This report assesses Bangladesh's external competitiveness in the context of the RMG sector after the full phase-out of the quotas dating back from the 1974 MFA. On January 1, 2005, the set of bilateral quotas that had governed trade in RMG for over 30 Years was eliminated. As these quotas had led to an artificial trade structure, the international RMG market faces a restructuring process. Bangladesh's exports are heavily concentrated in the RMG sector, which has been a main driver of growth and poverty reduction. With more than three-quarters of exports RMG related, the country is vulnerable to the MFA shock, in particular since it is confronted with other problems that affect its competitiveness. These problems are not limited to the RMG sector, but will be exposed more fully there in the post-MFA world. The challenge is therefore to improve competitiveness, both in the RMG sector and economy wide, and diversify exports, thus contributing to increased growth and poverty reduction. We will describe the RMG sector in Bangladesh. This gives some background for a brief assessment of the impact of the elimination of MFA quotas so far, including specific policy reactions, that moves beyond the short-term impact on the RMG sector, to Bangladesh's medium-term competitive position in general, looking at its main determinants.
The history of the Readymade Garments Sector in Bangladesh is a fairly recent one. Nonetheless it is a rich and varied tale. The recent struggle to realize Workers' Rights adds an important episode to the story. Below, we present a detailed narration of the evolution of the RMG sector from its humble origins to the present day.
The shift from a rural, agrarian economy to an urban, industrial economy is integral to the process of economic development (Kaldor, 1966, 1967). Although policymakers in the least developed countries (LDCs) have, at various times, attempted to make agriculture the primary engine of economic growth and employment generation, this approach has not worked, not least because of the contributions of the Green Revolution, which has had the dual effect of increasing agricultural productivity in the LDCs and displacing the rural labor force at the same time. Led by the example of the East Asian economies, most LDCs now accept the need for greater industrialization as the fastest path to economic growth. In particular, countries such as Japan, Taiwan and South Korea have demonstrated that an export-oriented industrial strategy can not only raise per capita income and living standards in a relatively short time; it can also play a vital role in modernizing the economy and integrating it with the global economic system. Bangladesh, one of the archetypal LDCs, has also been following the same route for the last 25 years. Once derided as a "basket-case" by Henry Kissinger (The Economist, 1996), the country stumbled across an economic opportunity in the late 1970s. New rules had come to govern the international trade in textiles and apparel, allowing low-cost suppliers to gain a foothold in American and European markets. Assisted by foreign partners, and largely unaided by the government, entrepreneurs seized the opportunity and exploited it to the fullest. Over a period of 25 years, the garments export sector has grown into a $6 billion industry that employs over a million people. In the process, it has boosted the overall economic growth of the country and raised the viability of other export-oriented sectors. This project analyzes the processes by which global trading rules came to help out a poor country like Bangladesh. It demonstrates the impact of the rule changes on the garments sector, and the response of the sector to multiple challenges and obstacles. It also discusses what steps Bangladesh should take in order to deal with the full liberalization of the international garments trade, which occurred in January 2005 and which could potentially threaten the...