Research Report On The contribution of Garments industries in Bangladesh Economy and challenge towards development

Research Report

The contribution of Garments industries in Bangladesh Economy and challenge towards development

Prepared by

Md. Rakibul islam

ID No: 21073

Department of Accounting & information systems

University of Dhaka

Prepared for

DR. Mohammad Tareq

Assistant professor

Department of Accounting &information systems

University of Dhaka

Background of the study

The ready-made garments (RMG) sector of Bangladesh has got a greater facet than any other sector in terms of growth and foreign exchange earnings. It makes a significant contribution to the national economy by creating generous employment opportunities and reducing poverty through socioeconomic development. Despite unquestionable success story, this sector has got a number of formidable challenges for the future growth. The present study has made a search on different dimensions of contribution and challenges of RMG industry in Bangladesh. To accomplish the task, a descriptive research based on study of available records is conducted. The study reveals that since its inception, especially during the last three decades, the RMG industry contributed significantly through creation of physical infrastructure which is demonstrated by 4222 RMG units along with the development of human capital as around 4 million workforce are directly involved in this industry. It has also contributed tremendously through empowering women as almost 90 percent of its labor force is female which ranked the highest in South-East Asia. In terms of core economic consideration RMG holds almost 14.07 percent of the GDP of Bangladesh as well as the 81 percent of the total export earnings. The study however, identifies some challenges towards its future development including unskilled workers, improper infrastructure, energy crisis, bank loan and high rate of interest, high tax rate, intricate social compliance, political crisis, lack of market and product diversification, compliance pressure of accord and alliance and lack of integration. Therefore, collaborative and coordinated steps from both public and private sectors need to be initiated to overcome these challenges.

Introduction

Bangladesh is a fast growing economy powered by the readymade garments (RMG) industry which has promoted the country in the world through the motto ‘Made in Bangladesh’. The RMG industry has become one of the life lines of Bangladesh economy, sharing a major part of the country’s export earnings. The industry started its journey in the late 70’s and since then it continued to play a key role in the growth of the economy, and has emerged as the largest export earning sector of the country. This industry has contributed in socioeconomic prospects, creating a huge number employment opportunities mostly for the poor illiterate female workforce of the country. Thus, the RMG sector has played a vital role in empowering women by providing eThe RMG sector of Bangladesh as employing the rural poor illiterate female workers is known for cheap labor and also producing low value garments. So producing high value products remains a challenge for it. Besides, there is a high dependency on imported raw materials especially in case of woven garments that cause high lead time in production. Thus, this industry is established for low value apparels products at low price. There are very less interest in developing technical skill, training and innovation, research and development activities within the sector to develop it and transform to high pay- high value products. That ultimately reduces the competitiveness this sector in the long run. In addition, there exists monotony for repetitive work, low motivation in the workplace. Frequent political violence, natural disaster or act of God often disrupts unrest and affect at the RMG sector. For example, an export order of US$15,000 million could not meet on time due to the flood of 1998, and more than 3 lakh workers were victims of the flood (Quddus & Rashid, 1999). Besides, there has been several life causing accidents such as Rana Plaza and Tazrin events that brought the workplace safety in the limelight as the most pressing challenge for the RMG sector. Apart from the government initiatives, global brands and retailers have taken major initiatives through creation of the Bangladesh Accord on Fire and Building Safety ‘Accord’ and the Alliance for Bangladesh Worker Safety ‘Alliance’. Apart from the internal challenges, the RMG sector also suffers from the challenge of world political and economic order. For example, recent devaluation of EURO against USD has created a spot of bother for the RMG sector. It makes the Bangladesh RMG product expensive in EU market which is the major export zone for Bangladesh. Political crisis such as terrorist attack in USA in 2001 and followed by a depression in 2004 caused a decline in Bangladesh export to USA by 13.04 percent (Abdin, 2008). In spite of its contribution into the economy in terms of employment and income generation, this sector is also facing some challenges from inside and outside. The present paper is an attempt to analyze the contribution of RMG sector in economic development of the country, and to uncover the challenges it is facing .

Objective of the Study

The main objective of the study is to find out and discuss the contribution of RMG sector in economic development of the country, and to uncover the challenges this sector is facing. The specific objectives of this study are as follows:

1. To find out the economic contribution of RMG in Bangladesh 2. To uncover the challenges of RMG sector 3.To address the challenges and sought out the possible ways out

Literature Review

Literature review exhibits the overall scenario of the RMG sector in Bangladesh and its contribution to the Bangladesh economy. Robbani (2000) examined that the major portion of foreign exchange earnings came from RMG sector, thus it created a giant position in the economy. Rehman and Hundker (2001) stated that the RMG sector started its journey in late 1970s as a small non-traditional export, with a small worth of 69 thousand US$, and by FY2002, exports have gone up to US$4.5 billion. In the following years, the sector develops into an exclusive growth rate of 15 percent per annum. Rock (2001) addressed that Bangladesh started exporting garments in 1976. The first joint venture garment factory in Bangladesh was Desh Garment in association with Daewoo, a South Korean company. Rahman (2002) described that the growth of RMG exports has undoubtedly positive effects on macroeconomic balances.

Chowdhury et al. (2005) addressed the challenges of unskilled labor with low productivity which results in increased per unit cost of production. Rahman and Anwar (2007) highlighted weak and inadequate infrastructures, e.g., poor energy supply, poor port facilities are the common challenges facing by the RMG sector in Bangladesh. Berik and Rodgers (2008) addressed that Bangladesh RMG owners are very reluctant to invest in training and development facilities, although it revealed that training costs are directly offset by the productivity increase. Rahman et al. (2008) addressed the RMG workers’ productivity and stated that the proportion of skilled workers is high in large factories (46-53 percent) than small and medium factories. The proportion of unskilled workers is high in small and medium enterprises (18-26 percent) than that of large enterprises (16-18 percent). Clark & Kanter (2011) found that the efficiency level judged by the productivity of Bangladesh RMG workers is not up to date or accordance to international level and it is just one-fourth of that of Chinese workers owing to workers’ low literacy. Berg et al., (2011) stated five major challenges for Bangladesh RMG sector such as weak infrastructures, compliance issues, low supplier and labor efficiency, insufficient backward linkage and political & economic volatility. Chowdhury et al. (2014) pointed major challenges as utility crisis such as oil and gas shortage, too much dependency on imported raw material, suppliers’ inefficiency and low labor productivity, high interest rate and insufficient bank finance and political unrest within the country. Hasan (2013) addressed that the single most challenge of Bangladesh RMG sector as the open competition emerged from the withdrawal of quota system under MFA agreement and the sustainability of the RMG sector under global market competition. Klaus Schwab (2014) addressed that the infrastructure facilities such as road network, sea and land port facilities, and utility such as electricity and gas supply are the top most challenges for Bangladesh RMG Sector. Construction of new and up-gradation of existing Road-Rail-Port facilities are now become major requirements for RMG growth and sustainability. Narrow and busy highways such as Dhaka- Chittagong will take almost take 20 hours of transport time, lack of alternative transportation mode e.g., rail also offers very limited capacity. Unavailability of deep sea harbor and inefficient management of Chittagong port and limited crane capacity and employee strike have increased the lead time by almost 10 days. Islam et al. (2014) identified a number of problems such as conflict between owners and workers, labor unrest, shortage of gas and electricity, poor infrastructure, poor port facility, lead time complexities, conspiracy of home and abroad, advancing competitors in the quota free international market. From the above literature it is clear that different researchers have examined the RMG sector in different viewpoints. The present study will be general in nature that it will analyze and consider both contribution and challenges of RMG sector in Bangladesh economy

CONTRIBUTION OF GARMENTS INDUSTRY TO THE ECONOMY

Growth of Factories in RMG Industry:

The journey of the RMG industry was started in 1978 when Reaz Garments exported its first consignment in USA and earned 69 thousand USD. But the actual milestone was led by the Desh Garments Ltd established in 1979, the first 100 percent export oriented company. It was set-up in joint venture with Daewoo of South Korea and became the single largest and most modern garment manufacturing unit in the sub-continent (Yunus and Yamagata, 2012). In 1980 Youngone-Bangladesh (49 percent), and Treximb Ltd (51 percent) were established as equity joint-venture garment firm. Since then there has been tremendous growth in the number of factories in consistent with the amount of export. Thus, the number of factories in RMG industry has gone manifold increase over the last 3 decades. Data in Table captures these facts.

Year	Growth Factories
1983-84	134
1989-90	759
2001-02	2353
2007-08	3618
2012-13	4743
2013-14	5876
2014-15	4222

Number of Workers in RMG Sector:

Emergence of RMG sector is seen as one of the best thing happened in Bangladesh economy as it created generous employment opportunity for labor force especially for the women. It provided a room for women participation and their empowerment. More than 4 million workers are directly employed in RMG sector.

Data in table , highlights workers trends in RMG sector.

Year	Workers(million)
1983-84	0.04
1989-90	0.34
1995-96	1.29
2001-02	1.80
2007-08	2.80
2012-13	4
2013-14	4

RMG Sector’s Contribution to Export:

RMG sector’s contribution to country’s export has experienced phenomenal growth over the years. It has evolved as the main export earning sector of Bangladesh. Over the last two decades the RMG industry has emerged as the thrust sector and ensured the fuel of growth and development of the economy. While export earnings from the apparel industry were barely 1 million in 1978, it became 31.57 million in 1983-84, 10.7 billion in 2007

were barely $ 1 million in 1978, it became $31.57 million in 1983-84, $10.7 billion in 2007-

08, and $24.49 billion in 2013-14 fiscal years holding the 81.13 percent of country’s of total

export earnings. Table captures these facts.

Year	RMG Export(million)	Total export(million)	Contribution (percentage)
1983-84	31.57	811.10	3.89
1989-90	624.16	1923.70	32.45
1995-96	2547.13	3882.42	65.61
2001-02	4583.75	5986.09	76.57
2007-08	10699.80	14110.80	75.83
2012-13	21515.73	27027.36	79.61
2013-14	24491.88	30186.62	81.13

RMG Export Earnings and Contribution to GDP:

Phenomenal growth of RMG sector resulted into its magnificent contribution to the country’s GDP as well

Year	GDP
1994-95	5.87
1999-00	9.24
2004-05	10.63
2009-10	12.48
2013-14	14.07

As captured by Table during 1994-94 the RMG exports contributed to slightly less .

than 6 percent of GDP, and continued to increase its contribution. In the fiscal year 2013-14, its contribution amounted to as much as more than14 percent of GDP.

Challenges of RMG Sector

1. Unskilled workers

Growth and development of an industry requires sufficient skills and expertise. However in spite of the growth of the industry, its development is constrained by lack of skilled workforce. Out of its current 4 million workers, 90 percent is women, most of who are illiterate, unskilled and come from the rural part of the country. This results in a lower productivity score 77 percent, compared to competitors e.g., India 92 percent, Vietnam 90 percent and Pakistan 88 percent (Islam, 2015). Most of the factories do not have in-house training facilities, and those have, the existing training facilities are poor in quality due to lack of professional qualified trainers, weak training program (irregular courses and covered only workers), lack of training aids, no systematic training needs assessment or evaluation program, no follow up and feedback intervention, no corollary relation between training and benefits in terms of cash or kind, etc. (Khan, 2010).

2. Insufficient Infrastructure

Transportation Infrastructure: Infrastructure like transport and utilities is the single largest issue hampering Bangladesh’s RMG industry. The Chittagong port, which handles nearly 85 percent of the country’s trade merchandise, suffers from labor problems, poor management, and lack of equipment (World Bank, 1999). Productivity and efficiency of Chittagong port is not competitive in comparison to other South Asian ports and it suffers from high lead time as well, for sea freight is increased by about ten days due to the lack of a deep-sea harbor needed for entry of the mother vessel. (Berg et al., 2011). The alternative mode of transportation such as Bangladesh railways and Dhaka-Chittagong Airports provides very less carrying and handling facilities.

3. Energy Crisis

Energy crises such as gas, oil, and electricity foiled the lucrative investment policy towards RMG sector development. Gas, oil, electricity, and water are the basic prerequisite of industrial development. The load-shedding of electricity caused a rapid decrease in production that led to reduced export supply. The frequent electricity disruptions force factory owners to use alternative source of energy like generator and independent power plant (IPP) which increase their cost of production further. Thus, the cost of production rises due to instant increase in electricity tariff. It is argued that 60 to 70 per cent of the factory had been affected due to extreme Gas and Electricity shortage and was unable to accept export orders from around the globe (Mazedul, 2013). Power shortfall resulted in loss of production worth of USD 1.6 million per day due to electricity crisis (Zadeed, 2013).

4. Safety Issue

At the point of inception of the RMG industry, factory buildings were in an unplanned manner that resulted into conversion of common buildings for factory purpose. As a consequence, several disastrous collapses took place such Rana plaza and Tazrin incidents which took away thousands of lives and injured another thousand. These have brought the safety issue as a priority concern

5. Tax Rate

As a part of tax policy1 , the period of concessional tax rate for RMG and knitwear exporters has expired on June 30, 2014. Consequently, the RMG exporters are likely to find it challenging to pay enhanced tax on their export earnings in the upcoming fiscal years.

6. Political Crisis

Political volatility has a common issue in the country. According to Asian Studies Center, Bangladesh is one of the most politically vulnerable countries both in the world and in Asia. The country ranked sixth in Asia and 29th in the world with 92.5 points. The political unrest, complicated policies, backed by corrupted administration is badly damaging the productivity and goodwill of the RMG industry (Hossan et al., 2011). According to European and US CPO report, (Berg et al., 2011) economy and political stability are the fifth in Bangladesh stated that they will reduce the sourcing from Bangladesh if the political stability were to decrease. Political unrest, strike and corruption are the main obstacles to hamper economic growth. Political instability is one the main reasons that has made the garments industry suffer along with some of the other industries in Bangladesh.

Future of RMG in Bangladesh

The domestic market demand of RMG is increasing with the increase in standard of living. Bangladesh is the second largest apparel exporter with just 4.83 percent of total world export after China with 37.35 percent of total world garment export. China has competitive advantage in unit price through economies of scale and large production capacity, while Bangladesh is competing with the advantage of cheap labor. Monthly wage of a RMG worker in Bangladesh is only $65 compared to $300 in china. Thus, in terms of labor cost Bangladesh is clearly ahead. Hence a huge gap between Bangladesh and China’s world share suggests that Bangladesh has a great chance to increase its world market share in apparel sector. China’s consistent rise in the living standard, more orientation to the high-tech expensive investment in capital machineries has increased per unit cost of production. The increase in unit price has made the Chinese apparel slightly unattractive and shifts the large apparel buyers from china to other countries. Bangladesh could be the next destination of those potential buyers. Moreover Bangladesh is also diversifying through new market exploration. Apart from the growth in the traditional market of EU and USA the share of apparel exports to nontraditional markets is 15 percent in 2013-14. Countries in Far East Asia like Japan, China, South Korea, and big markets such as India, South Africa, Russia, Brazil, Mexico and Chile in terms of population can be lucrative opportunities for market diversification.

1. Compared to many competing countries, Bangladesh has an advantage of cheap labor, which may attract foreign buyers.

2. The EU and USA companies have plans to rise their current sourcing of apparels from Bangladesh, from 20 percent to 25-31 percent by 2020 from Bangladesh.

3. Giant Swedish retailer, H&M has decided to double its apparel volume to US$ 3 billion from Bangladesh during next 5 years.

4. Estimated global apparel demand is US$ 650 billion by 2020. China’s domestic RMG market is worth of $310 billion. Bangladesh has a big room to explore there.

5. Dhaka Apparel Summit 2014 has envisioned an ambitious target of US$50 billion RMG export by 2021 that may be realized if challenges are properly addressed.

Financial Budget

Particulars	Amount (tk)
Academic personnel	500
Stipends	400
Consultants	800
Editorial assistants	1000
Study coordination	2500
Fixed equipment	1500
Communication	1300
Field work	700
Data collection	200
Total	8900