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Towards a Sustainable Growth of the RMG Sector of Bangladesh


This week’s Garment Worker Diaries blog is the final post in a series of blogs which have focused narrowly on Corporate Sustainability Due Diligence, CSDD compliance and worker well-being, and more broadly on the future of the RMG industry in Bangladesh. Each blog post has been guest-written by our partner in Bangladesh, the South Asian Network on Economic Modeling (SANEM). This 4th blog post continues the broad perspective, discussing the various challenges the industry in Bangladesh has faced and will confront in the future. The team at SANEM has been talking with and listening to garment workers for nearly five years without break, making their perspective a unique one. While SANEM’s recommendations for sustainable growth are far-reaching, they also remind us that garment workers, their skillsets and their own futures need to be incorporated into country-wide planning. To read this blog in Bangla, please navigate here.

 

Note: Banner photo courtesy of a garment worker in Bangladesh.

 

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The rise in Ready-Made Garment (RMG) exports in Bangladesh has catalysed economic growth, macroeconomic stability, employment creation (particularly among women), and poverty reduction. Nonetheless, there are several challenges that raise worries about the sector’s future. There are some crucial and imminent issues that the RMG sector currently faces: poor working conditions, labour unrest, technological advancements and the resulting loss of jobs, fierce competition from rival nations, and pressure from foreign buyers to address compliance-related issues.

 

As Bangladesh’s RMG industry has grown, both the export basket and the export market have become increasingly concentrated, leaving it highly vulnerable to exogenous and endogenous shocks. Historically, the RMG sector in Bangladesh flourished for a variety of reasons, including favourable policies, government support, and several critical political economy factors, such as the generation of sizeable ‘rents’ in this sector through the Multifibre Arrangement (MFA) quota (which no longer exists) and the Generalized System of Preferences (GSP); various forms of subsidies; tax exemptions; the maintenance of a suppressed labour regime; inadequate factory compliance; and both legal and unlawful RMG by-product businesses (for example the scrap from clothing items, locally referred as jhut, can be used for recycling). Bangladesh will no longer be considered a least developed country (LDC) by 2026, at which point it will have to contend with the erosion of export preferences in important markets and the ensuing risk of export loss, particularly the loss of RMG exports. Other major traditional challenges that the RMG sector in Bangladesh is facing are increased competition in the global market, working conditions and labour unrest, and increased pressure on workplace safety and compliance.

 

Although Bangladesh’s exports are still mostly concentrated on RMG exports, diversification within the RMG sector continues to be extremely challenging. The top 10 RMG products accounted for 70% of the total RMG exports from Bangladesh in 2017-18. Around 36% of the RMG exports in 2017-18 were made up of just two products—T-shirts and men’s trousers. The majority of Bangladesh’s RMG export products are of low value and basic quality. Bangladesh continues to be an attractive supplier of cheaper RMG items, according to the Global Sourcing Survey 2018 by Asia Inspection. Bangladesh’s attempt to move from low-quality to high-quality products has not been very successful. Only three RMG items have exceeded Bangladesh’s main competitors, China, India, and Vietnam, at the 4-digit Standard International Trade Classification (SITC) level, and the advantage Bangladesh holds in these three products is negligible.

 

Around 72% of Bangladesh’s apparel export earnings come from the USA and EU countries. However, sustaining this position would be challenging for Bangladesh due to the Free Trade Agreement between the EU and Vietnam. According to an estimate, the top five products of Bangladesh’s RMG exports account for 53.3%, whereas the figures are only 22.7%, 28.7%, and 25% for its competitors such as China, India, and Vietnam, respectively. The country’s lack of diversification in RMG export products and markets may constrain the country’s export growth in the future.

 

Once, Bangladesh was notorious for its terrible working environment, mismanagement, and poor workplace safety in the RMG sector. While some of these issues have been addressed by the government, there is still room for further improvement. Many factories often ignore proper guidelines and often neglect workers’ station conditions. Due to this unfavourable environment in the workplace or factory, many times, the health of the workers deteriorates. Due to the negligence of the proper guidelines formulated by the labour law, often labour unrest can be seen. Workers staged protests in Dhaka, in June 2022, demanding pay hikes as inflation rose to a record high.

 

Compliance issues and workers’ safety have always been a matter of worry in the RMG sector, and after the tragic Rana Plaza incident, these issues have become crucial determinants for shaping the future of this industry. There are constant threats of cancelling large preferential treatments from the international community in western markets to improve labour conditions. As quality competitiveness is increasingly being prioritized over price competitiveness, the quality of RMG products is continuing to improve. Concerns raised by the international community should not be viewed negatively but rather, as an opportunity to build the reputation of the industry in the global market by addressing these raised issues appropriately. However, priority should be set to address labour issues such as wages, workplace safety, fringe benefits, the workplace environment, etc. There has been a close link between Labor productivity and the improvement of labour conditions. So, to make the sector sustainable, current labour practices prevailing in the RMG industry need to be improved.

 

The COVID-19 pandemic has adversely impacted the industry as it disrupted the supply of raw materials. Also, shipments were delayed, and cancellation or suspension of orders led to the closure of many factories. The COVID-19 pandemic exacerbated the existing challenges faced by the sector.

 

In near future, the RMG sector will face further challenges stemming from the Fourth Industrial Revolution (FIR). The FIR is commencing, and it is dragging a slew of changes with it. Robotics, automation, machine learning, and intelligent systems are slowly infiltrating manufacturing processes around the world. Such significant advancements in manufacturing will have a severe impact on the labour market and the Bangladesh economy, and the RMG sector is no different.

 

Sustaining smaller RMG industries in this digitally competitive global environment has become a critical concern. Automation has already forced the closure of a large number of Small and Medium Enterprises (SMEs) in Bangladesh. To meet the demand for global competition, leading firms are modernizing their manufacturing systems by implementing automation. And yet, medium and small businesses can’t so easily afford to automate. They now largely rely on subcontracting to make ends meet, and because they have little bargaining power with western shops, they frequently accept orders at low costs. The RMG market is becoming increasingly unstable because of these factors.

 

Automation has profound repercussions for employment. While automation will undeniably result in layoffs and job cuts, there will also be job creation as the production operation would require supervision. The types of jobs created by automation, on the other hand, will necessitate higher level of skill and education—both of which the country lacks. There is also the risk of production being redirected to industrialised countries, as well as reshoring because manufacturers require skilled labour.

 

The Government of Bangladesh has formulated the National Skill Development Policy (2011) to address the challenges related to skill gap. However, there are serious concerns with regards to the workers’ capacity to face the challenges of FIR.

 

The Garment Worker Diaries (GWD) initiative states that 82% of the workers participating in their survey have not attained a secondary school certificate. But among this 82% of respondents, 30% claims that they would like to complete the secondary level of education. The aspiring respondents reported that not having enough time and getting married are the two highest barriers to their educational attainment. These insights need to be taken into consideration for designing any policy measure aiming to upskill RMG sector workers.

 

As is well known, Bangladesh, upon graduation from LDC status, will end up losing the privileged market access which the LDCs have as a consequence of several unilateral, bilateral, regional, and global agreements. While the EU has pledged to extend Bangladesh’s preferential market access for another three years after graduation, there is no denying that Bangladesh’s future market access scenario will shift dramatically in the coming years. However, deferring graduation until 2026 has provided Bangladesh with much-needed time for thought, which should be used to develop coping mechanisms that will both support the economy in the short term and accelerate it in the long term. A strong coping strategy necessitates policy-level actions as well as stakeholder participation at all stages of the process.

 

Bangladesh should actively collaborate with the European Commission to develop a mutually advantageous and satisfactory GSP arrangement. The country should use its expanding economy, which is anticipated to be worth more than USD 500 billion by 2025, to negotiate mutually beneficial accords. If negotiations for a free trade agreement with the EU fail, Bangladesh needs to negotiate at least one preferential trade arrangement (PTA).

 

Investment in the development of synthetic fibre-based items and a shift toward high-tech garment production need to be prioritized. Manufacturers should be incentivized to generate synthetic fibre. The government should lead a vigorous stakeholder consultation to make garment owners aware of the worldwide market for synthetic fibre products. To sum up, there should be increased effort in product diversification.

 

To sustain the RMG industrial base, Bangladesh’s RMG sector requires backward linkage sectors in areas such as MMF (spinning and fabric), chemicals utilized in RMG industries, and replacement parts. However, substantial investments will be required to accomplish this.

 

It is high time for Global Value Chain (GVC)-oriented RMG firms to reconsider their business models, as uncertainty about the future course may reduce incentives for new investments and investors may prefer to wait for policy stability. A major concern for policymakers will be ensuring the continuity of market access in developed countries while exposing domestic RMG producers to additional competition. The value chain directionality is important for Bangladesh at the current stage of the development of the country’s RMG industry. Although GVC-oriented firms have historically contributed most to the growth of the RMG industry, global experience suggests that Regional Value Chain (RVC)-oriented RMG firms perform a broader range of higher-value activities, and have greater incentives to shift toward high-value products, procure more inputs locally, and are more likely to engage in end-market upgrading. The key for Bangladesh’s policy will be to rethink the country’s multi-scalar industrial and trade policies to strategically combine the advantages of both types of value chains.

 

Dr Selim Raihan, Professor, Department of Economics, University of Dhaka and Executive Director, SANEM. Email: selim.raihan@gmail.com

 

Md. Tuhin Ahmed, Senior Research Associate, SANEM. Email: eco.tuhinsakib@gmail.com

 

Samantha Rahman, Research Associate, SANEM. Email: samantha.rahman9995@gmail.com