Aadil Champsi

The Garment Industry as a GCC and its effect on Development

January 2017

The Global Commodity Chain (GCC) is a concept discussed initially by Gereffi in 1994.
Gereffi and Korzeniewicz (1994) discuss how the past couple of decades have seen a shift in
industrialization on a world scale. There has been a physical shift in the location of where
manufactured goods are produced from developed or core nations to developing or peripheral
nations in the Global South. Essentially, we live in a globalized world which allows new forms
of firm organization that is threefold: low equipment need, high product differentiation, short
production runs. Gereffi and Korzeniewicz discuss how today there is a ‘global factory’: the
production of a single commodity spans several countries with each country specializing in the
task in which it has a cost advantage. This undoubtedly has its economic benefits as it reduces
the costs of production and allows firms to become more competitive and increases revenues.

Despite the theoretical benefits that a GCC can bring to a less developed economy, several
texts support that GCCs are responsible for an increase in globally uneven development.
Essentially, the most cost-efficient countries to produce in have lax laws and cheap labour.
Cramer (1999, as cited by Gibbon) quite strongly asserts that MNCs set ‘rigidly exploitative
terms’ in less developed countries. The exploitative nature of this relationship means that host
countries do not see many benefits from the presence of MNCs. These MNCs do not operate
with sustainability of the local area in thought. That is, there may be insufficient concentration
on skill development and employee training for local personnel, taxes may be avoided, there
may be environmental degradation, et cetera. This essay will analyse the garment industry in
order to show that whilst the GCC approach has benefitted several countries, it has generally
led to globally uneven development skewed against the poorest regions worldwide.

Within a GCC, Gereffi (1994) identified four key concepts: the input-output structure,
territorial coverage, internal governance structure, and institutional framework. The former two
are used to outline the configuration of a chain. ‘Internal governance structures’ is the most
discussed concept as it relates to barriers to entry and how chains are co-ordinated. The final
concept comprises of the conditions under which control over market access and information
are exercised in a globalised world and how small firms in a less developed country can,
through subordinate participation in a GCC, access markets, technologies, and knowledge at
lower costs than otherwise (Gereffi, 1999 as cited by Gibbon).
Within internal governance structures, Gereffi notes that there must be a distinction between
buyer-driven and producer-driven commodity chains. Buyer-driven chains refer to industries

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in which large retailers devolve production tasks to different locations. This would include
garments, footwear, handicrafts, and housewares. Producer-driven chains are those in which
large transnational corporations play the central role in coordinating production networks. This
would include capital and technology-intensive industries such as automobiles, computers,
aircraft, and heavy machinery. The garment industry, used in this essay as an example of a
GCC approach, represents an example of a buyer-driven chain.

The GCC for garments depends on the major retailers across the global north. Large retailers
are moving greater specialization by product (either clothes, shoes or even office supplies) and
also by price (such as high-volume, low-cost discount chains) (Gereffi, 1999). These retailers
in many cases have oligopoly control in the markets in which they operate. In the UK, Burton
Group and Marks and Spencer controlled over a quarter of the UK market in 1994 whilst in the
US, Wal-Mart and Kmart controlled a quarter of unit volume sold (OETH, 1995; Finne, 1996
as cited by Gereffi, 1999). These firms, by their sheer scale, do a significant amount of offshore
outsourcing as they compete for market share. The process of filling the distribution pipeline
has pushed retailers to develop strong ties with global suppliers, particularly those operating in
low-wage economies (Management Horizons, 1993 as cited by Gereffi, 1999). These
international ties mean that retailers can exert a significant amount of political power both
within their respective nations and internationally in order to operate with these these ‘rigidly
exploitative terms’. This can lead to globally uneven development as the host nation is, in many
cases, in dire need of direct investment and so may be willing to accept these terms, however
exploitative.

The garment industry is buyer-driven because Gereffi (1999) describes these chains as
‘manufacturers without factories’. That is, retailers carry out no production whatsoever and
were ‘born global’ since their sourcing has always been done overseas. Well-known examples
of such firms include Nike and Reebok. However, the human rights abuse cases in the factories
linked to them have been well documented. Labour laws abuse cases are a commonplace with
staff overworked and underpaid, fitting in with the exploitative nature of the deployment of a
GCC.

With several papers written on how the GCC is responsible for promoting globally uneven
development, some would argue that GCCs have been influential in promoting development

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January 2017

within specific poorer regions. Industrial upgrading as part of the GCC approach has allowed
countries within ‘East Asian Miracle’ to be able to develop their economies. This is where
firms or economies are able to move towards more profitable and/or technologically advanced
capital- and skill-intensive economic niches (Gereffi, 1999). This has led to more even
development, albeit with a greater timeframe. Within the East Asian newly industrialized
countries (NICs), there has been an ‘upgrade’ from simple assembly of imported inputs to more
integrated original equipment manufacturing (OEM) and original brand name manufacturing
(OBM) with more forward and backward linkages and, more recently between states, an inter-
regional trade flow where there is a division of labour through all phases of the commodity
chain (Gereffi, 1999). East Asia is in a situation where inter-regional division of labour is able
to thrive. High-wage economies such as Hong Kong are surrounded by low-wage opportunities
such as China. These countries share several common factors allowing for a seamless
integration of commodity chains within these areas. When Hong Kong sub-contracted
production to China in the 1980s and early 1990s, there was a 56% decrease in employment in
the Hong Kong garment industry but this was boosted by a fourfold increase in the number of
jobs in the trading sector (Khanna, 1993; De Coster, 1996 as cited by Gereffi, 1999). Thus,
Hong Kong, due to a GCC approach of industrial upgrading, was able to shift the economy
from production-based to export- and trade-based.

Hong Kong, alongside Japan and Singapore inter alia now benefit from high literacy rates, low
levels of inequality, high per capita growth grates, and high levels of domestic saving and
investment (World Bank, 1993 as cited by Gereffi, 1999). Despite the majority of profits being
made in developed nations, development was more even because the host nations also
benefitted through the GCC approach. However, the reason for this growth is still highly
debatable and it may not be possible to attribute it solely to the presence of GCCs or due to
capital accumulation (Krugman, 1994 as cited by Gereffi, 1999). Nevertheless, it is widely
accepted that shifting the economies to export-driven industrialization, as happens with
industrial upgrading, has been the driving factor behind this phenomenon.

Industrial upgrading to being a part of an OEM or OBM has its benefits. Once firms within the
host nation have benefitted from economies of scale such as access to information, it becomes
easier for the nation to develop towards OEM and OBM. The firms will be able to become
independent and can then better contribute to development within their nations and it gives

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local firms more power rather than relying on foreign firms. There are certainly higher revenues
in OBM production than in exporting garments for other firms. South Korea is a model nation
in OBM production with diversified firms such as Hyundai and Samsung who, over time, were
able to build the necessary tacit knowledge and expertise to operate in foreign markets.

However, the process of upgrading from simply being a part of a GCC to OEM and OBM
production is not to be taken for granted by host nations. Phelps (2008) argues that benefits of
development will not come with FDI alone but rather FDI needs to be coupled with strong
government policy if host nations are to benefit. The governments in less developed countries
need to be as proactive as East Asian governments if the benefits of a GCC are to come to
fruition. Other locations where a GCC approach has been operated in markets such as Sub-
Saharan Africa show that the GCC has led to globally uneven development. Unfortunately, the
same level of innovation or desire from firms in sub-Saharan Africa that are also a part of a
GCC have been unable to attain the level of development seen in East Asia.

Several intergovernmental agreements have been signed in order to bolster the garment
industry and make it fair for less developed nations to become more attractive for investment.
One such policy is the Multifiber Agreement (MFA), which was created in 1974 by developed
countries to impose import quotas on certain products. This was to protect developed countries
from a flood of low-cost imports. Moore (2003 as cited by Appelbaum, 2004) stated that the
MFA benefitted many small players in the developing world and not just the larger NICs:
‘Dozens of countries which currently ship textiles and apparel to the United States would not
be doing so if initially Japan, then Hong Kong, Taiwan, South Korea and, finally, China, were
not subject to control’. Thus, intergovernmental agreements such as the MFA have had a
positive influence in shifting development and making it a more globally distributed
phenomenon but these have since been removed.

The IMF and World Bank (as cited by Appelbaum, 2004) estimate that, due to the quotas
imposed by the MFA, as many as 19 million jobs have been lost in developing countries. The
export revenue loss to developing countries is estimated to be $22.3 billion. IMF (Truong, 2003
as cited by Appelbaum, 2004) claims that protecting a single job in developed countries causes
35 jobs to be lost in developing countries. Thus due to the structure of a GCC, policies like the

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MFA can be created to alter the commodity chain and possibly increase globally uneven
development where certain countries benefit more than others.

The removal of the MFA in 2005 benefitted many developing countries, which should be seen
as a positive effect. However, as Appelbaum showed, the buyer-driven chains preferred ‘lean
retailing’ – a preference that favours Hong Kong and China amongst others. Ernst et al. (2005)
believe that these benefits would have only impacted countries that are quite well developed
already (quoting countries such as China, Pakistan, Hong Kong and India). Of these, all but
Pakistan are already NICs. ‘Slight losers’ include Thailand, Cambodia, and Bangladesh.
Malone (2002 as cited by Appelbaum, 2004) believed that after the removal of the MFA,
retailers would concentrate in only 20% of the countries they currently manufacture in and
these countries would typically have ‘vertically integrated industries’. This means that the least
developed countries such as those in Sub-Saharan Africa would stand to lose the most from the
removal of the MFA. Hence even within these developing regions, there still exists globally
uneven development where due to the removal of the MFA, rich nations like China continue
to become richer whilst poor nations like Bangladesh suffer.

In an attempt for ‘higher levels of trade and direct investment in support positive economic and
political developments’ in Sub-Saharan Africa, US Congress in 2000 created the African
Growth and Opportunity Act (AGOA). Total exports to the US from AGOA countries
increased from $360 million in 1996 to $1.5 billion in 2003 (Ozden, 2005). AGOA supports
the garment industry by creating special rules that allow for fabric from anywhere to be used
to manufacture garments that can then be exported to the US duty-free. 86% of African garment
exports to the US rely on this (CTA, 2013). Due to AGOA, East Asian firms invested in East
Africa and shipped their raw materials there. The AGOA directly benefitted exporters in
Kenya, Lesotho, Madagascar, Swaziland, Namibia, and Malawi – all countries with very low
levels of development. Between 2000 and 2003, Kenya saw almost a five-fold increase in
garment exports to the US because of AGOA (Ozden, 2005). Thus, the AGOA has allowed for
GCCs to operate in new markets where they have been able to lead to increased growth and
opportunity.

Ozden showed that despite AGOA allowing African countries the same access as quota facing
countries, quota facing countries still produced higher quantities. Ozden also shows that after

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January 2017

the removal of MFA, Kenya should benefit in exporting some categories of garments whilst in
others, the nation may struggle. However, Ozden showed that Kenya’s main competition in
exporting garments is other preferential trade agreement countries as opposed to those who
faced MFA quotas. Reducing this competition is difficult due to other countries being AGOA
nations or members of NAFTA.

This essay set out to establish the effect that the GCC of garments has on global development.
It sought to show that the GCC has historically developed poorer countries and allowed them,
through industrial upgrading, to become newly industrialized countries. Hong Kong, China,
Singapore, and Japan are examples of countries who started off producing single parts of the
retail business. Today, these countries have been able to move beyond this to OEM and OBM.
The GCC approach has allowed for a development of local knowledge and expertise in these
countries that would otherwise not have been easily accessed. There has been growth in
countries like Hong Kong from production driven economies to now become services based.
This shows growth in the economy and high value added, which should translate directly to
higher economic growth and greater development within the nation-state. Nevertheless,
countries away from East Asia such as those in Sub-Saharan Africa have not seen nearly the
same level of growth, and neither is this expected. Thus the GCC approach has preferences in
different certain types of economies that already possess greater vertical integration. Firms
would be more interested in paying a premium for these services than having to train their staff
in Africa and still have to ship garments to different countries for value to be added. The GCC
does therefore need to be checked in terms of its applicability in promoting development on a
worldwide scale and needs to be inclusive of less developed countries that lack vertical
integration such as those in Sub-Saharan Africa. Investment in a country needs to be
specifically managed with a long-term goal of mixing FDI with a capable political and
legislative framework that allows for sustainable and equitable development to occur.

References

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and Clothing on Apparel Exports on the Least Developed and Developing Countries.
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Cramer, C. (1999). Can Africa Industrialize by Processing Primary Commodities? The Case
of Mozambican Cashew Nuts. World Development, 27(7), pp.1247-1266.

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CTA, (2013). Executive Brief Update 2013: Cotton sector. [online] Agritrade. Available at:
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