|Cambodia developed an interesting model that enabled it to develop its garments industry in the mid-1990s through a deal with the US.|
This is indeed part of a more general point about the so-called informal economy . Creating strict standards for the formal economy – to improve working conditions and living standards – often acts as a disincentive to become formal. These standards create a barrier that prevents many workers from having a job in the formal sector and leaves them without protection in the informal sector (or even worse, without job). This is something all countries, including developed countries, are struggling with: How to encourage the upgrading of standards without being counterproductive?
I find the use of the Phnom Penh dump as counterexample somewhat misleading though. In particular, as Nicholas Kristof recognizes, Cambodia has developed a very interesting (and successful) model that enabled it to develop its garments industry in the mid-1990s through a deal with the US: additional quotas to the US market in exchange for well-monitored labor standards. Monitoring – initially done by the International Labor Organization and now by the locally based Better Factories Cambodia  (BFC) – was a condition to get access to the US market. BFC is now trying to find, with support from the IFC , a sustainable financing model. Part of the financing will come from buyers, who show some demand and willingness to pay for it.
Of course, Cambodian garment firms point to the additional cost of the monitoring. But properly done, it can help reduce the cost of multiple audits (in the past, each reputable international buyer would design its own monitoring / audit program). BFC makes a more formal response to Nicholas Kristof's op-ed here .
The problems of the Phnom Penh dump are however real, though not necessarily solved by sweatshops. Let me mention the association Pour Un Sourire d'Enfant , as I have always been impressed by the quality of their interventions in support of the children around the dump.