Economic Analysis of Export and Import of Bangladesh 28th April, 2010

To Rafayet Alam Course Instructor, School of Business Independent University, Bangladesh Subject: Submission of report Economic analysis on Ready-made Garments of Bangladesh.

Dear Sir,

We due respect and great pleasure we are submitting our report on Economic analysis on Ready-made Garments of Bangladesh.

On the basis of the information we had, we have tried our best to make this report meaningful.

We would like to take this opportunity to thank you for your continuous help and support during the writing of this report. Therefore we would like to request you to accept our report and forgive us for any kind of unwilling mistakes and shortcomings.

Thanking you

Sincerely, Arifur Rahman Shams Jerin Farhana Jannat # 0721027 # 0921399 # 0531025

Economic Analysis of Export and Import of Bangladesh

ACKNOWLEDGEMENT At the very outset, we would like to give our deep gratitude, compliments and heartfelt thanks to our respectable course instructor Rafayet Alam , Independent University,

Bangladesh for providing me with the proper guidance and support. He has also bridged up the gap between the theory and practice by his relentless follow up and guided us through a difficult time when we were trying to prepare this report. If this report makes the honorable instructor satisfied then it would be a great achievement for us and we would think that our hard work has been worth of whatever we did. Numerous thanks to Almighty Allah for showing his blessing on us in every way.

Economic Analysis of Export and Import of Bangladesh

BACKGROUND OF THE STUDY The business course under the BBA program IUB requires a full comprising of economic analysis by the student. It is often said that practical is far better than theoretical knowledge. Reality is far away from theoretical knowledge in Bangladeshi perspective. The business course of IUB is a widely recognized system to gather practical knowledge. So, it gives us a great chance to meet the reality and to absorb how real business managed. As a student of Micro Economycourse we are conducting our assignment on the Economic analysis of Ready-made Garments in Bangladesh.

Economic Analysis of Export and Import of Bangladesh

1.0 INTRODUCTION

Since independence, the economy of Bangladesh is dependent on agriculture as most of the people live in rural areas. The goal of the government policy is to reduce poverty by receiving the maximum output from agriculture and attains self-sufficiency in food production. Beside agriculture, the development of export sector is under greater consideration. Exports from Bangladesh have both grown and changed substantially as time goes on. After the birth of Bangladesh, jute and tea were the most export-oriented sectors. But with the constant threat of flooding, declining jute fibre prices and a significant decrease in world demand, the contribution of the jute sector to the countrys economy has deteriorated. After that attention has turned to the role of manufacturing sector, especially in garment industry.

The garment industry in Bangladesh has become the main export sector and a major source of foreign exchange since 1980. It currently exports about $5 billion worth of products each year. The industry provides employment about 3 million workers of whom 90% are women. Two non-market factors have played a crucial role in ensuring the garment sectors continual success namely (a) quotas under Multi- Fibre Arrangement (MFA) in the North American market and (b) preferential market access to European markets. The whole procedure is strongly related with the trend of relocation of production.

1.1 History of Ready-Made Garments in Bangladesh In the 1950s, labors in the Western World became highly organized; forming trade unions. This and other changes provided workers greater rights including higher pay; which resulted in higher cost of production. Retailers started searching for places where the cost of production was cheaper. Developing economies like Hong Kong, Taiwan and South Korea presented themselves as good destinations for relocations because they had open economic policies and had non-unionized and highly disciplined labor force that could produce high quality products at much cheaper costs.

In order to control the level of imported RMG products from developing countries into developed countries, Multi Fibre Agreement (MFA) was made in 1974. The MFA agreement

Economic Analysis of Export and Import of Bangladesh

imposed an export rate 6 percent increase every year from a developing country to a developed country. It also allowed developed countries to impose quotas on countries that exported at a higher rate than the bilateral agreements. In the face of such restrictions, producers started searching for countries that were outside the umbrella of quotas and had cheap labor. This is when Bangladesh started receiving investment in the RMG sector. In the early 1980s, some Bangladeshis received free training from Korean Daewoo Company. After these workers came back to Bangladesh, many of them broke ties with the factory they were working for and started their own factories.

1.2 An Overview of Readymade Garment Industry of Bangladesh The RMG industry is the only multi-billion-dollar manufacturing and export industry in Bangladesh. Whereas the industry contributed only 0.001 per cent to the countrys total export earnings in 1976, its share increased to about 75 per cent of those earnings in 2005. Bangladesh exported garments worth the equivalent of $6.9 billion in 2005, which was about 2.5 per cent of the global total value ($276 billion) of garment exports. The countrys RMG industry grew by more than 15 per cent per annum on average during the last 15 years. The foreign exchange earnings and employment generation of the RMG sector have been increasing at double-digit rates from year to year. Some important issues related to the RMG industry of Bangladesh are noted in the following table. Table1.1: Important Issues related to Bangladesh ready-made garments

Source: Databases of the BGMEA, and the Export Promotion Bureau, Bangladesh.

Economic Analysis of Export and Import of Bangladesh

Currently, there are more than 4,000 RMG firms in Bangladesh. More than 95 per cent of those firms are locally owned with the exception of a few foreign firms located in export processing zones (Gonzales, 2002). The RMG firms are located mainly in three main cities: the capital city Dhaka, the port city Chittagong and the industrial city Narayangonj. Bangladesh RMG firms vary in size. Based on Bangladesh Garment Manufacturers and Exporters Association (BGMEA) data, Mainuddin (2000) found that in 1997 more than 75 per cent of the firms employed a maximum of 400 employees each. Garment companies in Bangladesh form formal or informal groups. The grouping helps to share manufacturing activities, to diversify risks; horizontal as well as vertical coordination can be easily found in such group activities. The quick expansion of the industry was possible because of the following unique nature of the industry. The technology is less complicated (easy to transfer), Machineries are cheap and easy to operate (sewing machines), A large female labor force that is easy to train is readily available.

Besides the low cost of labor, one of the major factors behind the success of RMG is the availability of offshore financing for world-priced inputs through back-to-back letter of credit (L/C) under the special bonded warehouse scheme. Presence of foreign buyers is also a major factor that introduces the system of international subcontracting. Foreign buying houses not only bring the international market to the doorstep of local entrepreneurs, they also ensure the availability of essential inputs such as imported fabrics and accessories for the industry. They also did the greatest favor for the RMG industry of Bangladesh by bringing the latest designs and by monitoring output quality. These measures especially enabled inexperienced garments entrepreneurs to establish a strong foothold during the 1980s. 2.0 METHODOLOGY

We collected Ready made garments data from secondary sources. Basically we use different government websites including Bangladesh bureau of Statistics website, Bangladesh Bank websites, Export promotion bureau website, websites of BGMEA as well as non government websites and also from different research papers, articles, newspapers and journals etc available in the web.

Economic Analysis of Export and Import of Bangladesh

3.1 THE GROWTH OF BGMEA At first, Bangladesh established Desh Garments, which formed the first joint venture with a well-known South Korean MNC. The success of Desh Garments encouraged companies to come to Bangladesh to have apparels manufactured under various arrangements and export from here. Jewel garments were recognized as the first exporter in 1977. The Government also assigned a very high priority for the development of Bangladesh garment industry and provided many attractive incentives to entrepreneurs. Table 3.1: Table showing the growth of members of BGMEA Year 1983-1984 1986-1987 1989-1990 1992-1993 1993-1994 1994-1995 1995-1996 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 No. Of members of BGMEA 134 629 759 1537 1839 2182 2353 2503 2726 2963 3200 3496 3618 3760 3957 4107 4220 4637 Year to year % of Growth 100 469 121 203 120 119 107 106 109 109 108 109 103 103 105 103 103 110 105.33 105.60 146.30 Cumulative Growth

Source: BGMEA Annual Report, 2006- 2007

Economic Analysis of Export and Import of Bangladesh

Figure 3.1: RMG Industries Life Cycle

In the figure the right side upward slope of the line shows the rate of growth in the number of BGMEA members. We can follow a steep slope starting from the year 1989 to 2007. During this period the growth rate is high which in turn means that the success in the garments industry in that particular time was because of the shelter of MFA. The economy of Bangladesh is now prominently dependent on her garments sector. Comparing BGMEAs export data with Bangladeshs total export data it can be found that during the year 1985-86 to 1992-93 (the data background are colored by yellow in the Table) the export amount of BGMEA was drastically increasing to be a significant part of the total export of Bangladesh. During the year 1985-86 the amount exported was US $ 131.48 million and during the year 1992-93 it has became US $ 1445.02 million. Within just nine years the percentage of growth for export of BGMEA to the total export of Bangladesh has reached from only 16.05% to 60.64%. During the last fiscal year (2006- 07), the industry has earned US$ 9.2 billion (The Daily Star, 2006).

Economic Analysis of Export and Import of Bangladesh

Table 3.2: Garment Export Data of BGMEA during 1983 2007 Year Export of BGMEA (Mill. US $) 31.57 116.20 131.48 298.67 433.92 471.09 624.16 866.82 1182.57 1445.02 1555.79 2232.09 2547.13 3001.25 3781.94 4019.98 4349.41 4859.83 4583.75 4912.09 5686.09 6417.67 7900.80 9211.23 Total Export of Bangladesh (Mill. US$) 811.00 934.43 819.21 1076.61 1231.20 1291.56 1523.70 1717.55 1993.92 2382.89 2533.90 3472.56 3882.00 4418.28 5161.20 5312.86 5752.20 6467.30 5986.09 6548.44 7602.99 8654.52 10526.16 12177.86 % of BGMEAs export to Total export 3.89 12.44 16.05 27.74 35.24 36.47 40.96 50.47 59.31 60.64 61.40 64.28 65.61 67.93 73.28 75.67 75.61 75.14 76.57 75.01 74.79 74.15 75.06 75.64 74.95 75.42 46.96 Cum. Growth

1983- 84 1984- 85 1985- 86 1986- 87 1987- 88 1988- 89 1989- 90 1990- 91 1991- 92 1992- 93 1993- 94 1994- 95 1995- 96 1996- 97 1997- 98 1998- 99 1999- 00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Source: BGMEA Annual Report, 2006- 2007 But if we divide the data into three periods such as 1983-84 to 1998-1999, 1999-2000 to 2003-2004 and 2004-2005 to 2006-2007 we see that average percentage of BGMEA export to total export was 46.96 during the 1983-1984 to 1998-1999 period. It jumped to 75.42% during 1999-2000 to 2003-2004 and it slightly decreased to 74.95% after 2004-2005.

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From Figure 1.2 the percentage of change can be easily observed. During the year 1985-86 BGMEA export was only 16.05% of the total export, it jumped up to 27.74% during the year 1986-87. Then until the year 1992-93 the growth drastically reached to 60.64% of the total exports of Bangladesh. Since 1998-99, up to the year 2006-2007 the percentage has been fluctuating somewhere around 75 %.This dependency of total export on BGMEAs export explains the importance of the garment sector in Bangladesh economy.
Figure-3.2: Showing the Comparison of "Export of BGMEA & Total Export of Bangladesh.

Source: BGMEA Annual Report, 2006- 2007

4.0 CATEGORIES OF READY-MADE GARMENTS MANUFACTURED IN BANGLADESH Ready-made garments manufactured in Bangladesh are divided mainly into two broad categories: woven and knit products. Shirts, T-shirts and trousers are the main woven products and undergarments, socks, stockings, T-shirts, sweaters and other casual and soft garments are the main knit products. Woven garment products still dominate the garment export earnings of the country. The share of knit garment products has been increasing since the early 1990s; such products currently account for more than 40 per cent of the countrys total RMG export earnings (BGMEA website). Although various types of garments are manufactured in the country, only a few categories, such as shirts, T-shirts, trousers, jackets and sweaters, constitute the major production-share (BGMEA website; and Nath, 2001).

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Economies of scale for large-scale production and export-quota holdings in the corresponding categories are the principal reasons for such a narrow product concentration.

5.0 STEPS INVOLVED IN PRODUCTION Backward linkage means the use by one firm of industry of produced inputs from another firm or industry (alan V deardorff, 2001). That means the finished garments relies on three steps-first level for converting fibers/ cotton to yarn, second step for converting yarns to grey fabrics and the final step for converting gray fabrics to dyed, printed of other finished fabrics. These steps are integrated into each other as show in the following table. It shows that these three steps are essential for backward linkage integration (BGMEA, January 2005)

Out of three steps, Bangladesh is only capable of Knitting, finishing in knitwear sectors but far behind in producing yarn, fabrics which is a major factor for woven section. Only success came to accessories where 80% demand of our country was fulfilled. The success of the garments industry very much depends on how effectively RMG sector linkages may operate backward and forward. If the manufacturer has effective control over the supply of raw materials, components and ancillary services needed to produce final product, then the production flow is likely to be interrupted. If the company develops and effective marketing service strategies that provide right signal, and if marketing and distributing system as a whole are effective for having the products reach the target markets, then the sales revenue for the company is likely to be maximized. It means that minimize the cost of production and maximize sales revenues both backward and forward linkages need to be integrated. Here the issue of developing backward linkage is discussed with reference to the desirability of having control over the supply of inputs of RMG industry, mainly, fabric, yarn and processing status

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5.1 Need for Improved Backward Linkages in Post MFA After abolition of quota in 2005, RMG sector in Bangladesh is facing stiff competition in global apparel export market. Moreover, increased competitions have been felt from neighboring countries including India, Pakistan, China and Thailand from where Bangladesh imports fabrics to meet the fabric demands of its RM G sector. These countries have stronger backward linkage support as they are able to utilize their locally produced yarns and fabric internally, resulting in higher prix in the export market, putting pressure on the Bangladesh garment sectors. Bangladesh RMG sector, therefore, needs to develop the backward linkage sub-sectors further in order to reduce dependency on imported raw materials and intermediate goods if she is to meet the export target in the global market. Again, competitive pricing is vital with this backward linkage support. Otherwise, it is not possible to survive in the world apparel market in the post MFA era Faced with the quota-free global apparel trade, Bangladesh RMG sector must not only be competitive in product price but also in the lead time. Development and growth of backward linkage industries will reduce price ranges and lead time in the long run. As the backward integration is needed for composite, spinning, weaving, finishing, dying and processing, all steps beginning with raw materials and ending with finished products must constitute backward linkages sub-sectors. The RMG sector then will be faced with more challenges in meeting these goals. Moreover, Bangladesh RMG sector has great advantages in terms of the lower in producing the fabric. The labor cost in Bangladesh, as shown in the following Table , is one of the lowest. The table compares average hourly wages (including fringe benefits) in the RMG industry. Table 5.1: Average hourly wages (including fringe benefit) in RMG industry

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With cheap labor advantage, Bangladesh garment industry is still holding competitive position in the global apparel market. Overall percentage of RMG sector growth has been steady although the sector has been affected by the USA market. This industry contributed 78% share of total trade of goods in Bangladesh, compared to the other South Asian countries like India 14%, Pakistan 23%, Sri Lanka 50% and Nepal 40% (Garment Association on of Nepal, 2001). In general, backward integration adds value and at the same time increases employment. Contribution of RMG sector in Bangladesh manufacturing can be measured by the increase in value-added (MVA) from 6.5 percent in 1993-94 to 30% in 1998-99 (CPD, October 2002). Another researcher (Khadker, January 2002) claimed that of Garment sector value added is only 25% and is much lower compare to other exported items which were contributed 60% to 70% in Some Gases. TWO-third of garments export earnings is for the labor fabric purposes. To add more value it is imperative necessary to build and develop more backward linkages industries from yarn to finishing fabric processing Bangladesh.

5.2 The Condition of Backward Linkage Although the RMG industry in Bangladesh flourishes in the 80s and 90s, there has quality. At present, only 25%-30% value addition takes place to the RMG products as manufacturer import bulk of the raw materials. On the contrary, almost 70% value addition takes place to the jute products exported to different countries. The garment industry should need to increase at least 50% value addition through enhancement of backward integration in the RMG marks. Backward linkages sub-sector for RMG industry includes cotton production, spinning (cotton and synthetic yarn), weaving and knitting, dyeing and painting, and accessories and all of the above sub-sectors reflect the present condition of the backward integration in the RMG in Bangladesh. Cotton Cotton is the main raw material for yarn production while production of cotton in Bangladesh has very limited profit margin. Hence, Bangladeshi spinning mills depends on imported cotton from international markets. India, Pakistan, Turkey, China, Uzbekistan, USA are the main production sources where Bangladesh largely dependent on. Bangladesh Cotton Development Board (BCDB) undertakes cotton promotions activities but achievement is not satisfactory. BCDB is striving for higher production of cotton with a production range of 103620 bales in four cultivating zones in south- western pat of the country. Cotton production requires vast land area where as in Bangladesh the land is in scarcity at only 144,000 square

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kilometers. Farmers prefer agriculture products that are more profitable than cotton. So in the context of cotton production, Bangladesh is in a dreadful situation. This implies that Bangladesh has to depend on imported cotton which involving large amount of foreign exchange. Bangladesh is not even in a position to move towards synthetic fiber production as it is capita intensive. Spinning Mills It is difficult to accurately determine the percentage of demand for yarn met locally because of the amount of yarn production varies with the efficiency of the spindles. Bangladesh Textile Mills Corporation (BTMC) and Bangladesh Textile Mills Awciation (BTMA) mills have spindles with different efficiency levels and there is no numeric data available on the efficiency levels of the spindle according to A M. Chowdhury (2002). But According BTMA, in year 2000 statistics, there are 148 spinning units (private 107 and public 41 units), installed capacity 3.6 million, with annual production 443 million kg, (BTM EA, 2001). Number of spinning mills increased to fulfill the gap of shortfall in local and domestic market. As per BGMEA, 2005, number of unit of spinning mills increased to 202 (private sector 176, public sector 26), Installed capacity: 4,334,796 Spindles with annual production capacity of 50 million kgs of yarn. According to a report submitted by the Sub-Committee of the Parliamentary Standing Committee on Textile (May 1999) to meet the demand (2000) domestically, Bangladesh will have to established 148 Spinning Mills with 25,000 spindles each (Hafiz G.A ) and again to attain self sufficiency in yarn to fulfill the domestic and export needs in year 2005, Bangladesh will need to established additional 98 spinning mills. So it shows that capacity of spinning mills in Bangladesh is not capable to cover demand of yarn that needed to produce fabric for RMG sector. The total demand for yarn by RMG producers and producers operating in the local market are more than the existing production capacity and there is requirement for an enormous increase in capacity if Bangladesh wants to ensure adequate supply of yarn locally. Handloom products may be suitable for the domestic market, but RMG producers cannot consider handloom as competitive because of consistent and large quantity demanded by quality fabric markets. On the other hand, power looms were originally targeted to serve the domestic market but to upgrade them for export quality is very difficult and costly. Weaving and Knitting Mills The next stage is weaving and knitting where yarn are converted to fabrics Fabric is main raw material for making garment and accounts for 75 percent of the garment cost. Both hand looms and power looms are suitable for the domestic market, but a large demand of quality fabrics cannot be met by hand loom production. But in case of power looms, they may increase the production capacity to satisfy part of the RIVIG sector demand with a large investment. In the long run, Bangladesh weaving mills need a high volume of yarn production to fulfill the demand for domestic and export markets. In year 2000, fabric demand was 830 million meters and soon after in year 2005 the demand almost doubled. In about 5 years of time, the demand would increase to 1600 million meters to fill these huge

Economic Analysis of Export and Import of Bangladesh

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demands and the fabric shortfal, the weaving industry needs to increase the production capacity by developing number of new weaving industries both new and reconditioned machines must be added in this sector. The associated large involvement required is amost $ 3.9 billon, $ 2.7 billion for new machines and $ 1.2 billion for reconditioned looms (CPD in the 12 EXPO). Dyeing, Printing and Finishing This isthe final aage where the fabric either can be used for domestic marka or RIVIG sector for export purposes Dyeing, printing and finishing units in Bangladesh are currently able to process all of the locally produced grey. According to Bangladesh Textile lVIiIls Association (BTMA, 2001) Bangladesh knitting, knit dyeing and finishing sib-sector had 282 firms (99 merchandized dyeing and finishing, 183 semi-merchandized dyeing and finishing) with annual fabric production capacity (fabric) of 680 million meters On the other hand, the knitting sector had a total of 155 firms (23 domestically supported edsting units and 132 export oriented units). Existing knitting, knit dyeing and finishing sub-sectors cover the local demand and the major portion of the export RMG sector in Bangladesh. Due to the increased demand in RMG sector add to attain self-efficiency in fabric supply, Bangladesh established 481 additional units of dyeing, printing and finishing units with 10 million meter fabric production capacity for each unit. Dyeing, printing and finishing factors had depended mostly on imported fabrics as Bang1adcshs weaving sector could not fill the export demand of the RMG. This sector dramatically improved over the last five years due to the relatively low level of investment required. However, only a few firms could carry out proper dyeing operations due to deficiency in dyeing know-how. Again, as the current dyeing facilities are mostly dependent on imported fabrics, their expansion does not depend on other sectors that impede the growth of backward linkage sub-sectors To develop dyeing, printing and finishing sub-sectors, it is imperative to build up modern units with appropriate technology, set up bonded warehouse that can meet the fabric demand until the local grey production can meet the quality and quantity, stocks of dyes and chemicals that can meet the demand of dyeing, printing, finishing sub-sectors. This sib-sector can contribute significantly to reduce lead time and price. It is suggested that dyeing, printing and finishing sub-sectors is in better position than the other backward integration sub-sectors when compared with spinning and weaving sectors.

6.0 CONTRIBUTION OF THE RMG INDUSTRY TO BANGLADESH RMG business started in the late 70s as a negligible non-traditional sector with a narrow export base and by the year 1983 it emerged as a promising export earning sector; presently it contributes around 75 percent of the total export earnings. Over the past one and half decade, RMG export earnings have increased by more than 8 times with an exceptional growth rate of 16.5 percent per annum. In FY06, earnings reached about 8 billion USD, which was only less

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than a billion USD in FY91. Excepting FY02, the industry registered significant positive growth throughout this period Figure 6.1: Trend of RMG Export Volume, Export Growth and Contribution to GDP

In terms of GDP, RMGs contribution is highly remarkable; it reaches 13 percent of GDP which was only about 3 percent in FY91. This is a clear indication of the industrys contribution to the overall economy. It also plays a pivotal role to promote the development of other key sectors of the economy like banking, insurance, shipping, hotel, tourism, road transportation, railway container services, etc. A 1999 study found the industry supporting approximately USD 2.0 billion worth of economic activities, when the value of exports stood at a little over USD 4.0 billion. One of the key advantages of the RMG industry is its cheap labor force, which provides a competitive edge over its competitors. The sector has created jobs for about two million people of which 70 percent are women who mostly come from rural areas. The sector opened up employment opportunities for many more individuals through direct and indirect economic activities, which eventually helps the countries: social development, woman empowerment and Poverty alleviation. Textile Sector as a whole plays an important role in the economic life of Bangladesh. The sector contributes 38% industrial value addition. Earns around 78% of total export earnings. Employs around 4.5 million workforce of which majority is women Generates huge cliental base for Banking, Insurance, Shipping, Transport, Hotel, Cosmetics, and Toiletries and related other economic activities. Provides indirect employment to 0.80 million workforce in accessories industries related to garments. Provides 0.2 million job to waste recycle industry related to RMG sub-sector. Contributes 10.50% to GDP through RMG sub-sector.

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6.2 Exporting Condition of Garments Industry The Ready-Made Garments (RMG) industry occupies a unique position in the Bangladesh economy. It is the largest exporting industry in Bangladesh, which experienced phenomenal growth during the last 20 years. By taking advantage of an insulated market under the provision of Multi Fibre Agreement (MFA) of GATT, it attained a high profile in terms of foreign exchange earnings, exports, industrialization and contribution to GDP within a short span of time. The industry plays a key role in employment generation and in the provision of income to the poor. Nearly two million workers are directly and more than ten million inhabitants are indirectly associated with the industry. Over the past twenty years, the number of manufacturing units has grown from 180 to over 3600. The sector has also played a significant role in the socio-economic development of the country. The Agreement on Textile and Clothing (ATC) introduced in 1994, aimed at bringing textiles and clothing within the domain of WTO rules by abolishing all quotas by the end of 2004. It provides an adjustment period of 10 years, so that countries affected by the MFA could take the necessary steps to adjust to the new trading environment. Liberalization of trade following the Uruguay Round agreement presents opportunities as well as challenges for a developing country like Bangladesh in RMG sector. In the Post-Uruguay Round period, traditional instruments of trade policy such as tariffs, quotas, and subsidies will become less feasible and less relevant. In a liberalized trade regime, competition among textiles and clothing exporting countries is likely to become intense. The objective of this paper is to identify the prospects of RMG industry after the MFA phase out by analyzing the current scenario along with different policy measures and the available options in order to be more competitive in the new regime. The export made by Garments Industries of Bangladesh is improving year after year except some of the year. Strike, layout, shutdown of company, political problem, economic problem, inflation etc. are the prime cause of decreasing export in this important sector. But above it, Readymade Garments Industries is the leading sector in export sector. Table 6.2: Year Export by the garments industries (in US $ million) Export (in US $ million) Percentage change 624.16 866.82 1182.57 1445.02 1555.79 32.49 38.88 36.43 22.19 7.67

Year 1991 92 1992 93 1993 94 1994 95 1995 96

Economic Analysis of Export and Import of Bangladesh 1996 97 1997 98 1998 99 1999 00 2000 01 2001 - 02 2002 03 2003 04 2004 05 2005 06

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2228.35 2547.13 3001.25 3781.94 4019.98 4349.41 4859.83 4583.75 4912.12 5686.09

43.47 14.11 17.83 26.01 6.29 8.19 11.74 5.68 7.21 15.83

Table 6.3: Exports of Knit and Woven Garments to the United States

(Source: Export Promotion Bureau of Bangladesh)

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7.0 MAIN STRENGTH OF READY-MADE GARMENTS SECTOR In this section we take a look at how the growth of the apparel sector induced by the exportled trade policies contributed to the creation of employment and generation of income among the poor. Employment The labor-intensive apparel sector has continually expanded the large pool of wage earning jobs for unskilled and semi-skilled labor in Bangladesh since its initiation in 1979/80. From employing merely 4500 employees in 1981/82, the apparel sector has grown to employ over 1.8 million workers in over 3,600 apparel factories in 2001/02 (EPB, BGMEA).The following figure shows Employment increased from 2 percent to 30 percent of all manufacturing employment during the period, thus becoming the single largest manufacturing employment sector in Bangladesh. Figure 7.1: RMG Sector Employment

Source: BGMEA website The RMG industry is also unique in another respect. Of the 1.8 million workers in the RMG industry, about 1.6 million, or 90 percent of the employees, are female workers. Nine out of the ten jobs went to women workers who came from the unlimited supply pool of low wage labor. Women workers fitted well to the nature of the apparel industries. The unskilled women were given some training in garment making before being placed in makeshift factories in the urban areas.

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For most women workers, the RMG industries provided opportunities to break away from the poverty cycle with wage earning. The 1997 survey conducted by the BIDS showed that the garment industry provided first wage employment to 96 percent of the male and female workers who previously were doing unpaid household work. According to an early survey, also by BIDS, 49.1 percent women garment workers had been unemployed or worked at home before joining the garment industry and 23.9 percent had been students with no work experience. In contrast, less than 2 percent of non-garment working women in urban areas, and less than 1 percent in rural areas had not worked previously in manufacturing jobs. The women took wage earning jobs in the apparel factories because of extreme poverty in the household. Thus a very large number, if not all, workers came from poor households to work in first-time wage-earning jobs provided by the export-oriented garment industries. Most women workers migrated from the rural areas to take wage earning jobs in the urban apparel factories. Ninety percent of the garment factory workers are migrants from rural areas. Among the migrants, 90 percent of males, and 69 percent of females migrated because of poverty and job opportunity in the garment factory. Four-fifths of female and about threefifths of male migrants came from functionally landless households (<0.5 acres). The opportunities for earning wages as well as making financial contributions with wage earning to the poverty-stricken households remain practically nonexistent in the rural areas. 69 percent of the male workers and 67 percent of female workers originated from the rural districts that are among the poorest. The study concluded that employment in the garment industry has reduced poverty in those areas. Income Earnings Bangladesh garment workers earn on average $ 0.23 per hour of work. The average wage in 1991 was Taka 1608 and in 1995 was Taka 1717 [in 1991 prices]. Real wages have increased by about 6.8 percent between 1991 and 1995. The wage increases, however, have been modest primarily because abundant unskilled labor is available at low wages. The wages are low comparative to other low-wage countries, but that made Bangladesh a lucrative ground for investment. The wage levels of male garment workers are 70 percent of that of all employees and 90 percent of that production workers in the manufacturing sector both these proportions are higher than their respective sector averages.

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Although 9 of 10 apparel workers are females, their earnings are less than that of male workers. Average monthly gross take-home income in 1997/98 of a male RMG worker was Taka 1781, and that of female was Taka 1581. Female workers remitted on average one-third, while male workers sent two-fifth of their earnings to families they left behind in rural areas. The 1997 BIDS survey found that 31 percent of female workers were the primary bread winners, and 43 percent contributed substantial portions of their incomes to families, as against 78 percent and 65 percent respectively for the male workers. Poverty Alleviation In Bangladesh where half of the rural households fall below the poverty line, garment workers were able to lift themselves over the poverty threshold as their consumption expenditures met basic needs. The estimated poverty line to be Taka 992 per month. At the average monthly gross take home income in 1997/98 of Taka 1781 and Taka 1581 of a male and a female worker respectively it is estimated that about 91 percent of male and 81 percent of female workers earned over the poverty line. The remaining 9 percent of male and 19 percent of female workers thus earned incomes below the poverty line. Thus, a substantial proportion of workers in the export-intensive apparel sector alleviated their poverty. Over one-fourth of the workers who had no earned income before, had been earning at levels far above the poverty line. In fact, 29 percent of males and 25 percent of females earned twice the poverty line amount. Had they not migrated to seek job in the export-intensive apparel sector, they would have remained either unemployed or engaged in non-paying home-based activities, or worked as wage laborers if they found jobs in the rural areas. From the facts and figures discussed above, it is apparent that export-oriented trade has contributed towards alleviating poverty by providing employment and income-earning opportunities. The apparel sector contributed heavily because of its export intensiveness. The RMG sector made significant economic changes in Bangladesh apart from its recognized role as the major foreign exchange earner. It has lead to poverty alleviation to a great extent by creating employment opportunities for rural poor predominantly from landless families. From no income of their own, more than 80 percent of migrant women workers earn above poverty threshold income.

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8.0 MFA MFA is an agreement among developed country importers and developing country exporters of textiles and apparel to regulate and restrict the quantities traded. It was negotiated in 1973 under the auspices of GATT as a temporary exception to the rules that would otherwise apply, and was superseded in 1995 by the ATC. The MFA is among the most important nontariff trade barriers facing developing countries today. Established in order to achieve the expansion of trade, the reduction of barriers to such trade, and the progressive liberalization of world trade in textile products, which at the same time ensuring the orderly and equitable development of this trade and avoidance of disruptive effects in individual markets and on individual lines of production in both importing and exporting countries. It sanctions a structure of country and product- specific quota on apparel and textiles exported by developing countries to developed countries. These quotas are negotiated bilaterally between the importing and exporting countries but are largely administered by the exporting countries. Despite being initially conceived as a temporary measure, the MFA has persisted for more than twenty years, since its inception in 1973, the MFA has been through five successive negotiations, with each round encompassing a wider range of products and countries. The most recent round of trade talks-the Uruguay Round, concluded in 1994-included a plan for the eventual elimination of the MFA.

8.1 Characteristics of MFA: Importers and exporters are involved in MFA MFA involves with the regulation and restriction of quantities of trade MFA emerged in 1973 under GATT MFA is a non-tariff trade barrier MFA evolved as a trade expansion It is an agreement which reduced the international trade barriers Multi-fiber Agreement is an agreement between developed and developing countries Its an agreement negotiated bilaterally between the importing and exporting countries MFA is a temporary agreement and this agreement has been terminated in 1994.

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8.2 Measurement of the Impact of the Phasing out of the MFA since 2005: In order to find out the impact of the withdrawal of the quota facilities we can examine the sales and net income figure after the year 2005.We observe from Table 3.2 and 3.3 that sales of all the sample companies have increased and accordingly net income figure has also increased. This indicates that withdrawal of quota facilities has not caused any problem for the sample companies in Bangladesh though the withdrawal has increased competition in U.S. markets. Other impacts of the post MFA period are discussed below:

Changes in the cost competitiveness of the RMG Low price for the same quality product and standard has been the competitive advantage for the sample companies. Regarding the question about how cost competitiveness of the RMG has changed during the post Multi- Fiber Agreement have been asked to our group of respondents. They all agree on the issue that the price of raw material is becoming higher. For example, the suppliers of woven fabrics have increased their product price. Some other factors such as longer lead time than expected, insufficient power supply, and political unrest during production period increase the production cost. In an answer to the question what are the strategies to remain cost competitive the respondent group mentioned a few strategies which are: Trying to buy raw materials locally. Decrease overhead and labor cost. Besides, trying to maintain the same status i.e., to maintain the production in a way so that the labor cost and overhead cost do not increase. 20% of the respondent group has increased the price of their finished products according to the increase in the price of their raw materials. Besides, developing the backward linkage industry would also be a strong competitive advantage for the sample firms in the industry. In addition, the Bangladesh Government has reduced tax and duties to help cost reduction.

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Change in the Government incentives and polices: Bangladesh RMG is an important sector of its economy. Consequently, the Government would support the sector to gain maximum benefit from it by using and increasing the competitive advantage. (Bangladesh Export Policy, 2006-2009). The Bangladesh Government has introduced reduced tax and duty to help cost reduction. The Government also has introduced cash incentive scheme for using locally produced yarn to support the backward linkage industry to grow. (Nasir Mainuddin, 2006). Moreover, it has decided to develop textile village at different part of Bangladesh as the backward linkage industry. The Government has decided to develop the port management system, simplify the goods uploading process to help reduce the lead time. Besides, the Government has promised to resolve the problem of electricity supply. To enhance the productivity of the employees the Government will arrange training facilities to develop the skills (Bangladesh Export Policy, 2006-2009). Increased foreign exchange earnings and employment opportunity The increasing sales figure of the sample companies during the post MFA period implies increased foreign exchange earnings. In addition, they are contributing to increase the national GDP (Gross domestic product). On the other hand, only one Sample Company which is 20% of our total sample was established before the decision of phasing out the MFA. Rest of the respondents, that is, 80% has been established after the phasing out of the MFA decision and still the industry has not reached its maturity, it is still growing. Figure-3.1 shows that since 1983 to 2001 the industry growth has been smooth. During the period 200102 it declined and again from the next year it started to grow at a more rapid rate. Thus we can comment that more employment has been generated in the post MFA period in Bangladesh.

9.0 RECOMMENDATIONS

The forty-year old quota system on textile and readymade garments has been withdrawn as of January 1, 2005. As a result our export-oriented readymade garments industry is now facing more competition than any time in the past. At the same time the countrys import system has been liberalized, and the rate of import duty has been fixed at the lowest possible level.

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Considering the overall situation and in order to maintain our current export growth, we have to increase the production capacity of local export-oriented industries, give more emphasis on production environment of the factories and on meeting the compliance requirements, improve the quality of the products, and most importantly, we have to strengthen our efforts to diversify products and their markets. All these objectives can be attained only when we can utilize our cheap labor and convert comparative advantage into competitive advantage. In doing so, efforts will be given on encouraging the establishment of labor-intensive exportoriented industries, encouraging training programs for the skills development of the workers, providing incentives for the diversification and encouragement of exports, low-interest loan facilities, infrastructural development, establishment of backward and forward industries, development of utility services, establishment of modern laboratories for controlling the quality of export products, establishment of product-based clusters, ensuring easy access to the raw materials for export products, ensuring regular supply of updated information on market and technology to producers, and on the overall development of the Chittagong Port including the simplification of goods unloading procedures.

Moreover, some steps will be taken to shorten the "lead time for export of readymade garments by means of development of port management, simplification of goods unloading, resolving the electricity problem and similar activities. Furthermore, assistance will be given to improve the work environment in the readymade garments factories, to reduce risks of accident and to fulfill the compliance requirements at the factory level. Besides, an integrated and reasonable compliance regulation will be prepared with the help of all stakeholders; Since, our RMG sector is facing huge competition in the world market as because of abolition of quota system we have to go very carefully to capture the world-wide market. As a result, we have to take some necessary steps which will be taken to send marketing missions abroad, to organize single country textiles and readymade garments fairs, to organize and participate in international trade fairs at home and abroad so as to expand and integrate the markets for readymade garments. At the end we can say that our RMG sector is doing well what is more than our expectation. And if this flow goes on this way then we will be successful and our RMG sector will be a great threat for other competitors in the world market. Based on the above data analysis and findings we suggest the following strategies that RMG should follow:

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i. Strategies for the RMG Sector in the Post MFA To sustain in the competitive market and detain the achieved position or capture more of the market share Bangladesh RMG must adopt certain changes and develop dynamic capabilities. In doing so some of our suggestions are as follows: ii. Re-structure RMG Sector with appropriate backward and forward linkage We have to re-structure the garment sector. The garment sector of Bangladesh is totally dependent on the foreign investment. They export raw materials, equipments and other facilities to our garments sectors, which are not cost effective. iii. Improve labor productivity and managerial efficiency The labor productivity should be increased and it can be possible if the labors are provided with a significantly decent wages and other facilities such as free medicine, bonus, and transportation cost, they will be more motivated and their motivation will lead them to become more productive. iv. Better working environment Working environment of garments in Bangladesh is very poor. The owners should give more attention to improve the working condition of the garments. There should be proper ventilation system, clean sanitation, significant number of fire extinguishers, emergency exit to ensure the safety and security of the workers. v. Market diversifications: There were very few market diversifications in our garment sector. Usually the Bangladesh garments sector used to export its products in USA and it realized that its not enough. This is why they started exporting in European Union countries. Moreover, to grow or capture more of the market share they should explore and exploit different markets. vi. Improving the R&D Bangladesh garment sector does not have advanced technology and equipments thats why they should invest more in research and development. Besides, they may buy high-tech machines or adopt lease strategy so that they can export higher quality products.

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vii. Backward Integration Backward Integration refers to the development of subsidiary industries in order to reduce Bangladesh garments dependence on imported inputs i.e., the supporting industries that produce garment accessories and the initial processing of imported gray fabric. viii. Upgrading of Skills and Technical Expertise

Although there is an apparent abundance of labor in Bangladesh, there is insufficient level of skill when it comes to the use of many high-speed machines used in the industry. Far too little has been spent on training of staff with skills that are transferable across the industry. Better skilled staff will increase the productivity of the company as well as increase in GDP. This factor of investment in its workforce is often neglected by enterprises, which have been hampered by short term planning. ix. Integration Due to the lack of development networks among the players involved in the Bangladesh industry and their respective markets, there is little integration within the garment industry. It is also necessary to develop direct links with retailers in the US and EU. x. Diversifying Product Range Bangladesh has always relied on a small, medium to semi-high quality product. These were the main categories covered by the MFA. The development of high quality products will require an investment in technology, training and quality control. xi. Elimination of child labor The Bangladeshi industries employ many children and the garment sector is not different from them. It is a matter of industrial reputation that will go down if they recruit child labors. Recruiting child labor may also bring negative impression on the brand image of the company to its customers.

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xii. Improvement of Quality Quality is one of the important factors that make the customer loyal to the product. The respondent group believes that the quality of the product is a factor that affects the sales. They also believe that the volume of their business depends on the quality, design and the commitment as the fashion and style changes too often. Therefore, the companies have to respond according to their customers test. Till now 80% of our respondents enjoy the duty- free market access and 20% of the respondent group enjoys GSP facilities only if local fabrics are used. 60% of the respondent group collects order through the buying house (local buying agent) and the rest gets offer directly through the head office situated abroad. They have no problem in collecting orders due to better quality and low price. The respondent group believes that they have been able to cope up in accordance with the changes in the attitude of buyers and customers.

CONCLUSION The Ready-Made Garments (RMG) industry occupies a unique position in the Bangladesh economy. It is the largest exporting industry in Bangladesh, which experienced phenomenal growth during the last 25 years. By taking advantage of an insulated market under the provision of Multi Fibre Agreement (MFA) of GATT, it attained a high profile in terms of foreign exchange earnings, exports, industrialization and contribution to GDP within a short span of time. The industry plays a key role in employment generation and in the provision of income to the poor. To remain competitive in the post-MFA phase, Bangladesh needs to remove all the structural impediments in the transportation facilities, telecommunication network, and power supply, management of seaport, utility services and in the law and order situation. The government and the RMG sector would have to jointly work together to maintain competitiveness in the global RMG market. Given the remarkable entrepreneurial initiatives and the dedication of its workforce, Bangladesh can look forward to advancing its share of the global RMG market.