Economy

Draft Policy Dialogue Series No. 20 21 August 2007 Title of the presentation: Prospects of RMG Sector in Bangladesh Speaker: Md. Fazlul Hoque, President, BKMEA Introduction: The Ready Made Garments (RMG) industry is the most important sector driving the economy as a whole. During the last fiscal year, the RMG’s total export worth was $9.2 billion. In context of Bangladesh’s total export, RMG’s contribution is approximately 76%. Over the years, this sector has had around 18% growth rate. Md. Fazlul Hoque, President, BKMEA The RMG sector faced several problems in the last fiscal year of 2006. In May 2006, there was labor unrest and the last quarter of 2006, witnessed political unrest as well. Because of these reasons, some buyers shifted their order to other countries like China and Cambodia. The garments industry has suffered because of the warmer winters in the western countries. For example, during the second week of January, it was around 12-14 degrees in Europe whereas 5 degrees in some places of Bangladesh. Usually, orders are placed during the terms of March to June. However, because of the various problems, there was less order placed for the winter clothes. Due to these problems, for the first time in 5 years, the RMG sector could not reach its set target. The RMG sector was also affected by the 9/11 which had an impact on the world economy. The national growth rate was 5-7% and during the last 10 years, knitwear’s growth has been around 28%. However, despite the various challenges, RMG has had a significant contribution to the economy of Bangladesh. It has generated employment and contributed to trade. Potential problems to the RMG sector: The main problems highlighted by the speaker were: 1. EU and China 2. Investment 3. Social Compliance EU and China: The strategic partnership between China and the EU is of immense importance, not just in terms of trade but also in terms of the effect it will have on other economies. EU will withdraw its quota system for China which means that China will grow to become a bigger competitor in the trade system. In terms of BKMEA, this may pose as a threat as the RMG sector will face tougher competition from China. Investment: In light of the socio-economic and political aspects, the investment scenario in Bangladesh is uncertain. Social Compliance: There are some factors which hinders the growth of the RMG sector. For example, the power supply, labor conditions, pollution, bureaucracy and standards of the factories are obstacles for the growth of the RMG sector. For any kind of real improvement or advancement, financial support is required along with commitment from government and other bodies. For example, USA spent $20 billion for a project to make Chicago pollution free in a time frame of seven years. Therefore, it is not possible for Bangladesh to become free of pollution within 6 months. Key Issues: RMG is not an isolated area of the country; it is an integral part of the society and economy. The backward linkage is very important for the RMG sector. The minimum wage issue has not been solved however; there are efforts towards solving this. The RMG sector may face tougher competition from China. RMG sector drives the economy and it should not have an ending like the jute sector. Proper planning, government policies, effective entrepreneurship is required for facing the challenges in world market. Economic and commercial wings do not receive adequate support from the government Government through its lobbyist failed to get duty-free market access to USA. Recruitment policy need to be changed, which has been “politicized” so far. No real effort made for branding Bangladesh in international market. Bangladesh needs to enhance its image in the foreign market in order to attract more buyers and investors. The economy diplomacy of the country needs to be improved. There is need of investment to improve the backward linkage of the RMG industry especially in the woven sector. Way forward: Bangladesh is suitable for the lower segment market and for the RMG sector, in terms of growth it is envisioned that “the sky is the limit.” Bangladesh can build up on its competitive edge because: As China is growing, with its more expensive labor and inputs, it is switching to high value products. On the other hand, both India and Pakistan is concentrated more on textile and less on apparel. Cambodia has around 297 factories and none is owned by the Cambodians. It has no backward linkage and labor force is not highly skilled. Sri Lanka is may not optimally utilize its resources to create a big enough market which will stand as a threat to Bangladesh. However, Vietnam can pose develop as a threat because they have strong industrial base and became a member of the WTO. Therefore, the world market is open for Bangladesh and it depends on us on how much we can grab. Other than tougher competition from China, Bangladesh’s main challenges will come from internal sources. Factors like entrepreneurship, government policy and planning, diversification etc. will affect the growth of the industry. Thus for the boom of the RMG sector, UNDP and other alliances have a vital role to play. Q & A Session: Q1) Is the growth in the RMG sector not reflected in the overall national growth' Fazlul Hoque (FH): RMG has a vital role because it is putting the GDP in an acceptable level. Maybe the accurate picture is not portrayed as other sectors maybe performing negative. There is scope for RMG sector to contribute to a higher level. Q2)What is meant by “international standards” of factories' FH: There are certain norms and standards set for factories. For example, there are set standards for lighting in a factory. However, such norms maybe unknown to the businessmen and for this reason, factories in Bangladesh are not in compliance with international rules for factories. This is usually because the lack of education of the businessmen. For maintaining such standards, financial and other resources are required. Q3) What is government’s role in removing bureaucracy' Ans: There are several changes required to ensure the efficiency of government officials: Proper recruitment policy Modification of salary structure Privatization scheme for certain sectors However, whatever deadlines are set to reach certain targets also need to be realistic. Md. Fazlul Hoque, President, BKMEA and Ms Shaila Khan, UNDP, Bangladesh Q4) What strategy does the RMG sector need to follow in order to face the more aggressive competition from China' FH: Although there has been a lot of discussion on this issue, there has been no real effort towards building a positive image of Bangladesh in the foreign arena. We need to enhance the image of Bangladesh so that people perceive it as a safer, calmer nation. In appropriate branding, we can attract more buyers and investors which will make the overall economy thrive. Q5) How the target of export is usually fixed' FH: The target of exports is usually fixed on historical data. There are no scientific or mathematical ways of setting the export target. For example, this year’s target has been set after adding a growth rate of 15%. Q6) How can UNDP and other government agencies assist to utilize the gains of trade for the poor' FH: The support of UNDP and other development partners is very crucial to the RMG industry. One of the most important factors is the training for workers and potential workers. We have shortage of both skilled and unskilled workers. There was an initiative taken by UNDP to start training centers in the northern region Bangladesh. The challenge is through effective training; make the government sector more equipped with skilled workers, this will help to solve many problems that we are currently facing. Q7) What is the current status of economic diplomacy in Bangladesh' FH: Government is not giving much effort towards the economic diplomacy of the country. The performance of the economic and commercial wings is disappointing as they have scope to do much more. For example, China can be a good market for apparel. They have made 83 items duty free including woolen products which we cannot produce. Therefore, this shows that the efficiency and effectiveness of the economic diplomacy is not that good. Q8) Does a trust gap between the workers and employers exist in the RMG sector' FH: If there was a huge trust gap between workers and owners, then the RMG sector could not have thrived. Certainly there is gap, but everyone is working towards reducing it and augmenting the employee-worker relationship. Q9)What is the role of the research and development (R & D) in the sustainability of the sector' FH: The RMG industry does have R&D facility but in a small scale. As part of building the foundation of research, Institute of Apparal Research and Technology (IART) will be launched.