Mukti

The real trouble facing the garments sector?

Posted in development, economics, labour, macro by jrahman on September 29, 2012

I’ve been following the Bangladeshi economy for over a decade now.  And in all that time, one constant theme has been the worries about the imminent collapse of the country’s garments sector.  Back in the early 2000s, it was China joining the World Trade Organisation and pushing out Bangladesh.  Then it was the end of Multi Fibre Arrangement in 2004 — how could the Bangladeshi industry survive without the preferential treatment?  By the end of the 2000s, the global recession emerged as the biggest risk (something I worried about too).  Meanwhile, wage hikes of 2006 and 2010 were also posed as threats to the industry.  Now we have the international coverage of periodic labour unrests in the industry as the latest worry.

Of course, the Deshi garments sector has thrived despite the challenges listed above.  I’ve argued earlier about not worrying about international boycott of the garments industry.  The thing is, there might be other reasons to worry about the sector.

Let’s think about the economics of why the industry has done well despite the shocks.  How does a typical garments factory operate?  It buys inputs from overseas, puts them together in Bangladesh, and sells to overseas buyers.  The key Bangladeshi ingredient is labour.  If the input prices rise or the output prices fall, that’s bad for Bangladesh.  But Bangladesh has no control over these prices — they are set in the world market.  And most of the shocks described above could have affected these world prices.

If the input prices rise or output prices fall, how can the Bangladeshi firm do better?  Well, it can squeeze the domestic labour — the main domestic input.  But this obviously has a limit — even under slavery condition, one cannot go below subsistence wage.  As it happens, domestic wages have actually risen.  So, what’s the secret behind the Desi garment’s success?

The answers is productivity.  As I wrote two years ago:

A garment worker’s productivity rises when hand finishing can be done on a machine, or when older machines are replaced with newer models. Her productivity also rises with better management techniques. All else being equal, higher pay is affordable if concurrent shifts in technique enable her to produce more in a given hour.

Basically, even as input or output prices have moved against Bangladesh, and domestic labour has become more expensive, the garments sector has thrived because productivity has risen.  In fact, all else being equal, in a competitive market, rising productivity translates through to higher real wage — and no reason to think Bangladesh is an exception.

Over the past decade, that’s what happened.  I don’t have the data for garments sector itself.  But BBS national accounts and labour force surveys have data for the entire manufacturing sector.  Given garments is such a major part of our economy, the trend in the overall manufacturing sector would be a good guide to what happens in the garments industry.

In the decade to 2009-10, manufacturing output in Bangladesh more than doubled.  Over the same period, employment in the sector had gone up by about 80%.  The fact that output had risen faster than employment is, by definition, due to increase in productivity.

The headline decade long figure, however, masks a worrying trend.  In the three years to 2002-03, manufacturing productivity grew by 1% a year.  In the following three years, productivity in the sector grew by 2.2% a year.  In the four years to 2009-10, on the other hand, productivity growth has weakened to 0.9% a year.

(Political quip I can’t resist: dark age of Hawa Bhaban rule and we had a productivity surge, post-1/11 honestocracy and a productivity slump — ironic, no?).

I don’t have more recent data.  If in more recent times productivity has been growing at around 2% a year, then the sector can afford pay rises and the labour troubles will dissipate.  But what if productivity growth has slumped to less than 1%?

That, dear reader, will mean real trouble for the industry.

 

 

 

 

 

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9 Responses

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  1. kgazi said, on September 29, 2012 at 9:51 am

    By “post-1/11 honestocracy” you dont mean the honestocracy of Hasina regime, do you ?

    • jrahman said, on September 29, 2012 at 2:29 pm

      No.

  2. Diganta said, on October 2, 2012 at 11:24 am

    What will happen if something like a robot doing all the sewing and knitting work comes into the game?
    http://www.mnn.com/green-tech/research-innovations/stories/robot-sewing-machines-could-make-made-in-china-obsolete

    • jrahman said, on October 14, 2012 at 1:40 pm

      Any world where robots displace unskilled factory workers will also be one where energy will be so bountiful that we can’t possibly fathom what the society will actually look like.

      • Diganta said, on October 17, 2012 at 12:07 am

        As per conservation of energy, unskilled workers use same (or similar) amount of energy to produce work🙂 …

      • jrahman said, on October 27, 2012 at 6:22 pm

        Hmm. I need to read up on basic physics I guess.

  3. BDAF said, on October 17, 2012 at 8:26 am

    My real worry here is the lack of diversification away from a basic garments industry towards higher-value income sources (in short, moving up the value chain). This really, really worries me. We cannot just rely on remittance money from the middle east. And even the remittance money is through unskilled or semi-skilled labour. We are not moving up the value chain there either (higher income workers can remit larger sums of money, as well as establish business links in foreign countries which can tack back to BD). The real problem for Bangladesh is that it requires an East Asian-style large-scale governmental “push”. Rather than starting a large number of new industries in unrelated fields (e.g. food processing & steel), there has to be a drive to create a network of inter-related industries that can support one-another in a chain-link (e.g. machinery & electronics). I can see no reliable way for this to spring up against competing interests in other countries without a large-scale governmental drive. This inter-related business network was aptly demonstrated during the rise of (particularly) South Korea & Japan. Because the initial start-up is so fragile in a particular industry (e.g. machinery), there has to be support from other related industries with heavy government backing (e.g. alloy-production for equipment parts). Generally speaking the wider economy is supported through specializations in related fields, and BD can move up the value chain of goods production. Of course the initial incentive to move production there is cost. While basic literacy is very very important, and clearly an area that BD is unsatisfactorily meeting at this time, the emphasis should be on skills and related experience for these industries. So without this co-ordinated government support, it is incredibly difficult to see anything like that getting off the ground. Surveying the government of today, it is extremely difficult to see this happening. Hence I am very, very worried about BD’s future. Even more “interestingly”, the types of industry must be carefully chosen as our big neighbour to the west will have it’s own interests in safeguarding it’s industries. Naturally it need not always be in conflict (zero-sum game) e.g. Indian pharmaceutical companies may find it cheaper to produce certain medications/drugs/compounds in BD than at home. But it IS yet another thing to consider during the planning stage. This requires a rather nuanced approach, and I worry that BD is not developing the staff/expertise to deal with such leadership/stewardship issues. It is very important to get a move on and not be left out of the loop while SE Asia (an obvious target for trade & geographic relations) develops.

    Contrary to what others think though, it is really not in India’s interest to deliberately jeopardize the development of BD. In fact it would actually become a dangerous tinderbox that could ignite HIGHLY dangerous tensions in the sub-continent if BD is kept behind (with it’s very large, densely-packed population so vulnerable to potential climate change). But naturally, as it does with Nepal, Bhutan, Sri Lanka, and to a lesser extent, with Pakistan, India tries to achieve a certain degree of hegemony. This is, however, to be expected when such size disparity exists between neighbours. What we need are effective planning-and-control systems that take these concerns (along with all others!) into account. Such a system is certainly not present in BD today.

    What I’m saying is that these kinds of problems should come as no surprise given the situation. I would now like us to come up with a toolkit of solutions rather than complaining about them all the time. Accept the situation as it is, plan for it, change the circumstances as best you can in our favour, adapt where necessary, and DEVELOP!

  4. On the garment sector’s woes « Mukti said, on December 18, 2012 at 11:46 am

    […] addition to this cyclical problem, Bangladeshi manufacturing may be facing a structural problem.  I contend that the idea that typical garment owner is living a life of luxury while the workers […]

  5. On farm productivity « Mukti said, on January 24, 2013 at 12:46 pm

    […] by the poll results.  Is there any way to check her performance in the data?  Well, as with garments sector, one good way to check how a sector is doing is to look at its productivity.  When productivity […]


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