The real trouble facing the garments sector?
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.