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Strategies for improving competitiveness, productivity, and job quality

In document Garment Industry (Page 36-41)

Garment industry in Bangladesh*

4. Strategies for improving competitiveness, productivity, and job quality

4.1 RMG industry at a crossroads

The discussion above underscores that the RMG industry in Bangladesh is at the crossroads, where the phasing out of the MFA and the increased pace of liberalization will impose new challenges. Meeting these challenges, and remaining competitive in the global market, will entail the transition to a new regime, the main elements of which involve strategic interventions aiming to:

l ensure higher productivity, skills development and better job quality;

l diversify products and markets; and

l establish backward linkage industries.

The RMG industry in Bangladesh, it may be argued, arose within a fortuitous set of circumstances. Its comparative advantage was based on factor endowments, particularly an elastic supply of cheap female labour. Government policy measures were also important in fostering sustained growth in the industry.

While initial growth was largely unplanned, the industry subsequently built up its capacity and learned from experience, even though gains in productivity have been slow.

One of the important learning effects has involved the building of relationships with buyers and gaining market access.

Future action, however, calls for a concerted national action plan to address the main issues highlighted in this paper. It also demands a recognition that the low wage-low productivity regime, hitherto the cornerstone of the RMG industry’s competitive advantage, will no longer present a viable strategy in the post-MFA era.

The following two sections further elaborate this conclusion with regard to changes in the cost structure of existing firms, including wages and skills composition. Recommendations are summarized in the final section.

4.2 Cost structure of the RMG industry

Although RMG manufacturing is a highly labour-intensive process, according to some findings labour costs account for a modest share in the entire cost structure of RMG products.

In the absence of any intertemporal data representing the entire RMG sector in Bangladesh, we present the findings of two sector studies—a survey of 72 RMG units by the World Bank under its Industrial Sector Strategy (ISS) in 1992; and a study of 38 RMG units by the Bangladesh Institute of Development Studies (BIDS) in 1995—to indicate the recent cost structure and profit margin of RMG units (Table 2.6).

Table 2.6: Cost structure and profit margin of RMG units

Indicators ISS Study (1992) BIDS Study (1995)

Value of output 100 100

Costs: 87.00 76.00

* Industrial cost (excluding wage)1 73.00 64.00

* Non-industrial costs2 03.00 05.00

* Employment cost (wage bill) 11.00 07.00

Gross value-added 23.00 31.00

Profit margin 13.00 24.00

Source: Bhattacharya and Rahman, op. cit., Table 10, p. 17.

Notes: 1. Industrial costs include expenditures on raw materials, packing materials, fuel and electricity, spares, and sub-contracting.

2. Non-industrial costs include expenditures on overheads, i.e., costs other than direct material and labour expenditures. These costs include advertisement and facilitation expenses, selling and distribution costs, interest payments, and taxes.

Bhattacharya and Rahman (1999), based on the above studies, have pointed out that, between 1992 and 1994, the proportion of costs in the gross value of output in Bangladesh’s RMG sector decreased from 87 percent to 76 percent leading to an increase in the profit margin from 13 percent to 24 percent. Concurrently, the share of industrial costs (excluding salaries and wages) fell from 73 percent to 64 percent, resulting in a growth of the share of gross value-added from 23 percent to 31 percent. During the corresponding period, within the gross value of output, the share of non-industrial costs rose from 3 percent to 5 percent.20 Strictly speaking, such comparisons, based as they are on two different surveys, are difficult, since neither the number nor the entities of the RMG units are the same in both studies. Discrepancies in figures under the respective heads, moreover, might be the outcomes of sample selection bias and/or measurement error. The statistics do, however, give an indication that, even though RMG manufacturing is a highly labour-intensive process, labour costs constitute a very modest part of the entire cost structure of RMG production.

Therefore, a strategy to reduce wage levels further, thus affecting workers’ quality of life, does not necessarily imply the decline of production costs to remain competitive in the world apparel market. In fact, production costs may increase many times over even in the presence of cheap labour, where there is political turmoil and strikes, extortion, and wide-spread corruption including bribery, which allegedly lead to an enormous increase in the hidden costs of doing business, thus often discouraging foreign buyers from coming to Bangladesh, and escalating raw material costs.

4.3 Recent trends in the wage rate

The proposition that repressing wage levels to remain competitive in the post-MFA era is not a viable strategy is further strengthened by analyzing the trend in wage rates for different categories of employees in the RMG sector. As may be seen in Table 2.7, the highest increase in the real wage rate is observed among skilled workers, which shows that, in an ever-increasingly competitive world due to globalization and liberalization, it is not reduction in wage levels, but rather improving labour productivity through appropriate incentives (i.e., attractive remuneration to match higher productivity), which would be an ideal competitive strategy.

Since female employment in the RMG industry is largely concentrated in low-skilled and unskilled jobs, most female workers unfortunately would not benefit to the same extent from the rising trend in wage rates. It is even possible that less skilled female employees would be replaced by skilled male employees, thus widening the gender discrepancy in division of labour. Women workers, therefore, need to be specifically targeted for human skills development.

20 “The shift towards a higher share of non-industrial costs is characteristic of products of high market value, which is corroborated by the increase in the share of value added. The decrease in wage cost’s share, however, does not signify a decrease in the wage rate in real terms” (cf. Bhattacharya and Rahman, 1999).

Table 2.7: Trend in nominal and real wage in garments by skill category

Worker Growth

category 1980 1985 1988 1990 1993 1997 rate (%)

Trainee/Helper

- Nominal 130 300 400 500 500 500

-- Real 195 300 267 337 296 242 24.10

Semi-skilled

- Nominal 300 500 600 800 1 000 1 000

-- Real 423 500 420 540 591 484 14.42

Semi-skilled

- Nominal 500 800 1 000 1 500 1 800 2 200

-- Real 760 800 762 1 012 1 064 1 065 40.13

Source: Bhattacharya and Rahman (1999).

5. Summary

A coordinated action plan is needed, once the quota system and preferential trading arrangements are phased out, to address the challenges faced by the RMG industry. The main recommendations in this regard are the following:

l diversification of markets into ASEAN and other regions outside the European Union and North America;

l diversification of products, particularly the transition to higher value-added items;

l building of technological capacity and skills for a range of products;

l support for the establishment of backward linkage industries, but with proper assessment of international competitiveness, with a focus on dyeing and finishing units (which some studies have identified as potentially more competitive), and on smaller units which are less capital intensive and less risky as investments;

l continued emphasis on primary and secondary education in government education policies, aiming to develop a more skilled and generally higher-quality labour force;

l continued emphasis on education and skills development for women, specifically, aiming to close the gender gap;

l introduction of functional English courses for managerial and supervisory staff and greater attention to on-the-job training, with appropriate incentives such as tax rebates;

l encouragement for relocation of factories outside main urban areas, with serviced plots being made available and adequate supervision to ensure that factories are functionally designed;

l better regulation and supervision of factories, reinforcing government regulatory capacity in this regard to ensure compliance with the Factory Act;

l compliance with labour laws with regard to wages, weekly holidays, canteen and crèche facilities, occupational safety including attention to fire hazards, etc.;

l setting up a data bank by the relevant ministries in collaboration with such organizations as the ITC, the ILO, and UNIDO to monitor trade flows by product and region, information on new technologies, etc.;

l dissemination of information by the ILO regarding linkages between job quality and productivity and best practices in other countries, aiming to promote attitudinal changes among entrepreneurs;

l respect for basic workers’ rights, promotion of better industrial relations and encouragement of freedom of association in the entire industry sector, including in the EPZs.

l introduction of productivity-enhancing schemes by agencies such as the ILO, with dissemination of best practices in competing countries; and

l dissemination to international consumers of information concerning improved working conditions such as the MOU on the abolition of child labour, and, it is to be hoped, of on-going improvements undertaken by the BGMEA, the ILO, and the Government.

ANNEXURE 1

In document Garment Industry (Page 36-41)