Factory closure and its indirect impacts on local economy | The Daily Star
12:00 AM, January 21, 2021 / LAST MODIFIED: 01:31 AM, January 21, 2021

Factory closure and its indirect impacts on local economy

When a reasonably large factory is closed down, either by the government or by a private entrepreneur, the immediate consequence of it that comes to mind is the loss of jobs. The closure of the factory will render a large number of workers unemployed and their families will suffer as a result. Oftentimes, the families of displaced workers go through terrible times and endure long-lasting effects. The direct consequence on the families of workers made redundant by factory closure is more easily understood by us, but the indirect impact of this on the locality in which the factory is located is not so easily perceived by all.

For example, if a sugarcane factory is closed down, it will have a negative consequence on the sugarcane growers in neighbouring areas who will suffer income loss as the demand for their produce falls. The damage to the local community and economy would be compounded as the affected families pull back on spending. Most of the schools, hospitals, businesses, restaurants, public transport and service facilities that were established centring round the factory will also suffer as a consequence.

The government is reportedly contemplating shutting down some loss-making sugar factories in the country. Depending on the size of the factory, it will have a proportionate effect which may be more localised but could also have regional consequences. The total loss of income and the consequent contraction of expenditure of the jobless factory workers and surrounding population might be huge, and are believed to have a depressing effect on the local economy by indirectly affecting other producers and service providers who depend on each other's income. The closure of one large factory may result in partial or full closure of other businesses and industries in the area, setting off a downward spiral of economic activities resulting in additional unemployment, out-migration and large-scale displacement of population.

A household affected by job loss will continue to spend less than before until the household head can arrange an alternative employment which may not be easy, especially for people of advanced age. They will try to hold on to their savings, if any, and the separation benefits they receive from the government, which may not be a substantial amount for a low-paid worker. The possibility of reemployment is often very limited due to a paucity of alternative local employment opportunities, especially in a contracting economic environment, while getting the same type of work with the industrial skills they possess becomes more difficult. Even if they find a work, the terms and conditions of employment are likely to be poorer than before, and chances of getting full-time work will remain a remote possibility. The chances of getting permanent employment will be meagre and average earnings will be reduced. Almost all the local businesses and industries are affected by the closure of an important factory, introducing a chain effect in the region which is not easy to recover from.

Before establishing an industry, a number of standard procedures are generally followed, including conducting a financial viability study and an economic feasibility study, the latter to assess the social costs and benefits of the industry. Therefore, while taking a decision on shutting down an industry, the wider consequences of the closure needs to be considered. The financial loss incurred by the enterprise should not be the sole basis for its closure—its impact on the local economy should also be estimated. In addition, the import substitution benefits of an existing industry should also be taken into account before closing down the industry. The drain on foreign exchange by importing the same item, for example, sugar, in case the sugar industries are closed down, and the effect of increased price of sugar on the public are important factors which should be taken into consideration before shutting down the industries.

It has to be remembered that losses are made not only by public-sector industries but by the private-sector enterprises as well. But both these sectors can recover from losses in various ways including modernisation, public-private partnership, foreign investment, re-pricing of products, use of innovative methods to produce by-products, and aggressive marketing of those. By using all or some of these, an industry can turn around and start making profit again. Therefore, all efforts should be made like modernisation, use of new technology, rationalisation of human resource needs and capacity building, and stronger management and monitoring to give the public-sector sugar factories a new lease of life.

If these industries are closed down, it will go against the government's policy of enlarging formal employment opportunities in the country. At present, 85 percent of the employed people work in the informal sector who face various problems including irregular salary payments, absence of health and other benefits and no job security. An eco-friendly and environmentally sustainable industry like sugar factories should not be closed down without an all-aspect assessment of their performances.

From the above, it is clear that worklessness associated with closure of factories and the consequent spending cuts by households will resonate through the local economy, negatively impacting on society and business and ultimately affecting the entire geographical area. Due to the precarious labour market situation in Bangladesh, it is often difficult for the displaced workers to get reemployed, although lack of evidence in this area makes it difficult to assess how post-retrenchment pathways are shaped by the availability of alternative local economic opportunities. To avoid the burden on the government to compensate the workers and for the sake of sustaining the local economy, I think the government should take closure decisions with caution and following assessment of the overall impact of such closures on the local economy, rather than on the basis of only financial loss the public-sector industries are making.


Dr Nawshad Ahmed is an economist and urban planner.

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