Success and failure story of RMG sector: FAQ

Q:  How rapidly did Bangladesh garments industry develop?

A:  The current readymade garments (RMG) sector in Bangladesh began its journey by the beginning of 1980s. In three decades the country has become a major garments exporter in the world, second to China. The garments export in 2013 is expected to exceed $20 billion threshold; a little less than 5% of the total global trade in textile. This phenomenal success has helped Bangladesh to achieve and maintain a 6% GDP growth rate; notwithstanding global economic downturns. The dividend also proved generous for many human development indicators in the country; including empowerment of women.

Q:  Is it private or the public sector that should be credited for this success?

A: Private and public sector both have contributed to this development. The production has been in the private regime, which it should be. The public sector from time to time has provided with favourable incentives — back-to-back LC, import and customs duty rebates and short and long term interest rates discount.

Q:  Quotas are primarily imposed to protect domestic industry. Did MFA quota hamper Bangladesh export?

A: As it is common with export oriented commodities the external factors have played an important role in the expansion of the garments industry. Beginning from the mid-1970s the trade in textile globally was regulated by the multi-fibre agreement (MFA). Quotas were imposed through bilateral agreement or unilaterally. In the European market Bangladesh enjoyed a quota free and duty free export privilege under the Generalised System of Preference (GSP) agreement. GSP covers most of the low-income countries (that gives an exemption of around 12% customs-duty). The MFA — through its quota system — paradoxically was favourable for Bangladesh garments. Bangladesh was able to successfully exploit the quota exemption facility for its apparel export and as well attract foreign investment in the country. Export promotion zones were set up.

Beginning from 1995, MFA was replaced with WTO's Agreement on Textile and Clothing (ATC). This — in four different phases — paved the way for a transition from managed to free trade in textiles. In 2005 the sector was fully integrated into normal GATT rules of free trade.

Q:  If quota helped Bangladesh export did its phase-out inhibit it?

A: The phase-out of the quota system wiped out the privilege that Bangladesh enjoyed; particularly in the European market. By that time, the industry however had developed an effective competitive advantage and export hardly reeled as it was feared by many. On the contrary, it accelerated.

Q:  Has USA provision of GSP?

A: USA too grants GSP; but then its apparel import is exempted of it. As a result Bangladesh garments do not enjoy this facility in the USA. Bangladesh has to pay steep customs duty to access the USA market. Nonetheless less than 1% of Bangladesh's $5 billion of annual exports to the USA falls under the GSP.

Q:  Everything looks bright; is there any dark side of this story?

A: All these are achieved through a single decisive factor in the domestic market; the low wage and the comparative advantage that follows it. The wage in the garment industry in Bangladesh is the lowest in the world — way below that of China, India, Vietnam, Cambodia and Pakistan.

From a theoretical point of view, wage, in the long run, equals productivity of workers. You get what you produce (at the margin). This means productivity determines wage. This however assumes a "zero profit" on part of the entrepreneur (i.e. profit margin is in line with the average in the industry). A zero profit in a free market is ensured by entry and exit in the industry. In global trade however geographical and other investment related inconveniences create barriers of entry (of both capital and labour). Thus significant wage differentials and discrepancy in profit margins in different countries exist for long; this is mirrored in the profit margin as well.

Q:  Is not low wage a blessing for competitiveness? Can low wage be counterproductive? How that should be understood?

A: Low wage at times is an obstacle to productivity growth; particularly when the profit margin is not determined through free (global) competition and labour supply is abundant (a case typical to Bangladesh). The incentive to increase productivity is not there. The sector gets trapped in a "low wage low productivity" cycle. Higher wage acts as a pull factor for productivity increase, innovation and efficiency.

An increase in the wage has little risk of shattering the Bangladesh RMG industry; provided that the profit margin is sufficiently big. This appears to be the case; although research with much accuracy is needed. Research should also estimate the extent of profit that the foreign buyers gain from their Made in Bangladesh import. There are reasons to believe that even that margin is relatively comfortable. The wage increase in the garments industry can then be defined by the surplus band in these two margins. All this is natural; a commodity with global market needs to be addressed through careful local and global considerations.

Q:  What is the political economy of Bangladesh RMG? Is it important to know about that?

A: The Huffington Post recently (6/6/3013) listed ten "tricks" of the RMG sector in Bangladesh. (These are: risky work, low wage, child labour, lack of rights, lack of access facility during emergency, lack of worker safety, workers trapped for extended hours, lack of funds to improve safety, workplace bullying and lack of employment choice for women.) The root of all these evils lies in the political economy of garments industry. Within two weeks of the Rana Plaza disaster yet another clothing factory was at ablaze in Mirpur, Dhaka; at least seven people lost their life. Among those died in this fire were the owner of the garments factory, the managing director, a high ranking police officer and an influential political leader. During late evening they all were in a room at a top floor of the building. This symbolically embodies the political economy of the RMG in the country: an unholy collusion of the industry owners, politicians and the law enforcement authority. The garments workers on the other hand are left with low wage, sub-standard labour condition and appalling work environment with no labour organisations of their own to protect their rights. The fabric of this political economy is easy. The dire state of the working condition together with the low wage is only a consequence of the alliance; the lack of enforcement of building codes and safety and welfare measures, laws, regulations, are all due to the collusion that exists.

Q:  Where can we go from here?

A: There is no immediate solution to this problem. But the direction is clear enough. (i) Consider RMG as a national treasure, for that a tacit bi-partisan agreement is necessary. The root cause of "modern day slavery" goes deep into the political economy, the essence of which is complete lack of accountability (ii) Increase wage in the sector; but only by that much which is economically permissible; this will boost productivity and in the long run generate employment (iii) Let garments workers organise themselves; and let their organisations function as gracious counterpart of the already well-organised RMG owners' associations (and not as appendages of political parties).

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Iftekhar Hossain is an economist. He is also a former Senior Policy Specialist at the UN. The opinion expressed here is his personal.