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Sustaining Ready-made Garment Exports from Bangladesh
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 industry’s growth in future. KEY WORDS: Textiles, garments, Asia, Bangladesh, Multi-ﬁbre 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 inﬂuenced 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: firstname.lastname@example.org ISSN 0047-2336 Print/1752-7554 Online/09/040597-22 Ó 2009 Journal of Contemporary Asia DOI: 10.1080/00472330903076891
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 diﬀerent 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 eﬃcient 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, ﬁnally, 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 diﬀerent types of yarn, fabric and machineries and manufacturing technology. Even in terms of labour use, these two types of RMG factories diﬀer. 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 women’s employment in the knitwear industry is only about 33%. This is because of diﬀerences in skill requirements in these two types of factories. A larger proportion of knitwear enterprises are of composite type, with a signiﬁcant 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 ﬁscal year 1980/81, it contributed 75.1% in 2005-06. It is evident from Table 1 that RMG export growth
Source: CPD (2001) and Economic Review (2007).86) 116 (1.5) 142 (8.4) 4084 (38.0) 1411 (82.55) 221 (2.7 (1.11) 459 (4.3) 206 (2.2) 72 (1.6) 5283 (91. Initially Bangladesh was producing and exporting only woven RMG.4) 3083 (53.1) 43 (2.58) 2819 (32. while non-RMG export and GDP growth rates were 8% and 5%. agro-processing and electronics.2 million people in 1985-86 to 1.28) 652 (7.55) 3598 (41.9) 710 (100) 1990-91 306 (17.3) 148 (1. RMG grew at an average annual rate of 19%.1) 15.5) 2148 (28.3) 17 (1.9) 131 (7. it became 48.5) 1717 (100) 1999-2000 469 (8. acted as the main force behind total export growth for Bangladesh.3% in 2005-06.2) 290 (16. ‘‘Other manufactured goods’’ also show a steady growth. which starts on the 1 July.4) 119 (16. Bangladesh Knitwear Manufacturers and Exporters Association.1% in total RMG export earning in 1990-91.5) 5752 (100) 2003-04 485.4 (2. 2008.4) 79. but these remain infant industries and are not in a position to become substitutes for RMG.6) 9 (1.1 (46.6) 375 (6. 2001: 138) to 5990 (1500 knitwear and 4490 woven) in 2008 (Bangladesh Garment Manufacturers and Exporters Association. While the share of knitted RMG was 15.6) 367 (51.8) 266 (4.4) 154 (1.6) 40 (2. During the period 1990-2006.8 (6.89) 7117.2) 390.3) 501 (70.9 million in 2005.5) 9753 (92. ﬁgures in parentheses refer to percentage share.2 (93.2 (12.6) 1270 (22. As seen in Table 3.8) 41 (5. 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. chemical.8) 7603 (100) 2004-05 648 (7. As has been mentioned above.Sustaining Ready-made Garment Exports from Bangladesh Table 1.3 (5.9) 736 (42.0) 3 (0.11) 16 (0.0) 11 (1.58) 197 (2.5 (3. Structure of exports.1) 94 (1.8) 3538.49) 96 (1.4) 0 (0.2) 211.3) 18 (0.4) 12 (0.8 (0. This category includes light engineering.0) 1028 (9.6) 195 (3.3) 78 (4.8) 104 (6. a feature of this employment is the employment of women as .8) 3817 (36.53) 8654 (100) 599 2005-06 773 (7. employment in the industry grew from 0.51) 307 (3.6) 246.60) 973.9) 136 (7. respectively. One important consequence of rapid growth of the RMG industry is the growth of employment in this labour-intensive industry. From the early 1990s production and exports of knitted RMG started and experienced robust growth (Table 2).6) 361 (3.4) 257 (2.8) 40 (5.7) 57 (8.1) 67 (0.18) 421 (4.3) 121 (1. 2008).34) 8006 (92. Over the years the number of RMG factories rose from 134 in 1983/84 (Zohir.8) 10526 (100) A year is noted here as the ﬁscal year of Bangladesh.3) 344 (6) 35 (0.5) 63 (8.
79 31. .4 15.34 62. 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 3816.82 30.87 83.0 29.75 29. Export volume and growth of RMG.21 68.80 Share in total RMG export (%) 15.22 56.8 9.3 35.1 7.7 4.2 72.02 82.8 12.2 18.51 74.8 34.9 7.9 23.6 1.7 13.98 17.36 76.8 12.1 20.98 –9.2 12.1 30.6 10.3 4.10 Table 2.25 70.2 4.5 15.7 3.9 14.92 48.64 23.3 21.15 74.0 6.2 22.13 16.38 Source: EPB (various years).78 43.13 9.43 24.50 84.6 18.66 37.7 5.1 8.7 15.31 Annual growth of RMG (%) Annual growth (%) 26.9 31.69 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 7900.5 76.49 25.83 69.17 30.7 29.4 77.600 Woven RMG exports Volume 735 1064 1240 1291 1835 1948 2237 2843 2984 3082 3363 3124 3258 3538 3598 4083.57 75.84 33.9 21.7 18.5 11.7 32.87 90.02 85.6 5.2 8.16 66.62 42.98 14.06 51.85 25.
As shown in Table 4. it is quite a new development that a large number of women are going to work in the city-based RMG factories. 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. 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). Japan and China) ensured a market for Bangladesh RMG in the USA and stimulated growth of the RMG industry (Bhattacharya and Rahman. These international and domestic reasons for the growth of the RMG industry in Bangladesh are discussed in the following sections. Rural women.3 1.6 1. The ﬁrst MFA was devised in 1974 and provided for rules and the imposition of import quotas. There are both international and domestic reasons for the growth of the RMG industry in Bangladesh. 2001: 96).8 1. Domestically. 601 Employment (million) 0.2 Though the quota imposed by the importing country should restrict the exports of the exporting country. either through bilateral agreements or unilateral actions. 2000).2 0. Hong Kong. remain outside the purview of the visible cash economy. A factory job may be counted as one of the few socially acceptable ways for uneducated or low-educated women to earn a living. on trade in textiles and RMG between individual developed country importers and developing country exporters.9 workers. 90% of the workers are migrants from the rural areas (Afsar.4 1. the availability of cheap workers stimulated the growth of the industry. inevitably changing their status and economic signiﬁcance. Employment in this industry has made women visible in national employment statistics and has brought about a social change (Zohir. largely. Moreover.Sustaining Ready-made Garment Exports from Bangladesh Table 3. Thus. In rural Bangladesh women live in a traditional atmosphere. 2004: 6). . export-promoting policy changes in general and some policies speciﬁc to the RMG industry contributed to a large extent to the rapid growth of this industry. Also. who account for 90% of the employees in the RMG industry (Mlachila and Yang. Drivers of RMG Export International Drivers Internationally Bangladesh’s RMG industry ﬂourished under the umbrella of the Multi-Fibre Arrangement (MFA) on textile and RMG trade. being primarily functional in the domestic and informal economies. which does not permit them to go to cities alone (even outside the village in some cases). it helped the growth of the RMG industry in many developing countries like Bangladesh. 2001).
o. which contributed to the expansion of RMG exports in the EU market provided that Bangladesh met the rules of origin (ROO) requirement. 2007).2 Estimates are based on the quota price information for countries other than India.0 10. prices net of quota price) Textiles USA Bangladesh India China Pakistan 0.0 36. high import tariﬀs. .0 9. For India estimates are interpolated from quota utilisation data. 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.3 RMGs EU 0. see Francois and Spinanger (2000). During this period.0 9. Domestic Drivers After achieving independence in 1971.4 USA 7. Since the early 1980s. Economic Review.0 54. The main export incentives received by the RMG industry are shown in Table 5.0 1.0 1. As a result of various liberalisation policies and reforms under the Structural Adjustment Programmes. ﬁscal imbalances and lack of incentives for industrialisation.4% in 2006 (CPD.0 20. the RMG producers were granted back-to-back letter of credit (L/C) and bonded warehouse facilities. For more on export tax equivalents (ETEs).0 9. 2001. This implied the emergence of large-scale public sector enterprises. As a result they achieved tariﬀ-free access to inputs and thus required less working capital. Export tax equivalents of import quotas in selected countries. decontrol and liberalise the economy. to enhance economic growth. Ahmed Table 4.b. The GSP scheme allowed EU importers to claim full tariﬀ drawback on imports when they import from Bangladesh (Bhattacharya and Rahman. 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. the government initiated steps to deregulate. the tariﬀ rate of RMG products in the EU is 12. Source: Mlachila and Yang (2004: 14). Foreign exchange liberalisation that allowed for convertibility of the Bangladesh currency (taka) also stimulated imports of inputs and RMG exports. The result was an ‘‘anti-export’’ bias. 2003 (as a % of f.602 N. Another important stimulant for the growth of RMG in Bangladesh was the tariﬀ and import quota-free access in the EU under the Generalised System of Preference (GSP) scheme. 2000). Such a preferential treatment made the EU the largest RMG export market for Bangladesh. but was zero for Bangladesh under the GSP. average nominal tariﬀ rates in Bangladesh came down from 89% to 17% during 1992-2000 and further to 13. foreign exchange rationing and an overvalued exchange rate. 2000). widespread quantitative restrictions on imports.0 20. On average.5%. the trade and investment policies promoted an import-substituting growth strategy.0 3. In 1980.6 20.8 EU 0.
This provision allows Bangladesh’s exporters to avoid investing their own resources to ﬁnance working capital. . labour compliance. domestic suppliers to export-orientated RMG factories used to receive a cash payment equivalent to 10% of the value addition of the exported RMG. under the BWF. an export industry can get back any import tariﬀ they already paid for imported inputs. if these inputs are used to produce products to be consumed domestically. As noted earlier. The seemingly unlimited supply of this labour. makes it easy to employ them at a low wage. Thus. All export-orientated production units not enjoying bonded warehouse facilities have access to the tariﬀ drawback. Also. infrastructure constraints are some of the challenges faced by this industry. the sector continued to receive a 5% cash incentive. migrating ﬁrst from rural areas and maintaining a close link with the rural economy. possible trade diversion from various regional trade agreements. thereby reducing the total cost of holding inventories. lacking backward linkages. dependence on imported inputs. the availability of low-wage workers is a major competitive advantage for Bangladesh. these workers are mostly young unmarried women. Challenges Faced by RMG Manufacturing Despite the long period of rapid growth. In 2008. The payment for the export of the ﬁnal good can be cleared by the exporter after they pay back the credit to the commercial banks. A ﬁrm can delay the payments of tariﬀs 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 tariﬀ. Moreover producers can maintain un-utilised stocks without paying taxes/tariﬀs. In 2003.Sustaining Ready-made Garment Exports from Bangladesh Table 5. Under the L/C extended by commercial banks. product and market concentration. In addition. For example. production of low value-adding products. the wage per worker in Bangladesh was 157% lower than in China. 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 tariﬀs paid on imported inputs and the value-added tax paid on local inputs used for export products are refunded. Comparing Bangladesh’s 1997 data with 1998 data for India we also observe that wage per worker in Bangladesh is 20-30% lower (Table 6). then producers have to pay the tariﬀs for the imported inputs. as mentioned above. by showing the export order exporters can get credit from commercial banks to pay for imported inputs. Under the cash compensation scheme. the RMG industry in Bangladesh faces a number of challenges. However. exporters are able to import inputs (fabrics and accessories) against the export orders placed in their favour by the ﬁnal RMG importers.
8 billion of textiles and related inputs and the trade surplus was US$2. cotton and synthetic yarn. Because of the type of machines and manufacturing technology required. dyeing and ﬁnishing unit of a minimum economic size is at least US$35 million (Quasem.8 billion (Mlachila and Yang. The domestic textile industry cannot fulﬁl the growing need for the raw materials needed in the RMG industry. knitted RMG is relatively less dependant on imported raw materials compared to the woven RMG industry. selected countries Yearly value-added per employee (US$) 900 2500 5000 7000 27. local fabric production is not enough to meet the demand of woven RMG and. Ultimately there is a trade surplus from the combined textile and RMG trade. from this yarn. while the investment requirement for a woven fabric manufacturing. For example. fabrics for knitting RMG are produced. 2005). Thus. dyeing and ﬁnishing unit of a minimum economic size requires an investment of about US$3.604 N. woven RMG is highly dependent on imported fabrics. this is only 25% of the yarn and fabrics used in knitted RMG (World Bank. Bangladesh is a net importer of textiles and a net exporter of RMG. Dependence on Imported Inputs Most of Bangladesh’s RMG exports are made from imported textiles. 2004: 7). cutting and sewing) on their own. Other RMG industry imports include raw cotton.5 million.3 .600 2600 2500 2500 Yearly wages and salaries per employee (US$) 400 700 1600 1800 14. 2005). There are three diﬀerent types of RMG manufacturers in Bangladesh: (1) integrated manufacturing. make and trim (CMT) factories (World Bank. known as cut. In 2002. Local spinning mills are mostly producing yarn for local knitting mills and. While 85% of the fabric used in woven RMG is imported. where factories import the cotton and do the rest of the production process (spinning. and (3) factories importing fabric and sewing the RMG. Most of the knitted RMG-producing factories in Bangladesh belong to the ﬁrst two categories and woven RMG-producing factories belong to the third category. weaving/knitting. The main reason for better integration in knitting RMG is the requirement of relatively low investment and simpler manufacturing technology. Ahmed Table 6.800 700 600 700 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). a knit fabric manufacturing. Bangladesh imported US$1. (2) factories importing yarn and then completing the rest of the manufacture. synthetic ﬁbre and textile accessories. 2002). Wages and productivity in RMG industries. huge investment is required for setting up factories producing fabrics for woven RMG. As a result. Textile fabrics imported in Bangladesh are used mainly in the woven RMG industry. therefore.
the net export earning (i. although the RMG industry has a share of 75% in total exports. The abolition of quotas was Table 7.1 1. 2001).1 0.5 0.2 2. Setting up of a central bonded warehouse could solve this problem.1 100.0 2002/03 73.4 0.4 0. between 40% and 60%. Dependence on imported inputs also prolongs the time for fulﬁlling an export order. export earning net of the cost for imported raw materials used for the export goods) is only 40% (Bhattacharya and Rahman. manufacturers keep inventories for very basic fabrics.1 1.1 0. However.6 0. at least to fulﬁl the needs of RMG factories for regular and basic fabrics.1 1. value-added is only 25-30% of the export value (Bhattacharya and Rahman.1 100. Product and Market Concentration Bangladeshi factories export both woven RMG and knitted RMG.1 1. were abolished on 1 January 2005. Bangladesh’s RMG exports are concentrated in two markets – the EU and the USA.1 0.0 0.1 100.9 0.5 0.2 100. 2000). Moreover.0 2.e.0 Totals 2001/02 52. the export of knitted RMG has grown faster (see Table 2).6 0 0.9 25.4 0.7 2. which stimulated the growth of the RMG industry in Bangladesh. Thus.0 Source: EPB (2002/03). 2000. These two markets together comprise 94% of Bangladesh’s total RMG export (Table 7). the knitted RMG industry has a higher value-added. especially as production in woven RMG is in accordance with orders. at best.6 2. therefore.7 46. Islam (2001) calculates that the product concentration of Bangladeshi RMG exports is much higher than for India and China.4 0.0 2002/03 47.2 0.1 0. Because of lower dependence on imported inputs.Sustaining Ready-made Garment Exports from Bangladesh 605 As a result of the heavy dependence on imported inputs.4 0. where buyers specify the type and colour of the fabrics.9 0. .4 0.0 100.1 1.6 0.3 38.8 0.6 0.0 Knitted RMG 2001/02 69. Ahmed (2005) noted that nine categories constituted 60% of Bangladesh’s RMG export to the USA in 2004.0 2.0 2002/03 56.6 42.0 2.6 0.1 21.3 0.9 0. fabrics for woven RMG factories are mostly imported and. For woven RMG.5 51. 2001-03 (%) Woven RMG Markets EU USA Canada Norway Switzerland Korea Japan Australia Others Totals 2001/02 44. Only ﬁve categories comprised almost 85% of total RMG exports in 1997 (Islam. Import quotas under the MFA. more time is required to complete production.1 1. This is because it is too costly for manufacturers to maintain an inventory.5 0. Although woven RMG contains the larger share.1 0.3 0.6 0 0. the RMG export from Bangladesh is highly concentrated on a few products. value-added of the RMG industry is quite low. As local textile mills cannot meet the demand of woven RMG.1 100. Share of exports of Bangladesh’s RMG to diﬀerent markets.
The export similarity index calculated by Mlachila and Yang (2004) identiﬁes China and India to be exporting similar products as Bangladesh to the USA and Pakistan to the EU (Table 8). and Canada allowed tariﬀ and import quota-free access for LDCs from January 2003. pessimistic predictions were made in studies by Lips and colleagues (2003) and Mlachila and Yang (2004). the ATC replaced the MFA. but lower than in Nepal. Bangladesh was facing import quotas only in the USA. In the case of Bangladesh. 2004. price of a 180 g T-shirt in diﬀerent countries as calculated by the World Bank (2005). 2003. With the removal of import quotas. 2004. Bangladesh was expected to face increased competition both in the USA and the EU.. The free-on-board (f.b.. Until the end of MFA. 1997). these studies concluded that phasing out of MFA would result in an increase in world trade of RMG and a decrease in consumer prices. which had governed the trade in textile and RMG until the end of the Uruguay round in December 1994. Bangladesh did not face any restrictions in the EU. Yang et al. when all countries . While Bangladesh received both import quota and tariﬀ exemptions in major restricted markets. In 1995. Diao and Somwaru.o. Ahmed undertaken under the Agreements on Textile and Clothing (ATC) of the WTO. Under the GSP scheme. while import quotas and tariﬀ restrictions in other markets had been removed already. it was noted that the impacts would vary between countries. Lips et al. price of RMG products (without any cost of quota) from Bangladesh is higher than the price of similar products in India and China. Hertel et al. Mlachila and Yang (2004) have noted that in 2002 Bangladesh was the second most export-restricted Asian country after China. because there is no tariﬀ preference. The f. 2001. In the USA. Norway’s import quotas had been removed while its tariﬀs on exports from LDCs were removed in 2002. The quota-restricting countries/regions were the USA. Canada and Norway.o. Nordas. At the same time.b. while 69% of RMG imports from Bangladesh were under import quotas in 2001-02. 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).. EU. Thus. In general. Table 9 presents the f. 1996. This preference gave Bangladesh an advantage over its competitors in those markets. Bangladesh still faced import quota restrictions in the USA in 30 items.o.b. 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 eﬀects 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. after quota abolition. many of its competitors still faced tariﬀ and import quota restrictions. Mlachila and Yang.606 N. 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. import quotafree competition may move Bangladesh out of this market.) price of RMG can be considered as an indicator of DRC. The possible impacts of phasing out of textile and RMG import quotas have received attention in a number of studies (e.g.
Bangladesh and its main competitors.1 67. Source: Mlachila and Yang (2004).2-1. Besides import quotas. 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. The estimates of Razzaque (2005: 133) suggested that tariﬀ-free access to the USA could increase exports of Bangladesh by US$530 million.o.5 Nepal 2.0 39. Export similarity index. Cost structure for producing a 180 g T-shirt in Bangladesh. The index is sensitive to the product aggregation level. allowing tariﬀ and import quota-free Table 8.9 India 1.3 Figure 1. 2004. it is considered that the competitive position of Bangladesh could deteriorate.Sustaining Ready-made Garment Exports from Bangladesh 607 are treated in the same manner. Table 9. Free-on-board price comparisons.6 The Finger-Kreinin Similarity Index can range from zero to 100 and higher values indicate greater similarity in exports between the considered countries.0 1.1 34. RMG products from Bangladesh face high import tariﬀs (15-20%) in the USA. price of 180 g T-shirt Source: World Bank (2005). 2002 (%) Markets Exporters China India Pakistan USA 71. Labour and administrative costs come next.8 EU 22. China 0. which is mainly expended on imported cotton fabrics (93% of total material cost). Source: Adapted from World Bank (2005: 41) .b. accounting for 78% of the total cost. The EU and Rules of Origin Textile and RMG export from Bangladesh has enjoyed preferential market access in the EU under the GSP since the early 1980s. 2004 (US$) Bangladesh F.5 57.
2000: 6). although some took a contrary position. many competitors of Bangladesh faced import quota restrictions in this market (see Table 6). exports from Bangladesh face restrictions in the form of the ROO requirement in the EU market. as faced by non-LDCs. Indonesia. 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. there is no extra beneﬁt for Bangladesh’s RMG industry under this amendment.5% tariﬀ. 2000). especially the woven RMG. In contrast. Thus. Sri Lanka. Failure to meet this requirement would cause RMG products of Bangladesh to face 12. Moreover a heavily import-dependent Bangladesh RMG industry was noted to ﬁnd it diﬃcult to fulﬁl the EU’s ROO requirement. especially for woven RMG. will be considered as the product of the country where the ﬁnal processing took place.5% tariﬀ rate for Bangladesh. Ahmed entry to this market. as woven RMG is heavily dependent on imported inputs (section 3). especially the free trade agreement between . Among others facing the import quotas are China. Under this. Therefore. Bangladesh faces two-stage ROO in the cases of both knitted and woven RMG. according to Bhattacharya and Rahman. Since 2001 Bangladesh. post-MFA competition in the EU was considered to be more intense than in the USA. It was expected that the EU would soften the ROO criteria under its new GSP scheme for the period 2006-15.5%. the members of SAARC are eligible to receive special ROO treatment if they meet a certain value-added criterion.5% tariﬀ rate). However. the ROO criteria have remained the same in the new GSP scheme. This is often diﬃcult. As the local value-added of the Bangladesh RMG. The tariﬀ on the product will be the rate applicable for India (15% tariﬀ drawback on 12. Many also faced tariﬀs at an average rate of 12. as the ROO provision remains the same under EBA as it is in the GSP. Now the change is expected to evolve under the so-called regional cumulation or South Asian Association for Regional Cooperation (SAARC) cumulation. However. EU-GSP allowed SAARC member countries the possibility of a regional cumulation (Rahman and Bhattacharya. In 2000. as an LDC. which is then processed in another country in that group. Bangladesh is unable to beneﬁt from this regional cumulation facility.4 As its competitors received import quota-free access to the EU market. The EU’s free trade agreements (FTA) with other countries are also imposing extra challenges for Bangladesh. which is much higher compared to 100% tariﬀ drawback on the 12. a product of a country in a regional group. Although there is no import quota restriction. Thailand and Vietnam. However. According to this treatment. Pakistan.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. For example. the value-added in the ﬁnal processing has to be higher than highest customs value of the products used originating in any of the other countries of the group. the existing preferential position of Bangladesh could be reduced. is included under a special arrangement of EU-GSP known as the ‘‘Everything But Arms’’ (EBA) initiative. as the value-added in knitted RMG is higher (around 60%. is only 25-30%. The knitted RMG industry can meet this ROO requirement. India. the ROO requires 51% domestic value-added for any product.608 N.
the triple transformation rules of origin must be met. These studies considered both quantity and terms of trade eﬀects of preferential trading arrangements. The member countries of a PTA face trade creation and/or trade diversion eﬀects. For RMG. The eﬀects of regional PTAs on members and non-member countries have received attention in both the theoretical and empirical literature (e. According to this rule. TDA 2000 has two main parts: the African Growth and Opportunity Act (AGOA) and the United-States-Caribbean Basin Trade . Bangladesh was predicted to lose market share in the EU (Islam. fabric and garment must be made in NAFTA countries to receive the preferential tariﬀs and RMG goods qualify as originating if the non-NAFTA content is 7% or less. then the rest of the world suﬀers 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). the yarn. While the impact of NAFTA is a concern for Bangladesh. trade in textiles and RMG can be aﬀected by regional preferential trade arrangements (PTAs). As the export similarity in RMG is high between Bangladesh and Mexico. The export similarity index of garment produces of Bangladesh and Mexico to the USA is as high as 68% (Islam. NAFTA is a particular concern for Bangladesh because of the special privileges accorded to Mexico in the US market. Regional PTAs that are of concern for Bangladesh are the North American Free Trade Agreement (NAFTA) and the SAARC Preferential Trading Arrangement (SAPTA).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. Islam (2001) has noted that trade diversion eﬀects caused by NAFTA can cause increased imports from Mexico at the expense of Asian exporting countries. The FTA liberalised over 96% of EU-Mexico trade by 2007. Krugman. Further enlargement of the EU might also be a threat. 2001).g. Ahmed. 2001. 1991). The nonmembers may be aﬀected both in terms of quantity (exports may decline as a result of trade diversion) and terms of trade (unfavourable to the non-members). 2001). which may ultimately aﬀect the welfare of non-members. Eventually all tariﬀs on textile and RMG traded between Canada. another concern in the USA is the implementation of the Trade and Development Act (TDA 2000). the NAFTA preferential tariﬀ only applies to products originating from a member country. the USA and Mexico were eliminated by 2003. However. US tariﬀs on RMG originating in Mexico were eliminated on 1 January 1999. Regional Preferential Trade Arrangements Apart from the multilateral trade rules. which has later been transformed to the South Asian Free Trade Area (SAFTA). 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 tariﬀ-free and import quota-free access to the USA for textile and RMG products if they meet certain eligibility criteria. Moreover the enlargement of the EU and the EU’s tarif reduction agreements with the Central and East European Countries could have had trade diversion eﬀects for Bangladesh. particularly because of the possible membership of Turkey.Sustaining Ready-made Garment Exports from Bangladesh 609 Mexico and the EU which began on 1 July 2000. which may be welfare increasing or welfare decreasing.
This process may encourage the informalisation of work and make workers more ‘‘ﬂexible.g.’’ Thus. Later it was transformed into SAFTA. . The basic concept of ‘‘decent work’’ calls for certain standards for work and the social environment in which employment takes place (see. various social standards have evolved as indicators of the competitiveness of a country. 2501/2001 of 10 December 2001). it has high potential to extend trade creation eﬀects and other (often non-economic) beneﬁts among its members. 1999. maternity leave for women workers. Low-cost labour is a major source of competitiveness of the RMG industry of Bangladesh. for example. The Council Regulation (EC). While conventional economists consider that poorer countries have a ‘‘comparative advantage’’ in the production of manufacturing goods. especially because of preferential treatments to Jamaica and Dominican Republic. tasks that will be mainly done by part-time or home-based workers. which is under a process of implementation. 2006: 119-26). However. But it is observed that labour remains low cost partly because workers’ rights – in terms of wages. factory environment and so on – are violated (Ahmed. Godfrey. 2001). overtime payment. it is rephrased by others as an ‘‘unfair advantage’’ as the working conditions of these manufacturing industries are often exploitative (see Kabeer and Mahmud. As a result.610 N.’’ deﬁned by the International Labour Organisation (ILO. Concerns over Workers’ Rights Ahmed (2006) has noted a pressure to reduce price ﬂows from ﬁnal consumers (in the importing countries) to the producers and ultimately to the workers as a result of globalisation and increased competition. With the rise of the decent work agenda. Ahmed has also noted another type of pressure of globalisation in the form of pressure to address workers’ rights. Although SAPTA was structured in the early 1990s and went through several tariﬀ reduction stages between the members. 2004). 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. 2003). job security. Though there are possibilities of trade diversion eﬀects from SAFTA. No. This act might have impacts for the RMG export from Bangladesh to the USA. Ahmed Partnership Act (CBTPA). It is diﬃcult to monitor working conditions at these levels of employment. In the current world the issue of workers’ rights is largely guided by the concept of ‘‘decent work. social standards (and also environmental standards) are included in various trade regulations as preconditions to receive special tariﬀ preferences (e. who are competitors of Bangladesh. which means greater possibility of violating workers’ rights. In many cases they receive the NAFTA treatment for their exports. SAFTA might help to strengthen the competitiveness of Bangladesh’s RMG by allowing low-cost import of inputs from the region. For the Caribbean countries it is a process of facilitating their ultimate participation in the Free Trade Area of the Americas (FTAA). there may be more sub-contracting of various parts of the production work. it did not have a substantial impact.
whereas the corresponding time for Sri Lanka is 19-45 days and for India just 12 days for similar products (Bhattacharya and Rahman. Even compared to other exporters of similar products. The World Bank (2005: 25) has noted that Chittagong’s container terminal can handle 100-5 lifts per berth per day. In a competitive world. capital intensity is low in Bangladesh’s factories.5 times the cost of getting power from the grid) and adds to the price of export products. lacks modern equipment. The cost of making up for inadequate infrastructure can be high. 2000).5 to 3. Moreover. the prices of Bangladeshi products are low. which are supplied into the low and medium market price quartiles in the EU and the USA. buyers prefer to source products from suppliers that can deliver products fast. increase cost and extend lead times. Islam (2001) showed that labour productivity in Bangladesh is less than half of that of India and Sri Lanka. Production of Low Value-adding Items Bangladesh produces low value-adding RMG items. For example. while that of China is US$4000. 2000). the unit price for Bangladeshi products is lower than the world average. Infrastructure Bottlenecks The World Bank (2005) has identiﬁed infrastructure bottlenecks. The World Bank (2005) has shown that average capital intensity per worker in RMG factories of Bangladesh is US$1500. in contrast with just over 1 in modern factories (Spinanger. Limao and Venables (2001) have ˜ identiﬁed infrastructure to be an important determinant of transport cost and have noted that the cost of transporting goods increases with poor infrastructure.Sustaining Ready-made Garment Exports from Bangladesh Productivity of Workers 611 The wage rate for RMG workers in Bangladesh is low and their productivity is also low. Low productivity partially oﬀsets the widely perceived comparative advantage of Bangladesh in terms of low wages for workers. Bangladesh RMG is also characterised by a narrow product range producing mainly basic tops. as a result of a lack of reliable electric power supplies. along with corruption and the high cost of ﬁnance. Table 6 reveals that value-added per worker in Bangladesh is lower than for its competitors. All these hamper the quality of production. as one of three main sources of comparative disadvantage for Bangladesh’s export industries. Moreover this port performs poorly because of corruption and ineﬃcient governance. which is relatively costly (2. Based on data from 1980-92. gas. trousers and unstructured jackets (Gherzi Report. The main sea port at Chittagong. This phenomenon is observed in case of Bangladesh. In Bangladesh the lead time for RMG export varies between 120 and 150 days. port facilities and telecommunications negatively impact exports from Bangladesh (including RMG) and this reduces the competitiveness of exporters. shirts. most factories maintain their own generator. Islam (2001: 61) mentioned that for 11 out of 20 selected RMG categories imported to the USA. which is far below the international productivity standard of 230 lifts per day. Infrastructure bottlenecks and ineﬃciencies in terms of electric power. The average number of operatives per sewing machine is 2. 2002). which increases the lead .
7 1. foreign direct investment (FDI) in the RMG industry is highly restricted in Bangladesh. The World Bank (2005) has identiﬁed that bribes paid when importing equipment for the knitted RMG industry raise equipment costs by 6-10%.1 70.6 4.7 5.3 to 73. selected economies. 2002 Country Bangladesh India China Sri Lanka Source: WDI (2004). 2002).7 70. a number of studies analysed the possible consequences.5 Table 11. such as India and China.4 8. (2003) 713 Not mentioned Not mentioned Mlachila and Yang (2004) 76. the greater the impacts). in general.4 to 72.5 to 77.8 to 70. exports of previously MFA import quota-restricted RMG products are Table 10. the export growth and competitiveness of Bangladesh RMG could be better.5 to 70. though the results vary under diﬀerent assumptions and scenarios (Table 11). Mlachila and Yang (2004) show that results depend on the use of elasticities of substitution between products from diﬀerent countries (the higher the elasticities. the cost of borrowing from the local banking system is high in Bangladesh compared to its competitors. if these bottlenecks were overcome. Most studies predicted a decrease in apparel export from Bangladesh. Ahmed time and the price of products (Hossain.1 . Possible consequences of MFA abolition on Bangladesh: comparison of diﬀerent study ﬁndings.2 2. it is observed that. Interest rate (%) 12. The real interest rate in Bangladesh in 2002 was twice that in China and also much higher than that in India (Table 10). Clearly. the industry suﬀers in terms of restricted ﬂow of modern technology and skills. 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).2 to 717.54 73 to 714. Disincentives for Investment Except for the Export Processing Zones.4 Lips et al.6 to 715.612 N. While FDI is restricted.9 70. Though this protects local entrepreneurs.9 71. The Post-MFA Experience Before abolition of MFA quotas.14 to 70. Real interest rate. % change from base Spinanger (2004) cited in Razzaque (2005) Indicators Export of apparel GDP Total exports Ahmed (2006) 79.
38 70.52 0 721.66 787.56 720.95 19.93 73.51 19.55 1239.88 27. 2004.48 695.88 0.95 84.9% in 2003 and rose to 2.38 35. Though the MFA quota no longer exists. RMG export from Bangladesh experienced 19% growth in the US market in 2004 and 2005.867 81.56 41. both export value and market share have increased.Sustaining Ready-made Garment Exports from Bangladesh 613 Table 12.18 731.16 730.53 7.30 27.718 13.02 703.93 2371.83 74. Therefore.3% in 2005 (International Trade Statistics.12 759.08 0.55 1977.54 680.78 0.94 720.99 0.71 77. it seems that Bangladesh has actually gained following the abolition of MFA quotas. the real competitiveness of Bangladesh exports will be revealed only after the safeguards against Chinese exports are abolished from 2009.00 683.02 1.03 96. it is too early to draw ﬁrm conclusions about the impacts of MFA import quota abolition. Chinese exports of nine out of the top ten Bangladesh export products to the US market are facing safeguard measures (Table 13).76 12. from e3. .87 71. Contrary to predictions in the studies.16 35.18 0.01 730. This growth continued in 2006.19 0. especially for woven garments. 2006). In the US market.521 MMF.89 2243.10 35.94 2914.26 3.66 768.00 72.65 9. RMG exports to the US market grew at a rate of 22%.71 114.73 1303.73 85.42 2185.32 720. It can be noted that RMG exports to the EU market declined immediately after the MFA phase out.36 23.44 44.63 % change (2005-06) 22. the EU and the USA.24 29. In 2006. actually growing.31 0. However. The most important concern is safeguarding measures imposed against the leading apparel exporter (China) in the two most important markets.56 87. S and V.10 0. Source: Major Shippers Report (2007).67 72. One concern for Bangladesh in the post-MFA world is low utilisation of GSP facilities in the EU market.522 13.16 83.001 0. the MFA information refers to the products that previously faced quotas.62 39.85 1684.17 64.00 33.59 29.26 2005 2456.88 57. These impacts can be short term in nature and the mediumto long-term eﬀects will depend on how far Bangladesh exporters can adjust to the changed competitive trade environment.64 650. The market share of Bangladesh in world exports of apparel was 1.07 1735.96 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. silk and vegetable. Performance of Bangladesh RMG products in the US market after MFA abolition.7 billion in 2005 (Razzaque and Raihan. 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) 18.54 19.9 billion in 2004 to e3.00 84. As Bangladesh’s woven RMG are known to have low domestic value-added contents.21 23.763 25.78 33.55 51.51 7100.55 9.02 22.32 23. 2007: 169).24 2006 2997. man-made ﬁbres.04 723.26 759.01 7100 25.
88 3. the government announced a higher minimum wage in textile and apparel industries.26 97.15 120. The minimum wage for workers in Bangladesh was introduced in 1994 and there had been no change in this until October 2006. improvements in port facilities. Ahmed (2006: 140-73) has noted that addressing workers rights has the potential to improve .09 88.86 32.83 8.67 78.63 73.65) per month from Tk930 in 1994 (International Herald Tribune.31 714. S/V.64 33. Though 80% of the knitted RMG export to the EU market is successful in utilising GSP facility.98 122.44 34.4 % change (2005-06) 76.24 40.53 17.41 38.73 119.36 116. they do not meet the ROO requirement in the EU market and thus do not qualify for the zero duty GSP facility. easy access to credit and so on.70 215. Ahmed Table 13.95 115.33 11.47 27.66 79.58 331. In the post-MFA world. The minimum wage for the apparel industry was increased to Tk1662 (US$25 or e9.36 82.68 82.60 62.89 63. Bangladesh exporters continue with the challenge regarding the situation of workers in RMG factories.86 13.79 53.54 13.64 710.57 55.77 83. Razi (2006) has noted that 75% of the woven RMG exports from Bangladesh fail to qualify for the GSP facility.30 95.61 731.39 179.80 105.55 2006 545. Though an increase in the minimum wage indicates an improved situation for workers.39 19.23 42.15 56.03 2.51 132.20 64.12 89.45 22. silk and vegetable.77 107.75 45.99 24.99 7.10 71.66 90. However.99 105.72 30. etc.16 332.67 361. W/G. 5 October 2006). Source: Major Shippers Report (2005).91 72.70 92.98 118.85 57.42 77. One concern is the wage received by RMG workers.24 82.05 28.51 55. Thus.03 266. W/G Cotton skirts Slacks. Responding to huge labour unrest.62 29. such as better power supply.66 52.48 89.48 53.88 49.96 2005 308. man-made ﬁbres. domestic value-added contents in woven RMG need to be increased to gain duty-free market access to EU markets.77 58.93 104.93 70.89 33.74 711.62 113.9 13. Performance of top 20 apparel products of Bangladesh in the USA after MFA import quota abolition.53 36.88 32.99 1.42 106.40 50.55 30. 2004-06 (US$ million and % change) % change (2004-05) 74.88 53.71 48. The categories are textile and apparel categories used by the USA.52 MMF.82 53.05 20. W/G MMF sweaters 2004 177.52 0.88 59.92 43.614 N.61 113. the rise in labour cost should be associated with other cost-reducing measures.31 24. 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. this also means higher production costs if all other factors remain the same.03 3.68 74.07 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. The existing situation is such that it may aﬀect ongoing attempts to gain duty-free entry in the US market.37 103. women and girls.65 84.
but without strong domestic backward linkages. Thus. negative impacts from various regional PTAs are also of concern for the RMG industry. improve product quality and the like. In addition to import quota removal. They should also stress highlighting these improvements in the international markets. Especially important are the improvements in transport facilities and port facilities and clearance procedure. This requires better infrastructure. the future of top Bangladesh RMG products is uncertain as China is facing a safeguard ban for most of those products. while evaluating its potential and challenges. ‘‘selective’’ safeguards may be imposed on any Chinese export causing market disruption until 2013. Any shrinking in the industry will throw a large number of people out of work. In the US market. locate new markets. joining a regional PTA like SAFTA could positively aﬀect the RMG industry and also the economy as a whole. Moreover. For the government and for the industry.Sustaining Ready-made Garment Exports from Bangladesh 615 workers’ productivity. However. improve factory conditions. as competitiveness in an import quota-free world depends on the quick delivery of quality products at a low price. various training programmes for workers have been conducted. setting up a central bonded house could reduce the inventory cost of . The issue of removal of safeguard measures against China at the end of 2008 is a major concern for the RMG industry of Bangladesh. The challenges faced by the RMG industry involve some 10 million people. At the same time. Bangladesh’s RMG export to the USA may decline. as there is no guarantee that these measures will be taken by developed country markets. Duty-free entry in the market is necessary for future growth or even for sustainability of the RMG industry of Bangladesh. In responding to these challenges. attempts to improve upon the domestic constraints of the industry should receive the main focus of sustaining and improving competitiveness. the government and the private sector have taken various steps. more investment and strong backward-linkage industries. The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) and Bangladesh Knitwear Manufacturers and Exporters Association have taken initiatives to monitor workers’ rights in factories. an increase in labour cost will be paid oﬀ in terms of better return. the hope is that Chinese exports would not be a major problem for a few years beyond 2008. Conclusions The purpose of this paper was to provide an overview of the drivers of growth in the RMG industry in Bangladesh. When those bans are removed. which not only increases the income of the workers but also the income of the entrepreneurs. ‘‘non-market economy’’ criteria against China may be used in calculating a ‘‘dumping margin’’ during the process of anti-dumping investigation. It has been shown that Bangladesh’s RMG industry has grown rapidly under the umbrella of MFA import quotas and with an abundant supply of low-waged workers. until 2016. In addition to increases in wages. To ensure timely delivery. so success or failure is of great signiﬁcance. Domestic problems need immediate attention. Under WTO rules. 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.
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