In the post-MFA era, large competitive countries like China and India were expected to take full and unrestricted advantage of their low production costs and impose fierce competition on smaller producing countries that had developed their ready-made garment (RMG) industry based on access to quotas rather than on their international competitiveness.

Many studies conducted during the last years of MFA concluded that Bangladesh would suffer massive job losses and depletion of foreign exchange earnings as a result of enhanced competition in the international market. What has been the impact on Bangladesh of the ending of MFA? What are the challenges facing the industry today? What should Bangladesh do to increase its competitiveness in order to keep its industry alive and thriving and prevent job losses? These are some of the questions this article aims to address.

The garment industry
The RMG industry occupies a very significant position in the economy of Bangladesh. It accounts for about 5% of the gross domestic product (GDP) and 25% of gross value addition in the manufacturing sector of the country. It is a major source of employment and absorbs about a third of the industrial workforce. Currently, the sector employs approximately 2.2 million workers, of whom almost 80% are females. It is also the most significant item of export, comprising 75% of total exports, and source of foreign exchange earning, with a contribution of more than three times that of foreign aid.

From a modest start in the 1970s, the ready-made garment industry grew phenomenally over the period of MFA during the last two decades and a half. The number of garment factories increased from 50 in 1983 to around 4,000 in 2004. Around 2,800 of these factories are located in and around Dhaka city, while most of the remaining are in the port city of Chittagong. About 65% of the factories produce woven garments, 20% are engaged in knitting, while the remaining 15% are involved in sweater production.

Over the years, RMG exports have increased dramatically, from a meagre $68,000 in 1978 to $4.5 billion in 2002 to $5.7 billion in 2004. More than half of the exports (57%) went to the countries of the European Union (EU) and 20% to the US. During the 1990s alone, garment exports grew at a rate of 15%.

What are the reasons for this phenomenal growth of the garment industry? First, the quota regime under MFA has substantially contributed to the development of the sector. Countries, like China, that had already utilized their quota of exports, turned to countries like Bangladesh that had not fully used theirs.

Second, the industry benefited from a number of advantages such as: (a) very low labour wages (even by regional standards); (b) increasing share of local inputs (particularly in knit fabrics); and (c) comparative advantage in mass-produced basic garments (such as knit cotton and woven cotton products).

Third, the sector has been helped by policy support provided by successive governments. This includes measures like duty drawback facilities, tax holidays, cash assistance, income tax rebate facilities, zero tariff on machinery inputs, rebate on freight and power rate, bonded warehouse facilities, provision of import under back-to-back letter of credit, loans at concessional rate, export credit guarantee scheme, etc.

Impact of MFA phase-out
Since January 2005, the market is no longer restricted by quotas. It was generally predicted that after the end of the MFA, countries that had been restricted by quotas would be able to take the full advantage of their competitive position, while those that had been less restricted by quotas might face difficulties in maintaining their current market share. In the long run, it is expected that smaller producers like Bangladesh will find it difficult to compete with integrated supply chain, service standards and economy of scale (savings on volumes) that the larger producers like China or India can offer, unless they take serious measures to improve their competitiveness.

Competition among garment exporting countries has indeed increased as the market climate has changed due to the abolition of quotas. The competitive position of China rapidly appeared to be so important that developed countries decided, soon after the official phasing-out of MFA, to use safeguard measures to continue to impose some restrictive quota on their imports from China on selected products until the end of 2008. Still, China, which is the largest exporter, has substantially increased its market share. In 2005, it increased its exports to the US market by $6 billion.

How is Bangladesh doing in the Post-MFA era?
The abolition of quotas, contrary to earlier predictions, has not as yet adversely affected the Bangladesh industry, thanks to the restrictions that still apply to China and Bangladesh's duty-free access to the EU market. Today, Bangladesh continues to be one of the leading exporters to the US and EU markets. The knitwear industry has done particularly well and there has been a shift from producing woven garment to manufacturing knitwear. The full impact of quota abolition will probably not be felt before 2008, when restrictions on China are scheduled to end. Moreover, expected growth in the global market for garments could mitigate the negative impacts on the garment industry in Bangladesh.

In the post-MFA period, Bangladesh has actually been able to increase its exports. In 2005 (January-December), it exported $6.9 billion worth of RMG products compared to $6.2 billion in 2004 (January-December), thereby registering a growth of almost 11%. This was mainly due to the knitwear industry, exports of which increased by about 27% during the same period, while that of woven garments slightly decreased. According to some estimates, 400 new factories have been registered and 65,000 new workers recruited after the ending of MFA. Even if these factories are not all effectively operational, this growth in investment and employment is real.

In 2004, Bangladesh was the tenth largest garment supplier to the US and its share of the market was 2.8% compared to China's 16% (the largest supplier) and India's 3.4% (seventh largest supplier). In 2005, Bangladesh increased its exports to the US market by around 21% both in terms of volume and value. As a result of increased exports, Bangladesh was able to raise its share of the US market by almost 14% in terms of volume and 12% in terms of value in 2005. The performance of Bangladesh compares quite favourably with other Asian countries (apart from China and India).

Post-2008 scenario
What will happen after restrictions on China are lifted at the end of 2008? For one thing, the market share of China will in all probability increase drastically (and for some products this has already happened). China's position as the major producer is likely to become even more important. However, this does not mean that there is no room for smaller exporters like Bangladesh. What it certainly means is that Bangladesh will have to improve its competitiveness to remain on the map of buyers, since it is also expected that buyers will consolidate sourcing and concentrate on fewer countries than during the quota period. They may buy more from fewer countries and deal primarily with larger factories in those countries.

In terms of labour costs, Bangladesh is well positioned and compares favourably with other Asian countries. The per hour cost of labour in Bangladesh is $0.25, compared to $0.27 in Indonesia, $0.34 in Pakistan, $0.46 in Sri Lanka, $0.48 in China, and $0.57 in India. However, wages are currently being revised to bring them more in line with the escalating cost of living and expectations of workers, as a result of which labour costs will increase. But there is much more to productivity than the cost of labour.

Bangladesh is less well positioned when it comes to the average unit price of selected apparel products. In the post-MFA period, the unit price of Bangladeshi garments improved by only 0.24% while other countries like Sri Lanka and India have recorded more impressive increases of 15% and 26% respectively. This may be an indication of the difficulties faced by Bangladesh's producers to position on high-end garment products.

What are the challenges facing the Bangladesh garment industry today? In order to thrive, the industry will need to ensure regular orders from international buyers. These buyers are primarily interested in three factors: price, lead time, and quality. But other factors are also important, such as financial capacity of manufacturers, labour compliance standards, customer base, vertical setup, design and product development capability, advanced production facilities, dependability, and long-term business relationship.

In order to survive and flourish in the increasingly competitive global garment trade, reforms need to be undertaken and forces need to be joined among the main actors to build a competitive RMG sector in Bangladesh. It is crucial for the different actors of the sector to hold dialogues amongst themselves with the purpose of identifying the main issues that constrain the industry and reaching agreement on activities that need to be carried out in order to improve the sector's competitiveness.

While no Asian countries, including Bangladesh, to date have experienced the mass exodus of jobs that was previously feared as a result of MFA phase-out, some countries have noted early signs of weakness in their export volume. All stakeholders in the region recognize the need to develop competitive domestic economic environments that will encourage investment and preserve employment in the post-quota era.

Bringing the main actors of the sector to discuss the major issues faced by the sector and agree on necessary measures to be undertaken. The Asia Foundation launched, at the end of last year, a regional project on Building Competitiveness through Economic Reforms in Garment-Exporting Countries, in Bangladesh, Cambodia and Sri Lanka, with financial support from the United States Agency for International Development (USAID).

The aim of the project is to facilitate tripartite dialogues among representatives of employers and employees of the RMG industry and public authorities to foster a constructive dialogue on country-specific agendas for domestic reforms that will enhance the ability of exporting countries to compete with other nations in maintaining a share of the global garment trade.

The contents are the responsibility of the tripartite meetings and do not necessarily reflect the views of USAID or the United States Government.