Policy for Rmg Sector Development in Bangldesh Assignment

Policy for Rmg Sector Development in Bangldesh Assignment Words: 2408

This report was prepared as a compulsory requirement of EMBA program. To finish a course, a student has to complete an assignment on a specific topic. In Bangladesh, agriculture has been the backbone of economy and chief source of income for the people. Government wants to decrease poverty by getting highest productivity from agriculture and achieve self-reliance in food production. Apart from agriculture, the country is much concerned about the growth of export division. Bangladesh have accelerated and changed her exports substantially from time to time.

After Bangladesh came into being, jute and tea were the most export-oriented industries. But with the continual perils of flood, failing jute fiber prices and a considerable decline in world demand, the role of the jute sector to the country’s economy has deteriorated. After that, focus has been shifted to the function of production sector, especially in garment industry. In 1994/95, export earnings registered a phenomenal growth rate of 37. 04%. At that time the govt. redirected trade policy towards a competitive export oriented economy by liberalizing the trade regime.

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Around this time there was a significant shift from jute centric export to RMG centric export. Gradually non-traditional items became more dominant as against traditional and primary commodities. Incremental export earnings have come mostly from the RMG sector in recent years. Concentration of export market is also quite visible with EU and USA accounting for almost 80% of Bangladesh’s total exports. Our external sector was under considerable strain in1998-99 when export growth decelerated to 2. 9%, the lowest since 1990s.

The devastating flood of 1998 and a slump in the prices of our commodities contributed to this decline. In the aftermath of 9/11, export earnings came down by 7. 44% during 2000-2001. A positive development in the structure of export growth, which has important policy implications, relates to performance of the knit RMG sector. This sector has been able to demonstrate robust growth performance over the recent years. More than eighteen months ago, on January 1, 2005, the Multi Fibre Arrangement (MFA), which had governed world trade in textiles and clothing for thirty years, came to an end.

With the expiry of MFA, the quota system and trade restrictions, initially meant to protect the industry in developed countries, were lifted, opening the door to free competition for all. In the post-MFA era, large competitive countries like China and India were expected to take full and unrestricted advantage of their low production costs and impose fierce competition on smaller producing countries like ours that had developed their ready-made garment (RMG) industry based on access to quotas rather than on their international competitiveness.

In addition, EU are putting stringent conditions that must be fulfilled by Bangladesh RMG exporters so our graments are not rising in EU. The basic objective of the present paper is to highlight the most important issues and challenges facing the RMG industry in EU market and to make a five years strategy to overcome this situation. 2. CONSTRAINTS FACED BY BANGLADESH EXPORTERS: The RMG industry occupies a very significant position in the economy of Bangladesh. It accounts for about 5% of the gross domestic product (GDP) and 25% of gross value addition in the manufacturing sector of the country.

It is a major source of employment and absorbs about a third of the industrial workforce. Currently, the sector employs approximately 2. 2 million workers, of whom almost 80% are females. It is also the most significant item of export, comprising 75% of total exports, and source of foreign exchange earning, with a contribution of more than three times that of foreign aid. From a modest start in the 1970s, the ready-made garment industry grew phenomenally over the period of MFA during the last two decades and a half. The number of garment factories increased from 50 in 1983 to around 4,000 in 2004.

Around 2,800 of these factories are located in and around Dhaka city, while most of the remaining are in the port city of Chittagong. About 65% of the factories produce woven garments, 20% are engaged in knitting, while the remaining 15% are involved in sweater production. Over the years, RMG exports have increased dramatically, from a meagre $68,000 in 1978 to $4. 5 billion in 2002 to $5. 7 billion in 2004. More than half of the exports (57%) went to the countries of the European Union (EU). During the 1990s alone, garment exports grew at a rate of 15%.

What are the reasons for this phenomenal growth of the garment industry? First, the quota regime under MFA has substantially contributed to the development of the sector. Countries, like China, that had already utilized their quota of exports, turned to countries like Bangladesh that had not fully used theirs. Second, the industry benefited from a number of advantages such as: (a) very low labour wages (even by regional standards); (b) increasing share of local inputs (particularly in knit fabrics); and (c) comparative advantage in mass-produced basic garments (such as knit cotton and woven cotton products).

Third, the sector has been helped by policy support provided by successive governments. This includes measures like duty drawback facilities, tax holidays, cash assistance, income tax rebate facilities, zero tariff on machinery inputs, rebate on freight and power rate, bonded warehouse facilities, provision of import under back-to-back letter of credit, loans at concessional rate, export credit guarantee scheme, etc. Since January 2005, the market is no longer restricted by quotas.

It was generally predicted that after the end of the MFA, countries that had been restricted by quotas would be able to take the full advantage of their competitive position, while those that had been less restricted by quotas might face difficulties in maintaining their current market share. In the long run, it is expected that smaller producers like Bangladesh will find it difficult to compete with integrated supply chain, service standards and economy of scale (savings on volumes) that the larger producers like China or India can offer, unless they take serious measures to improve their competitiveness.

Competition among garment exporting countries has indeed increased as the market climate has changed due to the abolition of quotas. The competitive position of China rapidly appeared to be so important that developed countries decided, soon after the official phasing-out of MFA, to use safeguard measures to continue to impose some restrictive quota on their imports from China on selected products until the end of 2008. Still, China, which is the largest exporter, has substantially increased its market share.

Although in the EU market there are no tariff and quantitative restrictions for LDCs, a country nonetheless needs to comply with EU rules of origin (ROO) for accessing preferential treatment. The EU ROO put Bangladesh in a disadvantageous position. Some relatively advanced developing countries with strong backward linkage industries such as China, India, and Pakistan, would be able to expand their exports to EU rapidly by undercutting prices, but the ROO will prevent Bangladesh from availing herself of the GSP and thereby effectively prevent the country from exploiting a major source of competitiveness for an LDC.

With the cessation of MFA, Bangladesh is competing with countries such as China, India, Turkey etc. in the EU market. The employment in the RMG sector is characterized by low wages and there is hardly any controversy over the fact that the decent work record of Bangladesh’s RMG industry is far from satisfactory. In fact, Bangladesh is a country with one of the lowest wage rates in the world (Abernathy et al. , 2004). While the low wage rate reflects large supplies of workers relative to demand, what is striking is that the legal minimum wage for this sector has not increased during the past 10 years or so.

It is often argued that despite the unchanged legal rate, the actual minimum wage in the sector has increased in response to the adjustment with the increased standard of living and inflation. However, such a claim is grossly overstated as full inflation adjustment is never undertaken. In spite of many significant contributions and keeping aside the problem of low wages, when it comes to working environment and conditions, the RMG industry is considered to be a sector largely apathetic about the welfare of its workers.

The industry is characterized by a wide variety of deprivations of women workers, which include lack of proper infrastructure facilities and safety at workplace, non-compliance with the minimum wages, wage discrimination, lack of provision of essential service benefits to workers, lack of housing facilities, and lack of skill development and training opportunities (CPD, 2003). Although the workforce of the industry is overwhelmingly dominated by women, provisions available in the sector are not gender sensitive at all.

Rare-availability of baby-creches at the factory premises, irregularities associated with granting of maternity leave and benefits to the eligible workers, insufficient number of toilets, congested workplace in unsafe buildings, non-issuance of any formal contract of employment, non-compliance with overtime works and allowances are some of the serious regular allegations. During the entire lifetime of the industry in Bangladesh, there has been very little improvement with regard to minimum basic provisions.

Repeated discussions on these issues have taken place, but unfortunately things have not changed much. In fact, it will be no exaggeration in mentioning that working conditions in a large number of Bangladesh’s RMG factories have always been in a critical state and no serious efforts have been undertaken to bring about changes. The collapse of a factory building at Savar immediately after the quota-phase out attracted renewed attention to work place safety concerns.

The general impression of the buyers is that safety measures in an overwhelming majority of garment units are not up to the mark. A leading EU garment workers’ federation and some European buyers have very recently urged the government to address all the compliance issues (including the workers’ safety and salary packages) to retain the market in the European Union (EU). Many buyers are increasingly raising questions about the compliance issues and threatening to discontinue sourcing garment products from a country like Bangladesh that is not maintaining ethical practice in production.

Recent labour unrest in Bangladesh’s garment sector is a potential risk to the industry and highlights the need for continued efforts to raise safety standards, to improve general working conditions, and to implement wage agreements. Chittagong is the largest of all the ports and is handling 80 percent of all import and 75 percent off the export. The Chittagong port has reasonable connections to the railway network, roads, waterways and airborne traffic. In 1999, 380,000 containers passed through Chittagong. However, major problems regarding Chittagong and Mongla are port congestion, labour problems and pollution management.

Port congestion is largely a factor of the physical constraints of the present facilities, including inadequate container-handling capacity, which increases time in port and costs. Strikes by the many trade unions at the Chittagong Port continue to interfere with operations, and custom service is ineffective. 3. MAJOR FINDINGS: Through our discussion we can pick some major findings which are- • EU-ROO imposed upon us •Our carelessness about socio-economic welfare of labours. •Our labour unrest situation •Port Congestion •Competition with stronger countries like China, Vietnam etc. in EU market. 4.

RECOMMENDATION AND SUGGESTIONS: As EU countries are stringent about quality, we should have a keen attention in our Quality Assurance department in each garment to produce apparels with standard quality. Trained personnel should be appointed in these departments. If possible we can encourage our members to arrange training, workshop in their garments to make them familiar with updated quality. While there is a broad consensus on the need for improving the working conditions, concerns have been expressed about setting-up unusually high compliance standards, which are unrealistic to the situation of Bangladesh.

Besides, standards used in evaluating the working environment and conditions considerably differ between buyers. Compiling with different standards set up by different buyers is extremely difficult for the entrepreneurs. To overcome this problem, a number of initiatives should be launched to develop a common set of codes of conduct for the sector, on which individual firms’ work environment record can be assessed. It is yet not clear, if and when these standards are specified whether those will be acceptable to all parties involved.

Employers usually point out that setting unusually high compliance standards for the RMG industry would be unwarranted given the prevailing situation in other industry and non-tradable sector. They argue that the garment sector has a much better working environment than many of the state run industries and other export-oriented sectors, which is partly attributable to buyers’ compliance requirement. It needs to be mentioned here that investment on better codes of conduct can have immediate cost-raising effects, while the gains associated with improved competitiveness via enhanced productivity can only be achieved with a time lag.

Therefore, how firms are going to adjust the implication of rising costs at a time of increased competitive pressure is an important issue. The main policy change since the expiration of the ATC has been to allow the import of yarn and raw cotton from India through land ports since December 2005, a policy that primarily benefits the integrated knitwear industry. The market segments that Bangladesh currently serves still allow for relatively long lead times. Buyers also report satisfaction that garment producers in Bangladesh consistently work to produce quality garments on time and exhibit great flexibility in accepting orders.

Producers and buyers warn, however, that lead time will become much more critical as Bangladesh moves into higher value-added garments and fashion wear and that this will require ready availability of high-quality fabrics and accessories at competitive prices. We can suggest our government to faccilitate the new enterprenuers to establish backward linkage industries to reduce our lead time. The vessel congestion in Chittagong Port causes a big problem for the import-export activities of RMG sector of the country.

We should give pressure to government for the cooperation of all concerned for making necessary arrangement for engaging more feeder vessels and to give priority shipment and clearance of the containers carrying RMG products. If possible we should demand for a single terminal which will be used only for RMG purposes. BIBLIOGRAPHY *BGMEABangladesh Garment Manufacturers and Exporters Association *EUEuropean Union *ROORules of Origin *RMGReady Made Garments *CPDCentre for Policy Dialogue *MFAMulti Fibre Agreement * 1. Khan, Shahiduzzaman. (2007). Challenges facing the garments industry. ” The Financial Express. 2. Ibrahim, Asif. (2007). “Building competitive business environments: building trade related infrastructure- what can the private sector do? ” Background Paper Series,WEDF. 3. World Trade Organization, 2006, “Trade Policy Review: Bangladesh, ” WTO (Geneva). 4. ” Bangladesh: Poverty Reduction Strategy Paper,http://www. imf. org/external/pubs/ft/scr/2005/cr05410. pdf 5. Centre for Policy Dialogue, 2004, “Surviving in a Quota-Free World: Will Bangladesh Make It? ,” Centre for Policy Dialogue (Dhaka),August 2, 2001

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