Journal of Contemporary Asia Vol. 39, No. 4, November 2009, pp.

597618

Sustaining Ready-made Garment Exports from Bangladesh

NAZNEEN AHMED
Bangladesh Institute of Development Studies, Dhaka, Bangladesh

ABSTRACT This paper analyses the main drivers of growth, challenges faced and performance of ready-made garment (RMG) manufacturing in Bangladesh following the abolition of the MultiFibre Arrangement (MFA). It provides evidence to show that both national and international MFA quotas did provide Bangladesh garments with access to guaranteed international markets. However, as shown by the rising export volumes and market shares of Bangladesh RMG over the period 2005-06, the withdrawal of MFA quotas did not impede the further development of the industry in Bangladesh. This is an outcome of safeguard measures imposed against China in major markets such as the USA and the European Union. The paper argues nevertheless that both the government and private sector of Bangladesh should stimulate upgrading so that the removal of its preferential treatment privileges will not adversely hinder the industrys growth in future. KEY WORDS: Textiles, garments, Asia, Bangladesh, Multi-bre Arrangement

Ready-made garments (RMG) have become the main export product of Bangladesh since the late 1980s. Starting as a non-traditional export item in the late 1970s, RMG achieved this status of leading export within a short span of time. While export earnings from the RMG industry were barely US$1 million in 1978, they reached US$8 billion in 2006, comprising 75% of overall export earnings and 81% of manufacturing export earnings (see below). Some entrepreneurs without any experience in the export business started RMG production and later their success stories motivated others to enter the business (Quddus and Rashid, 2000: chs 3 and 4). Both domestic and international policies have inuenced the rapid growth of the RMG industry. Moreover availability of cheap labour stimulated growth. For the last two decades, the RMG industry has been the main source of growth of exports and formal employment in Bangladesh. According to 2005statistics, this industry directly employs more than 1.9 million people, comprising 40% of manufacturing sector employment, 90% of whom are women and 90% are dominantly migrants from rural areas and mainly coming from the poorest rural households (Afsar, 2001; Mlachila and Yang, 2004; Razzaque, 2005). The employment generated in this industry is new employment rather than substituting for jobs in other industries (Kabeer and Mahmud, 2004: 107).

Correspondence Address: Nazneen Ahmed, Bangladesh Institute of Development Studies, E-17, Agargaon, Sher-e-Bangla Nagar, Dhaka-1207, Bangladesh. Email: nahmed@sdnbd.org ISSN 0047-2336 Print/1752-7554 Online/09/040597-22 2009 Journal of Contemporary Asia DOI: 10.1080/00472330903076891

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The RMG industry has faced several international and domestic challenges over the decade from 1998 to 2008. In the international market, implementation of the rules and regulations of the World Trade Organisation (WTO) and preferential trade arrangements among dierent groups of countries are of special concern for Bangladesh. In the domestic market, the challenges include lack of backward-linkage industries (supplying inputs) for RMG, low productivity of the workers, and lack of ecient infrastructure (Mlachila and Yang, 2004; World Bank, 2005). Thus, the main export industry of Bangladesh is facing important challenges. Because the industry has close links with the rural economy a woman RMG worker will usually remit two-thirds of her income to her rural home (Afsar, 2001: 133) changes to the industry may have large welfare consequences for those who are directly and indirectly dependent on this industry as well as for the economy as a whole. The aim of this paper is to provide an assessment of the Bangladesh RMG industry its emergence, growth, strength and weaknesses and challenges in the post-MFA world. The following section provides a brief description of production, export and employment of the RMG industry in Bangladesh. This is followed by discussions of the international and domestic drivers of the industry in Bangladesh, the domestic and international challenges and, nally, a discussion of the post-MFA experience. Production, Export and Employment Bangladesh produces two broad categories of RMG products woven RMG and knitted RMG (also known as knitwear or knit RMG). These two categories use dierent types of yarn, fabric and machineries and manufacturing technology. Even in terms of labour use, these two types of RMG factories dier. The woven RMG sector employs mostly women workers and knitted RMG employs mostly men. For example, Bakht and colleagues (2002: 46) found that the incidence of womens employment in the knitwear industry is only about 33%. This is because of dierences in skill requirements in these two types of factories. A larger proportion of knitwear enterprises are of composite type, with a signicant degree of backwardlinkage activities and are more skill intensive in nature (Bakht et al., 2002: 46), while skilled women workers are relatively scarce in the RMG sector of Bangladesh.1 Another reason for lower participation of women in knit factories is that they tend to incorporate a fabric-knitting section that is often operated in an overnight shift (Bakht et al., 2008: 3) and, according to the Bangladesh Labour Law (2006), women are not allowed to work between 10 p.m. and 6 a.m. (Bakht et al., 2008: 3). Emergence and Growth As noted above, since the early 1980s, the RMG industry of Bangladesh has grown at a very fast pace in terms of export value and share in total export (Table 1). Since then, the composition of export has also changed. The most obvious change is that raw and processed jute exports that were dominant in the early 1980s have been displaced by RMG exports. While the RMG (woven and knitted together) industry contributed only 0.4% to total export earning in the scal year 1980/81, it contributed 75.1% in 2005-06. It is evident from Table 1 that RMG export growth

Sustaining Ready-made Garment Exports from Bangladesh

Table 1. Structure of exports, Bangladesh (US$ million) Items Primary goods Raw jute Tea Frozen food Other primary goods Manufactured goods Jute goods Leather & leather goods Woven garments Knitted garments Chemical products Other manufactured goods Total export 1980-81 209 (29.4) 119 (16.8) 41 (5.8) 40 (5.6) 9 (1.3) 501 (70.6) 367 (51.7) 57 (8.0) 3 (0.4) 0 (0.0) 11 (1.5) 63 (8.9) 710 (100) 1990-91 306 (17.8) 104 (6.1) 43 (2.5) 142 (8.3) 17 (1.0) 1411 (82.2) 290 (16.9) 136 (7.9) 736 (42.9) 131 (7.6) 40 (2.3) 78 (4.5) 1717 (100) 1999-2000 469 (8.2) 72 (1.3) 18 (0.3) 344 (6) 35 (0.6) 5283 (91.8) 266 (4.6) 195 (3.4) 3083 (53.6) 1270 (22.1) 94 (1.6) 375 (6.5) 5752 (100) 2003-04 485.8 (6.4) 79.7 (1.1) 15.8 (0.2) 390.3 (5.1) 67 (0.89) 7117.2 (93.6) 246.5 (3.2) 211.4 (2.8) 3538.1 (46.5) 2148 (28.3) 121 (1.60) 973.2 (12.8) 7603 (100) 2004-05 648 (7.49) 96 (1.11) 16 (0.18) 421 (4.86) 116 (1.34) 8006 (92.51) 307 (3.55) 221 (2.55) 3598 (41.58) 2819 (32.58) 197 (2.28) 652 (7.53) 8654 (100)

599

2005-06 773 (7.3) 148 (1.4) 12 (0.11) 459 (4.4) 154 (1.5) 9753 (92.6) 361 (3.4) 257 (2.4) 4084 (38.8) 3817 (36.3) 206 (2.0) 1028 (9.8) 10526 (100)

A year is noted here as the scal year of Bangladesh, which starts on the 1 July; gures in parentheses refer to percentage share. Source: CPD (2001) and Economic Review (2007).

acted as the main force behind total export growth for Bangladesh. Other manufactured goods also show a steady growth. This category includes light engineering, chemical, agro-processing and electronics, but these remain infant industries and are not in a position to become substitutes for RMG. During the period 1990-2006, RMG grew at an average annual rate of 19%, while non-RMG export and GDP growth rates were 8% and 5%, respectively. Initially Bangladesh was producing and exporting only woven RMG. From the early 1990s production and exports of knitted RMG started and experienced robust growth (Table 2). While the share of knitted RMG was 15.1% in total RMG export earning in 1990-91, it became 48.3% in 2005-06. Over the years the number of RMG factories rose from 134 in 1983/84 (Zohir, 2001: 138) to 5990 (1500 knitwear and 4490 woven) in 2008 (Bangladesh Garment Manufacturers and Exporters Association, 2008; Bangladesh Knitwear Manufacturers and Exporters Association, 2008). One important consequence of rapid growth of the RMG industry is the growth of employment in this labour-intensive industry. As seen in Table 3, employment in the industry grew from 0.2 million people in 1985-86 to 1.9 million in 2005. As has been mentioned above, a feature of this employment is the employment of women as

600
Woven RMG exports Volume 735 1064 1240 1291 1835 1948 2237 2843 2984 3082 3363 3124 3258 3538 3598 4083.82 30.9 14.2 4.0 29.6 5.8 12.9 21.3 4.7 3.2 8.4 77.7 4.1 8.6 1.7 13.50 84.87 90.02 85.87 83.02 82.36 76.51 74.57 75.15 74.25 70.83 69.21 68.16 66.34 62.22 56.06 51.69 Annual growth (%) Share in total RMG export (%) Total RMG exports Volume 866 1182 1444 1555 2228 2546 3000 3783 4019 4351 4859 4583 4911 5686 6418 7900.80 Share in total RMG export (%) 15.13 9.98 14.13 16.98 17.64 23.49 25.43 24.85 25.75 29.17 30.79 31.84 33.66 37.78 43.92 48.31 Annual growth of RMG (%) Annual growth (%) 26.7 18.1 7.1 30.2 12.5 15.1 20.7 5.9 7.6 10.5 76.0 6.7 15.8 12.9 23.10

Table 2. Export volume and growth of RMG, 1990-91 to 2005-06 (US$ million and %)

Knitted RMG exports

Year

Volume

Annual growth (%)

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

131 118 204 264 393 598 763 940 1035 1269 1496 1459 1653 2148 2819 3816.98

9.62 42.2 22.7 32.8 34.3 21.6 18.8 9.2 18.4 15.2 72.5 11.7 29.9 31.3 35.38

Source: EPB (various years).

Sustaining Ready-made Garment Exports from Bangladesh

Table 3. Employment in the RMG industry of Bangladesh Year 1985-86 1990-91 1995-96 1999-2000 2001-02 2004-05
Source: Mlachila and Yang (2004: 7) and Razzaque (2005: 9).

601

Employment (million) 0.2 0.4 1.3 1.6 1.8 1.9

workers, who account for 90% of the employees in the RMG industry (Mlachila and Yang, 2004: 6). Also, 90% of the workers are migrants from the rural areas (Afsar, 2001: 96). Employment in this industry has made women visible in national employment statistics and has brought about a social change (Zohir, 2001). A factory job may be counted as one of the few socially acceptable ways for uneducated or low-educated women to earn a living. In rural Bangladesh women live in a traditional atmosphere, which does not permit them to go to cities alone (even outside the village in some cases). Rural women, largely, remain outside the purview of the visible cash economy, being primarily functional in the domestic and informal economies. Thus, it is quite a new development that a large number of women are going to work in the city-based RMG factories, inevitably changing their status and economic signicance. There are both international and domestic reasons for the growth of the RMG industry in Bangladesh. Domestically, export-promoting policy changes in general and some policies specic to the RMG industry contributed to a large extent to the rapid growth of this industry. Moreover, the availability of cheap workers stimulated the growth of the industry. These international and domestic reasons for the growth of the RMG industry in Bangladesh are discussed in the following sections.

Drivers of RMG Export International Drivers Internationally Bangladeshs RMG industry ourished under the umbrella of the Multi-Fibre Arrangement (MFA) on textile and RMG trade. The rst MFA was devised in 1974 and provided for rules and the imposition of import quotas, either through bilateral agreements or unilateral actions, on trade in textiles and RMG between individual developed country importers and developing country exporters.2 Though the quota imposed by the importing country should restrict the exports of the exporting country, it helped the growth of the RMG industry in many developing countries like Bangladesh. As shown in Table 4, this was due to the zero or low rates faced by exports from Bangladesh to the USA and the European Union (EU). Relatively less restrictive import quotas for Bangladesh under the MFA compared to traditional RMG exporters (such as Korea, Hong Kong, Japan and China) ensured a market for Bangladesh RMG in the USA and stimulated growth of the RMG industry (Bhattacharya and Rahman, 2000).

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Table 4. Export tax equivalents of import quotas in selected countries, 2003 (as a % of f.o.b. prices net of quota price) Textiles USA Bangladesh India China Pakistan 0.0 3.0 20.0 9.8 EU 0.0 1.0 1.0 9.4 USA 7.6 20.0 36.0 10.3 RMGs EU 0.0 20.0 54.0 9.2

Estimates are based on the quota price information for countries other than India. For India estimates are interpolated from quota utilisation data. For more on export tax equivalents (ETEs), see Francois and Spinanger (2000). Source: Mlachila and Yang (2004: 14).

During this period, political problems in Sri Lanka and the anti-export environment in India the two major South Asian RMG producers until the early 1980s induced buyers to shift attention to Bangladesh (Spinanger, 2000). Another important stimulant for the growth of RMG in Bangladesh was the tari and import quota-free access in the EU under the Generalised System of Preference (GSP) scheme, which contributed to the expansion of RMG exports in the EU market provided that Bangladesh met the rules of origin (ROO) requirement. The GSP scheme allowed EU importers to claim full tari drawback on imports when they import from Bangladesh (Bhattacharya and Rahman, 2000). On average, the tari rate of RMG products in the EU is 12.5%, but was zero for Bangladesh under the GSP. Such a preferential treatment made the EU the largest RMG export market for Bangladesh. Domestic Drivers After achieving independence in 1971, the trade and investment policies promoted an import-substituting growth strategy. This implied the emergence of large-scale public sector enterprises, widespread quantitative restrictions on imports, high import taris, foreign exchange rationing and an overvalued exchange rate. The result was an anti-export bias, scal imbalances and lack of incentives for industrialisation. Since the early 1980s, to enhance economic growth, the government initiated steps to deregulate, decontrol and liberalise the economy. As a result of various liberalisation policies and reforms under the Structural Adjustment Programmes, average nominal tari rates in Bangladesh came down from 89% to 17% during 1992-2000 and further to 13.4% in 2006 (CPD, 2001; Economic Review, 2007). Easy access to imported raw materials and incentives for export-orientated activities helped reduce the anti-export bias in Bangladesh and encouraged export-orientated investments. The main export incentives received by the RMG industry are shown in Table 5. In 1980, the RMG producers were granted back-to-back letter of credit (L/C) and bonded warehouse facilities. As a result they achieved tari-free access to inputs and thus required less working capital. Foreign exchange liberalisation that allowed for convertibility of the Bangladesh currency (taka) also stimulated imports of inputs and RMG exports.

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Table 5. Main export incentives for RMG Incentive Duty drawback Details

603

Bonded warehouse facilities (BWF)

Cash incentives

Back-to-back letters of credit (L/C) facilities

The taris paid on imported inputs and the value-added tax paid on local inputs used for export products are refunded. All export-orientated production units not enjoying bonded warehouse facilities have access to the tari drawback. A rm can delay the payments of taris until they are ready to consume inputs imported earlier and if these inputs are used for producing export products then they are not required to pay the tari. However, if these inputs are used to produce products to be consumed domestically, then producers have to pay the taris for the imported inputs. Moreover producers can maintain un-utilised stocks without paying taxes/taris, thereby reducing the total cost of holding inventories. Also, under the BWF, an export industry can get back any import tari they already paid for imported inputs. Under the cash compensation scheme, domestic suppliers to export-orientated RMG factories used to receive a cash payment equivalent to 10% of the value addition of the exported RMG. In 2008, the sector continued to receive a 5% cash incentive. Under the L/C extended by commercial banks, exporters are able to import inputs (fabrics and accessories) against the export orders placed in their favour by the nal RMG importers. Thus, by showing the export order exporters can get credit from commercial banks to pay for imported inputs. The payment for the export of the nal good can be cleared by the exporter after they pay back the credit to the commercial banks. This provision allows Bangladeshs exporters to avoid investing their own resources to nance working capital.

In addition, as mentioned above, the availability of low-wage workers is a major competitive advantage for Bangladesh. In 2003, the wage per worker in Bangladesh was 157% lower than in China. Comparing Bangladeshs 1997 data with 1998 data for India we also observe that wage per worker in Bangladesh is 20-30% lower (Table 6). As noted earlier, these workers are mostly young unmarried women, migrating rst from rural areas and maintaining a close link with the rural economy. The seemingly unlimited supply of this labour, makes it easy to employ them at a low wage. Challenges Faced by RMG Manufacturing Despite the long period of rapid growth, the RMG industry in Bangladesh faces a number of challenges. For example, dependence on imported inputs, product and market concentration, lacking backward linkages, possible trade diversion from various regional trade agreements, production of low value-adding products, labour compliance, infrastructure constraints are some of the challenges faced by this industry.

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Table 6. Wages and productivity in RMG industries, selected countries Yearly value-added per employee (US$) 900 2500 5000 7000 27,600 2600 2500 2500 Yearly wages and salaries per employee (US$) 400 700 1600 1800 14,800 700 600 700

Country Bangladesh China Hong Kong SAR India Indonesia Sri Lanka

Year 1997 2003 2001 2003 1999 1998 1999 1998

Source: 2003 Bangladesh and China data are from World Bank (2005: 44) and others from Mlachila and Yang (2004: 21).

Dependence on Imported Inputs Most of Bangladeshs RMG exports are made from imported textiles. Bangladesh is a net importer of textiles and a net exporter of RMG. Ultimately there is a trade surplus from the combined textile and RMG trade. In 2002, Bangladesh imported US$1.8 billion of textiles and related inputs and the trade surplus was US$2.8 billion (Mlachila and Yang, 2004: 7). The domestic textile industry cannot full the growing need for the raw materials needed in the RMG industry. There are three dierent types of RMG manufacturers in Bangladesh: (1) integrated manufacturing, where factories import the cotton and do the rest of the production process (spinning, weaving/knitting, cutting and sewing) on their own; (2) factories importing yarn and then completing the rest of the manufacture; and (3) factories importing fabric and sewing the RMG, known as cut, make and trim (CMT) factories (World Bank, 2005). Most of the knitted RMG-producing factories in Bangladesh belong to the rst two categories and woven RMG-producing factories belong to the third category. Thus, knitted RMG is relatively less dependant on imported raw materials compared to the woven RMG industry. While 85% of the fabric used in woven RMG is imported, this is only 25% of the yarn and fabrics used in knitted RMG (World Bank, 2005). Because of the type of machines and manufacturing technology required, huge investment is required for setting up factories producing fabrics for woven RMG. As a result, local fabric production is not enough to meet the demand of woven RMG and, therefore, woven RMG is highly dependent on imported fabrics. Local spinning mills are mostly producing yarn for local knitting mills and, from this yarn, fabrics for knitting RMG are produced. The main reason for better integration in knitting RMG is the requirement of relatively low investment and simpler manufacturing technology. For example, a knit fabric manufacturing, dyeing and nishing unit of a minimum economic size requires an investment of about US$3.5 million, while the investment requirement for a woven fabric manufacturing, dyeing and nishing unit of a minimum economic size is at least US$35 million (Quasem, 2002). Textile fabrics imported in Bangladesh are used mainly in the woven RMG industry. Other RMG industry imports include raw cotton, cotton and synthetic yarn, synthetic bre and textile accessories.3

Sustaining Ready-made Garment Exports from Bangladesh

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As a result of the heavy dependence on imported inputs, value-added of the RMG industry is quite low. For woven RMG, value-added is only 25-30% of the export value (Bhattacharya and Rahman, 2000). Because of lower dependence on imported inputs, the knitted RMG industry has a higher value-added, between 40% and 60%. Thus, although the RMG industry has a share of 75% in total exports, the net export earning (i.e. export earning net of the cost for imported raw materials used for the export goods) is only 40% (Bhattacharya and Rahman, 2000. Dependence on imported inputs also prolongs the time for fullling an export order. As local textile mills cannot meet the demand of woven RMG, fabrics for woven RMG factories are mostly imported and, therefore, more time is required to complete production. This is because it is too costly for manufacturers to maintain an inventory, especially as production in woven RMG is in accordance with orders, where buyers specify the type and colour of the fabrics; at best, manufacturers keep inventories for very basic fabrics. Setting up of a central bonded warehouse could solve this problem, at least to full the needs of RMG factories for regular and basic fabrics. Product and Market Concentration Bangladeshi factories export both woven RMG and knitted RMG. Although woven RMG contains the larger share, the export of knitted RMG has grown faster (see Table 2). However, the RMG export from Bangladesh is highly concentrated on a few products. Only ve categories comprised almost 85% of total RMG exports in 1997 (Islam, 2001). Ahmed (2005) noted that nine categories constituted 60% of Bangladeshs RMG export to the USA in 2004. Islam (2001) calculates that the product concentration of Bangladeshi RMG exports is much higher than for India and China. Moreover, Bangladeshs RMG exports are concentrated in two markets the EU and the USA. These two markets together comprise 94% of Bangladeshs total RMG export (Table 7). Import quotas under the MFA, which stimulated the growth of the RMG industry in Bangladesh, were abolished on 1 January 2005. The abolition of quotas was
Table 7. Share of exports of Bangladeshs RMG to dierent markets, 2001-03 (%) Woven RMG Markets EU USA Canada Norway Switzerland Korea Japan Australia Others Totals 2001/02 44.5 51.0 2.0 0.4 0.4 0.1 0.4 0.1 1.1 100.0 2002/03 47.7 46.6 2.9 0.5 0.6 0.1 0.4 0.1 1.1 100.0 Knitted RMG 2001/02 69.9 25.0 2.4 0.6 0.6 0 0.3 0.1 1.1 100.0 2002/03 73.1 21.2 2.9 0.8 0.6 0 0.2 0.1 1.2 100.0 Totals 2001/02 52.6 42.7 2.1 0.5 0.5 0.1 0.4 0.1 1.0 100.0 2002/03 56.3 38.0 2.9 0.6 0.6 0.1 0.3 0.1 1.1 100.0

Source: EPB (2002/03).

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undertaken under the Agreements on Textile and Clothing (ATC) of the WTO. In 1995, the ATC replaced the MFA, which had governed the trade in textile and RMG until the end of the Uruguay round in December 1994. Removal of MFA import quotas has generated doubts about the future growth or even survival of the RMG industry in Bangladesh and in many other least developed countries (LDCs). The possible impacts of phasing out of textile and RMG import quotas have received attention in a number of studies (e.g. Diao and Somwaru, 2001; Hertel et al., 1996; Lips et al., 2003; Mlachila and Yang, 2004; Nordas, 2004; Yang et al., 1997). In general, these studies concluded that phasing out of MFA would result in an increase in world trade of RMG and a decrease in consumer prices. At the same time, it was noted that the impacts would vary between countries. In the case of Bangladesh, pessimistic predictions were made in studies by Lips and colleagues (2003) and Mlachila and Yang (2004). Until the end of MFA, Bangladesh was facing import quotas only in the USA, while import quotas and tari restrictions in other markets had been removed already. The quota-restricting countries/regions were the USA, EU, Canada and Norway. Under the GSP scheme, Bangladesh did not face any restrictions in the EU; Norways import quotas had been removed while its taris on exports from LDCs were removed in 2002, and Canada allowed tari and import quota-free access for LDCs from January 2003. While Bangladesh received both import quota and tari exemptions in major restricted markets, many of its competitors still faced tari and import quota restrictions. This preference gave Bangladesh an advantage over its competitors in those markets. With the removal of import quotas, Bangladesh was expected to face increased competition both in the USA and the EU. In the USA, because there is no tari preference, import quotafree competition may move Bangladesh out of this market. The eects of import quota removal mainly depended on how restricted were the exports of a country under the MFA import quota regime in absolute terms and relative to the competitors. Bangladesh still faced import quota restrictions in the USA in 30 items, while 69% of RMG imports from Bangladesh were under import quotas in 2001-02. Mlachila and Yang (2004) have noted that in 2002 Bangladesh was the second most export-restricted Asian country after China. Although they also pointed out that in 2003 and in early 2004 the export tax equivalents (ETEs) of quotas for Bangladesh fell strongly compared to its competitors it can be argued that the removal of quotas facing China and India could have a negative impact on exports from Bangladesh because of the similarity of exports from these countries. The export similarity index calculated by Mlachila and Yang (2004) identies China and India to be exporting similar products as Bangladesh to the USA and Pakistan to the EU (Table 8). To predict the possible consequences of abolition of MFA import it is useful to look into the domestic resource cost (DRC) of RMG production in Bangladesh. The free-on-board (f.o.b.) price of RMG can be considered as an indicator of DRC. Table 9 presents the f.o.b. price of a 180 g T-shirt in dierent countries as calculated by the World Bank (2005). The f.o.b. price of RMG products (without any cost of quota) from Bangladesh is higher than the price of similar products in India and China, but lower than in Nepal. Thus, after quota abolition, when all countries

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are treated in the same manner, it is considered that the competitive position of Bangladesh could deteriorate. Looking further into the cost structure of the same 180 g T-shirt, it can be observed from Figure 1 that the cost of material is the major cost component, accounting for 78% of the total cost, which is mainly expended on imported cotton fabrics (93% of total material cost). Labour and administrative costs come next. Besides import quotas, RMG products from Bangladesh face high import taris (15-20%) in the USA. The estimates of Razzaque (2005: 133) suggested that tari-free access to the USA could increase exports of Bangladesh by US$530 million. The EU and Rules of Origin Textile and RMG export from Bangladesh has enjoyed preferential market access in the EU under the GSP since the early 1980s, allowing tari and import quota-free
Table 8. Export similarity index, Bangladesh and its main competitors, 2002 (%) Markets Exporters China India Pakistan USA 71.5 57.1 34.8 EU 22.0 39.1 67.6

The Finger-Kreinin Similarity Index can range from zero to 100 and higher values indicate greater similarity in exports between the considered countries. The index is sensitive to the product aggregation level. Source: Mlachila and Yang (2004).

Table 9. Free-on-board price comparisons, 2004 (US$) Bangladesh F.o.b. price of 180 g T-shirt
Source: World Bank (2005).

China 0.9

India 1.2-1.5

Nepal 2.0

1.3

Figure 1. Cost structure for producing a 180 g T-shirt in Bangladesh, 2004. Source: Adapted from World Bank (2005: 41)

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entry to this market. In contrast, many competitors of Bangladesh faced import quota restrictions in this market (see Table 6). Among others facing the import quotas are China, India, Pakistan, Sri Lanka, Indonesia, Thailand and Vietnam. Many also faced taris at an average rate of 12.5%. Therefore, post-MFA competition in the EU was considered to be more intense than in the USA, although some took a contrary position.4 As its competitors received import quota-free access to the EU market, the existing preferential position of Bangladesh could be reduced. Moreover a heavily import-dependent Bangladesh RMG industry was noted to nd it dicult to full the EUs ROO requirement. Although there is no import quota restriction, exports from Bangladesh face restrictions in the form of the ROO requirement in the EU market. Failure to meet this requirement would cause RMG products of Bangladesh to face 12.5% tari, as faced by non-LDCs. Bangladesh faces two-stage ROO in the cases of both knitted and woven RMG.5 For some woven products one-stage ROO is allowed when the value of the imported input does not exceed a certain limit (usually 40-9%) of the ex-work price of the product. Thus, the ROO requires 51% domestic value-added for any product. This is often dicult, especially for woven RMG, as woven RMG is heavily dependent on imported inputs (section 3). The knitted RMG industry can meet this ROO requirement, as the value-added in knitted RMG is higher (around 60%, according to Bhattacharya and Rahman, 2000). Since 2001 Bangladesh, as an LDC, is included under a special arrangement of EU-GSP known as the Everything But Arms (EBA) initiative. However, as the ROO provision remains the same under EBA as it is in the GSP, there is no extra benet for Bangladeshs RMG industry under this amendment. It was expected that the EU would soften the ROO criteria under its new GSP scheme for the period 2006-15. However, the ROO criteria have remained the same in the new GSP scheme. Now the change is expected to evolve under the so-called regional cumulation or South Asian Association for Regional Cooperation (SAARC) cumulation. In 2000, EU-GSP allowed SAARC member countries the possibility of a regional cumulation (Rahman and Bhattacharya, 2000: 6). Under this, the members of SAARC are eligible to receive special ROO treatment if they meet a certain value-added criterion. According to this treatment, a product of a country in a regional group, which is then processed in another country in that group, will be considered as the product of the country where the nal processing took place. However, the value-added in the nal processing has to be higher than highest customs value of the products used originating in any of the other countries of the group. As the local value-added of the Bangladesh RMG, especially the woven RMG, is only 25-30%, Bangladesh is unable to benet from this regional cumulation facility. For example, if fabrics are imported from India and the local value-added is 25% and the value added by India is 75%, the EU will consider the product as originating from India. The tari on the product will be the rate applicable for India (15% tari drawback on 12.5% tari rate), which is much higher compared to 100% tari drawback on the 12.5% tari rate for Bangladesh. The EUs free trade agreements (FTA) with other countries are also imposing extra challenges for Bangladesh, especially the free trade agreement between

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Mexico and the EU which began on 1 July 2000. The FTA liberalised over 96% of EU-Mexico trade by 2007. As the export similarity in RMG is high between Bangladesh and Mexico, Bangladesh was predicted to lose market share in the EU (Islam, 2001). Moreover the enlargement of the EU and the EUs tarif reduction agreements with the Central and East European Countries could have had trade diversion eects for Bangladesh. Further enlargement of the EU might also be a threat, particularly because of the possible membership of Turkey. Regional Preferential Trade Arrangements Apart from the multilateral trade rules, trade in textiles and RMG can be aected by regional preferential trade arrangements (PTAs). The eects of regional PTAs on members and non-member countries have received attention in both the theoretical and empirical literature (e.g. Ahmed, 2001; Krugman, 1991). These studies considered both quantity and terms of trade eects of preferential trading arrangements. The member countries of a PTA face trade creation and/or trade diversion eects, which may be welfare increasing or welfare decreasing. The nonmembers may be aected both in terms of quantity (exports may decline as a result of trade diversion) and terms of trade (unfavourable to the non-members), which may ultimately aect the welfare of non-members.6 If a PTA is large and it gets a terms of trade gain by reducing its trade with the rest of the world in favour of its own members, then the rest of the world suers a terms of trade loss (the rest of the world has to export more in order to be able to import a given bundle of goods from the PTA). Regional PTAs that are of concern for Bangladesh are the North American Free Trade Agreement (NAFTA) and the SAARC Preferential Trading Arrangement (SAPTA), which has later been transformed to the South Asian Free Trade Area (SAFTA). NAFTA is a particular concern for Bangladesh because of the special privileges accorded to Mexico in the US market. The export similarity index of garment produces of Bangladesh and Mexico to the USA is as high as 68% (Islam, 2001). US taris on RMG originating in Mexico were eliminated on 1 January 1999. Eventually all taris on textile and RMG traded between Canada, the USA and Mexico were eliminated by 2003. However, the NAFTA preferential tari only applies to products originating from a member country. For RMG, the triple transformation rules of origin must be met. According to this rule, the yarn, fabric and garment must be made in NAFTA countries to receive the preferential taris and RMG goods qualify as originating if the non-NAFTA content is 7% or less. Islam (2001) has noted that trade diversion eects caused by NAFTA can cause increased imports from Mexico at the expense of Asian exporting countries. While the impact of NAFTA is a concern for Bangladesh, another concern in the USA is the implementation of the Trade and Development Act (TDA 2000). Under this Act a total of 72 countries (of which 48 countries belong to Sub-Saharan Africa and the other 24 coming from the Caribbean Basin) receive tari-free and import quota-free access to the USA for textile and RMG products if they meet certain eligibility criteria. TDA 2000 has two main parts: the African Growth and Opportunity Act (AGOA) and the United-States-Caribbean Basin Trade

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Partnership Act (CBTPA). For the Caribbean countries it is a process of facilitating their ultimate participation in the Free Trade Area of the Americas (FTAA). In many cases they receive the NAFTA treatment for their exports. This act might have impacts for the RMG export from Bangladesh to the USA, especially because of preferential treatments to Jamaica and Dominican Republic, who are competitors of Bangladesh. Although SAPTA was structured in the early 1990s and went through several tari reduction stages between the members, it did not have a substantial impact. Later it was transformed into SAFTA, which is under a process of implementation. SAFTA might help to strengthen the competitiveness of Bangladeshs RMG by allowing low-cost import of inputs from the region. Though there are possibilities of trade diversion eects from SAFTA, it has high potential to extend trade creation eects and other (often non-economic) benets among its members. Concerns over Workers Rights Ahmed (2006) has noted a pressure to reduce price ows from nal consumers (in the importing countries) to the producers and ultimately to the workers as a result of globalisation and increased competition. This process may encourage the informalisation of work and make workers more exible. Thus, there may be more sub-contracting of various parts of the production work, tasks that will be mainly done by part-time or home-based workers. It is dicult to monitor working conditions at these levels of employment, which means greater possibility of violating workers rights. Ahmed has also noted another type of pressure of globalisation in the form of pressure to address workers rights. In the current world the issue of workers rights is largely guided by the concept of decent work, dened by the International Labour Organisation (ILO, 1999; 2001). The basic concept of decent work calls for certain standards for work and the social environment in which employment takes place (see, for example, Godfrey, 2003). With the rise of the decent work agenda, various social standards have evolved as indicators of the competitiveness of a country. While conventional economists consider that poorer countries have a comparative advantage in the production of manufacturing goods, it is rephrased by others as an unfair advantage as the working conditions of these manufacturing industries are often exploitative (see Kabeer and Mahmud, 2004). As a result, social standards (and also environmental standards) are included in various trade regulations as preconditions to receive special tari preferences (e.g. The Council Regulation (EC), No. 2501/2001 of 10 December 2001). Low-cost labour is a major source of competitiveness of the RMG industry of Bangladesh. But it is observed that labour remains low cost partly because workers rights in terms of wages, overtime payment, maternity leave for women workers, job security, factory environment and so on are violated (Ahmed, 2006: 119-26). However, the increased concerns of the world market towards labour compliance have exposed the entrepreneurs of the apparel industry of Bangladesh to the challenge of how they can achieve a balance between price competition and investing to address workers rights.

Sustaining Ready-made Garment Exports from Bangladesh Productivity of Workers

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The wage rate for RMG workers in Bangladesh is low and their productivity is also low. Table 6 reveals that value-added per worker in Bangladesh is lower than for its competitors. Based on data from 1980-92, Islam (2001) showed that labour productivity in Bangladesh is less than half of that of India and Sri Lanka. The average number of operatives per sewing machine is 2.5 to 3, in contrast with just over 1 in modern factories (Spinanger, 2000). Moreover, capital intensity is low in Bangladeshs factories. The World Bank (2005) has shown that average capital intensity per worker in RMG factories of Bangladesh is US$1500, while that of China is US$4000. Low productivity partially osets the widely perceived comparative advantage of Bangladesh in terms of low wages for workers. Production of Low Value-adding Items Bangladesh produces low value-adding RMG items, which are supplied into the low and medium market price quartiles in the EU and the USA. Even compared to other exporters of similar products, the prices of Bangladeshi products are low. Islam (2001: 61) mentioned that for 11 out of 20 selected RMG categories imported to the USA, the unit price for Bangladeshi products is lower than the world average. Bangladesh RMG is also characterised by a narrow product range producing mainly basic tops, shirts, trousers and unstructured jackets (Gherzi Report, 2002). Infrastructure Bottlenecks The World Bank (2005) has identied infrastructure bottlenecks, along with corruption and the high cost of nance, as one of three main sources of comparative disadvantage for Bangladeshs export industries. Infrastructure bottlenecks and ineciencies in terms of electric power, gas, port facilities and telecommunications negatively impact exports from Bangladesh (including RMG) and this reduces the competitiveness of exporters. All these hamper the quality of production, increase cost and extend lead times. In a competitive world, buyers prefer to source products from suppliers that can deliver products fast. In Bangladesh the lead time for RMG export varies between 120 and 150 days, whereas the corresponding time for Sri Lanka is 19-45 days and for India just 12 days for similar products (Bhattacharya and Rahman, 2000). The cost of making up for inadequate infrastructure can be high. For example, as a result of a lack of reliable electric power supplies, most factories maintain their own generator, which is relatively costly (2.5 times the cost of getting power from the grid) and adds to the price of export products. Limao and Venables (2001) have identied infrastructure to be an important determinant of transport cost and have noted that the cost of transporting goods increases with poor infrastructure. This phenomenon is observed in case of Bangladesh. The main sea port at Chittagong, lacks modern equipment. The World Bank (2005: 25) has noted that Chittagongs container terminal can handle 100-5 lifts per berth per day, which is far below the international productivity standard of 230 lifts per day. Moreover this port performs poorly because of corruption and inecient governance, which increases the lead

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time and the price of products (Hossain, 2002). The World Bank (2005) has identied that bribes paid when importing equipment for the knitted RMG industry raise equipment costs by 6-10%. Clearly, if these bottlenecks were overcome, the export growth and competitiveness of Bangladesh RMG could be better. Disincentives for Investment Except for the Export Processing Zones, foreign direct investment (FDI) in the RMG industry is highly restricted in Bangladesh. Though this protects local entrepreneurs, the industry suers in terms of restricted ow of modern technology and skills. While FDI is restricted, the cost of borrowing from the local banking system is high in Bangladesh compared to its competitors, such as India and China. The real interest rate in Bangladesh in 2002 was twice that in China and also much higher than that in India (Table 10). The Post-MFA Experience Before abolition of MFA quotas, a number of studies analysed the possible consequences. Most studies predicted a decrease in apparel export from Bangladesh, though the results vary under dierent assumptions and scenarios (Table 11). Mlachila and Yang (2004) show that results depend on the use of elasticities of substitution between products from dierent countries (the higher the elasticities, the greater the impacts). Looking at the actual export performance of Bangladesh in the USA over the two years after the abolition of the MFA import quota (Table 12), it is observed that, in general, exports of previously MFA import quota-restricted RMG products are
Table 10. Real interest rate, selected economies, 2002 Country Bangladesh India China Sri Lanka
Source: WDI (2004).

Interest rate (%) 12.4 8.7 5.6 4.5

Table 11. Possible consequences of MFA abolition on Bangladesh: comparison of dierent study ndings, % change from base Spinanger (2004) cited in Razzaque (2005)

Indicators Export of apparel GDP Total exports

Ahmed (2006) 79.6 to 715.1 70.5 to 70.9 71.4 to 72.4

Lips et al. (2003) 713 Not mentioned Not mentioned

Mlachila and Yang (2004)

76.2 to 717.7 1.5 to 77.9 70.3 to 73.7 70.14 to 70.54 73 to 714.2 2.8 to 70.1

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Table 12. Performance of Bangladesh RMG products in the US market after MFA abolition, 2004-06 (US$ million) Aggregated categories 0 1 2 11 12 14 30 31 32 40 41 42 60 61 62 80 81 82 % change (2004-05) 18.95 19.93 73.18 731.66 768.38 70.78 33.16 35.94 720.32 720.56 720.51 7100.00 72.83 74.44 44.26 759.12 759.71 77.63 % change (2005-06) 22.02 22.87 71.66 787.03 96.67 72.59 29.24 29.76 12.16 730.01 730.01 7100 25.53 7.04 723.56 41.62 39.71 114.96

Products Total MFA Apparel MFA Non-apparel MF Yarns Fabrics Made ups/ Miscellaneous Cotton product Cotton apparel Cot non-apparel Wool products Wool apparel Wool non-apparel MMF products MMF apparel MMF non-apparel S and V product S and V apparel S and V non-apparel

2004 2065.55 1977.56 87.99 0.26 3.00 84.73 1303.55 1239.17 64.38 35.10 35.08 0.02 703.54 680.21 23.32 23.36 23.10 0.26

2005 2456.93 2371.73 85.19 0.18 0.95 84.07 1735.85 1684.55 51.30 27.88 27.88 0.00 683.64 650.00 33.65 9.55 9.31 0.24

2006 2997.94 2914.16 83.78 0.02 1.867 81.89 2243.42 2185.88 57.54 19.51 19.52 0 721.48 695.763 25.718 13.522 13.001 0.521

MMF, man-made bres; S and V, silk and vegetable. Though the MFA quota no longer exists, the MFA information refers to the products that previously faced quotas. Source: Major Shippers Report (2007).

actually growing. RMG export from Bangladesh experienced 19% growth in the US market in 2004 and 2005. Contrary to predictions in the studies, both export value and market share have increased. The market share of Bangladesh in world exports of apparel was 1.9% in 2003 and rose to 2.3% in 2005 (International Trade Statistics, 2004; 2006). This growth continued in 2006. In 2006, RMG exports to the US market grew at a rate of 22%. In the US market, it seems that Bangladesh has actually gained following the abolition of MFA quotas. However, it is too early to draw rm conclusions about the impacts of MFA import quota abolition. These impacts can be short term in nature and the mediumto long-term eects will depend on how far Bangladesh exporters can adjust to the changed competitive trade environment. The most important concern is safeguarding measures imposed against the leading apparel exporter (China) in the two most important markets, the EU and the USA. Chinese exports of nine out of the top ten Bangladesh export products to the US market are facing safeguard measures (Table 13). Therefore, the real competitiveness of Bangladesh exports will be revealed only after the safeguards against Chinese exports are abolished from 2009. It can be noted that RMG exports to the EU market declined immediately after the MFA phase out, from e3.9 billion in 2004 to e3.7 billion in 2005 (Razzaque and Raihan, 2007: 169). One concern for Bangladesh in the post-MFA world is low utilisation of GSP facilities in the EU market, especially for woven garments. As Bangladeshs woven RMG are known to have low domestic value-added contents,

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Table 13. Performance of top 20 apparel products of Bangladesh in the USA after MFA import quota abolition, 2004-06 (US$ million and % change) % change (2004-05) 74.31 24.24 82.12 89.99 7.91 72.66 79.03 2.89 63.54 13.03 3.74 711.42 77.77 107.55 30.77 58.64 710.45 22.88 3.9 13.4 % change (2005-06) 76.83 8.88 53.93 70.99 24.99 1.33 11.67 78.47 27.92 43.68 74.63 73.05 20.61 731.86 13.53 17.10 71.31 714.52 0.71 48.07

Categories 347 340 348 338 647 659 352 341 339 239 634 359 351 335 640 334 635 342 648 646

Products Cotton trouser Non-knit shirts W/G slacks, et Knit shirts Trousers Other MMF apparel Cotton underwear W/G non-knit blouse W/G knit blouse Baby garments Other coats Other cotton apparel Cotton nightwear/pyjamas W/G cotton coats Non-knit shirts Other coats Coats, W/G Cotton skirts Slacks, etc. W/G MMF sweaters

2004 177.03 266.98 118.57 55.26 97.98 122.62 113.61 113.40 50.51 55.48 89.30 95.72 30.24 40.41 38.05 28.88 59.44 34.88 32.39 19.96

2005 308.58 331.70 215.93 104.99 105.73 119.37 103.36 116.68 82.60 62.70 92.65 84.79 53.77 83.88 49.75 45.82 53.23 42.86 32.62 29.55

2006 545.67 361.16 332.39 179.51 132.15 120.95 115.42 106.80 105.66 90.09 88.36 82.20 64.85 57.15 56.48 53.66 52.53 36.64 33.89 33.52

MMF, man-made bres; S/V, silk and vegetable; W/G, women and girls. The categories are textile and apparel categories used by the USA. Source: Major Shippers Report (2005).

they do not meet the ROO requirement in the EU market and thus do not qualify for the zero duty GSP facility. Razi (2006) has noted that 75% of the woven RMG exports from Bangladesh fail to qualify for the GSP facility. Though 80% of the knitted RMG export to the EU market is successful in utilising GSP facility, domestic value-added contents in woven RMG need to be increased to gain duty-free market access to EU markets. In the post-MFA world, Bangladesh exporters continue with the challenge regarding the situation of workers in RMG factories. The existing situation is such that it may aect ongoing attempts to gain duty-free entry in the US market. One concern is the wage received by RMG workers. The minimum wage for workers in Bangladesh was introduced in 1994 and there had been no change in this until October 2006. Responding to huge labour unrest, the government announced a higher minimum wage in textile and apparel industries. The minimum wage for the apparel industry was increased to Tk1662 (US$25 or e9.65) per month from Tk930 in 1994 (International Herald Tribune, 5 October 2006). Though an increase in the minimum wage indicates an improved situation for workers, this also means higher production costs if all other factors remain the same. Thus, the rise in labour cost should be associated with other cost-reducing measures, such as better power supply, improvements in port facilities, easy access to credit and so on. However, Ahmed (2006: 140-73) has noted that addressing workers rights has the potential to improve

Sustaining Ready-made Garment Exports from Bangladesh

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workers productivity, which not only increases the income of the workers but also the income of the entrepreneurs. Thus, an increase in labour cost will be paid o in terms of better return. In responding to these challenges, the government and the private sector have taken various steps. In addition to increases in wages, various training programmes for workers have been conducted. The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) and Bangladesh Knitwear Manufacturers and Exporters Association have taken initiatives to monitor workers rights in factories, improve factory conditions, locate new markets, improve product quality and the like. They should also stress highlighting these improvements in the international markets. Conclusions The purpose of this paper was to provide an overview of the drivers of growth in the RMG industry in Bangladesh, while evaluating its potential and challenges. It has been shown that Bangladeshs RMG industry has grown rapidly under the umbrella of MFA import quotas and with an abundant supply of low-waged workers, but without strong domestic backward linkages. Too much product and market concentration and imported input dependency have raised questions about the future of this industry in an import quota-free regime after the full implementation of the ATC. In addition to import quota removal, negative impacts from various regional PTAs are also of concern for the RMG industry. At the same time, joining a regional PTA like SAFTA could positively aect the RMG industry and also the economy as a whole. In the US market, the future of top Bangladesh RMG products is uncertain as China is facing a safeguard ban for most of those products. When those bans are removed, Bangladeshs RMG export to the USA may decline. Duty-free entry in the market is necessary for future growth or even for sustainability of the RMG industry of Bangladesh. The issue of removal of safeguard measures against China at the end of 2008 is a major concern for the RMG industry of Bangladesh. For the government and for the industry, the hope is that Chinese exports would not be a major problem for a few years beyond 2008. Under WTO rules, selective safeguards may be imposed on any Chinese export causing market disruption until 2013. Moreover, until 2016, non-market economy criteria against China may be used in calculating a dumping margin during the process of anti-dumping investigation. However, as there is no guarantee that these measures will be taken by developed country markets, attempts to improve upon the domestic constraints of the industry should receive the main focus of sustaining and improving competitiveness. The challenges faced by the RMG industry involve some 10 million people, so success or failure is of great signicance. Any shrinking in the industry will throw a large number of people out of work. Domestic problems need immediate attention, as competitiveness in an import quota-free world depends on the quick delivery of quality products at a low price. This requires better infrastructure, more investment and strong backward-linkage industries. Especially important are the improvements in transport facilities and port facilities and clearance procedure. To ensure timely delivery, setting up a central bonded house could reduce the inventory cost of

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individual rms. The rights of workers have to be addressed and the associated increase in production costs can be oset by improvements in productivity. Notes
1

Afsar (2001: 130) has noted that women workers in the RMG industry of Bangladesh mainly come from poorer backgrounds in terms of their level of education and average landholdings. Since 1974, the MFA has been re-negotiated four times and each modication has brought with it increasingly restrictive measures covering a broader range of products and reducing exibility provisions in the system. The major exporters of cotton woven fabrics to Bangladesh in 1996 were Hong Kong, China, India, Pakistan and Taiwan. However, for woven fabrics of synthetic bres, Bangladesh relies on imports mainly from China, Singapore, Hong Kong, Thailand, South Korea and Japan (Islam, 2001). However, Razzaque (2005) predicted that Bangladeshs RMG may continue with a better competitive position in the EU than in the USA because, in contrast to the USA, which applies high taris, the EU applies no taris. Thus, the import of yarn is possible and then the two stages of value-adding are fabrics (knitted or woven) from yarn and making RMG from the fabrics. Non-members have to reduce pre-tari prices of their exports to the PTA market and thus the terms of trade (in terms of pre-tari prices) deteriorate for non-members.

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