Forrest Cookson, PhD
Major events trigger more major events with consequences not foreseen. The past two years have seen the world in the grip of the Covid-19 pandemic, leading to major economic distress and changes in the world economy, not yet understood or even perceived. This dramatic pandemic followed by the Russian invasion of Ukraine leads to a bitter war now being fought with uncertain outcome. The Ukraine war has: triggered a major realignment of world energy resources; resulted in, as of this writing [March 20], three million refugees from Ukraine; as well as many well-educated Russians who have fled; brought forth a tough set of sanction against Russia enforced by all of the advanced economies.
While there are a remarkable number of military experts telling us what is happening and how things will turn out, one should be very cautious in assessing what the future holds. There are manifold opportunities for additional armed violence. The issue of Taiwan joining the rest of China remains an acute trouble spot; opportunities for differences in views about the sovereignty of the South China sea are manifold; there are several points of potential dispute along the Indian-Chinese border; Kashmir is always dangerous. Many of these issues remain quiet in a peaceful world but let slip the dogs of war and these issues may explode into violence. Any of these potential points of violence would have major implications for Bangladesh.
The future of the Bangladesh garment sector is linked to these uncertainties and it’s continuing success depends on luck and sound policy by the industry and the Government. Will these be forthcoming?
The impact on demand for garments from Bangladesh depends most of all on the recovery and growth of the advanced economies [as the IMF defines this group] which form the main markets for the industry. At present the US economy is quite robust while the European economies reveal weak growth and limited confidence. In addition, inflation is rising throughout the world economy and how long it will continue and how high it might go are unknown.
To drive the Bangladesh economy the real growth of garment exports should be faster than the rate of economic growth. As there is no good index of the prices of garment exports it is not easy to divide the dollar value of exports into the price effect and the volume effect. It is the volume that should be increasing rapidly to ensure that there is a strong impetus to growth. Prior to the pandemic the real growth was probably about 7-8%. It is not clear if it has accelerated from that period as the adjustment post-pandemic is still taking place. However, with the uncertainty of the performance of the advanced economies one should expect only moderate growth over the next three years unless there are appropriate policy actions taken by the Bangladesh authorities.
The competitiveness of the industry will not change over the next three years unless the Taka is depreciated by 10%. Otherwise even if exports are strong the value added will be weak and the growth impetus reduced. Many economists have made this argument, but I want to make it very strongly—there is no way to increase the volume and diversity of exports when the returns to investment are very low. Only a weaker Taka can achieve the needed increase.
Will the Government depreciate the Taka or allow the market to float freely? It appears unlikely the Taka will be allowed to follow market pressures instead the Government will allow the reserves to decline.
Perhaps the donors will increase their capital flows allowing the Government to avoid depreciation. One cannot imagine a more anti-growth action than the donors increasing aid flows enabling the failure of the export industries while the Taka is artificially kept strong.
The RMG industry faces rising costs: Energy costs incurred by production and transportation costs are rising. The wage structure for garment workers should come to the fore as a public policy issue in the near future. The cost of imports of yarn, cloth and accessories is rising. The competitive nature of the industry will make price increases by buyers limited.
There is considerable discussion in the manufacturing industries of moving the supply chains closer to the points of final consumption. The movement towards globalization of the past forty years has focused on trading by the most efficient producers without concern for the location of the factories; the issue was competitiveness. Should the buyers attach value to production locations near to final markets this is a serious threat to Bangladesh which is not well located with respect to the advanced economies. This is a concern for the next five years not so much for the immediate future.
Turning now to the supply side we ask is the capacity of the RMG sector increasing? Such an increase would come from improved procedures, new equipment, more efficient workers, or better infrastructure. At present there is a substantial increase in new equipment imported for use in the sector. However, energy supply to the industry remains unsatisfactory with poor quality electricity and continuing power outages. Gas to enable factories to generate their own electricity is in short supply. The logistics structure for the industry is slightly improving.
The industry is going through a transition where smaller factories are unable to compete and are closed or purchased by larger producers and operated more efficiently. The disadvantage of this arises from the key role of the small factories in taking on sub-contract work in periods of peak demand when large factories are fully engaged. Orders do not arrive smoothly and the sub-contracting effectively solves the problem of peak demands.
Another important supply problem is the availability of labor. All over the world the pandemic has caused the labor force to contract. “Why” this has happened remains a mystery. But unless more workers appear it will be difficult to expand production capacity. Investment in the current technologies requires more workers to operate the machinery. But more automated machinery requires more skilled workers.
The EU and the United States are both signaling dissatisfaction with the labor rights conditions in Bangladesh. The United States has repeatedly stated that GSP cannot be made available to Bangladesh, until the labor rights position can be settled. The EU’s position may be similar as Bangladesh graduates to a middle-income country. One wonders what work is going on this issue? Are BGMEA and the Ministry of Labor formulating an approach to resolution? Is serious work to understand the issues underway?
The history behind this problem is complicated and I will take this up in the next column.
There are two levels of problems before the industry:
Deep fundamental issues: Achieving competitiveness, increasing productivity [output/worker], reaching an accommodation on labor issues, expanding research and development on technologies, achieving a stable economic framework free of subsidies with uniform taxation, enhancing backward linkages, and improving the financing both working capital and long-term investment for the industry. These are all complex difficult issues. Much more research is needed on these matters. These issues are more or less independent of the war in Ukraine.
Immediate issues: Finding more workers and dealing with the need for a revised wage scheme; working with the Government on matters of electricity and gas pricing; demonstrating the necessity of allowing the Taka to depreciate to achieve a reasonable return on investment and encourage additional investment in the industry. Finally, there is a need to improve the quality and extent of information related to the RMG sector. While there is some improvement in data availability in recent months, there is a very long way to go.
