Despite its success, why does the RMG sector still want subsidies?
BGMEA recently asked for a huge amount of cash subsidy for the garment industry. It claimed that the industry is in a near-crisis situation.
The government has responded and the recently announced budget provides for some incentives. The BGMEA is not satisfied. In a post-budget press briefing, its president, Rubana Huq, has suggested this is not enough.
This is not the first time the industry has asked for subsidies. Such pleas from the industry, citing crisis-like conditions, numbers of factories either closed or facing closure, and thousands of jobs lost, are now frequent, almost predictably so.
This begs a question. Why should a mature industry of more than 30 years, the second largest garment exporter in the world, need subsidies every now and then? Perhaps there are good reasons, but newspaper reports do not provide detailed facts, nor reasoned analysis.
Is the problem widespread or concentrated in a few factories? If the latter, should these factories be allowed to die with their machinery and workers absorbed elsewhere? Is consolidation the answer, not continued subsidies?
When I posted about this on Facebook a few days ago, a friend from the industry responded with some helpful statistics. Here is a summary of what he said: In the current fiscal year (July to April), garment exports grew at 12.6%. But this is an aberration.
In the last five years, average growth was only 5.7%, less than half of the 11.75% growth rate achieved by Vietnam during the same period, and less than one-third of what we ourselves achieved from 2003 to 2013 (17.5% growth on average). In brief, garment exports are growing but at a rate much lower than what our competitors are achieving and we ourselves had achieved in the not too distant past.
Why is this so? According to my friend from the industry, the total cost of production in Bangladeshi factories has increased by 30% from 2014 to 2018 while the price of garment products in the global market place has dropped during the same period -- by 7.04% in the US and 3.64% in the EU.
The increased production cost is apparently due to increases in wage rates in Bangladesh (167% from 2014 to 2018), remediation costs, and an appreciation of the Taka vis-à-vis the currencies of the competitors.
The exchange rate of the Taka vis-à-vis the dollar has remained virtually unchanged from 2014-2018 while our competitors such as Vietnam, Turkey, and India have substantially devalued their currencies. The fact that, in recent years, Vietnam’s garment exports have grown at double the rate of Bangladesh’s, despite our lower wage rates, suggests considerable inefficiency on our part. Only a good analysis will tell us how important the other factors are, relative to low efficiency. But the industry does not deny that efficiency is low.
This raises the issue of restructuring in the industry to raise efficiency. Restructuring can be defined at two levels: a) at the product level (such as moving to higher value-added products, increasing efficiency etc), and b) at the industry level (such as consolidation so that we end up with fewer, but more efficient, companies).
So, if subsidies are provided at all, should these be used to maintain the status quo, as implied by the latest BGMEA request for cash subsidies, or to support change that has positive, long-term, consequences?
Restructuring is not easy but its benefits can be enormous. Take the case of the Adamjee Jute Mill, which was closed more than a decade ago, much to the chagrin of many. 26,000 jobs were lost, albeit all of them not genuine since there were many ghost workers.
A few years later, the Adamjee Export Processing Zone was set up where the jute mill once was. Within six to seven years of it being established, the EPZ was employing more than 26,000 people, the same number of people who had lost jobs when the jute mill was shut down.
Now the number is close to 60,000. This is what the famous Austrian-born economist Joseph Schumpeter had talked about -- creative destruction.
My Facebook friend claimed that the industry needs support for at least five years to turn around. Let us assume this is true. Then, what should the support be for?
If subsidies are to be given at all, these should be to facilitate restructuring in the industry, not artificially propping up factories that have neither the ability nor desire to become efficient.
In that case, it is important that we have a set of clear indicators and targets, to be monitored on a regular basis, which will tell the industry, government, and society whether that turn around is happening.
If the indicators tell a different story, the support may be withdrawn, and other measures contemplated.
This is exactly what was done in East Asia during the 1960s. In Korea and Taiwan, the government provided different types of support to export-oriented industries in the 1950s and 1960s. But these came with a discipline.
Firms had to meet certain pre-specified targets and, if they failed to do so, the support was taken away.
The governments were quite ruthless about this and even large conglomerates, such as the chaebols in Korea, were not spared.
Perhaps BGMEA may step forward and propose a set of such indicators and targets, and a credible mechanism for collecting and reporting data on these.
The indicators and targets may then be discussed with government and society and, once agreed, ruthlessly adhered to.
Is BGMEA willing to have such discipline imposed on it in return for the support it is asking for?
Syed Akhtar Mahmood works at an international development agency.