7

Industrialization and the Rise of RMG

The story is well known. Historically, Bangladesh exports were dominated by

just one cash crop, namely jute, which accounted for nearly 90 per cent of total
exports. Jute prices, however, experienced considerable volatility around a long-
term secular decline in its terms of trade, imparting a high degree of uncertainty
to export earnings. Remittance earnings opened up a much-needed additional
source of foreign exchange, serving to lessen dependence on jute.
At the same time that remittances were beginning to flow in, in the late
1970s, crucial first steps were also being taken that would ultimately lead to the
emergence of the apparels or RMG sector. Both remittances and RMG exports
signalled a more open and accessible world market where poor, labour-abundant
countries could find a niche on the basis of their comparative advantage.
The global climate was more favourable for poor countries like Bangladesh,
either by design or as the accidental consequence of advanced countries pursuing
their own self interests.1 Thus, once the RMG potential was demonstrated, the
response from local entrepreneurs was lightning-fast.2 The government, it must
be underlined, rose quickly to take advantage of the opportunity to introduce
incentives and policies to move things forward quickly for the RMG sector.
Key initial movers who were close to the corridors of power played a crucial
role in bringing the government fully on board. One could also argue that the
government in the 1980s initiated a distinct change in its stance on ‘socialism’,
which had earlier led to policy ambivalence and moved towards a more supportive
role for private sector-led, capitalist development.

The Stylized Facts

The mid-1970s saw certain important changes in the world market for RMG.
Advanced (importing) countries were getting increasingly worried about being
swamped with low-cost clothes from East Asia, and as a precautionary move
enacted the Multi-fibre Arrangement (MFA) in 1974, replacing the earlier
Agreement on International Trade in Cotton and Textiles, 1964, under which
country-specific quotas were imposed on major exporting developing countries.

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 100 The Odds Revisited

The move was driven essentially by protectionist motives on the part of importers
(the US and EU mainly) who were concerned about the effects on their own
manufacturing industries. The major concern was with the group of Asian ‘super-
performers’ whose market shares were expanding quickly. Quotas were imposed
with this group in mind, especially by the USA. Major exporters like South Korea
and Hong Kong had reached their quotas by the early 1980s. Subsequent MFA
negotiations were aimed at preventing rapid growth in their exports (preventing
sudden ‘surges’), which opened up space for potential new countries to enter
into this labour-intensive market that historically played an important role in
fostering industrialization in many advanced countries including England, Japan
and South Korea.
Daewoo, a South Korean firm, was the first to take a chance on Bangladesh, a
country that had no quota restrictions and plenty of low-wage labour. The story
of how it all began is well recorded.3 There were already a number of garments
houses in the country before the advent of Desh but these only managed to export
small occasional consignments. These included Bond Garments, Reaz, Paris, Aziz
Group, Sunmoon Group, Stylecraft and Aristocratic. These entities eventually
were also able to convert themselves into modern, export-oriented factories.

How It All Began

Noorul Quader and Abdul Majid Chowdhury were an unlikely pair. Quader
was a former bureaucrat who had become known for his role in the Liberation
War, while Chowdhury came from a business background and was doing well
in the new Bangladesh. They were of course interested in making money, but
they also had this vague desire to do something for the country – a desire that
was in fact widely shared at the time. Fortunately, Quader came into contact
with the boss of a major garment’s factory owner in Korea, namely the head of
Daewoo Corporation. The timing was perfect as the Koreans and other East
Asians were struggling with new rules under the MFA that restricted their exports
to the US and European markets and were seeking to diversify their production
bases. What now needed to be demonstrated was that Bangladesh could become
a good source for RMG – a test that Bangladesh passed with flying colours.
The technical assistance and hands-on training by Daewoo were crucial in getting
things started off on the right note. Today, there are over 4,500 garment factories
in Bangladesh with most tracing their lineage to the pioneering initiative of
Quader, Chowdhury and the 128 Bangladeshis who travelled to Korea 30 years
ago to be trained by Daewoo (Table 7.1).

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 Industrialization and the Rise of RMG 101

Table 7.1 RMG export trends (1983–84 to 2017–18)

Period Number of RMG Exports Total Exports RMG Exports/

Factories (USD, mn) (USD, mn) Total Exports (%)
1983–84 to 1987–88 485.2 202.368 974.49 19.1
1988–89 to 1992–93 1,003.6 917.932 1,861.92 47.9
1993–94 to 1997–98 2,320.6 2,622.892 3,893.672 66.5
1998–99 to 2007–08 3,407.4 4,545.012 6,013.378 75.6
2003–04 to 2007–08 4,309.4 7,983.118 10,614.47 75.1
2008–09 to 2012–13 5,282.8 16,672.88 21,204.7 78.6
2013–14 to 2017–18 4,377.6 27,368.41 33,395.36 81.9
Source: Bangladesh Garments Manufacturers’ Association, BGMEA, https://www.bgmea.com.bd/
(accessed 5 December 2021).

The rest was history as can be seen from Table 7.2. Starting from scratch,
it did not take long for the industry to take root and take off – all it needed was an
initial helping hand followed by supportive government policy.4 The figures show
that there were more than 5,000 factories in operation in 2013 employing some
4 million workers with 57 per cent being women, when the Rana Plaza disaster
struck. The fallout was clear – post-Rana Plaza, adjustments and compliance
costs meant that around a thousand units had to close down. The increased firm
concentration however did not affect exports, which continued to surge. Today,
more than 80 per cent of Bangladesh exports are accounted for by RMG.

Output, Employment and Structure

Perhaps one of the most profound outcomes of the RMG success was the
induction of large numbers of women in the workforce. The assumption that
tradition-bound, Muslim women from ordinary, rural backgrounds could leave
their rural comfort zones in such large numbers was unthinkable at the time.
Thus ADB (2016: 1) observes:

Traditionally, geographic mobility of poor women in rural Bangladesh has been

remarkably limited: in a 1996 survey in the rural area of Matlab, 93% of women
interviewed had never been to the local bazaar, 92% had never been to the local
mosque, and 68% left their residential compound at most once a week (Anderson
and Eswaran 2009). Effective restriction of mobility for women outside of the
household can still be fairly severe today. In 2011, 44% of married women aged
20–24 said that they were not generally free to make decisions about visiting

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 102 The Odds Revisited

their own relatives (BBS 2013d). A minority of women face even more severe
restrictions. The same survey found that 22% of women were not free to travel to
a health center either alone or with their children.

What it reveals is that women’s attitudes and independence have changed even
in the countryside, and people were more readily disposed to take on new
challenges, new risks and embrace new opportunities. Little is known about
how this attitudinal change came about, even though one could speculate that
the grassroots activities of NGOs, the delivery of micro-credit and various
development interventions often specifically focused on women are likely to have
been critical. In the absence of rigorous analysis, it is difficult to say much more
except to note that this little researched area may in fact hold the key to a true
understanding of Bangladesh’s development (see Chapter 9).
The exact number of workers in RMG and their gender composition is not
known. Frequently, we are told that 80 per cent of RMG workers are women,
especially those in the apparel sector, although it was not possible to locate any
reliable source for this assertion. A micro-level study relating to RMG units
located in and around Dhaka found the proportion of women outside the Dhaka
export processing zone (EPZ) to be 61 per cent, while this figure was 77 per cent
within the Dhaka EPZ in the 1990s (S. C. Zohir 2001). The figure given in
BBS (2013) shows that women constitute 64 per cent of the workforce in the
‘wearing apparel’ sector – indicating a small increase over time. More recent
estimates of women’s share in RMG jobs have ranged from 46 per cent in 2017
(BBS), 53.2 per cent in 2016 (CPD) and 60 per cent in 2018 (BIDS–ILO).5
While these estimates vary, one thing that everyone agrees with is that the share
has been declining in recent years – most observers blaming technology and
labour displacement for this tendency (Ullah and Akhter 2021).
RMG wages are rising and manufacturers have been trying to cut costs
and raise productivity through technology upgradation. This process is gaining
momentum and already some 20 per cent of firms (presumably larger ones) have
completed this move. This has led to lower labour demand in general with the
demand for (lower-end) women workers most affected.
This has also led to changes in the structure of RMG output towards higher
value addition. In absolute (value) terms, all items recorded impressive gains.
In terms of structure, the initial dependence on shirts and tee shirts have
now given way to a much more evenly balanced portfolio with much of the
restructuring coming from jacket and sweater production. It is also significant
that these structural changes have occurred in the face of dramatic increases in
value of output since 1993–94 (Table 7.2).

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 Table 7.2 Changes in structure of production of RMG in Bangladesh (1993–94 to 2018–19; USD, mn)

Item 1993–94 Col. 2003–04 Col. % Rise 2018–19 Col. % Rise Remarks
A % B % A to B C % B to C
Shirts 805.3 65.01 1,116.6 24.84 38.7 2,324.9 9.33 108.2 Steady decline

Trouser 80.6 7.07 1,334.9 29.70 1,556.2 6,939.6 27.85 419.8 Sharp rise and stabilized

Jackets 126.9 10.25 364.8 8.12 187.5 4,384.1 17.60 1,101.8 Initial decline/sharp rise

Tees 225.9 18.24 1,062.1 23.63 370.1 7,011.3 28.14 560.1 Steady moderate rise

Sweater – – 616.3 13.71 – 4,255.9 17.08 590.9 Sharp rise

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Total 1,238.7 100 4,494.7 100 262.9 24,916 100 454.3 −

Source: Based on BGMEA website, https://www.bgmea.com.bd/ (accessed 5 December 2020).

 104 The Odds Revisited

Policy Support
The role of policy support to RMG has been critical. From the very beginning,
the commitment to RMG was strong. It was helpful that the new sector was led
by people who were able to convince policymakers to come to its aid. While
the needs of the sector were diverse, ranging from financing to raw materials,
uninterrupted energy supply to infrastructure and port management, technology
and compliance, the most important, especially in the early days, related to bank
finance and working capital.
Sector leaders were able to quickly identify two particular areas of public
policy, namely (a) the ‘special bonded warehouse’ system to allow duty-
free imports to replace the existing, inefficient duty drawback system and
(b) the ‘back-to-back letter of credit’ facility.6 These mechanisms allowed RMG
manufacturers to import their required inputs and intermediate goods quickly,
without incurring duties, although the use of these policy instruments were not
common in competing countries. The bonded warehouse arrangement allowed
manufacturers to import all of the needed inputs without having to pay import
duties, and the ‘back-to-back letters of credit’ allowed RMG exporters to use
their original letter of credit (LC) as guarantees against bank loans to finance
imports.7 In the context of capital scarcity and a rudimentary capitalist sector,
this was a brilliant way to facilitate growth of the sector.8 The third element
of incentive widely used was cash incentives for exports, which could only be
claimed if the bonded warehouse facility was not availed.
The broad timeline for the various incentives is available from D. K. Roy
(1993). In the 1980s, the government introduced the ‘export performance
licensing scheme’, later known as ‘export performance benefit scheme’. This was
when there was a dual exchange rate in operation and a large gap between the
official rate and the market rate. These schemes were intended to pass on a more
realistic ‘premium’ exchange rate to exporters to make them competitive. These
were withdrawn from January 1992 when a single, market-led exchange rate was
introduced.
Bangladesh Bank also introduced a ‘cash assistance scheme’ that was used
mainly by RMG exporters, especially those who were not covered under the
bonded warehouse or duty drawback schemes. In the 1993–95 export policy, the
incentive rate was set at a maximum of 25 per cent of local value added. These
rates have since come down gradually to 4–5 per cent.
Exporters were given credit at a concessional rate in two ways: (a) if the period
of repayment was within 180 days, concessions would apply – this provision was
later relaxed by up to 270 days; (b) the interest rate structure was reformed to lie

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 Industrialization and the Rise of RMG 105

between 7.5 and 10.5 per cent with the instruction to stay at the lower bound
for exporters (it appears though that the instruction was generally not followed
[D. K. Roy 1993: 27]).

Special Bonded Warehouse

It is a form of temporary admission of imports into the country meant to
be used only in export manufacturing. The term is variously used – special
bonded warehouses (SBWs) in Bangladesh, export-only units in India, bonded
manufacturing warehouses in Malaysia. There is substantial variation of the rules
under which these operate.
In Bangladesh, bonded manufacturing status allows firms to bring imports
into special warehouses, duty free, use these in manufactures and then export the
output. The firms can also buy from domestic suppliers free of domestic excise,
sales and other taxes. Participating factories must operate under the supervision
of customs authorities, who check import and export containers coming in and
going out of the factories. This policy allows the relatively high import tariffs
to be offset and also saves firms the trouble and cost of claiming duty drawback
on the duty-paid imported raw materials and inputs. This serves to level out the
market for exporters who compete regionally and internationally.
Despite criticisms levelled against SBWs, there is little doubt that it has played
a very prominent role in bolstering local firms wishing to enter the RMG global
market. The issues most often discussed include denial of similar facilities to non-
RMG exporters, thereby constraining the development of exports in general,
and the complex set of rules and regulations that prevent access.9

Back-to-Back Letter of Credit

In 1980, the Bangladesh Bank gave permission for the use of back-to-back
LCs along with SBW facilities to RMG producers–exporters, decreasing their
working capital requirements and allowing duty-free access to inputs for the
sector. Both these policy prescriptions were based on the prescription of leading
local entrepreneurs. The innovation of the back-to-back LC system eliminated
the need for foreign exchange for importing inputs, spares, and machinery
for RMG as banks accepted the ‘master LC’ as collateral for releasing foreign
exchange for intermediate imports. In 1993, the revised import policy of
Bangladesh specified that the back-to-back LC cannot exceed 70 per cent of
the mother LC, implying a net accrual of 30 per cent of total export value to
the country in foreign exchange (see Table 7.3 for definition of terms such as
LC and back-to-back LC).

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 106 The Odds Revisited

Table 7.3 Back-to-back LC and master LC

Subject Master LC Back-to-Back LC

Back-to-back LC is opened by
the (Bangladeshi) exporter–
Master LC is prepared by the (foreign)
manufacturer to procure raw
Definition importer–buyer to import goods from
materials and other inputs for
the (Bangladeshi) manufacturer
the production of exported
(RMG) goods

Master LC is issued by the importer’s Back-to-back LC is issued by

Issuing bank
Bank the exporter’s bank

Types of LC This is the original LC This is the subsidiary LC

To buy or import raw

To buy or import goods from the
Purpose materials or inputs for RMG
manufacturer
from the suppliers
Source: D. K. Roy (1993).

A pervasive problem with all these schemes has been the exercise of discretionary
powers by concerned authorities that has led to a degree of arbitrariness and
discrimination in implementation. This has certainly led to extra costs and
inefficiencies. In other words, poor governance certainly has had the effect of
reducing benefits. In general, the constantly evolving policy regime has helped
the RMG sector to keep it competitive despite severe challenges faced from time
to time. These have included the MFA withdrawal of 2004, and the Rana Plaza
debacle of 24 April 2013, which led to stricter demand for compliance with labour
standards. All these moves served to raise costs in the face of stiff and growing
competition in the world market. Bangladesh has competed mainly with low
labour costs, but this advantage is now going out of steam: labour costs are rising,
productivity is not keeping up and areas where potential gains could be reaped,
for example, in more efficient customs procedures or removal of infrastructure
bottlenecks at ports, show few signs of change. Thus, the country now appears to
be moving into a new phase altogether. The old, time-tested approach in terms of
policy support may no longer be adequate. There is the growing threat of robotics
and technology that are eating into labour and employment shares. Global
markets for Bangladesh are less friendly compared to its rivals like Vietnam.
It is therefore important for Bangladesh to compete not on the basis of low wages
alone but also through superior management, technology and productivity.
A positive outcome attributable to the engagement with buyers’ organizations like

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 Industrialization and the Rise of RMG 107

ACCORD (Accord on Fire and Building Safety in Bangladesh) and Alliance for
Bangladesh Worker Safety is that compliance levels have recorded laudable gains,
with over 20 per cent of firms achieving full compliance in terms of meeting
both labour and environmental standards. This makes Bangladesh’s RMG sector
virtually unassailable even if vulnerable to various market shocks. Unfortunately,
the same cannot be said of other export sectors that have been in the ‘promising’
category for many years but failed to emerge out of the shadows of RMG. To an
extent, the blame for this can be laid on the obsessive focus on RMG relative to
all other sectors.

Backward Linkages: The Re-emergence of Textiles

The RMG story is well known but the phenomenal backward linkages that
developed in the wake of RMG is no less fascinating. It provides an example of
how the interplay of opportunity, entrepreneurship and policy support combined
to unlock the considerable potential presented by RMG for backward linkage
manufacturing of textiles. At the initial stages, RMG value addition was only
25–30 per cent. In recent years, this has ranged from 61 to 64 per cent. Today,
90–95 per cent of the yarn requirement of the RMG knitwear subsector is
provided by the domestic industry while 40 per cent of the fabric demand from
the RMG woven subsector is currently met locally (Kabir, Singh and Ferrantino
2019).10 There is thus significant potential that remains to be tapped in the
fabric subsector. Other accessories are largely domestically supplied. A beginning
has also been made in the man-made fibre subsector which augurs well for the
manufacture of higher-end products in the future.11
Bangladesh always had a large (relative to its small industrial base) textile
sector producing for the domestic market under protection from competition
by high tariffs and import quotas. The sector was affected by nationalization
and entered a period of diminished activity under public ownership in the
1970s. The new government in 1982 under General Ershad began to reverse the
process starting with denationalization of the Bangladeshi-owned textile mills in
public hands.
As RMG exports took off in the 1990s, rising by some 600 per cent in a decade
reaching USD 4.5 billion by 2000, the textile owners took note of the massive
RMG demand for textile products generated and met almost entirely by imports.
Various analysts suggested that Bangladesh did not have comparative advantage
in production of yarn and fabrics as it did not grow much cotton, opposing
domestic protection to the primary textiles sector (PTS) as being too risky.
It was argued that Bangladesh would be better off with ‘SAARC cumulation’

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 108 The Odds Revisited

whereby imports of raw material from within the South Asian Association for
Regional Cooperation (SAARC) would qualify it to meet the ‘rules of origin’
(ROO) requirements for exports to the EU (World Bank 2006a). In fact, such
a deal was signed between SAARC and the EU. This had generated controversy
in Bangladesh where the RMG lobby and the textile lobby took diametrically
opposed positions on the matter. Bhattacharya and Rahman (2000) provide a
useful analysis of this controversy in some detail, noting that SAARC cumulation
will be of marginal value to the RMG sector while the potential to hurt textiles
is considerable. However, ROO were modified to allow two-stage conversion,
which allowed this controversy to die down.12
What is important to note is that the government continued to provide
determined support from the 1990s in a bid to improve value addition and
stimulate the local industry. This was given a certain urgency with the withdrawal
of the 1974 MFA that was coming to a close in 2005, ushering in new market
opportunities as well as introducing additional risks. The fear grew that textile
suppliers from countries like India and Pakistan would channel their products
increasingly into their own domestic RMG industry, leaving Bangladesh’s RMG
industry hanging in a precarious position. If nothing else, the ‘lead time’ problem
faced by Bangladesh could well become further aggravated so that local sourcing
of intermediate goods needed for the industry would be highly desirable.
This perception led to a closing of ranks between RMG and textiles, who have
jointly lobbied a willing government for support. The two sectors have now
merged into one textiles and clothing (T&C) sector with both forward and
backward linkages occurring as a result of the marriage. Like the RMG pioneers
of the 1980s, a new generation of textile entrepreneurs had emerged onto the
scene by the mid-1990s (Lightcastle Partners 2020).
The rapid pace of this journey continued well into the new century despite the
withdrawal of the MFA in December 2004, which was almost universally heralded
as a moment of reckoning for the RMG industry for countries like Bangladesh
(World Bank 2006a). However, Bangladesh’s RMG run continued unabated
even in the post-MFA era: the number of spinning mills increased from 197 in
2004 to 350 in 2009; the number of weaving mills increased from 278 to 400;
dyeing and finishing units rose from 291 to 310; while the number of RMG
units rose from 4000 to 5000.
In other words, this was another bright area of the Bangladesh economy
that now contributes USD 21 billion to exports. It has been noted that this is
a major policy success of the government which at one stroke has stimulated
exports, increased value addition, diversified export earnings and can in fact
be viewed as a rare example of successful import substitution that has led to

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 Industrialization and the Rise of RMG 109

the creation of a globally competitive industry (Sattar 2020; Kabir, Singh and
Ferrantino 2019).
Some answers to the post-MFA puzzle were attempted by industry leaders
(Ahmed 2013). These refer to management changes and innovations like the
‘Lean Manufacturing System’, which supposedly ‘brought tremendous success in
the apparel sector’ as revealed through various key performance indicators (KPIs)
such as line balancing (LB), work-in-process (WIP) inventory, labour productivity
(LP), alter, reject and spot. Redwan Ahmed (2013) reports that LB and LP rose
by about 11 per cent and 24.5 per cent while LB and LP, the WIP, alter, reject and
spot reduced by about 85.4 per cent, 10.67 per cent, 33.34 per cent and 75 per cent
respectively. Moreover, advocacy and campaigns were carried out amongst
workers to forestall possible shocks resulting from work stoppages and strikes
while wages and other facilities were improved. In addition, the government set
up captive power plants and encouraged the private sector to invest in energy to
resolve the frequent ‘load-shedding’ problem.
A more academic explanation for Bangladesh’s ‘unexpected and overwhelming
success’ is likely to be as follows: first, Bangladesh’s basic advantage lay in its
cheap labour and the ability to scale up volume that must be singled out as
its primary advantage. The hourly wage rate in Bangladesh in 2008 was 0.22
cents compared to 0.33 cents for Cambodia, and 0.38 cents for Vietnam. Other
competing countries like China and Turkey had much higher rates and would
need higher export prices to compete.
Bangladesh has also quietly proceeded to diversify its export markets.
In 1992, over 40 per cent of its RMG exports went to the USA, which reduced
to 28 per cent in 2008 in the face of rapidly rising total exports diverted largely to
the EU, where generalized system of preferences (GSP) privileges were available
(Joarder, Hossain and Hakim 2010).
Last, but by no means least, Bangladesh’s move towards a floating exchange
rate regime in June 2003 has certainly imparted greater competitiveness to its
largest export sectors, especially knitwear. Thus, Hossain and Ahmed (2009) refer
to the first 10 months after floatation to be the ‘honeymoon period’ when rates
were stable. However, by mid-2006, a depreciation of 20 per cent was recorded
in nominal exchange rates bringing the real effective exchange rate (REER) quite
close to the equilibrium exchange rate. Hossain and Ahmed (2009) also point
to the significant association between RMG exports and international prices
and incomes of importing countries, and their finding that a stable REER has a
positive impact as well. In other words, opening up of the foreign exchange market
to greater competition and the subsequent re-alignment of the exchange rate
made Bangladesh’s export sector much better equipped to deal with not only the

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 110 The Odds Revisited

post-MFA challenges but also, subsequently, the global financial crisis of

2007–09. Strictly speaking, what Bangladesh has done is to introduce what is
known as ‘dirty float’ in central bank parlance, referring to a situation where the
flotation is ‘managed’. The dirty float system was introduced in May 2004 which
subsequently was reclassified as a ‘crawling peg’ since 2010 – a situation where
the exchange rate is allowed to fluctuate by small amounts (Table 7.4).
Post-COVID recovery measures are already having an impact on the exchange
rates of trading partners like China and India, which may usher in an era of
competitive devaluations. This should make Bangladeshi policymakers wary
of a possible ‘beggar thy neighbour’ mood that might come into play, forcing
Bangladesh to also follow suit. However, given Bangladesh’s strong reserve
position on the back of buoyant remittance flows even during the pandemic,
pressures on the central bank to depreciate the currency are mounting – a move
that it is continuing to resist. It is hoped that once recovery is underway, pent up
imports and investments will be released, thereby helping to even out the
potentially disruptive exchange rate movements that could otherwise occur.
The T&C sector has shown that given policy support and policy innovation
designed with close consultation with the stakeholders can lead to exceptional
results. Bangladeshi entrepreneurs have fought against the odds to carve out
their shares in the global market with determination and an innovative spirit.
This is once again a reminder that static comparative advantage plays into the
status quo, while for countries like Bangladesh the goal must certainly be to wring
out dynamic comparative advantages through purposeful policy innovations and
pragmatic interventions. The advice from consultants, however, often tends to
be based on static comparative advantage, which therefore needs careful review
(Kabir, Singh and Ferrantino 2019).

Table 7.4 De facto classification of Bangladesh’s exchange rate regime (2000–15)

Period e Δ e r Regime
Jan 2000–May 2003 0.33 L 1.28 H 4.56 H Adjusted peg
June 2003–April 2004 0.22 L 0.31 L 1.15 L Inconclusive
May 2004–December 2006 1.05 H 1.23 H 3.65 H Dirty float
Jan 2007–June 2008 0.15 L 0.18 L 5.97 H Fixed
2010–15 1.8 H 0.05 L 5.79 H Crawling peg
Source: Hossain and Ahmed (2020: 302).
Notes: H when value exceeds long-term estimates; otherwise = L. Long-term estimates: e=0.98; Δ e=1.16;
r=4.15. e: exchange rate volatility measured by monthly absolute percentage change in the nominal
exchange rate (NER); Δ e: volatility of exchange rate changes measured by the standard deviation of
monthly percentage change in NER; r: volatility of reserves measured by the absolute change of reserves.
De facto regime classification methodology is derived from Levi-Yeyati and Sturzenegger (2005).

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 Industrialization and the Rise of RMG 111

The Rana Plaza Fallout

The collapse of the Rana Plaza in Bangladesh in 2013 following on the heels
of the Tazreen factory fire sent shock waves throughout the world, exposing
poor working conditions and safety standards in Bangladesh’s RMG industry.
The outcry in consumer countries generated enormous pressure on retail brands
and factory owners and a suitable governance response had become urgent.
In a rare display of solidarity, leading brands in Europe and North America came
together to form the Accord on Fire and Building Safety in Bangladesh (over
180 European brands) and the Alliance for Bangladesh Worker Safety (major US
retailers), making it binding upon factories to raise safety levels to a satisfactory
standard. To achieve this end, the first task was to carry out thorough safety and
safeguard inspections in every factory – a huge task, but this is exactly what was
mandated. Both initiatives involved independent inspection of all Bangladeshi
suppliers and strict enforcement of the corrective action plans (CAPs) delivered.
This rare initiative has received much attention from the academic literature
and has been subjected to numerous analysis (for example, Donaghey and
Reinecke 2017; Sinkovics, Hoque and Sinkovics 2016; Ashwin, Kabeer and
Schüßler 2020).
Thus, the primary fallout of Rana Plaza was enforced safety inspections and
the generation of the action plans. The next task was to implement these plans
expeditiously. The alternative would have meant that brands and retailers would
stop working with the suppliers and would eventually have to take their orders
elsewhere. In addition, the US wasted no time before withdrawing its duty-free
privileges to Bangladesh’s RMG sector, promising to reinstate the GSP measures
once compliance was met. The compliance pressure on suppliers, therefore,
was enormous.
Compliance was costly, which in turn resulted in a number of repercussions:
smaller firms who were already operating on wafer-thin margins had to close
shop. The larger, better-resourced firms absorbed the costs and invested
heavily in upgrading processes and technology, many turning into world-class,
environmentally friendly production entities. Initial promises that brands
would share in the costs of upgradation directly or through higher prices did
not materialize. The suppliers and the government of Bangladesh were on their
own and had to lift themselves up by their own efforts. At the same time, the
work force had to endure greater pressures as wages stagnated. It has also been
suggested that the power imbalance between brands and suppliers had become
further aggravated as a result, ensuring that the ability of suppliers to negotiate
better prices saw no improvement (Sinkovics, Hoque and Sinkovics 2016).

https://doi.org/10.1017/9781009128230.008 Published online by Cambridge University Press

 112 The Odds Revisited

The data clearly shows the sharp decline in the number of RMG units
following 2013 with the closing down of around 1000 factories almost overnight
(see Table 7.1). The larger units survived and indeed many emerged into strong,
highly compliant, technologically advanced operations, much better placed to
compete in the world market. The downside was that the demand for unskilled
labour and female labour fell significantly as a result with accusations of jobless
growth gaining currency.
Today, once again the sector is faced with a grave crisis in the shape of the
COVID-19 pandemic. There seems little chance of a quick recovery in demand
from Western consumers. Nor is the US in a mood to reinstate the promised GSP
privileges despite the much-lauded gains made in meeting RMG compliance
standards, pointing now to new goal posts in the shape of permitting ‘trade
unions’ and the right of labour to organize in the T&C sector. This is a sensitive
area given the long and usually dismal story of public sector trade unions in
the country. This has made both the private sector and the government wary of
introducing ‘traditional’ labour unions. Nevertheless, it is important to allow
labour the right to organize in a responsible manner while suppliers need to
have the good sense to allow this space to prevent violence and conflict that has
surfaced from time to time. In practice, this remains a serious weakness in not
only RMG but the entire industrial sector of Bangladesh. In fact, in this respect,
RMG fares better because of the presence of international stakeholders and a
degree of local sensitivity to international criticism.
Bangladesh’s share of the US market has declined steadily, displaced by
Vietnam, although it has managed to improve its share in Europe as well as
exploit new, non-traditional markets. At the same time, Vietnam has moved
aggressively not only into the US market armed with duty concessions, but it
is now also poised to do the same in Europe with which it signed a preferential
trade agreement in August 2020. While the data is not available yet, it is thought
that Vietnam may already have displaced Bangladesh from its second position in
the global ranking of RMG producers (McKinsey 2021).
The solutions to RMG woes which continue to play a central role in
Bangladesh’s development are seen to lie in more technology, skills, infrastructure
and reduction of freight and handling costs. While there is considerable scope
for improvement in these regards, the crucial issue of market access – and
the unfolding regional geo-politics – will need to be carefully observed. The
outlook for market access through trade treaties does not look promising at the
moment, although the emerging geo-politics in the region may throw up some
opportunities to leverage its strategic location to some advantage. This is what
Vietnam appears to have done with aplomb.

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 Industrialization and the Rise of RMG 113

There are both dangers and opportunities here that must be carefully navigated.
The emerging polarization with China with the Belt and Road initiative on the
one hand and the US-led Quad involving India, Australia and Japan designed
to contain China in the Asia-Pacific on the other may force Bangladesh into an
uneasy position. For a small country flanked by powerful neighbours, a studied,
neutral position may be hard to maintain for long. That however is what it must
strive to achieve if it does not want to be crushed under the feet of quarrelling
elephants.

https://doi.org/10.1017/9781009128230.008 Published online by Cambridge University Press