POST MFA RMG SECTOR OF BANGLADESH
By G.K.M. Towfique Hassan
Director General, (Textile Cell)
Export Promotion Bureau (EPB)
It is indeed a great privilege for me to share my limited experience about readymade garments trade with such an august gathering. The issue is probably the most talked subject in recent times. Still there is much left to talk about because the garment industry has never been an easy place to make a dollar. As long as I remember garment business has never been this bad. It is as if there is a war out there, firms have been going bankrupt throughout the world. Today’s garment industry has fundamentally and radically changed. Last tow years might be the worst years in our entire industrial cycle in garments sector and next year may not be much better due to eminent MFA phase out. Importers, factories, retailers and exporters all are worried about what happens after 2004. There may be simply too many people chasing too few customers. In the backdrop of this scenario we have gathered here to discuss the future of RMG sector.
Textiles and clothing account for more than 76% of the total exporting earnings of Bangladesh. The three basic features characterize our exports of garments. They are
1. High concentration of three markets (US, EU, Canada)
2. Heavy dependency on imported materials.
3. High concentration on low value added very limited product range.
Liberalization of trade initiated under WTO agreement provides opportunities and challenges. The aim of the MFA introduced in 1974 was to provide temporary respite to developed country producers to undertake the changes arising from competition against producers from the developing countries. It has provided an effective framework for extending the protected position of developed country garments manufacturers and also provided a guaranteed market for small economies and small producers. The agreement on Textile and Clothing introduced in 1995 aimed at bringing textiles and clothing within the ambit of WTO rules by abolishing all quotas by the end of 2004.
Many developing and least developing countries benefited from the MFA, building a thriving clothing industry. Countries that built their clothing industry clearly fear the phasing out of the MFA and the possible consequences of this on the competitiveness of their garments industries. Many of these countries are heavily dependent on quotas as it ensures a protected market. Following the phasing out of some categories of quotas in 1998 and 2002 exports of small economies and small producers were lost to highly and more efficient producers. With the phasing out of MFAA and elimination of quotas some traditional RMG exporters like Bangladesh are expected to face serious competition from other exporting countries, that are till now under quota. Bangladesh is currently importing fabrics for its RMG sector from countries like China, India, Thailand, Pakistan under back to back L/Cs. Many believe that in a quota free market these countries will obviously try to export finished goods to Western Europe and North American markets rather than selling fabrics to Bangladesh. Therefore, this issue is of critical significance to many small economies and small suppliers.
If we observe the trend of garment trade from a global perspective, we see that for the past 5-year’s consumers through out the industrialized world have been spending less and less on clothing. This may be due to the rise of casual sportswear and dressing down work trends or other major changes in consumer buying habits. Whatever be the reason, the fact remains that the market in shrinking and will continue to do so for the foreseeable future. On the other hand, the number of suppliers is rising geometrically. Virtually every developing or least developing nation looks at garment making as a first step in building an export based industrial economy. Factories in the more developed Asian countries, rather have lose their customers to the newly low labour cost areas have rushed to open factories overseas. The rise of the trading blocks such as NAFTA, EU, AGOA etc. has dramatically altered garment-sourcing chains. In 5years Mexico has emerged from nowhere to be come the world’s largest garment exporter the U.S. factories in LDC’s are now compelled to accept orders from legitimate customers sometimes at prices below cost just to keep their machines operating. The entire industry is at war and not many survivors are expected unless go for a diversification of product range. The only question is shall we be among the survivors. The winners will be those who will be able to provide merchandise at the lowest cost with diverse products. We no longer have the luxury for error or sloppy work with basic products. Variety in product range, quality, delivery, price and social and other accountability are the key factors for success.
Let me now draw your kind attention to some basic impacts that RMG has on our economy.
· RMG sector has generated direct employment opportunities for 1.5 million workers of whom 80% is female. Besides more than 0.8 million workers are engaged in accessories industry related to garments.
· 0.2 million workers are engaged in the waste recycling industry, related to RMG sector.
· 10 million people are indirectly dependent on RMG sector.
· With the growth of RMG sector, economic activity worth US$ 2. billion is generated in areas such as – Banking, Transport, Insurance, Packing, Real Estate, Utility services, Hotels and Tourism.
· RMG sector contributed 29.7% in the GDP in 01-02.
· The sector accounts for about 1/4th of our economy’s value added, 1/3rd of its manufacturing employment and about 1/5th of our annual investment.
Extreme dependence of the economy on the RMG sector and the US and the EU export market signifies a structural problem making the country vulnerable to external shocks that the sector may have to endure with the phasing out of quota regime at the end of 2004. Given that the remarkable growth and export performance as well as employment generation has largely been due to preferential access provided into large market for the garments under GSP and the MFA, the expected outcome will certainly have substantial negative impacts on the livelihood of many of our workers and small entrepreneurs. According to modest estimates trade diversion after MFA will have an adverse impact on the employment of about a million workers in RMG sector alone. In addition loss of market share of apparel will adversely impacted linkage sectors and on the rest of the economy and society. Due to diversion of trade many small and medium size enterprise will be closed down on entrepreneurs will go bankrupt. The closure on downsizing of small or medium size garment units will have a negative impact on Govt.’s poverty alleviation program and empowerment of women. To survive in such turbulent environment, diversification in product range is an essential element.
Diversification program as the one we are discussing today will regard, as PPE under the umbrella of JOBS in cooperation with CBI is a praiseworthy venture. Personal Protective Equipments has multi-dimension. The portion that comes under textile and clothing or leather provides a breakthrough in our long demanded endeavor. As we all know that product diversification is a sine qua –now for market access and trade development of LDC’s, the program undertaken by JOBS must be taken up by all of us who are in RMG sector in the right earnest. Without diversification in our basic product range, it will not be possible to sustain what we have already achieved. In this regard we should keep in mind the outcome of a study undertaken by OECD on successful product development and market access. According to the study product development and market access depend on
· Stable macro-economic environment
· Development of infrastructure and R&D facilities.
· Use of enhanced and improved technology for product diversification and
· Pro-active participation in multilateral trade policy process under WTO.
Trade is a powerful engine of growth, but due to lack of exportable products, trade accounts for a small share of the economic activities in most LDC’s. Whereas in developing countries on an average trade accounts for between 24-26% of GDP, in LDC’s trade accounts for only 9 to 16% of GDP. During the last 20 years LDC’s exports have grown by 2% compared to world’s 8%. This clearly exemplifies our shortcoming of product range. LDC’s share of global merchandise trade has declined from around 0.8% in 1980 to 0.46% in 1995. Most LDC’s export go to 23 markets of diversification and have barely changed in the last two and half decades. A study of OECD showed that under air digit H.S. coding system out of 5000 traded products only 112 items are covered by LDC’s manufactured especially textiles and clothing constituted about 20% of LDC exports and are significant for a few like Bangladesh. Let me quote from a study undertaken by Commonwealth Secretariat on the global textile and clothing trade. The study was undertaken to assess MFA phase out on firms having the impact on limited product range.” For each major buyers within first year the number of supplying countries will drop by half. Within 4-5 years the big companies will be down to 12-15 countries.” If that is the situation then it is obvious that without trades diversion and variety of products, SME’s survival will be at stake. In addition factors such as human rights, competence to labour codes, security conformity, good infrastructure, predictable import-export procedure, efficient banking system, shorter lead-time will also be major forces.
A full in RMG export earning will destabilize the country and may lead to various social and economical problems. We do not have enough resources to absorb any big economic shock. In such a backdrop the initiative undertaken by JOBS in promoting a new product in our export basket deserve thanks. JOBS as I know have been working for a long time for human resource development as well as SMEs. This workshop is a manifestation of USAID, JOBS and CBI’s support in Govt.’s poverty alleviation program and industrialization process of the country. I hope this workshop will inculcate a sense of urge among the dynamic RMG entrepreneurs to go for diversification for their future sustainability and growth.
I thank all of you for your patient hearing.