Major changes are needed if the sector is to retain its competitive edge
The importance of the garment sector to the workers, the banking community, and the companies themselves is well understood to observers of the Bangladesh economy. The recovery of this industry is critical for the revival of our economy. The Covid-19 pandemic has provided an enormous challenge to the RMG industry.
The threat to Bangladesh’s future prosperity is real. In this article, I address, first the next two years when the industry will be recovering from the shock of the sudden drop of demand. Then we look at the longer term, say another few years ending in 2030.
I choose 2030 as the endpoint as by then the technology of the industry will have completely changed and the current comparative advantage of Bangladesh’s low-cost labour force will be largely irrelevant. To prosper for the next decade will require major change starting immediately to maintain a competitive edge.
The central bank and the government seem to have a view that everything will come back quickly and we can expect full recovery by 2021. We all hope that turns out to be accurate, but most thinking about the way back is less optimistic.
For the garment sector, prosperity rests completely on the behaviour of the North American and European economies. The IMF forecasts for the advanced economies conclude that the GDP in 2022 will be the same as 2018. Clothing demand over the next two years is very uncertain.
The patterns of consumption expenditures are really unknown. Furthermore, the IMF forecasts assume there is no second wave of infections in the advanced economies. In May 2020, there is little support for this assumption among epidemiologists, most of whom take the public position that such a second wave is inevitable.
It is very likely that the lifting of restrictions will lead to the second wave of deaths and infections. This may bring partial lockdowns, lower than expected income recovery, and certainly greater caution in making consumption expenditures not immediately needed.
The garment industry faces slow recovery of demand and rising competition as Asian and African countries fight for a larger share of the market in the advanced economies.
What are the challenges of the next two years? First, rebuilding the supply capacity in the face of constraints operating within the factories. These constraints effectively reduce the production rate.
To maintain the level of production reached at the end of 2019, while maintaining the protection measures that BGMEA has mandated, it will be necessary to operate two shifts with wages structured to avoid increasing the labour cost per garment.
Demand is unlikely to return to 2019 levels until after 2022. Nor is it likely to be feasible to remove the constraints on wider spacing and other health safety measures until early 2022. The supply chains are partially broken.
Fabric from India cannot enter the country through Benapole and one cannot know when the Indian authorities will open the border. Supply chains from China are struggling to get started; some US buyers are skeptical about using Chinese fabrics and may insist on sourcing to other countries.
All of this points to time and difficulty in reshaping supply chains. Bangladesh’s competitors are fighting for a greater share of the RMG markets. It is imperative that the supervision of the factories’ safety rules against the virus be implemented according to the Ministry of Labour’s instructions.
Bangladesh does not need the human loss or the bad publicity of a major outbreak of Covid-19 among workers. Inevitably there will be many workers who become ill; it is important for the industry to maintain the protection measures.
Competitiveness needs another look by the government. Competitor countries’ currencies have depreciated against the dollar more than the taka has. The government is using subsidies to help the RMG factories. Exporters receive 1% of the value of the exports. This is equivalent to a 2% depreciation of the taka. Furthermore, there is a delay of almost a year before factories receive this support.
A depreciation of the taka of 10% or an increase of the subsidy to 5% would be an appropriate step to strengthen faltering competitiveness.
Actions with longer run implications
The world is likely to change with shorter supply chains, rising trade conflicts between China and the US, and uncertain demand patterns.
To shorten the supply chains and increase the domestic value-added to RMG exports there are two programs that if started in 2021 will produce significant changes by 2023. First and most important is to upgrade the textile sector to produce domestically the fabrics and yarns needed.
In FY2019 imports from China were more than $3bn for major items. The diversification of fabrics and yarns required is a consequence of making garments with higher domestic content. The development of the backward linkage textile mills almost doubled the impact of the sector in raising GDP after 1998; the domestic content can be raised again by a serious effort to produce the fabrics and yarns the industry needs.
The existing textile plants must be given the opportunity to undertake serious upgrading of their production methods to reach the quality and diversity needed. Bangladesh Bank and the government must have some program to achieve this. Technical experts are needed to prepare the upgrades.
The textile industry is not able to achieve the needed improvements without such technical assistance. To achieve the objective of improving the backward linkages the textile industry needs to begin as soon as feasible to investigate what is needed.
These are complicated issues and the major RMG factories that are now importing fabrics and specialized yarns need to be consulted. Ultimately it is the foreign buyer who is going to accept the local fabric, making consultation and cooperation an important part of the upgrading.
One has to be realistic, it is the foreign buyer who will decide if local fabrics are acceptable and one is better off by seeking their advice from the beginning. The second action that is needed is establishing a major training program to replace a large number of foreign workers in middle and high-level management.
My rough estimate is the compensation of such foreign workers in the RMG sector comes to about $560m per annum.
Training plus research and development
Upgrading many textile plants will call for more foreign workers unless there is a well-directed training program. These foreign experts are here as the owners of the RMG factories do not believe that there are Bangladesh- is available to do the work.
The nation should be very ambitious here; establishing a university-level program to train mechanical engineers, chemists, and material engineers. One way to achieve this is to seek association with one of the leading western universities with excellent textile credentials for the garment and textile sectors.
In addition to training, serious relevant research and development program is needed to raise Bangladesh to the frontier of garment and fabric production techniques. The industry has shown a remarkable lack of ambition largely content to follow along.
The government has made some effort to develop training facilities as has BGMEA. But these have not been successful in achieving an international reputation. Much of what they teach is dated and few teachers have recent international training.
Despite the efforts of these institutions for many years, there has been no reduction in the use of foreign managers and middle managers. I think there is no shortage of competent personnel to be trained, but there is a tremendous shortage of resources.
Both BGMEA and the government have limited understanding of what is needed here and do not really take this matter seriously. But for the long run good of the sector, training and research are essential.
Look at the contribution that the University of Dhaka’s IDA has made to the economy and review the history of the resources, methods, and time that this took. The third area is the continuing set of issues surrounding logistical related to the garment sector. There are short-run aspects that I skip, turning to the long-run issues.
The issue is simple to state: The objective for the garment sector is to grow 10%-12% per annum for the next decade. That increases container outgoing shipments by a factor of two in seven years and at the high end by a factor of three by 2030.
Are we able to have port facilities that can double container export capacity in seven years? For 20 years plans and projects for a deep-sea port have been discussed, but progress for a port suitable for the container exports and imports is far away.
The Dhaka-Chittagong connection is also in desperate need of expansion. There is no time to waste in tackling these issues.
Forrest Cookson is an economist who has served as the first president of AmChamand has been a consultant for the Bangladesh Bureau of Statistics.