Bangladesh is witnessing an unprecedented spate of labour unrest in the readymade garments (RMG) sector. The reason for the unrest is a dispute over wages. The RMG workers are demanding a minimum wage of Tk23,500, whereas the owners have offered only Tk12,500.
The minimum wage was last set to Tk8,000 in 2018. The estimated cumulative inflation for the 2018-2023 period is 46.6%, and hence simple adjustment for inflation should bring the wage in 2023 to Tk11,729. Assuming that an average inflation rate of 6% (for 2018-2023) will hold till the next round of bargaining, the inflation adjusted wage for the mid-point (ie 2026) should be Tk13,969.
However, inflation adjustment is not the only factor in wage determination. Wages have to be adjusted for productivity improvement too. The country has risen to the level of the lower middle-income countries, thanks -- to a large extent -- to the productivity gains of the RMG industry. The workers of this sector can therefore expect to share in these productivity gains. The estimated cumulative growth in per capita income between 2018 and 2023 is 36.6%.
The cumulative productivity growth in the RMG sector must have been higher.
However, limiting to 36.6%, the minimum wage of RMG workers in 2023 should be Tk16,021. Again, assuming that per capita income continues to increase by the average 5.34% (for 2018-2023) till the next round of bargaining, the RMG wage by 2026 should be Tk22,350.
Hence the wage-offer of Tk12,500 made by the RMG employers is certainly inadequate. It is also unfair because it does not allow the RMG workers any of the productivity gains that the RMG sector in particular has gained during the past years.
A closer look
From this macro view of the issue, we can descend to a more micro view. First, is it the case that RMG owners cannot afford to pay higher wages? In considering this question, there is the simple fact that the price of the Dollar has increased from Tk83.90 in 2018 to Tk110.50 -- an increase by 31.7%. So, just based on the devaluation of taka, the owners should be paying in 2023 Tk10,536 as equivalent to Tk8,000 in 2018.
However, as Zahid Hussain noted earlier in his World Bank blog, labour costs typically constitute 1-3% for a garment produced in the developing world. Hence, even after accounting for the increase in the imported input costs, the windfall gain for RMG owners from devaluation of the Taka is about 50 times larger than what would be required to pass on a proportionate gain to the workers in the form of wage increase. In fact, this windfall gain from devaluation makes it easier for RMG owners to pass to the workers some of the long overdue productivity gains.
Also, the devaluation of the Taka is not likely to end soon, and while RMG owners will continue to reap the future windfall gain (from devaluation of the Taka), this will not be the case for workers, whose wages will be fixed by the contract. So, some adjustment for anticipated devaluation should also be allowed for the wages.
Second, is it the case that raising wages will lead to the loss of global markets for the RMG owners? To begin with, Bangladesh’s RMG wage is one of the lowest in the world. According to data compiled by the Centre for Policy Dialogue (CPD), when the RMG monthly wage in Bangladesh stood at $72, it was $170 in Vietnam, $172 in India, $200 in Cambodia, $243 in Indonesia, and $300 in China. Furthermore, as Zahid Hussain notes in his blog, because of the extremely low share of wages in the total production cost, “doubling wages would increase retail price by roughly 1-3%; tripling wages would result in price increases of 2-6%.” This is assuming that all the increase in cost (due to increase in wages) is passed on to the consumer (in buyer countries) and none of it is absorbed by RMG owners.
Hence, there is a lot of room for RMG wages to increase before it can hurt the international competitiveness of Bangladesh’s RMG exporter, provided they keep up with the rest of the requirements.
Therefore, the resistance of RMG owners to wage increases seems to be grounded more on socio-political reasons than on economics. When Bangladesh became independent in 1971, there was hardly any capitalist class. Over time, a capitalist class developed and it has now captured the political institutions. Until the time of Saifur Rahman and AMA Muhith as finance minister, there was some “relative autonomy” of the state. Now, it is completely beholden to the capitalist class. More than 70% of the MPs are businessmen-industrialists. Similar is the situation with the cabinet. The politics of the country is dominated by a competition between two factions of the capitalist class. The voice of the labour class was almost completely absent in the political scene.
The rise of a new class
Within the capitalist class, the RMG owners’ group is the most prominent and hence they basically impose their will on the government. Even after 40 thriving years, they continue to enjoy the privileges that are meant for an “infant industry.” Thus, the corporate tax on RMG companies is only 12% (for green factories, 10%), when it is 20% to 45% for companies in other sectors.
Furthermore, the 1% source tax paid by them on the FOB price of their export is deducted from their corporate tax, so that they hardly pay any corporate tax. Second, they continue to enjoy the bonded-warehouse advantage, so that they don’t have to pay duties on their imported inputs. According to NBR research, forgone import duties due to bonded warehouses amounted to Tk1,51,738 crore in 2019-20, of which about 80% was enjoyed by the textile sector
Third, the RMG sector continues to receive 15% as cash incentives. Thus, the RMG sector is increasingly assuming a parasitic character, passing on its weight on to the rest of the economy and society, instead of pulling it themselves. The proposal by the commerce minister to issue TCB permits to RMG workers, allowing them to receive essential food items at subsidized prices is the most recent example of such behaviour of the RMG sector. Why should the workers of the most developed industrial sector of the country have to depend on dole outs from the state?
Unfortunately, the dominance of the capitalist class on policy making has now started hurting the macro-economic management of the country. The current dollar crisis is an example. The import lobby has prevented timely continual adjustment of the Taka against the Dollar. Meanwhile, the cash incentives and other privileges have made the lives of RMG exporters so comfortable that they have not pressed for the exchange rate adjustment either. The harmful influence of the capture of politics by the capitalist class can be seen not only in exchange rate policy but in many other areas such as interest rate policy, foreign debt management, etc.
Hence, some balance is necessary in the political power equation in Bangladesh. The weight of labour in this equation needs to increase. Otherwise, policy-making will deteriorate further and the promise generated by the past progress will be lost. RMG owners have to understand that it is not by squeezing the labour further that they will be able to ensure their long-term future. The route lies through raising productivity.
For that, however, they need to share productivity gains with their workers. Irrational levels of wage are not conducive to productivity. Wages have to be rational.
Dr S Nazrul Islam, Former Chief of Development Research, United Nations, Department of Economic and Social Affairs.