Made in Bangladesh: challenges to the ready-made garment industry

Author:Meenakshi Ramesh Kurpad
Position:West Bengal National University of Juridical Sciences, Kolkata, India
SUMMARY

Purpose – The primary aim of this paper is to evaluate the challenges before the growth of the ready-made garment (RMG) industry in Bangladesh, the economy's backbone, and suggest appropriate reform. Design/methodology/approach – The paper begins by tracing the growth and evolution of the RMG industry before identifying the challenges. It then proceeds to suggest appropriate reform... (see full summary)

 
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This note seeks to address the trade-off between low wages and competitive advantage in the ready-made garment (hereinafter “RMG”) sector in Bangladesh and to address the problem of unsafe working conditions. It begins with the historical and economical background of the Bangladeshi economy and the RMG industry, in particular. It is followed by identification of the challenges in the garment industry and in specific, the need for wage increase for workers and ensuring safe conditions of work. The fourth section, looks at why and how collective bargaining can serve as an effective mechanism to address the trade-off. It is followed by an examination of the collective bargaining mechanism as followed in Bangladesh and a scrutiny of the reasons for its failure to work as effectual mechanism in the RMG industry, with a focus on the prevailing regulatory framework. It then argues why, despite the failures, collective bargaining is still the most ideal mechanism to address the trade-off in the garment industry. This note proposes a more efficacious model of collective bargaining to address the trade-off in the Bangladesh RMG industry in the wake of the government easing trade union regulations. In addition, it also looks at corporate codes of conduct as an alternative solution. This note concludes by calling for a “fairer globalisation” to Bangladeshi workers.

I Growth of the Bangladesh economy
A Early years – 1971-1975

Prior to Independence, the economy of East Pakistan (as it was then known) grew at a dismal annual average rate of 4 per cent. About a fifth of that economy was destroyed during the Liberation War of 1971 ( Rahman and Yusuf, 2009 ). Since independence, the Bangladeshi economy has seen many transformations. These phases of economic transformation have been broadly categorised into three phases by Ahmed and Sattar (2004a) namely:

  • early years;
  • de-nationalisation and de-regulation; and
  • economic reform; which is the present stage.
  • From 1971 to late 1975, Bangladesh followed a development strategy of state intervention and control ( Ahmed and Sattar, 2004a ). This first phase of economic transformation was characterised by excessive nationalisation of industries. In the initial years of its statehood, strict trade controls were placed on exports and imports in the country. There was massive nationalisation of major industrial enterprises, excessive price controls and control on agricultural inputs and marketing were placed ( Ahmed and Sattar, 2004b ). The RMG industry at this stage was practically non-existent as Bangladesh experimented with a socialist framework ( Ahmed and Sattar, 2004a ).

    B De-nationalisation and de-regulation – 1976-1990

    From 1976, there began a phase characterised by de-nationalisation, economic de-regulation and limited trade liberalisation ( Ahmed and Sattar, 2004a ). In this phase, there were initial trade reforms, when the government began to relax trade barriers and promote a “free-trade” environment for the garment sector ( Ahmed and Sattar, 2004b ). De-regulation and relaxation of price controls were introduced during this period. There was also encouragement of private sector services such as banking. This second phase lasted till 1990 when major trade policy reforms were introduced.

    C Economic reform – 1990 onwards

    Economic reforms in 1990 led to substantial scaling down and rationalisation of tariffs, removal of trade-related quantitative restrictions (QRs) and elimination of import licensing, unification of exchange rates and the move to a more flexible exchange rate system (this coincided with the Indian reforms of 1990s temporally as well as content-wise) ( Ahmed and Sattar, 2004a ). These reforms have brought in much needed economic growth and development to the Bangladeshi economy. For example, GDP per capita has increased substantially post-1997. “In 2009, Bangladesh's GDP was 21,000 taka. If there had been no reforms, the GDP would have been at an abysmal 7100 taka or worse off” ( Rahman and Yusuf, 2011, p. 2 ). These reforms also brought in substantial reduction and rationalisation of tariffs, removal of QRs, and a move from multiple to a unified exchange rate system, convertible current account and an overall outward orientation of trade policy regime ( The World Bank, 2012 ). There was large-scale liberalisation in trade and investment, as well as market orientation in this period. The economy shifted from a fixed to a moderately flexible exchange rate system ( Ahmed and Sattar, 2004b ).

    Over the last five decades, the Bangladesh economy has undergone changes in the sectorial composition as well. Bangladesh's GDP grew from 4.30 US$4 billion in 1960 to US$115.61 in 2012 ( Trading Economics, 2012 ). Industries contribute to about 28.6 per cent of the GDP ( Global Finance, 2013 ), which has nearly doubled from 15.7 per cent in 1960 ( Roberts and Fagernäs, 2004 ). The contribution of industries to the economy is much larger than agriculture ( Rahman and Yusuf, 2009 ). One of the major industries that grew during this period was the RMG industry. In 1984, there were only 384 garment manufacturing units which employed 0.12 million people; in 2012-2013, there are nearly 5,600 units employing 4 million people. The sector earns US$27 million and contributes to 78 per cent of the total exports of Bangladesh ( BGMEA, 2013 ).

    II Transformation in the RMG industry

    The General Agreement on Tariffs and Trade (GATT) came into force on 1 January 1948 and Bangladesh became a contracting party on 16 December 1972. On 1 January 1995, Bangladesh, along with the other GATT signatories, became a part of the World Trade Organisation (WTO). Since then, Bangladesh has been actively co-operating with WTO rules and regulations and its trade policy has been reviewed periodically by the WTO, most recently in 2012. The WTO also advises Bangladesh extensively on trade policy, most particularly with respect to the RMG sector.

    The RMG sector has been through many transformations which can be elaborated in two phases – the first phase from early independence to the cession of the Multi-Fibre Arrangement (hereinafter “MFA”) and the second phase which looks at the growth of the industry post the extinguishment of the MFA.

    1974-2005

    Prior to the 1990 economic reforms, the RMG sector contributed to a miniscule 4 per cent of exports in 1980 ( Ahmed and Sattar, 2004a ). The RMG emerged out of the MFA of 1974. The MFA subjected garment exporting countries to QRs in the form of quotas for their exports to major important markets ( The World Bank, 2005 ). These quotas helped Bangladesh to secure certain quantities of export sales and helped them establish a market presence around the world. More importantly, these quotas acted as a shield from regional competition from Indian and Chinese garment making industries.

    Post-2005

    However, the quotas ceased to exist upon the cession of the MFA in 2005. As a result, QRs on exports of clothes and textiles from developing countries to the USA and the European Union were reduced to a large extent. This invariably opened up competition among garment industries in the South Asian region in the global apparel market and thus there was a risk of Bangladeshi garment industries losing out to its regional competitors ( The World Bank, 2005 ). Many economists predicted that the RMG industry in Bangladesh would be largely impacted. However, the industry not only survived but also flourished post-2005 (Figure 1).

    There are many factors that are attributed towards the price of garments, the most important one being labour. The fact that costs of labour for apparel industries in Bangladesh were lowest in the South Asian region made the Bangladeshi RMG sector an attractive option over other South Asian sectors such India, Pakistan, Vietnam, Thailand and China. A garment worker in Bangladesh received ¢6 as wages per hour compared to ¢20 in India and Pakistan, ¢30 in China, ¢40 in Sri Lanka and ¢78 in Thailand ( Muhammed, 2011 ) (Table I). According to a 2011 O'Rourke Group Partners Report, for a shirt that cost the retailer $5.67, labour by itself contributed just $0.12 and $3.69 in materials and finishing. The rest were factory margins and freight and insurance. Thus, labourers received a mere ¢12 for a shirt that costs the retailer $5.67 which was finally sold in the USA and Canada for $14. This illustrates that labour costs being so low, has enabled Bangladesh to be at an advantage over its competitors.

    Apart from competitive labour costs, the industry also has other favourable options such as complimentary yarn and fabric production and quality labs which are available to the suppliers at low prices ( McKinsey & Company, 2011 ). The Bangladeshi RMG sector also has advantages in high quality of products at low prices, workforce being fast and efficient as well as quick learners, high labour supply, including a large supply of unskilled labour (which is evident from a labour-intensive nation like Bangladesh) favourable tax...

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