CONTRIBUTION OF RMG INDUSTRY IN BANGLADESH ECONOMY AND MFA PHASE OUT EFFECT

INTRODUCTION

At independence in 1971, most observers of the newly emerged country took a pessimistic view about the developmental prospect of Bangladesh. Many thought that the country would remain permanently locked in a ‘below poverty level equilibrium trap’. Although there is little room for complacency Bangladesh has come a long way from there. About two-fifths of the economy is now connected with the global economy through exports, imports, factor and commodity markets; the degree of openness of the economy1 currently stands at 40%. Bangladesh can now rightfully claim that she has graduated from a predominantly aid receiving nation to a trading nation. The export-oriented RMG sector has made crucial contribution to this abovementioned transformation of the Bangladesh economy. The role of our RMG entrepreneurs, domestic fiscal and financial, institutional policy support and incentives put in place by successive governments, substantial RMG-supportive linkage activities within the domestic economy and global market opportunities combined to create a story which is, to be honest and true, unparallel in the developing world. When jute and jute goods were losing their traditional markets, with the prospect of drastic fall in forex earnings it is the RMG sector which came in first to replace it, and then to overtake it. While traditional export sector could not yield expected results, the RMG sector gradually injected dynamism in the export as well as in the domestic economy though backward and forward linkage economic activities.

 The export-oriented readymade garments (RMG) sector in Bangladesh started its journey in late 1970s as a small non-traditional sector of export. Bangladesh exported RMG worth only US$ 69 thousand when Reaz Garments exported its first consignment to USA in 1978. By FY2002, within a span of about two decades exports have gone up to US$4.5 billion. Over the past decade alone, the sector registered a phenomenal growth rate of 15 percent per annum, which is impressive by any standard2. In fact, this was an exceptionally high growth rate for an emerging industry anywhere in the world. The industrial base which sustained such high growths also enjoyed a robust expansion, from less than 50 factories in 1983 to more than 3,400 in 2002, with the number of RMG workers reaching approximately 1.5 million.

Despite many difficulties faced by the sector over the past years, it continued to show robust performance, competitive strength and, of no less importance, social commitment. RMG’s contribution to Bangladesh economy is well-known, well-appreciated and well-respected. However, often times the magnitude of its multiplier impact and implications will justify the support that this sector has been given over the past years and also the support it is currently seeking from the government. In FY2002 Bangladesh exported RMG products worth 4.5 billion US dollars. Her share in total US imports of apparels was 3.2%; in EU it was 3.3% and in Canada it was 3.0%. Bangladesh is known in these countries as a small country with a strong presence. Everywhere, RMG serves as a flagship product of our country, inducing people’s interest in Bangladesh both as a tourist and investment destination. These are the impacts which are difficult to quantify, yet without which the country perhaps would not have been able to project itself to a trajectory of high growth and higher standards of living. Thus, RMG’s contribution to Bangladesh, both direct and indirect, needs to be recognized for what it is. In the following pages, an attempt is made to quantify the key role that RMG has come to play in the economy of Bangladesh. The RMG sector has also played a significant role in the social metamorphosis in a broader context. This paper attempts to qualify aspects such as women empowerment, population control, education, environmental awareness, elimination of child labor which contributed to overall improvement in the HDI (Human Development Index) Indicators. It should be noted that the study is not exhaustive, and can be further improved upon.

MACRO CONTRIBUTION

Contribution in GDP, Export Earnings and Local Currency Retention and Foreign Exchange Earnings by the Sector

 The Bangladesh RMG industry, with its woven and knit sub-components, is a pre-dominantly export oriented sector, with 95 per cent of the woven and 90 per cent of the knit exports being directed to foreign markets. The cumulative foreign currency earnings by the sector, since 1978, when first export was registered, is estimated at 36.6 billion dollars. Bangladesh’s RMG export earning stood at 4.58 billion US dollars in FY2002. In 2002 this sector contributed 76.6% of the total Bangladesh export of 5.9 billion dollars in the same year. RMG export in FY2002 was equivalent to 9.5% of Bangladesh’s GDP over the corresponding year. At present the local value addition by the RMG sector is estimated to be 45%. Accordingly, local value addition by the sector in 2002 was about 2.1 billion US dollars which was equivalent to 4.3% of GDP for the same year. The value addition created by the sector itself is estimated at 25% of total RMG export earnings which amounted to about 1.2 billion dollars or equivalent to 2.4% of GDP

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Thanks to increasing local value addition, the share of Back to Back L/C has been declining secularly, from 63% in early 1990s to about 45% in FY2001. If we consider that the total manufacturing sector’s contribution to GDP was about 15.6% in FY2001, it would be seen that RMG sector contributed about 29.7% of the manufacturing GDP in FY2002.

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 Emergence of Knit-RMG

The growth dynamics of the sector over the last decade evince two clearly discernible phases: during the initial period it was the woven-RMG which dominated the structure of apparel exports, whilst in recent years which could be termed as a second phase, it is the knit-RMG which emerged as no less of an important segment in the RMG sector with its share growing up steadily and local value retention fast approaching the level of woven-RMG.

Diversification

Within the apparels sector, Bangladesh has been able to accomplish product diversification. RMG sector has been able to extend its product line from T-shirts, pyjamas, ordinary shirts, shorts, caps, women’s and children’s wear to shirts of complicated designs and jackets; and some brand items have also emerged where the value was added to both the export earnings and the local value retention [Table 2.2].

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Incremental Contribution

The increasing importance of the apparel sector in the Bangladesh economy is best brought out by its share in the country’s incremental export growth. Table 2.3 shows that the growth of the sector was enough to push up the aggregate export growth rate and also compensate for the shortfalls in the export earnings in other sectors.

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Value Addition in the Manufacturing Sector

Table 2.4 shows that the contribution of RMG sector in Bangladesh manufacturing value added (MVA) went up from 6.5 per cent in 1993-94 to 30 per cent in 1998-99. Elasticity

of the MVA to RMG value added was about 0.3, implying that 10 per cent growth of RMG exports leads to an increase in the MVA by 3 per cent

 

Employment Creation and Wage Bill

RMG sector is one of the major employers in the economy. Total employment at present stands at about 14 lakh about 70 per cent of which are women. As a matter of fact in the 1990s a large part of the incremental labour force in the manufacturing sector was absorbed by the RMG sector. The RMG workers received USD 315.25 million as their wage in FY 2002. This purchasing power contributed significantly to the growth of the economy through its multiplier impact in terms of consumption expenditure and savings.

  SECTORAL CONTRIBUTION  

 Backward and Forward Linkages

Growth of RMG sector has spawned a whole new set of linkage industries and facilitated expansion of many service sector activities. The RMG industry not only propelled the growth of spinning, weaving, dyeing and finishing industries, production of accessories and spare parts, but also rendered large externalities by contributing to other economic activities in such areas as banking, insurance, real estate, packaging, hotels and tourism, recycling, consumer goods utility services and transportation.

As shown in Table 3.1, the RMG sector has overwhelmingly high backward linkage with textile sector providing fabrics, yarn and other ancillaries. It has important backward linkage with utilities such as electricity, gas, and machinery and spare parts supplying sectors. It has forward linkage with transport, communication, banking and insurance and trade services. Besides, there is a considerable subcontracting linkage within the sector. The buying house also plays important role towards bringing the manufacturers and buyers of the finished goods closer. As the input-output table shows, the RMG value-added ratio to output stood at 19% in 1993-94. Since then the RMG sector has undergone important changes, with substantial movements in terms of enhanced value addition. Direct value addition by the RMG was estimated to be about 25%.

Though the country had some base in cotton textile industry even before the emergence of export-oriented RMG sector, its linkage with global market was insignificant. Realizing the importance of the backward linkage industry in terms of supplying export quality yarn and fabric to satisfy the need of the growing RMG sector, the Bangladesh government took an early initiative to declare the textile sector as a thrust sector. Since the textile policy was put in place in 1995, the sector registered remarkable growth. In response to the incentive provided by the government and a ready market provided by the RMG industry, private sector came forward to invest in backward linkage industries. Backward linkages and other related activities marked remarkable progress in the last decade, particularly since mid-1990s.

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About US$ 0.5 billion of investment came to the RMG sector in the last five years of the 1990s by the private sector (CPD 2000). Many new mills have come under operation and some others are being set up. As of 2002 Bangladesh Textile Mills Association (BTMA) includes 524 members with 158 Spinning mills, 312 Weaving mills, and 58 Dyeing and finishing mills which meet a substantive part of cotton yarn requirement for circular knit export, cotton fabric requirement for woven export and domestic requirement for yarn and fabric. Again, installed capacity in Spinning increased from 0.76 million in 1984 to 1.46 million in 1995, and to 3.2 million in 2002 (BTMA). Currently BTMA member spinning mills have 3,000,000 spindles. The chart below illustrates the growth in the spinning sector since 1980.

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Actual production capacity in weaving has increased from 190 million meter in 1996 to 830 million meters in 2000. Dyeing finishing capacity also increased from 366 million meter to 680 million meter within this time. With expansion of production capacity, capacity utilization rate also marked some improvement.5 (Rahman and Rahman, 2001:2). In FY 2002 the domestic textile and fabrics producers’ had a share of about 38% in the total export earnings accrued from the RMG sector. This was equivalent to about 1495 million dollars in FY2002. Thanks to the flourishing RMG sector, there is a captive yarn-fabrics market of 3 billion dollars at present, providing ample scope for the growth of backward linkage industries. To cater to the requirements of garment industries, a good number of accessory industries have also been set-up which earns approximately Tk 200 crore per annum from the RMG sector.

 

Banking and Insurance

Growth of the RMG sector and the related activities has contributed a lot to the robust growth of the financial sector in Bangladesh. In FY 2002 the banking sector earned about 37 million dollars from business with the RMG sector in the form of interest and charges and L/C charges. More than one-tenth of the commercial banks’ asset portfolio belongs to the RMG and textile sector in the country [Appendix table 2]. In FY 2001 commercial banks lent Taka 4400 crore to the textile sector, while the amount lent to the woven-RMG sector was Taka 812 crore. The export financing business of the commercial banks is largely dependent on the textile and RMG sectors. The RMG sector received Taka 2175 crore as export-finance in FY 2001 which was 46.14% of the total export financing portfolio of the banks. A World Bank survey revealed that almost all firms (98%) are the clients of the commercial banks for working capital and procurement of machines and equipment (57%). The RMG sector has also contributed to the growth of the country’s insurance sector. On average, every year the premium paid by the RMG sector to the insurance companies was about 6 million dollars. All firms have their machines and plants insured and, additionally, 87% of importers of input and 15% of the RMG exporters get their imports/exports insured.

 

Shipping and Logistics

The RMG sector has contributed to the shipping business in Bangladesh and stimulated setting up of several container yards, expansion of port facilities to handle large container carrying trains, increase of cargo handling and storage facilities. RMG manufacturers also extensively use services of Clearing & Forwarding Agents for the purpose of customs clearance of inputs and finished goods. It is estimated that port usage fees earned from the RMG sector account for more than 40% of the income of the port authority. RMG sector contributed about US$65 million in FY2002 to earnings of the Shipping business of the country by way of port charges, C&F Agent’s commissions, freight charges, forwarding charges etc.

 Transport Communication

The growth and development of inland transport services to a considerable extent owe to the growth of the RMG industry. Both wheel transport service and railway service are widely used by RMG sector for activities related to manufacturing and cargo movement. The concept of covered van emerged in Bangladesh for safe transportation of the RMG products in particular. In 2002 the inland transport industry received about 27.3 million dollars as revenue from the RMG sector.

 Contribution to Government Exchequer

The RMG sector contributes to the government exchequer both directly and indirectly. In FY 2002 the sector paid 6.3 million dollars as stamp and postage, license renewal fee etc. Payments made for visa form, license form, GSP form and other forms to the Export Promotion Bureau amounted to 58.85 million dollars in FY2001 [See Appendix Table 6 and 7]. The sector also paid USD 2.4 million to the government as direct taxes in FY 2002.

  Professional Services

The RMG sector extensively uses professional services from CA firms, legal agencies, business consultants. In FY 2002 total payment for professional services is estimated at 3.61 million dollars.

 Engineering Sector

The RMG industry paid 14.2 million dollars to the engineering sector which included payments to repairing and maintenance service industry (USD 4.29 million), electrical engineering (USD 4.38 million), transport vehicle maintenance service ( USD 2.87 Million), and machine tools service (USD 2.63 Million).

 Utility Services

Payment of Electricity bill by the RMG industry is estimated to be 14.74 million dollars in FY2002. Utility payments for gas, WASA etc. amounted to an additional 3.75 million dollars.

 Information and Communication Technology

The RMG sector also plays a catalytic role in the growth of the country’s ICT sector. The services consumed by the RMG industry generated revenue for the ICT sector. Payments for ICT services which include communication, hardware and software services are estimated at 9.88 million dollars in FY 2002.

 Real Estate

Demand for real estate development by the garment industry to accommodate offices and factories of over 3400 garment units has generated a lot of activities in the Construction Industry. The RMG industries paid approximately 26.24 million dollars as factory, office and garage rent in FY 2002.

 Hotel and Tourism

About 1000-1500 overseas apparel buyers and their representatives visit Bangladesh every year for business purpose. In FY2002 the RMG industry created a business of approximately 4.42 million dollars for the country’s tourism industry.

 Waste Recycling Industry

Approximately 0.2 million people are engaged in waste (mainly, the waste out prices of fabrics) recycling industry of the country which get their materials from the RMG industries. With these waste materials, they are making stuff toys, patterns, quilts, cushions etc.

 Emerging Consumer Market

The 1.6 million workers in the industry have created a large demand for consumer goods. A regular source of earning increases the basic consumption needs such as improved diet, better healthcare, improvements in family utensils and housing conditions etc. The sector has created an increasing demand for consumption of low cost commodities, cosmetics items, dresses, footwear, fast food and other products. A whole industry has been created to service this growing demand and created employment opportunities for hundreds of thousands of people.

 SOCIAL IMPACTS OF THE RMG SECTOR

 Women Empowerment

It is well recognized that women’s participation in income generation activities lends them a better status within the family and provides them with considerable freedom. A job ensures equitable access to household resources (nutrition) and larger investment on female human capital (health and education). Employment opportunities draw attention to women’s needs for public facilities such as transportation, communication, safety etc. and create a demand for policy response in these areas. It also has created a demand for education and health. As the income by the female member reduces dependency on male income it reduces their vulnerability. It also reduces the possibility of domestic violence against women. Expansion of women’s employment has contributed positively to the improvement of the savings behavior of the poor people since women tend to be better savers. Employment in the RMG industry has provided direct access to cash income for the first time to many poor women. A survey, conducted by the BIDS in 1997 showed that for 96 percent of the female workers in the non-EPZ areas, work in the garment industry was the maiden wage employment. The survey also showed that women were taking up such roles paying for house rents and schooling expenses for their children or brothers and sisters. Despite the fact that they have lower incomes, the female garment workers were spending the same amount as the male workers on the studies of their family members. The same survey further showed that female workers were spending their earnings on their marriage, thus taking a big burden off their families. The independent earnings also allow these women to have a greater share in household decision making. Evidently, wage work at the garment industry has empowered women and improved their status.

 Savings

Regular earning enables a large number of the garment workers to go for some savings. Workers investments on family pension schemes etc. create savings. A BIDS survey conducted in the early 1990s found that 21 percent of both male and female workers aged 15 years and above had their own bank accounts. A higher proportion of workers (30 percent) had bank accounts in the EPZ. Findings showed that women are on average better savers than men and save about 7.6 percent of their otherwise small income.

 Child Labor

In recent years, international debate on child labor has intensified. The elimination of child labor is also among the core labor standards in the ILO Convention. The Harkin Bill placed at the US Senate entitled “The Child Labor Deterrence Act of 1993” which called for the elimination of child labor in the export oriented manufacturing and mining industries. As a consequence many garment industries had to retrench child workers from their factories. In many countries these retrenched children ended up in more strenuous and less-remunerative jobs, or worst, turned to begging in the street. The Bangladesh RMG sector set a unique example through collective efforts which eventually led to the development of a safety-net programmed for the child labors. The BGMEA/ILO/ UNICEF Child Labor Project in the garment industry of Bangladesh, funded by the US Development of Labor was the first of a series of child labor programmes executed by the International Program on the Elimination of Child Labor of the ILO. This project, initiated in 1995, is based on a Memorandum of Understanding (MOU) signed by the BGMEA and two international organizations, the ILO and UNICEF, with the aim of progressively phasing out child labor from more than 2,500 factories that are members of the association.

The key elements of the MOU were:

(a) A fact-finding survey to determine the extent of child labor in the garment industry;

(b) The establishment of an education programme in which identified child workers should be enrolled;

(c) The establishment of a monitoring and verification system;

(d) The provision of income compensation in the farm of a monthly stipend of Tk. 300, the equivalent of (at that time) US$ 7. The costs are to be shared by on fifty-fifty basis by BGMEA, the ILO and other donors.

Many of the retrenched child workers have been placed in schools and are receiving a monthly stipend. Football manufacturing industry of Pakistan has been following the globally acclaimed BGMEA Model of Child Labor Elimination. BGMEA has so far spent over 600,000 US dollars for the project. Successfully addressing of this issue has created a very favorable image about Bangladesh abroad and has promised continued market access for the sector.

 Population Control

Employment opportunities especially for women created positive impact on family planning and population control in the country. Independent working-women are getting more conscious about the advantage of a small family, and are exposed to modern family planning methods. Working adolescent girls tend to avoid early marriage as they have their own source of income and are self-dependent. The mean age at marriage for girls working in RMG factories tend to be higher than the national average.

 

CONCLUDING REMARKS

The above analysis brings out, in a very succinct manner, the increasingly crucial role the export-oriented RMG sector of Bangladesh has come to play in the economy and society of Bangladesh. In its turn, the BGMEA, as the apex body of all entrepreneurs in the RMG sector, takes all possible measures to promote the interest of the workers and the sector. BGMEA strives to promote the cause of the sector and raise public awareness about the important role the sector is playing in the life of the country. BGMEA hopes that appreciation of the role of the sector will enable policy makers to undertake further initiatives in order to enable the sector to achieve yet greater heights to the benefit of the country and its people.

 The preparation for the MFA Phase-out in Bangladesh

 
Main source: Horia Kraus American International School/Dhaka, Senior Project 2004

  The world today is driven by economic decisions made on a daily basis. If understanding the mechanism of the economic cycle is a problem, surviving in the new World Trade Organization (WTO) regulated environment will be very tough. Bangladesh like other developing countries is greatly affected by the rules and regulations of the WTO. In 2005, the Multi Fibre Arrangement (MFA) will phase out and will cause major dislocations of businesses across Asia, especially in the Ready Made Garments (RMG) sector. Right now, Bangladesh needs to catch up with other neighboring countries that are more developed economically and which create a threat to underdeveloped Bangladeshi garment factories. In order to have a competitive RMG sector in the new WTO trading regime, Bangladesh will need to modernize the way it interacts with global markets.

 REVIEW OF RESEARCH

For the past 10 years there have been many ongoing discussions about Bangladesh’s future after the MFA. The RMG industry has benefited from almost two decades of massive growth because of the free trade regime. For an industry that was built upon this arrangement it is hard to see how they will prosper in the post MFA era without making drastic changes. Because of the vital importance to the country there are plenty of articles being published on a regular basis regarding the issue of free trade and the effect of a free trade regime on Bangladesh. Information on the internet is not very hard to find. The problem is that the information is not very up to date. You would expect the Bangladesh Garment Manufacturing and Export Association (BGMEA) recent information, but the information they have posted on their site is older than on some other sites. There are many reports such as “Phasing out of the Multi Fibre Arrangement” by Angela Hale and another technical report called “Estimated Effects on the United States and Bangladesh of Liberalizing U.S. barriers to Apparel Imports” by Laura M.

 Baughman, Joseph F. Francois, and Dean Spinanger, which were very useful because of the detailed information they offered. Statistical information was a bit of a problem because it was different on almost every source. Information on the MFA was easy to find but the challenges that the garment industry is facing was a topic that has not been discussed in depth. Personal communications with Mr. Ison, Mr. Derrenger and Mrs. Kraus were useful in providing me with some insight on the mentality of garment factory owners and their perspective of the future. Mr. Caldera and Mr. Annisul Huq, both of whom own garment factories here in Bangladesh, helped explain things that I did not understand because the necessary information was not available form the usual sources.

 BACKGROUND MFA

In order to understand this topic we need to talk about what these terms actually mean.

The MFA was designed to curtail the growth in RMG products from places like Korea, Hong Kong, Taiwan, Thailand and others. The producers in these countries had to shift their operations to non-quota countries like Bangladesh, Sri Lanka, India, Maldives and others in order to maintain a high profit. In the beginning of the MFA era, these new producers flooded the markets of North America and Europe with their RMG products. After some time though, these countries were brought under the MFA rules and like the others, they also were assigned quotas. Having no history of RMG production, Bangladesh got started in RMG industry because no quota had been assigned to it. The very low cost and abundant labor aspect was the secondary factor why Bangladesh experienced such a boom in the RMG industry. The WTO realized what was happening with underdeveloped countries and their boom in RMG industries and this is why it is phasing out the MFA; an arrangement that has been around for 20 years. The MFA will be completely phased out on January 1, 2005; thus freeing the market of the quota system, giving equal chances to every country to compete for its share in an open market. This will bring trade in garment industries into line with the new WTO (World Trade Organization) trading rules.

 ATC

The Agreement on Textiles and Clothing (ATC) was introduced in order to streamline the phase-out of the MFA. It raised or lowered the quotas in a progressive way so that the impact was not so big. It restrained countries from suddenly increasing the number of exports in order to avoid damage to importing countries. It assured reciprocal market access; the EU and the US wanted greater access for Asian markets. Developing countries had to show effective methods for preventing transshipment and false declaration of origin. The removal of quotas will mean changes in the location of industries and more competition. Producers may move their factories to places with lower labor cost and to countries that have free trade agreements with the EU and with the US. The implementation of ATC meant that some gained and some lost. The concentration of industries has been in low cost labor locations. In an environment of open market competitiveness viable producers depend on lower wage costs, easier and broader range of textile/fabric supply, a better supply infrastructure for transport and shipping, and proximity to markets. Countries who cannot meet those criteria will lose business opportunities. Those who can will gain market share. Asia will experience the greatest changes in distribution of production. China has the highest predicted growth because of the huge availability of low-cost labor, and its new and enormous textile industry. Bangladesh on the other hand is expected to lose. Bangladesh developed its garment industry as a result of the MFA/ATC preferential trading agreements. It will suffer from a lack of backward linked textile industries and poorly developed infrastructure (Hale, 2002) (i.e. roads, bridges, ports, expanded EPZ, etc.) Bangladesh has been criticized for having relatively low levels of business acumen, design and quality control. It also has a reputation for bureaucratic high levels of corruption. The new WTO rules are simple: “the fittest will survive; the unfit will perish”. The big companies will get bigger and the small and ineffective ones will go out of business. The MFA phase out will have an impact on the workers also. The numbers of jobs in the Southern Hemisphere will increase due to the shifts of location of the garment factories; from places like Bangladesh to Sub-Sahara Africa for example. Ready-Made Garment Industry

 After Bangladesh’s independence in 1971, the economy was centrally managed and dominated by the public sector, focusing on import substitution. The economy depended mainly on the industries left from Pakistan. Paper, tea, and jute industries were the ones that were left, none of them being very developed or successful because of government restrictions and inefficiencies. In the 1980’s foreign investors, mostly Asians began to come. They invested in garment factories. In order to create a more market based economy, the government allowed foreign companies to invest in Bangladesh and have 100% ownership. Most of the factories in the RMG sector are situated in Dhaka, Chittagong, Sylhet, Rajshahi, and Kulna. In 1992 there were 1355 factories. The labor force has increased from 3% of the population 10 years ago to 11% in 1993 and to 43% of the population in 2002. Since 1991 when the policy, allowing foreign companies to invest in Bangladesh and have 100% ownership, was adopted, Bangladesh has made considerable progress in stabilizing and liberalizing the economy. Bangladesh is trying to diversify both its exports and its export markets. The export of ready-made garments (RMG) and knitwear account for 75% of total exports. The majority of those exports go to the United States and European countries.

 The Garment Industry is the fastest growing industrial sector in Bangladesh. This growth has been entirely dependent on the MFA’s quota system. The US uses a quota system, but the EU doesn’t, it has a free market system. The RMG sector is the largest employment sector in Bangladesh with around 1.8 million people of which 85-90% are women.

  Textile as a whole is a heterogeneous product market where yarn, fabric, fashion, material design, quality, colors, brands etc. create values. Therefore, constant innovation and improvement is a pre-requisite for increasing competitiveness. My presentation will therefore, have two-phases – one, dealing with Primary Textile Sector (PTS) having a brief on present status & potentials and the second phase with present status of Export Oriented Readymade Garments Units, in the post MFA challenging environment.

 CONTRIBUTION TO NATIONAL ECONOMY

• 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, Toiletries and related other economic activities. • Provides indirect employment to 0.80 million workforces 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.

INSTITUTIONAL FRAMEWORK

Textile Sector in Bangladesh has a number of sub-sectors; each operates independently, but works as complementary each other. In Bangladesh forward linkage that is apparels manufacturing. Process spans from yarn manufacturing to garmenting. From the processing point of view Textile sector has the following sub sectors:

 Yarn Manufacturing: Manufacturing of yarn from natural fibre & MMF

- Fabric Manufacturing: Woven & Knit Fabrics. – Textile Product processor: Dyeing & fiber – Knitting Mills – Knit-Dyeing-Finishing Mills – Woven Composite Mills (more than one process is carried) – Knit Composite Mills (more than one process is carried)

- Hosiery Units – Readymade Garments Industry (RMG): Apparel manufacturing.

The market share of Bangladesh apparels can be seen from this table (2003-04) (Value in $Mn)

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Bangladesh achieved a phenomenal growth in Readymade Garments exports, which is evident from the table below. (Value in Mn. US$)

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Growth of Woven Vs Knit RMG

The share of woven RMG export has been declining as the growth of Knit RMG export supported by local inputs had been much higher.

In 2003-04 knit RMG export has surpassed the woven RMG export because knit has competitive advantage due to availability of local inputs

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Factors that contributed to the growth and expansion of RMG exports in Bangladesh are:

– MFA (Protected Market) – G S P (Preferential Market) – Dynamism of Private Sector – Policy support from Govt. & Continuity of Policies in successive Govts. – Decontrol of Reserve Sector. – Financial and Non-financial incentives – RMG Sector in the list of free sector. – Introduction of Back-to-Back L/C and

– Bonded warehouse – Structural adjustment policies of Govt. – Low labor cost. The table below shows the product categories of our apparels export to major markets (2003-04)Untitled

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TREND IN EU MARKET

In EU market Bangladesh enjoys GSP facilities. The facilities have been further relaxed through Everything But Arms (EBA) scheme. – There is no quota for Bangladesh in theEU market.

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Export Trend in EU (Value in Mn. US $) Export of TC to 2000 -01, but bounced back by 12.48% 34.65% in 2003-04 over 2002-03 EU declined by 0.28% in 2001- 02 over in 2002-03 over 2001-02, Foreign Exchange Retention on National basis

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What is the Multi Fibre Agreement?

Exports of textiles and clothing from developing countries have long faced restrictive blocks to their exports called quotas. Brought in force as a temporary relief measure in favour of the domestic textile manufacturers in the developed countries, it has been in force for 40 years now. In 1962, a Long Term Agreement (LTA) regarding international trade in cotton textiles was signed. It replaced the one-year Short Term Agreement that existed at the time. LTA underwent several renewals and was subsequently replaced by the Multi Fibre Agreement (MFA) in 1974, which was expanded to cover exports of synthetic fibres and woolen products, besides cotton. MFA came into force to allocate export quotas to the low cost developing countries, limiting the amount of imports to countries whose domestic industries were facing serious challenge from rapidly increasing imports. It sought to expand trade, reduce barriers to trade and progressively liberalise world trade.  The MFA regime existed for 25 years, until 1994 when the Uruguay Round of Multilateral Trade Negotiations resulted in the Agreement on Textiles and Clothing (ATC). The ATC sought to phase out all quota restrictions in four phases spread over a period of 10 years. The first three partial phase-outs were in January 1995, January 1998 and January 2002. The final one is due on January 01, 2005.

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Source: WTO

Technically, until now, 51 per cent of the quotas should have been removed but in reality, only 16 per cent have been actually removed. Even these 16 per cent constitute categories, which were not sensitive for imports into the US and the EU. The commercial significance to the developing countries therefore has been very limited. 1 January 2005 will see the remaining 84 per cent quota restrictions being abolished for all countries barring China, which is expected to continue facing quota restrictions for another three years, with a possible extension till the end of 2011. Though the ATC provided a 10-year phase-out period for quota elimination, the ransition period was not well utilised by the exporting countries to gear up for the post ATC regime. With the quota restrictions disappearing from 1 January 2005, competition will intensify. It will enable some developing countries to increase their exports at the cost of smaller countries that enjoyed quota protection and duty free treatment

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About ETI

The Ethical Trading Initiative (ETI) exists to identify and promote good practice in the implementation of codes of labour practice, including the monitoring and independent verification of code provisions. We are an alliance of companies, trade union organizations and non-government organizations (NGOs) committed to working together to achieve that aim. Our ultimate goal is to ensure that the working conditions of workers in companies that supply goods to consumers in the UK meet or exceed international standards. The ETI Base Code is founded on International Labour Organization (ILO) Conventions and has become a model on which other codes are based. ETI’s Base Code can been seen in full on our website (www.ethicaltrade.org). We were established in 1998 as an independent, not for profit organization. We are funded by member contributions and a grant from the UK Department for International

Development (DFID).

Background and purpose of the seminar

The final stage of the phase-out of the MFA on 1 January 2005 is predicted to have significant economic and social consequences, including substantial job losses in some key garment producing countries in the developing world. But despite growing concern and debate, awareness of the real implications remains limited, as does concerted and effective action to mitigate potential negative impacts. This ETI seminar was organized to raise awareness and encourage action from ETI members and other EU and US companies. Specifically, it aimed to:

 • Raise awareness of the MFA phase out and its potential impact on workers;

• Take forward thinking on how different players can help prevent disaster for workers and the industry in vulnerable countries; and

• Provide participants with a chance to hear others’ perspectives on the issue.

 Key issues raised at this seminar, in particular any strategies and actions identified, will be fed into the on-going work of the MFA Alliance, an international multi-stakeholder alliance which has been established to create common understanding and identify possible courses of action to tackle the fall-out from the phase-out, and explore the potential for a co-ordinate approach to address the issues.

 ETI is grateful for the contributions of the following speakers:

• Maya Forstater (Research Associate, AccountAbility), who presented key findings from the first phase of the research commissioned by the MFA Alliance on the implications of the MFA phase-out. Maya was a member of the team responsible for conducting this research.

• Neil Kearney (General Secretary, ITGLWF), who has campaigned extensively on this issue on behalf of garment workers worldwide.

• Balachandran Gowthaman (Oxfam International), who has conducted research on the implications of the MFA phase out on the Sri Lankan garment industry and workers.

 What is the MFA phase-out?

On 1 January 2005, the Multi-Fibre Arrangement, which has governed garment and textiles imports to the EU and US through a system of quotas since 1974, will come to an end. The quota system, although initially introduced to protect the domestic industries in the EU and US, has in practice provided many developing countries with access to markets and shelter from the rigours of global competition. From 2005, these countries will have to compete with the world’s most efficient garment producing countries, particularly China. Clothing brands and retailers will have greater freedom to consolidate their supply base, concentrating on those countries offering the best deals.

 Why the commotion?

The agreement to phase out the MFA has been hailed by some as a real success in the battle for a more open market – so why the commotion? The concern is that retailers and brands will stop or substantially reduce sourcing from many poor garment producing countries, with serious economic and social consequences including substantial job losses.

According to Neil Kearney, trade in garments and textiles is worth USD 350 billion, making up more than six percent of total world trade, and many countries are almost totally dependent on the industry for export earnings and manufacturing employment. In Bangladesh for example, garments and textiles are responsible for 95% of the country’s industrial goods exports, 1.8 million jobs and probably another 2 millions workers who depend on the sector in an indirect way for their livelihoods. The problem is that in many of these countries the industry only took hold because of trade regulation and quotas – without the MFA it is doubtful whether countries like Bangladesh, Cambodia, Mauritius and Lesotho would have had a garment and textiles industry at all. These and other poorer countries who lack the infrastructure, technology etc to compete in a less regulated global market stand to lose out – and because of the high level of dependency on the industry for employment opportunities, workers in these industries are extremely vulnerable. This accounts for why trade union organisations and NGOs are concerned about the MFA phase out. But why should international brands and retailers care? The MFA Alliance believes that job losses and related negative social consequences resulting from companies’ decisions to shift production pose a real risk to brand reputation, and that the consequences may be widespread enough to spread cynicism about the broader “development through trade” and CSR agendas.

 Which countries will win/lose?

 The headlines

So what will be the end result? According to the mapping research commissioned by the MFA Alliance, buyers and industry analysts predict the following

• Winners: China, and to a lesser extent India Losers: Philippines, Mauritius, Nepal, and other countries supplying the mass (cheap end) garment market

• Uncertain outcomes – Group 1: Bangladesh, Pakistan, Indonesia and Vietnam. They all have the potential to be competitive supply bases but also have serious difficulties (eg, corruption, security). A lot depends on how the industry and government respond to the challenges.

• Uncertain outcomes – Group 2: Eastern European and Central American countries. They will remain part of the mix if they can take advantage of their proximity to EU and US markets, respectively, to deliver fast turn-around. Much of the discussion at the event centred around unpacking the China issue: there is little doubt that China is gaining and will continue to gain from the MFA phase-out, but how much was under considerable debate.

 What impact on workers?

Accepting the backdrop of limited employment data and little research done to date on the impact of the MFA phase-out on workers, trade union organisations and labour rights NGOs (as reported by the MFA Alliance), and our speakers, predict the following potential impacts/risks of the phase-out in vulnerable countries:

Job losses. No one can be certain of the exact numbers and location of job losses, and estimates vary widely. Nevertheless, to give a ballpark picture of the scale of job losses predicted: Neil Kearney quoted estimates of 1 million jobs to be lost in Bangladesh, a further million in Indonesia, and 300,000 of the total 350,000 jobs in the garment industry in Sri Lanka (although note Gowthaman’s caution about the figures – see section 1.4.1 above). What seems certain is that there will be disruptions in employment, and most commentators agree that job losses will be most concentrated amongst small and medium-sized enterprises (SMEs), low-tech and un-modernised factories, and those offering basic “cut, make and trim” facilities.

 Social impacts of job losses. In many garment producing countries, the garment workforce is dominated by young women who have migrated from rural areas. Where the economy is highly dependent on the garment industry, alternative job opportunities are scarce. There are particular concerns about migrant female workers in the more “patriarchal” societies in South Asia – having left rural areas to enter the job market, there is a real risk that they will not be accepted back into their home villages. Anecdotal evidence exists of increases in domestic violence, marriage breakdown and prostitution following factory closures.

Loss of owed wages and benefits from “overnight” closures. Many labour rights activists fear that many factories going out of business will “cut and run”, leaving workers not only without a job but also losing out on owed wages, benefits and redundancy payments required by law.

Poverty and security implications could be significant where the industry is critical to the national economy. Beyond the workers employed directly by the garment industry, other related industries, local economies and rural families dependent on remittances are also likely to suffer as a result of decline in the industry. According to Neil Kearney, tension is already rising in Bangladesh: there has been an increase in street crime, often attributed to the newly unemployed, and news reports speak of numerous suicides among young women workers recently made redundant.

Decline in working conditions for remaining workers. Many fear increased competition for orders will lead factory managers to reduce wages, default on proper compensation for overtime etc. in a bid to cut costs and remain competitive. Workers will be in an even weaker bargaining position due to the increased threat of work being moved elsewhere. Similarly, there are concerns that governments will reduce legal protection for workers to stay in the market. And according to Neil Kearney, the risks are very real: the Bangladesh government recently indicated that it is going to increase permitted overtime limits and relax the regulations on night work for women; and the government in the Philippines has indicated that it will exempt the garment industry from the minimum wage legislation.

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FDI in the RMG sector:

 If an MNC from a developed country makes a direct investment in a developing country and operates a firm that is owned 100% by itself, it is likely to be more productive than domestic firms. The reason is that the MNC brings exclusive technology that adds to its core competence more importantly, it brings established global marketing network and firm specific managerial efficiency that local firm lack. The productivity advantage of FDI is an established fact. Beside, joint venture with local firms tends to create spillover effect. The positive spillover effect of FDI through technology transfer, including management technology transfer, including management technology is widely recognized. The garment industry of Bangladesh is an example of this.

 The rapid development of RMG industry in Bangladesh in the early 1980s was to a great extent caused by to joint ventures with South Korean firms. For example, (1) The joint ventures between Desh garment & Daewoo Corporation of South Korea & (2) Trexinp ltd (the predecessor of currently operating style craft- a Bangladeshi RMG firm) & Youngone Corporation of South Korea proved the validity of this thesis.

In the first case, the local firm, Desh Garments provided necessary funds & Daewoo transferred production technology and was responsible to market the entire production. In both cases marketing and production technology were provided by the foreign MNCs . It is a fact that because the Korean firms had exclusive technology and marketing network, the Bangladesh garment got into US and other markets.

The advantages of FDI have been reaffirmed in a study foreign ownership and firm productivity in Bangladesh garment sector” found that the productive efficiency of the FDI firms in the RMG sector was on average 20% higher than that of the factories owned and managed by Bangladeshis. The study concludes the firms with foreign capital are the most productive of all firms”…..

And knitwear firms are most productive. An average knitwear firm has 10% higher productivity than a woven firm and 17% more productivity than sweater firm.”

 The policy implications of these findings are clear:

(1)    to increase productivity the RMG sector must successfully attract FDI

(2)    Production and export of knitwear should get higher priority.

(3)    By implication, increased involvement of FDI will make RMG sector competitive

 Textile Profile: Tradition, Modernity and competitiveness

Source Collection: The Daily Star 15th Anniversary issue, 2006

Export-Oriented Readymade Garment units (RMG):

The country entered into the export market of apparels in 1978 with only 9 units and earned only USD 0.069 millions. During the last two decades this sector has achieved a phenomenal growth, due to policy support of the government and dynamism of the private sector entrepreneurs. Now the number of RMG units is around 4000 and the export earnings have reached @ USD 6.40 billion. The export earnings between 1977-78 and 2004-05 have been shown in the following table:

EARNINGS FROM EXPORT OF APPARELS

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The support policy fro government has been:

  • Import of raw materials through back-to-back L/C,
  • Duty free import of raw materials under bonded ware house facilities
  • Cash incentives provided to the producers-cum suppliers of local fabrics and accessories to export-oriented RMG units.

 Local Yarn and Fabric Production

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Total supply of Fabrics and their use in local export oriented RMG units

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Demand-supply gap in fabrics:

The PTS is meeting the major demand of fabrics of the local markets. In addition to  that significant part of the demand of fabrics of export oriented RMG unit is being met by PTS. With gradual increase in population and expansion in trade, the demand for fabrics in the domestic markets as well as in the export oriented RMG units is increasing very fast. In the year 2003-04 the demand for fabrics in the domestic and export oriented RMG was 5188 million meters. Against such demand at present only 2750 million meters of fabrics domestically produced.

In 2008-09 the demand for fabric by both domestic market & export oriented RMG units shall be 6657.00 million meters. Against such a projected demand, the production of fabrics was at 2750 million meters in 2003-04, which was only then42%. This indicates that there will be a shortfall of fabrics by 3907 million meters which will be 58% of the total demand. Such a staggering deficit cannot be met by a country like Bangladesh by setting up new mills in the PTS into 4-5 years due to fund constraints. It is not possible by any developed or developing countries to be 100% self sufficient in fabric production. Therefore the projection of 2008-09 to produce additional fabric to the tune of 2027 million meters has been calculated in the consideration established amount of new mills (weaving, knitting and dyeing-finishing). On the other hand to meet the demand-supply gap of yarn by local export oriented RMG units for fabric production will stand @ 416 million kgs. 80% of this short fall can be met by the local production, if ring and spinning mills can be established. Projected number of new textile mills along with investment outlay in the primary textile sector (PTS) covering spinning, weaving, dyeing and printing.

A projection has been made to find out the demand-supply of yarn and fabrics in the year 2008-09. Along with the projection an investment outlay has also be made in the major textile sub-sectors as in the following table:

PROJECTED NUMBER OF NEW TEXTILE MILLS ALONG WITH I

NVESTMENT OUTLAYS IN THE PRIMARY TEXTILES SECTOR (

PTS)

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From the above table it is seen that if 72 spinning mills, 93 weaving mills, 70 knitting-knit-dyeing units and 60 textile processing mills are established by 2008-09, the demand for yarn and fabrics could be met. However, there will be fund requirement of tk161100.00 million for setting up those mills and production units. If established, job opportunities for the 8 million workforces could be created within the next 5 years.

DEMAND-SUPPLY GAP OF FABRIC AT LOCAL MARKET AND EXPORT ORIENTED RMG UNITS:

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 Export Performance of Bangladesh

Bangladesh’s total export has been growing very regularly, without any erratic fluctuations, at an average annual rate of around 13 percent for more than two decades. Trend of period average simple growth rate of total export of Bangladesh is almost similar in two periods; 1980-90 and 1991-2004 (Table-2.3). During the whole period under consideration ready-made garments (RMG) exports contribute lion’s share (around 75 percent). But before that jute and jute goods combined contribute the major share (around 70 percent). The other major products are frozen foods, leather and leather products and tea whose combined share is currently around 15 percent. For RMG export as a whole the average annual growth rate is much higher (95.2 percent) during the first period. Of the RMG export the average annual growth rate of knitwear export is much higher (74.0 percent) during the last period as compared to woven wear.

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In the backdrop of the moderation in world output growth outlook and Bangladesh’s GDP growth projection during 2005, the economy’s export growth record in FY05 could be viewed as fairly strong. Given the fact that Bangladesh’s export is significantly destined to USA and the Euro area (more than 70 percent), it is a matter of imminent concern that the current year’s reduced growth forecast of both the USA and European countries particularly, Germany, UK, France and Belgium could squeeze the demand for Bangladesh’s exports, especially that for RMG and other textile products, leather and leather products, frozen foods, raw jute and jute products in those markets. But also other positive factors are there such as the recent depreciation of taka against US and Euro dollar28, improvement of Bangladesh’s terms of trade against the major export destination countries etc. which could improve Bangladesh’s export competitiveness in the international markets. Bangladesh’s export basket is rather narrow, only a few products contribute a lion’s share of total exports. For instance, the RMG products’ share alone in total export earning is more than 75 percent and its main destinations are the USA and the Euro area. So, with the GDP growth moderating in those countries during 2005, the export demand would be lax. Again, with the world-wide removal of quota on RMG create heavy pressure on the price competitiveness of Bangladesh’s export and its negative impact has already been evident in the sharply decelerated annual growth record of only 1.7 percent of the woven RMG exports as of end June which is markedly lower than the target, and the underperformance may partly reflect a loss in competitiveness in the international market. Last one month’s export figures also recorded a sharply receded growth of woven RMG exports29 which still represent more than half of the total RMG exports. The other component of RMG is knitwear which experienced significantly higher year on year growth (more than 31 percent) in FY05. Given the extreme importance of Bangladesh knit wear export trade with the Euro area, part of the rebound of export growth in those countries is probably explained by the fact that Bangladesh appears to have maintained the growing competitive advantage in knitwear products vis-à-vis other exporters, which is not evident in the case of woven garments sub-sector. Knit wears also proved to be the sector of higher level of domestic value addition than for woven products, which is also playing positive role in achieving higher growth record of its exports. However, in the backdrop of near-term lower growth prospect in both USA and the Euro area countries particularly, Germany, UK, France and Belgium and also of growing competition from such economies as China and India, that Bangladesh’s overall export growth will remain relatively robust in the first half of FY06. On the upside, there is also prospective future for Bangladesh’s knitwear exports to the Euro area. First, given the fact that knitwear products are relatively inexpensive, these are unlikely to be adversely affected if economic growth remains anemic, and indeed register solid growth, in the event the low and middle income earners’ spending capacity in the Euro area is enhanced. Secondly, in the Euro area a gradual pickup in the rate of growth of economic activity is also expected this year and next, especially if the adverse impact stemming from the past appreciation of the euro gradually tapers off. Thirdly, Germany, France and UK have gained competitiveness, which has boosted their export growth albeit slowly in the year 2005 and also their imports have picked up briskly. Therefore, there are, as yet, few signs of any significant slackening of domestic demand growth. Looking ahead, these improvements may allow some scope for employment and real wage growth in these three countries. Particularly, employment growth, which had been notably

 Imports

Bangladesh experienced a faster growth (21 percent or USD 2244 million) in imports during FY05. The three major causes that fuelled this strong growth were external shock from international oil prices accompanied by growing domestic demand for petroleum, shortage of food grains in the domestic economy due to the adverse flood in 2004 and strong domestic demand for capital machinery particularly in the RMG sector. However, expansionary fiscal policy accompanied by high credit growth influenced high growth of imports throughout the last fiscal year.

 Imports of Capital Machinery: In FY 05, import of capital machinery grew by 53 percent compared to 33 percent in the previous fiscal year. The industries that enjoyed this high growth were textile, garments, pharmaceuticals and printing. Growth rates of textile and garments machinery in FY05 were 50.20 percent and 31.92 percent respectively. These increased investments would enhance productive capacity of the economy and may enable RMG sector to become more competitive with the rest of the world. It can be mentioned that though Bangladesh maintained a high stable growth (12.9 percent) in RMG exports during the MFA-phase out period, the main source of this growth was knitwear exports. At the same time, Bangladesh experienced a notable downward trend (from a growth rate 8.6 percent in FY04 to 1.7 percent in FY05) in the export of Woven Garments, which usually makes up about two thirds of the total RMG exports. It can be expected that high growth rate in imports of textile machinery would have a positive influence on exports of Bangladesh including woven garments.

  Wage board and its result

Collection Source: BGMEA WEB SITE

 

 Most occurrences that occur in our garments industry is because of poor providation of wages. Workers in various areas agitated in different factories for their poor wages for a pretty longtime. But last year it turns a drastic situation as workers in almost every factory came out from their works, and demanded for proper wage. To handle this situation a committee was formed with the representatives of government, entrepneurs, workers and elite person of our society. The committee has decided The Minimum Wage Board announced the final pay structure for the workers in the readymade garment (RMG) sector fixing Tk 1,662.50 as the minimum monthly wage including basic salary, house rent and other allowances for the entry-level workers. The board announced two separate pay structures for the garment workers and the employees. There are seven grades for the workers and four grades for the employees. Minimum wage for grade one workers will be a total of Tk 5,140 including basic salary, house rent and allowances, Tk 3,840 for grade two, Tk 2,449 for grade three and Tk 2,250 for grade four, Tk 2,046 for grade five and Tk 1,851 for grade six. Total monthly wage for apprentice workers will be Tk 1,200. An investigation found that 2001 garments factories among 2420- factories implemented this wage scale. This shows that still 429 factories do not follow the suggested wage scale. Government declared to take necessary steps to punish these factories.

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Industrial Valuation

Export Earning

The share of annual national export income from other sectors such as frozen food and jute goods together is not more than 12% of the annual national export income (see Table 2

Table-2: Development of the Export (in Million Taka) of different Sectors from 1993 to 1999

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Source : Bangladesh Export Statistics, Export Promotion Bureau (EPB) (Compiled).

Back in the 80s, a large number of private sector initiatives were taken in manufacturing sectors like the RMG industry. The RMG industry has enjoyed a meteoric rise from less than 50 factories in 1983 to over 3000 in 1999. In between this period, the level of employment has increased from some 10,000 to approximately 1.5 million today (see Table: 3); with its share of employment in the manufacturing industry increasing from a mere 2% to over 15%.

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Employment-Dir- Indirect:

Employment Generation: At present about 35 lakh people are directly employed in the textile industry. The successful implementation of the investment programme made for the period 1995-2005 will create new employment opportuniti4es for 25 lakh people.

Employment of Women: Women constituting about 50 percent of total population, need to be involved in economic activities for accelerated development of the country. Currently, female employment accounts for nearly 50 percent of total employment in the textile industry, of which the export-oriented RMG industry employs about 95 percent. Preference will be given to females for increased participation in the modern textiles sector.

Women employment: Women are the most disadvantaged section of our population, whereas in the apparel and garment industry they are the prime movers of this labor-intensive industry. About 90 per cent of the workers are women, comprising of almost 70% of all female employment in the nation’s manufacturing sector. This industry has also created a vast scope for employment at all levels of production including management, supervision, etc. This sector has uplifted the neglected section of the population, thus radically transforming the socio-economic condition of the country

Value addition in RMG

Backward linkage development

Inefficient Financial Support for Backward Linkage Industries

Since 1974 international trade in textiles and clothing has been guided by various restrictions on a global or regional basis under MFA. The entire business in apparel and garment industry has been subjected to bilateral quota negotiated under MFA. The arrangement of bilateral quotas and restrictions on import under MFA has begun phasing out from January 1995 and the process will be complete by 2005. Therefore there will be no more quotas and the only barrier to import penetration will be the normal rules of competitiveness such as price, quality, service, fashion and tariff.

Again, the GSP scheme is keen on the basic rules of origin and to meet this rule we need to mobilize the textile sector to feed the RMG sector. Investment in a textile industry will not be viable unless the government reforms its policies for financial support. The cost of financing the linkage projects must be brought down, as was done by India and other competitors of Bangladesh during the initial period of developing their textile sector. Cash incentives should continue. In addition, long term loans must be available at reasonable interest rates. Although the current nominal rates are around 12%, the actual cost of fund to the entrepreneurs amounts to between 20% and 24% after various adjustments. This is quite high a rate and discourages investment in this sector. The Commercial Banks need not maximize its profits at the cost of the RMG industry. The government may direct the Banks to make reasonable profit and lessen the rate of interest for the RMG sector substantially, say, to 6% to 7%. This of course does not mean that the Bank should not take necessary precautions against possible defaulters.

Investment in backward linkage industries for greater supply of raw materials to the RMG sector, particularly in composite textile mills, is quite large. The entrepreneurs will need equity capital from financial institutions. Currently a 50:50 debt-equity ratio is enforced. To encourage investment in this sector, the Government should moderate the ratio to a reasonable 80:20 level.

If all the backward linkage industries in spinning, weaving, dyeing, printing and processing are to be developed by 2004, a total of Tk. 210 billion will be needed for investment. The Government should create a special fund of at least Tk. 150 billion to provide equity capital to sound entrepreneurs who can come up with the balance 20% equity. It is worth mentioning here that similar support is available in many countries including India.

Given the investment needs and future uncertainty, it is questionable if Bangladesh will be able to invest Tk.210 billion in order to develop the total capacity in the backward linkage industries required to meet the RMG demand in 2005. To be self-sufficient in the production of export quality yam and fabrics is neither necessary nor feasible nor wanted. The traditional supply of cotton yarn and fabrics from foreign countries may decline due to the phasing out of MFA. Some of Bangladesh’s fabric supplying countries, facing the competition of total globalization after 2004, may not have the surplus to export while others may find it more profitable to expand their own garment industry.

Subsequently Bangladesh must create opportunities to generate a certain new capacity to spin yarn, weave cloth and process Grey fabric. Like Hong Kong and Singapore, which trade quite normally, RMG will have to remain partly dependent on imported yarn and fabric. This, however, should not create a serious problem for Bangladesh to remain competitive in the world market after 2004. Therefore the RMG industry needs to be restructured only partially; a limited number of composite mills, a large number of independent spinning mills and processing units need to be established. One of the easier avenues of gaining success in this respect may lie in modernization of dying or decadent mills.

OTHER POLICIES FOR THE OVERALL DEVELOPMENT OF THE TEXTLE INDUSTRY

DEVELPMENT OF INDUSTRIES COMPLEMENTARY AND ALLIED TO THE TEXTILE SECTOR:

Production of fabrics and RMG items depends to a large extent upon various allied textile products. For instance, production in spinning and weaving mills depends on the availability of spare parts, accessories, etc.; production in dyeing and finishing units depends on the availability of starch, bleaching, accessories, dyes, and chemicals; and production in RMG industry depends on the availability of sewing threads, buttons, labels, cartons, zippers, elastic, etc. Besides, many fabrics-based small and cottage industries have been set up in response to consumer demand; for example, batick, lace etc. To develop the allied textile industries, the policies adopted will be as follows.

Necessary encouragement and support will be given to set up allied textile factories in the private sector for generation of additional employment opportunities and earning/saving of foreign exchange.

RAW MATERIALS FOR THE TEXTILE INDUSTRY:

Raw cotton is the principal raw material for textile industry. The quality of raw cotton produced in the country is of international standard. Although cotton cultivation is profitable, it has not yet become popular. However, composition of land and weather condition of our country is suitable for production of this crop. In view of this, cotton cultivation has bright prospects in this country. But it is very difficult to make adequate land available for cotton cultivation in the face of serious pressure on available cultivable land to meet the demand for food in the country. Therefore, in line with cotton cultivation, efforts should be mad for production of man-made fibres domestically.

Locally produced cotton can meet hardly 4-5 percent of total requirement. On the other hand, the production of man-made fibres in the country is also very limited. As a result, spinning industry has become almost totally import -dependent. Such import dependence causes a serious drain n hard earned foreign exchange on the one hand, and makes domestic fabric uncompetitive through escalating domestic production cost of textile products, on the other hand.

With a view to reducing import dependence and making domestic textile products internationally competitive, the following policies will be adopted locally :

  1. Cotton cultivation will be extended to various regions suitable for its cultivation by further strengthening the Cotton Production Programme. Cotton Development Board under the Ministry of Agriculture will undertake various necessary steps, including import of improved variety of cotton seed.
  2. Along with the expansion of cotton cultivation, necessary steps will be taken for production of man-made fibres through the use of new technology and development of petro-chemical industries in the country.

Forces behind the Development

The success story of the Readymade Garments sector of Bangladesh is based on employment generation and increasingly high value addition, thus smoothening the path for growth and development of the country. The apparel and garment industry propels sectors such as banking, finance and insurance, cargo, shipping and transport, entertainment and hospitality, research and education and a lot more. The mentioned performance of the industry has been possible due to:

  • The Government of Bangladesh has always been concerned about the sector’s growth and has played an active role as a catalyst to solve various complexities, whenever intervention was necessary.
  • The cheap but disciplined and regimented workforce has been key for the success of this industry.
  • The entrepreneur class has been dedicated and motivated to the country’s economic prosperity.
  • The quality of the manufactured apparel, which has been increasingly recognized by our international buyers and end users all over the world.
  • Buyers’ response has been encouraging through repeat orders. The industry has been producing all sort of apparels for all seasons and has managed to get repeat orders for every season.
  • The import policy of Bangladesh has been flexible and friendly for import of accessories.
  • Although there are accountable anomalies, the financial institutions, both nationalized and private, have been serving to assist this sector.
  • Readymade garment industries have managed to maintain the confidence of the buying class and others in the business.
  • Although the backward linkage textile industry is not adequate for the needs of the RMG industry, it has been supporting regular manufacturing and supply systems to some extent

Wage …. / CPI

The Minimum Wage Board yesterday announced the final pay structure for the workers in the readymade garment (RMG) sector fixing Tk 1,662.50 as the minimum monthly wage including basic salary, house rent and other allowances for the entry-level workers.
All the six members of the board signed the final recommendation, which will be sent to the government on the next working day.

The board yesterday announced two separate pay structures for the garment workers and the employees.

There are seven grades for the workers and four grades for the employees. Minimum wage for grade one workers will be a total of Tk 5,140 including basic salary, house rent and allowances, Tk 3,840 for grade two, Tk 2,449 for grade three and Tk 2,250 for grade four, Tk 2,046 for grade five and Tk 1,851 for grade six. Total monthly wage for apprentice workers will be Tk 1,200. Minimum wage for grade one employees will be Tk 3,580 including basic salary, house rent and allowances, Tk 2,800 for grade two, Tk 2,449 for grade three and Tk 1,851 for grade four. Following serious labour unrest in the country’s premier export-earning garment sector, the government formed the wage board on May 31 and asked it to recommend a pay structure for the workers within three months. The minimum wage for workers in the RMG sector is now Tk 930, which was fixed about 12 years ago.

MDG achievement

The Millennium Development Goals (MDGs)

The MDG process specifically calls for promoting global partnership for development. The package of eight millennium goals (adopted in pursuance of the Millennium Declaration adopted by world’s leaders in the Millennium Summit held in September 2000) focuses essentially on poverty eradication, (goal no. 1), with a target of halving poverty by 2015. Six of the goals (goals 2-7) relate to education, gender equality, health, and environment, while the 8th goal calls for global partnerships for development with a view to fostering pro-poor policies and actions. Overall, this last goal is construed to aim at promoting good governance, development, and poverty reduction; address the special needs of the least developed countries as well as landlocked and small island developing countries; address the debt problems of the developing countries; promote descent and productive work for youth; provide access to affordable essential drugs in developing countries, in cooperation with pharmaceutical companies; and make the benefits of new technologies, particularly information and communications technologies, available to the developing countries, in cooperation with the private sector. (MDGs: Website)

Obviously, the MDG approach places a great deal of emphasis on global partnership building for making resources, technologies, and essential drugs available to the developing countries from the rich international community on affordable terms to help eradicate poverty and improve living conditions in the developing countries. It remains to be seen, however, how effective these partnership building efforts can become in terms of working out the mechanisms and an appropriate follow through by the international community as well as by the developing partner countries. It may be recalled here that the process of sustainable development, as defined in Rio Earth Summit (in terms of economic vibrancy, social progress, and environmental protection, with the human being placed at the centre stage), has not gone very far despite repeated renewal of commitments by the developed countries to providing resources and technologies [Monterrey (March 2002) and Johannesburg (September 2002), for example]. The commitment made by the OECD countries of providing 0.7 per cent of the GDP as ODA remains over two-thirds unfulfilled, notwithstanding a few countries (mainly Scandinavian) over-fulfilling their commitment in this regard.

 The overall ODA provided  in fact was downfrom 0.36 percent in 1993to 0.22 percentduring 2000-01 before slightly picking up to  0.25 percent during 2003-04, still much lowerthan in 1993 (see  Annex Tables 1 and 2 for further details).  Although, yet another aid related  concept has been floated in terms of ‘aid for trade’, the market access of exports from developing countries to developed countries remains severely constrained  due to continued tariff, para-tariff, and non-tariff barriers as well as heavy agricultural subsidies in thedeveloped countries (over a billion US$ a day). The most recent (December 2005) WTO Ministerial held in Hong Kong has failed to make headway in these regards. Notwithstanding  some improvement, particularly for Africa, in the ODA over the past two or three years, the total ODA still remains (at US$78.6 billion in 2004—see UN 2005b to p.115) a long way short of US$140 billion estimated by the UN Millennium Project as the requirement for 2005, made up of US$74 million as budget support to the low-income, resource-constrained countries to finance the MDGs, US$18 billion for non-MDG investment in the low-income countries, US$30 billion for the medium-income countries, and the balance to meet the cost of administering and monitoring ODA, conducting scientific research, and meeting other international and regional costs (Millennium Project 2004; Ahmad 2005) . On the other hand, many developing countries have failed to make substantial progress in governance reforms (including establishment of transparency and accountability; control of corruption; control of wastage; setting priorities on the basis of the realities on the ground; and enhancing policy-making, programme development, and implementation capacities and their proper deployment and application).

Survival of RMG sector

The special textile quota system, which provided specific facilities for garment exports from the least developed countries (LDCs) like Bangladesh has ended in January this year. The system, called multi fibre arrangement (MFA), introduced in January 1976 expired 30 years later on 31 December 2004 and Bangladesh now has to compete with rest of the world to maintain its export market. Although various international agencies have suggested that while Dhaka may not be in real danger of losing its global market immediately, it may eventually lose out unless it pulls up its socks by quickly improving the infrastructure facilities and become more competitive.

There are about 3,000 garment factories in the country and almost of half of them are small and medium sized and they are the ones which are running the risks of suffering most. They depend on buying agents for marketing their products abroad and lack the sophistication to quickly adapt to the changed situation. The owners of these factories will have to strictly adhere to local laws, ILO conventions that the government has ratified to meet the challenges to compete globally. Unfortunately the government’s labour directorate is not fully geared to monitor and enforce the related laws and make them aware of their responsibilities. Once the importers find this out, these factories could get into trouble. The buyers in the US and the European countries are now likely to insist on strict compliance of corporate code of conduct as preconditions for importing goods from them. The can also become a bargaining point to reduce the price further.

Big and influential garment factory owners have direct links with the buyers and many of them have already developed backward linkage facilities to retain their competitiveness. Some of the big ones are already in the process of expanding their production facilities to be able to capture bigger share of the market. Some members of Dhaka’s civil society in cooperation with the Asia Foundation and a few non-governmental organizations (NGOs) arranged round table discussions recently to find out how the smaller disadvantaged garment units could be helped to comply with the corporate code of conduct to stand a chance for survival. These garment units employ 100 to 500 workers, mostly women, could lose their business and be forced to close down rendering these women jobless. They were thinking about charting a roadmap to help these smaller garment units with joint participation of the concerned entrepreneurs, related government agencies, the NGOs, foreign experts for devising a rescue plan.

While we welcome the civil society’s initiative to try and evolve a rescue plan for the garment sector, we strongly urge the concerned government agencies to take up a more pro-active role in forging strong partnership between the government, the entrepreneurs and those who want to help to provide the vitally necessary support.

Bottlenecks Retarding the Growth of the Readymade Garment Sector

This vital and vibrant export oriented industry has been facing some problems from local forces, which may be termed weaknesses (or the Nation’s weakness), and some problems caused by forces beyond our geographical/political boundary, which may be termed as threats to our industry. The Readymade Garment Industry is already 20 years old but during the last two decades no planned, fruitful policy to build up a backward linkage textile industry to feed the RMG industry has been taken by the authorities. Even the existing textile industries are not capable of producing high standard fabrics to offset the foreign ones from the market. Shortage of capital necessary to develop local sources for quality fabrics/yam is a major weakness. The reason behind the shortage of capital, however, can be attributed to the socio-economic condition of the country; enabling foreign direct investment could however, compensate for this. Furthermore although the Government has responded to the RMG industry’s requests for devaluation of the local currency – the Taka – from time to time, it has failed to decrease the current rate of interest. At the same time, our financial policy measures are not sufficient to attract entrepreneurs to invest in the textile industry. Anomalies in the banking sector, problems at the port, vindictive political environment, bureaucratic shackles, electricity crisis, currency adjustment policy pursued by the country, and the lack of some policy support from the government to sustain the country’s falling competitiveness against its competitors in the international market are other serious weaknesses.

Without ‘miscellaneous’ expenditures no file moves, no UC is cashed, no imported raw material released. There are many eager hands in the public service agencies that the industries have to fill with ready cash. Without this practice no job can be done timely. The public service agencies work very slowly and ‘speed’ money becomes the only solution to hasten the procedure. This is however done increasing by miscellaneous expenditures. The raw materials the industry imports, say, within 7 days, take an additional 15 days to reach warehouses from the Chittagong port. About 54 formalities (with miscellaneous expenditure) have to be observed to release a shipment of raw materials. These formalities increased the industry’s lead-time against overseas competitors.

The weaknesses, which have been mentioned above, could be classified in following categories:

  • Unstable political environment and unfavorable law and order
  • Insufficient development of political measures for the RMG sector
  • Inadequate financial measures
  • Infrastructural bottlenecks
  • Inefficient service support
  • Inappropriate development management and institutional initiatives

Unstable Political Environment and Law and Order Political Instability: Due to the last non-cooperation movement in 1995-96 the industry suffered a loss of about Tk. 4,500 crore (Tk. 45 billion) and about 300 factories were forced to take loans of over Tk. 200 crore (Tk. 2 billion). Due to hartal (general strike) and other such political programs, problems such as order cancellations and stock-lot gluts arose in the ready-made garment industry. Banks started showing its reluctance to open L/Cs. Ultimately many affected factories were on the verge of winding-up and declaring bankruptcy. The export oriented garment industry bore production losses equivalent to Tk 6-9 crore (Tk. 60-90 million) per hour. During the last three years, the country went through about 200 working days of hartal. In the interest of 1.5 million workers and owners of over 3000 garment factories, the political differences should be solved politically in the parliament.

Unfavorable Law and Order Situation: The disrupting law and order situation is another heavy constraint which hinders not only the development of the national economy but also the development of the export- oriented RMG sector. Due to the depreciating law and order situation, the interest of both the employers and the employees are being affected. In this relation it should be mentioned that the Factories’ Act and labor laws of the country are old and do not support the development of the export-oriented RMG sector. The changed environment must be reviewed and in this process all interested and involved parties should be integrated.

Inefficient Development of Political Measures for RMG
(Unsuccessful Initiatives for Foreign Direct Investment in the Export Oriented RMG Sector):
The proper authorities have duly resolved that the Board of Investment (BOI) would not approve any Foreign Direct Investment (FDI) proposal in the RMG sector without seeking recommendation from the BGMEA. However, it is being observed that the BOI continues to decisions without seeking any BGMEA recommendations. Any further foreign investment in the garments industry must be considered in light of the technological modernization in this sector, i.e. whether the foreign investment is promoting technology transfer. The export-oriented RMG sector would welcome foreign direct investment and encourage foreign financial and technical assistance in the backward linkage textile sector as there is a dearth of fabric, both in quantity and quality, in the country.

Inefficient Efforts to Increase Quota in USA and Other Important Countries: This is a topic that is not only an integral part of US Senator Harkin’s personal political agenda but is also an issue of vital importance to the fate of Bangladesh’s readymade garment industry. BGMEA has been trying to enter the US market with an additional 30% quota over the present level. Although, on the face of it, a 30 percent raise might seem too large in actuality it would comprise an increase of less than one percent of the total amount of imports entering the United States. The increase would, however, be very vital and beneficial for Bangladesh. The increase is being pursued so as to compensate the apparel export losses Bangladesh suffered due to the anti-child labor propaganda that followed the introduction of the Child Labor Deterrence Act, popularly known as the Harkin’s Bill. After suffering export losses since 1992 with the signing of the historic MOU on elimination of child labor from the garment industry of Bangladesh, the country’s RMG industry started recovering in late 1996. Due to the Bill, it has been roughly estimated that the industry lost its market in the USA and other parts of the world by about 15-20% annually. While the BGMEA is trying for such a compensatory quota increase, the US House of Representatives has passed a Bill liberalizing trade with Sub-Saharan Africa (SSA) by a vote of 233 to 186, a smaller majority than the 350 votes projected by the Bill’s backers. The measure now goes to the Senate, while there are doubts whether the body would even act on the Bill this year. The measure is aimed at 48 SSA countries that have committed to market-based economic reforms and trade liberalization, and grants them free-access to the US market for a range of products. The US would also lift the textile quotas currently imposed on Mauritius and Kenya.

As a direct result of the SSA (Sub-Saharan Africa) Bill, Congressman Philip Crane, a backer of the Bill, estimates that Sub-Saharan African countries will immediately be able to double their present volume of export to the USA. SSA countries presently share about 1% of the USA’s apparel imports. Within a decade, they will be able to triple their present export to the USA.

If the SSA Bill is passed, the benefits to the SSA countries will be at the cost of developing countries like Bangladesh. Experts say the Bill would encourage textile and apparel producers in China and other Asian countries to flood the US market with garments partially assembled in Africa from Asian fabrics, as well as to Trans-ship apparel made in the Far East to the US market via SSA. Experts see in the legislation a rule of origin requirement that is far weaker than the rule of origin in effect between NAFTA partner countries. That is, by means of transshipments and other unfair means other textiles exporting countries will try to enter the US market through SSA countries. LDC like Bangladesh that lack in sound backward linkage industries will suffer terribly.

Considering all these points, the BGMEA has been pursuing for a 30% quota increase for the US market. It will provide the garments industry in Bangladesh with an opportunity to export apparel worth about US$ 400 million and to employ another one million workers. Although BGMEA representatives have initiated a strong drive towards achieving this target, visited the USA and met key Congressmen, Senators and other government representatives, it is still not considered sufficient effort to achieve such a large national interest issue; concerted efforts from the proper levels of Government are needed. Accordingly during the March 2000 visit to Bangladesh by President Bill Clinton of the United States, both the Government of Bangladesh and the BGMEA had requested for an increase in the textile quota and for the merger of certain categories, inline with the formal proposal submitted to U.S Government in November 1998. It is certainly a step in right direction.

 Insufficient International Marketing Support: In order to expand the market share and survive in the up coming free global competition in the international market, product diversification appears to be an indispensable strategy. The more varied the product line and range, the better the competitive strength. As for our access to other markets, efforts are being made to enter Japan and other far east markets, however, presently we are mainly dependent on EU markets and the U.S. We know that if we put all our eggs in one basket, our risk is higher. We can reduce the risk by putting our eggs in several baskets. When the GSP crisis arose we knew that our whole EU market was going to be disturbed, when quota matters created a problem we had to give extra efforts to keep our export earnings from falling. The EU market share accounts for 50% and the U.S. market shares for over 40% of our RMG exports. The above statistics justifies further market diversification. The government should ensure assistance from international organizations like WB, IMF, UNDP, WTO and international Chambers to support the export-oriented RMG sector.

Inefficient Financial Measures Inefficient Financial Support For Backward Linkage Industries: Since 1974 international trade in textiles and clothing has been guided by various restrictions on a global or regional basis under MFA. The entire business in apparel and garment industry has been subjected to bilateral quota negotiated under MFA. The arrangement of bilateral quotas and restrictions on import under MFA has begun phasing out from January 1995 and the process will be complete by 2005. Therefore there will be no more quotas and the only barrier to import penetration will be the normal rules of competitiveness such as price, quality, service, fashion and tariff.

Again, the GSP scheme is keen on the basic rules of origin and to meet this rule we need to mobilize the textile sector to feed the RMG sector. Investment in a textile industry will not be viable unless the government reforms its policies for financial support. The cost of financing the linkage projects must be brought down, as was done by India and other competitors of Bangladesh during the initial period of developing their textile sector. Cash incentives should continue. In addition, long term loans must be available at reasonable interest rates. Although the current nominal rates are around 12%, the actual cost of fund to the entrepreneurs amounts to between 20% and 24% after various adjustments. This is quite high a rate and discourages investment in this sector. The Commercial Banks need not maximize its profits at the cost of the RMG industry. The government may direct the Banks to make reasonable profit and lessen the rate of interest for the RMG sector substantially, say, to 6% to 7%. This of course does not mean that the Bank should not take necessary precautions against possible defaulters.

Investment in backward linkage industries for greater supply of raw materials to the RMG sector, particularly in composite textile mills, is quite large. The entrepreneurs will need equity capital from financial institutions. Currently a 50:50 debt-equity ratio is enforced. To encourage investment in this sector, the Government should moderate the ratio to a reasonable 80:20 level.

If all the backward linkage industries in spinning, weaving, dyeing, printing and processing are to be developed by 2004, a total of Tk. 210 billion will be needed for investment. The Government should create a special fund of at least Tk. 150 billion to provide equity capital to sound entrepreneurs who can come up with the balance 20% equity. It is worth mentioning here that similar support is available in many countries including India.

Given the investment needs and future uncertainty, it is questionable if Bangladesh will be able to invest Tk.210 billion in order to develop the total capacity in the backward linkage industries required to meet the RMG demand in 2005. To be self-sufficient in the production of export quality yam and fabrics is neither necessary nor feasible nor wanted. The traditional supply of cotton yarn and fabrics from foreign countries may decline due to the phasing out of MFA. Some of Bangladesh’s fabric supplying countries, facing the competition of total globalization after 2004, may not have the surplus to export while others may find it more profitable to expand their own garment industry.

Subsequently Bangladesh must create opportunities to generate a certain new capacity to spin yarn, weave cloth and process Grey fabric. Like Hong Kong and Singapore, which trade quite normally, RMG will have to remain partly dependent on imported yarn and fabric. This, however, should not create a serious problem for Bangladesh to remain competitive in the world market after 2004. Therefore the RMG industry needs to be restructured only partially; a limited number of composite mills, a large number of independent spinning mills and processing units need to be established. One of the easier avenues of gaining success in this respect may lie in modernization of dying or decadent mills.

 Unfavorable Taxes and VAT for RMG Exports: The tax burden on the export oriented garment sector is reducing the competitiveness of Bangladesh-made garments in the international market against products from competing countries. In Addition to incentives for aggressive marketing, several countries, including our neighboring ones, are totally exempting their export sectors, including RMG, from all export taxes to help supplement competitiveness and boost exports in the international market. Although included in the 1996-97 Export Policy, the export oriented RMG industry has not yet been brought within the purview of taxation. While the world is in transition from MFA to GATT to WTO, the country is still being constrained further, partly through old ideas. The industry has got to take its best lead before the international players in the industry are at full pace, otherwise there will be little scope for recovery.

Unfavorable Tax for New Investment in RMG Export Sector: International experiences show that facilities like a tax holiday could promote national and foreign investment. For the sake of a healthy economic development of the country, it is expected that with proper taxation policies in place investment in the export-oriented RMG sector in the country can be canalized.

Inadequate Adjustment of the National Currency with the Currency of International Competitors: With Bangladesh’s competitor countries adjusting their currencies downward, ranging from 25 percent to even as high as 550 percent, the downward adjustment of our local currency the Taka has become imperative. Considering currency devaluation by competitor countries like Indonesia, Thailand, Korea, Philippines, India, Pakistan, Sri Lanka etc., to successfully pursue the export-led growth, our government should have a similar strategy to increase the country’s external competitiveness. Against aggressive currency devaluation by our competitor countries, our real trade-weighted effective exchange rate is still insufficient to maintain competitiveness vis-à-vis our neighbors and potential competitors in the world export market. It must be properly adjusted. We cannot back step from steadily adjusting our currency by observing the strategy our competitors are taking. If devaluation is not conducive to the general national economic development of the country, an alternative must be worked out which best make more of our exporters competitive in the international market.

Unfavorable Value Addition for High Valued RMG Exports: Just because of the rigidity in the Value Addition criteria, high value items manufactured in the country are failing to enter the international market. For example, the margin that we can retain by producing one gown may not be secured by producing even 10 basic shirts. We had potential but because of our rigid value addition policy we are losing a huge amount of foreign currency. Besides earning foreign currency for the nation, relaxing this criterion could further develop the skill of the workforce, which in turn would not only support the economic development of the country but would make it one of the nation’s most valuable resources.

Anomalies in the Functions of the Banks: The RMG sector has been one of the main catalysts contributing to the tremendous development of the banking and insurance sector of the country. While foreign banks, under different heads, charge only 0.25% for first the US$50,000 + 0.125% for whatever rest amount, our banks charge rates from 10-16% straight. Presently our commercial banks are earning over Tk 2,000 crore (Tk. 20 billion) per year from the export-oriented sector. Over the years some bank charges have increased to even three times the charges from 1985. Even now there are some regulations and services which hinder performance of the export-oriented RMG enterprises. These are:

  1. Regulating approval from the Bangladesh Bank for creating Forced/Demand Loan by lien banks.
  2. Considering of Back-to-Back PAD/Forced Loans as default loans.
  3. Considering overdue FBP against the liability of any UC as default loans.
  4. Enforcing mandatory compulsions in the ECG policy.
  5. Regulating the obtaining of prior permission from the Bangladesh Bank for exporting goods against stock-lot.
  6. Regulating prior approval for discount from the Bangladesh Bank and EPB.
  7. Allowing 45 days from the date of document negotiation for fund remittance in the event of remittance being delayed.
  8. Allowing private commercial banks to charge “UC Acceptance Charges” fees which the Nationalized Banks do not.
  9. Applying the Banking Companies Act, passed by Parliament on 13 March 1997, also for the export-oriented Readymade Garment Sector of the country.
  10. Holding the readymade garment exporters responsible if the proceeds against their exports are not realized owing to the reasons beyond the exporters’ control.
  11. Banning of the Realization Clause when opening L/Cs.

 Inadequate Cash Support and Export Performance Benefit: The disbursement of alternative cash assistance has increased recently. This should not be a cause for alarm, however, stringent measures to ensure that genuine users of local yarn are being benefited should be put in place. Till date, less than 15 percent of the yarn and fabric demand in the RMG industry is being met from local sources. Hence the Alternative Cash Assistance scheme deserves to be continued until the industry achieves a sustainable development in the backward-linkage industry.

In the past, the Alternative Cash Assistance was used to give garment manufacturers and exporters help to increase garment exports. But since early the 1990s it has been given to the local fabric producers to encourage direct export or use of local yarn fabrics in the RMG industry. Appreciating the Government’s gesture toward the local yarn and fabric manufacturers, our observation are that since the garment manufacturers and exporters are the ultimate exporters of local yarn and fabrics, if they were encouraged to use local yarn and fabrics under the same scheme, as in the past, the ultimate objective of this scheme would be achieved through further usage of local yarn and fabrics.

While transaction and overhead costs have increased considerably, the garment manufacturers and exporters are still buying local fabrics and yam at higher prices in comparison to the prices of imported fabrics/yarns. In the international market, we are losing our market share to our competitors, who besides enjoying several export-benefits also enjoy tax-free status for all their export income.

Moreover, in the past, the Export Performance Benefit (XPB) used to be provided to the RMG manufacturers and exporters to encourage export earnings. Presently in the international market, competition has been intensified due to the entry of new competitors. Without such a benefit scheme, garment manufacturers and exporters of Bangladesh are losing their competitiveness in the international market.

 Infrastructural Bottlenecks Port Congestion and Crisis: Due to unchecked interest by a section of politicized dock laborers, the Chittagong Port has remained closed for about 30 days during the last three years. Go-slow and congestion are chronic problems. Chittagong port being the largest seaport in the country contributes to 80% of import and 75% of export of the total international trade. As the normal activities in export and import are hampered due to the complexity created by various reasons like dock labor unionism, go slow principle, strike etc. usage of the seaport by traders has been disturbed and declining. This is definitely influencing the national economy negatively. The Garment Exporters and Garment input importers have been facing problems in export and import for years. It is worth mentioning that due to delay in unloading of raw materials for the Garment Industry, it is not possible for the entrepreneurs to produce the garments within the Letter of Credit (L/C) period. Thus the L/C becomes invalid and the exporters face great financial loss. Consequently, buyers are losing interest in trade with Bangladesh. Moreover the entrepreneurs have to take the responsibilities of the loss on their own shoulders. A large number of garment factories are classified as sick as they have been unable to recover from the stock-lot problem, which is also one of the causes for bottlenecks in the port area.

Heavy congestion in the Chittagong port has been prevailing for the last four years. This congestion affects the normal activities of the port. Loading and unloading of goods are always delayed and ships remain in the outer anchorage for long periods of time. As a result, port utility has been lessened which is also damaging the reputation and image of the port internationally. The handling equipment at the port is insufficient to cope with the rising volume of the export-import business from the garment industry and other export oriented industries. The country should start setting up new jetties immediately to increase the loading and unloading capacity of the Chittagong Port because an average size jetty takes about 4 years to be set up.

The port is taken hostage by a handful of people for their egotistic interest, posing a serious threat to the export-trade of the country. The government should play a stronger role in addressing the port crises. Handing over port activities to private sector enterprises perhaps can ensure a sustainable solution.

Frequent Interruption in Energy Supply: For nearly the last two years the electricity crisis has been unparalleled. To better describe the situation it would be safe to say that the power grid has been at its peak capacity for the last decade or two. A survey in the RMG sector in May 1997, indicated that in Jan-May 1997, the RMG sector had already suffered losses in excess of Tk.1700 crore (Tk.17 billion). Presently on an average, we are losing production worth about US$ 1.6 million per day (or, US$ 46.4 million per month and US$ 561.6 million per year) just owing to the electricity crisis alone. For obvious reasons the chain-effect is more serious. RMG production could be increased by 10-15 % if reliable power supply was available.

Congestion in Road and Railway Communication and Traffic Jam: A good transport system is a prerequisite for economic development. A lack of it creates road congestion, as a result it may take a longer time to get imported raw materials from the port and transport the finished product to the port from the factory. It also causes additional transport costs. A congestion-free road and rail communication, especially between Dhaka and Chittagong, linking the garment industry is vital for further development of the export-oriented RMG sector.

Inadequate Service Support Unfavorable Service Charges for Air Cargo: It is a common practice that garment factories import goods by air, paying very high freight rates, only when the speedy delivery of finished goods is the prime requirement of the buyer. Thus, damage, misplacement, dislocation of raw materials and delay in clearance thereof grossly affect the delivery schedule of the finished goods. The replacement of damaged or missing raw materials is not only expensive, but also time consuming and involves onerous Customs/Bank formalities. The irony of the whole system is that the importer is not spared from the onus of paying duties/taxes for non-export of finished goods due to damage in fabric.

In the seaport at Chittagong, the Port Authority acts as Bailee on behalf of all carriers and thus goods land under the port’s tally along with remarks as to the condition in which goods have out-turned, stored consignment-wise/shipping mark-wise etc., no such system prevails at ZIA. Neither the Civil Aviation nor Bangladesh Biman act as “Bailee” nor as such there remain a vacuum of accountability for misplacement and/or damage to goods. Unlike the seaport at Chittagong or Mongla, at ZIA the importer or their C&F agents are unable to see the condition or storage position of the goods and have to depend on Biman Loaders for “produce of goods”. In the examination section a highly irregular practice is being followed by Biman when certain a percentage of goods are required to be produced for inspection purpose, the C&F agents are made to sign that all goods have been duly produced before the actual inspection. Only then does Biman produce the goods.

Therefore at the time of delivery if the loaders fail to detect any goods, in that case only tally marks are made on the reverse side of the photocopy of Air Way Bill which is retained by Security and only an entry for short received is made in their Delivery Register. The C&F agents are not given any official documents for the short receipt.

Even inside the canopy area there are storage tracks where goods are required to be stored according to the last digit of Air Way Bill Number, but the loaders for obvious reasons scatter single consignments in different tracks while stacking.

Incompetent, Slow and Corrupt Custom Services: It is obvious that with the rapidly expanding export business of the country the pressure on customs office has increased immensely. The globalize export business demands not only prompt but qualified services, because missing documentation could cause loss of international customers. Therefore it is not enough to employ sufficient personnel in the custom office but they must also be trained. The custom office must be provided with modern technical support and its services must be computerized. The government has already taken some steps in this direction, but it has to be strengthened.

Inadequate Development Management and institutional Initiatives
(Inadequate Exchange of Views between BGMEA and the Board of Directors of the Nationalized Commercial Banks):

BGMEA, the single largest trade organization, has been leading the RMG industry to become the biggest export-earning sector in Bangladesh. This sector has propelled the financial sector of the country to new heights. The sector also involves a huge amount of capital investment from the Nationalized Commercial Banks (NCB). The Bank’s recovery of loans from this sector has been positive and the sector’s contribution to the Bank’s earning has been quite considerable. But the financial activities of the NCBs are not sufficient to fasten the export-import procedure for this industry. Moreover, the government’s policy to reform the public sector banking institutions has not been working to simplify the complex system.

If representatives from the BGMEA could be included in the Board of Directors of Nationalized Banks and the Bangladesh Bank, this would help solve the different banking problems faced by the garment industry and thus help the economy in a positive way.

Unequal Opportunity for RMG Export Oriented Industry: The government’s policy to attract foreign investment in Bangladesh is quite impressive. This policy, however, show some inequalities. Under the bonded warehouse system every export oriented garment factory is an EPZ, but factories in the EPZ enjoy more benefits than those outside the EPZ. Even in Japan, all export-oriented factories enjoy such benefits. If these inequalities were eliminated and export oriented garment units outside the EPZ were provided with similar benefits to those industries in the EPZ, it would certainly support to increase export and earn more foreign currency for the country.

Indecisive regional Re-location Policies for Export-Oriented RMG Enterprises: To help reduce the environment pollution in the city and provide garment workers with adequate residencial facilities, garment factories need to be shifted to the outskirts of the city. Government’s “khas” (own) lands beside the Dhaka-Chittagong highway could be allocated for setting up of garment villages and to accommodate the workers of the export oriented garment industry. This could relieve not only the pressure on the environment of the city but also traffic jam and population and other related pressures.

Acknowledgement for the Needs of a Cabinet Committee for export-Oriented RMG:

A cabinet committee headed by the Hon’ble Prime Minister of the country should be formed to solve specific and unforeseen problems in the export-oriented RMG sector. The committee may meet quarterly to review the overall situation of the export-oriented RMG and take necessary measures to promote RMG exports.

 Recognition of the Necessities of Delegation of Responsibility of the Government: Export-led development has become imperative for survival in the changed environment of the world economy. To respond to the demands of the export business, the establishment of a Private Export Promotion Bureau has also become imperative. In view of the recent quota bungling by the corrupt EPB officials and quota brokers, it must be considered whether EPB activities relating to quota matters should be handed over to BGMEA.

Recent international development in this respect supports this view. Pakistan’s new textile quota management policy for 1998 to 2004, for example, has been deregulated. Conceding to the call for quota and duty free trade in textile and clothing by the year 2005, the country’s quota management has been dramatically shifted, almost in tote, from the official agency Export Promotion Bureau Pakistan to the 15 private sector associations dealing with knitwear, woven garments, made-ups and yarns & fabrics.

 Recognition of the Necessity for an “Apparel Board”: Solving specific and unforeseen problems of the exporters of the RMG sector from policy making to implementation in every phase needs prompt service from the Government.  Following the example of the Tea and Jute Board, the setting up of an “Apparel Board” has become very essential to free the industry from time wasting bureaucratic shackles and make it more dynamic.

 Recognition of the Role of Education and Training to Improve Labor Productivity: The experiences of the industrialized countries of the world show that improvement in working conditions and work organization can result in increased productivity and competitiveness. This has been also been demonstrated in Bangladesh by entrepreneurs of small and medium sized enterprises who have taken voluntary action to improve working conditions and labor productivity. Improving the productivity in this industry could thus result in making these enterprises more competitive. In Bangladesh, the garment industry is the major employer of the disadvantaged section of the population – the women. Increased competitiveness in the industry will also bring economic advantage for the women and make them socially safer.

The work force contributing to this sector comes mostly from the disadvantaged areas and thus workers lack the proper education and training. These workers are not highly skilled and their contribution sometimes results in more rejected products. It is the skilled laborer and technicians who play the vital role in the development of the industry. The employment of a disproportionate number of unskilled labor by the garment factories in Bangladesh results in low productivity and comparatively more expensive apparels. Measures to enhance worker contribution should take place immediately. Vocational training for increased labor productivity should include graduation/diploma programs at the plant level to ensure sustained improvement of the industry’s productivity. As a means, conventional vocational training institutes all over Bangladesh should be developed to teach the base level human resource for advanced technology. Moreover, necessary steps should be taken both by the government and the private sector to establish more fashion and technology institutes according to the spirit of the age. The work force in this sector should be well aware of the modern technologies as well as the fashion of the buying countries.

INCENTIVES FOR INVESTMENT IN THE TEXTILE SECTOR: According to the Industrial Policy the investors of textile industry will be eligible to the incentives/facilities as are allowed to the local and foreign investors in other sectors of the economy.

(A) Major Financial Incentives for Investment in Industry: (As per the Revised Industrial Policy-1991)

  1. There shall be a tax holiday for five, seven, and nine and twelve years for industries set up in the developed, less developed least developed and special economic zones respectively which will remain effective during initial period of operation.
  2. Local industrial products will be protected through tariff rationalization, keeping in view the interest of the entrepreneurs and the consumers.
  3. The tariff rate on the products which are produced locally will be higher then those on the raw materials to be used to produce such goods.
  4. Special incentives will be provided to encourage non-resident Bangladeshis for investment in industries. In case of their investment in Bangladesh, they will enjoy facilities similar to those given to the foreign investors. Besides, they will be able to buy any newly issued shares/debentures of Bangladeshi companies. Moreover, they will be able to maintain foreign currency deposit in the NFCD account for up to five years.
  5. Provision will be made upto 80-100 percent accelerated depreciation allowance.

(B) Major Benefits for Foreign Investment in Industries:

  1. Foreign investment by private individual or by joint-ventures will take place on the basis of mutually agreed upon terms and conditions. The Foreign Private Investment (Promotion & Protection) Act 1980 will continue to be the legal framework for foreign investment. The important features of this Act are as follows :

-  ensure equal treatment in all respects for both local and foreign investment,

-  Protection of foreign investment from nationalizations

-  ensuring repartition of proceeds from sale of shares and profits.

Moreover, appropriate legal protection for intellectual rights such as, patents, designs, trade marks, copy right etc. will be provided.

  1. In case of foreign investment, there will be no limitations pertaining to equity participation, i.e. up to 100 percent foreign private investment will be allowed.
  2. In case of joint-ventures or industries set up independently by foreign investors, there will be no obligation to sell shares through public issue irrespective of the amount of paid-up capital.
  3. If the foreign investors reinvest their repatriable dividends, those will be treated as new investments.
  4. Foreign investors or companies with foreign investment may obtain working capital loans equivalent to their equity amount. The amount and terms of loan will be determined in accordance with the Bank -Client relationship and the bank’s rules and procedures.
  5. Rules will be framed to facilitate foreign investors or companies with foreign investment to buy shares through the stock exchange.
  6. BSCIC has already developed Industrial Estates with infrastructural facilities like roads, water, power, fuel etc. For small and cottage industries and steps are being taken for setting up more Industrial Estates. In case of industries set up in the Industrial Estates, foreign investors will also get special concessionary financial benefits similar to local investors. If required, such facilities may also be arranged by the Board of Investment.
  7. Other facilities to be provided to foreign investors are as under :
  • tax exemption on royalties, technical know-how and technical assistance fees and the facilities for their repatriation;
  • tax exemption on the interest on foreign loan;
  • tax exemption on capital gains from the transfer of shares by the investing company;
  • avoidance of double taxation in case of foreign investors on the basis of bilateral agreements;
  • exemption of income tax up to three years for the foreign technicians employed under the approved industries;
  • remittance up to 50 percent of the salary of the foreigners employed in Bangladesh and the facilities of repatriation of their savings and retirement benefits at the time of their return;
  • there will be no restriction in issuing work permits to foreign nationals in Bangladesh ; andUntitled
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  • References

    1. Article on Textile profile: Tradition, Modernity and competitiveness

    Writer: GKM Towfique Hasan, Secretary General, BTMA

    Article published: The Daily Star (15th Anniversary issue, 2006)

    2. Article on FDI revamp in RMG industry

    Writer: Hafij G. A. Siddiqi, VC, NSU

    Article published: The Daily Star (15th Anniversary issue, 2006)

    3. Presentation on Bangladesh Strategy in post MFA environment

    Writer: M. A. Awal, Chairman, BTMA

    Presentation place: Beijing, 2nd June, 2005

    4. Wage board and its result

    Collection Source: www. BGMEA.org

    5. Export -Import performance

    Collection Source: Policy Analysis Unit (PAU), Research Department, Bangladesh Bank

    Head Office, Dhaka, Bangladesh.

    6. MFA PHASE-OUT who gains? Who loses?

    Collection Source: ETI Seminar, 27 October 2004 (www.ethicaltrade.org).

    7. MFA and its development

    Collection Source: Goggle search WTO website

    8. Impact on termination of the MFA on RMG sector in Bangladesh

    Collection Source: Export promotion Bureau website

    9. Contribution of the RMG Sector to the Bangladesh Economy

    Main paper : Debapriya Bhattacharya ,Mustafizur Rahman, and Ananya Raihan

    Center for Policy diagonal (CPD) analysis 2002-03

    10. The preparation for the MFA Phase-out in Bangladesh

    Main source: Horia Kraus American International School/Dhaka, Senior Project 2004

    11. Textile profile

    Main source: EPB

    Web:

     www.Ministry of Textiles and Jute.htm

    1. www.multi_fibre_agreement.htm
    2. www.bangladesh-bank.org
    3. www.BBC NEWS  Business  Millions ‘to lose textile jobs’.htm
    4. www.business & finance.htm
    5. www.Export Promotion Bureau (EPB) Bangladesh.htm
    6. MFA – Google Search.htm
    7. www.Multi-Fibre Agreement Phase-Out – ETI.htm
    8. The end of the Multi-Fibre Agreement and its implication for trade and employment.htm
    9. WTO  Trade topics – Textiles Monitoring Body (TMB).htm
    10. www. Bgmea .com
    11. www.Ready Made Garments (RMG).mht
    12. human_resources_employment.htm
    13. www.business & finance.htm /Textile quota phase-out: the final countdown
    14. www.Export Promotion Bureau (EPB) Bangladesh.htm
    15. www.HOLIDAY Anniversary Issue .htm
    16. www.Bangladesh News. Com.bd
    17. www.World Garment .htm
    18. www.bkmea.com
    19. Bangladesh economic review 2007:www.mof.gov.bd/economic/index.php
    20. www.btmadhk.com
    21. contribution_of_knitwear.BKMEA.htm
    22. www. EPP-RMG.html
    23. www. removal of quota.htm
    24. www.cpd-bangladesh.org
    25. www.thedailystar.net
    26. www.bbs.gov.bd

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