Case Study: Ready Made Garment Sector in Bangladesh
Case Study: Ready Made Garment Sector in Bangladesh
Introduction:
It is very apparent that political stability, corruption free, human rights rules,
hygienic condition, compliance of labor laws, Factory or business places security,
etc, all have become a set of precondition of international business any where in
the world. These preconditions are now in the fore front in business as the
importing countries always are worried about these factors. They now-a-days
want to make sure that the above conditions are prevailing in the exporting
countries before they want to invest or start business. There are other factors,
such as the facilities of infrastructure, for example steady power supply,
telecommunications, roads and rail communications, port facilities, etc. that also
decide how and where to do business or invest by the business owners. Political
stability and democracy will bring in the confidence among the business
community so that the other factors or condition can also have some effect on
business. In exporting commodities or products the WTO rules are set to follow
the human rights rules, hygienic conditions, labor laws, forbidding child labor.
It is the responsibility of a political government, which should begin its era with
democracy that leads to the freedom of speech, tolerance to the opposition,
accountability and transparency, within the administration and thereby give rise
to the political stability in the country. Such a government will enable to enforce
the laws that apply to the factories and business premises. It is beneficial for the
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Case Study: Ready Made Garment Sector In Bangladesh
government to appoint task forces to monitor all the conditions or rules if they are
complied by the owners of the business organizations. In this perspective some
study in the Ready Made Garments (RMG) industry is needed. It is a major
player in the activities of International Business. IT is not only a big earner of
foreign exchange but also a very big employer of skilled and semi-skilled labor
force over two million of which around 80% are women. It also brings economic
benefit and generates employment by supporting backward linking industries like
textile industries, dyeing industries, packaging industries, etc.
Background of RMG
The Ready Made Garments (RMG) industry began it’s a very modest journey in
the early eighties by exporting shirts to Europe. The Korean businessmen had
shown interest in this sector and transferred the skills to the local entrepreneurs.
In over two decades these sectors have been turned into a major industry
contributing the maximum earnings to the foreign exchange reserve. For several
years, nearly 60% of the total exports of garments went to USA and Canada.
USA being the maximum buyer (maximum 40%), while its 40% export to Europe
on quota basis under the GATT (General Agreement on Trade and Tariff)
agreement. The terms of these agreement is replaced by the WTO on a long
term of various trading arrangement, the era of quota system of garments has
ended and taken over by the MFA (Multi-Fiber Arrangement), which will enable
the industry exporting on a competitive basis. As the quota system is now
abolished from January 2005, Bangladesh Garment Industry has to enter into
competition with other countries like India, Pakistan, and China.
Ready made garments have been divided into two identities, such as woven
wear garments and Knitwear garments. So they are grouped under two
associates- known as Bangladesh Garments Manufacturers and Exporters
Association (BGMEA) and Bangladesh Knitwear manufacturers and exporters
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Case Study: Ready Made Garment Sector In Bangladesh
Association (BKMEA) respectively. These two associates look after the interest
of each respective sector of garments manufacturer and exporters. After the end
of quota system in 2005, there was much fear apprehensive that there might be
sharp decline in the export of ready made garments. But due to untiring effort by
countrymen and satisfactory support from these organizations, the industry has
been able to overcome the initial danger. In fact it is doing better particularly due
to excellent performance of Knitwear exports. In order to maintain the tempo of
the business, it is also the responsibility of the government to observe whether
there are any lapses in the rules of business within the industry, when it is
entered into international business. There are many foreign investments in the
garment sector. The atmosphere in the business must prevail and follow all the
preconditions that are needed for sound investment. It is the government who
must make sure and enforce the condition in business; otherwise the investors
and buyers may not show interest in business in Bangladesh. They are even
likely to retract their business and go else where.
Under the WTO Agreement on Textiles and Clothing (ATC), all textile and
clothing (T&C) quotas maintained by industrial countries under the now defunct
Multi-fiber Arrangement (MFA) were removed over the period 1995-2005. During
the 10-year transition period, the remaining quotas were also enlarged. Because
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Case Study: Ready Made Garment Sector In Bangladesh
those quotas were bilateral and the extent of their restrictiveness varies from
country to country, their removal altered competitiveness of individual exporting
countries. Countries those were facing more restrictive quotas saw their
competitive position improved after the quotas were removed, while those that
have been less restricted by quotas found it difficult to maintain their current
market share. The intensity of these shifts in competitiveness will be amplified by
the effective back loading of the quota phase-out under the ATC. Most of the
restrictive quotas were removed only at the end of the transition period, turning
what could have been a gradual adjustment process into a major shock at the
beginning of 2005.
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Case Study: Ready Made Garment Sector In Bangladesh
IMF evaluated the impact on the Bangladeshi economy of the phase-out of textile
and clothing quotas, with a particular focus on the medium-term effects on the
balance of payments (especially the trade account), GDP and employment. They
next mentioned about a general background on the RMG sector in Bangladesh.
They examined Bangladesh’s competitiveness vis-à-vis its main competitors, and
also identified the major supply constraints in the Bangladeshi export sector.
Quantitative assessments of the potential impact of the quota phase-out on the
Bangladeshi economy were carried out.
“Under the Uruguay Round Agreement on Textiles and Clothing (ATC), MFA
quotas are to be phased out progressively over a 10-year period. The 10-year
period cannot be extended. In the first stage, which began on January 1, 1995,
WTO Members were required to integrate not less than 16 percent of their 1990
imports of textile and clothing products. In stage 2, starting January 1998, not
less than a further 17 percent was to be integrated. In stage 3, from January
2002, a further 18 percent. Finally, on 1 January 2005, all remaining products
(amounting to a maximum 49 percent) are to be automatically integrated.
Products not yet integrated are subject to a special transitional safeguard
mechanism, whereby an importing country can apply quantitative restrictions for
up to three years on imports from a particular source of supply which causes or
threatens to cause serious injury to the domestic industry. After integration,
regular GATT safeguards apply.”
In addition to this integration process, the ATC accelerated the growth rates for
the remaining quotas. The annual growth rates of quota volumes were increased
by a factor of 16 percent for the first stage of the Agreement, by a further 25
percent for the second stage, and another 27 percent for the last stage. LDCs
enjoy one-stage advancement in the acceleration of quota growth.
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Case Study: Ready Made Garment Sector In Bangladesh
Various schemes and measures have been instituted over the years to mitigate
the effects of the supply constraints on the export sector. The RMG sector, in
particular, enjoys considerable policy preferences, including:
• Duty drawback scheme. The RMG sector benefits from a duty drawback
scheme for raw materials whereby import duties paid on these materials
are reimbursed to the importer upon execution of an export order.
However, poor implementation of the scheme has resulted in delays in
reimbursement and payment of kickbacks to tax officials who administer
the scheme.
• Bonded warehouse. Raw materials for garments manufacturing may be
imported without duty payments and kept in bond.
• Reduced income tax rates. The government has during the FY04 budget
reduced the corporate income tax rate for RMG industries from 30 to 10
percent for the period up to June 30, 2006. At the same time income tax
rates for textile manufacturers were reduced from 30 and 35 percent to 20
percent for the period up to June 30, 2006. Reduced income tax rates are
unlikely to have much of an impact for most of the producers since their
income tax bills are minimal.
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Case Study: Ready Made Garment Sector In Bangladesh
The overall effect of these schemes, especially cash subsidies, is rather difficult
to establish. The various schemes to ensure that imported inputs for export
production are not taxed are sound in principle but are very difficult to implement
in practice, leading to revenue leakages and rent-seeking activities. The CCS is
also onerous to administer. The required documentation is apparently so
voluminous that most manufacturers (especially small ones) prefer to forego the
benefit.
Bangladesh’s RMG exports have grown rapidly over the past two decades,
especially in the 1990s. The value of exports in U.S. dollars increased more than
six-fold during the period 1990-2002, or about 16 percent per year, considerably
faster than the growth of the country’s other merchandise exports (Figure 2). The
knitwear sector has performed particularly well over time. The sector’s share in
total RMG exports has grown from about 17 percent in 1995 to almost 40 percent
in 2003. Bangladesh’s knitwear sector enjoys several advantages over its woven
sector:
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Case Study: Ready Made Garment Sector In Bangladesh
Starting in 1998, however, RMG export performance slackened, with the annual
growth rate averaging less than 5 percent to 2002. For the first time in more than
20 years, export values (in U.S. dollars) actually declined in 2001/02, and then
after 2005. According to Bangladeshi exporters interviewed during IMF missions,
this is partly attributed to increasing competition in the world market, especially
from China and India, in a period of sluggish global demand. The exporters also
blame the U.S. preferential trade agreements for their export decline. In
particular, they believe that the U.S. African Growth and Opportunity Act (AGOA)
had diverted U.S. textiles imports away from Bangladesh to Africa.
RMG exports recovered in the first half of 2003. Bangladeshi exporters believe
that the rebound was mainly a result of a shift in demand in their favor due to the
SARS epidemic which hit China and South East Asia in early 2003, duty- and
quota-free access to the Canadian market beginning in January 2003, and
strengthening global demand. The recovery was also boosted by increased
exports to the EU where Bangladesh seems to begin to benefit from everything
but Arms (EBA) Initiative. Under the Initiative, which entered into force in March
2001, Bangladesh, together with 49 other least developed countries, benefits
from duty- and quota-free access for all products except arms (with phase-in
periods for rice, sugar and bananas).
Bangladesh continues to face quotas and tariffs in the US market, but quotas and
tariffs in other restricted markets have been removed. But now the removal also
took place in the garment sector as well. In contrast, most of Bangladesh’s major
competitors continue to face quota as well as tariff restrictions in all restricted
markets. Quota-free access to the restricted markets (other than the United
States) gives Bangladesh a distinctive advantage over its competitors, and
additional duty-free access further strengthens that advantage. It should be
noted, however, that rules of origin have often limited the benefits of quota- and
duty-free access. In the case of the EBA, while Bangladesh’s knit garments,
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Case Study: Ready Made Garment Sector In Bangladesh
which have high domestic value added (up to 80 percent), can generally meet
the requirement of 51 percent domestic and regional valued added to be eligible
for preferential access, its woven garments, which rely heavily on imported
inputs, face a considerable constraint in meeting this requirement. Given that
well over half of Bangladesh’s garments exports to the EU are woven products,
this constraint is significant in determining the country’s overall export
performance in the EU market. It is reported that less than half of Bangladesh’s
exports actually receives duty-free treatment under the initiative.
Bangladesh is heavily dependent on the EU and United States for its RMG
exports. The two markets combined account for about 94 percent of
Bangladesh’s total RMG exports. Exports to unrestricted markets are negligible.
In comparison, most of Bangladesh’s main competitors ship a much larger
proportion of their T&C exports to the unrestricted markets. China, for instance,
has over three quarters of its exports destined for these markets, while for India
the share is 40 percent. In general, unrestricted markets have been an important
for the more established exporters while quotas are in place in the United States
and EU. Among the world’s top 25 clothing exporting countries, Bangladesh is
probably the second most dependent on the restricted markets. These
comparisons show that Bangladesh is yet to demonstrate a capacity to penetrate
unrestricted markets. They also imply that Bangladesh may benefit little from
price increases in the unrestricted markets when demand in the restricted market
increases with the elimination of quotas.
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Case Study: Ready Made Garment Sector In Bangladesh
In the EU market, the fact that Bangladesh does not face any quotas there
means that the shock to its exports could be even larger when quotas on other
countries are removed. Unlike in the US market, where Bangladesh had a 7.6
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Case Study: Ready Made Garment Sector In Bangladesh
percent quota rent to cushion price falls when remaining quotas were removed,
any price falls in the EU market would directly cut into profits and hence exert
pressure on exports. This is the preferential EBA access that Bangladesh
enjoyed in the EU market. However, if quotas on all exporting countries were
removed, Bangladesh’s exports would contract in the U.S. market. In contrast, in
the EU market, Bangladesh’s exports would also contract. Clearly, while any
price fall in the EU market will lead to a decline in Bangladesh’s exports, its
exports supply to the United States is completely inelastic until the price falls.
The degree of substitution between exports from Bangladesh and its main
competitors is potentially high in the EU market. At first sight, this does not
appear to be the case based on estimates of export similarity in the EU market.
At the quota level, the overlap between exports from Bangladesh and China is
low, and that with India and Pakistan is considerably higher. Export similarity
between Bangladesh and China is low because China’s exports to the EU are
much diversified, while Bangladesh is specialized in several major clothing
categories. However, just five of these categories accounted for 86 percent of
Bangladesh’s total RMG exports to the EU in 2002, while they made up only 13
percent of China’s exports. In value terms, Bangladesh exported nearly twice as
much of these products as China did. Remarkably, according to World Bank
(2004) estimates, China’s exports in these categories face very high ETEs. Both
India and Pakistan also have higher-than-average ETEs for these categories, in
addition to a higher share of these products in their total exports to the EU, which
contributes significantly to the higher export similarity between these two
countries and Bangladesh. Thus, despite the apparent low export similarity
between Bangladesh and China, competition between the two countries is likely
to be intense.
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Case Study: Ready Made Garment Sector In Bangladesh
The strong competition between Bangladesh and other exporters seems to have
been borne out by the recent developments in exports for which quotas have
been removed. At the beginning of 2002, a number of quotas were abolished
integration (2002-04) under the ATC. Export performance in these quota
categories thus provides initial evidence of competitiveness after 2004. From
2001 to 2003, while Chinese exports surged, Bangladeshi exports of products,
declined by 46 percent (in value terms) in the EU market and 41 percent in the
US market. Among the seven categories of products for which quotas were
removed in the U.S. market in 2002, Bangladesh suffered export losses in all but
one category. Many other countries also suffered export declines, but
Bangladesh’s loss in the EU market might seem surprising given that it has
quota-free and duty-free access under the EBA.
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Case Study: Ready Made Garment Sector In Bangladesh
These results are broadly consistent with the observed effects of quota removal
on Bangladeshi exports under the third phase of ATC quota integration.
Abstracting from dynamic effects such as changes in productivity in Bangladesh
and its competitors, as well as growth in the size of the global market, a linear
extrapolation from performance would suggest that the potential loss in
Bangladesh’s RMG export values were be of the order of 25 percent when
remaining quotas after 2005; assuming that imports of textiles declined by the
same percentage but nothing else changed.
To more accurately reflect the current extent of quota restrictions, data on quota
premiums are updated based on the latest estimates for Bangladesh. The
simulations focus on the static, medium-term effects of quota removal. For this
reason, the database of the model is updated to 2007 through a projection
exercise, which involves augmenting GDP, population and factor (land, labor,
capital and natural resources) endowments with productivity accounting for any
slack in GDP growth. GDP and employment projections are based on IMF World
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Case Study: Ready Made Garment Sector In Bangladesh
In simulating the impact of the quota phase-out, quotas on exports from all other
developing countries are also removed together with those on Bangladeshi
exports (which face restrictions only in the US market). No other policy changes
are introduced. The removal of Canadian and EU quotas on Bangladeshi exports
is incorporated in the baseline projections. The simulation does not take account
of any dynamic or non-price effects of the quota phase-out, such as
improvements in product quality and transport facilities. Whether an exporting
country experiences an export expansion or contraction after quota removal
depends on whether its production cost (net of quota premiums) is lower or
higher than its main competitors’. All results are reported as deviations from the
2007 baseline.
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Case Study: Ready Made Garment Sector In Bangladesh
The simulation results are very sensitive to the elasticity of substitution between
products from different countries of origin. Intuitively, the greater the
substitutability between Bangladeshi and its competitors’ products, the larger is
the impact on Bangladesh’s exports when quotas are removed. The central
elasticity represent the best judgment on available estimates in the literature, but
the true values of these elasticity could be anywhere between the lower and
higher bounds. It is important to note that within this wide range of elasticity, the
direction of the impact remains unchanged.
Factor market assumptions are critical in determining the impact of the quota
phase-out on macroeconomic aggregates. The contractions in textile and
clothing exports lead to a decline in the consumer price index and the GDP
deflator. This leads to increases in real wages under the assumption of constant
nominal wages. The impact is even smaller if wages are perfectly flexible so that
there will be no contraction in employment. The balance of trade in fact improves
slightly because of a considerable real exchange rate appreciation. Another
important assumption is how investment will be affected by quota removal. If
investors believe that Bangladesh will be adversely affected by quota removal,
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Case Study: Ready Made Garment Sector In Bangladesh
Given the recent pressure in the United States and EU to re-impose quotas on
Chinese textile and clothing exports after 2004, a simulation of restrained
Chinese exports is also carried out. It is assumed that as a result of a newly
negotiated arrangement, Chinese textile and clothing exports would increase by
only half what they would if quotas were completely phased out. The results
indicate that the adverse impact on Bangladesh’s GDP, employment and exports
would be about 30 percent less than under the first scenario. The dampened
expansion of China’s exports is partially offset by increases in exports from
Bangladesh’s other competitors, such as India and ASEAN.
An increase in productivity would help offset the adverse effects of the quota
phase-out. Simulations indicate that to maintain the baseline level GDP,
Bangladesh would need to increase its total input productivity in the textile and
clothing sector (relative to its competitors) by 4-5 percent (cumulatively) in 2007.
To ensure baseline level employment, the sector needs to achieve a 5-6 percent
increase in productivity. Such productivity improvements, though not particularly
large, would also substantially reduce the potential deterioration of the trade
balance. This underscores the importance of overcoming supply constraints
(e.g., weak infrastructure) analyzed in the previous section.
The RMG industry has been the main source of growth in exports and formal
employment in Bangladesh; although it’s direct contribution to GDP, at about 2.4
percent, is relatively small. The industry plays a key role in employment and in
the provision of income to the poor, directly employing about 1.8 million people,
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Case Study: Ready Made Garment Sector In Bangladesh
The RMG sector has attracted limited foreign direct investment (FDI), most of
which has gone to the export promotion zone (EPZ), which contributes about 10-
12 percent of total exports. Bangladesh’s RMG sector was originally launched by
foreign investors, mostly from South Korea and Hong Kong, which took
advantage of Bangladesh’s export quotas in the restricted markets (Canada, the
EU, Norway, and the United States), as well as an abundance of cheap labor.
Over time, however, the role of FDI has been significantly reduced, mainly as a
result of government restrictions aimed at preserving valuable quotas for
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Case Study: Ready Made Garment Sector In Bangladesh
domestic producers (see Section IV). This has contributed to slow export
diversification and upgrading, giving low wages and quota access a greater role
in maintaining competitiveness. Bangladesh produces at the low end of the
market (“cut, make and trim”), where value added and profit margins are low.
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Case Study: Ready Made Garment Sector In Bangladesh
examined thoroughly in depth. It does not simply lie in merely apportioning blame
to external elements. However trouble ensue in the garment sector, the
conditions have to be ensured, such as good working condition in the industry,
good worker –employer relationship, grievances of workers, their satisfactory
wages, working hours, holidays, maternity leaves are needed to be addressed.
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Case Study: Ready Made Garment Sector In Bangladesh
at Tk 930 per month. Meanwhile, in 1997, the minimum wage for a worker in the
public sector was fixed at Tk 1,550 per month. The government, following a
protracted labor movement, announced in July 2001 the minimum wage structure
for the private sector workers, fixing Tk 1,200 as minimum monthly salary for
unskilled workers in small industries, Tk 1,250 in small and medium enterprises
and Tk 1,350 in large industries. The government again sought official
recommendation of the employers in April 2004 for ‘national minimum wages’ for
the private sector workers. The employers continued to oppose the idea of fixing
minimum wage for the workers.
World Bank's Country Director Christine Wallich has blamed low wage, irregular
payment, lack of social safety, among others, for the recent labor unrest in the
garment sector. Similar views have been expressed by Neil Kearney, a visiting
leader of the International Federation of Trade Unions. He went a step further
and faulted BEPZA, BGMEA and the government for their failure to visualize the
problems of the garment industry. Both have tried in their own ways to highlight
the problem that the garment owners, instead of addressing, allowed to fester.
The remarks of both Ms Wallich and Mr. Kearney, by and large, represent the
truth, if not the whole truth.
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Case Study: Ready Made Garment Sector In Bangladesh
The situation became so volatile in the readymade garment sector that it seemed
that the industry that generates billions of dollars in export revenue was sitting on
a tinder-box that needed only a spark to ignite a fire and cause an explosion.
That's what happened. No effort was made to defuse it in time. The
administrative machinery moved in too late and achieved too little to save the
situation. In such a murky atmosphere theories abound. And some even
discovered foreign conspiracy behind the mayhem and lost no time in pointing
fingers.
The fact of the matter is that neither the government nor the management took
note of the signals coming from the workforce about their woes and the growing
discontent among them. Some of the labor leaders, or whoever ruse as such,
should also have played a constructive role.
Years of deprivation of the workers - their low salary and lack of other benefits -
and the violence, vandalism and finally the forced closure of garment factories
should be a lesson for all.
It is just a week now that a deal between workers and readymade unit owners
were struck in presence of Government representatives and all the hell has been
let loose. As per the deal, employees were provided paid days off, union
membership and a new minimum wage policy would be announced within three
months.
Now, the Union leaders claim dissatisfaction among workers and they were
reportedly preparing ground to stage mass protests all through the month in
demand of a 30 percent hike in wages.
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Case Study: Ready Made Garment Sector In Bangladesh
While widespread unrest has witnessed violent agitation and loss to property,
worse has been the exports of textiles and garments that will reveals negative
effect soon as this sector claims top spot among foreign exchange earner for
Bangladesh.
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there was serious possibility that uneven competition from China would suffocate
demand from Bangladesh.
This Report points out that the export demand variations might have more impact
on the forward-linked sectors than on the backward-linked sectors. It also
estimates that the total income losses for forward and backward linkage sectors
would be around Tk.31.9 billion and Tk. 12.2 billion respectively. These
predictions and the dire connotations are also balanced by prospects on the
other side of the coin. It asserts that in case of rise in export, the total income
gains of forward and backward-linkage sectors may reach Tk. 11.9 billion and Tk.
4.3 billion respectively.
It is true that the industry leaders belonging to the BGMEA have been exhibiting
quiet confidence. They appear to be buoyant with regard to short-term
predictions. The general consensus appears to be that the transition to the post-
MFA period will be 'smooth and progressing well and will continue to be so, at
least in 2005 and 2006'. They believe that after this, continuing market share will
depend on future internal policies (regarding indirect support) of the Government
and political stability ahead of the next general elections.
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orders in terms of volume. Two major daily newspapers in the United States, the
Christian Science Monitor and the New York Times have both separately
reported that the US based Wal-Mart, the world's largest retailing company, has
stepped up its presence in Dhaka and increased its apparel imports from
Bangladesh by 18 per cent during 2003. It has also been suggested that this
Company which imported goods of about US dollar 900 million during 2003 is
planning to increase its imports by additional 30 per cent during 2005. Wal-Mart
executives have been quoted as saying that Bangladesh is very competitive
because labor cost here is less by a third than what it is in China and also
compares favorably with Fiji, Brunei, Macedonia and Turkmenistan.
Fortunately, Bangladeshi textile products have been able to find a growing niche
in the European Union. European countries imported products worth US$ 4,278
million in the 2003-04 fiscal year which was almost US dollar one billion more
than the previous year. Zero-tariff, a stronger euro and quota-free access along
with economic upturn in major importing countries within the EU- Germany, UK,
France and Italy have been the main reasons for this increase in exports.
Knitwear exports also went up in the EU because of the GSP (generalised
system of preference) facility for LDC products. The stronger euro also translated
into higher export figures in US dollars. The post-MFA period demands that the
RMG sector improves not only its competitive edge in the global market but also
the quality of its products by moving into the higher designer niche.
Fresh challenges require that apparel producers reduce the cost of production
even further. This assumes particular importance given the edge enjoyed by
some other countries that have better backward linkage facilities at their disposal.
Producers will also have to improve efficiency, reduce lead time and improve
handling capacity at the Chittagong Port. The government has announced that it
is planning to undertake a comprehensive improvement in facilities in the
Chittagong Port. One hope that time is not lost in looking for investment partners.
It has to be undertaken urgently, if necessary with local private sector capital.
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This assumes importance, given the fact, that more likely than not, there will be
higher volume in exports because of more competitive prices. Expansion,
development and upgrading needs to take place with regard to the Port's loading
and unloading efficiency, safety and security of the cargo, and its quick disposal
to different destinations. Steps also need to be taken about improving the
navigational channel and placement of ships in various docks without losing time.
The turn-around non-RMG exports in the short to medium term.
Structural rigidities have made it difficult for Bangladesh to fully exploit its labor
cost advantage. In a recent World Bank-led study (Bangladesh Enterprise
Institute and World Bank 2003); the following are identified as key structural
constraints to investment in Bangladesh:
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Case Study: Ready Made Garment Sector In Bangladesh
received in the power sector over the past decade. About 70 percent of
companies rely on back-up generators which supply electricity at a cost
typically 50 percent higher than the price of power from the public grid.
Bangladesh has expensive and often inaccessible telecommunications
networks (especially for overseas connections). The country has
significantly lower intensity of telephone lines and higher international
rates than its major export competitors. Although Bangladesh has a
reasonably developed road network throughout the country, there is
considerable congestion on the roads. Bangladesh’s main export gateway,
the port of Chittagong, is very slow in handling containers due to lack of
cranes. The development of a privately owned container terminal at
Chittagong has been slow as a result of labor disputes. Increasingly,
exporters have resorted to air freight in order to avoid losing orders,
thereby further squeezing profit margins. In an era in which export
success is increasingly dependent on rapid response and quick
turnaround of orders, Bangladesh’s poor infrastructure places its exporters
at a distinctive disadvantage against their competitors.
• In the post-ATC world textile and clothing market, infrastructure costs will
become an increasingly important determinant of FDI inflows and import
sourcing. A survey of major investors conducted in Hong Kong in 2000
shows that apart from quotas, political stability, policy predictability, and
good transport infrastructure are the most important factors in influencing
FDI in the RMG sector. Interestingly, lower wages, if not associated with
reasonable productivity, are not a very important factor.
• Transport infrastructure has become even more important and that the
availability of quotas has become a less critical factor for investment
decisions as the final stage of quota integration draws closer. The
importance of transport infrastructure in determining import sourcing is
highlighted by a recent study which finds that each additional day in
transport is equivalent to an extra 0.8 percentage point increase in applied
tariffs.
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Major Constraints:
In restricting the role of FDI in the broader textile and garment industries,
Bangladesh has foregone a number of FDI-related benefits. Foreign investors
often bring superior technology and managerial skills. FDI also helps local firms
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join the global value chains, which are dominated by multinational companies
based in industrial countries. Such value chains are often critical sources of
product information and channels for export sales. Greater integration with the
global value chains has enabled Bangladesh’s competitors to move faster to
higher quality merchandise, usually brand names, where the profit margins are
better. As noted early, Bangladesh’s average unit prices for major product
categories are considerably lower than for corresponding Chinese products. Of
course, FDI restrictions only partly explain Bangladesh’s low export prices. Other
factors include inadequate labor training, outdated equipment, poor
infrastructure, and the relatively large quotas which give Bangladeshi exporters
fewer incentives for product upgrading.
The requirement of back-to-back LCs significantly increases the lead times for
exporters. With a few exceptions, imports of raw materials for use in the RMG
can only be approved if there is back-to-back LCs. In other words, approval for
imports is granted if an importer can prove that he already has an export order
backed by an LC. The justification for this rule is to prevent non-exporters from
benefiting from duty-free access to inputs that is available for exporters. In
practice, this rule benefits greatly the domestic producers of textiles used in the
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Case Study: Ready Made Garment Sector In Bangladesh
Under the Flag Protection Ordinance (1982), exporters are required to set apart
40 percent of export cargo for domestic vessels. The law has not been effectively
enforced as it is difficult in practice to split individual shipments 40-60 percent.
Exporters usually get around the problem by seeking waivers from the office of
the Director General of Shipping. While the law’s effectiveness is debatable, it
imposes considerable costs on exporters in terms of lost time and potential for
corruption. The recent ban on the use of land ports for imported RMG inputs from
India is also likely to further increase export costs.
Some recent experts’ studies have shown that political corruption and political
instability significantly reduce international business and foreign exchange
reserve. Both political corruption and political instability hinder the business and
inflows of a countries’ foreign exchange reserve (FER), because they frustrate
the activities of foreign exchange earnings. (This reference is taken from:
International Reserve Holdings with Sovereign Risk and Costly Tax Collection,
NBER Working Paper 9154, Sept 2002). Their conclusion indicated that the
countries whose policy makers cope less about future, countries that are
politically unstable and countries suffering from political corruption.
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