jobs and effectively control wages. Instead of imposing laws and regulations, instituting higher taxes on the wealthy and subsidizing an expanded social-protection system for the poor would be the first best policy. The idea is to offer better options to the workers without restricting productivity and restricting employment.
This predicament where the interest of the relatively wealthy remains intact reminds me of the hypothesis found in one of the most popular books in recent years, Capital in the Twenty-First Century by Thomas Piketty. Its central premise is that, contrary to the influential theory developed by Simon Kuznets in the 1950s and 1960s, mature capitalist economies do not inevitably evolve toward greater economic equality. Instead, as Piketty contends, the data reveal a deeper historical tendency for the rate of return on capital to outstrip the overall rate of economic growth, leading to greater concentrations of wealth at the very top.
This drift toward “patrimonial capitalism” that Piketty’s charts seemed to show is not in any way due to economic determinism. Rather, this comes from the discrete actions performed by those in power. “It all depends on what the political system decides,” he says. Of course, the political system depends on the laws—and taxes—that society makes and enforces. It is time that we review our legal structures, and start looking systematically at the real causes of poverty and inequality.
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Leonardo Lanzona Jr. is director of the Ateneo Center for Economic Research and Development and a senior fellow of Eagle Watch, the school’s macroeconomic research and forecasting unit.