Bangladesh garment industry: Compliant? Yes. Competitive? Not so much.
While Bangladesh has set out an ambitious export strategy, a variety of factors and challenges will ultimately determine its execution.
With a booming readymade garment manufacturing industry, Bangladesh follows China as one of the largest distributors globally. The industry contributes over 10% of the country’s GDP.
Bangladesh has armed itself with a bold vision for 2021 – to reach USD 50 billion in exports of readymade garment products. Having set such an ambitious strategy, it is important for the country to take a look at many factors to increase the rate and stage of development.
What’s working for Bangladesh?
Within its borders, the number one factor in the country’s favor is low wages. It is Bangladesh’s comparative advantage. Labor is cheap, and many of the large garment companies are moving in for this very reason.
Another factor that has enabled the country to flourish is its large unskilled population. With a lack of adequate infrastructure and a low literacy rate, the garment industry presents a lucrative option to people, especially women in the country, who can draw a large source of their monthly revenue from the sector.
Adding to this is government support that the industry receives, which has helped it to flourish. As Bangladesh has made an ambitious pledge to increase its exports by 2021, it has provided many incentives to the sector to help it flourish.
Key among them are tax holidays, the creation of export processing zones, loans at concessional rates, and export development funds, among others. Thanks to the support of the government, Bangladesh has also relaxed FDI restrictions into the sector.
Adding to these factors is the increase in global demand. As we see countries such as the US battle out of their financial woes, with similar hopes in Europe, increase in income has led to an increase in consumption, which has led to a resurgence in demand.
Safety concerns that were a big concern after the Rana plaza factory collapse have been largely addressed. Pressure from the international community led to the creation of the Accord on Fire and Building Safety in Bangladesh and the Alliance for Bangladesh Worker Safety, which ensure the inspection of factory floor spaces and working conditions.
Those factories not under the Alliance or the Accord must submit to safety inspections under the National Tripartite Plan. The inspections are thorough and require companies to fix any safety-related electrical, structural, or fire safety issues within a span of 36 weeks.
Moreover, efforts are also underway to ensure that there is a trained workforce capable of carrying out safety inspections. With the pressure on, the country is working with the international community to improve its working conditions.
Another factor playing in Bangladesh’s favor is rising unrest in China over wages, which has pushed companies to other Asian companies, such as Bangladesh, which offers cheaper options.
Countries such as China are moving to expand their pool of offerings, and as the population gets more skilled, their workers demand increased wages. Further, with a higher number of skilled workers, countries such as China are looking to diversify their product base, offering more skilled and high-tech products to the market.
Hence, the cost of operating in China is becoming costlier and companies are moving to Bangladesh and Vietnam, among other countries, where the cost of labor continues to remain low.
Bangladesh still has a long way to go
The pressure to be compliant to international safety standards has bled many of the manufacturers dry. The cost to remediate factories is high, and it is one many small time subcontracting manufacturers in the country cannot afford.
About 20% of the 3,500 export garment factories subcontract their work to smaller factories. These factories cannot bear the cost of inspections, as their doors remain shut during this time.
Moreover, many of them have received a long laundry list of upgrades, which are beyond the financial reach of these small time operators. With no assistance from the government and no affiliation to the Alliance or the Accord, many of these operators who perform smaller tasks for larger operators are left with no option but to shut shop.
Secondly, the sector consists largely of unskilled uneducated workers, and hence labor productivity remains low. Labor conditions also are low with lax regulations and are a large factor hindering labor productivity.
It is no surprise that the country has one of the largest pools of disruptive unions, which increases the cost of operation for companies in the sector. At present, over 80% of the country’s exports come from the garment sector, leading to high export dependency.
Moreover, the country is making limited investment to improve the skills of these workers, which would render it uncompetitive in the international market in the long run.
Further, companies now looking for cheaper options are moving to countries in Africa such as Ethiopia, where the cost of production is comparatively lower than that in Bangladesh.
Countries like Ethiopia do not have minimum wage restrictions, like those in Bangladesh, and are considered more internally attractive, as the cost of labor is less than one-third. What adds to this is the cost of raw materials such as cotton, which Bangladesh must import for the garment sector.
As the cost of raw materials increases, so does the cost of the final product, which hence reduces its comparative advantage in the international market.
As the demand for cheaper clothing increases in the US and in Europe, companies will continue to look for cheaper options which could lead to production moving away from Bangladesh to countries which present cheaper alternatives.
Bangladesh still remains a lucrative market and the government draws a great deal of revenue from the sector. Hence the country must work to overcome its weaknesses to increase its competitiveness and diversify its portfolio in the international market in the long run.
For the country to truly realize its strength in the garment sector, it is important to understand its weaknesses and the threats imposed by external actors that are not within its control.