Exploring Causal Relationships Between the US Economy and Cambodian Garment Industry

Abstract

The purpose of this paper is to propose and advocate that educational curriculum in developed nations e.g. the United States of America (US) include instruction on globalization and how economic decisions made by governments and private consumers impact economic and social conditions in developing nations e.g. the Kingdom of Cambodia. In order to fulfill this purpose, this paper examines economic actions taken by the US government and US private citizens and how those actions directly and indirectly affected the economic and social conditions in the Kingdom of Cambodia from 1999-2010.

Keywords: casual relationships; Cambodian garment industry; causal loop diagram; international futures; US housing crisis; Cambodia GDP, Cambodia HIV prevalence;
Exploring Casual Relationships between US Government and Private Consumer Decisions on the Short-term Rise and Fall of the Cambodian Garment Industry

At the dawn of the British Empire, 16th century British playwright William Shakespeare wrote, “All the world’s a stage.” Perhaps at the time, he did not realize how far-reaching that proverbial stage could one day extend, even to the degree that decisions made in one part of the world would directly affect the political and economic conditions in another part of the world. Indeed, over the next 300 years European imperialist nations - e.g. Great Britain, France, Spain, and the Netherlands; circumvented the globe and began the process of what is now termed “globalization.” As the hegemonies of the European imperialists waned and were replaced by the American Empire, advances in transportation and media technologies in the late 20th and early 21st centuries extended the process of globalization and, even more so, reduced the world to what 20th century thinker Marshall McLuhan (1962, 1964) coined “the global village.” This process of globalization afforded the opportunity for actors from nearly every national and cultural stage of the planet to interact on one big stage. By the first decade of the 21st century, peoples and groups from different ethnic backgrounds intermingled to the extent that decisions made on the national and local levels in economically developed nations e.g. the United States of America and the European Union had direct and indirect effects on the lives of those in smaller developing countries e.g. the Ukraine, Kazakhstan, and Cambodia.

In light of the realities brought on by the globalization of the world, this paper proposes and advocates that educational systems of the United States and other developed nations include in their classroom curriculums instruction concerning the globalized economy. More specifically, this paper proposes and advocates including instruction on the possible ramifications of economic decisions made on national and local levels on economic and social conditions of the world-at-large. In making this proposal, this paper considers the role of decisions made in the United States from the mid-1990s to 2006 on economic and social conditions in Cambodia by exploring the causal relationships between decisions made by the US government and US private citizens and the short-term rise and decline of Cambodia’s textiles and apparel industry.

Historical Background of the US Interconnection with the Cambodian Garment Industry

To illustrate how the economic decisions of developed nations impact economic and social conditions in developing nations, this paper examines economic actions taken by the US government and US private citizens and how those actions directly and indirectly affected the economic and social conditions in the Kingdom of Cambodia from 1999-2010. The actions under consideration include (a) the decision of the US government to enter a time-limited, free trade agreement with Cambodia’s garment industry from 1999-2005 and (b) the decisions of principals and recipients of the US mortgage lending market from the mid-1990s-2006 to offer and accept housing loans the recipients could not afford and eventually could not repay. As related to Cambodia, the results of those actions in the US included (a) the rise of the Cambodian garment industry from 1999-2007 and (b) the decline of that same garment industry from 2008-2010. (To be fair, the end of the US-Cambodia quota agreements in 2005 and the consequent decline in Cambodia’s garment industry had as much to do with Cambodia officials’ decision to enter the World Trade Organization as the US decision to stop the quota agreement.) Still, it will be shown how the decline of Cambodia’s garment industry triggered mass layoffs and an increase in prostitution by former factory workers.

The United States – Cambodia Bilateral Trade Agreement 1999-2005

In 1999, the United States of America enacted a bilateral trade agreement with Cambodia’s textiles and apparel industry (Lum, 2007). The agreement included annual increases of import quotas of Cambodian textiles and apparel by the US for increased adherence to labor standards set and monitored by the International Labor Organization (ILO). From 1999 to 2005, Cambodia’s garment industry grew rapidly to provide approximately 80% of the country’s exports with the United States as the chief trading partner. In 2005, due to Cambodia’s then-recently approved membership in the World Trade Organization (WTO), the US-Cambodia garment bilateral free trade agreement was forced to expire. Subsequently, the US began imposing tariffs on imports of Cambodian textiles and apparel which increased the costs and decreased Cambodia’s competitiveness comparative to China and other suppliers around the world. The increase costs and decreased competitiveness of Cambodia’s textiles and apparel products translated to fewer contracts and less items exported to the US. With fewer contracts in hand Cambodian factory operators were forced to scale back production or close their doors and consequently lay off garment workers. The majority of Cambodian garment factory workers are females who come from poor rural villages and do not have other prospects to support their families.

The United States Housing Crisis

In the mid-1990s, the Clinton Administration urged mortgage lending agencies to make homeownership in the US more affordable to low income families by (a) minimizing the role of credit histories in lending decisions; (b) loosening debt-to-equity ratios to allow borrowers to make smaller down payments; and (c) encouraging mortgage lenders the use of adjustable interest-rate or balloon payment mortgages to shrink initial monthly payments (Bader, 2008). Although there was some mild attempt to revise these practices, the same lending practices continued under the Bush Administration. Coy (2008) showed how the erosion of lending standards pushed real estate prices higher due to increased demand which in turn fueled even greater demand and the pushing of even more risky loan packages. Fox (2008) concurred with that assessment and observed

A dangerous cycle developed. New homebuyers, who would likely not have met credit qualification standards in decades past, flooded into the market. The prices on existing homes skyrocketed, enabling existing homeowners to sell at a handsome profit, and then buy more expensive houses that they, too, would not likely have been able to afford if historic credit qualification standards and appraisal criteria had been applied. This fueled the biggest housing boom in U.S. history. (p. 1).

However, in order to skirt credit qualification standards, mortgage lenders forced new homebuyers and existing homeowners who would otherwise not qualify to sign adjustable interest-rate mortgages (ARMs) or low-fixed rate loans with balloon payments (Fox). In 2006 and 2007, the housing boom ended and the housing crisis began as the US central bank, the Federal Reserve, increased interest-rates to ward off rising inflation. In turn interest rates on ARMs began to increase and coincidentally balloon payment mortgage clauses started to kick in. The increased interest-rates and ballooned mortgage payments meant that homeowners had to pay more money for housing which left them less discretionary funds for items like clothing apparel. Less money for clothing apparel and resulted in lower demand for textiles and apparel from suppliers like the garment industry in Cambodia (Kazmin, 2008). Less demand of Cambodian textiles and apparel from the US, Cambodia’s chief trade partner, meant fewer contracts and less items exported to the US (Kazmin). Fewer contracts caused Cambodian garment factories to scale back production or in some cases close and consequently lay off garment workers (EIU, 2009). Many Cambodian female garment workers who came from poor rural areas and did not have other employment prospects, and turned to the sex entertainment sector, namely prostitution, in order to support their families (ILO Report, 2010; Prak, 2010; Daniel, 2010).

Theoretical Framework for Exploring Causal Relationships

This section provides a theoretical framework to explore causal relationships of trade embedded in the International Futures (IFs) forecasting model. The causal maps included in the IFs model provide visual representations of relationships involved in economic activities, trade, social and political processes and conditions, and value added factors like labor and capital (Hughes & Hillebrand, 2006).

Causal Loop Diagrams

In order to illustrate relationships between variables, the IFs model includes causal loop diagrams to provide causal maps of key concepts. Causal loop diagrams (CLDs) are simple illustrations drawn to indicate hypothesized relationships among elements within a system under examination (Saunders, 1998; Anderson & Johnson, 1997). Figure 1 is an example of a simple causal loop diagram (Sam, 2009). This CLD depicts the relationship between the two variables

Figure 1 – Causal Loop Diagram

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“poverty” and “livelihood options”. The minus signs indicate there is an inverse relationship between the two variables. As poverty increases, the amount of available livelihood options decreases or as livelihood options increase, poverty decreases. This type of loop can otherwise be referred to as a reinforcing loop in that the two minus signs on the variables indicate the change in the loop is in the same direction. The IFs model employs more robust causal maps for analyzing complex relationships pertinent to, involved in, and impacted by economic, social, and political activities by actors on the local and global stage.

International Futures Modeling System Overview

The IFs model system is a robust analytical and forecasting tool that allows users to experiment with how causal relationships affect interaction in nearly every sector of society. On a general level, Figure 2 manifests a visual representation of the overall framework of the International Futures (IFs) Model. From Figure 2, one can see that the IFs model (a) depicts relationships between broad sectors of life e.g. sociopolitical, economic, technology, and environmental; and (b) how decisions and actions carried out in each sector of life impacts each of the other sectors of life and vice versa. Within the IFs framework, the economic module relates to such notions as gross domestic product (GDP); supply and demand; prices; investment, both domestic and foreign; and international trade; and the socio-political module relates to governmental issues and actions and changes in life conditions e.g. income in terms of GDP per capita at purchase parity prices, educational level, and life expectancy.

Figure 2 – IFs Issues and Modules – Visual Representation

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