UNIVERISTY OF CALIFORNIA, LOS ANGELES
SCHOOL OF PUBLIC AFFAIRS
MASTER OF PUBLIC POLICY DEGREE PROGRAM
APPLIED POLICY PROJECT
APPAREL MANUFACTURING IN EL SALVADOR:
A POST-QUOTA STRATEGY FOR COMPETITIVENESS
CHARLES F. GATCHELL
April 26, 2005
This report was prepared in partial fulfillment of the requirements for the Master in Public Policy
degree in the Department of Public Policy at the University of California, Los Angeles. It was
prepared at the direction of the Department and of the World Bank Institute as a policy client.
The views expressed herein are those of the authors and not necessarily those of the Department,
the UCLA School of Public Affairs, UCLA as a whole, or the World Bank Institute.
April 26, 2005
TO: Michael Jarvis, Program Specialist
Corporate Governance and Corporate Social Responsibility Program
World Bank Institute
FROM: UCLA School of Public Affairs Team
RE: El Salvador’s Apparel Industry
Dear Michael Jarvis:
Pursuant to your request, the UCLA School of Public Affairs Team has performed an analysis of
the apparel industry in El Salvador. This paper will provide recommendations to World Bank
staff working with the Government of El Salvador on how both parties should react to the recent
changes in the global apparel industry.
Background research for this paper was conducted via a thorough literature review and data
analysis, which took place from January to March, 2005. Telephone interviews were carried out
with representatives from the apparel industry, international organizations, non-profits and
academics between January and February of 2005. An in-country assessment consisting of
factory visits and interviews with key government, industry, and NGO personnel was conducted
in San Salvador in February, 2005.
We appreciate having been given this opportunity to provide the World Bank Institute with this
Very truly yours,
The UCLA School of Public Affairs Team
Charles F. Gatchell, MPP 2005
Paavo Monkkonen, MPP 2005
Joseph Perman, MPP 2005
Jeremy Rempel, MPP 2005
April 26, 2005
Table of Contents
Executive Summary ........................................................................................................................ 4
1. The Apparel Industry in El Salvador .......................................................................................... 6
1.1 The End of the Multifiber Arrangement in El Salvador ....................................................... 9
1.2 Evidence of Impact ............................................................................................................... 9
2. Developing a Strategic Response for El Salvador .................................................................... 10
2.1 El Salvador in the Global Commodity Chain ..................................................................... 11
2.2 Traditional Sourcing: Cost, Quality, Speed and Trade Barriers ......................................... 12
3. The New Global Buyer ............................................................................................................. 14
3.1 Full-package Production ..................................................................................................... 14
3.2 Mitigating Reputation Risk................................................................................................. 16
3.3 Corporate Social Responsibility and the Demand for Socially Responsible Business....... 17
3.4 What Has Been Done To Date............................................................................................ 18
4. A Competitiveness Strategy for El Salvador ............................................................................ 19
4.1 Good Factories El Salvador (GFES)................................................................................... 19
4.2 Small-Scale Monitoring Programs...................................................................................... 25
5. Action Agenda .......................................................................................................................... 26
5.1 Good Factories El Salvador (GFES)................................................................................... 26
5.2 Upgrading and Maintenance of the Apparel Industry......................................................... 28
Bibliography ................................................................................................................................. 29
Appendix 1: Good Factories El Salvador Program...................................................................... 33
Appendix 2: Better Factories Cambodia Project Overview......................................................... 34
Appendix 3: List of Interviews .................................................................................................... 38
UCLA School of Public Affairs 1
April 26, 2005
Abbreviations and Acronyms
ASIC Salvadoran Garment Industry Association
CAFTA Central American Free Trade Agreement
CBTPA Caribbean Basin Trade Partnership Act
CETAP Competitive Enhancement Technical Assistance Project
CIMCAW Continuous Improvement in the Central American Workplace
CSR Corporate Social Responsibility
EPZ Export Processing Zone
FDI Foreign Direct Investment
FEASIES Federacion de Asociaciones o Sindicatos Independientes de El Salvador
FLA Fair Labor Association
FMLN Farabundo Martí National Liberation Frente
FOEX Promotion of Exports
FTAA Free Trade Agreement of the Americas
FUNDEMAS Enterprise Foundation for Social Action
GFES Good Factories El Salvador
GMIES Grupo de Monitoreo Independiente de El Salvador
GOES Government of El Salvador
ILO International Labor Organization
ITGLWF International Textile, Garment, and Leather Workers’ Federation
MFA Multifiber Arrangement
MINEC Ministry of Economy
MINTRAB Ministry of Labor
NGO Non-Governmental Organization
NIC Newly Industrialized Country
OECD Organizations for Economic Cooperation and Development
ONI National Office of Investments
OTEXA Office of Textiles and Apparel (United States)
PROESA Promoting Investment in El Salvador
SAI Social Accountability International
SME Small and Medium Enterprises
UN United Nations
UNDP United Nations Development Program
UNITEX Union de Industria Textil
USAID United States Agency for International Development
USITC United States International Trade Commission
WRAP Worldwide Responsible Apparel Production
WTO World Trade Organization
UCLA School of Public Affairs 2
April 26, 2005
This analysis is the product of many months of hard work and would not have been possible
without the assistance of many key individuals who offered valuable time and resources.
We would like to thank both the UCLA School of Public Affairs and the Ronald W. Burkle
Center for International Relations, whose generosity in financing our trip to El Salvador made it
possible for us to gain valuable insight for our project. Our advisor, Professor Mark Kleiman, as
well as the rest of the members of our seminar group, provided us with thoughts and a critical
eye for a better end product.
We appreciate the time and assistance of the individuals from the World Bank, the multiple
agencies within the Government of El Salvador, and the myriad of other organizations we spoke
with to gain insight on this important issue.
This paper is dedicated to Gilberto Alfaro, our taxi driver in San Salvador.
UCLA School of Public Affairs 3
April 26, 2005
The $1.7 billion in apparel exported by El Salvador to the U.S. in 2004 represented 62% of the
country’s manufacturing exports; however, in the global apparel trade of $226 billion dollars, El
Salvador is not a major player. El Salvador’s industry has mainly grown around trade agreements
that allowed preferential access to U.S. markets, under the condition that apparel manufacturers
in El Salvador engage in the component assembly of U.S. inputs. This reliance on trade
agreements makes El Salvador especially vulnerable at the end of the worldwide quota system,
as it has not yet been forced to compete in the global free market with more efficient apparel
Without drastic action, El Salvador will have a very difficult time competing with several Asian
apparel producing countries. Labor costs in El Salvador are considerably higher than in all of its
Asian competitors. Furthermore, El Salvador’s advantage in speed-to-market is diminishing as
Asian producers improve shipping times. Efforts on the part of the Government of El Salvador
have focused on exploiting its location advantage and upgrading its production facilities;
however, these steps towards modernization will not allow El Salvador to displace or even
compete with countries like China as a primary source of production for U.S. brands.
Therefore, El Salvador needs to explore alternative policies in order to remain a competitive
location for apparel production. The shift from component assembly to full-package production
that is taking place in the global apparel industry, several sweatshop scandals in the late 1990s,
and the concomitant increase in importance of risk as a factor brands must consider when
making sourcing decisions, provide El Salvador with an opportunity to pursue a non-traditional
competitiveness policy. Brands are concerned with production risk, the potential that problems
within a country could interrupt production, and reputation risk, the potential for reports about
the violation of labor standards could harm their brand value. In order to mitigate production
risk, brands will continue to maintain a diverse sourcing base and not consolidate their
production in one country. This implies that despite the higher level of efficiency of Asian
countries, El Salvador can compete as a best second-source. In competing for second-source
status, El Salvador can gain an important advantage by being able to credibly reassure buyers
that Salvadoran-made goods have little reputation risk.
In order to successfully capitalize on this potential advantage, we recommend that El Salvador
implement a national mandatory workplace standards monitoring program. This program should
be nation-wide and mandatory because poor labor conditions in one factory threaten the
reputation of the entire national industry. We have designed the Good Factories El Salvador
(GFES) program to meet these needs.
The proposed GFES program would be governed by a tripartite body with representatives from
the government, private sector and worker organizations. The chief functions of GFES will be
the monitoring of labor conditions in all the apparel factories in El Salvador, the education and
training of apparel workers and managers, and a worker complaint system. The major output will
be a monitoring report on conditions, actions and improvements in factories. Finally, GFES will
receive initial funding and technical assistance from the World Bank and the International Labor
UCLA School of Public Affairs 4
April 26, 2005
In addition to the high marketing value GFES represents for El Salvador, the structure of the
program yields additional advantages. The tripartite nature of its governance will make it a
legitimate and credible source of information in the eyes of U.S. buyers, and has the potential to
create a dialogue between stakeholders that have traditionally been extremely opposed to each
other. The monitoring visits and reports produced by the GFES program will substantially reduce
costs for brands and factories, as well as reduce the inconvenience for factories of the multiple
quarterly audits with which they currently are faced.
Due to the urgency of the threat posed by the end of the quota system, immediate action is
needed. However, the implementation of the GFES program faces several barriers that must be
overcome. The Government of El Salvador has not signed ILO Conventions 87 and 98, which
deal with the freedom of association and collective bargaining. These must be signed in order to
allow the formation of workers’ organizations that can form part of the tripartite GFES
governing body. In addition, attempts should be made to mollify the high animosity between
worker organizations and industry representatives, in order that cooperation in the governance of
the GFES program is possible. Finally, industry representatives and government officials that
mistakenly view independent monitoring activities as subverting the functions of the Ministry of
Labor must be made to understand that this is not the case, and that the GFES program can
strengthen the efforts and efficacy of the Ministry of Labor.
In order to implement the Good Factories El Salvador program, the World Bank should work
with the Government of El Salvador to immediately undertake several actions based around the
First, the Government of El Salvador should sign ILO Conventions 87 and 98. This is a
necessary step to assure the international community of the government’s commitment to
labor standards and to begin the possibility of dialogue with worker groups.
Second, the Government of El Salvador should adopt the national workplace standards
monitoring program, Good Factories El Salvador. Taking advantage of technical assistance
and cooperation from the World Bank and the ILO, the Ministry of Labor, the Ministry of the
Economy and the Office of the President should begin dialogue with representative from the
private sector and workers groups to create a project management unit that can begin the
In addition, the Government of El Salvador can continue current efforts to enhance the technical
capabilities of the apparel industry:
The Government of El Salvador should strengthen industrial upgrading efforts through a
continued focus on full-package production and textile mill development. This action is vital
in order to prevent the apparel industry from collapsing.
UCLA School of Public Affairs 5
April 26, 2005
The apparel trade is a vital part of the economy of El Salvador, making up 62% of the country’s
exports. Despite the importance to El Salvador’s economy, this trade represents less than 1% of a
global trade of $226 billion, involving 196 countries.1 El Salvador’s ability to compete in apparel
manufacturing has been based in part on a global system of quotas regulating apparel imports to
the United States and Europe. This quota system expired on January 1, 2005, presenting El
Salvador with a significant challenge, as it loses the significant benefit of restrictions on exports
of larger, lower-cost producers.2 In order to maintain and increase its competitiveness in a more
open global apparel market, El Salvador needs to adapt to a new set of criteria in the sourcing
choices of apparel buyers, who are increasingly looking for full-package producers with low
production and reputation risk. Therefore, El Salvador should implement a national workplace
standards monitoring program as well as improve on current efforts to increase full package
capabilities. This paper provides an analysis of the nature of the challenge confronting El
Salvador, and lays out an action plan for the design and implementation of a national workplace
monitoring project, Good Factories El Salvador.
The first section gives an overview of the problem posed by the end of the quota system in El
Salvador. The following section outlines a framework for a strategic response to the problem.
This includes the identification of the criteria that apparel buyers use to make sourcing decisions,
and an analysis where El Salvador stands relative to other apparel producing countries. The third
section introduces recent changes in the apparel industry’s buyers, and outlines how El Salvador
can adapt to the new environment. The fourth section summarizes the competitiveness strategy
and provides details on the design of the Good Factories El Salvador program. The paper
concludes with a series of specific actions to be taken by the World Bank and the Government of
1. The Apparel Industry in El Salvador
The apparel industry in El Salvador benefited significantly under the Multifiber Arrangement
(MFA) quotas. Apparel exports to the United States (which comprise approximately 95% of El
Salvador’s total apparel exports) grew from just $50,000 in 1990 to $1.7 billion in 2004.3 The
apparel industry comprises approximately 62% of the country’s total merchandise exports,
employs over ninety thousand people, and makes up roughly 12% of the country’s GDP.4
Salvadoran manufacturers have maintained close ties to the U.S. market for some time. In 2000,
the US-Caribbean Basin Trade Partnership Act (CBTPA) expanded preferential tariffs for certain
United States International Trade Commission (USITC) (2004).
The United States, Canada, and the European Union have employed quotas on apparel imports to protect their
domestic industries since 1962. In 1974, these structures were combined in the Multifiber Arrangement (MFA),
which was organized under GATT. As part of the development of the WTO in 1994, the MFA was reorganized
under the Agreement on Textiles and Clothing (ATC), which prescribed a four stage phase-out of the quota system,
completed on January 1, 2005.
OTEXA Trade Statistics (2004); this figure represents gross industry revenue.
UCLA School of Public Affairs 6
April 26, 2005
types of goods entering the U.S. market from the region. Most notably, the CBTPA included
extensions of the 807 and 809 programs. Under these arrangements, tariffs are reduced for
apparel that is produced from U.S. thread, yarn and fabric, either cut in the U.S. (807)5 or in the
CBTPA region (809), and assembled in the CBTPA region for export back to the U.S.
Preferential trade agreements are extremely important to the apparel industry in general and to
Central America in particular. Only 16% of the apparel goods manufactured in El Salvador and
exported to the U.S. in 2004 were produced outside the CBTPA or other U.S. trade agreements.6
These arrangements have encouraged El Salvador’s specialization in cutting and sewing goods
such as cotton underwear, knit shirts and blouses. As a result, El Salvador has not developed an
ability to produce high value-added fashion goods, or developed extensive full-package
production capabilities. Of CBTPA apparel exports to the U.S. in 2004, 54% were made from
U.S.-cut-and-supplied fabrics, with only assembly occurring in El Salvador.7
The more than 90% of apparel manufacturers in El Salvador are located inside a system of export
processing zones (EPZs or Zonas Francas).8 Zonas Francas are industrial parks that provide
extensive benefits to businesses producing for export only. These benefits include 100% local
and national tax exemptions, duty-free machinery imports, unlimited foreign capital investment,
and no limits on currency repatriation. The World Trade Organization (WTO) is currently
pushing for the elimination of export processing zones. When El Salvador completed
negotiations to become a full member of the WTO in 1995, the government agreed that all zones
(and bonded warehouses under the same legal structure) would be phased out by 2009.9 This
phase-out places a hard time constraint on improvements to the competitiveness and industrial
capability of the garment industry. The removal of Zona Franca benefits will significantly
increase the cost of production in El Salvador.
The government of El Salvador (GOES) recently extended preferential access to U.S. markets
with the Central American Free Trade Agreement (CAFTA). However, this agreement continues
to require that the vast majority of textile inputs be sourced from within the CBTPA region or the
United States. From early on in the negotiation process it was recognized by both El Salvador
and the U.S. that an increased freedom to source textiles from outside the trade agreement
partners would be necessary to ensure continued competitiveness of the apparel industry in El
Salvador. However, opposition by U.S. textile manufacturers and some local Salvadoran mills
effectively eliminated open sourcing rules. This lack of third-party sourcing reinforces a reliance
on basic assembly of U.S. cut or produced textiles, and as a result CAFTA will do little to
mitigate the impact of the end of the quota system. El Salvador was the first country to ratify
CAFTA in December of 2004. In March, 2005 Guatemala and Honduras ratified the agreement,
and now CAFTA awaits ratification by Nicaragua, Costa Rica, and the United States Congress.
807A+ goods must be made from U.S. yarn and cut in the U.S.; 807 goods may include any fabric cut in the U.S.,
OTEXA Trade Statistics (2004).
Christel de Arce, National Office of Investments (ONI), interview conducted 2/24/2005, San Salvador.
UCLA School of Public Affairs 7
April 26, 2005
Labor issues also play an important role in the apparel industry in El Salvador. One of the first
major instances of international exposure of poor working conditions in apparel manufacturing
occurred in El Salvador in 1995.10 This incident resulted in what is widely regarded as the first
independent labor monitoring arrangement, where Grupo de Monitoreo Independiente de El
Salvador (GMIES) was contracted to monitor and report on factory conditions for the U.S.
branded retailer Gap, Inc.
Although El Salvador was one of the first countries to contend with the risk of media exposure
for international buyers, it is not characterized as a country with lower labor standards than other
apparel producers. The national labor law is in accordance with accepted international norms,
with the exception of unionization. The government has yet to sign the two ILO core conventions
on Freedom of Association and Collective bargaining.11 El Salvador continues to face extreme
tension between labor unions and the government. The unions are typically associated with the
FMLN, which was the primary opposition to the conservative ruling parties during El Salvador’s
12 year civil war and remains so today. This discord will likely continue to be a problem as long
as ILO Conventions 87 and 98 are unsigned; however, current efforts are underway to address
the problem of unionization. In March 2005, the GOES agreed to initiate a working group to
address unionization issues. According to the government, the reason that ILO Conventions 87
and 98 have not been signed is a potential conflict with the Constitution of El Salvador, which
does not allow unionization of public workers. With increasing international pressure from the
ILO and the World Bank, as well as a government willingness to address unionization issues, it
is likely that El Salvador will make progress on the rights to Freedom of Association and
Collective Bargaining in the near future.
The Ministry of Labor (MINTRAB) conducts formal inspections, although it is criticized for
weak enforcement. Representatives from FEASIES (the confederation of labor unions), and well
as the independent monitoring group GMIES were highly critical of MINTRAB’s ability or
willingness to fully enforce the labor law.12 The 2004 Country report on Human Rights
published by the U.S. Department of State was also critical of MINTRAB, stating that despite
improvements in the number of inspectors, “Corruption among labor inspectors and in the labor
courts continued to be a problem.”13
In addition, roughly one third of the factories in El Salvador participate in the Worldwide
Responsible Apparel Production (WRAP) certification program. WRAP certification has been
used worldwide by apparel manufacturers, however, it is not universally recognized as a credible
standard, and therefore does not serve to increase the marketability of El Salvador as a
See section 3.2 for a brief description of the Mandarin-Gap incident.
Sources in El Salvador indicated that the GOES is currently considering whether ILO Convention 87 and 98 are
contradictory to the national constitution.
Interviews conducted in San Salvador, 2/21 to 2/24, 2005.
United States Department of State, Country Reports on Human Rights, 2004, available online at:
http://www.state.gov/g/drl/rls/hrrpt/2004/index.htm, accessed 4/20/2005.
UCLA School of Public Affairs 8
April 26, 2005
As of 2003, aggregate foreign direct investment in textile and apparel manufacturing in El
Salvador totaled $263 million.14 This figure represents 49% the total capital investment in the
apparel industry. An estimated 25 percent of capital investment originated from Asian countries,
particularly Taiwan and South Korea.15 The three most advanced East Asian economies, Taiwan,
South Korea, and Hong Kong, were among the first countries to reach their apparel quota limits.
This resulted in system of subcontracting known as triangle trade, where a head office in Taiwan
would take an order from a buyer in the U.S., source fabric from one country, have it assembled
in a different country with low cost labor, and ship it directly to the U.S. under that country’s
quota. El Salvador was a logical choice to locate production in the triangle trade due to
preferential tariffs that offered good access to the U.S. market.
1.1 The End of the Multifiber Arrangement in El Salvador
The end of the MFA poses a significant threat to the apparel industry in El Salvador because it
drastically reduces the cost of apparel production in all countries that were restricted by quotas,
most importantly China and India. The quota system effectively operated as an export tax on
apparel exported to the U.S. Many countries that were constrained by quotas charged a
substantial fee for access to quotas. China, for example, operated a domestic market selling quota
rights to manufacturers hoping to export to the U.S. In 2003, 32% of the total landed cost of a
pair of jeans produced in coastal China and imported into the United States was attributable to
the cost of obtaining quota rights.16 Thus, the elimination of the quota system translates into a
major reduction in cost for El Salvador’s competitors.
In addition, the end of quota restrictions greatly diminishes the primary impetus for Asian
investment in El Salvador. The most important driver behind this investment was the lack of
available quota for export to the U.S., thus, there is a considerable risk of the divestment of
Asian capital in the apparel industry.
1.2 Evidence of Impact
An examination of the trade data on Chinese and Salvadoran apparel imports into the U.S.
provide a picture of the trend in sourcing from the two countries. After China’s acceptance into
the WTO in 2001, there was a surge in the growth of U.S. imports from China (see Chart 1).
During this same period, apparel imports from El Salvador were experiencing moderate growth
of 2-5%. In the buildup to the end of the MFA during 2004, however, El Salvador’s apparel
industry experienced no significant growth, while China continued to grow at 16% to 25% per
Central Bank of El Salvador (2005).
ASIC Textile Summit (2004).
Abernathy, et al. (2004)
OTEXA Trade Statistics (2005).
UCLA School of Public Affairs 9
April 26, 2005
Chart 1. Value of U.S. MFA Apparel Imports
(Total for Year Ending in Month Indicated, Millions USD)
20 D v
20 D v
200 D v
20 D v
0 2 ec
0 3 ec
0 5 ec
China El Salvador
Hard evidence that Asian investment has begun to leave El Salvador is not readily available.
There are ominous signals, however, that the position of FDI in the apparel sector has weakened
significantly. While most of the Zona Franca San Bartolo EPZ outside San Salvador appears to
be functioning well with active production, a portion of the zone is occupied by rows of
Taiwanese financed buildings that are currently unoccupied and uncompleted. The recently
constructed Zona Franca Miramar EPZ is in worse shape, with only six functioning enterprises
at the site. Industry sources in San Salvador also indicated that as many as 7,000 jobs were lost in
the previous year due to the closure of foreign-owned apparel factories.18
2. Developing a Strategic Response for El Salvador
The transformation of the global apparel industry as a result of the expiration of the MFA is a
classic example of the removal of trade barriers in the presence of economies of scale. Long
transportation links in the supply chain, a highly-developed division of labor, and relatively
capital-intensive stages of production yield greater efficiency as the size of orders (and output)
increase.19 Under the quota system, economies of scale in apparel production were severely
limited by regulation. Countries with small export sectors and limited production capabilities that
were able to enter the apparel industry as more efficient producers reached their allotted quotas.
The removal of trade barriers will result in increased competition between producers, and
ultimately, a smaller number of more efficient manufacturers supplying the apparel market.
Interviews and site visits conducted February 2005, San Salvador.
It should be noted that this does not necessarily apply to the high fashion sector, where uncertainty and short lead
times often support smaller producers close to the market.
UCLA School of Public Affairs 10
April 26, 2005
Thus, the key question is how El Salvador can maintain or improve its position in a shrinking
pool of suppliers while competing against low-cost producers that are no longer limited by
2.1 El Salvador in the Global Commodity Chain
El Salvador is at the production end of a commodity chain driven almost exclusively by the
buyers. Figure 1 illustrates the
typical flow of the apparel Figure 1. Buyer-Driven Branded
commodity chain. At the top of the Commodity Chain Marketers
chain are branded marketers,
retailers, and branded manufacturers,
typically in the U.S. or Europe.20
Branded marketers are not involved Plants
Raw Spinning Factories
in manufacturing. These companies Materials Weaving
primarily focus on brand Printing Overseas
development, and do not own
manufacturing facilities. Examples
include U.S. companies Gap, Inc. Assembly Only Manufac-
and Nike. Retailers are likewise not
involved directly in manufacturing, Full Package Production
but may market many different
brands. This category includes Adapted from Gereffi (1999)
department stores as well as discount
retailers. Branded manufacturers are rapidly disappearing. Few brands continue to own
manufacturing facilities, preferring instead to outsource assembly, textile procurement, and often
design. Until recently, Levi Strauss & Co. was the largest U.S. brand involved in manufacturing,
however, all production is now outsourced to independent manufacturers. The vast majority of
apparel goods made in El Salvador are produced to the specification of brands and retailers
located in the U.S. There are no significant Salvadoran brands selling on the world market, nor
are Salvadoran producers able to set the price of what they sell to U.S. buyers.
Two separate types of production can characterize the buyer-driven chain: assembly and full-
package supply. Assembly is essentially industrial subcontracting, where cut parts are pieced
together, as in the 807 program.21 Full-package production, on the other hand can be considered
commercial subcontracting, where the sourcing country benefits to a greater degree from the
development of local economic links and knowledge.22 These benefits result from the reliance on
the producing country for textile sourcing, product design, marketing, and coordination of the
supply chain (see Figure 1). The development of these skills can greatly increase the value-added
in the production process. In addition, high-level skills such as design, marketing, and supply
chain coordination are transferable to other sectors, enabling the economy to shift focus
according to global demand. El Salvador’s apparel industry developed primarily in the category
of assembly. In order to achieve the greatest developmental benefit from apparel production in a
buyer-driven chain, El Salvador must shift into full-package commercial subcontracting.
El Salvador manufacturers must use imported fabric from the U.S. in the 807 program.
UCLA School of Public Affairs 11
April 26, 2005
2.2 Traditional Sourcing: Cost, Quality, Speed and Trade Barriers
Traditionally, sourcing decisions in the apparel industry have focused on basic factors of
production. Apparel manufacturers regularly cite production costs, quality of goods, and speed to
market as the core factors considered by buyers when placing orders. El Salvador’s garment
industry is no exception.
Speed to Market
El Salvador benefits from a significant advantage in its proximity to the U.S. and faster speed to
market. As demonstrated in Table 1, both shipping times and total lead times from El Salvador
are much lower than those from China. While this advantage is a key factor in attracting buyers,
there are limitations to the potential improvements. Existing shipping infrastructure is already
highly developed. The roads around San Salvador and those linking the city to ports in
Guatemala and Honduras are in excellent shape, with only 6 hours transport time to port. Regular
shipments to the U.S. eliminate excessive wait time in port.23
In July of 2004, the government of El Salvador, local apparel manufacturers, and U.S. buyers
and experts convened a summit in San Salvador to focus on the speed to market issue. Improving
speed has been billed as one of the primary means of maintaining a competitive edge over Asian
producers. Unfortunately, targeting speed alone is an insufficient strategy.
Shipping time from China makes up a relatively small portion of the overall lead time, allowing
China a greater window in which to improve its lead time. Additionally, one of the critical
factors in improving lead time is access to flexible local textile sources capable of responding to
production needs on short notice. The major weakness in El Salvador’s capability for improving
lead time is the inability to source raw materials locally. In many cases, an extra week of lead
time is required to ship textiles from the U.S. before production can commence. This problem is
discussed in greater detail in the consideration of full-package production approaches in section
Table 1. Speed to Market
Shipping Time Total Lead Time
El Salvador 2-7 days 3-5 weeks
China 9-14 days 7-11 weeks
Source: USITC (2004)
Juan Zepeda, Senior Investment Advisor, PROESA, interview conducted 2/23/05, San Salvador.
UCLA School of Public Affairs 12
April 26, 2005
It will be extremely tempting for El Salvador to attempt Table 2. Average Hourly Labor Cost
to compete with China by reducing labor costs. The low (USD, including benefits)
cost of labor in China is often cited as one of the major
factors driving the growth of Chinese exports. In apparel Country Apparel Textile
manufacturing, however, the average hourly labor cost in Indonesia 0.27 0.50
El Salvador is almost double that of coastal China (Table Madagascar 0.33 -
2). Competing on labor costs alone is a dangerous game Kenya 0.38 0.62
when the competitiveness of the apparel industry is in India 0.38 0.57
question. First, there are many exporting countries with Bangladesh 0.39 0.25
Pakistan 0.41 0.34
labor costs lower than China. It is a mistake to consider
Sri Lanka 0.48 0.40
cost alone without consideration of other relevant market
Haiti 0.49 -
and sector factors, such as speed, quality, and risk. This China – Inland 0.68 0.41
factor is made more complicated by the likely Philippines 0.76 -
undervaluation of the Chinese Yuan at current exchange Egypt 0.77 1.01
rates. In the case of a revaluation of the Yuan-Dollar Jordan 0.81 -
exchange rate, the cost of labor in China will increase. A China- Coastal 0.88 0.69
move to adjust labor costs to those in China is premature Thailand 0.91 1.24
pending an accurate valuation of the Chinese currency. Nicaragua 0.92 -
Second, attempts to increase competitive advantage by Colombia 0.98 1.82
lowering standards are linked to reduced output, Mauritius 1.25 1.33
efficiency, and competitiveness.24 There is a real threat South Africa 1.38 2.17
Malaysia 1.41 1.16
that an intentional reduction in Salvadoran wages could
Honduras 1.48 -
induce a race-to-the-bottom in which productivity is
Guatemala 1.49 -
brought below levels necessary to remain competitive El Salvador 1.58 -
with Chinese manufacturers, despite a reduced difference Dominican Republic 1.65 -
in labor costs. Mexico 2.45 2.30
Costa Rica 2.70 -
Trade Barriers United States 8.89 11.73
Although the MFA quota system has expired, tariffs
continue to play a major role in the landed cost of Source: Abernathy, Volpe, and Weil (2004).
apparel goods. El Salvador enjoys preferential tariff access to the U.S. market, provided it uses
fabric from within the CBTPA region or the U.S. If it could negotiate an agreement in which it
retained this access using fabric from other regions (e.g. Asia), its manufacturers engaging in
full-package production could have more flexibility to find the lowest cost textiles.
It is too late for El Salvador to modify CAFTA. However, the U.S. government has negotiated
smaller bilateral and regional trade agreements (such as NAFTA) in preparation for the final
negotiations on the Free Trade Agreement of the Americas (FTAA). Prior to those negotiations,
El Salvador should engage in a political lobbying effort both in Washington and among other
key actors in Latin America to ensure that more open rules of origin policies are considered. In
addition, a negotiating strategy should consider the incorporation of the workplace standards
program into a treaty similar to the US-Cambodia bilateral trade agreement. That trade treaty,
implemented with the assistance of the ILO, included yearly review process, where Cambodia
could be awarded more quota if improvements in workplace standards could be demonstrated.
Martin and Maskus (2001)
UCLA School of Public Affairs 13
April 26, 2005
With the quota system gone, a similar arrangement could be designed utilizing preferential U.S.
import tariffs for apparel that is produced under verified good labor standards
3. The New Global Buyer
Given the impracticality of competing based on traditional sourcing patterns, El Salvador must
consider the changing trends in U.S. buyer behavior. Diversification of sourcing from different
countries in order to reduce the political and macroeconomic risks of producing goods in the
developing world will ensure that the new global buyer continues to source from a variety of
countries. Even if China, with its comparative advantage in production cost, had an unlimited
production capacity, companies would not choose to source from there alone. El Salvador should
not adopt a strategy of direct competition with China; rather, it should strive to be a best second
While the traditional factors influencing apparel sourcing are still relevant, there has been a shift
in recent years in the characteristics of global apparel buyers. In the U.S., this shift has been
exemplified through a decline in the number of apparel companies involved in manufacturing.
Levi Strauss & Co. is a prime example, where production has been completely contracted. The
corporate focus of Levi Strauss & Co. is now centered on brand recognition and a chain of
specialty retail stores.25 The new global buyer exemplified by the Levi Strauss & Co. example is
one increasingly focused on shifting risk up the supply chain. Two outcomes of this trend will
have a major impact on the development of the apparel industry in El Salvador. First, buyers are
seeking manufacturers who have full-package capability. Even in the case that individual
factories are not completely vertically integrated, it will be expected that manufacturers can
source their own raw materials and provide a finished good. Second, this shift in production risk
up the supply chain will inherently require full-package apparel manufacturers to improve their
ability to ensure buyers that they are responsible producers.
3.1 Full-package Production
Full-package production is a production platform in which an apparel contractor is responsible
for all the components of the apparel production process, not just the assembly of components.
This platform requires that apparel producers manage and coordinate all elements of the supply
chain. Whether or not they actually have a vertically integrated factory, they must be able to
engage in the design process and source the inputs for assembly. Although some manufacturers
in El Salvador have followed this model for many years, it makes up a relatively small portion of
apparel exports.26 In order to expand the full-package capabilities of the apparel industry in El
Salvador, policy efforts should focus on the increasing the availability of textiles.
The primary weakness in the local supply chain for inputs into the apparel manufacturing process
is the lack of textiles. Currently only 5% of textiles required for apparel manufacturing can be
sourced from inside El Salvador, an additional 20% is available from the Central American
region, and the rest must be imported from outside the region. Historically, most imported
According to INCAE, only 32 of approximately 200 apparel producers are capable of full-package production.
UCLA School of Public Affairs 14
April 26, 2005
textiles have come from mills inside the United States to take advantage of the 807 program and
Not only is there an insufficient local textile supply, apparel manufacturers in San Salvador also
noted that local mills are hesitant to produce anything other than large lots of basic materials for
processing into low value-added goods.27 While this guarantees that the mills can sell all of their
output, it limits the ability of local apparel manufacturers to move into high-end fashion
production, which requires smaller lots of more expensive fabrics. Importing textiles from the
U.S. increases cost and shipping time, eroding the potential competitive advantage that El
Salvador enjoys in terms of speed to market, reaction time, and proximity.
Full-package Production: Policy Approaches
Government efforts to shift towards full-package production focus on the design of “virtual
vertical clusters.” These clusters are created by organizing separate local firms in a prearranged
full-package supply chain. The virtual vertical cluster program has been questionably successful.
According to an evaluation of by the OECD, business owners complained that the government
tried to exert too much influence over the supply chain. Manufacturers felt that this interference
inhibited their ability to adjust the virtual cluster effectively to meet buyer demand.28
In order to increase the full-package production capabilities of El Salvador, weak links in the
supply chain must be identified. Firms should be encouraged to expand their full-package
capability through technical assistance and financing. This effort should be linked with a
marketing initiative to match U.S. buyers with full-package suppliers in El Salvador. In addition,
an initiative to improve the skill set of local workers in the areas of design, marketing,
management and operational organization should be undertaken in conjunction with a program to
recruit qualified management personnel from other countries in Latin America. Finally, work on
improving the banking and business climate, as included in the World Bank’s competitiveness
technical assistance loan, should be continued.
New textile mills also need to be established in El Salvador. This is not a matter of purchasing
new machinery and setting up an entirely new enterprise; rather, existing equipment and
infrastructure should be relocated from the U.S. or other countries to the region. Measures to
entice existing mills to be more flexible in the fabrics they produce should also be undertaken.
There are currently two companies considering moving mills to El Salvador, and further efforts
should be made to ensure their relocation.29
Full-package Production: Benefits
A greater shift towards full-package production responds directly to the needs of buyers in the
U.S. who are increasingly demanding this service. Capturing a greater portion of the supply
chain in El Salvador creates the added benefit of increased linkages in the local economy,
yielding a much greater return than simple assembly under an 807 program. Functions such as
design, marketing, management and supply chain organization can significantly increase the
Factory manager, interview conducted 2/22/05, La Libertad, El Salvador.
A Brazilian mill that specializes in denim, and a mill from the U.S. that specializes in synthetics. Factory
manager, interview conducted 2/21/05, San Salvador.
UCLA School of Public Affairs 15
April 26, 2005
skill-set of local workers and provide greater economic benefit than lower-skilled assembly.
Improved development of linkages with input industries outside of free zones is vital in the case
of El Salvador, where the extremely free EPZ laws capture very little of the hard monetary
benefits of engaging in apparel production.
A local textile supply improves the capacity of apparel manufacturers to move into high-end
manufacturing, reduces their lead-time, and enhances their full-package capabilities. High value-
added apparel production requires a greater degree of flexibility and capacity to respond to buyer
demands for small order sizes and frequent style changes. Sourcing fabric from the U.S.
represents a significant delay in lead-time; a greater number of local mills could eliminate this
delay and significantly reduce lead-time. In addition, local mills will enhance the ability of
Salvadoran manufacturers to move into full-package production as coordination and control of
the entire supply chain is difficult if they have to source a significant portion of their fabric from
Full-package Production: Overcoming Implementation Obstacles
The scarcity of major local or regional textile inputs and the lack of qualified management
personnel are the two largest obstacles to full-package production. In order to address these
issues, policy work focusing on increasing textile production capabilities should be undertaken,
as well as education initiatives and efforts to attract qualified personnel from other Latin
The $40 to $60 million cost to move an existing textile mill to El Salvador has prevented mills
from relocating thus far.30 Total incoming FDI in the apparel sector was only $26 million in
2004.31 Existing mill owners have also heavily opposed expanding local production capability
due to the potential increase in competitive pressure.
The government of El Salvador has limited options when it comes to direct funding of the
relocation or construction of mills. Now that El Salvador has joined the WTO, it has essentially
forfeited its ability to engage in import substitution policy. It is likely that significant government
intervention in the relocation of textile production will draw severe criticism from U.S. textile
manufacturers. One of the primary bases for the potential reinstatement of quotas on China under
WTO rules is the claim that the Chinese government subsidizes mill development, which can
equate to dumping under trade rules. Therefore, the government of El Salvador must explore
innovative methods to encourage mill relocation.
3.2 Mitigating Reputation Risk
The risk that negative publicity of production conditions will damage sales is felt chiefly by
brands whose consumers make purchasing decisions based on brand image (e.g. Nike, Gap). In
contrast, retailers that sell products from many smaller brands whose names and logos are
virtually indistinguishable (e.g. Wal-Mart, K-Mart) do not face the same level of publicity risk,
as their brands do not add the same value to the products. Brands whose names and logos add
greater value will make stronger efforts to protect their image from the risk of negative publicity.
UCLA School of Public Affairs 16
April 26, 2005
There have been a number of cases, especially in the apparel industry, where publicity risk
negatively affected the brand value of a multinational corporation. The case of Mandarin
International, a Taiwanese factory that was located in Zona Franca Mercedes in El Salvador, is
one of the most famous examples. The exposure of poor working conditions and labor code
violations at Mandarin in 1995 prompted Gap, Inc. to accept independent monitoring of its code
of conduct at that particular factory. The initial press on this situation revolved around the poor
working conditions of the factories, the long working hours, incidents of physical abuse, and
workers fainting due to extreme heat. Additionally, the lack of freedom of association was
widely criticized after Mandarin fired 300 of its 800 employees when they tried to form a
The issue of publicity risk should be viewed at a national level. The negative press associated
with the conditions at one factory often translates to a bad reputation for the country where it is
located. In the Mandarin case, El Salvador generated a reputation for having poor labor
conditions. The reputation of a country takes on the characteristics of a public good, for which
there are benefits if all factories meet a certain standard, but all are negatively impacted if one
factory violates that standard. However, the belief that regulation of labor standards may have a
negative impact on profit creates an incentive for individual factories to lower their own
standards.33 The public goods nature of the country’s reputation and the incentive to cheat
necessitates that a national workplace standards program be mandatory, otherwise there will be
an excessive number of free riders.
While the Mandarin incident had an immediate negative impact on El Salvador in terms of
publicity, it served as an important learning tool and a building block for the future in terms of
collaborative efforts involving labor standards issues. The government learned a great deal from
the incident, and the fact that independent monitoring was born out of this situation sets a
precedent for greater efforts.
3.3 Corporate Social Responsibility and the Demand for Socially Responsible Business
The notion of corporate social responsibility (CSR), or conducting business in a way that is
responsible to workers, communities and the environment, has gained attention in recent years.
Industry representatives have increasingly asserted that responsible production processes are
important in their sourcing decisions. It is worth noting, however, that the inclusion of CSR as a
factor in the sourcing decisions of brands may have far less to do with a desire to improve actual
conditions than a desire to avert public scandal.
The growing demand for socially responsible business can be seen in consumer attitudes,
institutional investors and pension funds, and the rise in the number of products that use fair or
ethical production as a marketing strategy. In a 2001 consumer study conducted by the National
Bureau for Economic Research (NBER), respondents in the U.S. indicated that they would be
willing to pay an extra 28% for a $10 item of clothing and an extra 15% on a $100 item clothing
if it were produced responsibly.34 Studies conducted by the University of Maryland and
National Labor Committee, http://www.nlcnet.org/campaigns/archive/behindclosed/elsalvador.shtml, accessed
The nature of the link between standards and productivity is further discussed in Section 4.
Elliot and Freeman, (2001).
UCLA School of Public Affairs 17
April 26, 2005
Marymount University on U.S. consumers reached similar conclusions.35 A World Bank study of
apparel buyers working with Cambodian manufacturers also indicated that CSR was one of the
primary factors in the sourcing decision. While these studies point to a significant demand for
responsible production, they suffer from validity issues. Most consumers are neither aware of
what responsible production is, nor do they pay attention to where there clothes are made.
Consumer and industry respondents are both likely to exaggerate their preference for high labor
standards in a survey to avoid appearing uncaring. Although CSR professionals may advocate for
a labor standards criterion in sourcing decisions, these professionals are usually not making those
Investors are increasingly concerned with the behavior of the corporations in which they invest.36
Many companies produce a CSR, or sustainability report in addition to annual financial reports
to shareholders in order to be more transparent. Pension funds, such as the California Public
Employees Retirement System (CalPERS), the United States’ largest public pension fund with
$180 billion in investments, are also beginning to screen their investments in international
emerging markets on the basis of human rights standards.
The market for fair production is relatively new. There are many difficulties in verifying its
actual size, and there is no method of predicting its future growth. However, it is unquestionably
a current trend. Starbucks, American Apparel, and The Home Depot are examples of companies
that are using the notion of fair or ethical production to market their products. The fact that these
and many other companies have begun real campaigns to sell ethically-produced goods that are
not simply publicity-building efforts, demonstrates the belief in the potential of an untapped
market. The fact that few countries have linked domestic standards to the growing market for
responsibly-produced goods provides an excellent opportunity for El Salvador to become a
trendsetter in the marketplace.
3.4 What Has Been Done To Date
A number of recent public-private partnership initiatives are attempting to address workplace
standards in El Salvador as a means to enhance competitiveness. One example is the alliance for
Continuous Improvement in the Central American Workplace (CIMCAW), a multi-stakeholder
coalition supported by USAID that will work to strengthen the Central American apparel
industry via educational programs for factory owners and managers. Another example is the Fair
Labor Association’s (FLA) Central America Project. Designed to combat the problem of worker
blacklisting,37 which is believed to be prevalent in El Salvador, this project started in July, 2004
and will run for 15 months. Because employers do not have adequate policies and procedures
when it comes to human resources, the FLA is developing a tool kit that will provide guidelines
for employers in the areas of hiring, termination, discipline and grievances. Workshops with
factory owners and government officials are being conducted in order to develop a tool kit that
Marymount University Center for Ethical Concerns (1999), and University of Maryland Program on International
Policy Attitudes (2000).
Nelson (2004). Recent corporate scandals (Enron, World Com, etc.) have also contributed to the reasons behind corporate
investment in CSR.
Blacklisting is the process through which certain individuals are identified based on past affiliations with a union,
gang, or other group. These lists are provided to factory owners, and thus, prevents these people from getting a job
UCLA School of Public Affairs 18
April 26, 2005
will be utilized, and an ex-ILO official is helping to draft the guidelines.38 While each of these
initiatives is focused industry-wide, there has been minimal coordination or cooperation between
groups. Local NGO’s and government agencies in El Salvador also indicated that they had little
or no knowledge of the activities of independent workplace projects in the region.39
4. A Competitiveness Strategy for El Salvador
This analysis has identified the need for El Salvador to develop a post-MFA strategy for its
apparel industry that focuses on two key issues. First, there is a need to maintain existing apparel
industry production levels. This strategy must focus on improving performance in traditional
sourcing factors to the extent possible. It will also necessitate the development of the
characteristics that are now being sought by the new global apparel buyer, namely full-package
capability. Second, meeting the needs of the new buyer requires the ability to provide a low-risk
location to source production. A strategic response in this area will include policy actions that
enable marketing El Salvador as a safe, responsible place to do business.
In order for a workplace standards program to effectively ensure that labor conditions in El
Salvador meet a high standard, there should be an effective monitoring system with a basic
framework that focuses on four core criteria.40 Legitimacy: key actors should be included in all
stages of monitoring, including government, industry, and workers. Rigor: the monitoring
standard should meet or exceed accepted ILO norms and the local labor law. Accountability:
effective monitoring must be an independent and transparent process that results in unbiased and
accurate output. Complementarity: the independent monitoring effort must complement and
support the state’s ability to monitor and enforce the labor law.
4.1 Good Factories El Salvador (GFES)
We have developed Good Factories El Salvador (GFES) as a national project that covers all
apparel exporting factories. A tripartite governing committee, with representation from the
Government of El Salvador, industry, and apparel workers, will direct the program. GFES will
benefit from direct technical assistance from international donors and organizations, such as the
ILO and the World Bank. Appendix 1 includes a schematic of the program structure.
In order to achieve the primary goal of lower-risk production, GFES will include three primary
Independent monitors under the authority of the central committee would carry out monitoring in
order to ensure factory compliance with ILO labor standards. Inspections should occur on a
rotating schedule at least once every six months to properly assess factory conditions and
improvements. Monitors will not replace the function of existing MINTRAB inspectors. GFES
monitors will audit to a standard based on the labor of El Salvador, and ILO core standards. This
monitoring is designed to evaluate factory performance with respect to social compliance
Helena Perez, Project Coordinator, Fair Labor Association, telephone interview conducted 2/15/05.
Interviews conducted February 2005, San Salvador.
Dara O’Rourke (2000).
UCLA School of Public Affairs 19
April 26, 2005
standards, and not replace the determination of legal compliance with the local labor law, which
is the responsibility of MINTRAB. The monitoring effort, however, is designed to coordinate
with MINTRAB through sharing of results and transparency throughout the process. This
cooperation is intended to augment MINTRAB’s inspection capability by providing independent
inspection results that should allow MINTRAB to target areas of particular need and importance.
The monitoring activity would provide the governing committee with a clear picture of
individual factory performance and areas of needed improvement. Monitoring must be carried
out to a high standard by trained professional staff. In this area, technical assistance provided by
the ILO will be crucial in order to ensure quality and universal acceptance of monitoring results.
Following the general framework designed as part of the U.S.-Cambodia Bilateral Trade
Agreement,41 15 monitors should be sufficient to cover approximately 200 apparel and textile
Education and training activities would be undertaken in conjunction with existing efforts in El
Salvador and the region. A successful labor standards and quality based approach will require
that factory management, workers, and local organizations be fully informed on the Salvadoran
labor law and core ILO standards making up the GFES standard. In addition, trainings on labor
standards will incorporate best practices education in order to improve worker productivity.
A key element of a complete workplace standards system will be a complaints mechanism
through which concerns from workers, employers, and organizations can be objectively
investigated. The framework for this activity would be largely based on the ECOSOC 1235 and
1503 procedures in the U.N. system.42 Individuals, employers, or organizations would have the
ability to file a concern in writing directly to the governing commission. In the case of individual
concerns, these may be filed in confidentiality to ensure personal safety. It will be the
responsibility of the organizing committee to initially determine the merit of each. In such a case
that the committee determines a complaint is valid it would (1) be reported with monitoring
outputs described below and (2) be passed to MINTRAB for further legal consideration.
The output of the project will be in the form of a publicly distributed quarterly report. The
primary purpose of this report is to elaborate the activities and accomplishments of the project in
each of the three functions. This output is designed to provide apparel buyers with a clear picture
of the working conditions of individual factories, including areas that need improvement and
concerns that have been properly addressed. Factories will be provided with a copy of their
individual monitoring results, which can be requested by buyers. Additionally, the public
reporting procedure provides consumers and consumer advocates with more complete
information on the apparel supply chain. This allows consumers to make more informed choices
when purchasing apparel produced in El Salvador.
See Appendix 2 for a complete overview of the ILO-Cambodia Better Factories Project.
Additional information on ECOSOC 1235 and 1503 reporting procedures can be obtained from the UN High
Commissioner for Human Rights, available online at: http://www.ohchr.org.
UCLA School of Public Affairs 20
April 26, 2005
With respect to education, this will be a simple account of activities. The report on monitoring
will be the main output, which should closely follow the method utilized in the ILO-Cambodia
project. In that instance, individual factories that have been monitored are identified, as well as
general results by category (see Appendix 2 for a description of the ILO-Cambodia output). For
complaints that meet established criteria for validity, only the name of the facility in question
will be included in the quarterly report. The specific nature of the complaint will not be recorded
until a resolution has been reached and the successful corrective action can be published.
Participation of all apparel factories in El Salvador in the GFES project is necessary if the
program is to be accepted as a credible, accurate picture of standards in the country. Complete
participation is also necessary to overcome the public goods problem that national monitoring is
designed to solve. Marketing the country El Salvador as responsible source must involve all
factories that benefit from that effort, as if one factory violates labor standards, the reputation of
the entire country will be marred.
In order to achieve the goal of full participation, the project should make participation
mandatory. This strategy was carried out in the ILO-Cambodia project through the restriction of
export licenses. Only apparel manufacturers that participate in monitoring are granted a license
to export goods. This approach eliminates the potential for shirking, and directly addresses the
public goods nature of the workplace reputation of El Salvador. It makes implementation more
difficult, as apparel factories face an additional form of export regulation. Smaller manufacturers
and subcontractors who have not previously been subject to a high degree of independent
monitoring may also be opposed to a mandatory scheme. In order to reduce this implementation
problem, an awareness campaign highlighting the benefits of the project should be undertaken.
A voluntary participation model could be considered. This could be feasible through the use of a
logo branding or certification scheme, where factories participating in the program are allowed to
tag their products with a logo identifying participation in GFES. Such a scheme should appeal
most to branded marketers, who have a great deal invested in the reputation of a particular brand
name. It would also allow factories to choose whether they participate. Theoretically, the
marketability of the logo with U.S. buyers should create a demand for reluctant factories to
increasingly participate over time. However, this approach allows a great potential for shirking
and free riding. Companies could enjoy the benefits of the country’s reputation without actually
participating in the program. This would be a particularly acute problem with smaller producers,
or those producing for low-cost retailers in the U.S., as lower quality retailers do not face the
same reputation risk as branded marketers and retailers like the Gap and Nike.
Cooperation with MINTRAB and MINEC
The Good Factories project should coordinate with MINTRAB in two ways. First, monitoring
results can be shared in detail with MINTRAB as they are collected. This information can
enhance the labor law inspection and enforcement capabilities of MINTRAB by highlighting
specific areas for action. Second, direct technical assistance should be provided to MINTRAB.
The exact nature of this assistance should be determined in cooperation with the Ministry, but
would include training and infrastructure.
UCLA School of Public Affairs 21
April 26, 2005
The Ministry of Economy (MINEC), through its export promotion agency PROESA, should
focus on marketing El Salvador as a sourcing location with low publicity risk for U.S. buyers.
The GOES should explore the development of a branded logo in order to maximize the
marketability of the country as a safe place to conduct business.43 In addition, MINEC should
promote the cost savings associated with the GFES program through a substantial decrease in the
number of audits conducted in the apparel sector.
The ILO-Cambodia program has operated on a $1 million yearly budget, of which $600,000 is
directed towards monitoring.44 Given the slightly larger size of the apparel industry in El
Salvador, combined with education and complaints mechanisms, an annual budget of $2 – $2.5
million is anticipated for the GFES project. In the first two years of the project, 100% of funding
should be budgeted via equal inputs from World Bank sources and the GOES. Bank funding
should be in the form of direct assistance, while the GOES portion should be budgeted through
the current competitiveness loan provided by the World Bank. Initial buy-in from factories
would not be expected. While participation should be mandatory, it is reasonable to allow
program benefits some time to accrue before requiring a financial commitment from the apparel
industry. In the third and fourth years of GFES, World Bank funding should be phased out and
replaced with fees collected from apparel manufacturers. The structure of this system should be
negotiated with manufacturers after project implementation, but could include yearly dues, or a
fee per inspection. Additionally, a sliding scale approach to financial commitments from
factories should be considered so that smaller, start-up factories do not bear the same financial
burden as larger, more established factories.
The principal designed benefit of the Good Factories program is the marketing value to U.S.
brands, identifying El Salvador as a sourcing location with low risks and high labor standards. A
well-designed and universally trusted monitoring structure also has the potential to reduce the
cost of doing business in the country over the long run. Although there are currently efforts in El
Salvador to certify factories as mentioned in the first section, and there are other certification and
monitoring models (see appendix 3), the monitoring program set forth by GFES is the most
credible worldwide and thus has the highest marketing value.
In addition, the program does not represent a new burden to factory managers. Factories are
currently monitored directly by buyers, who use internal or privately hired firms to conduct
audits. Virtually no cooperation exists between buyers, even when the same factory is producing
for multiple buyers. This practice has resulted in a large-scale duplication of efforts that is
extremely costly to buyers and factories alike. The cost of an international monitoring visit
averages approximately $2000.45 For large U.S. brands, this cost is usually absorbed; retailers
and other buyers often charge this cost directly back to the factory. Factories have reported
facing as many as 60 individual buyer audits in a single year.46 GFES is designed to significantly
Current branded logos include “Fair Trade Certified” (e.g. coffee) and that of the Forest Stewardship Council
Ros Harvey, CTA, ILO-Cambodia Project, telephone interview 3/1/05.
UCLA School of Public Affairs 22
April 26, 2005
decrease the number of audits a factory must endure, while reducing the need for individual
buyers to rely on separate monitoring programs.
In the best-case scenario, a Table 3. Cost Analysis: Buyer Monitoring vs. Good Factories El
transparent and trusted monitoring Salvador
framework would generate reports (Estimates in USD)
that could be requested by buyers Buyer Monitoring Good Factories ES
instead of requiring regular Cost per audit 2,000 2,000
independent visits. The GFES # audits/year/factory 16 2
program specifies 2 audits per # factories monitored 200 200
year for each factory. To analyze
Factory Cost Year 1
cost savings over the current
Cost to factory 20,000 -
buyer-driven monitoring system, a
Cost to buyer 10,000 -
conservative estimate of 16 audits Cost to government 2,000
per factory per year is assumed.47 Cost to donors 2,000
Data on the proportion of audit Total cost per factory 32,000 4,000
costs charged back to factories in
El Salvador in unavailable; for the National Cost Year 1
purpose of this analysis, 2/3 of Cost to factories 4,266,667 -
these costs are transferred directly Cost to buyers 2,133,333 -
back to the factory. This should be Cost to government - 400,000
equivalent to 2/3 of production Cost to donors - 400,000
being contracted with buyers
using an independent monitoring Total cost for country 6,400,000 800,000
Table 3 estimates the costs of implementing the monitoring portion of the GFES program. In the
first year of the program, shifting the cost of monitoring to the GOES and international donors
reduces the overall cost of monitoring from $6.4 million to $800,000.
Additionally, upgrading working conditions is positively correlated with product quality, worker
productivity, and FDI.48 These improvements provide positive feedbacks that enhance industrial
transformation and upgrading efforts. They also provide direct benefit to the workers themselves
in terms of better working environment. Finally, the government should benefit, as noted above,
through cooperation with the activities of MINTRAB.
Overcoming Implementation Obstacles
A critical element of GFES is close coordination and cooperation with existing government
agencies charged with the administration of labor and industrial codes. The purpose of the
program is to enhance the governance capabilities of MINTRAB and the competitiveness of the
apparel industry. It is not designed to replace or provide an alternate framework for the
responsibilities of the GOES. Designing a program that strengthens civil society (NGOs, local
This corresponds to a factory facing quarterly audits from an average of four buyers with work in progress or
pending throughout the year.
Daude, Mazza, Morrison (2003), Martin and Maskus (2001).
UCLA School of Public Affairs 23
April 26, 2005
organizations, etc.), as opposed to directly strengthening MINTRAB, serves to add international
credibility to El Salvador as a sourcing option for global brands.
The development of a comprehensive workplace standards program is a politically sensitive
issue. Within the GOES there are widely varying views both on the value of improving
monitoring and the capabilities of MINTRAB. MINEC has two programs initiated by the World
Bank (ONI and FOEX), and appears to be in a much better position to accept a national level
standards program. The more contentious relationship is that between MINTRAB and the
proposed program. As discussed earlier, it is vital that any new programmatic effort not erode the
authority of MINTRAB. To the contrary, it should be inherent in the design of the program that
close cooperation, coordination, and technical assistance be provided.
A necessary element of the GFES design is a mechanism for input from workers in the overall
governance of the project and in the complaints mechanism. This is a particularly difficult issue
as traditional union representation is not widespread. There is also significant tension between
existing labor organizations and the national government. In the absence of formal union
representation, it is possible that other organizations could effectively represent worker interests.
For example, several initiatives have involved women’s organizations to advocate for workers.
This may serve as a partial solution as women make up 85% of the labor force in apparel
manufacturing.49 In general, however, the issue of labor representation needs to be addressed.
Closely related to this issue is the matter of the ILO core conventions on Freedom of Association
and Collective Bargaining, which the GOES has yet to sign or ratify. Reportedly, the GOES is
considering signing on to these conventions; however, there is some debate over whether they
contradict the Salvadoran constitution. Any major ILO involvement in a monitoring program
will necessitate action on this matter. The tripartite structure of the ILO, which includes formal
labor representation, will require that recognized worker organizations be part of the project.
In addition to gaining ILO approval, however, the GOES signing on to these remaining core
labor conventions would send a strong message to apparel buyers that the government is
committed to promoting and adhering to high-standard work environments. Freedom of
Association and Collective Bargaining demonstrate the strongest positive correlation to increased
FDI flows of any core labor standards.50
Replication and Expansion
After its successful implementation, GFES presents an opportunity for El Salvador to develop
their experience with national workplace standards monitoring as an industry in itself. The
replication or expansion of the program into other countries could be developed; just as the
existing independent monitoring group, GMIES, has engaged in monitoring activities throughout
the region. Moreover, if support in the U.S. for labor standards in a trade agreement were to
emerge in the future, there would be a guarantee for the need for experienced monitors and
workplace monitoring program managers.
Interviews conducted in San Salvador, February, 2005.
Daude, Mazza, Morrison (2003)
UCLA School of Public Affairs 24
April 26, 2005
4.2 Small-Scale Monitoring Programs
Two different small-scale monitoring programs should be instituted immediately in order to
demonstrate the viability and effectiveness of a strategy focusing on low-risk production. These
two programs can work simultaneously with the GFES program.
Responsible Manufacturing in Selected Factories
The Selected Factories pilot program will demonstrate the effectiveness of standards monitoring.
This program would provide dual benefits. First, it will enable El Salvador to demonstrate a
commitment to labor standards and low-risk production to international buyers. Second, it will
demonstrate to local manufacturers the viability of the model as a method of improving
productivity and marketing the factory and country.
Few personnel would be needed, and could work out of PROESA. After identifying potential
model factories with the assistance of MINTRAB, these factories would be offered the incentive
of compliance assistance and consolidation of audits by one or two trained monitors. These
monitors would have the same function as those described in the GFES project above. In
addition, the newly hired personnel at PROESA would use this pilot project to market the larger
GFES program to U.S. and international buyers as well as other companies in El Salvador.
FOEX SME Program Expansion
FOEX, an export promotion agency of MINEC, could be used to channel funds immediately into
a small-scale monitoring program. The current program is a $25,000 grant and technical
assistance for small and medium enterprises (SMEs) that are mainly export companies.
The FOEX SME program could be expanded to include apparel companies with fewer than 500
employees, equivalent to a small-size factory in the apparel industry. These smaller companies
are more likely to be engaged in subcontracting or assembly for discount retailers. When
engaged in subcontracting for other local manufacturers, SMEs are often not subject to buyer
monitoring for labor standards. In response, FOEX SME program expansion would increase the
current $25,000 in assistance available to these companies for export promotion, in exchange for
participation in a small-scale monitoring program.
The chief attraction of the small scale programs is that both could be engaged within months.
The programs could later be incorporated into the larger program as it begins. A secondary
benefit is that these are politically feasible as they do not require worker representation and could
be included in existing agencies’ responsibilities. Third, these programs would provide a useful
model to use when lobbying for the implementation of the Good Factories El Salvador program.
Finally, the targeted nature of the programs is especially relevant to their goals: the Selected
Factories provides marketable models of the GFES program, and the FOEX SME program
assists SMEs that are more likely to have labor problems, and less
Overcoming Implementation Obstacles
There are no significant obstacles to the implementation of these two projects in the short-run.
However, the small scale of these two programs may not yield significant impact in terms of
increasing the reputation of El Salvador as a responsible apparel producer. The GFES program is
UCLA School of Public Affairs 25
April 26, 2005
more capable of generating the positive reputational externalities required to convince buyers of
the responsible production capabilities of El Salvador.
5. Action Agenda
The shifts in global apparel production resulting from the end of the MFA quota system will play
a significant role in the future of the apparel industry in El Salvador. This analysis has identified
a series of actions aimed at maintaining the competitiveness of the apparel sector. El Salvador
must focus on ensuring its position as a second-best sourcing option, rather than engaging in
competition on cost factors alone. The most effective means of engaging this strategy will be the
implementation of the GFES program, which will serve to designate El Salvador as a low-risk,
responsible location to source apparel goods. GFES is also designed to significantly reduce the
costs associated with current buyer-initiated monitoring programs. Policy action is necessary in
order to overcome the inherent public goods problem associated with such a program. In addition
to the GFES project, some traditional improvements must be made to keep the apparel industry
functioning. The GOES should expand upon efforts to expand full package production
capability, and improve access to raw materials.
5.1 Good Factories El Salvador (GFES)
In order to develop and effectively implement the Good Factories El Salvador project, the
following actions should be taken by The World Bank and the Government of El Salvador.
The World Bank should:
1. Work with the ILO on preliminary negotiations for cooperation on the implementation of
the Good Factories El Salvador project. The primary contact for these initial negotiations
should be Johanna Walgrave, Director, Social Dialogue, Labour Law, and Labour
Administration Department (DIALOGUE), ILO Geneva. ILO buy-in is essential for the
Good Factories project to develop.
2. Hold consultations with key actors in El Salvador that have a direct bearing on the Good
Factories project. Two initial consultations should be organized immediately. One
consultation, including ASIC, MINTRAB, MINEC, and FUNDEMAS, should focus on
the role of existing government agencies and industry in the Good Factories project. A
second should include GMIES, FEASIES, and local NGO’s to evaluate the potential for
project cooperation with existing independent monitoring efforts and trade associations.
Official ILO involvement will require union participation; however, the lack of current
union representation will make representation difficult. Women’s organizations have
been suggested as a potential alternate voice for worker input in the monitoring process.
3. Consult with the current CIMCAW and FLA projects for potential coordination on the
education portion of the GFES project. Samira Salem at Development Associates
International (DAI) is the CIMCAW project lead. FLA efforts in Central America are
being organized by Helena Perez.
UCLA School of Public Affairs 26
April 26, 2005
4. Consult with the U.S. buyers in order to explore their willingness to accept universal
transparent labor standards monitoring and reporting system in place of current the
duplication of efforts. Buyer participation will be essential for the smaller pilot
monitoring project to be viable.
5. Provide direct aid to fund 50% of the GFES project for the first two years of
implementation. In years three and four, funding should be gradually phased out, so that
self sufficiency is achieved by the 2009 expiration of the Zona Franca law. In the ILO-
Cambodia project funds have been distributed through the Foreign Investment Advisory
Service (FIAS). Efforts to leverage funds from other international donors should also be
The Government of El Salvador should:
1. Conclude deliberation on ILO Conventions 87 and 98 (Freedom of Association and
Collective Bargaining), and sign both for immediate ratification.
2. Cooperate with the World Bank in reallocating a portion of the CETAP 2
competitiveness loan to fund the GFES project, and provide increased funds for a
redesigned FOEX SME Competitiveness project.
3. Develop a negotiating strategy that explores the idea of linking a preferential tariff to
labor standards for possible future trade talks with the United States.
4. Engage other countries in the region in an effort to develop a Central America-wide
workplace standards monitoring program.
The Ministry of the Economy (MINEC) should:
1. Through PROESA, develop a marketing strategy for the GFES project. This should
involve a significant focus on the benefits of the program to U.S. buyers. Expansion of
the program to include a branding logo identifying goods produced under the GFES
project should also be considered. This effort should engage other governments and
organizations in the CAFTA region to explore the development of a regional branding
scheme for responsibly-produced apparel.
2. Develop a pilot factory program to be administered by PROESA. With the assistance of
MINTRAB, 5 factories should be selected to participate in a fully-funded, small-scale
monitoring effort based on the larger GFES model. Factories that conduct significant
portion of business with U.S. brands should be selected for participation. This will
necessitate the dedication of 3 to 5 staff, trained by the ILO to oversee monitoring and
3. Begin development of an expansion of the current FOEX SME competitiveness program.
This will require an expansion of the program to include apparel factories with up 500
UCLA School of Public Affairs 27
April 26, 2005
employees. Monitoring and factory education can be conducted with staff from the
PROESA factory pilot project.
The Ministry of Labor (MINTRAB) should:
1. Identify areas of potential cooperation with the GFES project. This should include
potential sharing of monitoring results and output that would strengthen the enforcement
capability of MINTRAB. Areas for potential technical and financial assistance from
international project partners should also be identified.
2. Provide technical assistance and consultation on local the labor law in the development of
the Good Factories project.
3. Identify factories for potential participation in a pilot project with transparent standards
reporting. Coordination should be carried out with PROESA, who would oversee the
5.2 Upgrading and Maintenance of the Apparel Industry
In order to maintain and enhance the abilities of the apparel sector to complete on a global scale,
we recommend that the GOES engage in the following activities immediately.
The Government of El Salvador should:
1. Commence in an effort to expand third-party sourcing preferences. A lobbying effort
with the U.S. Trade Representative and administration should be designed to focus
attention on El Salvador’s sourcing preferences in the buildup to the Free Trade
Agreement of the Americas (FTAA) negotiations. GOES should review the declassified
U.S. International Trade Commission document “Textiles and Apparel: Assessment of
the Competitiveness of Certain Foreign Suppliers to the U.S. Market,” for direction on
the U.S. analysis of third-party sourcing in Central America. Additional efforts should be
directed at all trading partners in Latin America who will be party to the FTAA
negotiations, to ensure a unified focus on sourcing rules.
2. Focus on initiatives to facilitate local textile mill development. Consultations should be
held with local mill owners to reduce opposition to the development of textile sources.
Careful analysis of the potential to finance or assist in the relocation of mills under WTO
rules should also be conducted.
The Ministry of Economy should:
1. Work through PROESA to match U.S. buyers with full-package producers.
2. Enlist PROESA to engage international mill owners in the U.S. and Latin America.
Efforts should target mills with the interest and capacity to move production to El
UCLA School of Public Affairs 28
April 26, 2005
Alvarado, Jeannette, et al, “Privatization: a process with cracks,” Social Watch, El Salvador,
American Apparel and Footwear Association, “U.S.-Central America Free Trade Agreement
(CAFTA) Summary of Apparel, Footwear & Travel Goods Provisions” February 4, 2004.
Bonacich et al, eds., Global Production: The Apparel Industry in the Pacific Rim. Philadelphia,
PA.: Temple University Press, 1994.
Ascoly, Nina and Zeldenrust, Ineke, “Challenges in China: Experiences from two CCC pilot
projects on monitoring and verification of code compliance,” SOMO, Centre for Research on
Multinational Corporations, October, 2003.
Bardach, Eugene, A Practical Guide for Policy Analysis: The Eightfold Path to More Effective
Problem Solving, Chatham House Publishers: New York, 2000.
Brown, Drusilla K., “The Effects of Multinational Production on Wages and Working
Conditions in Developing Countries,” Tufts University, August 30, 2002.
Calvert, Brian, “End of the Line? Expiration of a Crucial Trade Agreement Could Change the
Face of Cambodia’s Top Industry,” The Cambodia Daily, August 10-11, 2002.
Chavarria, Elisa, “Earnings of Maquila and Non-Maquila Workers in El Salvador”, The Berkeley
McNair Research Journal, 1999.
Coates, Dougless “Codes, Monitoring, and Worker Orgasnizing: Challenges and Opportunities,”
Seminar Report, Maquila Solidarity Network, Puebla Mexico, February 6-8, 2002, available
online at: http://www.worldtrademag.com, accessed 3/11/05.
Condo, Arturo et al., “El Sector Textil Exportador Latinoamericano Ante la Liberalización del
Comercio, ” INCAE, 2004.
Condo, Arturo et al., “Textiles en Centroamerica,” INCAE 2003.
Daude, Christian, Mazza, Andrew, and Morrison, Jacqueline, “Core Labor Standards and FDI in
Latin America and the Caribbean: Does lax enforcement of labor standards attract investors?”
Inter-American Development Bank, 2003.
Darling, Rick et al., “Is there a life for Central American apparel contractors after 2005?”
Executive Technology, 2003, available online at: www.executivetechonlogy.com, accessed
Elliot, K.A., and Freeman, R.B., “White Hats or Don Quixotes? Human rights vigilantes in the
global economy,” Working Paper 8102, National Bureau of Economic Research, January, 2001.
UCLA School of Public Affairs 29
April 26, 2005
“El Salvador’s Apparel Exports Already Fell in October-November,” Emerging Textiles, January
20, 2005, available online at: http://www.emergintextiles.com, accessed 2/7/2005.
Farrell, Janice et al., “Do audits of labor standards have a positive impact on the Vietnamese
economy and society?” Kellogg School of Management, April, 2003.
Foo, Lora Jo, et al., “Free Trade’s Looming Threat to the World’s Garment Workers,” working
paper, October 30, 2003, available online at: www.sweatshopwatch.org, accessed 2/15/05.
Foreign Investment Advisory Service, World Bank Group “Building and implementing a
framework for CSR as a development tool in El Salvador,” presentation San Salvador, El
Salvador, December, 2004.
Forest Stewardship Council, “Letter regarding FSC accreditation monitoring unit of SmartWood
at Forest Industry Organization (FIO) Thailand,” 2003.
Frundt, Henry, “Unions wrestle with corporate codes of conduct,” Ramapo College, N.J., 2003.
Gap, Inc. Press Release, “UNITE and Gap, Inc. Set Aside Differences to Work Together on
Garment Factory Conditions,” April 19, 2004.
Gereffi, Gary, “International Trade and industrial upgrading in the apparel commodity chain,”
Journal of International Economics, 48, 1999, p. 37-70.
GMIES, “Verification of compliance with labor laws and the code of conduct of Liz Claiborne,
Inc., in three plants of a company in El Salvador,” El Salvador, 2001.
Graafland, Johan, el al, “Strategies and Instruments for Organising CSR by Small and LAarge
Businesses in the Netherlands,” Journal of Business Ethics, 47: 45-60, 2003.
“Highlights of Trade Capacity Building Initiatives in Support of U.S.-CAFTA Negotiations,”
The Office of the U.S. Trade Representative, January 8, 2003, available online at:
http://www.ustr.gov/Document_Library/Fact_Sheets/2003, accessed 1/6/2005.
Human Rights Watch Case Studies, “Deliberate Indifference: El Salvador’s Failure to Protect
Worker’s Rights,” available online at: www.hrw.org/reports/2003/elsalvador1203/7.htm,
ILO, “Eighth synthesis report on the working conditions situation in Cambodia’s garment
sector,” ILO, April, 2004.
ILO, “Export processing zones: Addressing the social and labor issues,” Bureau for
Multinational Enterprise Activities, available online at: www.transnationale.org, accessed 2/5/05.
UCLA School of Public Affairs 30
April 26, 2005
International confederation of Free Trade Unions, “Internationally Recognized Core Labor
Standards in El Salvador,” report for the WTO general council review of trade policies in El
Salvador, Geneva, February 2003.
Jenkins, Mauricio et al., “Export processing zones in Central America,” Harvard Institute for
International Development, Discussion Paper, 1998.
Lowry, David, “A Review of Setting Global Standards: Guidelines for Creating Codes of
Conduct in Multinational Corporations,” Business and Society Review, 2003.
Martin, Will and Maskus, Keith, “Core labor standards and competitiveness: Implications for
global trade policy,” Review of International Economics, 9(2) 317-328, 2001.
Marshall, Tyler et al., “Clothes Will Cost Less, But Some Nations Pay,” Los Angeles Times,
January 16, 2005
Marymount University Center for Ethical Concerns, “The Consumers and Sweatshops,”
Maskus, Keith, “Should Core Labor Standards be Imposed Through International Trade Policy?”
Policy Research Working Paper No. 1817, World Bank: Development Research Group, 1997.
Nelson, Jane, working paper, “The Public Role of Private Enterprise: Risks, opportunities, and
new models of Engagement,” Kennedy School of Government, March 2004.
OECD, “DAC Workshop: Towards Good Practices for Donors on Capacity Development for
Trade,” DCD(2000)10/ANN1, 2000.
Olson, Kara, “Sourcing patterns and the elimination of textile and apparel quotas,” 2003.
Ormond, E., et al., “Sourcing Overseas for the Retail Sector,” PricewaterhouseCoopers,
O’Rourke, Dara, “Opportunities and obstacles for Corporate Social Responsibility reporting in
developing countries,” World Bank, March 2004.
O’Rourke, Dara, “Outsourcing regulation: analyzing nongovermental systems of labor standards
and monitoring,” The Policy Studies Journal, Vol. 31. No. 1, 2003
Polaski, Sandra, “Trade and Labor Standards: a Strategy for Developing Countries,” Trade
Equity and Development Project, Carnegie Endowment for International Peace, 2003.
Pollin, Robert, et al., “Global Apparel Production and Sweatshop Labour: Can Rising Retail
Prices Finance Living Wages?,” Cambridge Journal of Economics, 2004.
Quinteros, Carolina. “¿Puede el CAFTA sacar adelante a la maquila centroamericana?”
UCLA School of Public Affairs 31
April 26, 2005
Revista Centroamérica en la Economía Mundial del Siglo XXII, 2004.
Schrank, Andrew, “Export processing zones: Free market islands or bridges to structural
transformation?” Development Policy Review, 2001, 19 (2): 223-242.
Sepulveda, Jose A., “Modeling a Garment Manufacturer’s Cash Flow Using Object-Oriented
Simulation,” Winter Simulation Conference, 2004.
Speer, Jordan K., “20 Top Strategies for a Post-Quota World,” Apparel Magazine, January 1,
The Economist Intelligence Unit, El Salvador Country Report, December 2004.
Transcript: Jim Lehrer News Hour, “New Garments,” December 31, 2004.
Tsogas, George, “Corporate codes of conduct and labor standards: Developing the “human rights
function in HRM,” Institute of Social Studies, 2000.
United States International Trade Commission, “Textiles and Apparel: Assessment of the
Competitiveness of Certain Foreign Suppliers to the U.S. Market,” Investigation No. 332-448,
USITC Publication 3671, January 2004.
University of Maryland, Program on International Policy Attitudes, “Americans on
Globalization: A Study of Public Attitudes,” College Park, MD, March, 2000.
USAID, “Guatemala Labor Standards Alliance: Fostering Competitiveness through Workplace
Improvements,” September 2004
Utting, Peter, “Regulating business multistakeholder initiatives: a preliminary assessment,”
Vallejo, Nancy, J. Morrison, P. Hauselman, “Cetrification and Trade Policy Strategic
Assessment,” ISEAL Alliance strategy paper, February 2004.
VESTEX – Comisión de la Industria de Vestuario y Textiles. “Resultados del CAFTA para el
Sector Textil y Confección”. Enero, 2004.
World Bank CDF Profiles, “The Central American Integration Process,” April 24, 2003.
World Bank Institute, “An Introduction to Corporate Social Responsibility and Sustainable
Competitiveness,” available online at: www.csrwbi.org, accessed 2/9/05.
World Bank Institute, “From perception to reality: Changing Central America’s image in the
market,” presentation San Salvador, El Salvador, February, 2005.
UCLA School of Public Affairs 32
April 26, 2005
Appendix 1: Good Factories El Salvador Program
UCLA School of Public Affairs 33
April 26, 2005
Appendix 2: Better Factories Cambodia Project Overview
(AS PROVIDED IN DRAFT FORM BY THE ILO)
Better Factories Cambodia
Better Factories Cambodia is a unique programme of the International Labour Organization. It
benefits workers, employers and their organizations. It benefits consumers in Western countries
and helps reduce poverty in one of the poorest nations of the world.
It does this by monitoring and reporting on working conditions in Cambodian garment factories
according to national and international standards, by helping factories to improve their
productivity and by working with the Government and international buyers to ensure a rigorous
and transparent cycle of improvement.
The project grew out of a trade agreement between the United States and Cambodia. Under the
agreement the US promised Cambodia better access to US markets in exchange for improved
working conditions in the garment sector. The ILO project was established in 2001 to help the
sector make and maintain these improvements.
Better Factories Cambodia was formerly known as the ILO Garment Sector Project. The new
name better reflects the present aims of the ILO project.
About the garment industry
Cambodia’s garment industry has grown rapidly by any standards. It began from almost nothing
in 1994. However, today garments now make up to 80% of Cambodia’s export earnings. It is
Cambodia’s largest industry and brought in around US$1.9 billion in 2004. In no other country
does this industry make up such a large share of total exports.
More than 270,000 people work in the industry. Most of them are young women from rural
areas. Outside the garment industry jobs in Cambodia for these people are scarce so employment
in the factories is particularly valued. Working in the industry enables many women to both earn
for themselves and to send some money back to their families to improve their living standards
Almost all garment factories in Cambodia are foreign owned. Most owners are from Hong Kong,
Taiwan or mainland China. US companies buy about two-thirds of Cambodia’s garment
production. European firms buy most of the remainder.
How it works on the ground
Better Factories Cambodia runs a programme of unannounced factory visits to check on
working conditions. The monitors’ checklist, based on Cambodian labour law and the standards
of the ILO, runs to more than 500 items. To ensure accuracy, workers and management are
interviewed separately and confidentially. Interviews with workers usually take place away from
the factory. Monitors also talk with factory shop stewards and union leaders.
UCLA School of Public Affairs 34
April 26, 2005
Factory managers get written reports of the findings that include suggestions for improvement.
Suggestions are specific, touching on issues as diverse as child labour, freedom of association,
employee contracts, wages, working hours, workplace facilities, noise control and machine
After time for discussion and follow-up action, the monitors again visit the factory to check
progress. The findings from the monitoring are made public through reports. Factories are named
and their progress on implementation is identified in all reports made after the second visit.
Better Factories Cambodia is creating services to help the industry improve working conditions,
whilst at the same time improving quality and productivity. A range of training opportunities and
resources are being progressively offered to the industry. Options range from simple good
practice sheets to an intensive 12-month modular training program. From 2005, with funding
from the Agence Francaise de Developpment, Better Factories Cambodia will implement a new
website, develop new resource materials and offer a diverse range of training opportunities.
Workplace co-operation between management and unions is at the heart of the Better Factories
Cambodia training programs. The training focus is on both boosting productivity and improving
working conditions through worker involvement. The ILO draws on its international expertise to
design and deliver these improvement programs. The topics cover such things as workplace co-
operation and dispute resolution, occupational health and safety, working conditions,
globalisation and change processes. Training is conducted in Khmer, Chinese and English.
Better Factories Cambodia training is designed so that everyone can share their views and ideas
and can build on their own experiences. The emphasis is on practical and measurable
improvements at the factory level.
Better Factories Cambodia also works with government staff to build their own capacity, and
with local organizations to deliver training to the industry in the longer term.
Better access to information
At present the results of the monitoring are published in reports and are available from the ILO
website. Better Factories Cambodia is working to improve transparency and access to
information. A world-first information management system is being implemented in 2005. The
new system will be web-based and will provide timely reports on monitoring, training and
improvements in Khmer, English and Chinese.
The new system will continue the practice of naming factories and identifying their progress on
improving working conditions. But it will be more user-friendly and capable of producing
analytical reports on industry trends, as well as improvements and problem areas in compliance.
This will help industry policy and program planning. Where detailed information on particular
factories is needed, special access keys can be granted with the approval of the factory
UCLA School of Public Affairs 35
April 26, 2005
Why it works
The project works for several reasons. It is includes all exporting garment factories and
represents common interests of all those involved in the industry. It is transparent, credible to
international buyers making sourcing decisions, and meets the needs and interests of workers and
All export factories in the country are monitored by the project due to the co-operation of the
Cambodian Ministry of Commerce. Participation is a condition of export licensing in Cambodia.
The Better Factories Cambodia programme is not intended to guarantee complete compliance
with labour standards. It focuses on continuous improvement. While problems still remain, over
the last four years of the programme genuine progress has been made. Better Factories does
what it says. It brings about improvement over time.
Better Factories Cambodia represents a convergence of common interests of the industry,
international buyers, of the desires of western consumers for sweat-shop free products, and for
more and better jobs in one of the poorest countries of this world. As with all ILO projects,
national trade unions, employers’ organizations as well as the national government are partners
in this work.
World Bank Survey of Cambodian Buyers
In 2004 the World Bank found that the assurance of good working conditions in Cambodian
factories was a major factor in buyers sourcing from Cambodia. The World Bank study was
independent and rigorous in its assessment. In fact, Cambodia's key overseas buyers rate labour
standards as top priority in their decision to source from a country and consider Cambodia to
have an advantage over Bangladesh, Thailand, Vietnam and China. The survey also found that
almost 80% of buyers consider auditing of labour standards to be critical after the end of quotas,
and have high praise for ILO’s monitoring. Buyers also state that improved labour standards
have positive effects on accident rates, workplace productivity, product quality, worker turnover
Graph as provided
Source: Cambodia: Corporate Social Responsibility & the Apparel Sector
Buyer Survey Results, Foreign Investment Advisory Service (World Bank Group), Washington,
UCLA School of Public Affairs 36
April 26, 2005
The cost of the monitoring is modest – less than US$3 a year for each worker, or US$2800 for
each factory. Factories taking part in training programs contribute further to the cost.
At present Better Factories Cambodia is funded by the US Department of Labor (USDOL), the
Agence Francaise de Developpement (AFD), the Cambodian Government (RGC) and the
Garment Manufacturers Association of Cambodia (GMAC).
Better Factories Cambodia is guided by a tripartite committee from Cambodian ministries,
GMAC and the Cambodian union federations. International buyers are important to Better
Factories Cambodia’s work and there is a strong commitment to consulting and building
relationship with interested buyers.
Better Factories Cambodia aims to be sustainable over the longer term. Most of its staff are
already Cambodian nationals. A significant party of its work involves capacity building. Current
funding plans aim for the project to be self-supporting by 1st January 2009. This requires the
commitment of the social partners (Government, employers and unions), as well as of buyers and
consumers to ensure that Cambodia can build on its successes.
For further information, contact:
Better Factories Cambodia
#9, St 322
Boeng Keng Kang 1
Phone: +855-23 212 847 ext 106
Fax: 855-23 212 903
UCLA School of Public Affairs 37
April 26, 2005
Appendix 3: List of Interviews
Christel de Arce, National Office of Investment, San Salvador
Ricardo Avila, Administrator , Miramar Free Zone, San Salvador
Jim Chestnut, CEO, National Spinning, North Carolina
Lorraine Clewer, Field Director, Latin American, Worker Rights Consortium, Washington DC
Rosamaría de Colorado, Legal Consultant, UNDP, San Salvador
Lic. Pedro Antonio Cruz, Administrator, San Bartolo Free Zone, San Salvador
Claudia Gonzalez, Executive Director, ASIC, San Salvador
Roger Gutierrez, Secretary General, FEASIES, San Salvador
Ros Harvey, Chief Technical Adviser, ILO-Cambodia project, Phnom Penh, Cambodia
Gabriel Llaguno, Director of Compliance, Americas, Nike, Inc., Guadalajara, Mexico
Dara O’Rourke, Assistant Professor of Environmental and Labor Policy, UC Berkeley
Helena Perez, Project Coordinator, Fair Labor Association, Guatemala City, Guatemala
Ruth Rosenbaum, Executive Director, Center for Reflection, Education and Action, Connecticut
Alan Scott, Distinguished Professor of Public Policy and Geography, UCLA
Michael Storper, Professor of Urban Planning, School of Public Affairs, UCLA
Kristina Svensson, Consultant, CSR Practice, Foreign Investment Advisory Service, World Bank
Vladimir Velásquez, Senior Adviser, FOEX, San Salvador
Marian Vidaurri de Rank, Program Director, FUNDEMAS, San Salvador
Lynda Yanz, Coordinator, Maquila Solidarity Network, Toronto, Canada
Juan Zepeda, Senior Investment Adviser, PROESA, San Salvador
*** Name removed at the request of interviewee.
UCLA School of Public Affairs 38