Assignment 3

Moral Hazard

Introduction: This paper is about corporate scandal which has occurred in Ready Made Garment industry in Bangladesh and the moral hazard associated with this scandal. Furthermore, research has been carried out to find out what were the excessive risk undertaken by the management which led to the scandal and thereafter possible solutions to mitigate the moral hazard are discussed.

Corporate Scandal Which Occurred: Ready Made Garment (RMG) industry in Bangladesh is one of the most important industry of and chief source of foreign exchange income for the past 25 years. RMG industry provides employment to approximately 3.6 million workers, and all of these workers are illiterate or they have very little knowledge of labour standards, human rights and safe working environment. On 24th April 2013, eight story building named Rana Plaza which mostly contained garment factories collapsed.

Reports showed that 1,021 people died in the collapse whereas 2,000 got injured, and a lot of people are still reported missing. The report further showed that Rana Plaza was actually constructed as five storey building and later on three other storeys were constructed illegally so that more factories can be accommodated in the building.

International spotlight has been placed on readymade garment industry in Bangladesh after the collapse, and this shed light on brutal human rights violations within the industry which has 3.6 million registered workers which earn the lowest amount of just 37 dollar per month making them the most lowest paid garment industry workers.

Moral Hazard Involved In the Scandal: Following are the moral hazard which are involved in this scandal 1. Ready Made Garment factory owner knows that if a problem rises in the factory due to their carelessness, Ready Made Garment Association will always come to rescue them.

2. This enabled them to provide less safe working environment to workers while they manage to reduce their production cost while taking very high risks due to the reason that they knew they will be bailed out.

Excessive Risks Taken By the Management: The excessive risks which were taken by the management are listed below 1. Illegal construction of three additional storeys when the building which actually design and constructed for storeys only so to accommodate more garment factories. 2. Provision of unsafe working environment in order to reduce production costs.

Possible Solutions to Mitigate the Moral Hazard: The possible solutions to mitigate the moral hazard are given below 1. Employee safety should be the first priority 2. Employees should be provided with necessary personal protective equipments in order to ensure their safety

References

http://abetterbangladesh.blogspot.com/2013/05/moral-hazard-and-our-rmg-industry.html http://www.japantimes.co.jp/opinion/2013/05/12/editorials/whos-to-blame-inbangladesh/#.UwDESYVSSSo http://en.wikipedia.org/wiki/2013_Savar_building_collapse http://www.ijhssnet.com/journals/Vol_2_No_17_September_2012/27.pdf http://www.ndc.gov.bd/elibrary/webroot/earticle/1364/Garment_Export_from_Bangladesh _-_An_Update_and_Evaluation.pdf http://www.policymic.com/articles/41053/bangladesh-building-collapse-this-is-whathappens-in-a-libertarian-paradise