This chapter explores the relations between the structure of global value chains (GVCs) and labour employment in developing countries where downstream suppliers are largely concentrated. As laid out in the introduction to this book, this starts with knowledge, usually protected under intellectual property rights (IPRs), creating oligopolies or monopolies with degrees of monopoly in the product markets in the headquarter economies of lead firms. In an unequal world—unequal in the distribution of knowledge, incomes, and wages—there is the possibility of utilizing these differences to increase the profits of product monopolies through the disintegration of production in GVCs.

GVCs have embedded within them a distribution of knowledge among different GVC segments: knowledge-intensive segments in pre- and post-production tasks, which are protected under IPRs in lead firms; and production knowledge distributed among many suppliers in developing economies that is not protected under IPRs. The monopolies on the product market then appear as monopsonies in input markets, where a few buyers can bargain with many suppliers to the buyers’ advantage. In the resulting distribution of value within the value chain, the lead firms earn rents (or super profits), while the suppliers just earn competitive profits.

Before proceeding, let us revisit our terminology, as clarified in the introduction, once again. The technical term for a market with a few buyers and many suppliers is an oligopsony, while that for a market with a few sellers and many buyers is an oligopoly. Not only is oligopsony a somewhat clumsy word, but it is not very commonly used. The term ‘monopsony’ can be extended to describe a market where a few players on one side deal with many players on the other side. In this way, there are brands with degrees of monopoly in the product market and also degrees of monopsony in the input market.

The relationship between lead firms and suppliers has been analysed under the rubric of value chain governance (Gereffi, Humphrey, and Sturgeon 2005). The theory of supplier firm governance divides them into three types of governance, in which we emphasize differentiation based on the knowledge level of the tasks performed. Suppliers in captive governance are characterized by the low-knowledge level of tasks performed, as seen in the manufacture of garments or shoes. There is an intermediate level of knowledge in supplier firms in modular governance, as seen in automobile and electronics assemblies.

What of the internationalism of the knowledge economy? As we saw in Chapter 3, the politicians, academics and commentators who championed the idea of knowledge-based growth often stressed the importance of international openness to success in the new economy. This was partly because, on their analysis, there was no alternative: globalization (itself abetted by the computing and telecommunications revolution of the 1980s and 1990s) had made labour, capital and ideas internationally mobile, and this was a reality to which countries would simply have to adapt. But it was also because, they conjectured, policies that actively sought to deepen international openness and international ties would enable countries to steal a march on their rivals in the global knowledge economy. Removing obstacles to international investment would help to attract knowledge-intensive overseas businesses, providing domestic workers with opportunities to work for (and learn from) firms at the cutting edge of the global technological frontier. Removing obstacles to international trade would provide domestic consumers with higher-quality (and lower-cost) goods and services while simultaneously exposing domestic industries to efficiency-enhancing competition, allowing them to incorporate the latest technologies and techniques into their own output. Removing obstacles to international immigration – at least for highly skilled workers – would enable technologically advanced, high-wage countries to cream off the most innovative, educated and skilled workers from the rest of the world, further consolidating their lead in knowledge-intensive industries.

Underpinning this optimistic internationalism was a particular analysis of the competitive advantages of developed democracies in the knowledge economy era. This analysis assumed that the presence of a highly educated workforce, combined with high-quality infrastructure and robust rule-of-law institutions, would enable developed democracies to act as a magnet for knowledge work (and the businesses that create it): an advantage that their lower-wage rivals would find difficult to replicate. The same high wages that put advanced economies at a comparative disadvantage in fields such as mass manufacturing should enable these self-same countries to attract and retain highly skilled talent from overseas. And, in an era where knowledge is key, democracies that encourage the free movement of ideas within and across borders (including the products, individuals and firms who embody them) should be well placed to stay at the cutting edge of the global knowledge economy.

What of the broader moral and political case for knowledge-driven growth, predicated on its ability to deliver social mobility, equality of opportunity and a fairer distribution of economic rewards? In light of the shortfall of knowledge work already identified, it should come as little surprise that the inclusivity of knowledge-based growth has fallen short too: if being included means securing a well-paid knowledge job, then there are not enough of these jobs to go around. Even if we define inclusion more modestly, as the ability to access these jobs on an equal footing, it is unclear whether policy-makers have delivered. A 2018 report into social mobility by the OECD noted that opportunities for people to move up and down the income distribution have decreased across the developed world since the 1990s, with the highest earners more likely to remain highly paid and the lowest earners more likely to remain poorly paid than they were two decades before, with your parents’ education and occupation increasingly decisive in shaping your own life chances.

This chapter explores why the social inclusion agenda has faltered. It begins by examining the uneven geographical distribution of opportunity, before turning to the relationship between education and economic success. Does what you earn really does depend on what you learn? Or are other factors – access to capital and social networks, for instance, or the competitive structure of certain knowledge-intensive sectors themselves – to blame for rising inequality?

The landscape of opportunity

Knowledge-based growth was seen by some of its 1990s advocates as a solution to the problem of regional economic divergence, and in particular to the loss of jobs in former industrial heartland regions arising from globalization. Yet, far from reversing these trends, the knowledge economy era has witnessed a further deepening of regional economic inequalities. For example, in the USA, whereas prior to 1980 cities with lower wages saw faster wage growth (and thus convergence with their more affluent counterparts), post-1980 this trend has stalled, with some higher-wage cities – such as Boston, New York and San Francisco – pulling further away from the pack. Similar patterns are replicated across western Europe.

Why has this happened? Much as academic theorists of endogenous growth and increasing returns originally anticipated (in contrast to many cheerleaders of the knowledge economy among the political class and the professional commentariat), knowledge-intensive businesses have tended to cluster together in large cities and their surrounding regions.

In Chapter 1, a subsidy was defined as the purchase of a product, such as labour power, or an environmental service, such as water, below their cost of production. The cost of production of a commodity is the sum of the various inputs that go into its making, plus a normal profit for capital. This is Marx's prices of production or also a neo-Keynesian definition of cost. The difference between the cost of production and the price of the product, however, does not just disappear from the value chain. The cost is incurred somewhere, either in the household where labour is reproduced or within the environment. If this incurred cost is not compensated, it appears as a subsidy extracted from the household or environment.

The extraction of the subsidy takes place in multiple locations: the factory and other sites of production, such as worker and farmer households, and also the environment. Thus, it may seem that the subsidy is being provided to or benefiting the producer, which is the factory owner in the value chain. However, monopsony relations in the value chain result in the capture of that subsidy by the brands, who are able to keep supplier prices down to incurred monetary costs. Thus, there is a distinction between the site of subsidy extraction, which is the supplier factory, and the site of its capture, which occurs through the monopsony relation between brands and suppliers. This is important in the analysis of global value chains (GVCs), such as that of garments, where the monopsony structure of the input market enables the capture of subsidy by the brands even when the extraction of that subsidy takes place under the management of the supplier or local authorities in supplier countries.

Consequently, since the subsidy (in terms of lower prices of inputs) translates into lower ex-factory prices of garments, the subsidies are reverse subsidies to brands—from gendered labour, farmer households, and the environment. These are reverse subsidies in two senses. The first is that they are extracted from the weakest and worst-off in the value chain. The second is that they do not accrue to supplier firms; rather, through the monopsony structure, they are transferred to the brands.

In Chapters 4 to 10, we saw how value is extracted through the purchase of inputs, gendered labour power, and environmental services at prices below their respective costs of production. Such acquisitions of inputs below their costs of production were identified as subsidies. These subsidies are extracted in different nodes or locations: the garment manufacturing factory, the household, including the rural household, and the enviroment. In the framework chapters, we have argued that these subsidies, though extracted at different nodes of the global value chain (GVC), end up with, or are captured by, the brands that govern or are lead firms in these value chains. This argument is similar, but not equal, to the Marxist distinction between the location of value production and realization, where there is a distinction in the firm and country location of value production and value realization (D. Harvey 2017).

In this chapter, we discuss the manner in which monopsony functions to bring about value capture by brands. The analysis in this chapter is built on the primary material gathered from discussions with over 100 suppliers from different research projects during the five-year period of 2016 to 2020. One round of investigations was with about 60 garment suppliers across the Delhi National Capital Region (NCR), Jaipur, Surat, Bangalore, and Tiruppur as part of the International Labour Organisation Apparel Export Promotion Corporation (ILO-AEPC), a quasi-government body study of management practices in Indian garment suppliers (Nathan and Harsh 2018). The management weaknesses reported in this study led to the ILO-AEPC Handbook of Good International Practices in the Garment Industry. This report also formed the basis of a paper (Nathan and Harsh 2018) on process upgrading in the garment industry.

During 2017–2019, the Society for Labour and Development (SLD) carried out a questionnaire-based survey of 45 garment firms in Delhi NCR, Bangalore, and Tiruppur. The data from this survey was filled out with inputs from senior officials of the firms. Besides these project-based surveys,the researchers have also interacted with various suppliers and brand representatives in many multi-stakeholder initiatives. These interactions date back to our participation in the Capturing the Gains (CtG) research programme between 2011 and 2016.

Information gathered from these discussions do not fit into survey-type results. But they are important in forming impressions of how buyer–supplier bargaining functions.

Since the global financial crisis, many developed democracies have experienced seismic political upheavals. Knowledge-driven growth strategies – and their champions in the political establishment – today stand on unstable electoral ground. Centrists of both the left and the right have seen their vote share eroded. Party systems that just a few years ago appeared frozen have suddenly become fluid. New political movements and organizations have seized votes, seats and even government office from their better-pedigreed rivals. In other cases, outsiders have contested the leadership of mainstream parties, posing serious challenges to candidates favoured by established party hierarchies and powerbrokers, and on occasion even emerging victorious. These outsiders pose serious challenges to diverse aspects of the knowledge-driven growth agenda: calling into question everything from its commitment to international openness to its celebration of dynamic markets, from its vision of prudent macroeconomic policy to its insistence that social investment will suffice to tackle problems of inequality and exclusion.

In Part I, we explored how the knowledge-driven growth agenda came to dominate economic policy debate and practice in developed democracies from the early 1990s onwards. In Part II, we examined the diverse ways in which that knowledge-driven growth agenda has fallen short. In this chapter, we unpack the political implications of those shortcomings. The chapter begins by revisiting the idea of the knowledge economy as a growth regime: a set of economic policy ideas and assumptions that are underwritten politically by a distinctive coalition of supporters. It identifies three groups who have been particularly badly affected by the shortcomings of knowledge-driven growth, and thus who are particularly likely to withdraw their support from the status quo: younger people, lower-paid and/or lower-skilled workers, and residents of regions undergoing relative economic decline. The chapter goes on to examine electoral data showing declining levels of support for the political mainstream, as well as evidence that these declines are particularly pronounced among the three groups that our analysis predicts. The chapter concludes by comparing this analysis to alternative accounts of the outsider insurgency, showing how it is compatible with these rival explanations but also how it is complementary to them, filling in their gaps and resolving their inconsistencies.

Fragmentation

As outlined in Chapter 1, a growth regime consists of two components. It denotes a set of ideas about the causal mechanisms underpinning economic growth, on the back of which governments base their policy choices.

So far, we have dealt with the household as a site for the reproduction of labour power. However, the household is also a site for production to perform tasks outsourced from the factories. There are two types of home-based workers. First, those who buy inputs, perform some value-adding tasks, and sell the output. These are called either own-account workers or self-employed workers. Street vendors and hawkers are of this type who operate on their own account. The second type of home-based worker constitutes those who perform tasks specified by an employer. Women in Informal Employment, Globalizing and Organizing (WIEGO), the international network of women in the unorganized sector, refers to this type of home-based workers as homeworkers, and this terminology will be followed here.

The ILO Convention 177 on Home Work defines home work as

Since we are considering sites of production, it is important to note that to qualify as homework, work must be carried out on a site ‘other than the workplace’ and carried out ‘as specified by the employer’. Since homework is carried out as specified by the employer, it qualifies as part of the global value chain (GVC), where work contracted to the manufacturer of garments is outsourced to a homeworker. The relation between the manufacturer, the exporter, and the homeworker is not of the market type where the homeworker sells goods or services to the manufacturer. Rather, the manufacturer contracts for the performance of tasks, usually embroidery or finishing an almost-finished garment.

These subcontracted homeworkers occupy an intermediate space between independent own-account workers and factory workers (Raveendran, Sudarshan, and Vanek 2013). They differ from own-account workers in that they are not sellers of their output. The finished pieces of work are returned to the factory, via the contractor, and the homeworkers are paid for the tasks performed.

On 7 March 2000 – three days before the tech-heavy NASDAQ Composite stock index hit a peak that it would not reach again for 15 years – almost 400 people crowded into the Connaught Rooms, a conference venue in central London. The event, entitled “Knowledge 2000”, had been organized jointly by the UK's Department of Trade and Industry and Department for Education and Employment. It brought together business and labour interests to discuss how to build a successful, knowledge-driven economy fit for the challenges and opportunities of the twenty-first century. The attendee list testified to the breadth of the coalition backing this agenda. Representatives from the Confederation of British Industry mingled with representatives from the Trades Union Congress. Antonio Guterres – then Portuguese prime minister and president of the European Council, later to be secretary-general of the United Nations – was also present, a symbol both of the strident internationalism of the New Labour government and of the global appeal of knowledge-driven growth. Topping the bill of speakers was Tony Blair, who was exactly 15 months away from a general election that would see him win the second-largest UK parliamentary majority of the postwar era – eclipsed only by the record he himself had set just under three years before. In his keynote address, Blair outlined an economic strategy that would capitalize on the opportunities of the knowledge economy era, generating a truly inclusive form of growth: “Knowledge and skills, creativity and innovation, adaptability and entrepreneurship are the ways by which the winners will win in the new economy … That way we can all prosper.”

Over the next two chapters, we will map out the economic policy agenda championed by advocates of knowledge-driven growth in the 1990s and early 2000s. Four elements of this agenda stand out. First, policy-makers believed that social investment in education, infrastructure and research would act as a magnet for internationally mobile knowledge jobs and would help knowledge-intensive industries to grow. Moreover, these social investments would combat poverty and social exclusion, overcoming differences in opportunity between economically marginalized people and places and their more affluent peers. Knowledge-driven growth also required dynamic markets, aided by the removal of tax and regulatory burdens that might hamper businesses from responding in an agile fashion to their rapidly changing environment.

Introduction

In this chapter, we look at the utilization of environmental products and services, or ecosystem services, and the manner in which their costs are met within or externalized from the core garment global value chain (GVC) production system, resulting in subsidies. These ecosystem services include provisioning services, such as raw materials and water, besides other materials used in production, such as fuel, biogenic materials, plant protection, and medicinal materials. The garment GVC also uses regulating services, such as waste decomposition and air and water purification. These provisioning and regulating services are used both in garment production and in the production of raw cotton.

Ecosystem services are either secured through market-based exchanges or extracted by non-market appropriation. Market exchanges include the acquisition of fresh water through payment to local municipalities. This may be underpriced, in the sense that it does not cover the replacement cost of the fresh water. It may also be secured free, as in the extraction of groundwater by raw cotton cultivators. The result of such underpriced or non-priced appropriation is the overuse and depletion of a renewable, but exhaustible, resource.

The cost of ecosystem services also includes the use of water (in the form of a reservoir formed by a dam in the case of garment manufacture in Tiruppur) and land resources (in the case of raw cotton cultivation) for the dumping of waste generated in the production process. Garment factories, particularly through their dyeing and printing segments, produce sludge as waste while raw cotton agriculture produces degraded land with inorganic fertilizer and pesticide residues.

Environmental Subsidies

The manner in which ecosystem service subsidies are created may be partly through the market mechanism and partly through non-market mechanisms. Even in market mechanisms, there may be subsidies through underpricing. Non-market mechanisms of appropriation, as in the case of groundwater for the cultivation of cotton, are a clear case of subsidy. How do we decide that there is underpricing and thus a subsidy? Take the case of water for garment factories. We have to use some system of valuing ecosystem services from renewable natural assets. Non-renewable assets would pose a different problem and we do not go into that. There exist a number of systems for valuing ecosystem services, the most prominent of which are that of contingent valuation and of replacement cost.