1 INDIVIDUAL STUDY ON EXPORT GROWTH SOURCES OF BANGLADESH READYMADE GARMENT INDUSTRY (A CONSTANT MARKET SHARE MODEL) By Sk. Ashiquer Rahman A Thesis Submitted In Partial Fulfillment of the Requirement for the Degree of Masters in International Economics and Finance CHULALONGKORN UNIVERSITY (CHULA) PUBLIC UNIVERSITY, BANGKOK, THAILAND
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1
INDIVIDUAL STUDY ON
EXPORT GROWTH SOURCES OF BANGLADESH READYMADE
GARMENT INDUSTRY (A CONSTANT MARKET SHARE MODEL)
By
Sk. Ashiquer Rahman
A Thesis Submitted In Partial Fulfillment of the Requirement for the Degree of Masters in International Economics and Finance
CHULALONGKORN UNIVERSITY (CHULA) PUBLIC UNIVERSITY,
BANGKOK, THAILAND
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Main part (body)
INTRODUCTION
Bangladesh economy experienced a trend rate of growth of 4.8 per cent during 1990s as
against 4.4 per cent during the previous decade. The rate of growth of per capita GDP has also
been impressive during the 1990s. In addition to the higher growth rate of overall GDP, this was
facilitated by a sharp fall in the rate of growth of population. During the 1980s, population grew
at an annual compound rate of 2.2 per cent, and the rate of growth of per capita GDP was
recorded at 1.7 per cent per annum. In contrast, population growth rate came down to 1.7 per
cent during the 1990s.Per capita GDP grew at an annual compound rate of 3.3 per cent during
the 1990s.However, in terms of the absolute level of per capita income, Bangladesh continues to
remain at the lower end of the income scale. Per capita income of US$370 compares unfavorably
against the low-income country average of US$410.During 1990s, Bangladesh's total exports in
current US$ value grew at an annual compound rate of 14.4 per cent. In fact, Bangladesh
experienced double digit export growth in most of the years during the 1990s. Imports, on the
other hand, grew at an annual compound rate of 10.9 per cent during 1990s. The gap between
export and import widened from -US$1792 million in 1990/91 to -$2814 million in 1999/00,
although the share of export earnings in import payments steadily rose from 31 per cent in
1980/81 to 67 per cent in 1999/00. The openness of the economy as measured by total external
trade as a proportion of GDP went up from around 22 percent in 1990/91 to nearly 30 per cent in
1999/00 with the share of export in GDP rising from 7 per cent to 12 percent during the same
period. The structure of export has changed significantly over the past two decades. Bangladesh
seems to have made the transition from resource-based to process-based exports. In 1980/81,
primary commodity constituted nearly 29 per cent of total exports. In 1990/91, this share came
down to 17.8 per cent and further down to 8.2 per cent in 1999/00. There has been shift from
jute-centric to garments-centric export. In 1980-81, raw jute and jute goods together constituted
68 percent of total exports. Between 1980/81 and 1999/00, export of both raw jute and jute
products declined in absolute terms and their total share came down to only 6 per cent in
1999/00. In contrast, woven and knit garments together accounted for less than 1 per cent of
exports in 1980/81. Their combined share in exports rose to nearly 76 percent in 1999/00.A
change in the composition of output and employment away from the agricultural sector in the
direction of manufacturing and service sectors is often used as a measure of development. In
Bangladesh, the share of agriculture in GDP declined from 29.2 percent in 1990-91 to 25.5
percent in 1999-00 - a decline of 3.7 percent. The fall was compensated by an increase in the
share of manufacturing and construction. Despite declining share of agriculture in GDP, the
CHAPTER I
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increase in food production has been quite satisfactory moving the country from a state of chronic
food deficit to near self-sufficiency level. Manufacturing industry in Bangladesh achieved
respectable growth during 1990s. The contribution of manufacturing to GDP increased from 12.9
per cent in 1990-91 to 15.4 per cent in 1999-00. However, the sector's current share in GDP
appears rather modest for it to spearhead sustained high growth of the economy. Thus, for
example, in Thailand the share of manufacturing in overall GDP was 22 per cent in 1980 and it
rose to 32 per cent by 1998. The growth of Bangladesh’s manufacturing sector has also been
rather narrowly based with readymade garments accounting for nearly a quarter of the scrotal
growth. Other important export industries contributing to scrotal growth are Fish & seafood, and
Leather tanning. Major import substituting industries experiencing significant growth during this
period include Pharmaceutical, Indigenous cigarettes (bidi), Job printing and Re-rolling mills.
Other success stories of Bangladesh include maintenance of low level of inflation, rapid spread of
micro credit program largely at the initiative of NGOs, and significant improvements in the social
sector. However, in spite of such successes, the structure of production and exports has remained
extremely narrow in Bangladesh. Bangladesh has also failed to attract adequate amount of FDI
into the country. While the opening up of gas, electricity and telecommunication sub-sectors to
private investment has resulted in the inflow of considerable foreign direct investments (FDI) in
these sectors, the overall inflow of FDI has remained sluggish. The narrow export base has
rendered Bangladesh’s external sector extremely dependent on global trading environment and
preferential treatment by its main trading partners. The recent poor performance of exports in the
face of global economic slowdown has confirmed this vulnerability of the Bangladesh’s external
sector. Other weaknesses of Bangladesh economy include a dysfunctional banking system
overburdened with classified loans, persistent loss of the state owned enterprises, poor
infrastructure, deficient tax efforts, political disturbances and unsatisfactory law and order
situation.
Now we are going to the Country Competitiveness Indicators of Bangladesh. Because
export growth performance depend on competitiveness factors
Table-1. Overall Performance:
GNP per capita (US$) 1996 $260
Average Annual Growth of GNP per capita (%) 1965-96 1.00%
Standard Deviation of Income Distribution 11.31
Source- World Bank Group
Table-2. Macro and Market Dynamism:
Table-2(a) .Investment and Productivity Growth
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Gross Domestic Investment (% of GDP) 1996 17%
Average annual growth of Gross Domestic Investment (%) 1990-1996 13.6%
Private Investment (% of Gross Domestic Fixed Investment) 1996 62.5%
Net Foreign Direct Investment FDI (% of GDP) 1996 0%
Average annual difference in Net FDI (%) 1980-82 to 1990-92 0%
Average Annual Growth of Real GDP per worker (%) 1980-90 2.4%
Source- World Bank Group
Table-2(b). Overall Trade Dimensions Trade
Surplus/Deficit (% of GDP) 199500% -8%
Export Share of World Trade (%) 1994 0.1%
Average Annual Growth in Export Share (%) 1989-95 6.697%
Export Concentration Index 1992. 0.246
Percent Change in Export Concentration Index (%) -2.381%
Exports of goods and services (% of GDP) * (
total)
Developing
countries
29.9
Banglade- sh 14.0
Total debt service (% of exports of goods and services)** (total) 19.3 9.2
Source- World Bank Group
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Figure-1
* **
Source: World Development Indicators database, July 2000
Table-2 (c). Export Competitiveness
Average Annual Nominal Export Growth (%) 88-89 to 93-94 16.4%
Export Growth from World Demand (%) 88-89 to 93-94 7%
Export Growth from Market Share (%) 88-89 to 93-94 8.8%
Export Growth from Market Diversification (%) 88-89 to 93-94 0%
Source- World Bank Group
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Table-2 (d) . Export Structure
Manufactured Exports (% of total exports) 1995 83%
Percent Change in Share of Manufactured Exports (%) 1980-93 20.29%
High Tech. Exports (% of manufactured exports) 1995 0%
Source- World Bank Group
Table-2 (e). Trade Policy
Mean Tariff (%) 1990-93 84.1%
Standard Deviation of Tariff Rates (%) 1990-93 26.1
Percent of Products covered by Non-Tariff Barriers (%) 1990-93 N/A
Source- World Bank Group
Table-2 (f). Government Involvement in the Economy
Government Consumption (% of GDP) 1996 14 %
Average Annual Growth of Government Consumption (%) 1990-95 3.4%
Value Added of State Owned Enterprises SOE (% of GDP) 1990-95 3.4%
SOE's Investment (% of Gross Domestic Fixed Investment) 1990-95 23.5%
Government Surplus/Deficit (% of GDP) 1995 N/A
Source- World Bank Group
Table 3. Financial Dynamism
Net Present Value of External Debt (% GDP) 1996 30.0%
Growth in Total External Debt (%) 1980-94 89.82%
Average Outstanding Money M2 (% of GDP) 1996 36%
Average Annual Growth Rate of GDP Deflator (%) 1990-96 4.9%
Credit to Private Sector (% of GDP) 1996 20.6%
Stock Market Capitalization (% of GDP) 1996 14.3%
Real Interest Rate (%) 1996 8%
Source- World Bank Group
Actually, growth has accelerated in Bangladesh in the 1990s. Much of this acceleration in
growth took place in the context of rapidly declining external aid. External aid has fallen from
12% of GDP in the early 1980s to only about 2% of GDP now. There have not been any
compensating private flows during this time. This enhanced growth performance occurred during
a period of policy reforms. However, it does not necessarily mean that policy reforms were alone
responsible for the acceleration. Some increase in total factor productivity was responsible as was
some increase in the savings rate, due largely to an increase in public sector savings. Much of the
growth in large-scale industry has been driven by ready-made garments (RMG). Growth in the
non-RMG large-scale industry has been slow about 4% in the 1990s. This is less than that in the
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1980s. Why is it that so few industries have managed to duplicate the performance of the RMG
sector? One question worth exploring is whether the RMG sector, by absorbing the domestic
savings, crowded out the other industries. The RMG sector has had phenomenal growth. Growth
rates of earnings, in real dollar terms, jumped from about 6% during the 1980s to 15% during
the 1990s. For the first time in FY01-02, there was a 10% drop is export earnings. But, even in
this bad year, the volume of exports actually went up by 10%, albeit not by enough to
compensate for the 20% drop in average prices. There are some fronts, however, where the
industry has not been very successful. One such area is marketing. The industry has not yet
developed good marketing skills of its own and continues to rely heavily on foreign buying
houses, notably those from India and Sri Lanka. These intermediaries capture a large part of the
margin. The scope for the industry to benefit from devaluations is limited in such a situation. The
industry should have used the last 20 years to go deeper into the marketing channel. The fact
that foreign direct investment had not been allowed in the industry is one possible reason for our
failure to do so. The Bangladesh Garments Manufacturers and Exporters Association (BGMEA) is
now thinking of setting up marketing centers abroad. This is an area where public-private sector
collaboration may be required. The only import-substituting industry that grew significantly,
reflecting somewhat the East Asian pattern, is pharmaceuticals. It first grew under protection
alongside imported pharmaceuticals. It then out-competed the imported products and has now
started exporting. It is possible that some parts of the industry are not very efficient but are
surviving due to protection while other parts are efficient and competing in world markets. The
shrimp processing industry is an interesting case. A few years ago, the industry faced serious
reputation problems due to the fraudulent practices of a few producers. The malpractices of a few
jeopardized the entire industry indicating that reputation is a public good. In other words, the
industry as a whole needed to take remedial actions. The industry is now finally realizing this and
has started taking steps at self-regulation. Having concluded that the government’s standards
institute is inefficient, it has adopted measures to impose standards on their own and monitor
compliance. The capital goods industry has declined, e.g., textile machinery industry has virtually
disappeared. It is important to have a capital goods industry. Adaptation of technology is
important for industrial growth. For this to happen, one needs a domestic capital goods industry.
Small scale industries have done quite well in recent years and have largely benefited from
liberalization. On the one hand, they are not much affected on the output side (do not compete
with imports) but benefit from the liberalization of imports of inputs. They expanded at the
expense of inefficient large-scale industries as well as cottage industries. Poverty reduction will
require further growth in such small scale enterprises. The contribution of export industries and
large-scale industries to poverty reduction will be less direct. Their main contribution will be
through generating capacity to import by earning foreign exchange. This will help small-scale
enterprises who need imported inputs and this, in turn, will help reduce poverty. Cash subsidies
are currently given to various activities, such as agro-processing, leather goods and light
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engineering. The practice of providing cash subsidies started with Grameen check(garment). It
was meant to compensate for duties paid on imports and amounted to 25% of total sales value, a
high amount by any standard. The rationale for providing cash subsidies, especially at the current
scale, is weak. Import duties have gone down due to import liberalization. If compensation is to
be provided, the amount required for various products will have to be re-calculated, taking into
account the changes in duty rates. Many people fear that the RMG industry will be hard hit after
2005 when quota privileges are withdrawn. However, the fears may be exaggerated. The
European market is already open and Bangladeshi exporters are doing reasonably well there. The
key is to improve productivity and go deeper into the marketing chain. Dispersed, non-farm
growth in rural areas and in and around small towns is probably the way to go. There is some
potential in micro-level enterprises but not much. Self-employment in low-productivity activities
does not hold much promise. Wage rates will increase through small-scale activity, not much
through micro-enterprises. Industrial development will require improvements in governance.
Bangladeshi industry can do quite well without much protection if there is better governance,
e.g., if there is no toll collection and if utilities can be provided efficiently. A recent study has
shown that the costs of giving tolls, as percentage of turnover, is greatest for small-scale industry,
and lower for micro and large enterprises.
Consistent with the on-going trend of the free-market economic system and globalization
of world economy, a liberal trade policy was pursuer in the financial year ended on 30th June,
2000 as in the preceding year with the objective of providing protection to the domestic
industries, trade liberalization and expansion of export trade. So a small change has occurred in
Bangladeshi trade policy, especially garments sector. Earning from the export of the readymade
garments which stood at 4352.0 million us dollar during 1999-2000 was 8.3% higher than 4020.0
million us dollar during 1998-1999. The USA, Canada, and EC countries were the principal buyers.
Export receipts from readymade garments were 1.2% higher than the target of 4380.53 million us
dollar for the year and accounted for 75.7% of the total export receipts of the country.
Seventy-five per cent of Bangladesh's exports is dominated by only one item-ready-made
garment (RMG) - and the bulk of the volumes of RMG exports goes to North America and Europe.
After RMG, the only other mentionable items are shrimp, jute and leather. Even the buyers of
these secondary export items are limited in number. The composition of the export trade to such
a small number of goods and their limited number of buyers mean that the country's external
trade is vulnerable to any downturn in the external environment in the form of price fluctuation or
reduced demand. Both prices and demand for Bangladeshi RMG products have recently much
declined in the Us market the biggest single market for Bangladesh's ready-made garment .
Similar is the condition of the other export items with the only exception of leather. But
notwithstanding the global recession and setbacks in certain markets, the country's export trade
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would not slump badly perhaps and could be maintained at a reasonable level if steps were taken
much earlier to achieve diversification of both exportable and their buyers. In that case, the
country would be hedged considerably against any drastic fall in export earnings as reduced
earnings of some items or from some countries could be offset by good or steady earnings from
other sources. Exporters of Bangladeshi garment industries must get used to being dynamic for a
change. They must shake off the habit of waiting for orders to come to them automatically. They
should be rather out in the field hunting for such orders. Experts in the RMG field say that good
markets are there for Bangladeshi products in some South American countries, in the CIS
countries and in Japan. RMG producers should lose no time in immediately exploring these
markets and Bangladeshi missions’ abroad need to work round the clock in support of such
market identification and development activities. Government's fiscal and other polices will have
to be quickly adjusted as the exporters search out new markets and attempt entering into them.
Apart from the conventional items, exporters need to be encouraged in every way to go all-out to
try and export unconventional items and in greater quantities. It was estimated that Bangladesh
produces about 4.2 million tons of fresh fruits and vegetables a year and a substantial quantity of
such produce gets wasted. But the same have good market demand abroad and can earn good
amounts in foreign currencies provided government makes the right move to reduce freight,
handling and other charges and provides other incentives to exporters of fruits and vegetables.
Government policies taken in support of the moves of exporters of agro-produces can probably
create quickly new items for export at a time when the country is in a rather desperate situation
to earn more foreign currency from its export trade.
So, There in the light of importance of garments industry in Bangladeshi economy, we
intend to evaluate its export growth and to analysis it’s structural change.
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CHAPTER II
2.1. Statement of the Problem and its Significance:
A total of 1,276 ready-made garment (RMG) factories had closed down in the aftermath
of the 11 September 2001 incident in the USA of which 1,178 were located in Dhaka and 98 in
Chittagong. As a result of the factory closure 350,000 workers were rendered jobless. Although,
some of the factories have gradually reopened since March 2002, 501 factories still remain closed
while some 2,25,000 workers - mostly women - remain jobless.
Needless to mention, the government, the factory owners and the BGMEA have a moral
and social responsibility towards these workers. The prospect resulting from the joblessness of
millions of unemployed women on the streets has the potential to create mass social and add to
the dismal economic situation resulting from the garment industry crisis.
The international and national trade bodies, policymakers and the media are primarily
focusing their attention on the economic causes and fall-out of the RMG sector crisis in
Bangladesh. Little attention is being paid to the impact of the crisis on livelihood security of the
workers. Since the majority of workers in the garment industry in Bangladesh are women, it is
these women who are bearing the brunt of the market decline. At present, there is not a single
industry where this volume of narrowly skilled workers call be reemployed. The crisis will
therefore have a devastating social effect, not only for the women who will lose their jobs, but
also for their families and communities.
With a modest beginning in the late seventies the RMG sector in Bangladesh rapidly grew.
Within a very short period of time, it attained prominence in terms of its contribution to
Bangladesh’s gross domestic product (GDP), foreign exchange earnings and employment. The
industry flourished due to the cheap and predominantly female labor market and the favored
international textiles and clothing regime under the Multi-Fibre Agreement (MFA).
2.2. The objective of the study:
The purpose of the present study has been to assess the direct and indirect contribution
made by RMG in the economy of a developing country like Bangladesh. With this aim in view, we
tried to estimate the direct and indirect linkages of growth in the economy of Bangladesh. Since,
the RMG industry presently earns Bangladesh the largest amount of foreign exchange and is
considered to be the leading 'growth industry' of Bangladesh, we made a particular attempt to
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assess the contribution o f growth of RMG manufacturing and exporting activity. These exercises,
together with an examination of the current international trade growth of Bangladesh, made it
possible to outline the future development and potential international trade of garment in
Bangladesh. Besides on, the main interest of this study is to analyze the sources of the observed
rapid increases of Bangladeshi readymade garments exports. This will also analyses the sources
of the growth of readymade garments exports. Then the barriers to readymade garment
exportation will be reviewed and its impact on exports growth sources will be evaluated.
2.3 . Scope of the study:
The period under the study will cover approximately ten years from 1989 to 1998 and
the historical development will be included to show this industry can become one the major
export earning sources. In employing the constant-market- share method, five market are
considered, namely(1) USA,UK.CANADA AND ALL OTHERS.
Export of garment products consist of 4 commodities, namely slandered trade classification (SITC)
code numbe-48119,48219,4851,48511,48512 and 48522.
2.4. Organization of the study:
My paper is consists of six chapter-
Chapter 1 gives the introduce the present condition of Bangladesh.
Chapter 2 gives the statement of the problem, scope of the study
Chapter 3 -gives the general view about Bangladeshi’s garment industry.
Chapter 4- is devoted to the methodology and definition used to assess the export growth of
Bangladeshi garment industry. Then it shows the empirical results of the export growth of
Bangladeshi garment product. This chapter identifies the importance factors of the export growth
of Bangladeshi garment industry usining the “Constant Market Share Model”
chapter 5 -Is mostly devoted to explain the results obtained in chapter 3 concentrating on the
competitiveness factors and explains the market stricture of Bangladeshi garment export and
discusses the relationship between factor requirement of garment product and their export
market.
Chapter 6 gives the summary of the result and conclusions.
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CHAPTER-III
MARKET STRACTURE OF BANGLADESHI GARMENT INDUSTRY:
Textile Sector in Bangladesh is predominantly made of natural fibre using cotton. This
sector is broadly classified into the following stages/sectors based on the value addition.
• Yarn
• Fabric
• Apparel
Each of the above sector is analysed to generate an overall perspective on the industry.
Apparel is the high Growth Sector of garments sector. The liberalization of industrial
policy of Bangladesh along with development of export processing zones at Dhaka and
Chittagong, attracted investment in the Ready-Made Garment (RMG) industry in Bangladesh to
set up large plants working on higher economies of scale. This enabled Bangladesh to achieve a
phenomenal growth in export of RMG. The export of RMG from Bangladesh increased from a
meager US $ 7 million during 1981-82 to about US $ 1.95 billion during 1995-96. The RMG
Sector achieved a growth of 20% per annum over the past ten years. Such high growth was
catalysed by the low wages along with Multifibre Agreement (MFA) on textile quotas principally
with U.S.A., Canada and European countries. The Generalised System of Preferences (GSP)
provided import tax breaks worth about 15% of the import valuation, giving Bangladesh's RMG
export a considerable advantage in these markets.
In addition to the above, the financing arrangements created through a system of back- to-back
Letters of Credit (LOC) covering imported inputs and finished exports, greatly contributed to the
accelerated growth of RMG sector.
The above factors enabled Bangladesh to become the fifth largest exporter of RMG to the
European Union and Sixth largest to the USA. The apparel industry in Bangladesh is broadly
classified into Knitwear, RMG, speciality/linen including terry towels and others.
The total export of apparel was about Takas 105.87 billion during 1995-96. The share of RMG
export in this sector is above 75%. The composition of export of apparel by type is indicated in
the following chart:
13
Composition of Apparel Export
Bangladesh (by Type)
Value of Textile Export : Taka 105865 million
The further break-up of main items of knitwear and RMG export is provided in the following
charts:
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BREAK-UP OF MAIN ITEMS OF EXPORT
IN APPAREL SECTOR OF BANGLADESH
Knitwear
RMG
Value of RMG Export : Taka 79.7 Billion
(Approx. US $ 2 billion)
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The quality of fabric produced domestically in Bangladesh is not upto the standard
required for the production of export quality garments. Therefore, exporters of garment, largely
have to depend upon import of quality fabric.
There are about 26 weaving mills in Bangladesh reported as in 1996, with a total of 7,179
looms. About half of these mills are government owned. There are also another 515 thousand
hand looms in the country apart from about 488 hosiery units. About 30 per cent of these hosiery
units produce export quality knit fabric. The local fabric production is reported to be about 915
million meters during 1995-96.
The total demand for fabrics against this production level is estimated to be about 3155
million meters (approximately 3.45 billion yards) during 1995-96. Hence apart from the quality
considerations mentioned earlier, domestic production is inadequate to meet the fabric demand.
The composition of demand of fabrics for garments for domestic market and garments for
export market is illustrated in the following chart:
Composition of Demand
for Fabric from Garment Sector
The above chart indicates the importance of export market for textile sector of
Bangladesh.
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The local demand for fabric, which is reported to be about 1325 million meters, is largely
met by the traditional hand looms, small power looms and textile mills in the government and
private sector. However as domestic production falls short to meet even the domestic demand for
fabric, about 410 million meters is imported during 1995-96 to meet the short fall.
The overall scenario of fabric sector in Bangladesh is indicated in the following table and chart:
Fabric Sector In Bangladesh
Fabric Sector in Bangladesh
during 1995-96
Million Meters Total Market Segment
Domestic Export
Demand 3155 1325 1830
Production 915 915
Import 2240 410 1830
The following chart illustrates the interpretation of above table in graphical form.
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Million Meters
The above chart indicates that about 82% of the fabric imported is consumed in the
production of garments for export, while the balance 18%, is consumed to meet the domestic
demand, which by itself is about 30% of the requirement of domestic market.
This emphasis’s the need for investment in textile/weaving segment in Bangladesh. After
assertazzining the need for setting-up a weaving unit, the following paras investigates the
prospects and key success factors for such weaving mill:
Yarn is the primary input to the weaving mill. Yarn is spun in a spinning mill using
spindles. Bangladesh has about 118 spinning mills. About 25% of these mills are owned and
managed by the government. It is reported that about 45% of these spinning mills are out dated
and run at a loss.
The production of yarn in Bangladesh is reported to be about 100,000 tonnes during
1995-96. The demand for yarn is, however, as high as 470,000 tonnes. Hence the domestic
production meets only about 21% of the domestic demand for yarn. The huge deficit in
production of yarn to meet its demand in Bangladesh, is met through imports.
Bangladesh sources its requirement of yarn mainly from countries like India. Pakistan
apart from China, Korea, Singapore, Thailand, USA, Canada, Egypt, etc.
It is estimated that about 116 additional spinning units with a capacity of 25,000 spindles
each are required to meet the demand-supply gap for yarn. The Bangladesh Government has
projected a need for an additional 125 spinning units by year 2005. This indicates the immediate
requirement for investment in spinning sector in Bangladesh for setting up a spinning mill for
producing high quality yarn that will feed the requirement of weaving mill for production of fabric
for garment exports as well as domestic market.
The above discussions reveal the immense potential for setting up a spinning and
weaving mill in Bangladesh apart from investment for modernization of the existing mills.
Realizing this Bangladesh government is encouraging private sector investment in textile sector by
local as well as foreign investors.
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India and Pakistan are the major suppliers of yarn and fabric to Bangladesh. In view of
the developed garment industry in Bangladesh and its liberalized policies for investment, India
and Pakistan can pool in their resources to set-up a world class large-scale composite textile mill.
The fabric output from such mill will readily find market in the garments sector as the fabric
output will be cheaper than imports. This will help the garment sector in Bangladesh to price their
products more competitively in the export market, resulting in the overall development of the
textile sector in Bangladesh.
The garment export industry registered a growth of about 20% over the past 10 years
upto 1995-96. However it took a down turn during the month long general strike in March 1996.
The strike took a toll of Bangladesh garment factories. Industry sources indicate that as many as
half of the 1,600 factories could have been severely affected due to the disruption of fabric
imports and garment exports. This affected the high growth of the garment exports. However,
the domestic market for garment is expected to maintain the growth of about 7% per annum.
In accordance with provisions of GATT, the textile quotas (MFA) and GSP benefits will be
phased out by the year 2005. At this time, the market reserved for Bangladesh will fall open to
competition. At this time, the traditional suppliers of fabric are likely to re-direct much of their
production to the OECD market which would fetch higher price realisation. As a result, garment
exporters in Bangladesh may face a severe crisis in obtaining fabric from traditional supplier
countries.
In anticipation of this problem, the government adopted a liberal textile policy in 1995.
This provides an opportunity to the textile companies in India and Pakistan which supply yarn and
fabric to Bangladesh, to invest in Bangladesh to set up a composite textile mill that will supply the
output to the developed garment industry in Bangladesh, at a competitive price and reduced lead
time. This will enhance the competitiveness of garment industry in the international market and
thereby result in the overall growth of Bangladeshi textile sector as a whole.
Prospects for the proposed world class composite textile mill in Bangladesh, largely
depend uponthe garment exports from the country. Port services plays a major role in influencing
the order turn around time for garment exports, which is crucial to execute an order. Delays at
port increases the order turn around time and hence the prospects for repeat order. Most of the
export of garments takes place in containers through Chittagong port.
The spinning and weaving machinery for the proposed mill can be sourced from India,
which is advanced in this field. Most of the mills exporting yarn/fabric to Bangladesh use Indian
made machineries. The Indian spinning and weaving machineries are competitive and can
produce the high quality output desired by the export oriented end-user sector in Bangladesh.
19
The scale of operation for the proposed project are based on economies of scale and
average size as per the industry standard. A spinning capacity of 25,000 to 50,000 spindles is
recommended which will involve an approximate weaving capacity of 5-10 million meters.
Apart from setting up of new spinning and weaving capacity, India, Pakistan and
Bangladesh should join hands for the revamping and modernisation of the existing textile mills.
"Textile Revival Plan" could be taken up as the one of themes of the SAARC Chamber of
Commerce.
• Further, Bangladesh should expand the capacity of its garment sector and
target the markets in the SAARC country.
• Since in Bangladesh, the labour is cheap, Indian companies can set up the
garment unit there for marketing the products in India or for exports.
• India can provide the desired technical support for expansion of the processing
capacity in Bangladesh.
• India has also emerged as the major supplier of the man made fibers like PSF,
PFY, NFY, Acrylic fibre, as well as blended/mixed yarn.
Many people fear that the RMG industry will be hard hit after 2005 when quota privileges
are withdrawn. However, the fears may be exaggerated. The European market is already open
and Bangladeshi exporters are doing reasonably well there. The key is to improve productivity
and go deeper into the marketing chain.
Dispersed, non-farm growth in rural areas and in and around small towns is probably the
way to go. There is some potential in micro-level enterprises but not much. Self-employment in
low-productivity activities does not hold much promise. Wage rates will increase through small-
scale activity, not much through micro-enterprises.
Industrial development will require improvements in governance. Bangladeshi industry
can do quite well without much protection if there is better governance, e.g., if there is no toll
collection and if utilities can be provided efficiently. A recent study has shown that the costs of
giving tolls, as percentage of turnover, is greatest for small-scale industry, and lower for micro
and large enterprises Weaving Plant • Captive Production of Yarn and Cloth • Expansion of the
Local Garment Industry for Exports to the SAARC and Non SAARC Countries • Strategic
20
Revamping and Modernisation of Textile Sector in SAARC Countries • Textile Revival Plan for
Bangladesh, Pakistan and India
The garments industry of Bangladesh represents one of the recent success stories of
industrial development in a poor, developing country. Starting from scratch in the late 1970s, the
industry is now Bangladesh's most important source of foreign exchange earnings. It currently
exports about $5 billion worth of products each year; this is a little over three-fourths of our
annual export earnings. How did this industry take off? The answer to this question has important
lessons for designing approaches to promote industrialization and private sector development. In
particular, it would inform the debate on the relative efficacy of focusing on improvements in the
overall policy environment vs. micro-level interventions, such as subsidized credit or business
advisory services. This note describes what happened in the early years of the industry. The story
of the early growth of the garments industry in Bangladesh is a story of the diffusion of good
practices, from foreign to local enterprises and then from one local enterprise to many others. It
is also a story of how a few, but strategic, improvements in policy and institutions opened up
opportunities even within a generally unconducive environment. One entrepreneur seized these
opportunities after another, each learning from the success of those who had entered the arena
earlier. Direct, subsidized support to individual firms from government had very little role in all
this. The catalyst for the birth of the industry was the South Korean company, Daewoo, whose
collaboration with the Bangladeshi enterprise, Desh Garments, led to the growth of the industry.
Daewoo, itself a major exporters of garments, was hitting quota restrictions and was looking for
opportunities in countries which had barely used their quotas. Sri Lanka attracted them first, but
when the civil war erupted there the Koreans switched attention to neighboring Bangladesh.
When the Chairman of Daewoo showed interest in Bangladesh, the country's President put him in
touch with a dynamic young ex-civil servant who, having got bored with working in the
bureaucracy, was looking for more entrepreneurial pursuits. So was born the collaboration
between Daewoo and the pioneer of Bangladesh's garments industry, Desh Garments.The role of
good practice diffusion Daewoo did not make any capital investment in Desh but it signed a five-
year collaboration agreement with it. Under this agreement, Daewoo helped Desh purchase
machinery and fabrics, some of it on credit from it, set up the plant and market the products.
Most importantly, it provided training to Desh employees. This included both formal training in
Daiwoo's plant in Pusan, Korea and learning-by-doing at Desh's facilities in Bangladesh. 130 Desh
employees, including four future managers of Desh, stayed at Pusan for seven months. There
they received very intensive on-the-job training covering not only technical production skills but
various aspects of management and marketing. Much of the training was practical where trainees
worked on actual production lines. By the time they returned to Bangladesh, this cohort of Desh
employees has had in-depth exposure to how a highly successful multi-national company
operated in competitive export markets. They brought back with them not simply a set of
valuable technical knowledge related to production and marketing but an appreciation of the
21
corporate culture required for success in export markets. In addition, Daewoo sent technicians to
Desh to help set up the machines, oversee quality assurance in production and train Desh
workers who had not been to Korea. Daewoo also handled the marketing of products. But, even
here, there was transfer of knowledge--Desh managers and employees learned by observing
Daewoo's marketing practices. A year and a half after factory operations, and with several years
remaining to the agreement, Desh felt that it had learned enough. It was ready to operate on its
own and, on June 30, 1981,terminated its contract with Daewoo. Desh's confidence was
vindicated by the rapid growth in its business in the following years. In the first six years of its
operations, i.e., 1980/81-86/87, Desh's export value grew at an annual average rate of 90%,
reaching more than $5 million in 1986/87. During the same time, unit export value rose about
75% from $1.30 to $2.30, suggesting significant improvement in product quality. Desh expanded,
from 450 machines to 750, and workforce almost trebled, from 500 (in 1979) to 1400 (in 1987).
By 1987, Desh was handling all its export marketing and was procuring all its raw material from
non-Daewoo sources. It had virtually snapped all ties to Daewoo and was completely self-
reliant. All this happened despite that fact that not only had the Koreans left but many of the
pioneering Desh employees had also left Desh to set up or join other garments factories that were
springing up, inspired by Desh's success. It is clear that good practices had been diffused quite
rapidly within Desh, enabling it to maintain high growth despite this exodus. Desh's success was
thus facilitated significantly by two rounds of good-practice diffusion: first from the Koreans to the
pioneering cohort of Desh workers and then from the latter to other Desh workers. A third round
of diffusion helped replicate Desh's success in other factories, leading to the phenomenal growth
of the industry. By 1985, i.e., just five years after it all started, there were 700 garment export-
manufacturing factories in Bangladesh.While many factors contributed to the rapid growth of the
industry, an important catalyst in the early years were employees and managers of Desh who
went to set up or join other garments factories. The migration was swift: by mid-1981, i.e., barely
18 months after Desh started its operations, 115 of the 130 Daewoo-trained workers had left
Desh. Desh employees transmitted production, marketing and management know-how to
hundreds of other factories. And they did it fast, resulting in the phenomenal growth of the
industry within a few years of starting form scratch. The way in which migration of workers from
one enterprise to another helped diffusion is illustrated by the case of one company, Mohammadi
Apparels Ltd. Established in January 1985, Mohammadi has developed into one of the leading
garments manufacturers of Bangladesh. Its early growth was also fast, like Desh's. A significant
part of the credit goes to a dozen former Desh employees who joined Mohammadi and provided
training to its initial cohort of over 200 workers. Ex-senior managers of Desh held some of the key
managerial positions in Mohammadi, including that of a production manager, a marketing
manager and an administrative manager. The role of policy changes Diffusion of good practices
was a key factor in the early growth of Bangladesh's garments industry. However, it can't explain
all. There is another important part of the puzzle that helps explain why the industry could
22
develop so far despite a generally inhospitable policy environment. Bangladesh's policy
environment was not conducive to entrepreneurship in the early eighties. Even now, twenty years
later and after many reforms, there are serious problems. But it was worse then. There was a
very restrictive trade regime with import bans, quotas and high import duties. A duty exemption
system existed but was ineffective. Investment licensing was a nightmare. Access to import
financing was limited and rarely at competitive markets rates. This was clearly not a policy
environment that would have allowed enterprising Bangladeshis to put their ideas into practice,
set up garment factories on the scale they did, and compete effectively with foreign competitors
who enjoyed a freer business environment. The pioneers of Bangladesh's garments industry,
Daewoo and Desh, realized early on the critical need for speedy access to inputs at world market
prices as well as access to import financing at competitive market rates, and ease of entry into
the industry. They, and others, lobbied the government and successfully persuaded it to make
some vital policy changes and adopt innovative administrative procedures that proved critical to
the garment industry's subsequent growth. In 1980, the garment export industry was declared a
free sector, i.e., licenses were not required to set up capacity. Efficient administrative
arrangements for assuring free trade status for 100% export-oriented garment factories were
introduced. The government introduced a Special Bonded Warehouse system for such factories.
This measure was critical to the initiation of garment export production in Bangladesh. The
system has been very effective in administering duty-free and restriction-free imports of
intermediate inputs for garments exporters. The government did not provide any import financing
facility. However, it allowed local banks to open back-to-back import letters of credit (L/Cs) based
on garment exporters' export L/Cs, under the system of strict foreign exchange controls. Desh
Garments had the added advantage of having access to short-term supplier credits from Daewoo
for its fabric and other supplies. This allowed Desh to import inputs without government-
supported import financing or access to foreign exchange. Finally, the government maintained
realistic exchange rates with substantial devaluations in the early eighties. The diffusion of
knowledge from Daewoo was not restricted to the nuts and bolts of production, management and
marketing. Daewoo transmitted to the Government of Bangladesh, through its Desh partners,
some of its own knowledge on good practice administrative arrangements for basic export
incentives, such as the successful bonded warehouse system in Korea.The remarkable story of
how the garments industry took off from scratch in Bangladesh has important lessons for anyone
interested in the dynamics of industrialization in a developing country. This is not the case of an
industry that developed because there was a committee of wise men who identified this as a
potential industry and then drew up an elaborate blueprint to develop it. It is not a case where
there was a special fund or an agency dedicated to providing direct support to enterprises,
whether in the form of cheap credit or business advisory services. Instead, this is a case of a
large number of decentralized entrepreneurs who saw what others were doing and then followed
them, who saw opportunities and grabbed them, who had ideas, which they boldly put in
23
practice. Often they acquired their skills as someone else's employee and then had the boldness
and enterprise to go and try it on their own. As good practices and knowledge got diffused and
enterprise developed, the government responded by coming up with policy and administrative
reforms that facilitated the growth of the industry. Thus, even though the environment was
broadly not favorable to industry and enterprise, and in many ways remains so even now, enough
changes were made to give entrepreneurs adequate space to show their dynamism. This, then, is
the lesson we learn. Industries will develop in Bangladesh not when we have committees of wise
men picking winners or special agencies providing subsidized credit to enterprises. It will develop
when the policy and institutional environment is conducive and barriers to entrepreneurship are
removed. The rest can be left to the entrepreneurs themselves.Since the early 1980s, the
readymade garment export industry has been the proverbial goose that lays the golden eggs for
the economy of Bangladesh. Presently, the industry occupies the enviable position of being the
largest manufacturing and export business in the country, employing over 1.5 million workers, 90
percent of whom are women who have migrated from rural Bangladesh in search of a better
economic future. The large participation in the recently held elections of the Bangladesh Garment
Exporters and Manufacturers Association (BGMEA) indicates that the membership is concerned
that the coming years, culminating in the year 2004 when the Multi-Fiber Agreement (MFA) based
quotas will no longer exist, pose significant challenges for the industry. The 1998 Floods that
affected Bangladesh between July and September 1998 were among the worst natural disasters
impacting the people and the economy of Bangladesh in recent history. As the year closed, there
were hopeful signs that the damage to the manufacturing base and to the infrastructure was not
as severe as was estimated just after the aftermath of the crisis. Once again the remarkable spirit
of survival and entrepreneurship of the ordinary people of Bangladesh resulted in a remarkably
quick rebound in the economic and commercial lives of the citizens. This was also true for the
apparel-for-export sector that once again demonstrated its resilience. The 1998 floods directly
impacted thirty million people for three long months, caused 1,100 deaths, partially destroyed
15,000 kilometers of roads, 14,000 schools, hundreds of bridges, and as many as 500,000 homes.
The property damage, both private and public, was estimated to be in the $3.4 billion range. In
addition, the negative shock to the economy reduced the GDP growth by a couple of percentage
points according to early estimates by the economists. The manufacturing sector was also
adversely impacted as many urban areas were inundated by floodwaters for several months in
late summer. The floods affected many areas in Dhaka, Narayangang, Savar, Tongi, Rupganj,
Narsindi and other cities where manufacturing is concentrated. According to one estimate, eighty
percent of the 500,000 handlooms in the country sustained damage from the floods. The damage
to assets and raw materials in 50 percent of these units was serious. Manufacturing is expected to
grow only at three percent during this fiscal year compared to 6.7 percent in the previous year.
Fueled by higher food prices, the inflation rate shot up compared to the same period last year.
Preliminary data and informal evidence indicates that in current production and exports the
24
garment exports may have weathered the devastating floods of 1998 relatively well. The floods
did create a crisis for the tightly scheduled export industry, but the industry and the individual
firms responded creatively to the unexpected dislocation and transportation disruptions. The
readymade garment industry is 100 percent export-oriented and therefore insulated from
domestic demand shocks; however, it remains vulnerable to supply shocks such as disruptions in
the functioning of the banking system and dislocation of transportation and other forward and
backward linkage sectors in the economy.
Recent Performance of the Apparel Export Sector
Besides the floods, there were several other crises that impacted the garment industry in
1998. The disruption of the normal functioning of the Chittagong port due to labor unrest was
certainly one of them. The BGMEA has repeatedly requested the government to ban labor strikes
in the Chittagong port on grounds of national interests. Another source of disruption was the
perennial problem of hartals (nationwide general strikes) called upon and enforced by the
opposition political parties to protest government policies. Although, in a major concession to the
apparel exporters, the leader of the main opposition party had declared that the garment industry
would be exempt from such hartals, in practice the situation is more complex. On the ground, the
firms cannot take chances to send their products on the road for fear that these will be attacked.
The psychological impact of these events on the existing and potential buyers cannot be
overstated. Buyers in the global garment markets remain highly sensitive to the risks of unfulfilled
orders. The image of Bangladesh as a somewhat unpredictable supply source may have been
strengthened due to the floods, as the floods received considerable world media attention and by
the violent political unrest that spills over in the streets of urban areas. In the early months of
1999, it has gradually become apparent that there may have been a substantial reduction in new
orders received by Bangladeshi manufacturers as a result of these problems and also due to
increased competition from the East Asian manufacturers whose currencies have been severely
devalued.Historically, apparel exports from Bangladesh have grown at an annual rate of more
than twenty percent, roughly doubling every three years. In 1996-1997 the exports in gross terms
equaled three billion dollars. At this rate, these exports could potentially reach six billion dollars by
the year 2000 and possibly exceed ten billion dollars in the not too distant future. However, in the
year 2004, the Multi-Fiber Arrangement (MFA) quotas will end, ushering in a globally competitive
market for clothing products. One of the most important factors responsible for the success of this
industry has been dynamic entrepreneurship. In fact, we believe the garment entrepreneurs
should receive a national award for their creative initiatives in overcoming the crises during this
period. The industry presents a model that entrepreneurs in other sectors could emulate with
benefit. The many hurdles the industry overcame in 1998 include the floods, the shocks from the
most severe economic collapse and currency devaluation in East Asia economies in recent history,
and other domestic crises. Strategies pursued by the industry in 1998 include the following: the
decision to hold monthly meetings between BGMEA officials and leaders of the labor unions in the
25
industry; efforts to implement the child labor agreement of 1995; hiring a high-profile American
politician to lobby for the industry in Washington D.C.; and asking the U.S. government to
increase quotas for apparel made in Bangladesh by thirty percent to reward the progress made in
reducing the use of child labor in the garment factories.
Manufacturers and Exporters Association (BGMEA); Author's calculations of monthly
averages and growth factors. What implications does the success of the apparel exports have for
the economy of Bangladesh? The positive impacts are considerable and widespread. For several
years now, apparel exports have been the largest manufacturing industry, and also the biggest
source of foreign exchange earnings. It may be a "soft goods" industry but nevertheless it has
created positive changes in the economy and society by creating employment and income for
poor women workers and by bringing in foreign exchange for the country. In terms of gross
foreign exchange receipts, in the most recent period for which we have data (July 1997- May
1998) export of readymade garments earned $3392.45 billion or 73.18 percent of the total export
earnings of Bangladesh. The share of apparel products in total exports has steadily risen for
several years. In both absolute and relative terms, the industry dominates the modern economy
of Bangladesh. In addition, the positive sociological, demographic, political and economic impact
of 1.5 million workers employed in the manufacturing sector is huge. This is especially true since
ninety percent of these workers are women, many of whom have migrated from the countryside
in search of a life free of poverty. The forward and backward linkage industries and services such
as textiles, accessories, transportation, and packaging and the private sector in general have also
been significant beneficiaries. The government has gained tax revenues, and the foreign investors
to a large extent have been exposed to Bangladesh as a result of the success of garment exports.
However, the biggest winner has been the private entrepreneur in Bangladesh. Entrepreneurship
is alive and well in Bangladesh. The sustained success of apparel exports underscores this point.
The Future of Garment Exports and the Economy of Bangladesh The growth rate in overall
exports from Bangladesh peaked in 1994-1995 at 40 percent a year. However, export growth has
remained strong. Currently, the garment exports alone bring in close to four billion dollars in
gross terms. The imports of fabrics and related intermediate goods account for $2.3 billion
resulting in net earnings of approximately $1.7 billion. The garment and knitwear exports
accounted for the bulk of these exports. The knitwear sector has been especially dynamic in
recent years. Given the fact that the market for knitwear exports is unprotected by quotas, this
bodes well for the post MFA future of the industry. Bangladesh apparel exports can now point to a
proven track record of successfully competing in the global competitive environment.
Unfortunately, other potentially promising exports from Bangladesh- leather, jute goods, frozen
foods - have not fared as well over this period. This has accentuated the already narrow export
base of the country and is a matter of concern for policymakers. The excessive dependence of the
economy on the garment sector for foreign exchange earnings and export growth demands
policies that would diversify the export base of the economy. What can be said about the future
26
performance of the apparel export industry in Bangladesh? What are the risks for exports of
Bangladeshi apparel? First, supply shocks such as the debilitating floods of 1998 that shaved off
several percentage points from the expected GDP growth this year and caused widespread
disruption in production and transportation can never be accurately anticipated. The other major
crisis the industry had to deal with in 1998 was external and once again hardly anticipated. We
refer to the East Asian economic debacle of 1997-1998. The financial panic and the subsequent
economic meltdown that afflicted several economies in the East Asia - Malaysia, Indonesia,
Thailand, Philippines and South Korea- certainly have been a restraining element in the economic
performance of the regional economies.
What are the links between the East Asian economies and garment exports from
Bangladesh? There are several avenues by which negative economic shocks from these emerging
economies can impact this export industry in Bangladesh. First, several of these nations are also
big apparel exporters in same markets to which Bangladesh exports apparel. A steep depreciation
in their currency makes their products more competitive in both the open and the quota-protected
apparel markets. In the markets protected by quotas, such a development would be a
deflationary force pulling down the unit prices and the profit margins for Bangladesh apparel
exporters. Second, given the crunch, these economies would try to export themselves out of their
severe recession. In the recent crisis, these regional and international forces have greatly
increased competition for Bangladesh exports. Third, to help them recover from their downturn,
the U.S. government and others have already relaxed quota restrictions on exports from the worst
affected economies, making the playing field more difficult for Bangladeshi exporters. Fourth,
prior to this crisis, some of these nations were potentially big investors in Bangladesh in the
textile and infrastructure projects. Their economic troubles have meant a dramatic scaling back in
their direct investments in Bangladesh.
On the other hand, partly as a result of the East Asian economic debacle, there was a
massive return of Bangladeshi workers from this region that has swelled the urban labor force
pool from which garment factories recruit their workers. Second, when some of these economies
weakened, their ability to compete was impaired from the economic or political collapse. This
could mean new opportunities for those competitors who were unaffected by the economic crisis.
Finally, Bangladesh has tried to take advantage of the crises by demanding from the U.S. equal
quota concessions, pointing to its efforts in reducing the underage worker problem in the apparel
factories. In our view, the biggest threat to apparel exports in Bangladesh comes from the
financial sector. Although we do not anticipate a financial panic similar to the Asian crisis since the
influx of short-term foreign investment (hot money) and borrowing by the private and public
sector has been rather limited in Bangladesh, there are some similarities. One common element
that we share with these affected economies is a weak banking sector with little transparency or
central bank control. Elements of crony capitalism and moral hazard are certainly present in
Bangladesh, especially in the nationalized banking sector and in credit markets. According to the
27
World Bank-Asian Development Bank report, the financial sector in Bangladesh remains fragile
with 33 percent of the portfolios of the NCB's and domestic private banks in the non-performing
category. Notwithstanding the fifty billion taka of taxpayer money that was used to re-capitalize
the nationalized commercial banks (NCBs) in the early 1990s, the system-wide capital inadequacy
today is estimated to be taka 133 billion. This situation could cause the entire banking system to
collapse as a result of a large external shock or even from a domestic shock such as a run on a
major financial institution. One important lesson from the East Asian crisis is that moral hazard
and the resulting financial panic can be very costly for an economy, even when the fundamentals
are sound. Without fundamental reforms in the banking sector, the financial sector in Bangladesh
remains susceptible to a financial panic where a speculative price bubble crashing in the real
estate sector or elsewhere in the economy could start a systemic self-fulfilling crisis. Such a
collapse could seriously impact apparel exports, which are critically dependent on a healthy
banking system for the institutional support in exports and for short-term financing.
Other potential hazards include an overvaluation of the taka compared to the currency of its
competitors. Despite the repeated devaluation in the recent past, according to the World Bank,
the taka remains overvalued in real terms. This could undermine the long- term competitiveness
of the industry. Finally, in the year 2004, under the Uruguay Round Agreement on Textiles and
Clothing, MFA quotas will be phased out. Bangladesh will lose its preferential access to its most
important markets and will have to compete with India, China and other apparel exporters in a
truly global competitive environment. Many apparel firms in Bangladesh are not ready for this
change, although the more efficient larger firms that have diversified their products and markets
are expected to do well in the post MFA world.
Finally, we anticipate that the biggest source of problems for the apparel export industry is likely
to be domestic, not external. The politicians could seriously damage this sector by creating
instability and attempting to achieve their goals by violent means in the streets instead of the
parliament. The bankers, the bureaucrats, and the politicians remain a source of threat. In their
attempt to further extract rent from this sector, they could undermine the long-term viability of
this industry. The failure of the law enforcement forces to control the menace of mastans and toll
collectors may create a climate that debilitates commerce and production in the economy. Labor
disturbances and frequent disruptions in the Chittagong port also remain a source of concern to
exporters in general. Increased contacts between factory owners and the union leadership would
help the industry. Garment workers remain one of the hardest-working segments of the labor
force in Bangladesh. The working conditions and benefits for workers should improve as the
industry matures and human capital increases. In the long run, this is the best defense against
labor union agitation. Investing in worker training and in improved working conditions would
certainly enhance productivity. The apparel factory owners must be proactive instead of reactive
on this important issue.
28
CHAPTER IV
Conceptual Framework and Method
4.1. Literature Review:
Several authors have analyzed aspects of the garment industry in Bangladesh. Of the
various aspects of the industry, the problems and the working conditions of female workers have
received the greatest attention. There are several studies including the Bangladesh Institute of
Development Studies (BIDS) study by Salma Chowdhury and Protima Mazumdari (1991) and the
Bangladesh Unnayan Parisad ii(1990) study on this topic. Both of these studies use accepted
survey and research methodology to analyze a wealth of data on the social and economic
background, problems and prospects of female workers in the RMG sector. Professor Muzaffar
Ahmad looks at the industrial organization of the sector and discusses robustness and long-term
viability of apparel manufacturing in Bangladesh.iii Wiig (1990) provides a good overview of this
industry, especially the developments in the early years.iv One of the few studies on the
Bangladesh apparel industry to be published in a reputed journal in the U.S. is that of Yung Whee
Rhee (1990) who presents what he calls a “catalyst model” of development. The Bangladesh
Planning Commission under the Trade and Industrial Policy (TIP) project also commissioned
several studies on the industry. v Hossain and Brar (1992) consider some labor-related issues in
the garment industry.vi Quddus (1993) presents a profile of the apparel sector in Bangladesh and
discusses some other aspects of the industry.vii Quddus (1996) presents results from a survey of
apparel entrepreneurs and evaluates the performance of entrepreneurs and their contribution to
the success of this industry.viii Islam and Quddus (1996) present an overall analysis of the
industry to evaluate its potential as a catalyst for the development of the rest of the Bangladesh
economy.ix
Many economist have wrote about garment sector but I have observed three presentation
papers ( Dr.Khaled Nadvi, Dr.Salma Chaudhuri Zohir and Dr.Naila Kabeer.) and one seminar
paper (Ms Simeen Mahmud).Dr. Nadvi’s paper deals with the nature of current challenges for
Bangladesh in the global garment industry and discusses some of the salient observations from
the trade data analysis illuminating how Bangladesh’s position in the global garment trade has
changed over time. Dr. Salma Chaudhuri Zohir provided details on findings from Bangladesh
garment sector firm surveys and Dr. Kabir presented some preliminary evidences from the
garment and non-garment workers surveys conducted in Dhaka.
29
Dr. Nadvi identifies four sets of global challenges that are especially key for a low- income
garment exporting country like Bangladesh. These challenges are : a) The phasing out of Multi
Fiber Agreement by January 2005 b)Increased competition from China which at present controls
18 percent of the global trade in garments and severely quota constrained in leading markets.
c) Growing concerns around meeting global standards. These include standards that address
labor conditions, environmental impacts and quality assurance as well as wider social and ethical
concerns in production. d) Changes in the retail structure of the global industry and the new
competitive pressures from the global buyers. Buyers are increasingly seeking to not only
outsource production to local suppliers, but also shift more functions and risks associated with
such task further down the value chain. More over one of the key demands that is emerging in
the increasingly more fashion driven global industry is the need to reduce the lead times and to
bring about quick changes in products in keeping with changing market demands.
Dr.Nadvi then tries to map Bangladesh’s position in the global garment industry by
comparing the changes in Bangladesh’s unit price of exports and market access with those of her
major actual and potential competitors in the EU market. A mixed story emerged form his
analysis. Bangladesh has significantly increased its market share during the last decade. But the
discomforting feature is that in most items studied Bangladesh has seen its unit values decline
more or as rapidly over time as those of its competitors. In this context he cited the example of
Vietnam whose share in the cotton shirt sector in the EU market has gone up from less than 0.5%
in 1990 to 3.7% in 1999 and at the same time it’s unit value has risen by an average of 6.8% a
year during the 1990s. This suggests significant improvements for Vietnam which is indicative of
some productivity gains. The decline in Unit value in Bangladesh can be an indicative of the
lowering labor cost and even with large reserve army of labor there are limits to which labor cost
can be reduced. Thus the challenge at the firm level for Bangladesh to upgrade is critical if it is to
sustain its market share in the long run.
Dr. Salma Chaudhuri Zohir’s paper provided some important insights from an enterprise
survey covering 30 firms of different size. Initial finding suggests the following overall
performance indicators: Export volume has increased for all but one firm. Number of buyers has
mostly declined to 3 to5. Average unit price of garment has declined due to local and international
competition. Average product quality has improved Net profit has declined mostly. Costs are
increasing as firms have to set up own building with facilities .Employment has increased in all but
one firm . On average lead time in woven has declined to 80 to 90 days from 120 days .
Average lead time for imported yearn is 90 days and for local yearn is 60 to 70 days for
sweater . Average lead time for knitwear is around 45 days.
She suggested that the firms in Bangladesh are constantly adapting themselves to the
changing demands of the market. They are responding to the buyers demand in terms of
30
upgrading products, upgrading plants and compliance with standards. She then discussed some
of the major future challenges for the industry and summarized her presentation with the
following observations: Medium and large firm will survive and the small firm will die. MFA phase
out will affect woven garments in both USA and EU. Women are mainly employed in woven and
hence are more at risk of being unemployed than men. Knitwear and sweater will survive if GSP
continues. Duty free access to USA and EU is essential for the survival of woven RMG. Rules of
Origin should be carefully considered. Firms need to seek direct orders from the retailers. We
should go for lower and medium price products. To survive in future the garment industry has to
maintain price competitiveness and reduce the lead-time. Measures must be taken to avoid
balance of payment crisis and mass unemployment of women. FDI in the garment industry should
be welcomed
Dr. Naila Kabeer undertakes a comparison of the condition of the female workers of
RMG sector and that of a non-RMG sector in Bangladesh. The research was conducted among
both types of female workers living in the same place. Some of the initial findings are as follows:
Although both the RMG and non- RMG female workers come from the similar social background,
the RMG workers are financially better off than the non-RMG workers. RMG workers mainly come
from moderately poor families while majority of the non- RMG female workers are coming from
extremely poor families .RMG workers migrate with their friends not with their close relatives,
whereas the non-RMG female workers migrate with their close relatives and they stay with their
families. Compared to the non RMG female workers the RMG workers have better education and
better access to health care facilities. The RMG workers perceive themselves to be temporary
migrants to the city and therefore they have higher savings and they send remittance to their
family members in the villages to a large extent. Female RMG workers face greater problems on
their way to the work place. Most of the RMG workers think the working hours are increasing
day by day. Involvement in trade union among the female RMG workers is very limited RMG
workers cope with bad situation by cutting their expenses while the non- RMG workers cope by
borrowing.
Dr. Kabeer opined that through the wider participation of female workers in RMG the
inner capacity of the female work force has been exposed and recognized in a male dominated
society. The female themselves have also found out that they can be involved in the industrial
production, even with low-level of education. This discovery will prevail even if the RMG sector
does not exist. By sending the remittances to the rural area to the poor family members the
female RMG workers are helping the alleviation of rural poverty.
They are mention that already around 40% of the fabric for woven garments is produced
domestically. They argued that textile sector should be provided some support so that RMG does
not become totally dependent on imported fabric. In this regard some initiatives were suggested:
31
(a) Our textile producers should be given credit as per the global rate of interest, which is far
lower than the rate prevailing in Bangladesh, (b) Utilities like electricity, gas etc. should be
provided at a confessional rate to the textile sector as the prices of these things are lower in
countries from where imported textile is brought, (c) Port facilities should be improved, (d) duties
on import of textile machinery should be reduced, (e) a green fund on an interest free basis
should be provided to comply with the environmental norms. At this point some discussant
commented that RMG export can be sustained even without backward linkage industries and cited
the example of Vietnam where despite the presence of large textile sector, the export of RMG is
totally dependent upon imported textile. The textile secretary informed the participants that the
government is in the process of setting up a training institute where workers and managers of
both RMG and textile sector will be trained. He called for the active participation of BGMEA and
BTMA in this regard.
.
Ms Simeen Mahmud have focused on policy issues regarding the RMG sector of Bangladesh in the
context of the changed global scenario after 2005. In the one hand, the policy makers got to
know the research findings and recommendations made by different stakeholders and on the
other hand they informed the participants about the approach and the initiative of the Govt.
regarding the challenges that lies ahead of the growth and sustainability of the RMG sector in
Bangladesh.
Improving the market access
Participants strongly demanded greater attention of the government on improving the market
access of Bangladeshi RMG products. They gave stress on creating facilities so that the producers
can have direct relationship with the buyers, mainly with retailers. This attempt will reduce the
amount of surplus captured by the buying houses and other middlemen. The need for exploring
the Japanese and other Asian market also received attention. The secretary for commerce
informed the participants that government is very much concerned about the market access
issue. He gave example of the Canadian market case where Bangladesh has recently received not
only duty free entry but also soft rules of origin condition. The effort is going on to get similar
facilities from Australia.
Workers’ welfare considerations
The discussion concerning the workers’ welfare covered the following issues— workers should be
given prior notice before closing any factory .Employers should give attention to improve the skills
32
of existing workers, otherwise when the RMG sector moves to higher value products the low
skilled workers will lose job as higher value products require higher skill. At this point Dr. Salma C.
Zohir mentioned that during the survey of factories she found that even with the present level of
skill, workers are capable of producing quality products and thus moving to high quality products
is very much feasible. trade union should be permitted in the RMG sector. However unholy
alliance of trade unions with the non- trade union people has to be stopped. Democratic trade
union laws have to be implemented. Dr. Rehman Sobhan suggested that workers might be given
equity share in their companies to ensure that they benefit properly from the value chain. At this
point some discussants also mentioned that too much of emphasize on the distribution may
indeed harm the interest of the industry. They argued that if competition is ensured by say,
allowing FDI, the condition of the workers will improve automatically as the market will drive their
wages up.
Foreign Direct Investment in the RMG sector
Most of the participants welcomed FDI in the RMG sector of Bangladesh. They gave example of
Sri Lanka where welcoming FDI lessened the worry about developing the backward linkages. It
was argued that FDI would not only ensure higher investment in this sector, but also transfer
technology and ensure bigger market access by providing direct linkages with the retailers at the
export market. The minister informed the participants that decision on whether or not FDI will be
allowed in the RMG sector will be taken soon. He told that FDI will be welcomed if interest is
shown to develop at least one backward linkage by each investor. But some discussants also
pointed out that putting a stringent condition for FDI will indeed be self defeating as foreign
investors will switch to other countries where the investment regime is more liberal.
Increase in Efficiency in RMG production
Discussants unanimously agreed that production of quality product is a must in the post MFA
period. Therefore increasing labour productivity is required. It was argued that low skilled labour
is not really cheap if we consider the low level of productivity of those workers. Dr.Zaidi Satar of
World Bank argued that we have to ensure that the producers get the inputs at the world price
during the free trade environment of post MFA era. He decries the tendency of linking RMG with
textile at the excuse of promoting backward linkage and called for independent formulation of
policies for the RMG sector. He gave the example of Sri Lanka in this respect where the degree of
backward linkage is almost as it is in Bangladesh but the RMG producers get textile at zero
percent duty. Improvement of the infrastructure and the need for better shipment facilities also
drew considerable attention. These steps were considered necessary for Bangladeshi exporters to
move at FoB level instead of the existing CM/CMT level.
33
Mr. Suhel Ahmed Chowdhury, Secretary, Ministry of Commerce raised the issue of viability of
many of the small RMG units during the globally competitive environment of post MFA period. He
stressed the need of merger and acquisition among the existing RMG units so that they can
benefit from the economies of scale. Some of the discussants also argued for technological up
gradation. But the suggestions faced objection from Dr.Naila kabir as she thought that
disappearance of small factories and introduction of capital intensive technology might lead to
loss of employment by the women workers. At this point some of the discussants emphasized the
need for skill up gradation so that the existing workers can be assimilated in the newly formed
improved technology based and relatively large RMG units.
Some discussants argued for discontinuation of cash incentives for RMG exporters after 2005 as
they need to become competitive to survive at that stage. Concern was also raised that after
2005 cheap import from China may pose a threatening challenge to the industry. But some
discussants argued that China couldn’t continue with her present policy of veiled subsidy after
2005, as they have to come under strict scrutiny on the basis of the Agreement on Textile and
Clothing (ATC). ATC does not allow for subsidization of primary textile, which China is currently
practicing. It was also mentioned that the US has reserved some safeguard against Chinese
flooding of market after 2005. This may provide a certain level of protection to our export also.
4.2. CONCEPTUAL FRAMEWORK:
THE EXPORT GROWTH FACTOR OF BANGLADESHI GARMENT PRODUCT:
(CONSTANT-MARKET-SHARE MODEL)
In discussion and explaining the export growth of Bangladeshi garment products an
analytical device as the constant market share model is employed. To examine a country’s export
growth, this model basically ascribes favorable or unfavorable export growth either to a country’s
export structure or to it’s “competitiveness”. The basic assumption of constant market share
model is that a country’s export share in world market should remain unchanged over time. The
difference between the export growth implied by this constant share norm and the actual export
performance is attributed to the effect of competitiveness, and actual growth in exports in divided
into competitiveness, commodity composition and market distribution effect. Demand for exports
in a given market from two competing sources of supply may be described by the following
Total 3388822420 8587852106 171957224 232888036 0.649
( r)
111600238.40 111600238.4 263811614
Analysis-
Bangladeshi Exports in 1998-------------------------------------$232888036
Bangladeshi Exports in 1969-------------------------------------$171957224
Change in Exports
$60930812 100%
1. Due to increase in world trade:-------------$ 110382381.60 18.12
2. Due to commodity composition:--------------$1975483.20 3.24
3. Due to market distribution ----------- $ -1963250.60 -3.22
4. Due to increase competitiveness-------------$ 50536197.80 82.94
86
Notation- ijV = value of A’s exports of commodity to country j in period 1, ijV ′= value of A’s exports of commodity I to country j in
period 2, r= percentage increase in total world exports from period 1 to period 2, ir = percentage increase in world experts of
commodity i from period 1 to period 2, ijr = percentage increase in world exports of commodity i to country j from period 1 to
period 2.
* ijr was first computed from the cross classification of actual world exports by market destination and commodity groups and
multiplied by ijV , the cross classification of change in actual Bangladeshi exports by market destination and commodity groups
from 1989.
References: 1 .Chaudhuri, Salma and Pratima Paul-Majumdar, The Conditions of Garment Workers in Bangladesh - An Appraisal, Report, Bangladesh Institute of Development Studies, October 1991. 2. Bangladesh Unnayan Parisad, A Study On Female Garment Workers in Bangladesh, draft report, Dhaka, May 1990. 3 Ahmad, Muzaffar, "Readymade Garments Industry in Bangladesh," Bangladesh Journal of Political Economy, Vol. 9, No. 2, 1988, 94-122. 4. Wiig, Arne, "Non-tariff Barriers to Trade and Development--the case of garment industry in Bangladesh," in Norbye (edited) Bangladesh Faces the Future, University Press Limited, Dhaka, 1990. Ather, S. A., "The Readymade Garments Industry: Current Status, Problems and Prospects," Doc-TIP-MPU-B-11, June 1987. 5. Hossain, Najmul and Jagjit Brar, "The Garment Workers of Bangladesh: Earnings and Perceptions Towards Unionism," Journal of Business Administration, Vol. 14, No. 4, 1988. 6. Quddus, Munir., Entrepreneurship in the Apparel Export Industry of Bangladesh," Journal of Asian Business, Vol. 9, No. 4, Fall 1993, 24-46 7. Quddus, Munir, “Apparel Exports From Bangladesh: Brilliant Entrepreneurship or Spurious Success? Journal of Asian Business, Vol. 12, No. 4, Winter 1996, 51-70. 8. Islam, Anisul M, and Quddus, Munir, “The Export Garment Industry in Bangladesh: A Potential Catalyst for Breakthrough,” in Wahid and Weis (edited) 9.The Economy of Bangladesh: Problems and Prospects, Praeger, Westport, 1996. BGMEA Newsletter, September 1998 issue. 10.The world bank group
11.Bangladesh statically bureau.
12.Book of Bangladesh bank.
13. Rchardson,j.David “Constant- Market-Share analysis of export growth” Journal of
The International Economic, voll1 1971.pp.190-207.
88
1 Chaudhuri, Salma and Pratima Paul-Majumdar, The Conditions of Garment Workers in Bangladesh - An Appraisal, Report, Bangladesh Institute of Development Studies, October 1991. 2 Bangladesh Unnayan Parisad, A Study On Female Garment Workers in Bangladesh, draft report, Dhaka, May 1990. 3 Ahmad, Muzaffar, "Readymade Garments Industry in Bangladesh," Bangladesh Journal of Political Economy, Vol. 9, No. 2, 1988, 94-122. 4
Wiig, Arne, "Non-tariff Barriers to Trade and Development--the case of garment industry in Bangladesh," in Norbye (edited) Bangladesh Faces the Future, University Press Limited, Dhaka, 1990. 5
Ather, S. A., "The Readymade Garments Industry: Current Status, Problems and Prospects," Doc-TIP-MPU-B-11, June 1987. 6 Hossain, Najmul and Jagjit Brar, "The Garment Workers of Bangladesh: Earnings and Perceptions Towards Unionism," Journal of Business Administration, Vol. 14, No. 4, 1988. 7
Quddus, Munir., Entrepreneurship in the Apparel Export Industry of Bangladesh," Journal of Asian Business, Vol. 9, No. 4, Fall 1993, 24-46 8
Quddus, Munir, “Apparel Exports From Bangladesh: Brilliant Entrepreneurship or Spurious Success? Journal of Asian Business, Vol. 12, No. 4, Winter 1996, 51-70. 9 Islam, Anisul M, and Quddus, Munir, “The Export Garment Industry in Bangladesh: A Potential Catalyst for Breakthrough,” in Wahid and Weis (edited) The Economy of Bangladesh: Problems and Prospects, Praeger, Westport, 1996. 12
BGMEA Newsletter, September 1998 issue. 13
This loss would be less than 5 percent of the total production that is in the $3.7 billion range.