Tasting Chinese soup at home

| Updated: October 24, 2017 13:45:19

Tasting Chinese soup at home

If one is asked to name two sectors that lubricate the wheels of the Bangladesh economy and substantially contribute to poverty reduction, surely remittance and readymade garments (RMG) would immediately be on everybody's lip. Researchers have shown that headcount poverty reduction at 9 percentage points during 2000 and 2005 would have been about 7 percentage points in the absence of growth of garments and remittance in that period of time. Take the case of RMG that employs roughly 5 million people - 80 per cent being women and the sector accounts for one-tenths of GDP against 3 per cent in 1991. By and large, the contribution of RMG to poverty reduction is immense.
The writer recalls that Gustav Papanek, an eminent economist, while visiting Bangladesh in 2010, argued that Bangladesh should seize upon the opportunities waiting on the wings for her apparel sector. It is in the wake of rising wages in China - holding roughly one-thirds of the world's textile market at that time. Not only in RMG, Bangladesh could capture Chinese share in all labour-intensive products now facing an erosion of comparative advantage, and thus create 3-4 million jobs a year against 1 million at present. The impact of jobs in a general equilibrium sense is quite understandable. Note worthily, Papanek in his paper pointed to turning liability into asset implying that Bangladesh's vast pool of unskilled labour, considered as liability,  should be made asset through proper skill training.  
The recent study 'Stiches to Riches', based on data of 2012, by the World Bank also seems to suggest the same. It is that Bangladesh can create millions of jobs in its garment industry by making its people more productive and addressing the environmental and compliance issues. "One per cent increase in Chinese apparel prices could hike firms' demand for female labour by 0.44 per cent in Bangladesh, and a 1 per cent increase in output could raise firms' labour demand by about 0.3 per cent". The story stretches further: "A 1 per cent increase in Chinese apparel prices could boost the demand for Bangladeshi apparels in the US by 1.4 per cent". It may be noted here that and as per the study, China is the largest supplier of apparels claiming 40 per cent of global share while Bangladesh stands far behind at second with roughly 6 per cent of the total market share. Like Papanek, the report also reckons that "Bangladesh is likely to be benefitted from the shift of work orders from China as the economic giant is losing its market share due to higher costs of production". By and large, the study findings point to a few important things: first, the sector has greater potential for job generation, especially for women, not only in Bangladesh but also in South Asia as a whole; second, for the US market, a 10 per cent increase in Chinese apparel prices would raise apparel employment in Bangladesh by 4 per cent. In other words, the sun-set in apparels in China could signal a sun-rise in Bangladesh, other things remaining the same.
But Chinese soup may not be a free lunch for Bangladesh. To turn wishes into reality, Bangladesh needs to improve performance on non-cost factors that are considered important to global buyers. That would mean, inter alia that Bangladesh embarks on deep economic reforms to capture Chinese share and compete with Vietnam, Cambodia and Indonesia - also casting an eye on the cake. The main areas to focus on are, for example, skill upgradation efficiency, and increased productivity of workers. Both would have to come from better management.
There is little shade of doubt that the apparel industry stands as a linchpin for Bangladesh's economy accounting for roughly four-fifths of total export earnings.  The sector has not only contributed to foreign exchange earnings but also has helped growth of import. The Chinese soup in evidence could better be reaped at home by satisfying buyers' concerns on cost, lead time, quality, and more importantly, compliance with safety standards and other policies.  It is disheartening to note that excepting a few cases, Bangladesh has lagged far behind in terms of improvement in these. To be specific, the problems that Papanek cited in 2010 seem to hold true even in 2016. The study also notes that the achievements so far have been production of large quantities at low costs due to low wages. But Bangladeshi firms mostly specialise in low-value and mid-market price segment apparels such as trousers, knit and woven shirts and sweaters. It has, to mention a few, to go a long way to penetrate the high-end clothing market.
The challenge is the looming competition from Vietnam, Cambodia and Indonesia as also the buyers are moving towards greater consolidation in sourcing decisions. The challenge is also to relocate industries to export processing zones. The industries have been established without due consideration to compliance. The challenge is also to change the mindset of the RMG owners that workers need to be made more productive in the face of emerging competition in global market. And finally, the challenge is also to change the mindset of policy- makers that the days of captive markets for a basket of items are over.  Buyers, sellers and Bangladeshi stakeholders should join hands in diversifying exports both in terms of areas and products, pay attention more on quality and compliance, and improve overall governance in the RMG in accessing the one-time-in-life opportunity that Bangladesh is faced with following China's shift in comparative advantage. In fact, RMG could be one of the sectors that can provide demographic dividend. But for all that is to happen, urgent implementation of reforms is a must. Bangladesh has to seize upon this golden opportunity to move to a higher growth trajectory. Perform well or perish.

The writer is Professor of Economics at Jahangirnagar University.
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