Fear has recently been stalking the corridors of the Bangladeshi RMG sector and as a result the economy as whole. Rightly so, for the industry now accounts for over 75% of exports and has shown phenomenal growth of around 12% annually.
Garments now represent 13% of the country’s GDP, but industry experts claim that if EU duty-free access dries up, as could happen, many factories would close down over night. The EU is the largest export market for the sector, but if the EU removes the country’s status it would add 12.5% onto the cost of Bangladeshi garments overnight. RMG bosses say this would push down competitiveness in relation to China, despite the fact that Chinese wages are increasing rapidly and are already many times higher than Bangladeshi wages.
This then asks a question of where Bangladesh should head. It is without doubt that the sector has been overly reliant on foreign policies from inception. Indeed it was the 1974 Multi Fibre Arrangement (MFA) conceived by western nations to combat the challenge of East Asian economies, such as South Korea, that prompted the growth in RMG in Bangladesh.
This gave quotas to countries to prevent western markets being swamped by products from emerging economies. This then made western importers seek new sourcing nations who were not fulfilling their MFA quotas, such as Bangladesh. How did the MFA-affected exporters of the 1970s respond?
South Korea is a valuable case in point. In the 1950s the country lay in ruins. Now it’s hi-tech manufacturers are the “only thing between Apple and world domination,” according to South Korean Cambridge economist, Ha-Joon Chang.
This happened in spite of western quotas, policies or economic prescriptions, and it didn’t happen because of the inherent work ethic of Koreans.
The Korean economy ironically picked up in the 1970s through government prescription, protectionism, and policies that ran contrary to the wisdom of western orthodox economists. The birth of POSCO, which started producing steel in 1972, is a case in point.
In a country with no natural energy to operate smelters and no iron ore, this seemed a misnomer. However, POSCO, as of 2010, was the largest steel maker by market value and the Korean economy is now the 15th largest on the planet. The point about steel is not that Bangladesh should imitate this; instead it is that policy should look to feed downstream growth, as steel did in South Korea.
Bangladeshi wages are some of the lowest in the world. This fact cannot be relied upon. According to a recent study by management consultants McKinsey & Co. Bangladeshi wages will increase by around 30% in 3 years. If this is coupled with removals of duty free status, the country’s exports will become increasingly uncompetitive.
This should not mean that Bangladesh abandons garments, it just means that value and efficiency need to be added wherever it can. Short-sighted profits will not help. This is why government policy is essential.
McKinsey surveyed corporate bosses from the RMG sector and note that “the current lack of any noteworthy own raw materials, supply of natural or man-made fibres in Bangladesh weighs even stronger, beyond immediate issues of lead time increase.”
If everything has to be imported to make the garment and is expensive, and slow to procure as a result, this becomes a major concern for bosses, which is ultimately balanced out through low wages.
This points at two deficiencies, infrastructure, making imports slow, and a lack in the manufacturing of raw materials for garments. In the case of China it has become a leading exporter through, “artificially cheap raw materials, components, energy and land,” according to the Harvard Business Review. Subsidising spinners and artificial fibre manufacturing through tax incentives could therefore be an area where affirmative government economic action could occur.
Infrastructure on the other hand is a well-known problem, on which the Padma Bridge issue weighs heavy, as does the tedium in realising new power projects. Whilst this government has increased megawatts available to the RMG sector, it is clear that Bangladesh’s building stock capacity suffers at the hands of strong parties and weak bureaucracies.
Positive plans that are made could ultimately get ripped up the next time we have a change of “Begums.” Herein, it would be highly advisable if certain areas of economic policy could be ring-fenced, above and beyond party politics, as a national priority to prevent policy changes induced by a change in government.
Joseph Allchin is a Journalist.
