Background
The Multifibre Agreement was developed in 1974 and governed the world’s textile sector until 2004 when it was phased-out. The accord inflicted quotas on the amount developing countries could export to the developed world. It was meant to help the developed countries adjust to existing absolute advantage that the developing countries have in the textile industry. The existence of the agreement allowed the Bangladesh textile industry to flourish in the 20th century and early 21st century. It was highly expected that the phase-out of the MFA would greatly affect Bangladesh negatively as the country was highly dependent on the existing agreement with the United States and Europe. Economist and scholars predicted the expected outcome of the phase-out using the general equilibrium model.
The studies depicted a gloomy future for the case of Bangladesh which had an estimated 94% reliance on the MFA quotas in 2002. The social scientists argued that the abolition of the quotas would change the competitiveness of the industry allowing low-cost countries like china access to the United States and European Union markets. Given that the Bangladeshi textile industry was highly reliant on the existing quotas at the time, the industry was highly vulnerable to the phase-out. Bangladesh was associated with low competitiveness and assumed to be headed to very gloomy later. Ten years later and Bangladesh does not seem to be leaving the top three exporters of apparel and garment in the world anytime soon. The country seems to have conquered the post-MFA challenges. The success of the RMG industry in Bangladesh is associated with government policies and existing conditions within the country that allowed the industry to remain relevant and competitive. The success is also associated with the existing labor conditions within Bangladesh that ensure a continuing supply of cheap labor for the RMG companies.
Review of Literature
The RMG industry in Bangladesh experienced an uninterrupted growth and expansion between 1970 and 2004. This is mainly due to the existence of a ready market for the produce provided by the MFA. The MFA was a blessing for the Bangladesh RMG industry since it gave the country the opportunity to develop and build a foundation for the growth of the industry. According to Kiron, the industry has matured as a result of the MFA quotas. As a result of the dependence on the MFA, many experts and scholars expected the industry to either fail or experience difficulties after the abolition of the quotas. However, the last decade has proven the experts wrong. The industry has grown to unimaginable heights beating competition from other low-cost producers of garments and apparel, this is partly due to the promotions by the government through different means. Before the abolition of the MFA, the Bangladesh government’s support for the RMG industry is remarkable. This is because most governments in the developing countries lack proper timing and coordination in the development and implementation of necessary policies. The Bangladeshi government after independence was socialistic in nature. It was involved in the nationalization of main companies in the country. The government also imposed limits on private foreign investments. Through the government policies, the government modified the import [policy to provide garment industries with bonded warehouses. The modification also allowed the industries to import fabrics. The government also supported the industry in the importation of machinery and inputs for use in the RMG industries. These policies implemented by the government established the Bangladesh RMG sector in a pole position to take advantage of the MFA quotas. During this period, the sector had developed partnerships with international companies in the United States, Canada, and the European Union. However, most of this relationships relied on the MFA as it gave Bangladesh preference on the exportation of garments and apparel into the aforementioned countries. By 2002 the RMG industry in Bangladesh relied on the markets where the country had a favored status for 94% of its exports.
The high reliance on the quota-aided markets raised concern among experts in the view that the abolition of the MFA would result in dire consequences for Bangladesh. Several studies conducted to investigate the possible effects of the MFA abolition would cause in the RMG industry. Most of the studies predicted a gloomy future for the Bangladesh economy and the RMG industry.Studies done bu Spinanger (2004) reveal that elimination of the quota results in 8% lie in exports that will inturn lead to countries GDP decline by 0.54%. Mlachila and Yang (2004) urgued that abolition of quotas' would change competitiveness of different exporting countries and the comparatively weak competitiveness makes the economy of Bangladeshi vulnerable in the final stage of the quota phase-out. After accessing the the restrictiveness of quotas' and export similarity, its possible that Bangladeshi could face a huge pressure in its balance of employment, output and payments
However, the RMG industry in Bangladesh was barely affected by the abolition of the MFA. Even though the industry experience troubles with the standoff between the workers and their employers, the industry was able to recover flourish. There were mainly three reasons why the industry was able to recover. One of the reason was the availability of resources. During the three decades that the industry was protected by quotas, the companies managed to amass resources with the support of the government. In addition, the government provided support to the industry through the provision of required resources. Another readily available resource in Bangladesh was the availability of cheap labor that ensured a continuous supply of human resource. The Bangladesh population ensured a continuous supply of labor wit workers even willing to work overtime. The availability of labor also enabled the maintenance of the cost structure in the companies. This was enough to support productivity and remain competitive even with the falling international prices. The second factor was the availability of resources. Bangladesh had developed business relationship and a sustainable market niche in North America and the European Union. Through MFA, the country had secured markets in the aforementioned regions. The companies took advantage of the existing markets and expanded the markets adequately. The third factor was the government policies. Due to the role played by the RMG industry in the Bangladesh economy, the government ensured support to the industry by imposing high taxes on the imported fabric and offering subsidies to the companies that use locally produced fabrics.
Competitiveness of the RMG Industry in Bangladesh
The success of the RMG industry in Bangladesh can be attributed to unforeseen competitiveness that the country was able to keep high after the MFA phase-out. Theoretically, the apparel and garment industry has been supported by the proactive domestic policies developed during and after the MFA phase-out. Another factor is the regulated international trade regime that ensured competition does not bring down the developing nations like Bangladesh. However, the unforeseen competitiveness of Bangladesh is only attributed to the existence of cheap labor that keeps the RNG companies a going concern. Cheap labor creates and earlier underestimated labor-based competitive advantage over other apparel and garment producing countries. Since the human resource segment has remained an important factor in the RMG industry, the companies can rely on the modest share of labor in their final product’s cost structure. The industry also relies on the marginal existence of the processing activities backward linkages. The government policies governing the sector also ensure a continuing competitive advantage against the world’s major producers of garment and apparel. The Bangladeshi Readymade Garment (RMG) industry was expected to have a gloomy future after the abolition of the Multifibre Agreement (MFA) due to the industries reliance on the quotas. In addition, the country’s heavy reliance on imported fabric was a cause for concern about the ability to cope with the phase-out. However, the country made a remarkable success over the ten years after the abolition owing to the government policies prior to the abolition and the complementary policies since 2005. The country was able to maintain its comparative and competitive advantage due to the government’s commitment towards the industry and the existing intrinsic conditions in the country. A combination of the country’s intrinsic conditions and the government policies create a unique environment for the country to prosper in the industry.
Low minimum Wage
The Bangladeshi government established a minimum wage as a cure to the continuous wage struggles between the RMG companies and the workers. The developing countries basically have an absolute advantage of developed countries in the textile industry because the industry is labor intensive. The existence of lower wage rates in the developing countries significantly reduces the cost of labor for the industry, giving the countries an absolute advantage over the developing countries. Human labor is directly embodied in the production processes of the garment and apparel sector and accounts for a major share of the cost of production. Mechanized in this sector cannot outdo the need for human resource especially when human labor is much cheaper. The imposition of quotas on major apparel and garment producing industries forced most countries to shift their RMG exports to Bangladesh. Bangladesh had an existing market access power in North America which provided the country with a given level of competitiveness.
The existence of market access and the low labor costs allowed Bangladesh to produce apparel and garment in large quantities and compete with major producers of these products like china. The prevailing labor costs also allowed the companies to easily shift the production transition process. Even though low wage rate is associated with other challenges due to the increasing liberalization, the Bangladesh case is also supported by the low opportunity cost of the readily available labor in the country. Bangladesh also enjoys very low opportunity cost of female labor which is mainly employed in the low-skilled low-wage sectors of the industry. The majority of the RMG workers are the non-unionized female workers which allow the companies to continuously depress the wage level. The companies allow the workers to work overtime in order to complement their low wages. This is also advantageous for the company in the long run. Even though there is increasing complaints about the low wages, the entrepreneurs in the RMG sector argue that the workers also have very low productivity. The low productivity of labor in Bangladesh general grants the employers the freedom to continue paying very low wages. Understanding the implication of unreasonable wage rates in the industry is key to the government’s ability to promote the industry. Therefore, the government needs to ensure that the wage rate does not suppress the industry’s productivity. In addition, the government needs to ensure that the wage rate does not suppress the labor force. Therefore, the government controls the wage rate through minimum wage which is reviewed regularly.
Other Government Policies
Policy makers in Bangladesh have always presented some uniqueness compared to other developing industries. They are known to respond to proposals and reasonable propositions from the entrepreneurs and other stakeholders in the RMG industry. This allowed the industry to prosper during the quotas period and has played a major part in the success of the industry after the quotas. The government’s role in making the industry successful is through the imposition of policies that keep the industry afloat and that do not greatly undermine the industry’s existing competitive advantage. The RMG industry in Bangladesh has enjoyed freedom from government intervention for most of its existence. This allows the industry’s competitiveness and capitalistic nature of the entrepreneurs to formulate strategies that keep it a going concern. In addition, policy making allowed the industry to enjoy international markets through the establishment of special bonded warehouses and external financing. These strategies were mainly implemented during the MFA period and played a major role in creating a stronger RMG industry to sustain the phase-out period. The imposition of minimum wage rate for the industry reduced the standoff between the RNG companies and the works to a reasonable extent for the industry to function.
After the MFA, the government also continued to promote the industry through trade agreements like the generalized system of preferences (GSP) which gives the country access to the European market. The GSP does not fall under the Uruguay round of the WTO agreements. Therefore, the Bangladesh RMG industry has enjoyed tariff-free access to the EU. In addition, Bangladesh also enjoys such privileges in Canada and enjoys competitive advantage based on prices in the United States. The country has also established marketing investments in different countries growing the competitiveness of the industry to a great length. The favored trading status of the RMG industry enabled the industry to develop and keep low prices. Through this growth, the country has expanded the investment opportunities in the industry. In addition, its favored status provides the country with a comparative advantage and a competitive advantage in trade partnership with countries that import fabric to the country. The country only produces about 10% of the fabric used in the RMG industry. This increases the advantage of backward linkage in the industry. It also creates an opportunity to set up textile industry combining textile, yarn, and garments within the country.
Investment opportunities still exist in the RMG sector. This I mainly because the local production of fabric cannot meet the increasing demand for the fabric in the industry. Currently, the demand is met through fabric importation. The government on this front provides an incentive for investment through subsidies to the exporters of RMG products who source fabric locally. This is a direct incentive for investment in fabric production in Bangladesh and lowers the cost of sourcing the fabric locally. The government monitors investment opportunities within the industry and offers the investors several options. The government supports investment in new RMG mills, privatization of existing public RMG mills, and indirect investment in the industry by private investors through financial services and leasing. The Bangladeshi government also supports the spinning process through lower tariffs for spinning machinery and their spare parts, raw materials, tax reduction, cash incentives, and funding. This support increases the attractiveness of the sector to investors and reduces the cost of production in the long run. The government also supports the industry by supporting research and development within the industry and supporting trade fairs and tradeshows meant to promote the industry.
The government plays the important role of the policy maker in the attempts to necessitate the proper working of the industry. However, the industry still faces problems related to the working environment and the wage rate. As much as Bangladesh has a low productivity of labor, the wage rate is still considered low in comparison to other low-cost producers like china. The government still needs to address the issue of wages for the workers in the RMG industries. Higher wages may result in increased productivity and as a result translate into increased output. In addition, the RMG industries in Bangladesh are associated with poor working conditions for the workers. This is an issue that needs to be addressed in order to adhere to the internationally accepted standards. The industry is also linked with employment of very young girls and gender discrimination in the workplace. As a result, women are paid less as compared to their male colleagues. The RMG industry employs more women than men in the lower levels of production. This is because women empowerment in Bangladesh is still low. Therefore, the government needs to impose laws and regulations that will improve working conditions for women in the RMG. The government should also put in place policies to empower women through equality of opportunity and compensation. This way, the country will be able to meet the international standards in regards to human resource management and working condition. Women empowerment may also improve their productivity in the sector and improve the final output in the industry.
Conclusion
The Bangladeshi RMG industry attributes its growth to its competitive and comparative advantage resulting from the low-cost of labor and capital requirements. However, the government has also played a major role in ensuring that the industry maintains the comparative and competitive advantage. Through policies, subsidies, minimum wage, and trade partnerships, the Bangladeshi government has continuously supported the RMG industry. Through this support, the industry developed in the MFA era and gained important growth that contributed to its continued success after the MFA abolition. The government’s support after the MFA has enabled the industry to attract favorable status in the international market. The government has also ensured that the falling prices do not significantly affect the industries performance be finding markets for the industry’s produce in order to keep producing. Keeping the production high ensures that the industry enjoys the economies of scale and is able to meet the low price demands. The low price demands also ensure that the sales volumes remain high when the products meet the expected prices.
In addition, the government maintains the low-cost by managing the wage demands and subsidizing fabric purchasing and investment. This reduces the cost of production and importation of fabrics from other countries. The favored status created by partnerships also discourage competition from other low-cost garment producing countries. The government policies during MFA era also allowed the industry to enjoy the captured niche market. This prevented an implosion of the industry immediately after the abolition of the MFA giving the country a grace period to find solutions. In addition, the established niche had ensured that Bangladeshi companies had existing relationships with international partners like Walmart. The existing partnerships would ensure that the companies have time to adjust production strategies before prices fell. The government policies allowed the country to rationalize production and played a major role in preventing the effects of the quota elimination.
The policies seem to boost the industry players but do not put the welfare of the citizens in consideration. The minimum wage policy works for the RMG industries. However, for the women and young girls working in the RMG sector, the government is yet to develop policies to protect their welfare. The government uses taxes and subsidies to ensure the RMG industries prosper but does not put similar importance in the development of policies to protect the welfare of the employees and the development of regulations to limit the misuse of the loopholes in the laws. Major companies in the developing countries are known to take advantage of the loop holes in the laws and regulations to promote their business at the expense of the locals. Bangladesh is a good example of such a country. The absence of labor protection laws, the companies neglect the workers welfare and take advantage of their willingness to work overtime. For that reason, the wages are kept low in order to encourage the workers to work extra time in search of extra earnings. The Bangladeshi government should ensure that the workers are able to enjoy the success of the RMG sector as the companies do. In addition, the government should ensure that the companies provide good working conditions for the workers and that the companies do not discriminate against women. The government should also put policies in place to prevent child labor within the textile sector. The Bangladeshi government has been remarkably excellent in ensuring that the country’s most important industry is kept afloat. The development of the right policies to protect the workers is also possible and equally important.
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