ecn 201 final

1Economic Analysis of Export and Import of Bangladesh

28th April, 2010

To

Rafayet Alam

Course Instructor,

School of Business

Independent University, Bangladesh

Subject: Submission of report “Economic analysis on Ready-made Garments of Bangladesh”.

Dear Sir,

We due respect and great pleasure we are submitting our report on Economic analysis on

Ready-made Garments of Bangladesh.

On the basis of the information we had, we have tried our best to make this report

meaningful.

We would like to take this opportunity to thank you for your continuous help and support

during the writing of this report. Therefore we would like to request you to accept our report

and forgive us for any kind of unwilling mistakes and shortcomings.

Thanking you

Sincerely,

Arifur Rahman # 0721027

Shams Jerin # 0921399

Farhana Jannat # 0531025


ACKNOWLEDGEMENT

At the very outset, we would like to give our deep gratitude, compliments and heartfelt

thanks to our respectable course instructor “ Rafayet Alam”, Independent University,

Bangladesh for providing me with the proper guidance and support. He has also bridged up

the gap between the theory and practice by his relentless follow up and guided us through a

difficult time when we were trying to prepare this report.

If this report makes the honorable instructor satisfied then it would be a great achievement for

us and we would think that our hard work has been worth of whatever we did.

Numerous thanks to Almighty Allah for showing his blessing on us in every way.


BACKGROUND OF THE STUDY

The business course under the BBA program IUB requires a full comprising of economic

analysis by the student. It is often said that practical is far better than theoretical knowledge.

Reality is far away from theoretical knowledge in Bangladeshi perspective. The business

course of IUB is a widely recognized system to gather practical knowledge. So, it gives us a

great chance to meet the reality and to absorb how real business managed. As a student of

“Micro Economy”—course we are conducting our assignment on the “Economic analysis

of Ready-made Garments in Bangladesh”.


1.0 INTRODUCTION

Since independence, the economy of Bangladesh is dependent on agriculture as most of the

people live in rural areas. The goal of the government policy is to reduce poverty by

receiving the maximum output from agriculture and attains self-sufficiency in food

production. Beside agriculture, the development of export sector is under greater

consideration. Exports from Bangladesh have both grown and changed substantially as time

goes on. After the birth of Bangladesh, jute and tea were the most export-oriented sectors.

But with the constant threat of flooding, declining jute fibre prices and a significant decrease

in world demand, the contribution of the jute sector to the country’s economy has

deteriorated. After that attention has turned to the role of manufacturing sector, especially in

garment industry.

The garment industry in Bangladesh has become the main export sector and a major source of

foreign exchange since 1980. It currently exports about $5 billion worth of products each

year. The industry provides employment about 3 million workers of whom 90% are women.

Two non-market factors have played a crucial role in ensuring the garment sector’s continual

success namely (a) quotas under Multi- Fibre Arrangement (MFA) in the North American

market and (b) preferential market access to European markets. The whole procedure is

strongly related with the trend of relocation of production.

1.1 History of Ready-Made Garments in Bangladesh

In the 1950s, labors in the Western World became highly organized; forming trade unions.

This and other changes provided workers greater rights including higher pay; which resulted

in higher cost of production. Retailers started searching for places where the cost of

production was cheaper. Developing economies like Hong Kong, Taiwan and South Korea

presented themselves as good destinations for relocations because they had open economic

policies and had non-unionized and highly disciplined labor force that could produce high

quality products at much cheaper costs.

In order to control the level of imported RMG products from developing countries into

developed countries, Multi Fibre Agreement (MFA) was made in 1974. The MFA agreement


imposed an export rate 6 percent increase every year from a developing country to a

developed country. It also allowed developed countries to impose quotas on countries that

exported at a higher rate than the bilateral agreements. In the face of such restrictions,

producers started searching for countries that were outside the umbrella of quotas and had

cheap labor. This is when Bangladesh started receiving investment in the RMG sector. In the

early 1980s, some Bangladeshis received free training from Korean Daewoo Company. After

these workers came back to Bangladesh, many of them broke ties with the factory they were

working for and started their own factories.

1.2 An Overview of Readymade Garment Industry of Bangladesh

The RMG industry is the only multi-billion-dollar manufacturing and export industry in

Bangladesh. Whereas the industry contributed only 0.001 per cent to the country’s total

export earnings in 1976, its share increased to about 75 per cent of those earnings in 2005.

Bangladesh exported garments worth the equivalent of $6.9 billion in 2005, which was about

2.5 per cent of the global total value ($276 billion) of garment exports. The country’s RMG

industry grew by more than 15 per cent per annum on average during the last 15 years. The

foreign exchange earnings and employment generation of the RMG sector have been

increasing at double-digit rates from year to year. Some important issues related to the RMG

industry of Bangladesh are noted in the following table.

Table1.1: Important Issues related to Bangladesh ready-made garments

Source: Databases of the BGMEA, and the Export Promotion Bureau, Bangladesh.


Currently, there are more than 4,000 RMG firms in Bangladesh. More than 95 per cent of

those firms are locally owned with the exception of a few foreign firms located in export

processing zones (Gonzales, 2002). The RMG firms are located mainly in three main cities:

the capital city Dhaka, the port city Chittagong and the industrial city Narayangonj.

Bangladesh RMG firms vary in size. Based on Bangladesh Garment Manufacturers and

Exporters Association (BGMEA) data, Mainuddin (2000) found that in 1997 more than 75

per cent of the firms employed a maximum of 400 employees each.

Garment companies in Bangladesh form formal or informal groups. The grouping helps to

share manufacturing activities, to diversify risks; horizontal as well as vertical coordination

can be easily found in such group activities.

The quick expansion of the industry was possible because of the following unique nature of

the industry.

The technology is less complicated (easy to transfer),

Machineries are cheap and easy to operate (sewing machines),

A large female labor force that is easy to train is readily available.

Besides the low cost of labor, one of the major factors behind the success of RMG is the

availability of offshore financing for world-priced inputs through back-to-back letter of credit

(L/C) under the special bonded warehouse scheme. Presence of foreign buyers is also a major

factor that introduces the system of international subcontracting. Foreign buying houses not

only bring the international market to the doorstep of local entrepreneurs, they also ensure the

availability of essential inputs such as imported fabrics and accessories for the industry. They

also did the greatest favor for the RMG industry of Bangladesh by bringing the latest designs

and by monitoring output quality. These measures especially enabled inexperienced garments

entrepreneurs to establish a strong foothold during the 1980s.

2.0 METHODOLOGY

We collected Ready made garments data from secondary sources. Basically we use different government websites including Bangladesh bureau of Statistics website, Bangladesh Bank websites, Export promotion bureau website, websites of BGMEA as well as non government websites and also from different research papers, articles, newspapers and journals etc available in the web.


3.1 THE GROWTH OF BGMEA

At first, Bangladesh established Desh Garments, which formed the first joint venture with a

well-known South Korean MNC. The success of Desh Garments encouraged companies to

come to Bangladesh to have apparels manufactured under various arrangements and export

from here. Jewel garments were recognized as the first exporter in 1977. The Government

also assigned a very high priority for the development of Bangladesh garment industry and

provided many attractive incentives to entrepreneurs.

Table 3.1: Table showing the growth of members of BGMEA

Year No. Of members of BGMEA Year to year% of Growth

Cumulative Growth

1983-1984 134 100

1986-1987 629 469

1989-1990 759 121

1992-1993 1537 203

1993-1994 1839 120

1994-1995 2182 119

1995-1996 2353 107

1996-1997 2503 106

1997-1998 2726 109

1998-1999 2963 109 146.30

1999-2000 3200 108

2000-2001 3496 109

2001-2002 3618 103

2002-2003 3760 103

2003-2004 3957 105 105.60

2004-2005 4107 103

2005-2006 4220 103

2006-2007 4637 110 105.33

Source: BGMEA Annual Report, 2006- 2007


Figure 3.1: RMG Industries Life Cycle

In the figure the right side upward slope of the line shows the rate of growth in the number of

BGMEA members. We can follow a steep slope starting from the year 1989 to 2007. During

this period the growth rate is high which in turn means that the success in the garments

industry in that particular time was because of the shelter of MFA.

The economy of Bangladesh is now prominently dependent on her garments sector.

Comparing BGMEA’s export data with Bangladesh’s total export data it can be found that

during the year 1985-86 to 1992-93 (the data background are colored by yellow in the Table)

the export amount of BGMEA was drastically increasing to be a significant part of the total

export of Bangladesh.

During the year 1985-86 the amount exported was US $ 131.48 million and during the year

1992-93 it has became US $ 1445.02 million. Within just nine years the percentage of growth

for “export of BGMEA” to the “total export of Bangladesh” has reached from only 16.05% to

60.64%. During the last fiscal year (2006- 07), the industry has earned US$ 9.2 billion (The

Daily Star, 2006).


Table 3.2: Garment Export Data of BGMEA during 1983 – 2007

Year Export of BGMEA

(Mill. US $)

Total Export of Bangladesh (Mill.

US$)

% of BGMEA’s export to Total

export

Cum.Growth

1983- 84 31.57 811.00 3.89

1984- 85 116.20 934.43 12.44

1985- 86 131.48 819.21 16.05

1986- 87 298.67 1076.61 27.74

1987- 88 433.92 1231.20 35.24

1988- 89 471.09 1291.56 36.47

1989- 90 624.16 1523.70 40.96

1990- 91 866.82 1717.55 50.47

1991- 92 1182.57 1993.92 59.31

1992- 93 1445.02 2382.89 60.64

1993- 94 1555.79 2533.90 61.40

1994- 95 2232.09 3472.56 64.28

1995- 96 2547.13 3882.00 65.61

1996- 97 3001.25 4418.28 67.93

1997- 98 3781.94 5161.20 73.28

1998- 99 4019.98 5312.86 75.67 46.96

1999- 00 4349.41 5752.20 75.61

2000-01 4859.83 6467.30 75.14

2001-02 4583.75 5986.09 76.57

2002-03 4912.09 6548.44 75.01

2003-04 5686.09 7602.99 74.79 75.42

2004-05 6417.67 8654.52 74.15

2005-06 7900.80 10526.16 75.06

2006-07 9211.23 12177.86 75.64 74.95


But if we divide the data into three periods such as 1983-84 to 1998-1999, 1999-2000 to

2003-2004 and 2004-2005 to 2006-2007 we see that average percentage of BGMEA export


to total export was 46.96 during the 1983-1984 to 1998-1999 period. It jumped to 75.42%

during 1999-2000 to 2003-2004 and it slightly decreased to 74.95% after 2004-2005.

From Figure 1.2 the percentage of change can be easily observed. During the year 1985-86

BGMEA export was only 16.05% of the total export, it jumped up to 27.74% during the year

1986-87. Then until the year 1992-93 the growth drastically reached to 60.64% of the total

exports of Bangladesh. Since 1998-99, up to the year 2006-2007 the percentage has been

fluctuating somewhere around 75 %.This dependency of total export on BGMEA’s export

explains the importance of the garment sector in Bangladesh economy.

Figure-3.2: Showing the Comparison of "Export of BGMEA” & “Total Export of Bangladesh”.


4.0 CATEGORIES OF READY-MADE GARMENTS MANUFACTURED IN BANGLADESH

Ready-made garments manufactured in Bangladesh are divided mainly into two broad

categories: woven and knit products. Shirts, T-shirts and trousers are the main woven

products and undergarments, socks, stockings, T-shirts, sweaters and other casual and soft

garments are the main knit products. Woven garment products still dominate the garment

export earnings of the country. The share of knit garment products has been increasing since

the early 1990s; such products currently account for more than 40 per cent of the country’s

total RMG export earnings (BGMEA website). Although various types of garments are


manufactured in the country, only a few categories, such as shirts, T-shirts, trousers, jackets

and sweaters, constitute the major production-share (BGMEA website; and Nath, 2001).

Economies of scale for large-scale production and export-quota holdings in the corresponding

categories are the principal reasons for such a narrow product concentration.

5.0 STEPS INVOLVED IN PRODUCTION

Backward linkage means the use by one firm of industry of produced inputs from another

firm or industry (alan V deardorff, 2001). That means the finished garments relies on three

steps-first level for converting fibers/ cotton to yarn, second step for converting yarns to grey

fabrics and the final step for converting gray fabrics to dyed, printed of other finished fabrics.

These steps are integrated into each other as show in the following table. It shows that these

three steps are essential for backward linkage integration (BGMEA, January 2005)

Out of three steps, Bangladesh is only capable of Knitting, finishing in knitwear sectors but

far behind in producing yarn, fabrics which is a major factor for woven section. Only success

came to accessories where 80% demand of our country was fulfilled.

The success of the garments industry very much depends on how effectively RMG sector

linkages may operate backward and forward. If the manufacturer has effective control over

the supply of raw materials, components and ancillary services needed to produce final

product, then the production flow is likely to be interrupted. If the company develops and

effective marketing service strategies that provide right signal, and if marketing and

distributing system as a whole are effective for having the products reach the target markets,

then the sales revenue for the company is likely to be maximized. It means that minimize the

cost of production and maximize sales revenues both backward and forward linkages need to

be integrated. Here the issue of developing backward linkage is discussed with reference to

the desirability of having control over the supply of inputs of RMG industry, mainly, fabric,

yarn and processing status


5.1 Need for Improved Backward Linkages in Post MFA

After abolition of quota in 2005, RMG sector in Bangladesh is facing stiff competition in

global apparel export market. Moreover, increased competitions have been felt from

neighboring countries including India, Pakistan, China and Thailand from where Bangladesh

imports fabrics to meet the fabric demands of its RM G sector. These countries have stronger

backward linkage support as they are able to utilize their locally produced yarns and fabric

internally, resulting in higher prix in the export market, putting pressure on the Bangladesh

garment sectors. Bangladesh RMG sector, therefore, needs to develop the backward linkage

sub-sectors further in order to reduce dependency on imported raw materials and intermediate

goods if she is to meet the export target in the global market. Again, competitive pricing is

vital with this backward linkage support. Otherwise, it is not possible to survive in the world

apparel market in the post MFA era Faced with the quota-free global apparel trade,

Bangladesh RMG sector must not only be competitive in product price but also in the lead

time. Development and growth of backward linkage industries will reduce price ranges and

lead time in the long run. As the backward integration is needed for composite, spinning,

weaving, finishing, dying and processing, all steps beginning with raw materials and ending

with finished products must constitute backward linkages sub-sectors. The RMG sector then

will be faced with more challenges in meeting these goals. Moreover, Bangladesh RMG

sector has great advantages in terms of the lower in producing the fabric. The labor cost in

Bangladesh, as shown in the following Table , is one of the lowest. The table compares

average hourly wages (including fringe benefits) in the RMG industry.

Table 5.1: Average hourly wages (including fringe benefit) in RMG industry


With cheap labor advantage, Bangladesh garment industry is still holding competitive

position in the global apparel market. Overall percentage of RMG sector growth has been

steady although the sector has been affected by the USA market. This industry contributed

78% share of total trade of goods in Bangladesh, compared to the other South Asian countries

like India 14%, Pakistan 23%, Sri Lanka 50% and Nepal 40% (Garment Association on of

Nepal, 2001). In general, backward integration adds value and at the same time increases

employment. Contribution of RMG sector in Bangladesh manufacturing can be measured by

the increase in value-added (MVA) from 6.5 percent in 1993-94 to 30% in 1998-99 (CPD,

October 2002). Another researcher (Khadker, January 2002) claimed that of Garment sector

value added is only 25% and is much lower compare to other exported items which were

contributed 60% to 70% in Some Gases. TWO-third of garments export earnings is for the

labor fabric purposes. To add more value it is imperative necessary to build and develop more

backward linkages industries from yarn to finishing fabric processing Bangladesh.

5.2 The Condition of Backward Linkage

Although the RMG industry in Bangladesh flourishes in the 80’s and 90’s, there has quality. At present, only 25%-30% value addition takes place to the RMG products as manufacturer import bulk of the raw materials. On the contrary, almost 70% value addition takes place to the jute products exported to different countries. The garment industry should need to increase at least 50% value addition through enhancement of backward integration in the RMG marks. Backward linkages sub-sector for RMG industry includes cotton production, spinning (cotton and synthetic yarn), weaving and knitting, dyeing and painting, and accessories and all of the above sub-sectors reflect the present condition of the backward integration in the RMG in Bangladesh.

Cotton

Cotton is the main raw material for yarn production while production of cotton in Bangladesh

has very limited profit margin. Hence, Bangladeshi spinning mills depends on imported

cotton from international markets. India, Pakistan, Turkey, China, Uzbekistan, USA are the

main production sources where Bangladesh largely dependent on. Bangladesh Cotton

Development Board (BCDB) undertakes cotton promotions activities but achievement is not

satisfactory. BCDB is striving for higher production of cotton with a production range of

103620 bales in four cultivating zones in south- western pat of the country. Cotton production

requires vast land area where as in Bangladesh the land is in scarcity at only 144,000 square


kilometers. Farmers prefer agriculture products that are more profitable than cotton. So in the

context of cotton production, Bangladesh is in a dreadful situation. This implies that

Bangladesh has to depend on imported cotton which involving large amount of foreign

exchange. Bangladesh is not even in a position to move towards synthetic fiber production as

it is capita intensive.

Spinning Mills

It is difficult to accurately determine the percentage of demand for yarn met locally because of the amount of yarn production varies with the efficiency of the spindles. Bangladesh Textile Mills Corporation (BTMC) and Bangladesh Textile Mills Awciation (BTMA) mills have spindles with different efficiency levels and there is no numeric data available on the efficiency levels of the spindle according to A M. Chowdhury (2002). But According BTMA, in year 2000 statistics, there are 148 spinning units (private 107 and public 41 units), installed capacity 3.6 million, with annual production 443 million kg, (BTM EA, 2001). Number of spinning mills increased to fulfill the gap of shortfall in local and domestic market. As per BGMEA, 2005, number of unit of spinning mills increased to 202 (private sector 176, public sector 26), Installed capacity: 4,334,796 Spindles with annual production capacity of 50 million kgs of yarn. According to a report submitted by the Sub-Committee of the Parliamentary Standing Committee on Textile (May 1999) to meet the demand (2000) domestically, Bangladesh will have to established 148 Spinning Mills with 25,000 spindles each (Hafiz G.A ) and again to attain self sufficiency in yarn to fulfill the domestic and export needs in year 2005, Bangladesh will need to established additional 98 spinning mills. So it shows that capacity of spinning mills in Bangladesh is not capable to cover demand of yarn that needed to produce fabric for RMG sector. The total demand for yarn by RMG producers and producers operating in the local market are more than the existing production capacity and there is requirement for an enormous increase in capacity if Bangladesh wants to ensure adequate supply of yarn locally. Handloom products may be suitable for the domestic market, but RMG producers cannot consider handloom as competitive because of consistent and large quantity demanded by quality fabric markets. On the other hand, power looms were originally targeted to serve the domestic market but to upgrade them for export quality is very difficult and costly.

Weaving and Knitting Mills

The next stage is weaving and knitting where yarn are converted to fabrics Fabric is main raw material for making garment and accounts for 75 percent of the garment cost. Both hand looms and power looms are suitable for the domestic market, but a large demand of quality fabrics cannot be met by hand loom production. But in case of power looms, they may increase the production capacity to satisfy part of the RIVIG sector demand with a large investment. In the long run, Bangladesh weaving mills need a high volume of yarn production to fulfill the demand for domestic and export markets. In year 2000, fabric demand was 830 million meters and soon after in year 2005 the demand almost doubled. In about 5 years of time, the demand would increase to 1600 million meters to fill these huge


demands and the fabric shortfal, the weaving industry needs to increase the production capacity by developing number of new weaving industries both new and reconditioned machines must be added in this sector. The associated large involvement required is amost $ 3.9 billon, $ 2.7 billion for new machines and $ 1.2 billion for reconditioned looms (CPD in the 12‘“ EXPO).

Dyeing, Printing and Finishing

This isthe final aage where the fabric either can be used for domestic marka or RIVIG sector for export purposes Dyeing, printing and finishing units in Bangladesh are currently able to process all of the locally produced grey. According to Bangladesh Textile lVIiIls Association (BTMA, 2001) Bangladesh knitting, knit dyeing and finishing sib-sector had 282 firms (99 merchandized dyeing and finishing, 183 semi-merchandized dyeing and finishing) with annual fabric production capacity (fabric) of 680 million meters On the other hand, the knitting sector had a total of 155 firms (23 domestically supported edsting units and 132 export oriented units). Existing knitting, knit dyeing and finishing sub-sectors cover the local demand and the major portion of the export RMG sector in Bangladesh.

Due to the increased demand in RMG sector add to attain self-efficiency in fabric supply, Bangladesh established 481 additional units of dyeing, printing and finishing units with 10 million meter fabric production capacity for each unit. Dyeing, printing and finishing factors had depended mostly on imported fabrics as Bang1adcsh’s weaving sector could not fill the export demand of the RMG. This sector dramatically improved over the last five years due to the relatively low level of investment required. However, only a few firms could carry out proper dyeing operations due to deficiency in dyeing know-how. Again, as the current dyeing facilities are mostly dependent on imported fabrics, their expansion does not depend on other sectors that impede the growth of backward linkage sub-sectors To develop dyeing, printing and finishing sub-sectors, it is imperative to build up modern units with appropriate technology, set up bonded warehouse that can meet the fabric demand until the local grey production can meet the quality and quantity, stocks of dyes and chemicals that can meet the demand of dyeing, printing, finishing sub-sectors. This sib-sector can contribute significantly to reduce lead time and price. It is suggested that dyeing, printing and finishing sub-sectors is in better position than the other backward integration sub-sectors when compared with spinning and weaving sectors.

6.0 CONTRIBUTION OF THE RMG INDUSTRY TO BANGLADESH

RMG business started in the late 70s as a negligible non-traditional sector with a narrow export base and by the year 1983 it emerged as a promising export earning sector; presently it contributes around 75 percent of the total export earnings. Over the past one and half decade, RMG export earnings have increased by more than 8 times with an exceptional growth rate of 16.5 percent per annum. In FY06, earnings reached about 8 billion USD, which was only less


than a billion USD in FY91. Excepting FY02, the industry registered significant positive growth throughout this period

Figure 6.1: Trend of RMG Export Volume, Export Growth and Contribution to GDP

In terms of GDP, RMG’s contribution is highly remarkable; it reaches 13 percent of GDP which was only about 3 percent in FY91. This is a clear indication of the industry’s contribution to the overall economy. It also plays a pivotal role to promote the development of other key sectors of the economy like banking, insurance, shipping, hotel, tourism, road transportation, railway container services, etc.

A 1999 study found the industry supporting approximately USD 2.0 billion worth of economic activities, when the value of exports stood at a little over USD 4.0 billion.

One of the key advantages of the RMG industry is its cheap labor force, which provides a competitive edge over its competitors. The sector has created jobs for about two million people of which 70 percent are women who mostly come from rural areas. The sector opened up employment opportunities for many more individuals through direct and indirect economic activities, which eventually helps the countries:

social development, woman empowerment and Poverty alleviation. Textile Sector as a whole plays an important role in the economic life of Bangladesh. The sector contributes 38% industrial value addition. Earns around 78% of total export earnings. Employs around 4.5 million workforce of which majority is women Generates huge cliental base for Banking, Insurance, Shipping, Transport, Hotel,

Cosmetics, and Toiletries and related other economic activities. Provides indirect employment to 0.80 million workforce in accessories industries related

to garments. Provides 0.2 million job to waste recycle industry related to RMG sub-sector. Contributes 10.50% to GDP through RMG sub-sector.


6.2 Exporting Condition of Garments Industry

The Ready-Made Garments (RMG) industry occupies a unique position in the Bangladesh

economy. It is the largest exporting industry in Bangladesh, which experienced phenomenal

growth during the last 20 years. By taking advantage of an insulated market under the

provision of Multi Fibre Agreement (MFA) of GATT, it attained a high profile in terms of

foreign exchange earnings, exports, industrialization and contribution to GDP within a short

span of time. The industry plays a key role in employment generation and in the provision of

income to the poor. Nearly two million workers are directly and more than ten million

inhabitants are indirectly associated with the industry. Over the past twenty years, the number

of manufacturing units has grown from 180 to over 3600. The sector has also played a

significant role in the socio-economic development of the country.

The Agreement on Textile and Clothing (ATC) introduced in 1994, aimed at bringing

textiles and clothing within the domain of WTO rules by abolishing all quotas by the end of

2004. It provides an adjustment period of 10 years, so that countries affected by the MFA

could take the necessary steps to adjust to the new trading environment. Liberalization of

trade following the Uruguay Round agreement presents opportunities as well as challenges

for a developing country like Bangladesh in RMG sector. In the Post-Uruguay Round period,

traditional instruments of trade policy such as tariffs, quotas, and subsidies will become less

feasible and less relevant. In a liberalized trade regime, competition among textiles and

clothing exporting countries is likely to become intense. The objective of this paper is to

identify the prospects of RMG industry after the MFA phase out by analyzing the current

scenario along with different policy measures and the available options in order to be more

competitive in the new regime.

The export made by Garments Industries of Bangladesh is improving year after year except some of the year. Strike, layout, shutdown of company, political problem, economic problem, inflation etc. are the prime cause of decreasing export in this important sector. But above it, Readymade Garments Industries is the leading sector in export sector.

Table 6.2: Year Export by the garments industries (in US $ million) Year Export (in US $ million) Percentage change

1991 – 92 624.16 32.49

1992 – 93 866.82 38.88

1993 – 94 1182.57 36.43

1994 – 95 1445.02 22.19

1995 – 96 1555.79 7.67

1996 – 97 2228.35 43.47


1997 – 98 2547.13 14.11

1998 – 99 3001.25 17.83

1999 – 00 3781.94 26.01

2000 – 01 4019.98 6.29

2001 - 02 4349.41 8.19

2002 – 03 4859.83 11.74

2003 – 04 4583.75 5.68

2004 – 05 4912.12 7.21

2005 – 06 5686.09 15.83

Table 6.3: Exports of Knit and Woven Garments to the United States

(Source: Export Promotion Bureau of Bangladesh)


7.0 MAIN STRENGTH OF READY-MADE GARMENTS SECTOR

In this section we take a look at how the growth of the apparel sector induced by the export-

led trade policies contributed to the creation of employment and generation of income among

the poor.

Employment

The labor-intensive apparel sector has continually expanded the large pool of wage earning

jobs for unskilled and semi-skilled labor in Bangladesh since its initiation in 1979/80. From

employing merely 4500 employees in 1981/82, the apparel sector has grown to employ over

1.8 million workers in over 3,600 apparel factories in 2001/02 (EPB, BGMEA).The

following figure shows Employment increased from 2 percent to 30 percent of all

manufacturing employment during the period, thus becoming the single largest

manufacturing employment sector in Bangladesh.

Figure 7.1: RMG Sector Employment

Source: BGMEA website

The RMG industry is also unique in another respect. Of the 1.8 million workers in the RMG

industry, about 1.6 million, or 90 percent of the employees, are female workers. Nine out of

the ten jobs went to women workers who came from the ‘unlimited supply pool’ of low wage

labor. Women workers fitted well to the nature of the apparel industries. The unskilled

women were given some training in garment making before being placed in makeshift

factories in the urban areas.


For most women workers, the RMG industries provided opportunities to break away from the

poverty cycle with wage earning. The 1997 survey conducted by the BIDS showed that the

garment industry provided first wage employment to 96 percent of the male and female

workers who previously were doing unpaid household work. According to an early survey,

also by BIDS, 49.1 percent women garment workers had been unemployed or worked at

home before joining the garment industry and 23.9 percent had been students with no work

experience. In contrast, less than 2 percent of non-garment working women in urban areas,

and less than 1 percent in rural areas had not worked previously in manufacturing jobs. The

women took wage earning jobs in the apparel factories because of extreme poverty in the

household. Thus a very large number, if not all, workers came from poor households to work

in first-time wage-earning jobs provided by the export-oriented garment industries.

Most women workers migrated from the rural areas to take wage earning jobs in the urban

apparel factories. Ninety percent of the garment factory workers are migrants from rural

areas. Among the migrants, 90 percent of males, and 69 percent of females migrated because

of poverty and job opportunity in the garment factory. Four-fifths of female and about three-

fifths of male migrants came from functionally landless households (<0.5 acres). The

opportunities for earning wages as well as making financial contributions with wage earning

to the poverty-stricken households remain practically nonexistent in the rural areas.

69 percent of the male workers and 67 percent of female workers originated from the rural

districts that are among the poorest. The study concluded that employment in the garment

industry has reduced poverty in those areas.

Income Earnings

Bangladesh garment workers earn on average $ 0.23 per hour of work. The average wage in

1991 was Taka 1608 and in 1995 was Taka 1717 [in 1991 prices]. Real wages have increased

by about 6.8 percent between 1991 and 1995. The wage increases, however, have been

modest primarily because abundant unskilled labor is available at low wages. The wages are

low comparative to other low-wage countries, but that made Bangladesh a lucrative ground

for investment. The wage levels of male garment workers are 70 percent of that of all

employees and 90 percent of that production workers in the manufacturing sector both these

proportions are higher than their respective sector averages.


Although 9 of 10 apparel workers are females, their earnings are less than that of male

workers. Average monthly gross take-home income in 1997/98 of a male RMG worker was

Taka 1781, and that of female was Taka 1581. Female workers remitted on average one-third,

while male workers sent two-fifth of their earnings to families they left behind in rural areas.

The 1997 BIDS survey found that 31 percent of female workers were the primary bread

winners, and 43 percent contributed substantial portions of their incomes to families, as

against 78 percent and 65 percent respectively for the male workers.

Poverty Alleviation

In Bangladesh where half of the rural households fall below the poverty line, garment

workers were able to lift themselves over the poverty threshold as their consumption

expenditures met basic needs. The estimated poverty line to be Taka 992 per month. At the

average monthly gross take home income in 1997/98 of Taka 1781 and Taka 1581 of a male

and a female worker respectively it is estimated that about 91 percent of male and 81 percent

of female workers earned over the poverty line. The remaining 9 percent of male and 19

percent of female workers thus earned incomes below the poverty line. Thus, a substantial

proportion of workers in the export-intensive apparel sector alleviated their poverty. Over

one-fourth of the workers who had no earned income before, had been earning at levels far

above the poverty line. In fact, 29 percent of males and 25 percent of females earned twice

the poverty line amount. Had they not migrated to seek job in the export-intensive apparel

sector, they would have remained either unemployed or engaged in non-paying home-based

activities, or worked as wage laborers if they found jobs in the rural areas.

From the facts and figures discussed above, it is apparent that export-oriented trade has

contributed towards alleviating poverty by providing employment and income-earning

opportunities. The apparel sector contributed heavily because of its export intensiveness. The

RMG sector made significant economic changes in Bangladesh apart from its recognized role

as the major foreign exchange earner. It has lead to poverty alleviation to a great extent by

creating employment opportunities for rural poor predominantly from landless families. From

no income of their own, more than 80 percent of migrant women workers earn above poverty

threshold income.


8.0 MFA

MFA is an agreement among developed country importers and developing country exporters

of textiles and apparel to regulate and restrict the quantities traded. It was negotiated in 1973

under the auspices of GATT as a temporary exception to the rules that would otherwise

apply, and was superseded in 1995 by the ATC. The MFA is among the most important non-

tariff trade barriers facing developing countries today. Established in order to achieve the

expansion of trade, the reduction of barriers to such trade, and the progressive liberalization

of world trade in textile products, which at the same time ensuring the orderly and equitable

development of this trade and avoidance of disruptive effects in individual markets and on

individual lines of production in both importing and exporting countries. It sanctions a

structure of country and product- specific quota on apparel and textiles exported by

developing countries to developed countries. These quotas are negotiated bilaterally between

the importing and exporting countries but are largely administered by the exporting countries.

Despite being initially conceived as a temporary measure, the MFA has persisted for more

than twenty years, since its inception in 1973, the MFA has been through five successive

negotiations, with each round encompassing a wider range of products and countries.

The most recent round of trade talks-the Uruguay Round, concluded in 1994-included a plan

for the eventual elimination of the MFA.

8.1 Characteristics of MFA:

Importers and exporters are involved in MFA

MFA involves with the regulation and restriction of quantities of trade

MFA emerged in 1973 under GATT

MFA is a non-tariff trade barrier

MFA evolved as a trade expansion

It is an agreement which reduced the international trade barriers

Multi-fiber Agreement is an agreement between developed and developing countries

It’s an agreement negotiated bilaterally between the importing and exporting countries

MFA is a temporary agreement and this agreement has been terminated in 1994.


8.2 Measurement of the Impact of the Phasing out of the MFA since 2005:

In order to find out the impact of the withdrawal of the quota facilities we can examine the

sales and net income figure after the year 2005.We observe from Table 3.2 and 3.3 that sales

of all the sample companies have increased and accordingly net income figure has also

increased. This indicates that withdrawal of quota facilities has not caused any problem for

the sample companies in Bangladesh though the withdrawal has increased competition in

U.S. markets. Other impacts of the post MFA period are discussed below:

Changes in the cost competitiveness of the RMG

Low price for the same quality product and standard has been the competitive advantage for

the sample companies. Regarding the question about how cost competitiveness of the RMG

has changed during the post Multi- Fiber Agreement have been asked to our group of

respondents. They all agree on the issue that the price of raw material is becoming higher. For

example, the suppliers of woven fabrics have increased their product price. Some other

factors such as longer lead time than expected, insufficient power supply, and political unrest

during production period increase the production cost. In an answer to the question “what are

the strategies to remain cost competitive the respondent group mentioned a few strategies

which are:

Trying to buy raw materials locally.

Decrease overhead and labor cost. Besides, trying to maintain the same status

i.e., to maintain the production in a way so that the labor cost and overhead

cost do not increase.

20% of the respondent group has increased the price of their finished products

according to the increase in the price of their raw materials.

Besides, developing the backward linkage industry would also be a strong competitive

advantage for the sample firms in the industry. In addition, the Bangladesh Government has

reduced tax and duties to help cost reduction.


Change in the Government incentives and polices:

Bangladesh RMG is an important sector of its economy. Consequently, the Government

would support the sector to gain maximum benefit from it by using and increasing the

competitive advantage. (Bangladesh Export Policy, 2006-2009). The Bangladesh

Government has introduced reduced tax and duty to help cost reduction. The Government

also has introduced cash incentive scheme for using locally produced yarn to support the

backward linkage industry to grow. (Nasir Mainuddin, 2006). Moreover, it has decided to

develop textile village at different part of Bangladesh as the backward linkage industry. The

Government has decided to develop the port management system, simplify the goods

uploading process to help reduce the “lead time”. Besides, the Government has promised to

resolve the problem of electricity supply. To enhance the productivity of the employees’ the

Government will arrange training facilities to develop the skills (Bangladesh Export Policy,

2006-2009).

Increased foreign exchange earnings and employment opportunity

The increasing sales figure of the sample companies during the post MFA period implies

increased foreign exchange earnings. In addition, they are contributing to increase the

national GDP (Gross domestic product). On the other hand, only one Sample Company

which is 20% of our total sample was established before the decision of phasing out the

MFA. Rest of the respondents, that is, 80% has been established after the phasing out of the

MFA decision and still the industry has not reached its maturity, it is still growing. Figure-3.1

shows that since 1983 to 2001 the industry growth has been smooth. During the period 2001-

02 it declined and again from the next year it started to grow at a more rapid rate. Thus we

can comment that more employment has been generated in the post MFA period in

Bangladesh.

9.0 RECOMMENDATIONS

The forty-year old quota system on textile and readymade garments has been withdrawn as of

January 1, 2005. As a result our export-oriented readymade garments industry is now facing

more competition than any time in the past. At the same time the country’s import system has

been liberalized, and the rate of import duty has been fixed at the lowest possible level.


Considering the overall situation and in order to maintain our current export growth, we have

to increase the production capacity of local export-oriented industries, give more emphasis on

production environment of the factories and on meeting the compliance requirements,

improve the quality of the products, and most importantly, we have to strengthen our efforts

to diversify products and their markets. All these objectives can be attained only when we can

utilize our cheap labor and convert comparative advantage into competitive advantage. In

doing so, efforts will be given on encouraging the establishment of labor-intensive export-

oriented industries, encouraging training programs for the skills development of the workers,

providing incentives for the diversification and encouragement of exports, low-interest loan

facilities, infrastructural development, establishment of backward and forward industries,

development of utility services, establishment of modern laboratories for controlling the

quality of export products, establishment of product-based clusters, ensuring easy access to

the raw materials for export products, ensuring regular supply of updated information on

market and technology to producers, and on the overall development of the Chittagong Port

including the simplification of goods unloading procedures.

Moreover, some steps will be taken to shorten the "lead time” for export of readymade

garments by means of development of port management, simplification of goods unloading,

resolving the electricity problem and similar activities. Furthermore, assistance will be given

to improve the work environment in the readymade garments factories, to reduce risks of

accident and to fulfill the compliance requirements at the factory level. Besides, an integrated

and reasonable compliance regulation will be prepared with the help of all stakeholders;

Since, our RMG sector is facing huge competition in the world market as because of abolition

of quota system we have to go very carefully to capture the world-wide market. As a result,

we have to take some necessary steps which will be taken to send marketing missions abroad,

to organize single country textiles and readymade garments fairs, to organize and participate

in international trade fairs at home and abroad so as to expand and integrate the markets for

readymade garments.

At the end we can say that our RMG sector is doing well what is more than our expectation.

And if this flow goes on this way then we will be successful and our RMG sector will be a

great threat for other competitors in the world market. Based on the above data analysis and

findings we suggest the following strategies that RMG should follow:


i. Strategies for the RMG Sector in the Post MFA

To sustain in the competitive market and detain the achieved position or capture more of the

market share Bangladesh RMG must adopt certain changes and develop dynamic capabilities.

In doing so some of our suggestions are as follows:

ii. Re-structure RMG Sector with appropriate backward and forward linkage

We have to re-structure the garment sector. The garment sector of Bangladesh is totally

dependent on the foreign investment. They export raw materials, equipments and other

facilities to our garments sectors, which are not cost effective.

iii. Improve labor productivity and managerial efficiency

The labor productivity should be increased and it can be possible if the labors are provided

with a significantly decent wages and other facilities such as free medicine, bonus, and

transportation cost, they will be more motivated and their motivation will lead them to

become more productive.

iv. Better working environment

Working environment of garments in Bangladesh is very poor. The owners should give more

attention to improve the working condition of the garments. There should be proper

ventilation system, clean sanitation, significant number of fire extinguishers, emergency exit

to ensure the safety and security of the workers.

v. Market diversifications:

There were very few market diversifications in our garment sector. Usually the Bangladesh

garments sector used to export its products in USA and it realized that it’s not enough. This is

why they started exporting in European Union countries. Moreover, to grow or capture more

of the market share they should explore and exploit different markets.

vi. Improving the R&D

Bangladesh garment sector does not have advanced technology and equipments that’s why

they should invest more in research and development. Besides, they may buy high-tech

machines or adopt lease strategy so that they can export higher quality products.


vii. Backward Integration

Backward Integration refers to the development of subsidiary industries in order to reduce

Bangladesh garment’s dependence on imported inputs i.e., the supporting industries that

produce garment accessories and the initial processing of imported gray fabric.

viii. Upgrading of Skills and Technical Expertise

Although there is an apparent abundance of labor in Bangladesh, there is insufficient level of

skill when it comes to the use of many high-speed machines used in the industry. Far too little

has been spent on training of staff with skills that are transferable across the industry. Better

skilled staff will increase the productivity of the company as well as increase in GDP. This

factor of investment in its workforce is often neglected by enterprises, which have been

hampered by short term planning.

ix. Integration

Due to the lack of development networks among the players involved in the Bangladesh

industry and their respective markets, there is little integration within the garment industry. It

is also necessary to develop direct links with retailers in the US and EU.

x. Diversifying Product Range

Bangladesh has always relied on a small, medium to semi-high quality product. These were

the main categories covered by the MFA. The development of high quality products will

require an investment in technology, training and quality control.

xi. Elimination of child labor

The Bangladeshi industries employ many children and the garment sector is not different

from them. It is a matter of industrial reputation that will go down if they recruit child labors.

Recruiting child labor may also bring negative impression on the brand image of the

company to its customers.


xii. Improvement of Quality

Quality is one of the important factors that make the customer loyal to the product. The

respondent group believes that the quality of the product is a factor that affects the sales.

They also believe that the volume of their business depends on the quality, design and the

commitment as the fashion and style changes too often. Therefore, the companies have to

respond according to their customers’ test.

Till now 80% of our respondents enjoy the duty- free market access and 20% of the

respondent group enjoys GSP facilities only if local fabrics are used. 60% of the respondent

group collects order through the buying house (local buying agent) and the rest gets offer

directly through the head office situated abroad. They have no problem in collecting orders

due to better quality and low price. The respondent group believes that they have been able to

cope up in accordance with the changes in the attitude of buyers and customers.

CONCLUSION

The Ready-Made Garments (RMG) industry occupies a unique position in the Bangladesh

economy. It is the largest exporting industry in Bangladesh, which experienced phenomenal

growth during the last 25 years. By taking advantage of an insulated market under the

provision of Multi Fibre Agreement (MFA) of GATT, it attained a high profile in terms of

foreign exchange earnings, exports, industrialization and contribution to GDP within a short

span of time. The industry plays a key role in employment generation and in the provision of

income to the poor. To remain competitive in the post-MFA phase, Bangladesh needs to

remove all the structural impediments in the transportation facilities, telecommunication

network, and power supply, management of seaport, utility services and in the law and order

situation. The government and the RMG sector would have to jointly work together to

maintain competitiveness in the global RMG market. Given the remarkable entrepreneurial

initiatives and the dedication of its workforce, Bangladesh can look forward to advancing its

share of the global RMG market.

ecn 201 final

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