Whither Bangladesh’s RMG industry
In beginning of the 1980s, the readymade garments (RMG) sector of Bangladesh caught the eye of the Western producers, who were facing high costs of production and were searching for countries with low manufacturing costs. Taking advantage of low wage and abundant labor, RMG sector of Bangladesh has only flourished since then. Over the last three decades the country has become the second largest global garments exporter annually exporting garments products worth USD $18 billion. The path to success had not been smooth. For example, with the removal of the Multi-Fiber Agreement (MFA) in 2005, fear of imminent doom stroked in the hearts of the garments owners. Despite the adverse predictions of different studies, the RMG sector of Bangladesh managed to pull through the abolishment of the MFA unscathed. Bangladesh later secured a position under the Generalized System of Preference (GSP), which allowed the country to enjoy privileged trade links with the Western producers. However, after the most recent tragedy of Rana Plaza where more than 1200 garments workers lost their lives, the US government suspended the GSP of Bangladesh. Even though EU promised not to withdraw GSP for Bangladesh it comes with stipulations attached. In this circumstance, the question that everyone is compelled to ask themselves is- “Will the RMG sector of Bangladesh collapse with the recent crisis it is faced with, or will it be able to hold its ground?” The Evolutionary Path of the RMG Sector
Before delving further into the recent crisis and its impacts, let’s first identify the contribution of RMG sector in Bangladesh economy and its strengths that led to its immense growth over the last few decades. RMG sector is the highest foreign exchange generating sector of Bangladesh, constituting 79% of total export and around 22 percent of total GDP in FY 2012-13. It is evident from graph 1 that the sector’s contribution to total export and economy as a whole has only increased over time. Currently it employs 44 million worker 80% of which are women. Therefore, it would not be wrong to say that RMG sector has become the lifeline of Bangladesh economy. Graph1: RMG export and Total Export Graph 2: Minimum hourly wage rate of RMG Sector
Source: BGMEA Source: ILO The global hegemony of Bangladesh in RMG sector can be ascribed to the fact that it enjoys a competitive advantage in terms of low wages and lax regulation that transformed into competitive global prices. With a minimum wage of USD 0.26 per hour, the rate is one of lowest in the world (see Graph 2).The biggest earner of foreign exchange in Bangladesh has also been showered with favorable incentives such as back-to-back LC, import and customs duty rebates and short and long term interest rates discount. Harnessing on its cheap labor, Bangladesh RMG sector has found a strong foothold to sustain on its own. For example, the MFA quota system which had initially acted in favor of the Bangladesh RMG sector was phased out in 2005 but the RMG sector registered a growth of 19 percent in the first six months following the abolishment. According to the Mckinsey report 2011, Bangladesh has all the potential of becoming the no. 1 apparel sourcing hotspot replacing China. Buyers at the cost of labor wages
According to Doug Miller, professor emeritus of supply chain ethics, “In Bangladesh, you have a glut of buyers in search of a cheap product wanting to place enormous orders, and the capacity is built hurriedly.” With a clause of deferred payment in letter of credit (L/C) i.e. the formal loan agreement for purchases, merchants in Bangladesh get products shipped out and release payments to manufacturers after months of delay of as much as 6 months. With payment being deferred, Bangladeshi manufacturers are actually forced to subsidize the buyers....
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