The Readymade Garment (RMG) industry of Bangladesh tells an impressive story of the country

view with charts and images

The Ready made Garment (RMG) industry of Bangladesh tells an impressive story of the country

Introduction

Background

The Ready made Garment (RMG) industry of Bangladesh tells an impressive story of the country’s successful transition towards a major export-oriented economy. Starting its journey in the late 1970s with a relatively small investment, the industry flourished in 1980s and 1990s and has become the largest industry in Bangladesh. The contributory factors of the RMG industry in Bangladesh are global trading agreements, cheap labour cost, government policy support and dynamic private entrepreneurship. All these things have helped Bangladesh to gain a handsome share in the global garment business. From early 1990s onwards the RMG industry has become the largest foreign exchange earning sector in the economy. In 2005-06, Bangladesh earned nearly $8 billion by exporting garment products and RMG covers over 75 percent of the total export of the country, having the lion’s share of the country’s foreign exchange. Contribution of RMG is very positive in Bangladesh economy, sharing 13 percent of the total national GDP (Ahmed and Hossain, 2006). Moreover the industry has become a vehicle for further industrialization of the country. After the end of the Multi-Fibre Agreement at the beginning of 2005 and the changeover to the New World Trade regime, it was feared that the Bangladesh’s successful RMG industry would suffer, as it would lose business to countries like China and India. But fortunately for Bangladesh, so far this prediction has been proved wrong. In fact, the industry has continued to grow at a healthy rate of approximately 20 percent (Kumar, 2006). Now in Bangladesh, more than 10 million people’s livelihoods directly and indirectly depend on this single industry and it accounts 40 percent of industrial employment (World Bank 2006). More than 2 million garment workers are working in approximately 4250 RMG units; of them over 85 percent are women.

Despite the impressive performance, the RMG industry has several problems especially in terms of labor rights. There is a growing concern that labour rights are often violated in Bangladeshi RMG industry. The empirical evidence suggests that labour rights have not yet been established in the RMG industry. Labour rights work as the safeguards against discriminatory labour practices and are the prerequisites for sound business and have been ratified by Human Rights Convention. Bangladesh is committed to secure labour rights for the well-being of labourers by virtue of ILO membership. But the outcome observed in the RMG industry is simply unsatisfactory. Instead of formal sector arrangements, an informal nature of employment persists in the RMG industry with negative consequences ranging from poor working conditions, to low wages, to repression. Garment workers have been demanding rights to establish their logical entitlements but garment owners systemically overlook those legal provisions. Against the longstanding deprivation there was a wave of resistance across the RMG industry in May, 2006 that caused a loss of around US $70 million. Researchers, journalists, and labour right activists claim that the damage would not happen if government can formulate and implement a comprehensive and effective labor law that incorporates labour rights in the RMG industry. These critics also indicate the global prevailing business system which largely benefits business sectors in developed countries creates barriers in implementing labour rights not only in Bangladesh, but also in most developing countries. Thus the realities on the ground call for a fresh analysis and solution to the existing problems.

Aims and Objective of the Research

The thesis analyses the global RMG industry and growth and development of Bangladeshi RMG industry. It also explores the RMG labor market, trade liberalization policies in Bangladesh, and the global garment business chains. Though many issues are related to RMG industry, the study briefly analyses those issues with an emphasis on labour rights. This study intends to provide an extensive research that covers implementation of labour rights in RMG industry. Thus the major research question that as explored is: “how can labour rights be incorporated into the Ready Made Garment Industry?”

The major objective of the study is to conceptualize and understand Labour rights scenario in the Ready Made Garment (RMG) Industry in Bangladesh. The research project covers multiple dimensions such as economy, gender, labour standards, policies and practices. The research also discusses theories related to labour rights and garment industry such as sweatshop, division of labour, globalization and its impacts on the garment industry in Bangladesh. Here the intention is not to produce a meta-theory or a recipe for action. Rather the study intends to critically analyse theories associated with the research project and an interpretation of those theories in the real life scenario and search for a framework to set competing ideas and different visions and putting them into practice. Finally, the study recommends some suggestions for the benefits of the garment workers’ rights as well as the garment industry as a whole.

Aims of this research are as follows:

  • To analyse the problems/issues of labour rights situation in the RMG sector in Bangladesh.
  • To investigate and examine the legal provisions with an explicit aim to assess the adequacy/inadequacy of the laws in addressing the rights of the RMG workers.
  • To provide a proposition as to how existing labour rights can be ensured and also to provide a rationale for the enactment of new laws if necessary.

Methodology

The study is conducted through Case study method. The case study accounts what has been happening in a business or industry over a number of years. Britha Mikkelsen (1995) argues research and development issues are best understood in a multidisciplinary perspective. Case study allows multiple sources of evidence. Moreover Case Study research method is an empirical enquiry that investigates a contemporary phenomenon within its real life context, when the boundaries between phenomenon and context are not clearly evident. Case Study method also involves detailed, holistic investigation; data can be collected over a period of time; data is contextual – relative to a certain industry; and it can use a range of different measurement techniques (Davies, 2005).

The research project is conducted through a sociologically-oriented and coherent analysis of the following literatures: historical materials; trade and labour policy reports of Bangladesh; journals, research reports, scholarly reports; newspaper and magazine reports; documents published by NGOs on labour issues; and Bangladesh Garment Manufacturers and Exporters Association (BGMEA) activity report, project reports. Given the nature of the study secondary materials are the chief source of data. An extensive but selective review of the relevant literature is completed. Research based on secondary data often runs the risk of being journalistic and often fails to be analytical. This research strives to rise above such superficial review and arrive at a sociologically-minded and coherent analysis of the problem in question.

Structure of the Thesis

The study has been structured as follows: Chapter 1 provides an overview of global garment production and the features of expansion of global RMG chain. Here the detailed assessment of Bangladeshi RMG industry and its impact on economy has been analysed. Chapter 2 provides a brief summary of labor market in Bangladesh. It also identifies the characteristics of female garment workers, positive and negative impacts of garment employment on their lives, their positioning and collective actions in the society at a large. Historical background of labour rights and the situation of labour rights in Bangladeshi RMG industry have been outlined in chapter 3. An investigation of the recent labour unrest and new Labour Law 2006 is also discussed in this chapter. An attempt has been made in Chapter 4 to conceptualize globalization and trade liberalization and identify their impacts on Bangladesh economy. This chapter also discusses how labour rights are related with trade and globalization and concerning issues of labour rights implementation. In final section of this chapter an analysis done on sustainability of the Bangladeshi RMG industry. Finally, the conclusion summarizes the findings of the research and emphasises implementation of labour rights in RMG industry in Bangladesh.

Chapter 1

Global Relocation and Rising of Bangladeshi RMG Industry

In this chapter present an overview of global garment industry and the features that led the shift and expansion of garment industry. Examine the growth of RMG industry in Bangladesh and how it contributes to the Bangladesh economy. In doing so, this chapter elaborates on the employment patterns within the industry and the subsequent growth of other sectors as a result of this success.

1.1 Overview of the Garment Industry

Clothing is regarded as one of the basic needs of human being. From the early stage of human history it gained much more attention and developed overtime. The nature of clothing is so obvious and its presence so universal that we often overlook the brilliance of its invention. In considering what textile and clothing is, we must remember that the origin of the earliest and humblest cloth is lost to us; it pre-dates our recorded history, it precedes the age of metals and the invention of the wheel. As our civilizations have grown, so has fabric developed with us, an integral part of every cultural stage, a resource in every struggle, a comfort in the most personal and domestic spheres of our lives. Each of us has a relationship with fabric from cradle to grave (Gale and Kaur, 2002).

Before the first industrial revolution in Europe, tailoring was a skilled craft occupation carried out by ‘master tailors’ who cut and made up cloth purchased by their customers or by themselves to the specifications of their customers. The mechanization of production, starting with the invention of the sewing machine and the band knife in the 1850s, increased the rate at which garments could be made up and led to the emergence of a market in ready-made garments. As the market expanded, it became possible to subdivide the production process into a series of increasingly simpler tasks which could be carried out by less and less skilled, and hence cheaper, labour, mainly women and girls (Kabeer and Mahmud, 2004).

The term “garment” is used interchangeably with “apparel” and “clothing”. The “garment” includes readymade woven garments as well as knitwear and hosiery. The products of the garment industry are very diverse ranging from industrial work-wear to basic shirt. The concept of “textile complex” or “textile chain” includes the ginning of fibre, spinning yarn, weaving fabrics and operations like dyeing, processing, printing, finishing the fibre and finally making the Readymade Garment (RMG). The final product is garment/apparel. Sometimes all these operations could be taken together in an integrated single industrial complex. On the other hand, these individual operations are also often considered separate industries. Therefore, the textile and garment manufacturing are considered two separate industries as well. A textile mill may limit its operations to only spinning yarn or weaving fabric. There may be an integrated textile mill that is commonly called “composite mills”. A simple composite mill may combine only two major manufacturing operations, namely spinning and weaving. Some composite mills combine additional operations like dyeing, printing, and processing. In some other cases, however, composite mills include garmenting as well (Siddiqi, 2005).

The production of garments evolved historically along broadly dualistic lines. One sub-sector was made up of women’s wear, which was characterized by considerable product differentiation, limiting the extent to which tasks could be subdivided for assembly line production, while seasonal fluctuations and changes in fashion served to limit the size of retail orders and hence the length of the production run. Men and boys outwear, on the other hand, has always been a more standardized product, particularly at the cheaper readymade end, and lent itself quite early on to a greater subdivision of operations, particularly in the machining stage. This led to a form of production in which each machinist only made one section of a garment (‘section work’) instead of making the whole garment (Kabeer and Mahmud, 2004).

Garment making is one of the world’s most globalized industries. Almost every country, irrespective of its stage of development, is involved in garment manufacturing and trading. Many industrialized countries have had an important textile and garment manufacturing sector at some point in their history. In fact, almost without any exception, textile/garment was the first industry which a country was able to develop and eventually led to the development of other industries. Frequently, the growth of the garment sector has been seen as a first step on the road to industrialization, bringing growth and prosperity (War on Want 2001). Growth in the textile sector benefits other sectors through increased demand for material inputs or machinery and equipment. In addition, the textile and apparel sectors depend on the presence of many modern economic activities. Through developing export-oriented textile and apparel industries, a country acquires crucial knowledge and skills such as marketing, advertising, transportation, and communication. These advances highlight the importance of the textile and apparel industries to a country’s development process (Siddiqi, 2005).

The garment industry needs relatively low level of technology that reflects a relatively small amount of investment. A garment industry can range from a very small unit which employing few people, to a large industry that employs thousand workers and production limit could be only a part of whole garment production such as dyeing, stitching. In terms of investment risks, both entry into and exit from RMG industry are relatively less expensive. The risks are low because the entrepreneurs need relatively a small amount of capital to start and if for some reason they want to move out of the industry by disposing off the factory, it is relatively easy for them to find buyers with perhaps small loss.

By the 1950s, the growing concentration in the retail sector increased the business length and made production planning more possible. There was steady growth of larger manufacturing firms and of mass unionization across much of the industry which generated full employment during this period. At that time the labour market incorporated women on a much larger scale and directed to an organized trade union movement, all of which led to rising costs of labour in the industrialized countries. Competition for the mass clothing revolved primarily around price and the search for profit began to lead to the relocation of sections of the clothing industry, initially out of expensive urban locations within the developed countries, and subsequently to the low-wage economies. Eventually, the low wage countries welcomed the opportunity and had opted for open, rather than protective, economic policies and boasted a highly disciplined and non-unionized labour force which could produce the same quality goods at a fraction of the price (Kabeer and Mahmud, 2004: 135).

The expansion of labour intensive garment industry provides a potentially important avenue for developing countries to stimulate employment generation and reduce poverty. Most developing countries have a comparative advantage in terms of abundant supplies of labour and labour intensive production can provide employment opportunities for unskilled workers. The clothing sector is an example of a labour intensive sector that can play beneficial role, and developing countries (mainly in Asia) have been gradually increasing their dominance of this sector in recent years, with associated benefits for economic growth and poverty reduction (Siddiqi, 2005).

The apparel trade is considered as one of the most important, global export industries in the world. As a leading sector of globalization, the garment industry continues to increase its share in manufacturing communities in the world market. In fact, the growth is faster than any other trade in manufacturing activity. Due to its low technology requirements and high labor absorption potential, low and middle income countries were the most beneficiary and shared 70 percent of global apparel export, rising from $53 billion to $123 billion in 1993 to 2003 period (World Bank, 2006). During the last four decades global apparel exports and imports have increased substantially. All countries’ clothing imports reached US$ 198.9 billion in 2000, an increase of about 84% in 10 years since 1990, and are projected to increase further as garment making capacities in high cost, rich countries continue to decrease (Siddiqi, 2005). Oxfam (2004) reports that the clothing industry is one of world’s biggest businesses: global consumers spent around US$1 trillion buying clothes in 2000, with around one third of sales in Western Europe, one third in North America, and one quarter in Asia. The biggest profits lie in branding and retailing. For brand companies, image and reputation are intangible assets, but they can be worth billions: in 2003 the value of Nike’s brand alone was estimated at US$8.2bn, Gap’s brand at US$7.7bn, and Levi’s brand at US$3.3bn. Some retailers and brands use mid-chain suppliers to manage the production process, from fabric and component sourcing, design and product development, to identifying and negotiating with manufacturers, coordinating production, and logistics, packaging, and shipping services. Oxfam (2004) further argues that the mid-chain suppliers can become multi-billion dollar multinationals in their own right, but are barely known by name. Other retailers and brands aim to strip out the costs of mid-chain agents by setting up their own regional offices, and sourcing direct from factories that take on more steps and upgrade to be ‘full package’ suppliers themselves.

1.2 Shift and Relocation of Global Garment Production

The RMG industry is migratory in nature. It migrates from high-cost to low-cost countries and therefore tends to be easily globalized. Costs cutting and raised productivity are the main reasons for this tendency. The global economy is now dominated by the relocation of production where firms of developed countries shift their interests to developing countries. The relocation model is based on a core-periphery structure of production, with a relatively small core of permanent employees (located in developed countries) handling finance, research and development, technological organization and innovation; and a periphery consisting of dependent components of production process in developing countries. Garment business firms have found that the simplest way to undercut is to relocate production to a country where wages and production costs are lower. Another significant aspect is that the advanced countries are in a safe position regarding environmental and legal concerns, because most developing countries offer sites that do not impose costs like environmental degradation. Production costs are higher in developed countries as they need to invest for environmental issues. The production shift to the Third World has favoured the growth of economy of these countries and also pace the economy of the developed countries (Rahman, 2004).

The relocation of production is mostly dominant in the garment industry. The internationalization of garment manufacturing began earlier and has extended further than any other form of factory production. Developing countries can offer cheaper labour than industrialized countries, and the garment being a major employment source of this cheap labour, giving new opportunities for these countries to develop. Meanwhile, the developed countries use their new industrial base to move into more profitable, high-technology products such as cars and electronic goods. Even countries like Japan, South Korea, and Singapore shifted to high technology and more profitable production and less profitable and low-technology products like garments moved to other developing countries (Siddiqi, 2005; Rahman, 2004).

Up until the early 1960s, the apparel industry in US and UK and some other European countries relied on domestic subcontracting; cutting and stitching operations were subcontracted to small garment factories mostly relying on the use of cheap female labour, while large-scale merchandising was undertaken by larger firms. Subsequently, as industrial wages began to rise, the apparel retailers in the developed countries found it more profitable to relocate production to lower-wage developing countries. In most cases, such out-sourcing took the form of subcontracting arrangements between the retailers in the developed countries and the garment manufacturers in the developing countries, development of communication system and networking geared the relocation. The retailers in the developed countries placed work-orders with the off-shore garment manufacturers, often through buying agents, and they also helped the garment makers in various ways to produce and ship the merchandise. Such sub-contracting reduced the risk of doing business with foreign partners since it did not require any foreign direct investment. In essence it was a triangular trade between the garment manufacturers and the foreign buying agent on the one hand, and the retailer and the buying agent on the other (Rashid, 2006).

Following the Industrial Revolution, Britain was the most important manufacturer of textiles and garments in the world, gradually to be challenged by the US and Germany in the late nineteenth century (War on Want, 2001). Siddiqi (2005) points out that the relocation/migration process of apparel industry began first within USA. The US firms have relocated their labor-intensive manufacturing operations from high-wage regions to low-cost production regions within USA. The American producers moved production to low-wage neighbour Mexico, and then subsequently to other low-wage countries like Japan in the1950s. From the 1960s, the level of wages and skills in Japan rose and Japan turned its interest to more profitable products such as cars, stereos and computers and as a result garment production then shifted to the Asian Tigers – South Korea, Taiwan, Hong Kong and Singapore in 1970s and they became successful exporters of garment products. But the trend of relocation of production did not stable there because of rising wage and successful trade union movement. The mid-1980s through the 1990s saw another migration of garment production, from the Asian Tigers to other developing countries – Philippines, Malaysia, Thailand, Indonesia and especially China. The retailers shifted their production orders to these countries.

As a result of the MFA quota restrictions, the Asian countries, which had used up their quota, initially established manufacturing platforms in other Asian countries, which were not in a position to fully utilize the available quota. Again garment production has expanded and shifted to a wide range of countries including Bangladesh, Srilanka, Pakistan and Vietnam. In South Asia, the relocation of manufacturing platforms from other Asian countries caused rapid expansion of garment industry during the last two decades[1], which has given a boost to job creation in the organized sector, which is otherwise less than ten percent of overall garment production in South Asian countries. The growth of RMG production in South Asia occurred largely due to the availability of quotas for export to the US and EU markets, low wages and ease of entry and exit for operating garment manufacturing. The migration of garment production certainly helps South Asian countries especially Bangladesh, Nepal and Sri Lanka, which have no resource endowment or historical tradition of garment exports.

Distance and national boundaries are no longer obstacles to trade or investment, and this allows corporations more freedom. Removing such barriers, together with new technology such as the Internet, has made it much easier for multinational corporations (MNCs) to produce and transport goods almost anywhere in the world. To attract corporations in their countries, governments of several developing countries have established Export Processing Zones (or Free Trade Areas) which carry incentives for foreign corporations to source there (War on Want, 2001). The focus is on speeding up production, cutting prices, and seeking locations offering ever-lower costs. Labour standards are usually far down the list of priorities – and workers bear the brunt of it.

From 1974, the industrialized world particularly the US, restricted imports of garments under the pretext of market disruption, named Multi Fibre Arrangement (MFA). This was a framework for bilateral agreements or unilateral actions that established quota limiting imports into countries whose domestic industries were facing serious damage from rapidly increasing imports. Since 1995, Agreement on Textiles and Clothing (ATC) has taken over from the MFA for 10 year period, from 1995 to 2004. Quotas were withdrawn gradually to allow time for both importers and exporters to adjust to the new situation. By 1 January 2005, the quotas came to an end. The quota system has been an extremely cost-effective method of bringing social and political stability to a very needy part of the world.

1.3 Features of the Migration and Expansion of Global RMG Chain

The garment industry experienced migration from one country to another and from one region to another for various reasons. According to Siddiqi (2005) three most important reasons for migration are (1) dynamics of wage differentials that change location specific advantages, (2) availability and non – availability of quotas under Multi Fibre Agreement (MFA), and (3) preferential market access under specific conditions other than MFA. The analysis of the three reasons of migration are summarize below.

1.3.1 Dynamics of Wage Differentials

Over the decades, garment production has dramatically shifted from high wage to low wage countries. The garment assembling/marketing is labour intensive by nature. If the cost of wages in an exporting country increase its products tends to be less competitive. Usually labourers in developed countries are well trained and disciplined and their efficiency is high. In developing countries labour is less efficient and they may take longer time to complete their task. One may assume production cost in developing countries should be higher but this does not happen to be so because labour cost is generally low which compensates inefficiency of the labourer in developing countries. (Siddiqi, 2005).

In garment production wage differences cannot be substantially reduced through automation to gain financial benefits. As labour intensive low technology operations tend to become less profitable because of higher wages in developed countries, business firms search for strategies that will minimize the cost of production. In the case of apparel industry, one such strategy is to relocate the plants in areas/regions where wages are low. As a result, apparel production tends to gradually shift from the developed to the developing countries that have an abundant supply of low-skill, low wage workers.

Over the past two decades, garment production has shifted from high wage to low wage regions. In the case of USA, US garment firms went to Mexico for lower labor wages which brought lower production cost and higher profits, particularly with US business firms used Maquiladoras[2]. In Europe, the similar thing happened. British and German business enterprises moved to other European countries such as Spain, Portugal and several Central and Eastern European countries. Investors of the apparel industry have, for decades, shifted their factories around the world in search of new low-cost, competitive locations, knowing they will find workers wherever they go (Oxfam, 2004). By means of their abundant cheap labor, developing countries have thus emerged as abundant suppliers of garment products.

1.3.2 Availability of Quotas under MFA

Protection of the textile and clothing sector has a long history in the United States and Europe. In the 1950s, Japan, Hong Kong, China, India and Pakistan agreed to voluntary export restraints for cotton textile products to the United States. In 1962 a Long Term Agreement Regarding International Trade in Cotton Textiles (LTA) was signed under the auspices of the GATT (replacing a 1-year short-term agreement). The LTA was renegotiated several times until it was replaced by the Multi Fibre Agreement (MFA), which came into force in 1974. The MFA, as the name suggests, extended restrictions on trade to wool and man-made fibres in addition to cotton.[3]

The MFA quota system primarily designed to protect the domestic clothing and textile industry of the rich importing country, it is also partly designed to encourage the poor exporting countries to develop their manufacturing and export capabilities. Under MFA, an importing country can impose quota restrictions through bilateral negotiations with an exporting country. Market access is partly determined by the availability of quotas. As per provisions of MFA, initially a least developed country is usually granted quota free status, and can export an unlimited quantity of apparel of a given specification (in value or volume) to the market of the rich country. After reaching certain point of export capability the importing countries impose quota restrictions to the exporting country. In 1970s, large exporters like South Korea, Hong Kong, Taiwan, and Singapore experienced rising quota restrictions and tended to become less competitive. To remain competitive and retain position in the world market, these countries relocated their production units to those countries which had quota free status or larger quotas either under joint-venture or through foreign direct investment (FDI). MFA quota arrangement favored developing countries (e.g. Bangladesh, Srilanka, Vietnam) who previously had very limited exporting capacity. Similar factors explain why till today garment businesses migrated to countries (especially Caribbean and Sub-Saharan countries).

The MFA can be considered to be a blessing for small developing and least developed countries across the world. The protectionist quota system imposed on the import of RMG by developed nations welcomed by developing countries. Small nations around the world, particularly LDCs and developing countries, were able to develop RMG producing industries that could cater to the world market, without any significant pressure from other countries. In a sense, then, the MFA provided LDCs and developing countries with an even playing field in terms of RMG exports. This allowed the RMG industries in these countries to grow massively, with consequences including rising investment, rising employment, higher incomes and greater economic growth (Sobhan and Ajhar, 2006).

1.3.3 Preferential Market Access under Special Conditions Other than MFA

Sometime preferential treatment in the form of partial or complete duty-free status is accorded to certain categories of countries by the rich importer countries. To enjoy such benefit, an exporting country must belong to the group of the least developed countries or operate as a member of certain regional group like NAFTA. This is a privilege that partly determines, like quota privilege, the nature of migration apparel producers make from a group of countries to another. Preferential market access may be granted to a group of countries or to a regional bloc.

Developed countries provide Generalized System of Preferences (GSP) to least developed countries. An essential requirement for obtaining GSP facilities is that the export products of these beneficiary countries must satisfy the applicable rules of origin. Each developed country (or custom territory) has its own GSP scheme to provide preferential treatment to export products of developing countries and a set of rules of origin to go with it (World Bank, 2006). RMG exports to the EU by LDCs are governed both by the Generalized System of Preferences (GSP) facility, as well as by the extended everything but Arms (EBA) facility, which allows LDCs to export most products to EU countries on a duty free basis. In recent times, the US has signed a number of regional and country-specific preferential trade agreements that provide for duty- and tariff-free trade between participating countries. Through trade agreements like NAFTA, CBI and AGOA, countries in North America, Africa and the Caribbean are able to avail of duty-free trade access to the US. At the same time, bilateral agreements with Jordan, Israel and Vietnam have given these nations the potential to become strong exporters. Canada uses a special condition for RMG trade with the LDCs from January 1, 2003. Canada has provided duty-free access to LDCs for goods that use raw materials from any of the 48 LDCs or Canada (Sobhan and Ajhar, 2006).

Beside the above mentioned features, Oxfam (2004) reveals a mix of four factors that diversify locations of garment production around the world. These are:

  • Low cost: investors want quality, speed, and flexibility at a low price, so they seek cheap labour – as long as it comes with a stable economy, reliable electricity and phone lines, efficient shipping services, and easy access to fabrics.
  • Proximity to customers: speed from the factory to the store is a premium for high fashion clothing, so drawing production closer to consumers. In the 1990s, US buyers turned more to Mexico and Dominican Republic; European buyers started sourcing in Morocco and Romania.
  • Government giveaways: many governments attempt to draw foreign investors with tax holidays, investment allowances, and even a ‘union-free’ workforce, by setting up export processing zones.
  • Trade preferences: shifting rich-country trade barriers keep garment investors on the move, in search of the latest tariff cuts. The African Growth and Opportunity Act (AGOA), giving sub-Saharan African exports duty- and tariff-free access to the USA, has drawn many Asian investors to set up garment factories in Kenya, Lesotho, and Swaziland. For 30 years the USA, Canada, and much of Europe have used quotas under the Multi-Fibre Arrangement to limit imports from developing countries.

1.4 Overview of the Bangladeshi Economy

Before exploring Readymade Garment (RMG) industry, it is important to discuss the Bangladesh economy in a brief. Bangladesh has a population of 144.2 million in 2005 and has been increasing at an approximate rate of 1.9 percent per year. It thus has the unwanted distinction of being the world’s most densely populated country, and this overpopulation is at the root of many of Bangladesh’s socioeconomic problems. Life expectancy of male is 62 years and female 63 years. The country has made impressive progress in human development by focusing on increasing literacy, achieving gender parity in schooling, and reducing population growth. In spite of numerous constraints, the economy has been on a steady growth path for the last 15 years (World Bank, 2006). The constraints include pervasive political instability and violence, endemic corruption and disregard for the law, frequent natural disasters, inefficient state-owned enterprises that are hotbeds of trade unionism, lack of political will to carry through necessary economic reform, inadequate infrastructure at all levels (power generation, roads and highways, port facilities), etc.

In 2006, Bangladesh achieved 6.1% GDP growth rate. The economy has proved to be resilient. Since 1990, it has grown at an average rate of 5% per year. Historically, Bangladesh is an agricultural nation; sectorally services constitute the largest portion of GDP with 51.7%. Industry accounts for 27.1% and Agriculture 21.2%. However, the distribution of the labour force is reversed, with most people still working in agriculture (61%), and followed by services (27%) and finally industry (12%). This imbalance between output and employment is indicative of a large amount of “disguised” unemployment and underemployment. Unemployment (including underemployment) is estimated to be about 40%. The poverty rate, as of 2004, is about 45% (BBS, 2006).

Jute was once the economic engine and main export earning commodity of the country. In late 1990s, jute was replaced by other products especially garment. Since 1990s, the economy of Bangladesh is fuelled by higher level of income through a sharp improvement in crop production, manufacturing earning especially garment workers’ earnings and greater inflow of foreign remittances (Osmani, 2005). In 2006 Bangladesh exports worth of about $11 billion. The main exporting items are cotton textiles, garments, tea, jute and jute goods, leather, frozen fish and seafood and exporting partners are USA, Germany, UK, France, and Canada. Bangladesh imports more than $13 billion last year. The main importing items are machinery and equipment, chemicals, iron and steel, textile fabrics, foodstuffs, petroleum products, cement and importing countries are India, China, Kuwait, Singapore, Japan, Hong Kong, USA and EU (CIA, 2007).

Bangladesh is a Least Developed Country (LDC) of South Asia, it has paved its way to development by coping of with the present globalize economy. Bangladesh is now following free market economy but a number of industries are still in public sector. So it can be termed as a country of mixed economy. Bangladesh is a member of the World Trade Organization (WTO) and actively involved in the process and its activities. The country is playing an important role in the international trade negotiation talk and WTO activities as leader of the Least Developing Countries (LDC). The country has been actively reforming its economic, trade policies, taxation rules and system since late eighties to fit itself with the WTO mechanism. Globalization has opened new fields of business and trade horizon but at the same time because of open market economy many industrial goods have lost the local market itself.

1.5 Growth of the Readymade Garment Industry in Bangladesh

Bangladesh has a historical background in textile sector. Traditionally it has played an important role in the economy of this part of the subcontinent since the Mughal days through the British era to the Bangladesh days. If its hallmark in quality handloom production was represented by muslin, jamdani and silk fabrics, the efficiency with which subsequently woven and knitted the garments success story owes its origin to the skill that is perhaps ingrained (Hasan, 2006). Generally, an industry initially develops in response to domestic demand, and then subsequently turns to export once it becomes mature. Due to internal or domestic demand, the textile and apparel industry developed in most developed countries, and even in developing countries like India, Indonesia, Hong Kong, Thailand and similar other countries domestic demand stimulated to the growth their apparel industry. The evolution of the garment industry in Bangladesh, as in most CBI and Sub-Saharan countries, has not followed this pattern. In case of Bangladesh, domestic demand was too little to attract large scale investment which could not develop garment industry alone. The rise of the RMG industry in Bangladesh was largely due to growing demand in developed countries for cheap apparel. It was the external force, the urge of the high wage countries to relocate production facilities in the low wage countries that created a favourable environment to the growth and development of RMG industry in Bangladesh. It was primarily due to the migratory nature of the RMG industry, moving from high-wage to low-wage countries, that industry saw its development in Bangladesh (Rashid, 2006; Siddiqi 2005).

We should not forget that there was a small domestic, custom-made garments industry in the then East Pakistan (now Bangladesh) during the 1960s which working out of tailoring shops catering primarily to urban markets. Until early sixties, mostly individual garments made garments for the domestic markets, based on the specifications provided by the individual customers who supplied plain cloths and fabrics. Mercury shirts, a Karachi based company, sourced a few consignments of shirts during 1965-68 made by some tailoring outfits operating in Dhaka, and then exported these to some European countries. There were a few tailoring groups in Dhaka who made a small quantity of export-quality shirts and children’s wear on specific orders. They received orders from and supplied to Karachi-based firms. However, there was little investment in this industry during those days because of the very limited size of the domestic market. It was the global trend of relocation of production of garments from high-wage to low-wage countries, together with the bilateral MFA Quota system, that acted as the main driving force for the emergence and subsequent growth of the RMG industry in Bangladesh. Supportive government policies also played an important contributory role in this regard (Rashid, 2006: 7-8).

After independence in 1971, the government of Bangladesh established the Trading Corporation of Bangladesh (TCB) – a state trading agency. The TCB was entrusted with the responsibility of carrying out export-import activities, on behalf of the state. In the mid-seventies, TCB made the first export of RMG from Bangladesh to East European countries followed by counter-trade arrangements. But the volume and value was very small. Rashid (2006) reveals that the first consignment of private sector export of garments from Bangladesh took place in 1978 when M/S. Reaz Garments Ltd. exported men’s shirts worth 13 million French Franc to a Paris-based firm, Hollander France. It established in 1960 as a small tailoring outfit and served domestic markets including Karachi (then capital of Pakistan). It was the first private direct exporter of garments from Bangladesh. In 1978, another garment factory, named Jewel Garments exported garment products to then West Germany. At that time, there were only 9 export-oriented RMG units in Bangladesh. Along with Desh Garments- the first hundred percent export oriented garment factory, some other apparel-producing enterprises were set up in 1979, bringing the total number of firms in the industry to 22. By 1980, the number of firms in the industry increased to 47, but total RMG export from Bangladesh was less than US $ 1 million (Rashid, 2006). Though in the initial years, by the early eighties, export volume was small, the export-oriented RMG industry was running well on its way to a historic place in the archives of industrial development in Bangladesh.

After implementation of MFA in 1974, quota restrictions were imposed on the exports from Southeast Asian countries and China. Later, it was extended to South Asia. In the seventies, large exporters like Hong Kong, South Korea, Taiwan and Singapore were already experiencing tough competition in the apparel export markets due to their rising wages. Quota restrictions further constrained their competitiveness. In response, they followed the footsteps of Japan. They relocated labor-intensive garment making in low wage ASEAN countries and China. According to Siddiqi (2005) many firms from Southeast Asian NICs relocated their production facilities or buying outfits in Bangladesh for four reasons: (1) initially, in the late 1970s and early 1980s, Bangladesh had quota free status; (2) later, when quotas were imposed on Bangladesh, the quotas were very large; (3) more importantly, labor cost was unusually low in Bangladesh, and (4) the government of Bangladesh provided special incentives to promote this export oriented industry. This migration of foreign buyers from quota restricted countries to Bangladesh contributed to the growth and development of RMG industry in Bangladesh.

During the early eighties, the Government of Bangladesh issued licences to many entrepreneurs for the duty-free importation of machinery to produce garments for export purposes. Consequently, the number of firms in the garments industry increased rapidly from 134 in 1983-84 to 685 in 1987-88. At that time, the value of RMG exports increased from US $ 31.57 million to US $ 433.92 million, a phenomenal growth indeed, as shown in Table 1.1. Bangladesh exported its garments to the North American and European markets in the early eighties; at that time, its exports were not subject to MFA Quotas in these markets, hence counted the spectacular growth. However, the very rapid growth of imports of apparel from Bangladesh prompted the US, Canada and the European countries to impose MFA Quotas on Bangladesh’s garments exports in 1985. This had temporarily slowed down growth of the RMG industry in Bangladesh; there was a restrained increase in the number of firms from 744 in 1985-86 to 804 in 1989-90. In 1987/88, the RMG export share surpassed that of raw jute and allied products. This industry experienced an export boom in the 1990s because of the excellent quota negotiation with the US in 1984-85, allowing an advantage over China and India. The quota distribution policy was also flexible. However, the industry jumped up from 1990 onwards and remains the main export earning sector of the country.

Table 1.1: Comparative Statement on Export of RMG and Total Export

Year Numbers of RMG Factories Export Of RMG(In Million Us$) Total Export Of Bangladesh(In Million Us$) % Of RMG’s share toTotal Export
1983-84 134 31.57 811.00 3.89
1984-85 384 116.2 934.43 12.44
1985-86 594 131.48 819.21 16.05
1986-87 629 298.67 1076.61 27.74
1987-88 685 433.92 1231.2 35.24
1988-89 725 471.09 1291.56 36.47
1989-90 759 624.16 1923.70 32.45
1990-91 834 866.82 1717.55 50.47
1991-92 1163 1182.57 1993.90 59.31
1992-93 1537 1445.02 2382.89 60.64
1993-94 1839 1555.79 2533.90 61.40
1994-95 2182 2228.35 3472.56 64.17
1995-96 2353 2547.13 3882.42 65.61
1996-97 2503 3001.25 4418.28 67.93
1997-98 2726 3781.94 5161.20 73.28
1998-99 2963 4019.98 5312.86 75.67
1999-2000 3200 4349.41 5752.20 75.61
2000-2001 3496 4859.83 6467.30 75.14
2001-2002 3618 4583.75 5986.09 76.57
2002-2003 3760 4912.09 6548.44 75.01
2003-2004 3957 5686.09 7602.99 74.79
2004-2005 4107 6417.67 8654.52 74.15
2005-2006 4250 7900.80 10526.16 75.06

Source: Compiled from BGMEA[4]

The average growth rate of RMG exports during 1990/91-1997/98 was almost 21 percent per year. However, the growth rate of exports declined in the 1998/99-2004/05 period mainly due to exogenous factors like flood in 1988, the global recession in 2000, and the September 11 incidents in the US the following year (Siddiqi, 2005, Rashid 2006). In 2001-02, not only RMG export declined but also the total export decreased too. But interesting to note is that during that time RMG export was 5.68% less than the previous year but it counted 76.57 percent of total export which is so far the highest share of the total national export. The share of garments export in total export earnings of Bangladesh climbed from 3.89 percent in 1983-84 to 73.28 percent in 1997-98 and has stayed around this level since then. BGMEA is expecting to double its export within 3 years from $ 9 billion to $ 18 billion per year if government provides adequate support and inclusion of updated system.

The RMG sector has become the lifeline of the Bangladesh economy– for jobs, income, and exports. More than 10 million people, directly or indirectly, depend for their livelihood on this industry, which accounts for 40% of industrial employment. The sector has played a far greater role in Bangladesh’s growth performance. This very dynamic sector has become the main source of direct and indirect employment, a major source of foreign exchange earnings, which in turn helps finance a growing share of imports of vitally important capital goods and essential inputs. It has created significant additional positive externalities, including by being an important training ground for a growing number of new entrepreneurs (World Bank, 2006). In terms of GDP, RMG’s contribution is highly remarkable; it reaches 13 percent of GDP which was only about 3 percent in 1991. This is a clear indication of the industry’s contribution to the overall economy (Ahmed and Hossain, 2006). Foreign multinational companies played a catalyst role in promoting this particular industry in Bangladesh. They brought initial technology and other know-how with respect to the modern production of garments meeting international requirements. Simultaneously, through controlling product development and marketing operations, they have successfully linked Bangladesh as a competitive production base to the international market. They further contributed to diffusing technology and know-how to local firms by generating spin-offs (Murayama, 2005).

1.6 Factors that Contributed to the Growth and Expansion of RMG Exports of Bangladesh

The emergence of an export-oriented RMG industry in Bangladesh can be traced to a confluence of policy trends at global and national levels. At the global level, the imposition of quotas on clothing exports from some of the early industrializing countries in East Asia led them to search for quota-free locations to set up garment assembly plants. At the national level, investment in the RMG industry was made even more attractive by changes that occurred around this time in the domestic policy environment (Kabeer and Mahmud, 2004). Most researchers and academics claim that cheap labor and quota advantage along with supportive government policies are the main contributory factors for rise and growth of RMG sector in Bangladesh. Some researchers overlook and few of them even deliberately ignored entrepreneurship is an important factor for the development of RMG industry. These contributory factors are discussed in the following sections.

1.6.1 Global Trading Agreements

Developed countries have been trying to control the global garment business through different strategies. In order to protect their clothing industry they imposed quota restriction and other agreements such as GSP, EBA, AGOA etc. though there is a motive to assist under developed or least developed countries by providing opportunity to do business in those developed markets. As Bangladesh is a member of Least Developed Country (LDC), it has the opportunity to export its RMG to developed countries’ markets. The most noted agreements which help to grow Bangladeshi RMG are MFA and GSP. Thanks to protectionist measures like quotas that were imposed during this period, Bangladesh was able to take advantage of the available and cheap labour force into building an efficient export-oriented RMG industry targeted towards Europe and the United States of America. Further assisted by the provision of duty free access to European markets, the export of RMG from Bangladesh rose steadily over the 1990s to stand at approximately 75% of the country’s export basket today (Sobhan and Ajhar, 2006).

In 1974, the developed countries introduced Multi Fibre Arrangement (MFA) to protect their own textile and apparel industry against competition from the more efficient producers in developing countries, particularly in Asia. Quota restrictions were applied on developing countries that exported significant quantities of textile and apparel products to the developed countries. Countries like South Korea, Taiwan, Hong Kong and other major suppliers faced quota restrictions along with high labor wages in those respective countries. Until 1985, Bangladesh enjoyed quota free status. USA and large importers imposed quotas in 1986, but it must be admitted that the quota system has been an advantage rather than disadvantage for Bangladesh. The competitors of Bangladesh faced quotas much earlier than Bangladesh did. Eventually, they found Bangladesh a very attractive sourcing place for garment businesses. The quotas acted as a guarantee for certain quantities of export sales, helping to establish market presence, and acted as a way to emergence out of the MFA shield with its comparative advantage against other countries (World Bank 2005).

Even though Bangladesh enjoyed quota-free status in the North American market, its exports were subject to the payment of import duties. However, in the EU market, Bangladesh was not only exempted from MFA quotas but it also enjoyed preferential market access under the EU’s Generalised System of Preference (GSP) which allowed duty-free access to Bangladesh’s garment exports. Thus, Bangladesh’s exports of garments enjoyed quota-free and duty-free access to the EU market. This was another important factor which contributed to the emergence of the RMG industry in Bangladesh (Rashid, 2006). EU introduced the Everything But Arms (EBA) GSP scheme in 2001 which allows virtually all LDC export products to enter the EU market at zero tariffs when other countries had to pay full or concessional tariffs. This provided a considerable competitive edge to LDC garment exports that qualified for duty-free treatment in the EU market since the MFN (most favoured nation) tariff rates on RMG products were generally quite high (World Bank, 2006). Another important feature of the EU markets is that it offers duty free access of ready-made garments made with local fabric or yarn which precede backward linkage in exporting LDCs. As a LDC member, Bangladesh enjoyed quota free as well as duty free status in EU markets.

1.6.2 Government Policy support

The industry did not really take off until changes had been made in the domestic policy environment. Bangladesh had retained its pre-independence commitment to an industrial policy of import substitution which entailed a complex set of protective measures intended to curtail imports and build an industrial base to cater to the domestic market. Rashid (2006) characterizes the early 1970s as unfavourable initial conditions and was not encouraging for industrial development. At that time, the government was trying to rehabilitate the war-ravaged economy. By the end of the decade, however, a succession of crises, including a major cyclone, war, famine and political turbulence, together with declining receipts from raw jute and jute manufactures, the country’s main export, and an increasing import bill, dominated by food imports, left the country with a precarious balance of payments situation. It also faced a growing deficit within the domestic budget due to virtually stagnant government revenue collection (Kabeer and Mahmud, 2004).

The RMG sector only started its major expansion in response to the market reforms that were undertaken from the early 1980s. These stimulated production of clothing (mainly for export) by opening up the economy to private trading, reducing restrictions on foreign investment, reducing import tariffs and providing incentives to investors (Rabinwotz, 2006). The most significant policy reforms in the industry sector were introduced through the New Industrial Policy (NIP) announced by the government in June 1982. The aim of the NIP was to stimulate industrial development through the private sector’ and to that end it made fundamental changes in the industrial policy environment and promotional instruments. The NIP was revised in 1986, and the Revised Industrial Policy (RIP) further strengthened the process of liberalization set in motion by the NIP. The Industrial Policy 1991 reiterated the objectives of the NIP and the RIP of achieving a rapid expansion of the private sector and transforming the economy into a competitive market economy. For certain fast-moving items such as RMG, a notional system of duty payments was adopted in 1982-83. Under this system, exporters were exempted from paying duties and taxes on imports used in export production at the time of importation (Rashid, 2006). In order to mitigate import difficulties, the government introduced the system of bonded warehouse in the early 1980s. The bonded warehouse facility was a significant business-friendly policy support instrument that eliminated the duty-payment requirement and also substantially reduced bureaucratic hassles and delays.

A number of direct export incentive schemes were put in place while foreign direct investment was encouraged through the establishment of export processing zones outside Dhaka and Chittagong. Further incentives for stimulating investment in RMG were instituted in the early 1990s. Since the 1990s, the Government has increasingly supported private sector development through sound macroeconomic management and measures to open up the economy. Automatic registration was provided to projects financed from non-government sources, and from 1991 no government sanction was required for private investment in ‘free’ sectors, provided the industry was set up with the entrepreneur’s own fund. These reforms made it much easier for new investors to enter the RMG industry.

Garment sector has been helped by policy support provided by successive governments. This includes policy measures such as duty drawback facilities, tax holidays, cash assistance, income tax rebate facilities, zero tariff on machinery inputs, rebate on freight and power rate, bonded warehouse facilities, provision of import under back-to-back letter of credit, loans at concessional rate, export credit guarantee scheme, and related facilities (Ahmed and Hossain, 2006; Rashid, 2006; Siddiqi, 2005). At present government operates a cash compensation scheme through which domestic suppliers to export-oriented RMG units receive a cash payment equivalent to 5 percent of the net FOB value of exported garments. The 2004 budget also lowered the corporate income tax rate for the RMG industry from 30 to 10