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Lower Labor Costs Linked To Higher Risks

Cam McGrath / Khmer Times Share:

PHNOM PENH (Khmer Times) – Businesses with operations or supply chains in Myanmar, Bangladesh and Cambodia are benefiting from the world’s lowest labor costs, but their cost competitiveness could be offset by the risks associated with operating in or sourcing from these low-cost locations, a new study has warned.

Risk analytics company Verisk Maplecroft identified the three Asian nations as among the five best countries in the world for cheap labor in its Labor Costs Index. The index measures a combination of wages, employment regulations, social security contributions and labor productivity to calculate the cost competitiveness of workforces in 172 countries.

“The cost of employing staff is a key consideration for companies when they consider where to invest,” said Charles van Caloen, a senior analyst at Verisk Maplecroft. “Countries that have high labor costs relative to productivity levels risk deterring mobile international capital that can bring jobs and growth in its wake.”

Cambodia ranked 169th in the index, making it significantly more attractive for manufacturing investment than its more industrialized regional neighbors, China and Thailand, which ranked 64th and 93rd respectively.

The study noted that China’s labor costs have risen rapidly in line with the country’s growth, prompting firms to replace Chinese manufacturers in global supply chains with suppliers in lower-cost economies such as Myanmar, Bangladesh and Cambodia.

However, the attractiveness for investors in setting up factories in these low-cost countries is tempered by lower productivity and risks associated with operating in, or sourcing from, low-cost locations, Verisk Maplecroft warned.

It rated the locations as ‘extreme risk’ for health and safety, working conditions, child labor and human trafficking. 

“Countries with low levels of socioeconomic development and inadequate environmental protections present a host of additional risks and indirect costs to business – including brand damage, investor alienation, and potential lawsuits,” the firm noted.

It said that extremely low wages and poor working conditions can also result in industrial action and civil unrest, especially if workers perceive that they are not benefitting from the country’s foreign investment or rapid economic growth.

“The true cost of business in the emerging economies is more than the direct expenses associated with the labor force,” said Mr. Van Caloen. “It is essential for companies to understand and price in risks, such as strikes, disruptions and poor worker health, when making market entry or strategic sourcing decisions.” 

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