I. The Ready-Made Garment Industry in Bangladesh: An Update1
1. Bangladesh’s RMG industry grew out of the quota system associated with the MFA of 1974–94. The industry was established by foreign investors who set up garment and accessories factories in Bangladesh’s EPZs during the mid-1980s to access Bangladesh’s abundant supply of low-cost labor and take advantage of its quota share under the MFA. The RMG sector has grown tremendously over the past 20 years, generating associated increases in employment that contribute greatly to poverty reduction and a rise in export earnings. The RMG industry’s share in export earnings rose from just over 10 percent in 1984 to almost 76 percent in 2006. Moreover, RMG exports accounted for more than 81 percent of the growth in the value of exports during that period.
2. The RMG sector itself in Bangladesh accounts for a small proportion of GDP yet serves as an engine of growth. Taking into account the high import content of garment manufacturing, it is estimated that the RMG industry directly contributes only about 25 percent of value added in manufacturing, which itself now accounts for approximately 17 percent of GDP.2 The sector, however, generates substantial demand for transportation, distribution, other services, and construction. Moreover, RMG factories account for 40 percent of industrial employment and provide the largest single source of formal employment and wage earnings in the economy. RMG factories and associated businesses (spinning, dyeing, finishing, etc.) are estimated to provide employment for a total of 10 to 12 million people.
3. While FDI played a major role in establishing the RMG industry in Bangladesh, the industry is now dominated by domestically-owned firms. Of an estimated 4,330 firms at the end of 2006, just 83 were wholly or partially foreign owned (Table 1). Aggregate FDI in the sector since the industry’s inception is estimated at $370 million (Table 2). All FDI was restricted to the EPZs by law until 2005 and there is no evidence of any significant FDI outside of the EPZs since the removal of that restriction. The vast majority of employment in the RMG sector is in domestically-owned firms located outside of the EPZs and the average number of employees in these factories has consistently been around 500. Key differences between firms with FDI and those that are domestically owned are that productivity in the firms with FDI is estimated to be 20 percent greater than in domestic RMG firms and the average number of employees in firms with FDI is substantially higher.3
|Fiscal Year||Domestically-Owned Factories||Employees||Average Employees per Factory|
|Memorandum items (end-2006):|
|Total employment in EPZ garment factories||122,098|
|Of which: In wholly and partially foreign-owned firms||95,559|
|Number of wholly and partially foreign-owned firms in EPZs||83|
|Investor||Woven Garments and Accessories||Knitwear||Textiles||Total|
|100% Foreign Owned||247.2||65.6||168.6||481.5|
|100% Domestically Owned||54.1||12.0||42.0||108.1|
For all firms operational as of December 31, 2006.
For all firms operational as of December 31, 2006.
4. The remainder of this chapter reviews and analyzes the performance of the RMG industry in Bangladesh since the abolition of quotas at the expiration of the WTO Agreement on Textiles and Clothing on December 31, 2004.4Section B examines RMG export performance in recent years, looks at the changing composition of Bangladesh’s garment exports, and puts the recent performance of Bangladesh’s garment industry in an international context; Section C discusses various factors that affect the competitiveness of the sector, and opportunities and constraints facing the sector; Section D concludes.
B. RMG Export Performance
5. Despite expectations to the contrary, Bangladesh’s garment industry has exhibited robust growth since the expiration of the ATC and the corresponding elimination of quotas on January 1, 2005. Following a slowdown in garment export growth early this decade, total garment export value (and volume) growth has recovered in the past three years to annual rates in excess of 20 percent (Table 3). Significantly, the growth of exports of woven garments is showing signs of a recovery in the past two years following a deterioration that began in 2001.
Fiscal year ending June 30.
Fiscal year ending June 30.
6. The overall export figures for garments mask a significant change in the structure of Bangladesh’s RMG industry that is the result of the very rapid growth of knitwear production and exports.5 From a total share in garment export earnings of 25 percent in 1997 knitwear exports rose to half of exports in the six months ending in December 2006 (Figure 1). In volume terms, knitwear now accounts for more than 60 percent of Bangladesh’s garment exports.
Figure 1.Bangladesh: Changes in the Structure of the RMG Industry
Sources: Export Promotion Bureau; and Fund staff calculations.
7. Bangladesh has had a mixed experience relative to other Asian LIC garment producers in capturing additional total market share in the world’s largest garment markets since the removal of quotas. In the EU market, which was the largest market in the world for imported garments in 2006, India and Vietnam have outpaced Bangladesh in capturing market share in the past two years (Table 4). In the U.S. market, Bangladesh has captured an additional 1 percent of market share, on par with India and well ahead of other Asian LICs.
8. Among Asian countries other than China, Bangladesh and other major Asian LIC garment producers are in aggregate capturing an increasing share of Asia’s total exports to the EU and U.S. markets. Detailed data for all major producers of garments show that the aggregate shares of major Asian LIC producers (Bangladesh, Cambodia, India, Pakistan, Sri Lanka, Vietnam) in total Asian garment exports (excluding those of the People’s Republic of China) to the EU and U.S. markets have risen from between 34 and 57 percent in 2003 to between 45 and 68 percent in 2006, depending on product and destination. This is evidence that production outside of China but within Asia is shifting rapidly to Asian LIC producers, and indeed the market shares of Malaysia, Philippines, South Korea, Taiwan Province of China and Thailand are eroding across markets and across products (Tables 5–8).
|(In percent of total EU25 imports)|
|Hong Kong Special Administrative Region||5.1||4.7||4.4||3.6||3.8||5.1|
|Macau Special Administrative Region||1.6||1.2||1.2||1.0||0.7||0.8|
|(In percent of EU25 imports)|
|Hong Kong Special Administrative Region||6.2||5.3||4.6||4.2||2.6||3.5|
|Macau Special Administrative Region||1.1||0.9||0.8||0.7||0.5||0.5|
|Taiwan Province of China||0.6||0.4||0.4||0.3||0.2||0.2|
|(In percent of total U.S. imports)|
|Hong Kong Special Administrative Region||8.2||7.0||6.1||5.9||5.9||4.2|
|Macau Special Administrative Region||2.4||2.6||2.5||2.6||2.2||2.0|
|Taiwan Province of China||4.0||3.6||3.5||3.1||2.2||2.0|
|(In percent of total U.S. imports)|
|Hong Kong Special Administrative Region||6.3||6.3||5.8||5.7||4.2||3.5|
|Macau Special Administrative Region||1.4||1.3||1.6||1.7||1.2||1.2|
|Taiwan Province of Chjina||2.0||1.6||1.5||1.4||0.9||0.7|
9. Cambodia and Vietnam are considered by garment manufacturers and buyers in Bangladesh to be Bangladesh’s most direct competitors. Bangladesh has increased substantially its share of the knitwear market in the EU and the woven market in the United States, but its other market shares have been fairly constant in recent years. Cambodia has managed to capture a much greater share of the U.S. knitwear market but its other market shares are either constant or falling. Vietnam’s exports, on the other hand, are rising across the board.
10. A very significant development is that some major garment-producing countries with duty free access to the U.S. are still losing shares in that rapidly growing market. A number of countries currently benefit from duty-free access to the U.S. market under the NAFTA, the CBI, and the African Growth and Opportunities Act. Notwithstanding this fact, CBI and sub-Saharan African countries have lost substantial market share in both knitwear and woven garments in the U.S. since the expiration of the ATC. In addition, Mexico’s share in the U.S. market has fallen over the past five years by more than 40 percent for woven garments and by over 50 percent for knitwear, and it is experiencing stagnation in the Canadian market. Similarly, the largest exporters, excluding China, of woven garments to the EU five years ago—namely Turkey, Morocco, Romania and Tunisia—have experienced very significant declines in their shares in that market over the past several years.
C. Competitiveness, Opportunities, and Constraints
11. The competitiveness of Bangladesh’s garment sector in the post-MFA era has been guarded in part by the flexible exchange rate regime. Competitiveness also continues to be shored up by Bangladesh’s labor cost advantage. Even after adjusting for productivity differences across countries, Bangladesh’s garment industry retains a significant per unit labor cost advantage.6 Buyers with representation in dozens of countries consistently rank Bangladesh as their lowest-cost source of supply.7
12. The trade preferences and rules that Bangladesh faces in its major garment export markets have not changed since the expiration of the ATC. In the EU, Bangladesh continues to benefit from the EBA initiative adopted in 2001. In principle, this means that Bangladesh’s exports to the EU benefit from duty free access, but in fact there are strict ROO and value-addition rules.8 In the U.S., Bangladesh benefits generally from GSP privileges but since 2001 the U.S. has excluded a list of 20 apparel items from the GSP and this list covers most of Bangladesh’s garment exports. As a result, Bangladesh faces an average tariff rate of 13 percent on woven garments and tariffs of 14–18 percent on knitwear in the U.S. rather than the more preferential GSP tariffs that typically apply to these goods. In Canada, the MAI for LICs came into effect on December 31, 2002 and Bangladesh benefits from this initiative. The MAI has liberal ROO and value-addition requirements and provides for duty-free access for those LICs that meet them.
13. Bangladesh’s export pattern is evolving based on the mix of ROO and value-addition requirements. Since Bangladesh’s knitwear production has very high domestic content and value added (around 80 percent) it is estimated that 95 percent of its knitwear exports to the EU enter free of duty under the EBA initiative, thereby contributing to the very rapid growth of Bangladesh’s exports of knitwear to the EU. Bangladesh’s woven garment exports to the EU, which do not meet ROO and value-addition requirements under the EBA initiative, have fared less well. Bangladesh’s production cost advantage is allowing its exports to the U.S. to increase rapidly despite the high tariffs it faces. 9 Due to the very liberal ROO and value-addition rules under Canada’s MAI, virtually all of Bangladesh’s garment exports benefit from duty-free access to the Canadian market. Bangladesh was, after China, the second largest garment exporter to Canada in 2006 and though the Canadian market accounts for under 10 percent of Bangladesh’s garment exports it is a rapidly growing market.
14. Safeguard measures imposed on China through 2008 by the EU and the U.S. have provided opportunities for all garment-producing countries to maintain a larger portion of the global market than they would have otherwise.10 Bangladesh is among only six countries other than China that have managed to capture significant market share in one or both markets.11 This is an indication that the global industry views Bangladesh as a serious contender to remain a major garment producer. The evidence from Canada, however, provides a cautionary note for Bangladesh (and other producers). Despite rapid growth in exports to Canada and its rise to the number two position in the Canadian garment market in 2006, Bangladesh’s share of the overall Canadian market has declined from 7.4 to 6.9 percent over the past two years. Canada is Bangladesh’s only major market that has not imposed interim safeguard measures on China.
15. Investment in the garment industry in Bangladesh has risen rapidly over the past several years, as indicated by imports of machinery by the sector (Figure 2) and investment by newly-established firms in the EPZs (Table 9). The figures also suggest that the primary textile sector in Bangladesh is expanding rapidly in response to the strong growth of the RMG industry. This demonstrates that Bangladesh-based producers believe that they will continue to be competitive. Woven garment factories are primarily investing in new technologies to produce somewhat higher value added garments. Knitwear factories, on the other hand, are investing mostly to expand capacity. Producers and buyers report that investment is also directed toward raising safety and environmental standards, factors that now must be taken into account when gauging overall competitiveness.12 Several important recent developments are the establishment by major international buyers of a permanent presence in Bangladesh, the opening of Bangladesh’s first “brand wear” factories that produce garments exclusively for a single label, and the rapid expansion of the knitwear industry into sweaters. These developments show that major buyers are bolstering already strong long-term relationships with producers and are increasingly prepared to invest their own time and funds in technology and knowledge transfer to Bangladesh’s garment industry, and that Bangladesh’s knitwear manufacturers are prepared and able to invest quickly in new market opportunities.
Figure 2.Bangladesh: Letters of Credit Settled for Imports of Machinery 1/
Sources: Bangladesh Bank; and Fund staff calculations.
1/ Data for 2006–07 for July through January.
|Investor||Woven Garments and Accessories||Knitwear||Textiles||Total|
|100% Foreign Owned|
|100% Locally Owned|
16. A number of studies conducted prior to the expiration of textile and clothing quotas identified factors that would likely negatively affect Bangladesh’s competitiveness in the post-ATC world.13 First among these was the long lead time for Bangladesh’s woven garment exports—arising from Bangladesh’s location relative to its major markets; restrictions on imports of inputs for RMG that were designed to protect the domestic textile industry; generally inadequate infrastructure and a poorly functioning Chittagong port; and the failure to approve a CBW system. The other major constraints identified were the failure of Bangladesh to take advantage of regional accumulation (South Asian Association for Regional Cooperation accumulation) opportunities to benefit more from duty-free access to the EU woven-garment market and the inadequate standard of training of labor in the garment industry.
17. There has been limited progress on measures that would reduce the lead time for Bangladesh’s garment producers. The main policy change since the expiration of the ATC has been to allow the import of yarn and raw cotton from India through land ports since December 2005, a policy that primarily benefits the integrated knitwear industry. The market segments that Bangladesh currently serves still allow for relatively long lead times. Buyers also report satisfaction that garment producers in Bangladesh consistently work to produce quality garments on time and exhibit great flexibility in accepting orders. Producers and buyers warn, however, that lead time will become much more critical as Bangladesh moves into higher value-added garments and fashion wear and that this will require ready availability of high-quality fabrics and accessories at competitive prices.
18. There is general consensus that the major constraint on the garment industry in Bangladesh is the low level of labor skills, followed by generally poor infrastructure, especially as related to moving goods through the ports. Some initiatives are underway by the manufacturers’ associations to provide training for garment workers and to attract general university graduates as management trainees. In addition, buying houses are assisting in some cases with labor training and are maintaining pressure for better working environments. These remain, however, fairly marginal contributions to improving overall labor productivity. More importantly, as some of Bangladesh’s main current competitors move further up the value-added chain, or even out of garment production altogether, the labor force constraint will make it more difficult for Bangladesh to capture more market share in the low-end to medium garment market and will prevent the industry from easily moving itself up the value-added chain.
19. Bangladesh has demonstrated that it is highly competitive in the world’s major garment markets since the expiration of the ATC. Its strong performance to date is attributable to significant competitive advantages emanating from its abundant low-cost labor, the flexible exchange rate, and increasingly close ties with major international buyers that are allowing the industry to benefit from the transfer of knowledge and technology. The industry’s success has, however, been supported by the transitional safeguards on exports from China. These safeguards are due to expire in 2008 and the erosion of Bangladesh’s market share in Canada—its only major market in which there are no safeguard restrictions on China—over the past two years suggests that Bangladesh will face much greater competition in its two largest garment export markets in the relatively near future. Vietnam’s accession to the WTO in January 2007 poses a challenge for Bangladesh since Vietnam now has quota-free access to the large markets in which these two countries compete head-to-head. Recent labor unrest in Bangladesh’s garment sector is a potential risk to the industry and highlights the need for continued efforts to raise safety standards, to improve general working conditions, and to implement wage agreements.
20. To maximize the likelihood that Bangladesh’s garment industry will continue to thrive the industry and government will need to address a number of issues. Foremost among these is the development of vocational and other educational programs that will support the industry’s need for more highly-skilled domestic labor, including line and production managers. Given the clear constraints imposed on the RMG and other industries by the poor condition of the country’s infrastructure, it is critical that the government moves to improve the roads, railways and ports, and to streamline further the customs procedures applied at all points of entry. A general change for the better in the business climate—from better infrastructure and improved governance—may attract more FDI into the garment sector, including outside the EPZs. This could be particularly important since there is strong evidence that productivity (and employment) is higher in FDI firms and more FDI in the sector would create additional competition, thereby helping to improve the competitiveness of all RMG firms. Aside from addressing these constraints to growth, Bangladesh’s garment industry should more actively explore new markets. Even though firms report that they are constantly running at maximum capacity and prefer to deal with known buyers and customers, efforts should be made to develop new business, at least in large Asian countries such as Japan, China and India.14 This may help Bangladesh to sustain its growth in the increasingly competitive global market, particularly since it is well placed to absorb business in the low-end and medium garment market as other major producers move up the value-added chain.
Centre for Policy Dialogue2004“Surviving in a Quota-Free World: Will Bangladesh Make It?” Centre for Policy Dialogue (Dhaka).
MlachilaMontfort andYongzhengYang2004“The End of Textiles Quotas: A Case Study of the Impact on Bangladesh,”IMF Working PaperNo. 04/108 (Washington: International Monetary Fund).
OsmaniS. R.WahiduddinMahmudBinayakSenHulyaDagdeviren andAnuradhaSeth2003“The Macroeconomics of Poverty Reduction: The Case Study of Bangladesh” UNDP (Dhaka).
RahmanMustafizur andA.Anwar2005“EU Sanctions on Import of Chinese Apparels: Implications for Bangladesh,”CPD Trade Policy BriefVol. 2 4Centre for Policy Dialogue (Dhaka).
World Bank2005“End of MFA Quotas: Key Issues and Strategic Options for Bangladesh Ready Made Garment Industry” World Bank (Dhaka).