Garment Industry

Garment industry in South Asia Rags or riches? Competitiveness, productivity and job quality in the post-MFA environment

Edited by

Gopal Joshi

South Asia Multidisciplinary Advisory Team (SAAT) International Labour Organization New Delhi

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First Published 2002 ISBN: 92-2-111910-6

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Foreword Garments exports from five South Asian countries (Bangladesh, India, Nepal, Pakistan and Sri Lanka) have generated sizeable employment in the recent years. However, these countries are faced with the prospects of declining employment as the quota arrangement under the MFA (Multi-Fibre Agreement) comes to an end by the year 2005. The smaller countries, which do not have a diversified export portfolio, are expected to be particularly adversely affected in terms of potential loss of employment and income resulting from abolition of the quota system and increased competition from other low-cost countries. The ILO is naturally concerned with the potential loss of employment and deterioration of job quality in the developing countries in South Asia. Nepal has already experienced a downturn in its employment in the garment industry from the peak of approximately 100,000 workers to approximately 30,000 workers due to various reasons, including increased competition. Bangladesh, which is considered to be performing relatively well in garment exports among the South Asian countries and which employs 1.5 million workers (90 percent female), is expected to be affected due to its large dependence on the US and EU markets for its garment exports and also due to its general disadvantage in productivity. As the competitive pressures from low-cost, high productivity countries increase, not only employment but also job quality may get adversely affected; and the burden of such adverse consequences may fall disproportionately on female workers. Therefore, it is essential to determine how such likely adverse consequences of abolition of quota could be minimized. In this context, each country needs to assess its strengths and weaknesses and formulate a strategy to prepare the industry for the liberalized and globalized environment. In order to assist in this process, the ILO organized a sub-regional meeting from 25-26 September 2001 in Kathmandu with the participation of the representatives from the Ministries of Industry, Labour, and Textiles; workers’ and employers’ organizations; and garment manufacturers’ associations. By organizing the sub-regional workshop, the ILO has sought to facilitate formulation of strategies among the participating countries before the quota arrangement under the MFA is abolished. This publication, a compendium of the country papers presented during the sub-regional workshop and the proceedings of the meeting, was prepared and edited by Mr. Gopal Joshi, Senior Enterprise Specialist, ILO New Delhi. I would also like to take this opportunity to acknowledge the contribution of various resource persons in preparing the country papers and the rich inputs provided during the discussions by the representatives of the governments, employers’ and workers’ organizations and the garment industry.

Herman van der Laan

April 2002

Director, South Asia Multidisciplinary Advisory Team ILO New Delhi

Contents Page 1.

Overview of competitiveness, productivity, and job quality in South Asian garment industry – Gopal Joshi 1. 2. 3. 4.

Introduction Illusory competitiveness Productivity and job quality Common strategy

1 1 4 9 11

2.

Garment industry in Bangladesh – Nasreen Khundker 1. Introduction 2. Static vs. dynamic competitive advantages 3. Major issues and prospects in the garment industry 4. Strategies for improving competitiveness, productivity, and job quality 5. Summary

13 13 19 23 27 30

3.

Garment industry in India – M. Vijayabaskar 1. Introduction 2. Characteristics of Indian garment sector 3. Features of world garment industry 4. Competitiveness of Indian garment exports 5. Labour and Indian garment exports: A case study of Tiruppur knitwear industry 6. Possible impact of removal of quota restrictions

39 39 42 48 57 62 69

4.

Garment industry in Nepal – Dinesh Pant and Devendra Pradhan

83

1. 2. 3. 4. 5.

6.

Introduction Globalization context of garment industry in Nepal Employment and quality of jobs in garment industry in Nepal Strategies for improving competitiveness, productivity and job quality in garment industry

83 90 102 115

Garment industry in Pakistan – Asir Manjur

137

1. 2. 3. 4. 5. 6. 7.

137 138 141 148 151 159

Introduction Global market Apparel exports Unit price realization Apparel industry structure Quotas in textile trade Issues, concerns and suggested strategy thrust for apparel sector development in Pakistan

Garment industry in Sri Lanka – Saman Kelegama and Roshen Epaarachchi 1. Introduction 2. Major issues facing the industry 3. How competitive is the Sri Lankan garment industry?

167 187 187 193 196

Page 4. Contributing factors to low productivity 5. Impact of globalization on garment industry 6. Key strategies for improved productivity and competitiveness in Sri Lanka’s garment industry 7.

Sub-regional meeting on competitiveness, productivity and job quality in the garment industry in South Asia, Kathmandu, 25-26 September 2001 1. 2. 3. 4. 5. 6.

Proceedings and conclusions Inauguration Technical sessions Country presentations Panel discussions Conclusions Closing

199 210 215

233 233 233 234 234 237 239 242

List of tables Page 1.1 1.2 1.3 1.4 1.5 1.6 1.7 2.1 2.2 2.3 2.4 2.5 2.6 2.7

Employment in the garment industry in South Asia Quota exports of garments from South Asia Labour costs in selected countries (in US $/hour) Growth of intraregional garments trade, 1990-98 Share in world garment exports, 1998 Unit price realization of selected garment exports (in US $/piece) Productivity and wages Growth rate of RMG exports Sectoral composition of female employment in Bangladesh, 1995-96 Participation indicators of female employment in Bangladesh, 1995-96 Inter-country comparative average hourly wage in the RMG industry Gender discrepancy of participation and wage rates in export-oriented RMG Cost structure and profit margin of RMG units Trend in nominal and real wage in garments by skill category

1 3 4 5 6 8 9 16 17 18 20 22 28 30

3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 4.1 4.2 4.3 4.4 4.5 4.6 4.7

Growth rate of exports of Indian apparel, 1980-2000 Machines installed by apparel export firms (nos.) Employment within the textile and apparel industry in India Sex-wise distribution of workforce in the organized Indian garment sector (1997/98) World’s leading exporters of apparel, 1980-95 Cost structure of the apparel industry Labour costs in apparel industry across regions (in US $/hour) US imports from selected countries by MFA categories, 1996 (unit values) Rank correlation coefficients of the RCA indices for pairs of countries (garments) No. of workers employed in the knitwear industry in Tiruppur Worker characteristics in finishing units, Tiruppur Break-up of cost of production Cost composition and profit margin Import of raw materials and accessories for garment industries Garment export as percentage of GDP Share of South Asian countries in total garment import of U.S.A US imports from SAARC region in 1999 Comparative cost structure and profit margin (in US dollar) Manufacturing labour productivity indices of selected Asian countries

44 46 47 48 49 51 52 58 61 63 64 66 88 93 94 94 95 96 96

5.1 5.2 5.3 5.4 5.5

Comparative Comparative Comparative Comparative Comparative

unit unit unit unit unit

price price price price price

realization realization realization realization realization

of of of of of

men’s wovenwear exports men’s knitwear exports women’s wovenwear exports women’s knitwear exports exports of T-shirts & pullovers

149 149 150 150 151

Page 5.6 5.7 5.8 5.9 5.10 5.11 5.12

Number of stitching machines installed Extent of losses in the knitwear industry Competitiveness of apparel manufacturing in Pakistan Average monthly salaries based on skill levels in the apparel industry Apparel industry average hourly wages Pakistan’s quota utilizations in the USA Quota utilization in EU

153 154 155 156 156 161 162

6.1 6.2

Distribution of factories by size Geographical distribution of garment establishments and numbers of employees, 1999 Garment industry gender composition in labour force by occupational categories, 1998 Quota and non quota exports Percentage share of quota and non quota garment exports Growth in garment industry Hourly labour costs including social & fringe benefits (US $), 1996 Selected characteristics of the wearing apparel sector in selected South Asian countries, (annual data), 1993/4 Garment industry labour turnover and absenteeism (percentage) Mode of training in garment industry (percentage), 1999

189

6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10

190 191 192 193 197 198 199 202 203

List of figures and exhibits Page

Figures 1.1 1.2

Rings of global sourcing Scattergram of productivity and wages of selected countries

8 10

2.1 2.2 2.3 2.4 2.5

RMG exports from Bangladesh BGMEA membership Male and female workers in Bangladesh RMG industry (1990’s) Productivity and wages in Bangladesh RMG industry Productivity and wages in selected countries

14 15 19 20 21

4.1 4.2 4.3 4.4 4.5 4.6

Ready-made garment exports Changes in Garment Export to U.S Market Ratios of male female employment and local foreign labour Garment export in national total exports Interactive relationships between job quality, productivity and competitiveness Cyclic linkages between productivity and competitiveness

85 86 87 89 114 119

5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 5.15 5.16 5.17 5.18 A5.1 A5.2 A5.3

Volume of world apparel imports World imports of apparel – product split Trend of world imports of apparel Global imports from Asia Apparel exports from South Asia Pakistan’s exports to world Split of Pakistan’s exports 1999 Share of knit and woven garments in Pakistan’s exports Trend in Pakistan’s apparel export Pakistan’s exports to EU Split of exports to EU Pakistan’s exports to USA Split of exports to US Split of textile products, 1999-2000 Apparel market segments Composition of apparel trade with US Global consumption of fibres US import of men’s knit garments from Mexico US import of apparels Types of US imports Split of Asian exports to US, 1999

138 139 139 140 141 141 142 143 144 145 146 147 147 152 159 161 168 169 173 174 175

Page A5.4 A5.5 A5.6

EU imports of apparel Types of EU imports, 1999 Breakup of Asian exports to EU, 1999

176 177 177

6.1 6.2 6.3 6.4

Quantity of garment exports Value of garment exports (US $) Sri Lanka garment exports to EU, 1999 Total value of export of garments and value of imports to the garment industry, 1990-1998

187 188 191 208

Exhibits 3.1

Types of retailers and major global sourcing area

56

5.1 5.2 5.3

Buyers preference in apparel market segments Key features of textile quota policy in Pakistan – I Key features of textile quota policy in Pakistan – II

159 165 165

6.1 6.2 6.3 6.4

Dependence of competitiveness on productivity and job quality Transport and hostel facilities available for garment workers Present garment industry training institutes and programs Possible impact of globalization on garment industry

199 201 204 210

1

Overview of competitiveness, productivity, and job quality in South Asian garment industry Gopal Joshi*

1.

Introduction

During the last two decades, South Asian countries have experienced phenomenal expansion of employment opportunities and export earnings due to growth of export oriented garment industry. Exports of garments from Bangladesh has risen from about 4 percent of its total exports in 1983-84 to about 76 percent in 1999-2000 generating employment to 1.5 million workers. Ninety percent of these garment workers are female, which signifies unprecedented entry of female workers in manufacturing activities. Similar expansion in employment has been experienced albeit with varying levels of success by all five South Asian countries (Bangladesh, India, Nepal, Pakistan and Sri Lanka) as shown in Table 1.1 below. Table 1.1: Employment in the garment industry in South Asia Countries

Bangladesh India Nepal Pakistan Sri Lanka

No. of workers

1.5 million 4.3 million 40,000 700,000** 277,000

Percent female 90 34* 15 10 87

Percent of total exports 76 13 38 60 52

* Estimate based on a sample study of Tiruppur knitwear industry. ** Estimate based on formal sector garment industry and installation of machinery. Sources: Country Papers prepared by Nasreen Khundker for Bangladesh, M. Vijayabaskar for India, Dinesh Pant and Devendra Pradhan for Nepal, Asir Manjur for Pakistan, and Saman Kelegama and Roshen Epaarachchi for Sri Lanka for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garment Industry in South Asia, Kathmandu 25-26 September 2001.

Rapid expansion of the garment industry within the last two decades has certainly given a boost to job creation in the organized sector, which is otherwise less than ten percent in the South Asian countries. Such rapid job creation also has created apprehensions about the possibility of similarly rapid loss of jobs once the quota system instituted under the MFA * Senior Enterprise Specialist, ILO-SAAT, New Delhi.

12

GARMENT INDUSTRY IN SOUTH ASIA

(Multi-Fibre Agreement) is abolished at the end of the year 2004. Prevention of large-scale job losses due to liberalization and globalization is a major concern for the countries in South Asia. Furthermore, there are also concerns in some of the countries regarding the state of job quality, particularly in view of its likely deterioration as a result of the competitive pressures. Therefore, the issues concerning employment in the garment industry are: Ø Ø Ø

How sustainable are the jobs in the garment industry? How important is productivity in enhancing competitiveness of the industry? How does job quality in the garment industry affect its productivity and competitiveness?

The issue of sustainability of the jobs in the garment industry, which carry even greater significance considering the impending removal of quota system at the expiry of MFA (Multi Fibre Agreement) at the end of the year 2004, can be addressed only by examining the position and nature of the South Asian garment exports in the world trade, which is also greatly influenced by bilateral and multilateral arrangements. 1.1 Dependence on quota Among several reasons, there are primarily two situations that have caused rapid expansion of garment industry in last two decades in the South Asia; such as, Bangladesh, Nepal and Sri Lanka, which have no resource endowment or historical tradition of garment exports. These two situations are: ü

ü

Relocation of manufacturing platforms in South Asia from other Asian countries including larger neighbours within the region largely due to availability of quotas for export to the US and EU markets. Low wages and ease of entry and exit in these countries for operating garment manufacturing.

South Asian countries are preponderantly dependent on quota based exports, more so in regards to the smaller countries with no resource endowments (Table 1.2). The quota system was fashioned by industrialized countries under the MFA (Multi-Fibre Agreement) in 1974 as a temporary arrangement to protect their domestic garment industries from the onslaught of cheap imports from low wage countries. As a result of the quota restrictions, the Asian countries, which had used up their quota, initially established manufacturing platforms in other Asian countries, which were not in a position to fully utilize the available quota. Quota arrangements under MFA are due to terminate in a phased manner by the end of the year 2004. While it supposedly frees up the market for exporting countries to export garments without quota restrictions, there is a great deal of apprehension that the jobs and incomes of a very large number of people in the

OVERVIEW

13

garment industry would be in jeopardy when the exporting countries, particularly with resource endowment, textile and clothing tradition and efficient manufacturing base, jostle for market share. Not only the number of jobs may come under threat but also the quality of jobs may suffer as price competitiveness places pressure on wage costs. Table 1.2: Quota exports of garments from South Asia In percent Countries Bangladesh India Nepal Pakistan Sri Lanka

Quota-based exports 95 73 80 90 62

Sources: Implications of the phase out of MFA on exports of garments & textiles and the structural adjustments required, a study by KSA Technopak, India for Ministry of Textiles and FICCI and Country Papers prepared by Nasreen Khundker for Bangladesh, M. Vijayabaskar for India, Dinesh Pant and Devendra Pradhan for Nepal, Asir Manjur for Pakistan, and Saman Kelegama and Roshen Epaarachchi for Sri Lanka for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garment Industry in South Asia, Kathmandu 25-26 September 2001.

1.2 Job quality for productivity ILO would naturally be concerned about loss of jobs and deterioration of job quality as globalization affects garment industry as well, which provided some respite by generating jobs for the rapidly swelling ranks of job seekers in the labour markets of South Asia. ILO has articulated the need for promoting Decent Work for the working women and men, whereby they have opportunity for remunerative and productive jobs with workers’ rights. However, a massive job loss is detrimental to the mission of promoting Decent Work. Furthermore, competitive pressures deteriorating job quality would not only harm the cause of Decent Work but also dampen the prospects of expansion of job opportunities when the success of the industry is doubtful. Therefore, the questions faced in preventing job losses and degradation in job quality in the garment industry are: q q q q

Can there be a strategy to prevent job losses through improvement in productivity and competitiveness? Should such strategy examine the possibility of gradually reducing the dependence on quota allocations and seeking other avenues of exporting garments? How could improvement in job quality contribute to the enhancement in productivity and competitiveness? What are other measures required in improving competitiveness?

14

GARMENT INDUSTRY IN SOUTH ASIA

Although attempts need to be made to respond to the above questions, all the answers may not be available immediately. However, it is necessary that the South Asian countries accurately assess their competitive situations. The growth being experienced in the garment exports may provide illusory confidence among some exporters and the governments in their competitive capabilities.

2.

Illusory competitiveness

It is natural that the South Asian exporters and governments remain complacent in the belief that they are uniquely placed to export with the strength of low wages or that they have the various sourcing companies in the West locked into a business relationship or that they have natural resource endowment and clothing and textile tradition to weather the competitive pressures. The levels of wages in South Asia are certainly lower than in many other garments exporting countries (Table 1.3). However, such low wages may not be enough for achieving competitive edge since wages occupy only one percent in the cost structure of the apparel industry.1 Table 1.3: Labour costs in selected countries (in US $/hour) Countries

1991

1993

Bangladesh India Pakistan Sri Lanka

NA 0.25 0.24 0.39

0.16 0.27 0.27 0.35

China Indonesia Thailand

0.24 0.18 0.59

0.25 0.28 0.71

Italy UK US

13.5 7.99 6.77

NA NA NA

Sources: Moore 1997, Table 2; Ramaswamy and Gereffi 1998, 123 as quoted in M. Vijayabaskar, “Productivity, Competitiveness and Job Quality in Garment Industry in India,” a discussion paper prepared for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garment Industry in South Asia, Kathmandu 25-26 September 2001.

While it is true that the sourcing companies or retailers in the West may not wish to breach the trust developed with the suppliers and may stick with them even in times of adversity; nonetheless, the past behaviour of garment manufacturers has proved that they are ready to relocate the manufacturing plants if they perceive benefits from doing so. South

1

http://www.stanford.edu/class/e297c/trade_environment/rights/haddress.html as quoted in M. Vijayabaskar, “Productivity, Competitiveness and Job Quality in Garments Industry in India,” a discussion paper prepared for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garments Industry in South Asia, Kathmandu 25-26 September 2001.

OVERVIEW

15

Asian countries are destinations of such third relocation, after the first and second waves of relocations in East and South East Asian countries. There is evidence of such shift in sourcing taking place in other regions as well. 2.1 Growth of intraregional trade There has been a growing trend in intraregional garments trade among the countries in North America, Europe and East Asia, which has begun to impact the exports from other developing countries regardless of the price advantage of the latter. Table 1.4 provides a glimpse of such growing trend in intraregional garment trade. Such growth has been largely motivated by: ü ü ü ü

Proximity to the markets in developed countries, where the garments assembled from the material inputs from these countries can be exported. Flexibility in production processes whereby the garment importing countries are not entirely dependent on the exporting countries from design to marketing. Political considerations of having stable economies with employment in the neighbouring countries. Regional trading blocks; i.e., EU and NAFTA. Table 1.4: Growth of intraregional garments trade, 1990-98 Regions

Growth (in percent)

Intra-Western Europe Asia to W. Europe Asia to N. America Central & EEC to W. Europe Intra-Asia Mexico & Latin America to N. America

2 4 5 20 11 20

1998 Trade volume (US$ billion) 46.5 18.6 31.2 8.7 19.6 11.7

Source: WTO as quoted in Implications of the phase out of MFA on exports of garments and textiles and the structural adjustments required, a study by KSA Technopak, India for Ministry of Textiles and FICCI.

There have also been periodic changes in such intraregional trade depending on the latest agreements reached among groups of countries on the basis of various considerations. Until recently, Caribbean countries enjoyed a surge of as much as 3.3 percent growth in 1997-98 in such garment exports to the US market due to the CBERA (Caribbean Basin Economic Recovery Act) launched by USA in 1983 and subsequently amended as CBTPA (Caribbean Basin Trade Partnership Act) in 2000.2 However, once NAFTA (North American 2

“The textile and clothing industry in developing countries after the Multi-Fibre Arrangement,” an ILO discussion paper prepared for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garment Industry in South Asia, Kathmandu 25-26 September 2001.

16

GARMENT INDUSTRY IN SOUTH ASIA

Free Trade Agreement) came in force, Mexico has been able to increase its garment exports to the US by increasing its market share from 3.8 percent in 1992 to 12.6 percent in 1998. EU also has increasingly started assembly of the garments in central and east European countries due to proximity and probably for the political reasons. There have also been evidences of growth of intraregional trade within East and Southeast Asia. How far the South Asian countries become a part of such intraregional trade would determine their ability to bargain and compete in the garment industry. The complementarity of comparative advantages brought about by such intraregional trade may enhance the competitiveness of these countries. 2.2 Features of garments trade in South Asia Although the growth of garment exports among South Asian countries has been phenomenal in many respects, the share of their exports in the total world garments trade still remains quite marginal (Table 1.5). The items being exported by these countries remain quite narrow and few, while other Asian countries have far more diversified and high-value added exports. On the other hand, China’s share of garment exports has risen to over 15 percent by 1995 from 4 percent in 1980.3 It has climbed to be the top exporter from the eighth rank during the period with comparative advantage in as many as 32 categories of export items vis-à-vis such exporting countries as India and Indonesia.4 Table 1.5: Share in world garment exports, 1998 In percentage Countries Bangladesh India Nepal Pakistan Sri Lanka

US market 3.77 3.14 0.4* 1.8* 2.56

EU market 1.9 3.3 1.1

*1997 Sources: Country Papers prepared by Nasreen Khundker for Bangladesh, M. Vijayabaskar for India, Dinesh Pant and Devendra Pradhan for Nepal, Asir Manjur for Pakistan, and Saman Kelegama and Roshen Epaarachchi for Sri Lanka for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garment Industry in South Asia, Kathmandu 25-26 September 2001.

The garment exports from South Asia may be quite vulnerable to sudden shift in the policies of developed countries or swings in the market. Each of the South Asian countries has its 3

4

K.V. Ramaswamy and G. Gereffi, “India’s Apparel Sector in the Global Economy – Catching Up or Falling Behind?” in Economic and Political Weekly, 33/3: 122-130 as quoted in M. Vijayabaskar, “Productivity, Competitiveness and Job Quality in Garments Industry in India,” a discussion paper prepared for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garments Industry in South Asia, Kathmandu 25-26 September 2001. M. Vijayabaskar, “Productivity, Competitiveness and Job Quality in Garments Industry in India,” a discussion paper prepared for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garments Industry in South Asia, Kathmandu 25-26 September 2001.

OVERVIEW

17

strengths and weaknesses in garment exports. Bangladesh had had the largest annual growth rate of almost 17 percent in garment exports during the nineties.5 This may be largely due to the lowest wage rate among all the countries in the region, in addition to other factors such as technological upgradation and union free EPZ. Nepal has shed jobs in large numbers from around 100,000 to below 40,000 while maintaining a growth in garment exports. It is beset with the problems associated with a landlocked country and costs associated with it. 6 All three countries, Bangladesh, Nepal and Sri Lanka have no natural resource endowment while India and Pakistan are both amply endowed with cotton production. Yet, cotton tends to be the source of problem in both countries, whether in terms of contaminated cotton in Pakistan or over-dependence on cotton (as much as 70%)7 as the input material in India. In India’s case, large percentage of cotton component in the apparel has held back any progress that could be made in moving up to the high-value added garments with inputs of various fabrics. Furthermore, government cottage and small scale reservation policy has held back the prospects of productivity improvement. Sri Lanka is the only country, which has markedly moved up in the value chain. Pakistan, on the other hand, suffers from dependence on very narrow items of quota based exports as a result of the government policy of allocating quota only to existing exporters, thus depriving incentives to new entrepreneurs. 2.3 Export of commodities There are several layers of global hierarchy in sourcing indicating the extent of the value garments are able to command on the basis of value addition and branding (Figure 1.1). South Asian countries fall in the outer periphery beyond ring 3, where the garments are sold through mass merchandisers and discount chains. South Asian countries are carrying out more of a role of commodities exporters responsible for assembling low-cost discount clothing without much role as independent exporters of branded merchandise or even as commercial subcontractors or component suppliers. As a result of the above weaknesses described in Section 2.2 above, the exporters from South Asia are largely confined in buyer driven commodity chains (BCC) rather than producer driven commodity chains (PCC). As a result of the above confinement of exports at mass merchandising and discount chain outlets on a commodity basis, the region generally receives much less value in

5

6

7

Export Promotion Bureau, Government of Bangladesh as quoted in Nasreen Khundker, “Productivity, Competitiveness and Job Quality in Garments Industry in Bangladesh,” a discussion paper prepared for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garments Industry in South Asia, Kathmandu 25-26 September 2001. Dinesh Pant and Devendra Pradhan, “Productivity, Competitiveness and Job Quality in Garments Industry in Nepal,” a discussion paper prepared for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garments Industry in South Asia, Kathmandu 25-26 September 2001. Handbook of Export Statistics, AEPC as quoted in M. Vijayabaskar, “Productivity, Competitiveness and Job Quality in Garments Industry in India,” a discussion paper prepared for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garments Industry in South Asia, Kathmandu 25-26 September 2001.

18

GARMENT INDUSTRY IN SOUTH ASIA

Figure 1.1: Rings of global sourcing Ring 1: Designers’ products Ring 2: Top quality, high priced brands and labels Ring 3: Specialty stores with brand name Ring 4: Mass merchandising Ring 5: Discount chains and small retailers

Source: G. Gereffi, “Capitalism, Development and global Commodity Chains,” in L. Sklair (ed.) as quoted in M. Vijayabaskar, “Productivity, Competitiveness and Job Quality in Garment Industry in India,” a discussion paper prepared for the Subregional Meeting on Productivity, Competitiveness and Job Quality in Garment Industry in South Asia, Kathmandu 2526 September 2001.

terms of unit price of the garments exported (Table 1.6). Excepting for Sri Lanka, very few garment export items from South Asia fetch high value. Low wage rates have probably gone into manufacturing low priced products. Bangladesh has the lowest wage rate, and it has none of the export items securing high value. In many instances, low wages are also accompanied by low quality and low productivity, as it would be seen later (Figure 1.2 in Section 3). Table 1.6: Unit price realization of selected garment exports (in US $/piece) SITC

Product description

Bangladesh

India

Men’s woven wear 8414 Trousers 84151 Cotton shirts 84159 Shirts (other material)

4.21 4.82 4.17

3.91 5.59 6.16

Men’s knit wear 84324 Trousers 84371 Cotton shirts 84379 Shirts (other material)

3.17 2.97 3.45

Women’s 8425 8426 8427

woven wear Trousers, breeches Blouses, shirt-blouse Skirts

Women’s knit wear 8425 Skirts 8426 Trousers, breeches

Pakistan

Sri Lanka

China

Thailand

3.67 3.74 2.89

6.44 6.15 5.72

5.74 4.02 5.28

6.35 7.51 4.85

2.80 4.53 4.62

3.21 4.06 3.81

3.90 7.44 6.08

2.04 5.49 8.14

3.29 7.48 3.34

3.47 4.55 3.28

4.77 4.22 3.94

4.04 3.67 3.14

5.39 5.87 5.69

7.53 5.85 6.77

6.05 7.13 7.04

0.00 2.59

2.92 3.74

5.68 2.90

4.85 4.82

3.13 6.78

4.41 4.54

Source: “Globalization and the Apparel Industry of Pakistan,” a discussion paper prepared by Asir Manjur for SMEDA (Small and Medium enterprise Development Authority) for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garment Industry in South Asia, Kathmandu 25-26 September 2001.

OVERVIEW

3.

19

Productivity and job quality

The rising competitive pressures in the post-MFA environment may force South Asian countries to examine their strategies in dealing with the competition. They may choose to take the ‘Low Road’ of price competitiveness based on low wages and low quality or the ‘High Road’ of quality based competitiveness with emphasis on quality, branding and higher value. Thus, the strategy of ‘Low Road’ of price competitiveness through reduction in labour costs may take them on a downward spiral of further reducing not only wages and prices but also towards deterioration of overall job quality for the workers. As it is, there are numerous instances of the workers in the garment industry, particularly female workers, having endured harsh working conditions and environment and exposure to workplace hazards. Long working hours, cramped working and living conditions away from home, absence of basic facilities (such as, adequate toilet facilities, meal breaks and crèche for childcare), and lack of workers’ rights have been often noted. These conditions can be expected to further worsen, as price competitiveness becomes primary concern of the manufacturer. However, low wages and lower levels of benefit do not necessarily make a manufacturer more competitive in the long run. With low wages and adverse working environment, not only productivity is expected to suffer but also retention of skilled workers becomes harder. Table 1.7 below illustrates the levels of productivity and wages among selected countries. It is essential to examine whether a different strategy of ‘high road’ should be taken whereby the efforts are made to improve productivity and value addition and thus enhance competitiveness. Such strategy would lead to securing of high value in the export items thus leading to higher spiral of larger incomes and investments. Table 1.7: Productivity and wages in US$ Countries

Wages

Productivity

Share of wages (%)

Bangladesh (1992) India (1994) Nepal Pakistan (1991) Sri Lanka (1993)

340.9 627.5 — 1,553.5 653.1

890.1 3,146.1 — 3,236.1 1876.1

38.3 19.9 — 48.0 34.8

Sources: S. Islam, The textile and clothing industry of Bangladesh in a changing world economy (Dhaka, University Press Ltd.), 2001 as quoted in Nasreen Khundker, “Productivity, Competitiveness and Job Quality in Garment Industry in Bangladesh,” a discussion paper prepared for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garment Industry in South Asia, Kathmandu 25-26 September 2001.

Although South Asian countries can claim to have some of the lowest wage rates, such advantage is negated by low levels of productivity. When the wages and productivity of a few selected countries are plotted in a scattergram (Figure 1.2), it is obvious that the advanced countries, such as Italy, U.S. and Japan, have high levels of productivity to match their high

20

GARMENT INDUSTRY IN SOUTH ASIA

levels of wages. On the other hand, most low wage countries are clustered around the left bottom of the graph. Figure 1.2: Scattergram of productivity and wages of selected countries 45000

w

40000 35000

w

w

Productivity

30000 25000

w

20000

w

15000

w

10000 5000 0

www w 0

w w w

w

5000

w 10000

15000

20000

25000

30000

Wages

Sources: Adapted from S. Islam, The textile and clothing industry of Bangladesh in a changing world economy (Dhaka, University Press Ltd.), 2001 as quoted in Nasreen Khundker, “Productivity, Competitiveness and Job Quality in Garment Industry in Bangladesh,” a discussion paper prepared for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garment Industry in South Asia, Kathmandu 25-26 September 2001.

If a garment manufacturer decides to adopt the strategy of improving productivity through high value addition and high quality, it can be pursued through a combination of various measures: Ø Investments in new technology and equipment Ø Upgradation of skills among the workers Ø Improvement in production organization and processes Ø Carrying out productivity campaigns and emphasis on quality improvement Ø Improvement in Job Quality Investments in new technology and upgradation of skills could certainly contribute to improvement in productivity and competitiveness, as in the cases of Bangladesh and Sri Lanka. However, improvement in working environment, workers’ concerns (for instance, crèche for the children of working mothers), benefits and incentives, safety and security and other working conditions would provide motivation for the workers to utilize such skills and technology for enhancement in productivity. Improvement in production organization and process emphasizing on productivity campaigns and product quality can certainly orient the workers towards the need for higher levels of productivity. Improvement in production organization and process is not, however, complete without improvement in working environment. For instance, if a manufacturer strives for hygienic and dust-free environment

OVERVIEW

21

through installation of sanitary and air-conditioning facilities, not only the product quality is improved through cleaner handling of the garments but also the working environment for the workers is improved. Similarly, reduction in excessive working hours, correct work posture, and less hazardous working environment, all contribute to better productivity. ‘High Road’ of high value addition, quality product requires the garments manufacturers placing less reliance on exports of low-priced discount merchandise and increasing the share of branded merchandise being produced through the use of latest technology and upgradation of the worker skills. Such strategy requires examining the human resource development policies of the manufacturers in treating the workers in two different groups - skilled master craftsmen and semi-skilled assembly workers. In most instances, female workers presently predominate in the latter group. Skill development among the workers in the semi-skilled category would determine the ability of the enterprises to enhancing the quality and value of the product.

4.

Common strategy

While there are numerous initiatives that can be undertaken by the individual countries and enterprises in improving the competitiveness, the countries in South Asia would need to evolve a common strategy to deal with the onslaught of increased competition in the post-MFA environment. There may be several areas requiring common strategy from building complementarity among the countries to avoiding non-tariff barriers against the garments exports. As stated earlier, there is a growing trend of intraregional trade in Europe and North America for benefiting from proximity and flexibility of the production platforms within the regions. South Asian countries could benefit from developing linkages to the intraregional trade, particularly in Asia. Their complementarity among themselves as well as with other countries in Asia could enhance competitiveness. However, it would be essential that productivity, quality and value added in manufacturing of the garments would need to be in tandem with such growth in complementary relationship. Then only, the South Asian countries could become a part of the regional designing, branding and marketing. Such enhancement in productivity, quality and value added requires improvement in job quality and skills upgradation. Whether the countries in South Asia remain in the low skill, poor job quality and low price bracket or whether they would move up to high skill, better job quality and high value bracket would have to be determined by themselves individually. But a common strategy among these countries would need to be evolved through mutual discussions and agreements in order to be a part of the regional complementarity in the garment trade. Hence, a common strategy for the region may be in: ü

Enhancing competitiveness of the sub-region as a whole through complementarity and integration within the sub-region as well as with East and South East Asian

22

GARMENT INDUSTRY IN SOUTH ASIA

ü

ü

ü

countries. Global scale capacities as being developed elsewhere through information flow and knowledge management on garments manufacturing and export could also benefit South Asian garment industries. Avoiding non-tariff barriers against garment imports in developed countries by exchanging information on the compliance to these barriers relating to labour standards, environment, human rights and democracy. Voluntary compliance to labour standards, particularly in the areas of freedom of association, child labour, workers’ rights and health and safety, could be promoted through exchange of best practices. For poverty alleviation through job creation, making a common case on the basis of the least developed status for access to the European and North American markets beyond the year 2004. Lastly and most importantly, promoting local market within the sub-region for the garments since the existence of such local market is an important cushion against the market fluctuations as well as for promoting the scale of operation required for innovation and value addition.

23

2

Garment industry in Bangladesh* Nasreen Khundker

1.

Introduction

Bangladesh’s industrial base, which has remained stagnant over the past two decades, is very narrow, contributing to about 11.5 percent of the GDP (BBS, 2001). Within this narrow industrial sector, however, the ready-made garments (RMG) industry has flourished as its most dynamic sector. Since its modest beginning in the early 1980s, the industry has contributed to the economy appreciably in terms of employment, output, and foreign exchange earnings. Moreover, employing as it does more than 1 million young women, the industry has brought about a noticeable change in society as well as in intra-household gender relations. Apparently the two most important factors behind the success of the RMG industry in Bangladesh are: l the availability of cheap labour; and l the GATT/WTO-controlled international textile and apparel trading system through the operation of the Multi Fibre Arrangement (MFA). The phasing out of the MFA by the end of 2004, together with ever-increasing globalization, will exert intense competitive pressure on Bangladesh’s RMG industry. As the future of the manufacturing sector and the overall economy crucially depends on the performance of this industry, a matter of serious concern is how far, and in what manner, the RMG industry will face up to the challenge of the post-MFA trading scenario. In this connection, there is growing apprehension as to whether the industry, in order to remain competitive, will see both a reduction in the already very low wage levels and a further deterioration of the already very poor working conditions. This study aims to: l analyse the current status and future prospects of the RMG industry in Bangladesh in terms of its growth, employment, and exports; l assess the likely impact of globalisation and liberalization (with special reference to the phasing out of the MFA) on the RMG industry; and l investigate whether the reduction in wage rates and worsening of working conditions in the RMG industry figure as strategies to continue to be competitive in the world apparel market. * The paper was prepared under the UNDP Dhaka funded Globalization SPPD and is being published by the ILO as a part of the Globalization Report titled, Bangladesh: Economic and Social Challenges of Globalization, University Press Ltd., Dhaka (2002).

24

GARMENT INDUSTRY IN SOUTH ASIA

The paper examines the static versus the potential dynamic competitive advantages of Bangladesh’s RMG sector, and the inter-linkages between job quality, productivity, and competitiveness in this industry. 1.1 Contribution of RMG to the economy Globalization, especially the intensification of trade liberalization in the 1990s, has had a significant impact on the Bangladesh economy, opening up opportunities in the export sector and subjecting the import-competing sectors to greater international competition. Overall, exports in the 1990s have increased by a factor of four, with imports also rising. The ratio of exports to GDP rose from around 5.5 percent in the early 1980s to around 13 percent in 1997. GDP increased to nearly 5 percent on average over this period, leading to a modest rise in per capita income. Unfortunately, the growth in income has also been accompanied by a rise in income inequalities, the national Gini coefficient rising from around 0.36 in 1983/84 to around 0.43 in 1995/96. Absolute poverty, at around 47.5 percent of the population, has registered hardly any decline from 1988/89 to 1995/96, although the percentage of the hardcore poor (those unable to meet 1,805 k. cal per person per day) has declined a few percentage points, and still accounts for 25 percent of the population.1 Within the export sector, there has been a shift away from more traditional exports such as tea and jute, to items such as RMG, fish and seafood, and leather. The change in revealed comparative advantage (ratio of net trade flows to total trade) between 1990 and 1995 is shown in Table A2.1 in Annex, while the heavy concentration of exports of RMG in total exports (around 76 percent in 1999/00) is shown in Figure 2.1 (Table A2.2 in Annex). Figure 2.1: RMG exports from Bangladesh 8000

w

US$ (in millions)

7000 6000

n n

5000

n

w

n

4000 n

3000 n

2000 1000 0

n

w

8384

n

w

8485

n

w

8586

n

w

8687

n

n

w

w

w

8788

8889

8990

n

w 9091

w w

w 9192

n

n

n

9293

9394

w

9495

n

w

9596

w

9697

w

9798

9899

9900

Years

w

RMG Exports

n

Total Exports

Source: Export Promotion Bureau, Dhaka, September 1999 and Bangladesh Garment Manufacturers and Exporters Association 1

BBS, 2001.

BANGLADESH

25

The current manufacturing growth experienced by Bangladesh is thus by and large driven by the growth of the RMG industry. In 1992, knit and woven RMG accounted for 7 percent of units, 11 percent of fixed assets, 21 percent of annual investment, 30 percent of the employment and wage bill, and 23.5 percent of gross value added and returns on capital attributable to Bangladesh’s private manufacturing sector.2 A study of the country’s manufacturing sector’s performance in the 1980s found that the top 11 sub-sectors were, in terms of growth in value-added, RMG, fertiliser, tea processing and blending, compressed liquefied gas, bidis, leather shoes, printing and publishing, bakery, fish and sea food, silk and synthetic textiles, dyeing and bleaching textiles, soft drinks, hand and edge tools, china and ceramic wares, and tanning and finishing.3 According to a more recent study, RMG and pharmaceuticals are the two sub-sectors which demonstrated the most robust growth in output between 1988/89 and 1995/96, and thus commanded the most significant weight in the manufacturing structure.4 1.2 Growth of RMG units Since its beginning more than two decades ago, the RMG industry has shown phenomenal growth, despite Bangladesh’s generally sluggish industrial base, turning the country from a traditionally jute-centred export economy to one primarily based on RMG exports. Between 1983 and 1984/85 the number of garment manufacturing units increased from only 47 to 487. In the 1990s, Bangladesh Garments Manufacturers and Exporters Association (BGMEA) membership experienced an annual average growth rate of 18 percentage points (see Figure 2.2 below, Table A2.3 in Annex).5 Figure 2.2: BGMEA membership 3500

No. of Members

3000 2500 n

2000

n

n

n n

1500 1000

n

n

n n

500 0 90-91

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

Years

Source: Export Promotion Bureau, GOB. 2 3 4 5

Bhattacharya, 1996. Bakht, 1997. Bakht, op.cit. According to the BGMEA, the growth of the RMG industry can be sustained during the post-MFA years, given appropriate adjustments.

26

GARMENT INDUSTRY IN SOUTH ASIA

1.3 RMG exports The dynamic performance of the RMG industry has transformed Bangladesh from a jute exporting country into what is primarily a garment exporting economy. From about 4 percent of Bangladesh’s total export earnings in 1983-84, within a time span of 15 years, the RMG industry currently accounts for about 76 percent of the country’s total export earnings, making Bangladesh one of the 12 largest apparel exporters in the world. More than 95 percent of the output of the RMG units and about 90 percent of that of the knitwear units cater to the foreign market. The success of Bangladesh’s RMG exports is in part attributable to availability of cheap labour; preferential treatment received from the European Union (EU) under the GSP scheme; and substantial quotas available in the USA (as against quota restrictions imposed on its principal competitors, e.g. China, India, Pakistan, Sri Lanka, and Thailand). In the late 1970s and early 1980s, intermediate buyers began to shift sources of RMG products from neighbouring countries, due to the imposition of quotas, to countries like Bangladesh. Abundant cheap labour in Bangladesh ensured competitive prices, and thus acted as a primary incentive, while political turmoil in neighbouring countries (e.g. Sri Lanka) further induced this transfer process. By relaxing the need for working capital and allowing duty-free access to inputs for the RMG sector, conducive domestic economic policies such as the granting by the Bangladesh Bank of back-to-back letters of credit (L/C) and bonded warehouse facilities further accelerated the process of establishing new RMG units. Superimposed on this process has been the impact of the North American quota system and the European Union’s preferential treatment under various schemes, e.g. the General System of Preferences (GSP). While in the USA and Canada, quotas imposed on apparel imports mean guaranteed access for developing countries like Bangladesh, the GSP provided by the EU lends crucial support in maintaining competitive prices, and thus a competitive edge for Bangladesh’s RMG exports. Consequently, RMG exports have boomed (see Table 2.1 below). Over the last decade (1987-1997) the compound growth rate of RMG exports was more than 25 percent. Between 1992 and 1997, the annual compound growth rate of RMG exports experienced a robust growth of 19.4 percentage points, four times higher than GDP growth rates registered over the same period. Table 2.1: Growth rate of RMG exports

Exports Woven-RMG Knit-RMG Total RMG

Last 10 years (FY 1987-FY 1997) 21.6% 25.4%

Source: Bhattacharya and Rahman, 1999

In the 1990s (FY 1990-FY 1997)

Last 5 years (FY 1992-FY 1997)

19.5% 75.5% 24.4%

14.7% 45.0% 19.4%

BANGLADESH

27

Once the quota system comes to an end and trade is liberalized, however, Bangladesh is likely to face intensive competitive pressures. The most trend as shown in Figure 2.1 above do show a slowing down of the growth rate of RMG exports. 1.4 Female employment in the manufacturing sector Although female economic activity rates have been increasing compared to those of their male counterparts, they have remained at a very low level, reflecting the usual trend among labour markets in developing countries. The female share in Bangladesh’s total labour force is about 38 percent (around 19 million), of which only a little more than 7 percent is involved in manufacturing activities, as shown in Table 2.2.6 Table 2.2: Sectoral composition of female employment in Bangladesh, 1995-96 Female employees Women’s share in Women’s share in Women’s share in

as a % of total employment non-agricultural labour force as a % of total female employment manufacturing as a % of total female employment services/commerce as a % of total female employment

Women’s share in agriculture as a % of total female employment

38.10 22.60 7.04 14.90 77.40

Source: Labour Force Survey 1995-96, Bangladesh Bureau of Statistics

Due to extensive involvement in household and agricultural activities, the female labour force participation rate (FLFPR) is lower in urban areas (26.1 percent) than in rural areas (40.6 percent). With regard to the age cohort in urban areas, female labour force participation (FLFP) is found to be highest in the 15 to 24 year age group (36.4 percent) compared to the overall urban average of 26.1 percent, implying that the rate of female labour absorption in the manufacturing sector is markedly higher among younger women (see Table 2.3). Tables 2.2 and 2.3 present the most recent picture of women’s employment in Bangladesh. Unfortunately, the various labour force surveys have frequently redefined categories, making it difficult to present trends in women’s employment. Nonetheless, survey data suggest that FLFPRs in the overall national economy in general, and non-agricultural and manufacturing activities in particular, have experienced some improvements. The improvement in urban areas is attributable to the growth of labour-intensive exportoriented manufacturing enterprises, especially in the RMG industry. In the rural areas, meanwhile, increasing female participation in economic activities is attributable to the expansion of non-governmental organization (NGO), micro-credit schemes and other forms of organizational support. One short-term impact of recent industrialization is thus the incremental absorption of female labour in export-oriented manufacturing enterprises. Both wage and non-wage factors— low opportunity cost of female labour on the one hand, and docility and amenability to 6

LFS, 1995-96.

28

GARMENT INDUSTRY IN SOUTH ASIA

repetitive process functions on the other—account for entrepreneurs’ explicit preference, in export-oriented enterprises, for employing young, mostly single women with some formal education. Table 2.3: Participation indicators of female employment in Bangladesh, 1995-96 Age group years Indicators

15+

15-19

15-29

20-24

25-29

Female labour force participation rate Rural Urban

37.77 40.63 26.09

37.50 37.74 36.36

43.28 45.45 33.33

48.39 50.98 36.36

44.00 47.54 28.57

Female economic activity rate Rural Urban

55.65 63.60 30.44

47.59 54.61 28.99

55.73 64.03 30.80

59.14 67.27 33.14

60.04 69.26 30.56

Source: Labour Force Survey 1995-96, Bangladesh Bureau of Statistics.

By increasing their bargaining power at the household level, such increased female participation in the labour market is empowering women. It is also contributing to poverty alleviation by generating extra earnings for poor households. At the same time, however, the nature of this employment is making women vulnerable to fluctuating global demand. The “footloose” nature of export-oriented manufacturing enterprises thus affords less job security for women. Women’s employment in the manufacturing sector, moreover, is confined to only a few industries. According to the most recent Census of Manufacturing Industries 7 , about 200,000 women (15.3 percent of the total manufacturing employment) were employed in the manufacturing sector. Of these, 85 percent (about 12.9 percent of total manufacturing employment) were employed by the weaving apparel sector (BISC 323); followed by textiles manufacturing, including cotton synthetic and jute textiles (BSIC 321 and 323), accounting for about 6 percent (i.e. about 1 percent of manufacturing employment); and food processing (BSIC 311 and 312), accounting for about 3.2 percent of female industrial employees. The woodwork, cigarette manufacturing, and pharmaceutical industries employ about 1.84 percent, 1.47 percent, and 0.58 percent of female industrial employees respectively. The RMG industry currently employs about 1.5 million people, 90 percent of whom are female. Between 1990/91 and 1997/98, the average annual growth rate of total employment was 23 percentage points. The corresponding growth rates of female and male employment were 25 and 10 percentage points respectively (Figure 2.3 below and Table A2.4 in Annex). Consequently, the share of female employment in total employment in the RMG sector has increased from 85 to 90 percentage points over the past seven years. In addition to this direct employment, 0.2 million people are also employed in other industries linked to the RMG sector. 7

CMI, 1991-92.

BANGLADESH

29

Employment of women in the RMG industry, furthermore, has led to significant ruralurban migration, as most women RMG workers are migrants from rural areas. This has also increased women’s visibility in the public sphere, with important sociological implications. Figure 2.3: Male and female workers in Bangladesh RMG industry (1990’s) 1600000

No. of Workers

1400000 1200000 1000000 800000 600000 400000 200000 0 91-92

92-93

93-94

94-95

95-96

96-97

97-98

Years Male

Female

Source: BGMEA

2.

Static vs. dynamic competitive advantages

2.1 Wage levels in the RMG industry The principal static comparative advantage that Bangladesh enjoys over potential competitors is its cheap labour force. The wage level in the RMG industry is low both for males and females, compared with workers in a similar category in other sectors. For instance, a comparison on the basis of wage data provided by Bangladesh Bureau of Statistics 8 shows that the average monthly wage of skilled RMG factory workers is 1.4 to 2 times lower than that of similar factory workers in the textile and other sectors. Real wage indices also show the comparatively low wages in this sector (Table A2.5 in Annex). Moreover, female employment in the industry is confined primarily to low-paid jobs such as helpers and operatives. On an international scale, the RMG wage level is one of the lowest in the world (Table 2.4). Even by South Asian standards, it remains very low, with the average hourly wage in Bangladesh being 42 percent, 50 percent, and 33 percent of those in India, Nepal, and Sri Lanka, respectively. Low wages, however, do not necessarily imply a low per unit cost of production. Labour productivity, non-wage cost and the exchange rate are also equally significant factors. As labour productivity also remains relatively low, the per unit production cost of output tends to be high in spite of low wages. It has been calculated that person-minutes required per basic product in Bangladesh’s RMG sector is 25.0, compared to 14.0 in the USA; 19.7 8

BBS, 1999.

30

GARMENT INDUSTRY IN SOUTH ASIA

in Hong Kong, China; 20.7 in the Republic of Korea; and 24.0 in Sri Lanka.9 Trends in labour productivity from 1981-1992 using United Nations Industrial Development Organization (UNIDO) data show only modest increases of around 14 percent in labour productivity (Figure 2.4 below and Table A2.6 in Annex), along with a very modest 11.5 percent increase in wages over this period. While the share of wages in value-added has remained more or less same around 38 percent, share of value-added in output has declined during the period to about 25 percent from 35 percent. Labour productivity is also higher in knitting mills, compared to the apparel, spinning, weaving, and finishing industries, according to UNIDO data, while productivity growth in the spinning, weaving, and finishing mills appears to have declined in the early 1990s. Table 2.4: Inter-country comparative average hourly wage in the RMG industry Country Germany USA Republic of Korea Mexico Poland Sri Lanka China India Nepal Bangladesh

Wage/hour (US$) 25.00 16.00 5.00 2.40 1.40 0.45 0.35 0.35 0.30 0.15

Source: The Financial Express, Dhaka, 15 June 1995.

Figure 2.4: Productivity and wages in Bangladesh RMG industry 1200 n

1000

US $

800

n

n

n

n

n

400

w

w

1981

1982

n n

n

n

600

n

n

w

w

w

w

w

1983

1984

1985

1986

1987

w

w

w

w

w

1989

1990

1991

1992

200 0

1988

Years

Source: Islam, S., 2001.

9

See Technical Evaluation of the ILO/UNDP Project no. BGD/85/153.

w

Wages

n

Prouctivity

BANGLADESH

31

Table A2.7 in Annex shows a substantial productivity gap between Bangladesh and other countries (for the year 1992 with the latest data available). Nevertheless, the very fact that RMG exports from Bangladesh have shown sustained high rates of growth suggest that the country enjoys certain comparative advantages in the world apparel market. Low labour productivity is compensated for by low wage rates; and it is arguable that low wages and low productivity together make Bangladesh competitive at the labour-intensive, low-value product end of the international apparel market. Thus, for products of similar quality, Bangladesh is generally cheaper than China or India by 5 to 20 percent.10 In order to assess the potential competitiveness of the RMG industry in the coming decade, however, one needs to go beyond the static comparative advantage of cheap labour to look at potential dynamic comparative advantages related to labour productivity, linkage industries, and the overall industrial base and business climate, as has been pointed out by several authors.11 In this connection, a detailed international comparison of cost structure is essential, although it is currently difficult due to the unavailability of data. In fact, interviews with entrepreneurs indicated that considerable uncertainty prevails regarding the competitive edge of Bangladesh’s potential competitors in the post-MFA era. Adequate information in this respect is likely to be a key factor in determining Bangladesh’s strategy in maintaining competitiveness in the future. 2.2 Gender discrepancy in job type and wage rate Within the RMG factories, gender discrepancy in wage levels for comparable jobs is small, especially when accounting for factors such as age, education, and experience. In the production process, however, female workers are mainly concentrated in “less skilled” operations, and thus are low paid. In the RMG industry, most women work either as operators (where almost all workers are female) or as helpers (40-60 percent of the total work force in this category are females). It is extremely rare to find women working as production managers, supervisors, finishing and machine operators, or as “in-charges” who draw salaries varying from 2-10 times that of the average operator, depending on the type of operation involved (Table 2.5 below). Elsewhere,12 the author has thus argued that the female labour market in Bangladesh is largely segmented by jobs (tasks) and by type of industry, as is clear from the discussion in Section 3.1.4, above, and factors such as age, education, and marital status 13 account for the low average wages of female workers, since they are prone to “crowd in” to certain specific jobs and occupations. Thus, discrimination in wage payments between male and

10 11 12 13

IFC, 1999. Siddiqui, 2000. Khundker, 1997. Also see Mazumdar, 1983, for a more general discussion on segmented labour markets in less developed countries.

32

GARMENT INDUSTRY IN SOUTH ASIA

female workers may be very limited, but discrimination in terms of education and training and various barriers to entry explain the low wages and low opportunity costs of female labour, a factor which needs to be addressed at the policy level. Table 2.5: Gender discrepancy of participation and wage rates in export-oriented RMG Type of work Operators Plain and overlook Flat lock Helper Supervisors Finishing in-charge Production manager

Wage/pay per month (taka)

Average female participation rate

1 200-1 600 1 500-1 800 500-700 2 000-3 500 4 000-5 000

80-95% 40-60% 40-60% 10-20% 0-5%

12 000-25 000

Extremely rare

Source: Bhattacharya and Rahman (1999).

2.3 Job quality One feature of the RMG industry in Bangladesh has been its rapid but unplanned growth, responding to global opportunities, which has affected both the working environment and job quality in this industry. Besides low wages, women and also men are subject to long working hours beyond the eight-hour day. Few workers receive such advantages as formal contracts or appointment letters, or maternity benefits; and there have been complaints about arrears in payments. Labour turnover is also high in this industry. Working conditions, however, improve with the size of the factory and have also improved over time, although fire hazard safety precautions are inadequate despite special programmes executed by the ILO. This is mainly because factories are not functionally designed, and are mostly located in urban areas. Lack of unionization remains an issue, when discussing the slow progress in improvement of poor wages and working conditions. Both wages and working conditions are also said to be better in the export processing zones (EPZs), compared to the domestic tariff area (DTA), though in the former workers suffer from a ban on freedom of association. Some factories have initiated health schemes in collaboration with NGOs. 2.4 Impact of globalization on employment and job quality The possible impact of globalization on employment and quality of jobs in the RMG industry will depend on Bangladesh’s ability to withstand a more competitive global

BANGLADESH

33

environment. It is arguable that this competitiveness on the other hand will depend amongst other things on measures taken to improve productivity and job quality. In the worst scenario, a failure to maintain competitiveness will lead to enterprise closures and increased sub-contracting from larger to smaller units. This will obviously lead to unemployment among mostly women workers, a possible reverse trend of rural-urban migration, and a reduction in the household earnings of workers. A greater degree of subcontracting may also adversely affect job quality, since working conditions and job quality have been found to be inversely related to the size of RMG units.14 Deterioration in job quality is likely to have serious consequences. Entrepreneurs must recognize that labour is not simply a commodity; and that better working conditions are desirable from the point of view of productivity and efficiency, as well as from that of fairness and justice. Workers’ rights include freedom of association, which is currently prohibited in the export processing zones, while unionization is actively discouraged in the industry as a whole.15 Interestingly, the entrepreneurs interviewed as part of this study expressed divergent views regarding job quality. Most were worried about the impact on costs, and some regarded labour retrenchment and subcontracting as a way out. A few more enlightened entrepreneurs believed attitudinal changes were needed, and that wider dissemination of information would help. Others thought that the imposition of a social clause should be delayed, giving entrepreneurs a chance to adjust to the phasing out of the MFA, as well as helping them to relocate factories outside Dhaka, where there could be more available space for canteens and other facilities, and where factories could be functionally designed to meet safety standards. In any case, measures to increase productivity and competitiveness may involve some rationalization of the workforce and technology upgrading such as the introduction of computer-aided design (CAD). It has been suggested that the latter will lead to a substitution of male for female workers, given the higher educational and skill requirements of the new technologies, and the currently disadvantaged status of women in this respect. Sub-contracting may again be more actively pursued as a cost-cutting strategy by larger and more successful firms. Other measures to improve productivity and competitiveness such as skill upgrading will, on the other hand, improve job quality and earnings for workers.

3.

Major issues and prospects in the garment industry

3.1 Need for market diversification If Bangladesh were to remain competitive in the post MFA era, one inevitable strategy would be to take the necessary steps to increase labour productivity. In order to realize the 14 15

Mazumdar and Chowdhuri, 1991. Khan, 2001.

34

GARMENT INDUSTRY IN SOUTH ASIA

incremental gains from the expansion of the global apparel market, the country also needs to diversify its market, instead of putting all its eggs in one basket, i.e. continuing to exploit the same niche market. Though Bangladesh now exports garments to about 25 countries around the world, the USA is the single largest importer of its RMG products, amounting to 43 percent of total garment exports. Bangladesh is the sixth-largest supplier of apparel in the US market (Rahman and Rahman, 2001). Considering the European Union as a single market, the USA then becomes the second largest. Over the past few years, Bangladesh’s RMG exports to the EU have expanded rapidly, with the EU currently importing about 52 percent of Bangladesh’s total garment products. The inter-temporal evidence of the narrow market base of Bangladesh RMG exports in the 1990s is provided by the concentration of exports to the US and EU market (almost 96 percent in 1998-99, see Table A2.8 in Annex). While the export share to the USA has witnessed an annual average rate of decline of 1.5 percentage points, however, the corresponding share to the EU has experienced an annual growth rate of 1.6 percentage points. Thus, the increment in the EU share has simply replaced the declining share in the USA market, which suggests that, instead of diversification, Bangladesh’s export market has remained concentrated over the past decade. The combined market share of the USA and the EU has thus increased from 95.5 percent to 95.6 percent between 1991-92 and 1998-99. Bangladesh so far has been unable to gain access to ASEAN or Indian markets, although it imports a huge quantity of fabrics and yarn from these countries. Similarly, although it imports about 95 percent of its total garment machinery from Japan, its market share of apparel export to Japan is a mere 0.1 percent.16 Bangladesh’s inability to gain access to these large markets in turn suggests that the country has yet to establish its claims, as advocated by the WTO, to the principles of reciprocity and market access. The North American quota system and GSP facilities afforded by the EU have contributed to the undiversified RMG export market in Bangladesh, in that entrepreneurs have focused on taking advantage of these special opportunities. Thus, the entire national clothing export business will be endangered by the year 2005, when the MFA is eliminated and GSP schemes may cease to operate. The country must thus make immediate and vigorous attempts to diversify its export markets. 3.2 Need for product diversification As already mentioned, due to its low labour productivity Bangladesh is competitive, with low value and thus low-priced items, at the lower end of the RMG market. RMG production is concentrated in a relatively limited range of products such as shirts, T-shirts, 16

Rahman and Rahman, 2001.

BANGLADESH

35

trousers, and shorts. To be internationally competitive, Bangladesh needs to expand its product range and should begin producing fashion-wear and higher value-added items. Product diversification is essential to meet the challenges of the post-MFA world. Evidence suggests that Bangladeshi entrepreneurs are already shifting to higher-value knitwear products. One way of understanding how entrepreneurs have responded to market opportunities and have diversified their products, as well as built up skills and capacity, is to look at changes in revealed comparative advantage over time. The revealed comparative advantage (RCA) (Table A2.9 in Annex) has increased for trousers, outer garments, knitted undergarments, jerseys and headgear. The table also shows, however, that there is scope for diversifying into a range of other products. Policy-makers must recognize that sufficient capacity building is required for such diversification, which involves improving skills such as fashion design and cutting as well as upgrading technology. Entrepreneurs can also benefit from a data bank which gives comparative RCAs for close competitors, enabling them to better understand market trends and potential. 3.3 Establishing backward linkages A fundamental constraint on the potential of the RMG industry is the general absence of backward linkages. In their absence, despite abundant cheap labour, the country’s local value addition has so far been only 25-30 percent of gross exports. The RMG industry is currently heavily dependent on imported raw materials. Roughly 80 percent of the woven fabrics and 50 percent of the knitted fabrics are imported17 , despite some improvements in this regard since the mid-1990s, in terms of investments in backward linkage industries, especially with the announcement of the Textile Policy, 1995, and the granting of various incentives by the Government. With the phasing out of the MFA, Bangladesh may face a supply shortage of required fabrics, some stakeholders argue, since the current suppliers will find it more profitable to use their domestically produced fabrics to produce their own RMG products, which they will be able to export competitively in the quota-free world apparel market. Recent trends and relaxation of the GSP to allow for cumulation within the SAARC region, however, suggest that the availability of fabrics may not be such a severe constraint. Nonetheless, Bangladesh’s excessive dependence on imported raw materials has adversely affected its competitiveness by increasing the lead time and cost of production. This is something which has to be overcome in what promises to be a highly competitive post-MFA phase. The lead-time from the order date to the shipment date in Bangladesh is between 120 and 150 days, compared to 19-45 days in India and Sri Lanka. For some countries, the lead17

Rahman and Rahman, op. cit.

36

GARMENT INDUSTRY IN SOUTH ASIA

time is only 12 days (Textile Asia, June 1999, p-61). Unless Bangladesh manages a substantial reduction in its lead-time, domestic production of quality fabrics for export will be left in a very disadvantageous position. Establishment of backward linkages, especially the domestic production of yarn, can reduce the cost of production. The current gap in demand and domestic production, met through imports, is estimated to be 480 million kg for yarn, and 2,300 million meter for fabrics.18 The country could thus save considerable foreign exchange by increasing domestic production of yarn and fabric. Production costs would also be reduced, since the RMG manufacturers would not have to buy fabrics at international prices that are not necessarily competitive. Nor would they have to pay high interest rates for a certain period (almost three months), nor large transport costs, nor the bribes, commissions, and fees for middleman services involved in custom clearance, etc., all of which significantly increase the hidden cost of doing business. Large-scale investments in backward linkage industries may require considerable inflows of FDI, however, and/or a pro-active government policy in terms of providing the finance for such investments to domestic entrepreneurs. It would also require a careful assessment of the different stages such as dyeing and spinning in which Bangladesh may have a comparative advantage. So far, only a few backward linkage industries have been established, some in the form of composite textile mills; and these are highly capital intensive. What is needed is a policy of promoting smaller and labour-intensive units, whereby the necessary backward linkages take place without heavy investments. Dyeing units in particular are said to have the greatest potential in terms of international competitiveness. Recent research19 show that spinning and weaving are also internationally competitive, using the DRC (domestic resource cost) criteria. 3.4 Improvements in productivity It is clear from the discussion so far that one issue facing the RMG industry in Bangladesh is the slow rate of increase in productivity, and the gap that exists between this country and other competitors in this regard. There is also scope for capacity building in different types of skills and processes. The aim should be to move the industry up to a different regime, wherein competition is based on higher productivity, an improved working environment, and backward and forward linkages to meet the new challenges of the post-MFA era. A more concerted action plan is needed in this regard. Interviews with entrepreneurs, for example, have suggested that Bangladesh is at a disadvantage compared to other countries in South Asia; such as, Sri Lanka, where a more educated labour force, especially at the supervisory and managerial levels, increases labour 18 19

Rahman and Rahman, op. cit. Rahman and Rahman, op. cit.

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37

productivity. Thus, training schemes for managers and supervisors are an important element in increasing productivity, including the introduction of functional English courses for higherlevel employees, improving their ability to read operating manuals and so on. To these ends, the Government should also increase its allocations to the education sector. 3.5 Responsiveness to consumer ethics and standards New challenges facing the RMG industry and the export sector in general include greater consumer awareness of quality, health, and environmental standards. These issues may well act as non-tariff barriers, but entrepreneurs have little option other than to meet these requirements and codes of global transactions. Similarly, working conditions—including safety, health, and the earnings of workers, together with issues such as child labour—are growing concerns on the part of international consumers. The industry needs to improve its image in this regard, advertising recent achievements such as the abolition of child labour and improvements in occupational safety. Efforts to further improve standards, furthermore, are likely to have longer-term payoffs. 3.6 Need for a data bank Interviews with entrepreneurs suggested considerable uncertainty regarding the behaviour of competitors and their responses to the new global environment. A considerable gap also exists in knowledge about trade and investment flows. This is understandable, given that most entrepreneur interactions are with buyers who merely specify their product needs, provide the designs, etc. The emerging global environment, however, calls for more strategic action with regard to major competitors. In this respect, international organizations such as the ITC, UNIDO, and the ILO can have special roles to play. The relevant ministries can also maintain easily accessible data banks on trade flows by country and region, including information on product line, changes in unit costs, special opportunities, new technologies, cost effectiveness of different technologies, etc., especially in the backward linkage industries. The BGMEA should also try to disseminate such information to all types of entrepreneurs.

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;

38

GARMENT INDUSTRY IN SOUTH ASIA

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. l

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 Value of output Costs: * Industrial cost (excluding wage)1 * Non-industrial costs2 * Employment cost (wage bill) Gross value-added Profit margin

ISS Study (1992) 100 87.00 73.00 03.00 11.00 23.00 13.00

BIDS Study (1995) 100 76.00 64.00 05.00 07.00 31.00 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.

BANGLADESH

39

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 widespread 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).

40

GARMENT INDUSTRY IN SOUTH ASIA

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

1980

1985

1988

1990

1993

1997

Growth rate (%)

Trainee/Helper - Nominal - Real

130 195

300 300

400 267

500 337

500 296

500 242

24.10

Semi-skilled - Nominal - Real

300 423

500 500

600 420

800 540

1 000 591

1 000 484

14.42

Semi-skilled - Nominal - Real

500 760

800 800

1 000 762

1 500 1 012

1 800 1 064

2 200 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

l l l

l

l

l

l

diversification of markets into ASEAN and other regions outside the European Union and North America; diversification of products, particularly the transition to higher value-added items; building of technological capacity and skills for a range of products; 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; continued emphasis on primary and secondary education in government education policies, aiming to develop a more skilled and generally higher-quality labour force; continued emphasis on education and skills development for women, specifically, aiming to close the gender gap; 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; 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;

BANGLADESH l

l

l

l

l

l

l

41

better regulation and supervision of factories, reinforcing government regulatory capacity in this regard to ensure compliance with the Factory Act; compliance with labour laws with regard to wages, weekly holidays, canteen and crèche facilities, occupational safety including attention to fire hazards, etc.; 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.; 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; 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. introduction of productivity-enhancing schemes by agencies such as the ILO, with dissemination of best practices in competing countries; and 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.

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GARMENT INDUSTRY IN SOUTH ASIA

ANNEXURE 1 Table A2.1: Revealed comparative advantage (1990 and 1995) SITC codes

03 Ox 1 264 2x 3 4 5 61 65 6x 7 842 844 845 846 848 8x

Revealed comparative advantage1

Group of products

Fish, crustaceans, molluscs, preparations thereof Other food and live animals chiefly for food Beverages and tobacco Jute and other textile based fibres, n.e.s, raw/processed Other crude materials, inedible, except fuels Mineral fuels, lubricants, and related materials Animal and vegetable oils, fats, and waxes Chemicals and related products, n.e.s. Leather, leather manuf., n.e.s., and dressed fur/skins Textile yarn, fabrics, made-up art., related products Other manufactured goods class. chiefly by material Machinery and transport equipment Outer garments, men’s of textile fabrics Under garments of textile fabrics Outer garments and other articles, knitted Under garments, knitted or crocheted Art. of apparel and clothing accessories, no textiles Other miscellaneous manufactured articles

1990

1995

99.9 -66.4 -71.6 100.0 -15.6 -89.2 -99.9 -87.5 97.1 -21.3 -96.7 -99.3 99.6 -100.0 -100.0 -100.0 -87.9 86.5

97.9 -91.1 -94.7 100.0 -96.3 -94.9 -99.7 -56.0 92.2 -66.1 -95.3 -96.6 99.0 98.2 98.3 98.9 41.8 -55.7

1

Revealed comparative advantage is measured as the ratio of net trade flows to total trade (imports plus exports). Source: ILO Task Force based on data from Statistics Canada (1998) World Trade Analyzer CD ROM.

Table A2.2: RMG exports of Bangladesh: a comparative scenario Year 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000

Export of RMG (in US$ million) 31.57 116.2 131.48 298.67 433.92 471.09 624.16 866.82 1 182.57 1 445.02 1 555.79 2 228.35 2 547.13 3 001.25 3 781.94 7 019.98 4352.39

Total export of Bangladesh (in US$ million) 811.00 934.43 819.21 1 076.61 1 231.2 1 291.56 1 923.70 1 717.55 1 993.9 2 382.89 2 533.9 3 472.56 3 882.42 4 418.28 5 161.2 5 312.86 5752.19

RMG export as a % of total export 3.89 12.44 16.05 27.74 35.24 36.47 32.45 50.47 59.31 60.64 61.4 64.17 65.61 67.93 73.28 75.67 75.66

Source: Export Promotion Bureau, Dhaka, September, 1999 and Bangladesh Garment Manufacturers and Exporters’ Association.

BANGLADESH

Table A2.3: BGMEA membership fiscal year-wise Year

No. of members

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 Average annual growth rate(%)

1 1 1 2 2 2 2 2

Growth rate (%)

834 163 537 839 182 353 503 726 963 -

39.45 32.16 19.65 18.65 7.84 6.37 8.91 8.69 17.72

Source: Export Promotion Bureau, GOB.

Table A2.4: Employment in the RMG industry in 1990s Years

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Source: BGMEA.

Male

8 120 124 120 129 139 150

730 600 050 000 000 756 000

Female

1 1 1 1

494 683 702 080 165 257 350

700 400 950 000 042 808 000

Female employment as a % of total employment 85 85 85 90 90 90 90

1 1 1 1

Total

582 804 827 200 294 397 500

000 000 000 000 042 564 000

43

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GARMENT INDUSTRY IN SOUTH ASIA

Table A2.5: Real wage indices of industrial workers (all employees) (Base: 1985-86 = 100) Indices BSIC code

1986

Name of industry

1989-90

1990-91

1991-92

311-312 313 314 315

Food manufacturing Beverage industries Tobacco manufacturing Animal feed manufacturing

133 77 71 80

124 61 47 78

143 99 48 78

321-322 323 324 325 326 331 332

Textile manufacturing Wearing apparel (except footwear) Leather and leather products Leather footwear (except rubber and plastic) Ginning, pressing and baling of fibres Wood and wood cork products Wooden furniture and fixture manufacturing

112 86 96 44 104 102 50

99 87 94 46 94 89 54

98 84 99 39 91 110 59

341 342 351 352 353 354 355 356 357

Paper and paper products Printing and publishing products Drugs and pharmaceutical products Industrial chemicals Other chemical products Petroleum refining Misc. petroleum, coal products Rubber products Plastic products N.E.C.

107 124 102 96 96 174 138 79 119

96 89 117 81 53 168 102 75 106

127 118 120 91 60 197 109 81 150

361 362 369 371 372

Pottery, china and earthenware Glass and glass products Non-metallic mineral products Iron and steel basic industries Non-ferrous metal basic industries

128 115 111 73 81

116 55 91 90 65

83 128 118 88 101

381-382 383 384 385 386 387

Fabricated metal products Non-electrical machinery Electrical machinery Transport equipment Scientific, measuring instruments and equipment Photographic and optical goods

83 92 73 86 155 85

84 101 66 88 125 89

88 90 66 88 131 108

393-394

Other manufacturing industries

89

84

78

Total:

All industries

112

96

96

Source: C.M.I., B.B.S.

BANGLADESH

Table A2.6: Productivity and wages in apparel in Bangladesh Year

Annual wages (US$)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

305.7 308.5 344.4 329.6 350.0 338.3 344.4 299.5 345.5 352.2 334.7 340.9

Labour productivity (US$) 778.8 788.7 803.1 810.4 806.2 638.0 692.8 869.3 989.4 965.1 951.1 890.1

Average size 25 123 163 234 206 252 205 244 239 245 288 315

Share of wages (%)

Share of value added (%)

39.3 39.1 42.9 40.7 43.4 53.0 49.7 34.5 34.9 36.5 35.2 38.3

35.0 31.7 28.3 25.4 30.9 27.1 26.0 25.8 27.4 28.0 26.6 24.7

Source: Islam, S. , 2001. Notes: 1. Average size refers to the average number of employees per establishment. 2. The share of wages refers to the share of wages in value-added. 3. The share of value added refers to the share of value-added in output. 4. The data is from UNIDO, Industrial Statistics Database at the 4-digit level of the SIC system.

45

46

GARMENT INDUSTRY IN SOUTH ASIA

Table A2.7: Productivity and wages in selected countries: Apparel Countries

India

Wages (US$)

Productivity (US$)

Share of Wages (%)

Average Size

626.0 (1981)

627.5 (1994)

1 323.6 (1981)

3 146.1 (1994)

19.9 (1994)

74

4 121.5 (1981)

13 389.3 (1995)

6 720.1 (1981)

20 454.4 (1995)

65.5 (1995)

24

664.9 (1981)

1 119.6 (1996)

1 230.7 (1981)

3 555.8 (1996)

31.5 (1996)

169 (1996)

Korea, Republic of

2 096.9 (1981)

13 024.3 (1995)

5 562.4 (1981)

37 195.4 (1996)

35.0 (1996)

22 (1995)

Malaysia

1 363.4 (1981)

3 895.0 (1996)

2 915.3 (1981)

7 182.9 (1996)

54.2 (1996)

20 (1995)

Mexico

1 817.8 (1987)

4 622.6 (1994)

5 181.7 (1987)

9 767.7 (1994)

47.3 (1994)

158

Pakistan

1 228.4 (1985)

1 553.5 (1991)

2 587.1 (1985)

3 236.1 (1991)

48.0 (1994)

128

Philippines

955.1 (1983)

2 328.8 (1997)

1 648.4 (1983)

5 696.1 (1997)

40.9 (1997)

96 (1995)

Singapore

3 045.1 (1981) 499.4 (1990)

9 522.5 (1994) 653.1 (1993)

5 236.5 (1981) 1 554.9 (1990)

13 236.3 (1994) 1 876.1 (1993)

71.9 (1994) 34.8 (1993)

66 (1994) 464 (1993)

1 708.3 (1982)

3 646.8 (1994)

3 792.0 (1982)

5 420.4 (1994)

67.3 (1994)

438 (1994)

1 703.2 (1981) 18 505.8 (1989)

2 168.6 (1994) 23 991.7 (1991)

6 839.0 (1981) 27 460.3 (1989)

14 839.3 (1994) 36 251.4 (1991)

14.6 (1994) 66.2 (1991)

62.0 (1994) 55 (1991)

Japan

6 787.3 (1985)

18 645.1 (1993)

12 747.6 (1985)

33 573.1 (1993)

55.5 (1993)

20 (1993)

USA

9 024.6 (1981)

16 226.2 (1997)

19 580.7 (1981)

42 193.3 (1997)

38.5 (1997)

41 (1992)

Hong Kong, China Indonesia

Sri Lanka Thailand Turkey Italy

Source: Islam, S., 2001, based on UNIDO data. Figures in parentheses are years for the data reported.

BANGLADESH

Table A2.8: Trend of RMG export to the US and EU in the 1990s Year 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

Exports to the USA (as a % of total export)

Exports to the EU (as a % of total export)

Combined share of the US and EU export (%)

49.14 48.72 38.08 45.15 39.33 41.49

46.42 45.69 55.43 49.36 55.17 54.11

95.56 94.41 93.51 94.51 94.50 95.50

43.24

52.38

95.65

Source: Export Promotion Bureau (EPB) and Bangladesh Garments Manufacturers and Exporters Association (BGMEA).

Table A2.9: Revealed comparative advantage (RCA) of Bangladesh in clothing (selected years) SITC Codes

8421 8422 8423 8429 8431 8432 8433 8434 8441 8442 8451 8452 8459 8461 8465 8471 8472 8481 8482 8483 8484

(Overcoats, men’s) (Suits, men’s) (Trousers) (Outer garments) (Coats and jackets) (Suits of women) (Dresses, women’s) (Skirts, women’s) (Shirts, men’s) (Undergarments) (Jerseys, pullovers) (Dresses, knitted) (Outer garments, knitted) (Undergarments, knitted) (Corsets, etc.) (Clothing accessories) (Clothing accessories, knitted) (Clothing accessories ofi) (Clothing accessories ofp) (Fur clothing) (Headgear and fittings)

Source: Islam, S. (2001).

Years 1980

1985

1990

1996

1997

1 0 0 0.6 0 0 0 0 0.2 0 0 0 0.2 0 0 0 0 0 0 0 0

9.0 0.5 3.0 5.4 2.8 0.2 0.4 4.7 52.2 11.7 1.1 0 0 0 0 0 0.4 0 0 0 0

13.0 13.0 1.0 55.2 0 0 0 0 0 0 0 0 0 0 0 7.4 15.5 0.1 0 0 .4

4.1 1.4 20.7 25.2 2.4 0.9 7.4 7.7 55.8 15.3 15.9 5.3 9.7 29.8 3.1 0.5 2.3 0.3 .2 0 53.8

5.1 0.3 22.7 29.4 4.9 5.5 7.9 7.0 52.9 19.5 20.2 3.6 10.9 23.4 3.2 0.8 2.2 0.3 0.2 0 56.0

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References Bakht, Z., 1997. “The experience of the industrial sector in Bangladesh in the 1990s”, in Growth or stagnation? Bangladesh Development Review, 1996, (University Press Ltd.). BBS. 1997. Labour Force Survey 1995-96. ———. 2001. Statistical yearbook of Bangladesh, Bangladesh Bureau of Statistics (Dhaka, Government of Bangladesh). Bhattacharya, D.; Rahman, M. 1999. Female employment under export propelled industrialization: Prospects for internalizing global opportunities in Bangladesh’s apparel sector (Geneva, UNRISD). Islam, S. 2001. The textile and clothing industry of Bangladesh in a changing world economy (Dhaka, University Press Ltd.). International Finance Corporation (IFC). 1999. Bangladesh: Textile study (Washington, DC, IFC). Khundker, N. 1977. “Gender issues in Bangladesh’s Development since the 1980s”, in Growth or stagnation? Bangladesh Development Review, 1996. (Dhaka, University Press Ltd.). Khan, S.I. 2001. “Gender issues and the readymade garment industry of Bangladesh: The trade union context”, in Globalisation and gender, changing patterns of women’s employment in Bangladesh, (Dhaka, University Press Ltd.). Mazumdar, D. 1983. “The theory of segmented labour markets in LDCs”, American Economic Review. Mazumdar, P.P., Chowdhury 1991. The socio-economic condition of garment workers in Bangladesh. Bangladesh Institute of Development Studies. Research report. (Dhaka). Rahman, S.; Rahman A.K.M. 2001. “Development in the backward linkage industry in the textile sector: Promises and achievements”, a paper presented at TexBangla 2001 seminar, organized by Bangladesh Textile Mills Association in collaboration with the Centre for Policy Dialogue (Dhaka) 26 May 2001. Siddiqui, H.G.A. 2000. “Beyond 2004: Impact of MFA phase out on the apparel industry of Bangladesh”, keynote paper presented at the BATEXPO-2000 organized by the BGMEA (Dhaka), 21-25 Nov. 2000.

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3

Garment industry in India M. Vijayabaskar

1.

Introduction

The world garment industry is on the threshold of far reaching institutional changes in the near future. Hitherto, despite being one of the most globalized industries in the world, it has also been an exemplar of how trade practices in a ‘globalizing’ world are still distorted in favour of advanced economies. Over the past three to four decades, trade restrictions, price and quantitative, have come to play a major role in conditioning patterns of the sector’s development. However, over the next few years, by 2005 to be specific, the existing institutional constraints on garment production and trade would be removed. The removal of institutional barriers to trade would have important implications for output markets, especially that catered to by low-income economies seeking to industrialise through promotion of the garment sector. In turn, changes in these characteristics, given the labour-intensive nature of garment production, would have a serious bearing upon the labour market, especially in ‘labour-surplus’ economies like India that seek to strengthen/sustain their position in the global output market. The garment sector has been conventionally viewed as a major source of employment generation. Of late, in addition to this dimension, following the success of the East Asian economies, it is also seen as a lead sector in the industrialisation process of low-income economies. Its low skill requirements and large labour absorption potential have made it an important source of non-agrarian employment for the rural populace of these regions. To add, the garment sector is also seen to offer tremendous prospects for employment of women, unlike other traditional manufacturing sectors. Given these factors, it is of great importance to understand the labour market implications of the changes in the international trade regime. In this study, we address this issue in the case of the Indian garment industry. Though the study is confined to an empirical examination of the possible changes in the prospects for Indian garment manufacture and employment and challenges that confront Indian policy makers in this regard, obviously its relevance would extend to other regions with similar structural characteristics. 1.1 Issues being examined The report is largely based on secondary literature and published data sources. Statistics published by the Apparel Export Promotion Council, by garment industry associations, and by multilateral agencies would be used for the purpose apart from studies done in this area

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by others. To overcome the gaps in secondary literature, a few interviews were undertaken with key informants like members of garment producers’ associations and trade union members actively involved in this sector. In this report, however, a case study on Tiruppur knitwear industry is also being discussed. Following issues are examined in this report: a. b. c. d. e.

f.

What are the key elements that condition/influence the dynamics of global division of labour in the garment industry? What are the characteristics of the market niche that Indian garment producers occupy in the world garment industry? To what extent has this phenomenon been influenced by the quota system? What are the sources of competitiveness of Indian garment production? How do they compare with garment production in competing nations? What would be the likely impact of a quota-free regime on the prospects of garment exports, from India and consequently, on extent and nature of employment generation in India? What would be the nature of policy intervention required to sustain and/or enhance the quality and quantity of employment in the new trade regime?

1.2 Organization of the report This report first provides a framework outline to understand the issues under consideration. In the next section, the major characteristics of the Indian garment industry are delineated, and its position in the world garment industry is examined. The dynamics of the world apparel market would obviously exert a key influence upon the mode of participation in the world market and consequent production imperatives. The characteristics of the market segments that Indian garment industry caters are identified. To comprehend the sources of competitiveness of Indian garment industry, the production structure of the Indian garment industry and the factors enabling the formation of such a structure are examined. This exercise is attempted in a comparative frame, relating some of India’s structural and performance characteristics with that of a few of its competing countries so as to comprehend India’s competitive strength better. Possible changes are examined in input and output markets wrought by the onset of a quotafree trade regime. Here, the focus is on a few important dimensions of the Indian garment sector, and its labour market in particular. The constraints and opportunities for its development are highlighted. Finally, the nature of institutional intervention required to sustain and upgrade the quality and quantity of employment in the garment sector are suggested. 1.3 Nature of global sourcing Since it is important to understand the trajectory of a commodity sector embedded in a global division of labour and its implications for labour, a framework is necessary for understanding the dynamics of production and trade as impacted by the global division of

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labour. The ‘commodity chains’ approach as developed by Gereffi and others are the most appropriate for the purpose. The commodity chains perspective, initially advanced by the world systems theorists (Hopkins and Wallerstein 1986), and enriched by subsequent empirical analyses of Gereffi (1995, 1996, Gereffi and Korzeniewicz, 1994) and others (Bonacich et. al 1994, Gibbon 1997, Ramamurthy 2000), facilitates understanding accumulation processes in sectors where production and distribution functions are dispersed across the world.1 In a period when nation states are losing their importance in economic decision-making, it is less fruitful to analyse the capitalist system in terms of linkages of nation states. It is obvious for instance, that integration of a national economy, especially one as large as India, with the world market would lead to territorially and sectorally differentiated outcomes. It becomes important therefore to analyse how specific industries are organized globally and to discern the mechanisms of surplus extraction at various points and of co-ordination of dispersed labour and exchange processes. A commodity chain, as defined by Hopkins and Wallerstein (1986, 159), refers to “a network of labour and production processes whose end result is a finished commodity.” To construct a commodity chain, first, the various production processes required for the final product need to be delineated. Each of these processes constitutes a node in the chain. In relation to each node the following properties may be looked into: Ø the geographic loci of the node; Ø commodity flows to and from the node, and those operations that occur immediately prior to and after it; Ø relations of production within the node; and Ø dominant organization of production, including technology and scale of the production unit (pp 160-163). Gereffi views the globalization process as one organized by two distinct sets of economic actors. Manufacturing Transnational Corporations (TNCs), who source their components and labour intensive processes of their production from less industrialised regions, constitute one set. These sectors are mostly technology and skill intensive and offer substantial economies of scale (automobiles, computers, aircraft, electrical machinery, etc). Profits are derived from scale, volume and technological advances. These constitute producer driven commodity chains (PCCs). Gereffi distinguishes such commodity chains from buyer driven commodity chains (BCCs), which are controlled by big merchandisers, retailers, and trading companies that co-ordinate decentralised production networks all over the world. The third world manufacturers produce finished goods and not components. The buyers normally involve in design and/or marketing, deriving profits from a mix of research, design, sales, marketing and financial services. They are less likely to own production facilities. 1

In fact, this perspective has been mooted to advance the New International Division of Labour (NIDL) hypothesis’ explanatory power by moving away from nation-states as units of analysis and allowing space for peripheral regions to serve multiple roles in the global division of labour.

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In PCCs, the transnational corporations exercise control through command over raw material and component suppliers, as well as forward linkages into retailing. BCCs on the other hand, since they are design and marketing intensive, create high barriers to entry at the brand name merchandising and retail levels where ‘firms invest considerable amount in product development, advertising and computerised store networks to create and sell these items’. Whereas core firms at the point of production control PCCs, control over BCCs is exercised at the point of consumption. The latter production organization can be best described as one of contract (or specification contracting) manufacturing where the finished consumer goods output of local firms is distributed and marketed abroad by trading companies, branded merchandisers, retail chains or their agents. The distinction also helps to understand the kind of trajectories that firms need to take to move up the value chain. Even within low-income economies, Gereffi stresses the need to differentiate the role played by each region in the world economy. Focusing on export production, he outlines five basic international economic roles that peripheral regions may fulfil: (a) The commodity export role (b) the commercial subcontracting role (c) the export platform role (d) the component supplier role and (e) the independent exporter role. There is thus a suggestion of a possible progressive movement from extreme dependent production to one of an independent exporter of manufactured goods. It is also clear that industrial relations and labour market outcomes would be influenced by the kind of roles that peripheral economies/ regions play in the global division of labour. The commodity chains perspective thus, offers the possibility of understanding the production organization patterns in specific regions in terms of their location in the global division of labour. Next, a framework is needed for linking the changes in output markets with the changes in labour markets. In this regard, the works of industrial organization theorists like Sabel and Piore, and labour market theorists like Peck would be useful. They are primarily concerned with contemporary changes in global output markets and the possible implications for labour markets as mediated by other institutional factors. Increasingly, it is felt that competition in global markets relies more on innovative capability and an ability to shift from one process or product to another without loss in efficiency. Such ‘flexibility’ in output markets may be derived through deployment of flexible technologies and/or through use of flexible labour. Flexibility in labour use may be obtained either through employment flexibility or through development of functional flexibility among the workers, which may in turn depend on many institutional factors. The implications for labour market changes are however, clear.

2.

Characteristics of Indian garment sector

2.1 Changes in export composition Garment exports as a share of manufactured exports from India rose from 0.3 percent in 1960/61 to 17 percent in 1992/93 (Chatterji and Mohan 1993; Exim Bank of India

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1995, 5).2 Chatterji and Mohan distinguish two phases of this growth based on composition of garments exported, their destination and demand vagaries. The first one, during the late 1960s and early 1970s, was led by a tremendous surge in demand for handloom garments due to fashion requirements in the US and Europe. The second phase, according to Chatterji and Mohan (1993), begins from 1983/84 and has been marked by a relatively more steady growth. From around Rs. 640 crores in 1983/ 84, it has increased to around Rs. 22,915 crores in 1999 (Exim Bank of India 1995, AEPC, various years). However, this relatively stable growth has been accompanied by changes in the relative shares of segments within the sector (Tables A1.1 and A1.2 in Annex). Of special significance has been the rise of the knitwear segment. From 16.9 percent in 1983, it has almost doubled to 33 percent by 1999. That the cotton knitwear segment has led this growth is quite clear, as it alone constitutes 90 percent of this sector. However, the share of handloom garments has fallen steadily from 6.9 percent to 0.3 percent while that of mill made garments continues to be high at around 70 percent (Chatterji and Mohan 1993, M-104). This remains so, despite a slow but steady decline in the share of mill made garments. The decline in both these product categories has been compensated by a steady increase in the share of knitwear products. Between 1985 and 2000, knitwear exports have grown at a compound growth rate of 9.63 percent while that of woven wear has grown only at 4.93 percent (Panthaki 2001, 86). With regard to the fabric base, cotton garments continue to dominate the export basket. Cotton based garments accounted for nearly 71 percent of value of garment exports from India in 1999 (AEPC 2000). Synthetic and woollen garments constituted 26.2 percent and 3.39 percent respectively in 1999 (ibid) as compared to 9.1 percent and 6.6 percent in 1983 respectively (Chatterji and Mohan 1993, M105). In fact, the share of cotton garments in quantity terms is even higher at 81 percent, indicating a lower unit value of cotton garments as compared to that of synthetic and woollen wear, especially synthetic garments. Comparing the composition of Indian exports with that of South Korea and Hong Kong, Chatterji and Mohan (1993, M105) find that there is a “predominance of woven clothing”. Further, they also note a high concentration of items exported. The Exim Bank study (1995, 12) notes that five products, viz., women’s blouses, dresses, skirts, men’s shirts and knitted undergarments constitute 61 percent of total Indian garment exports in 1991. Since almost all the garments are cotton based, they argue that Indian products compete for only 15 percent of the global market for clothing. On the other hand, Ramaswami and Gereffi argue that a pattern of specialisation is not confined to India and find a similar product concentration in the composition of exports from competing economies like China and Indonesia. In fact, in all these three economies, the top two products account for more than 50 percent of their total garment exports. Further, across all the product categories exported, India’s market segments 2

“During the last decade, (i.e. 1983-93) garment exports have expanded at the rate of 19.1 % per annum in US $ terms, which is more than double the rate of growth for exports as a whole (8.2%).” (Exim Bank of India, 1995, 5).

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“mainly fall in cotton, semi-fashion, middle price segment with main product category being T-shirts, men’s shirts, ladies’ blouses, ladies’ dresses and skirts” (Tait 2001, 44). 2.2 Destination characteristics The change in the composition of garments exported also partly reflects changes in the destination of Indian exports. In the initial phases of Indian apparel exports, USSR and Eastern Europe were the biggest importers. Right from the mid-1960s through the mid1970s, they accounted for roughly over 50 percent of the market for Indian apparel exports (Chatterji and Mohan 1993, M 99). Since the late 1970s and the beginning of the 1980s, there has been a gradual shift to US and European markets along with the decline of the former East European and USSR markets. By 1999, a major share of Indian garment exports catered to the US and European markets, 29.54 and 33.63 percent respectively (calculated from AEPC 2000). Indian exports to these countries have been subject to quantitative restrictions. Along with currency depreciation, this has in fact governed the relative share of garment imports by these regions from India. While during the early 1980s, the share of the EEC market was around 50 percent, it declined in proportion to increase in the share of US market, only to again increase and stabilise at 43-44 percent during the late 1980s and early 1990s (Chatterji and Mohan 1993, M 102; Exim Bank of India 1995, 35). Since quotas given in most countries have been fulfilled, analysts expect that the removal of MFA restrictions would enhance the ability of Indian exports to penetrate these markets. Moreover, there has been a slight diversification into non-quota markets in recent years with quota markets’ share declining from 82 percent in 1987 to 74 percent in 1993 (Exim Bank of India 1995, 7) and to 68 percent in 1999 (Handbook of Export Statistics, AEPC 1999). These new markets are UAE, Switzerland, Japan, Russia, Saudi Arabia and Australia. Table 3.1 gives the growth in restrained and non-restrained markets since 1980. Table 3.1: Growth rate of exports of Indian apparel, 1980-2000 (compounded rate of growth) Period 1980-84 1985-89 1989-94 1995-2000 Entire Period

Restrained markets 1.25 11.5 7.5 4.8 8.83

Non-restrained markets 32.8 11.9 22.8 7.8 17.9

Source: Panthaki (2001, 85).

As can be seen in the above table, exports to non-restrained countries have grown at a much higher rate than that for quota countries, indicating a degree of competitiveness of Indian apparel. However, 51 percent of the garments exported continue to be governed by quota restrictions (Handbook of Export Statistics, AEPC 1999).

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2.3 Relative performance Indian garment exports do not compare well with many other peripheral economies. The growth in India’s share has been relatively slow, having moved from 1.5 percent in the 1970s to around 2.4 percent in 1992 (Exim Bank of India 1995, 7) and then to 2.6 percent by 1994 (Ramaswamy and Gereffi 1998).3 Even the latest figures for India’s exports place it at only around 2 percent (Tiruppur Exporters Association 2000). Though the growth of its exports has moved in tandem with world garment trade, its performance does not compare too well with that of other peripheral economies. Economies like Thailand, Indonesia, Bangladesh, Mauritius, Pakistan and Sri Lanka have achieved higher growth rates during this period as compared to that of India (Exim Bank of India 1995, 8; Ramaswamy and Gereffi 1998, 124). China, for instance, has more than tripled its share from 4 percent in 1980 to 15.2 percent in 1995 (Ramaswamy and Gereffi 1998, 124). Bangladesh has increased its share to 0.9 percent from near nil exports in the early 1980s. As a result, India’s share in ‘developing’ countries’ exports has not improved beyond the 4 percent mark achieved in 1974 (Chatterji and Mohan 1993, M 96). To add, India’s rank among ‘developing and NIE’ country exporters has fallen from 5 in 1980 to 8 in 1992 (Exim Bank of India 1995, 8). This relative stagnation assumes further significance in the context of India’s advantages in terms of cheap cotton production and availability of large pools of labour. In fact, substantial quantities of cotton fabric and yarn are exported from India to some of these economies from where they are made up into garments and exported. 2.4 Government policies and production structure The strategy of import substitution based industrialisation, with emphasis on growth of heavy industry has exerted a strong influence on prospects of the garment industry. Since heavy industries are capital intensive, and given the huge labour surpluses in India, the state assigned a few light goods industries, including the garment sector, the role of a labour absorber. Further, since there already existed a strong traditional artisanal garment sector, it was felt that it needs protection from the more ‘efficient’, modern capital. Consequently, sectors like the garments were reserved for firms that fall under the ‘small scale’ sector. Firms with a capital investment limit of less than Rs. three crore4 are categorised as ‘small’ and any firm with greater investment need to commit to export more than 75 percent of its output. Since no time frame is provided for this requirement, it is said that big firms do not will to risk entry into this sector (Chatterji and Mohan 1993, M117). Further, the small firms too would be unable to upgrade their technology, as this would invite a movement beyond the capital ceiling fixed for the small-scale sector.5 As a result, the Indian garment sector is found to consist of smaller firms as compared to other exporting peripheral nations, 3 4 5

ASSOCHAM Parliamentary Digest puts India’s share in textile exports for 1997 at 2.5 per cent (1999, 216) It has been revised to Rs. three crores only since 1998, and the limit was Rs. one crore during the 1990s. “In the case of export of cotton garments to the US in 1989, the average unit value realisation for Indian products was $ 3.50 as against a figure of $ 4.61 for Hong Kong, $4.73 for Taiwan and $5.1 for Korea.” (Chatterji and Mohan 1993, M115).

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thereby placing limits on the sector’s ability to compete on the basis of productivity (M 116). Moreover, given the importance of market information in this industry, traders exert a dominant influence in the export market. Out of 10,000 exporters registered with AEPC, only 250 are manufacturer exporters (M114). As a result, incentives to improve production techniques have not been forthcoming. It is therefore said that Indian exports depend more on fashion changes than on any inherent competitive strength based on quality or productivity (Chatterji and Mohan 1993). Despite these limitations, Ramaswamy and Gereffi (1998) find that India has improved its market share in 9 out of its 17 main product categories (129) and further that, there has been an increase in the unit values realised. This appears to have been possible due to the advantages derived from such a decentralised and networked production structure, which enable firms to compete in low-volume segments with greater fashion content as compared to say, China or Bangladesh where the minimum efficient scale of operation is much higher.6 In fact, Kathuria and Martin (2000), quoting Khanna (1990), cite that all successful exporting firms subcontract much less than India. While Indian firms subcontract 74 percent of their output, countries do not subcontract more than 36 percent of their output in all other cases. Further, they also contend that investment of Indian firms in processing techniques is very low when compared to other exporting countries (Table 3.2). Thus, while government policies have constrained garment producers from competing on the basis of scale economies and improved labour productivity, they have fostered a structure, albeit accidentally, that facilitates production for a more flexible product market. However, with the removal of reservation for the small-scale sector, possibilities of entry into large-scale production and benefiting from the scale of economy, have been facilitated. Further, with a good domestic production base in cotton fibre and lack of import restrictions to upgrade process techniques, Indian garment producers may venture to compete in the mass market as well. Nevertheless, given the strong competition in this segment and absence of a first-mover advantage, it may still be in the ‘flexible’ market segment that Indian producers retain their advantage in the post-MFA regime. Simultaneously, it also opens up possibilities for the latter segment to upgrade its quality by taking advantage of availability of new processes. Table 3.2: Machines installed by apparel export firms (nos.)

S. Korea Taiwan Hong Kong Thailand India

Pre-cutting 2.9 2.6 2.3 2 0

Cutting 12.3 7.5 13.2 12.8 2.3

Sewing 134.3 185.1 455.4 460.8 103.7

Special 77.5 49.5 112.7 72.4 8.6

Processing 31 12.8 27.9 21.9 4.6

Source: Kathuria and Martin (2000, 10). 6

“While China is gearing itself to meet the needs of the ‘volume’ markets for standard items, India is concentrating on “niche” markets for speciality products.” (Sen Gupta, http://www.carleton.ca/ctpl/library/booklibrary/01-01-023-11.htm, 250).

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2.5 Labour employed Given the fact that considerable section of Indian garment industry is confined to the ‘unorganized’ or ‘informal’ sector, working conditions for the workers are hardly under the legal purview. For instance, Gupta ( http://www.carleton.ca/ctpl/library/booklibrary/01-01023-11.htm) reports that only 25 percent of the total value of garment output is accounted for by the firms registered under the Factories Act. Hence, secondary data at the macro-level too are hard to come by in this regard. Time and again, as in many other countries, we observe that labour in the garment industry is subject to harsh working conditions and low wages (Singh 1990; Kalpagam 1981, 1993; Alam 1994). Further, given the predominance of ‘informal’ sector activity, legislation with regard to labour markets are less likely to be enforced as compared to other economies. Tait (2001) provides the distribution of the workforce in the Indian garment industry as follows (Table 3.3). Above all, the table clearly brings out the heterogeneity of the sector, and the share of the workforce employed in the export sector is still unclear. Employment in the ready-made garments industry is around three million, which is only eight percent of the total workforce in this sector, seen as a segment of the apparel commodity chain. The Annual Survey of Industries provides data on employment, output and capital used in the factory sector of all the manufacturing industries. Table 3.3: Employment within the textile and apparel industry in India No

Sector

Employment (in million)

1 2 3 4 5 6 7 8 9

Handicrafts Sericulture (Silk Industry) Readymade garments Woollen sector Handloom Decentralised powerloom Man-made fibre/filament yarn Cotton/man-made fibre/Yarn Textile/Mill Sector Jute

7.1 (18.64) 6 (16) 3 (7.87) 1.2 (3.15) 12.4 (32.5) 6.8 (17.85) 0.06 (0.16) 1.14 (2.99) 0.4 (1.05)

Total

38.1 (100)

Note: Figures in parenthesis in Column 3 are the percent shares of employment in the sector. Source: Tait (2001, 44).

Though confined to only a small proportion of the garment sector, we provide the employment figures as they are the only reliable macro-data source available for the Indian economy (Table 3.4). The table indicates the high dominance of women workers in the woven garment industry, while they are relatively less in the knitwear sector. However, as stated earlier, the data are hardly representative of labour employed in the numerous subcontracting and household enterprises that populate the ‘informal’ sector. Given the unreliability of these figures, rather than seek to understand the conditions of labour at the macro-level, or understand

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the labour market conditions in all centres of the Indian garment industry, the analysis is confined to that existing in Tiruppur, one of the biggest centres of apparel exports and representative of regions undertaking garment exports in India. Prior to that, in the next section, with a view to capture the structural dynamic of the global apparel industry and the possible impact of it on specific regions, some of its key characteristics are delineated. Table 3.4: Sex-wise distribution of workforce in the organized Indian garment sector (1997/98) Industry Code

No. of factories

260 265

1380 2983

No. of male workers 24708 7637

No. of female workers 7612 148910

Share of female workers (in %) 23.5 95.2

Note: ‘260’- Knitting mills; ‘265’ -ready made garments sector other than knitting mills where fabrics are cut and sewn into garments. Source: Annual Survey of Industries, 1997-98.

3.

Features of world garment industry

3.1 Wage cost differences and strategy of shifting location The characteristics of garment production, as noted earlier, low sunk costs, relative absence of advanced technology and skills, have always induced apparel firms in the advanced capitalist countries to shift labour intensive operations to peripheral economies. Studies supportive of the ‘New International Division of Labour’ hypothesis, in fact, view the process of globalization as a movement from high wage cost regions to low wage cost ones (Frobel, Heinrichs and Kreye 1980). While in the case of garment manufacture in Europe, shifting of production to low wage regions initially took place mostly within the continent7 , movement to other peripheral countries was largely initiated by apparel manufacturers from the United States of America (USA or US) (Bonacich 1994, 81). This process has its origins in the 1950s when manufacturers began to shift production to Japan to take advantage of the lower wages prevailing there. This sourcing of garments from Japan with still lower wage levels followed the earlier movement of US garment production from the northern part of the country to the less unionised and lower waged southern regions (Markusen 1987, 134).8 Subsequent to the economic boom in Japan during this period accompanied by rise in wage rates, manufacturers began to shift production to Hong Kong (Jones 1971, 140). From Hong Kong, capital migrated to South Korea and Taiwan to benefit from the lower wages prevalent there (Bonacich et al. 1994, 23). The process of incorporation of other East Asian economies 7

8

Though they too did source from East Asia, the early phase was mostly characterised by relocation of production to the nearby East European economies. Frobel et. al (1980) gives a detailed account of relocation of garment factories from Germany to the lower-waged non-EEC countries in Europe and Asia. Around this period, manufacturers also contracted out orders to producers in Latin American and Carribean countries as well (Bonacich et al. 1994, 81).

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was also aided by the growing foreign direct investment by Japanese firms in neighbouring countries to take advantage of the prevailing low wage rates. The period thus witnessed a trend towards movement of Japanese apparel capital to offshore locations like neighbouring South Korea. The 1980s witnessed the incorporation of other Asian countries with relatively low wage levels like China, Thailand, Indonesia, Sri Lanka, Pakistan, India and Bangladesh into the world garment trade.9 Between 1975 and 1990, the share of ‘Third World’ in the total output of global textiles has increased from 18.6 percent to 26.1 percent, and that of clothing from 11.7 percent to 20.4 percent (Kiely 1998, 153).10 During this period, the share of apparel in the exports of the newly industrialising countries (NICs) in fact declined. On the other hand, garment sector has become a growth pole for economies at lower levels of development like Bangladesh, China, Sri Lanka, Indonesia, India and Thailand (Gereffi 1994, 59). Table 3.5 depicts this process better by detailing the market shares of the leading garment exporting countries over a 15-year period, from 1980 to 1995. Table 3.5: World’s leading exporters of apparel, 1980-95 Countries

Hong Kong China Italy Germany South Korea US France Turkey Thailand Portugal Chinese Taipei India Indonesia UK Netherlands

Share in world exports 1980

1990

1995

11.5 4 11.3 7.1 7.3 3.1 5.7 0.3 0.7 1.6 6 1.5 0.2 4.6 2.2

8.6 8.9 10.9 7.3 7.3 2.4 4.3 3.1 2.6 3.2 3.7 2.3 0.5 2.8 2

6 15.2 8.9 4.7 3.1 4.2 3.6 3.9 2.9 2.3 2.1 2.6 2.1 2.9 1.8

Source: Ramaswamy and Gereffi 1998, 124.

9

10

“ ...while the NICs in E.Asia and other regions were shifting into more advanced export industries, textiles and clothing became a key growth sector for countries at lower levels of development like Pakistan, Bangladesh and Indonesia. At present, China, India, Bangladesh, Indonesia, Sri Lanka and Pakistan, with their low wage advantage have begun to establish themselves as major players in world garment trade” (Gereffi 1994, 59). “In the most recent years apparel export industries in Thailand and Indonesia have exploded past the 3 billion dollar mark, and India, Sri Lanka and Malaysia have topped one billion dollars in apparel exports” (Christerson and Appelbaum 1995, 1363). According to Chatterji and Mohan (1993), the share of developing countries in garment exports has more than doubled from 21 percent in 1970 to 56 percent (M98).

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As the table indicates, while the market shares of more industrialised economies and the newly industrialised regions like Hong Kong and South Korea have declined in most cases, that of peripheral economies like China, Thailand, Indonesia, Turkey and India have increased. This process has also been aided by state promotion of this sector among the less industrialised economies on account of its high labour absorption potential and low technology and skill requirements. Together, they have enabled garment manufacturing to attain the status of the most globalized industry. As the leading sector of globalization, the garment industry continues to increase its share in world trade for manufactured commodities. World garment trade has in fact grown faster than trade in manufactured goods as a whole (Ramaswamy and Gereffi 1998, 124).11 Accompanying this global expansion, there have also been changes in the organization of production with important implications for garment production in peripheral economies. 3.2 Changes in mode of organization The globalization process was paralleled by important changes in organization of the apparel commodity chain. While the initial phase of globalization was dominated by manufacturing capital in the advanced capitalist economies, it was, from the early 1970s, replaced by retail capital (Bonacich et al. 1994, 83; Fine and Leopold 1993,107-110). This process was once again facilitated by the requirements of low investment and technology in the industry. Earlier too, the manufacturers did not produce the entire output in-house. They sourced a substantial portion of their output through ‘contract manufacturing’, whereby they contracted production to small producers, many of them located overseas. The bigger manufacturers focussed on supplying designs to the producers in the low-waged regions, and ensured control over quality of output sold to wholesalers and retailers in the metropolitan regions. Since traders could undertake the same process of outsourcing as well, wholesalers and retailers sought to bypass the manufacturers and began to source directly from overseas manufacturers. Importantly, this process transformed the mode of pricing in this industry. While previously, pricing was primarily based on cost of production, with the dominance of trading capital, pricing increasingly was based on what the customers could afford to pay (Bonacich et al. 1994, 83). Since they could aggressively market the output, they could peg the prices at a much higher level as compared to the cost of production. This process has important ramifications for the modes of organising production in the sector since then, with the industry becoming an archetype of a buyer driven commodity chain. Given their relatively less knowledge of production, they competed primarily on the basis of design, marketing

11

Trade in apparel has grown at a rate of 10.2 percent per annum (in US dollars) while overall world trade grew only at 4.9 percent during the period 1980-92. In fact, the growth rate of world garment trade since the mid-eighties has been much higher at 15 percent per annum during the period 1985-92 (EXIM Bank of India 1995, 16).

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and fashion creation. The market for apparel has therefore become highly segmented and differentiated as a consequence, with non-price factors playing a critical role in competitiveness in many of these segments. Over time, the industry has come to be dominated by a few powerful retailers. At present, in the USA, top 10 retailers account for over two-thirds of imports into the US (http://www.sweatshopwatch.org/swatch/industry/cal/retailers.html). As a result of their increased bargaining strength vis a vis the supplier manufacturers, it is said that they even demand a profit margin of nearly 50 percent, further placing pressure on the former’s profit margins and hence the workers’ wages. Over time, with the dominance of the retailers, the distribution of costs or surplus along the garment commodity chain is heavily tilted in favour of the retailers as the following table would reveal (Table 3.6). The table gives the percent of final retail price as distributed among different nodes in the value chain for a pair of jeans. As can be seen in the table, the share of wages amounts only one percent of the sale price and the same study states that the share of wages in the final price for clothes is normally never higher than five percent. It also indicates the potential for a less skewed redistribution of surplus to the lower nodes in the chain, enabling producers to pay more wages to labour in low wage regions. Table 3.6: Cost structure of the apparel industry Cost components Retail Shop Profit & Other Costs (Personnel, rent, administration & advertising) Brand Profit, Overhead and Promotion Material Costs and Factory Profits Transportation/Taxes/Import costs Factory Workers’ Wages Retail Price

Percent 50% 25% 13% 11% 1% 100

Source: http://www.stanford.edu/class/e297c/trade_environment/rights/haddress.html

The sourcing of garments from distant locations was found profitable not only because of the low wages, but also due to improvements in transport and communication technologies. Such technological innovations enabled capital to facilitate co-ordination of production in distant locations to take advantage of lower factor costs that prevail in these areas without much increase in transaction costs. Countries with better infrastructure in these areas would therefore gain over those, which lack it. Despite the criticality of these factors, lower wage rates continue to draw capital to that region (Table 3.7). Table 3.7, in consonance with Table 3.5, reveals the growing share of the lower-waged regions in world garment trade. Countries with lower wage costs like China, Indonesia, Thailand and India have increased their share in world trade whereas, most economies with higher average wage costs, have witnessed a decline in their shares.

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3.3 Persistence of dominance of core economies Though the trend depicted above does lend empirical support to importance of the ‘low wage’ pull factor, other features of this sector do not lend credence to this view. Despite the growth of garment production and exports from many peripheral economies, there has not been much change in composition of the top exporting nations (Table A.3 in Annex). Table 3.7: Labour costs in apparel industry across regions (in US $/hour) Europe

1991

1993

UK W. Germany France Netherlands Italy Ireland Belgium Denmark Greece Portugal Spain

7.99 14.81 12.41 14.95 13.5 7.5 12.57 15.91 4.26 2.65 7.11

NA NA NA NA NA NA NA NA NA NA NA

6.77

NA

US

Asia Hong Kong South Korea Taiwan India Indonesia Malaysia Pakistan Philippines Sri Lanka Thailand China Japan Singapore Bangladesh Mauritius

1991

1993

3.39 2.75 3.74 0.25 0.18 0.62 0.24 0.46 0.39 0.59 0.24 7.44 NA NA NA

3.85 2.71 4.61 0.27 0.28 0.77 0.27 NA 0.35 0.71 0.25 10.64 3.06 0.16 1.04

S. America Brazil Mexico Argentina Peru Uruguay Venezuela

1991

1993

0.76 1.17 1.81 0.88 1.59 1.38

NA NA NA NA NA NA

Source: Moore 1997, Table 2; Ramaswamy and Gereffi 1998, 123.

Table A.3 in Annex reveals a number of interesting features. First, and the most obvious has been the rise of China to the status of world’s leading exporter in 1995 from its eighth rank in 1980. Further, its share of 15.2 percent is the highest held by any country during the entire period. A related observation is the increase in shares of peripheral economies like India, Indonesia and Thailand. The shares of semi-peripheral economies, viz., South Korea, Hong Kong and Taiwan (Chinese Taipei), premier exporters in the 1970s, have declined. On the other hand, importantly, despite decreases in their shares, core economies continue to have a significant presence in the global garment exports. In 1995, seven European countries continue to figure among the top 15 exporters apart from the USA. USA has not only increased its share during this period, but has also improved its rank. Moreover, many of these economies meet a substantial portion of their internal demand for clothing through domestic production. USA, for instance, still manufactures 50 percent of its requirements domestically in 1990 though it had shrunk from the 70 percent share it had in the domestic market in 1980 (Bonacich et al. 1994, 23). In fact, between 1993 and 1995, the share of less industrialised countries in global clothing trade declined from 65 percent to 53 percent, indicating a gain for industrialised regions (Hale and Hurley, 7). To understand this apparent paradox, we have to comprehend other forces that impact on the geography of apparel

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production and hence, on the prospects of peripheral regions industrialising through exports of garments. Towards this, in the following sections, a few other important features of the apparel product market are highlighted. 3.4 Protectionism in the advanced economies Despite the continued presence of core economies in the top ranks of garment exporters, their shares (other than that of USA) have declined. Further, these economies have witnessed a certain degree of import penetration, especially from the semi-peripheral economies. To illustrate, between 1983 and 1991, the share of domestic market catered to through imports has risen from 30 to 45 percent (Taplin and Winterton 1998, 20). Further, the rise in cheap imports of apparel from the lower waged peripheral economies has coincided with a phase of growing unemployment in the advanced economies. In the UK, employment in the apparel sector declined by over 50 percent in the period 1973 to 1993, while in Germany, employment declined by 2,70,000 during the period 1970 to 1994. This has led to the view that imports have resulted in loss of employment opportunities in these economies (Hoffman 1985).12 More importantly, a strong lobby of domestic manufacturers and workers has forced core governments to insulate the domestic industry from such imports. Hence, trade restrictions by the developed countries, both in terms of price and quantity, have come to impact the industry over a considerable period.13 The MFA has been revamped thrice since its creation, with each renewal meant to increase the coverage and intensity of the restrictions (Goto 1989, 204). While the MFA sought to impose restrictions on the quantity of different apparel that can be imported from each country, price restrictions were also imposed in the form of duties on other textile products. Discrimination was hierarchical. ‘Sensitive’ products, i.e., items with higher import penetration, met with higher quantitative restrictions. There is a gradation in tariffs imposed as one moves from processed to the final finished garment (Goto 1989, pp. 206-207). The quota system that has evolved under the MFA has exerted considerable influence on the structure of production of apparel. While the main objective of the quota regime is to restrict imports into the European and US markets, it has set in motion a process of quota imposed economies seeking to avoid the restriction by shifting production to other low wage economies that are yet to face quota restrictions. The rise of Bangladesh as a garment exporter is a classic example of this phenomenon (Rhee 1990). Many other Asian economies like China, Thailand and Indonesia too benefit from the relocation of manufacturing by firms in NICs to these countries. 12

13

However, imports were not the primary reason for job losses in this sector in the core economies. In Germany, for every job loss due to imports, 50 were lost due to productivity gains. Further declining demand constituted job losses 20 times of that which can be attributed to imports from the periphery (Underhill 1998, 57) The impact of trade restrictions on import penetration from the less industrialised regions has been, among others, examined by Keesing and Wolf (1981).

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While this process has definitely influenced the movement to relatively low wage cost countries, it has also helped to perpetuate market hierarchies in the industry. Manufacturers in the quota-imposed countries are forced to move into more value added products whose competitiveness is not based on low wages but on quality and fashion. Since there are restrictions on quantity, producers seek to increase their turnover by enhancing the value added to each garment. Segmentation in the apparel market, therefore, influences location of production. This is of course not to imply that the quota system is the key determinant of market segmentation. Firms in these countries only seek to move up existing market hierarchies created on the basis of quality, fashion and price. 3.5 The fragmentation of the apparel market Fashions have always influenced creation of demand in this industry, especially after the rise of retailers’ control of the commodity chain. Given their closeness and greater understanding of the market than manufacturers, these traders sought to compete through market innovations like new designs and fashion marketing rather than through cost reductions by innovations in production techniques. Here again, there are differences across various segments. Women’s and children’s wear is subject to more fashion based design changes as compared to men’s wear (Fine and Leopold 1993, 109). Further, socio-economic and related cultural changes have created a general trend in clothing towards more informal and casual wear since the 1970s. Consumption based identities have begun to play a bigger role in marking one’s position in the social hierarchy, thereby facilitating the creation of market niches (Underhill 1998, 77). All these factors have led to the rise of distinct segments in the apparel market. This trend has accentuated in recent years, when it is said that the recession in advanced economies has led to a more skewed distribution of income, creating two distinct market segments (Mody and Wheeler 1987; Hoffman 1985). Others point to the rise of post-Fordist life-styles, with consumption being an important marker of one’s identity, as responsible for this phenomenon (Underhill 1998; Lash and Urry 1987). The causes notwithstanding, the apparel industry has been divided into two key segments with different characteristics; i) a vibrant and growing upmarket fashion segment and ii) a relatively stagnant, low priced and standardised segment. The former market is highly volatile and is characterised by short production runs, fast changing fashions and designs, aggressive marketing and higher mark-ups. In response to market instability, firms target smaller, more rapidly changing market niches, which require quick alteration of product designs. Here, cost advantages do not matter as much as in the mass-market segment. More important is the ‘quick response’ factor (QR), the ability to deliver in time and adjust production to changing designs and quantities. In other words, ‘flexibility’ becomes an essential characteristic of production for this segment. Thus, the cost advantage gained in dispersing production to low wage areas tends to be offset by slowness in supply response. Production in distant locations is not suited for such markets,

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where reorders14 and fashion obsolescence are common.15 Further, the quality requirements of the fabric meant for such up-market garment production necessitates confinement of production to countries with better processing technologies. Nevertheless, garments of certain segments that are relatively less intensely driven by fashion and requiring lesser quality may continue to be sourced from distant regions. In sum, despite dispersal to low wage economies, the fragmentation of the apparel market into fashion-determined smaller and smaller niches has enabled the core economies to retain their competitive edge in these segments of the apparel industry. Another important explanation for the simultaneous dispersal and concentration of apparel production takes into consideration the social embeddedness of production processes and their part played in reducing transaction costs of firms in this sector. 3.6 High transaction costs for dispersion A key factor that works against greater dispersion of garment production globally is the amount of transaction costs involved in co-ordinating a global network of decentralised producers and traders. The high vertical and horizontal disintegration in this industry increases the volume and rapidity of inter-firm transactions. The location of production will therefore be also influenced by geographical proximity to suppliers, contractors and final markets, particularly when transactions are “small scale, irregular and involve production for quickly changing niche markets” (Storper and Scott 1990, cited by Christerson and Appelbaum 1995, 1364). In a cluster of firms in a region, the social embeddedness of production organization creates extra economic ties that facilitate transactions. Community and ethnic relationships provide certain regions with economic advantages in such a milieu. This is more relevant to the garment sector dominated by vertically disintegrated firms. Firms tend to cluster in regions that have a common ethnic or communal identity that enable entrepreneurs to enter into long term contracts with less risk. Christerson and Appelbaum’s study on location of garment industry in East Asia provides empirical support to this argument (1995). It has also been observed that it is easier for Taiwanese and Hong Kong firms as compared to the Korean firms to enter into contracts with overseas Chinese businessmen because of these social networks (Bonacich et al. 1994, 138). Given the high transaction costs involved, it may not be too feasible for buyers to shift their point of sourcing too often taking into consideration only the labour cost advantage. In fact, studies point to the fact that buyers increasingly prefer to negotiate with more 14

15

“…volume production in many branches of the clothing industry is observed by the repeated re-ordering of small branches of successful styles …rather than by the continuos production of standard goods”, (Fine and Leopold 1993, 223). ‘Reorders require a 10-14 day turnaround which is possible if the original order was placed with a local factory, but impossible if placed with an Asian factory, since transportation time alone for East Asia to Los Angeles ranges from 13 to 30 days. While the turnaround time for a Los Angeles firm is 4 to 5 weeks, for a firm in Asia it takes around 12 to 16 weeks...” (Christerson and Appelbaum 1995, 1368).

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reliable but lesser number of importers rather than many importers (Egan and Moody 1992). Further, the costs of finding and entering into a long-term relationship with new suppliers too would deter buyers from shifting points of sourcing. Given these factors, established suppliers may continue to manufacture for importers even if they lose the labour cost advantage over time. This is likely to be true in the mid-price segment where production costs are a lesser source of competitiveness. To sum up, though there are various forces at work in influencing the location of garment production, it is still possible to envisage a hierarchy of producers, hierarchy defined by levels of development, wage levels and quality of garments produced. Elson (1994, 194) presents six tiers of garment producers, with each country trying to move into the tier above them. Gereffi’s depiction of the sourcing of different products from different regions by American retailing firms reproduced below (Exhibit 3.1 below) is also very useful to understand this hierarchy. Exhibit 3.1: Types of retailers and major global sourcing area Representative firms

Type of retailer

Main global sourcing area

Characteristics of buyers orders

Fashion oriented companies

Armani, Donna Karan, Polo, Ralph Lauren, Boss, Gucci

First and second rings

Expensive designers’ products requiring high levels of craftsmanship; orders are in small lots

Department stores

Bloomingdale’s, Saks fifth Avenue, Neiman Marcus

Second, third & fourth rings

Top quality, high priced goods sold under a variety of national brands and private labels (i.e. store brands)

Speciality stores brand named companies

Macy’s, Norstorm, J.C. Penny, The Gap, The Limited, Liz Claiborne, Calvin Klein

Second, third & fourth rings

Medium to large sized orders, often co-ordinated by department store buying groups (such as May department store company and Federated department store)

Mass merchandisers

Sears Roebuck, Montgomory Ward, J.C.Penny, Woolworth

Second, third s & fourth ring

Good quality, medium priced goods predominantly sold under private labels; large orders

Discount chains

Walmart, Kmart, Target

Third, fourth & fifth rings

Low-priced, storebrand products; giant orders

Fourth & fifth rings

Pilot purchases and special items; sourcing done for retailers by small importers who act as ‘industry scouts’ in searching out new sources of supply; orders are relatively small first, but have the potential to grow rapidly if the suppliers are available.

Small importers

Note: Ring 1: Italy, France, UK and Japan Ring 2: Taiwan, Hong Kong, South Korea and Singapore Ring 3: Indonesia, Philippines, China, India, Malaysia, Thailand, Brazil, Mexico, Egypt and Turkey. Ring 4: Sri Lanka, Pakistan, Bangladesh, China, Tunisia, Morocco, Gulf and Caribbean countries, Eastern Europe, Mauritius,etc. Ring 5: Fiji, Maldives, Cambodia, Myanmar, N.Korea, Madagascar, Vietnam, Nicaragua, Bolivia, Peru, etc. Source: Gereffi 1994, 22.

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Exhibit 3.1 above clearly indicates the dominance of core and semi-peripheral economies in the premium up-market segment (Rings one and two), leaving the rest to compete for shares of the lower end of the market segment. Further, the table reveals differences even among the peripheral economies in niches that they cater to, in the global garment market. These differences, it is reasonable to argue, are conditioned by variations in technology and skill levels, and level of control over product markets.

4.

Competitiveness of Indian garment exports

While garment exports have registered impressive growth rates relative to the rest of manufactured exports from India, as we saw in an earlier section, India’s relative performance vis a vis its competing nations have not been too well. India, falls under ring 3 along with a few other Asian peripheral economies. In this section, based on existing studies and new computations, we seek to measure the competitiveness of India’s exports. With the withdrawal of quota and price restrictions from 2005, India, despite having unrestrained access to global markets, may face tougher competition from similar countries seeking to expand their market shares. Hence, it is imperative that measures are taken to meet the possible increase in competition. Competitiveness, in existing studies, has been measured primarily by a comparison of market shares (Chatterji and Mohan; Exim Bank of India 1995; Ramaswamy and Gereffi 1998). Alternately, as an input measure, labour costs corrected for labour productivity can be used. However, given the high presence of production in the informal sector, data on labour use is insufficient to use. Further, this measure is also difficult to be used as a comparative measure given the impact of exchange rates on wage costs. Given the importance of non-price factors like quality in influencing the competitiveness of garments, unit value realisation may be a better indicator as a measure of competitiveness. This measure, once again, is problematic given the highly fragmented nature of the apparel market. Higher unit values may probably indicate a foothold in a different market segment rather than competition in a similar market. Nevertheless, higher unit values indicate an ability to upgrade, which would be a critical factor in sustaining or improving competitiveness over time. Lastly, given the importance of many non-price factors like quick response, quality of fabric and processing, no single indicator can reflect the extent of competitiveness of Indian garment exports. Consequently, in this section, we draw upon a multitude of indicators to understand this dimension of Indian apparel exports. At the three digit level (Table A3.4 in Annex) garment categories, non-knit women’s outerwear, non-knit undergarments and knitted undergarments constitute the biggest shares and together account for more than 70 percent of exports from India. Even within these categories, specific items like women’s blouses and men’s shirts dominate the export basket. When compared to the market shares of these and other product categories of Indian exports against few of its competitors (Table A3.5 in Annex), India’s competitive edge is quite

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mixed. This comparison is confined to apparel exports to the USA, the single largest market for Indian exports. As can be seen in Table A3.5 in Annex, China and Hong Kong, in terms of market shares, appear to pose the strongest competition. Together, they have a higher market share in the US than India has in thirteen out of the seventeen product categories listed in the table. In fact, China alone has a higher market share than India has in ten of the product categories. Further, in quite a few categories, other countries like Indonesia, Pakistan, Sri Lanka and Bangladesh too have higher market shares than India. However, by and large, there seems to be a specialisation among the competing countries with each holding higher market shares in a few specific categories. On the other hand, China has penetrated significantly in most of the product categories. This leads us to infer that a region-wise specialisation in specific niches may enable the countries to expand their shares without undermining that of other countries. However, the market shares may also be influenced by the quota restrictions that prevent countries from expanding their exports beyond a point. Hence, the unit values of these product categories exported across these countries are examined in Table 3.8. Table 3.8 indicates that unit values of garments exported from Hong Kong are higher than that of most other countries indicating that they compete in a different, relatively upmarket segment as compared to the other countries. Thus, unit values may not indicate the level of competitiveness too accurately as even at the four digit level. Garments are a highly differentiated category, in terms of design and quality and hence, price. However, we do obtain a measure of competitiveness when we relate India’s unit values to that of the average for all competing countries. It appears that India has an above average unit value in two of the six product categories though Indonesia has a higher unit value in both these categories and China in all of them. Thus, China appears to offer the biggest source of competition to India in the post-MFA era. Table 3.8 US imports from selected countries by MFA categories, 1996 (unit values) Category description Cotton Cotton Cotton Cotton Cotton Cotton

men’s knit shirts men’s non-knit shirts women’s non-knit shirts other manufacturers men’s trousers women’s trousers

Average 8.35 4.13 5.57 0.75 5.19 4.82

India 10.35 4.35 4.42 0.57 4.16 4.76

Bangladesh Pakistan Indonesia Hong Kong 8.92 3.05 3.86 0.42 4.21 3.81

9.65 2.73 3.74 0.52 3.76 2.76

16.00 4.75 5.63 0.57 5.59 5.77

20.83 5.67 7.71 1.29 6.70 6.40

China 16.42 4.69 7.85 1.07 5.99 6.13

Note: Average for all countries Source: Ramaswami and Gereffi (1998, 127)

As a step towards further refining the measures of competitiveness, we next calculate the revealed comparative advantage (RCA) in some of the product categories of Indian garment exports and compare them with that of China and Indonesia. It is well known that

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the comparative advantage of a country is influenced by a number of factors, which may be broadly classified as price and non price factors. It is however, difficult to obtain information on these factors across products and countries. For example, sufficient information to make inter-country cost comparisons is not available. Thus Balassa (1965) suggested that it is sufficient to provide information on Revealed Comparative Advantage. The RCA, a well known measure, is simply a ratio of the industry A’s export share to total merchandise export from that country to the export share of the world exports of A to total world exports. The RCA is thus a ratio of two shares and is expressed as: RCA= (India’s export of product A/India’s total merchandise export)/(World export of product A/World’s total merchandise exports). It has definite advantages over use of market share as an indicator. The simple market share is very sensitive to the size of the country. To illustrate, China obviously will have larger share in the world exports as compared to say, Nepal. Such a large market share need not be related to comparative advantage per se as the larger share may be reflecting the larger size of China. But, RCA is a standardised measure and using this measure it is possible to find that Nepal records a comparative advantage despite its low share in the world market. To be explicit, one cannot say anything about comparative advantage on the basis of simple shares. But, if RCA is greater than 1, one can make a definite statement that the country has a comparative advantage. Similarly, if the RCA is less than 1, one can make a definite statement that the country has a comparative disadvantage. To add, unit values are generally not used as a measure of comparative advantage. Rather, it is used as a measure of quality of the product. This measure as an indicator of quality also is not free from flaws. It is very sensitive to the level of aggregation used. At higher levels of aggregation, it is not an accurate measure as the units of measurement may vary at specific product level. Thus, differences in unit value need not capture quality. Rather, it may arise as a result of the particular aggregation followed. The use of ‘revealed comparative advantage’ offers other advantages as well. Its basic thrust is to `measure’ the patterns of comparative advantage as are revealed by the observed trade flows. The Hecksher-Ohlin-Samuelson theory tries to explain trade flows in terms of factor intensities and factor endowments. In other theories of comparative advantage, there are propositions about the relationship between some other determinants of trade flows and the actual trade flows. For example, such determinants include technology gap (as in technology gap theory), economies of scale (Dreze, 1960), and domestic demand (Linder, 1961) etc. In the approach of RCA, there is an explicit recognition to the effect that the observed pattern of comparative advantage is the result of multiplicity of factors, which encompass all the standard theories of comparative advantage. The main advantage of the RCA measure over simple share and unit value is clear from the above discussion. That is, the RCA measure is very much derived from theory, whereas the uses of simple shares and unit values do not have any theoretical rationale. For calculation

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of the RCA, we use ‘India Trades’, an electronic database from the Centre for Monitoring Indian Economy (CMIE), as the source. This database contains detailed information on India’s trade as well as world trade. While information on India’s trade is sourced from the Directorate General of Commercial Intelligence and Statistics (DGCI&S)), that on World trade is sourced from the Statistics Department of the United Nations (UN). Earlier studies like that by Chatterji and Mohan (1993) and Ramaswamy and Gereffi (1998) too use the UN data. They are however, based on SITC Rev-2, wherein SITC 84 represents garments. As per an understanding with the UN, all individual countries are now supposed to adopt a new commodity classification system called Harmonised Commodity Description and Coding System. In fact, decision in this regard was taken long back, but many countries are yet to adopt the new commodity classification system. Thus, the UN in its published sources has been reporting the data on the basis of the earlier classification system (SITC-Rev 2). However, the data in India Trades is based on the Harmonised System, wherein 61 and 62 represent garments16 . One limitation of the world trade data in India Trades is that it is available for only one year (1995). The CMIE does not give any explicit reason why the data is confined to only 1995. It is possibly due to the new commodity classification system followed. Thus, while data for the years prior to 1995 are based on the earlier classification, that for 1995 and beyond are based on the new system. Usually, in its published sources, the UN covers data on all major countries including South Asian countries of Bangladesh, SriLanka, and Pakistan. In India Trades however, these countries are not covered. Again, the CMIE has not given reasons for not covering these countries. Yet again, the likely reason could be that these countries have not yet started providing data on the basis of the Harmonised System. All the countries, included in the database are probably the ones, which actually started providing data on the basis of the Harmonised system. To illustrate how RCA indices can be interpreted, India’s exports of clothing account for around 13 to 14 percent of merchandise exports and the world exports of clothing is a mere 3 percent of world merchandise exports. Then RCA is equal to 14/3 = 4.66. An RCA of unity would imply ‘normal’ export performance. An RCA of more than unity is usually taken as an indicator of comparative advantage and an RCA of less than unity imply comparative disadvantage. The calculated values for India and two of its primary competitors, China and Indonesia are given in Table A3.7 in Annex for product categories at the 4-digit level. It may be seen from the table that the three countries indeed record comparative advantages in most products. China has a comparative advantage in 32 out of 34 product categories. The similar figure for India is 25 while that for Indonesia is 29. Based on the above calculations, the products can be categorised in terms of which of the three countries have the highest comparative advantage (Table A3.8 in Annex).

16

Also, note that the DGCI&S has been following the Harmonised System since 1987.

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Also, using the RCA, one can draw certain inferences on structural characteristics. For example, if R1 denotes the vector of RCAs for country 1 and R2 is the similar vector for country 2, then a rank correlation between the two vectors (R1 R2), indicates the similarity or dissimilarity in the patterns of RCA between the two countries. Here, we have undertaken such an exercise with regard to India, Indonesia and China (Table 3.9). Table 3.9: Rank correlation coefficients of the RCA indices for pairs of countries (garments) Pairs of countries India and China India and Indonesia China and Indonesia

Rank correlation 0.119 -0.050 0.230

Karl Pearson correlation -0.095 -0.025 0.114

Note: None of the correlation is statistically significant. Source: Calculated from ‘India Trades’, CMIE.

The small values of coefficients indicate that there are no similarities in the pattern of revealed comparative advantage between the pairs of countries. It may, however, be noted that the similarity in patterns of comparative advantage is relatively higher for China vs. Indonesia as compared to other pairs of countries. This exercise once again indicates that the line of specialisation among the three countries may enable them to compete in the global market without eating into the market shares of other countries. Another indicator of competitiveness is that of labour productivity. The Global Competitiveness Report 1999 gives a number of competitiveness indicators of countries in terms of labour. One such indicator is the wage adjusted for productivity differences. It is found that wage adjusted for productivity is one of the highest in India. While the rank of India is extremely low at 51 out of 59 countries, that of China and Indonesia is 5 and 45 respectively. In fact, wages are found to be very low for the country’s level of productivity in China. Further, China too ranks pretty favourably as compared to India in terms of flexible hiring and firing practices despite better educational levels. Though these indicators are only representative of the entire workforce and may not hold true for the garment sector, it is quite likely that some of the differences would favour China even within the garment sector. In fact, though the data on wage rates would indicate that Indian wage rates are not too different from other peripheral economies, it is found that the cost per standard minute in India is higher than that of Indonesia, Thailand and China (Majumdar 1996). Its performance when placed against that of other peripheral economies is poor. Even in the leading categories, other peripheral economies have a bigger market share than India. Various reasons have been cited for the relatively poor performance of the Indian garment sector in the world market. One, garment exports from India is largely confined to cotton garments and hence confined to only one segment of the world apparel market. Two, and more importantly, it is said that government policies have created distortions in the industrial

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structure that prevent Indian producers from competing on equal terms with other lowincome regions. In the next, section, the role of government policy in influencing the prospects for Indian garment exports is analyzed through a case study of Tiruppur Knitwear Industry.

5.

Labour and Indian garment exports: a case study of Tiruppur knitwear industry

In earlier sections, the pattern of distribution of the workforce in Indian textiles and garments sector has been already depicted. The growing share of cotton knitwear in India’s export basket of garments is obvious. Knitwear has gradually increased its share in total garment exports from 16.9 percent in 1983 to 33 percent in 1999, and manufacturing of knitwear in and around Tiruppur accounts for the major chunk of exports under this category. In fact, its growth since the mid-1980s owes solely to the massive surge in exports of cotton knitwear. Being one of the most vibrant of the export segments, a study of labour market changes in the region would reflect the macro-changes consequent to export production. Interestingly, labour in the Tiruppur knitwear industry, despite being confined largely to the unorganized sector, has a long history of labour mobilisation through two trade unions affiliated to the two dominant parliamentary communist parties in India, CPM and the CPI (CITU and AITUC respectively). Discussions with respondents among exporters reveal that Tiruppur’s major competitors are China and Bangladesh. However, they claim to have an edge in the relatively low-volume, fashion-intensive category compared to these countries on account of their dense networking and modes of labour use. This observation, as other studies point out, is not unique to Tiruppur and can be safely extended to other centres of garment production in India as well (Tait 2001, 44). In this section, we profile the important changes in the labour market and modes of labour use and attempt to seek inferences for labour in a post MFA regime. However, we also draw upon other studies undertaken with regard to garment industry in other parts of India to adduce further evidence. 5.1 Growing feminisation of the workforce Exports from Tiruppur began in the early 1980s and has been increasing rapidly since then. Given the high labour requirements of the industry, this growth process has been enabled by the growing incorporation of women and children into the workforce apart from sourcing of migrant labour from the arid agricultural hinterlands of Tamil Nadu. The following table depicts the feminisation of the workforce during this period (Table 3.10) Given the predominance of ‘informal’ sector activity as the garment sector elsewhere in India, the data is highly unreliable insofar as the magnitude is concerned. Only 904 factories are listed for 1998 when informal sources reveal that there are over 5000 firms in Tiruppur. If the latter number were fairly accurate, it would imply that only 20 percent of the factories are in the organized sector. Further, data for the year 1990 is very inaccurate

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and not consistent with the data for the remaining years. Another glaring underestimate is the figures on child labour (‘boys’ and ‘girls’ category). It is clear from visits to the numerous units that helpers in all stitching units are child workers, except in a few direct exporting firms, which account for 15 to 20 percent of the total workforce. These limitations notwithstanding, the data is definitely useful to indicate broad trends in composition, duration of employment and the growth of the industry. Table 3.10: No. of workers employed in the knitwear industry in Tiruppur Year 1998 1997 1990 1985

Tot. no Sub. Total returns 904 843 311 219

721 670 289 185

28298 12263 4338 2235

Men 19892 8804 3993 1525

Women Male 8406 3459 311 312

0 0 19 200

Female Boys 0 0 15 143

183 0 0 50

Girls 997 0 0 5

Share of FL 33 28 8 21

Note: ‘Males’ and ‘Females’ are adolescents aged between 15 and 18 while boys and girls represent child labour. ‘Sub.’factories submitting returns, ‘Share of FL’- Percent share of total female labour employed. Source: Inspectorate of Factories List, Palladum Taluk for year 1985, and Tiruppur Taluk, respective years.

The important observation is the phenomenal growth in the use of female labour. From a low of around 21 percent in 1985, the proportion of female labour in the total workforce has increased to 33.8 percent. In absolute terms, the number is very high when we consider the fact that the total workforce has increased from an average of 2000 workers to nearly 30,000 workers in 1998. Interestingly, among child labour, girls account for over 90 percent of the workforce. Nevertheless, they seem to be present in a lesser proportion among the older workforce. This is due to the segmentation of the workforce along gender and age lines. 5.2 Segmented labour markets Though children have been employed in this industry before, with the movement to the export market, the quantum of use has increased manifold. Though it is difficult to come up with estimates of the absolute magnitude, informal sources place the workforce in this sector to number around 200,000. Of these, nearly 20 percent are children and women workers would account for another 30 to 40 percent of the total workforce. The labour market is highly segmented with women and children confined to a specific set of jobs, which as we shall see in Table 3.11, are relatively less paying as compared to jobs in which men predominate. There is no discrimination in wage rates against women within a job type. However, as can be seen, women are employed predominantly in the lesser paying jobs. The wage rates given in Table 3.11 provide only the average rates, and actual rates are found to be

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much lower in firms located on the urban fringes. More women are employed in such firms as they need to be closer home to attend to household work as well. Further, women workers do not undertake jobs in ancillary firms like fabrication units as it would involve working night shifts, which once again undermines their access to relatively better paying jobs. Thus, the structural location of women in a patriarchal household too reinforces the segmentation process. In fact, it may be even argued that jobs that exclusively employ women or children are lesser paying precisely because women and children are employed, since their wages are seen to only supplement the family income. Table 3.11: Worker characteristics in finishing units, Tiruppur Processes

Cutting Stitching

Pressing & Packing

Job

Age

Sex

Pattern master Cutting master Tailors Helpers Trimmers Folders Checkers Button holing & fixing Label fixing Iron master

A A A C C C A A A,C A

M M M,F M,F M,F M,F F M M,F M

Packers

A,C

F

Approximate wage rate in 1999 >5000 per month 80-100 75-90 30 30 40 65 60 60 90-100 60-65

Note: Wage rates, except otherwise stated refer to that paid per shift (8.30 AM to 5.30 PM). ‘A’- Adult, ‘C’- Children, ‘M’-Male, ‘F’- Female. Source: Fieldwork undertaken in 1999.

5.3 Casualisation of labour With movement to the global market, demand has become more seasonal, uncertain and flexible. It is therefore imperative for capital to flexibilise the workforce to adjust the quantum of labour employed to production requirements. For most firms in Tiruppur, production ceases for nearly four months in a year and hence, it is expensive for firms to maintain a permanent workforce. Along with the movement to the export market, there has been a growing casualisation of the workforce, with recruitment ‘just-in-time’. Workers, especially tailors who constitute bulk of the labour force, are recruited indirectly through labour contractors who would bring in labour whenever required. These labour ‘gangs’ under the contractor move from firm to firm according to employment availability. As a result, workers find employment in the industry only for eight months in a year. On the other hand, workers employed in firms catering to the domestic market are recruited directly and employed on a permanent basis. Given the uncertain employment prospects, households of

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the workers are forced to send more than one member of the household to work in the industry so as to reduce the risk of inadequate income due to uncertain employment. This casualisation of the labour force also precludes them from bargaining for social security provisions that had been fought for and obtained through trade union struggles in the early 1980s. At present, of the 5000 odd firms in Tiruppur, there are only roughly 20 to 25 firms that provide social security benefits to employees, like Employees State Insurance, Provident Fund, etc. 5.4 Work intensity and conditions of work Under the Indian Factories Act of 1948, and the Shops and Establishment Act, workers ought not work for more than 48 hours per week. However, in Tiruppur, such regular and optimal work hours are found only in firms catering to the domestic market. The movement to the export market has rendered the need for a labour force willing to work for long hours. Given the importance of sticking to delivery schedules, workers during peak season are found to work intensively for lengthy periods. In tailoring units, workers including child workers, tend to work for 36 hours at a stretch, and then go home for a short break, only to return to work the following day. On an average during peak season, workers in finishing firms, especially tailors, work for a minimum of 10 hours, six days a week. Working for three or four continuous shifts are however quite common. It is said that the turnover time, i.e., the time taken between the placement of an order with an exporter and the arrival of garments on the sellers’ premises, has come down over time and this squeeze on time available to complete orders subject workers to such intense work hours. And importantly, such intense work hours alternate with bouts of unemployment during which workers are engaged in search for employment. A study finds that the high work intensity and the cotton dust permeating the town has led to serious ailments among workers including children (cited in John 1998). In fact, over 60 percent of child workers reported ill health that included mouth ulcers, respiratory problems, stomach-ache, giddiness, etc. Apart from such effects of long work hours, work also poses serious hazards due to inadvertent slipping of fingers or hands or dresses into the stitching machine. An incident in point is the recent death of a child worker. While she purportedly worked in a unit that would fall under the Factories Act, the accident however took place in a neighbouring unit run by the owner’s son which was not registered. This unit functioned as an extended production unit of the former firm and worked on the excess orders of the parent firm passed on to this unit to overcome capacity constraints. Hence, legal redressal could not be sought (John 1998, 9). 5.5 Mode of wage payment During the initial phase of exports, when quality requirements were low, payment of wages moved to piece-rate system from the time-rate system extant in the segment catering

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to the domestic market. However, over time, especially from 1990, with the region’s movement to the semi-fashion segment with its attendant quality requirements, wage rates have slowly reverted back to the time rate system in a number of firms. It was felt that under the piece rate system, workers were not paying sufficient attention to the quality of stitching and that the piece rate system was detrimental for production in the new segment. This warranted a reversion back to the time-rate system among tailors. However, through casual employment and recruitment through the labour contractors, entrepreneurs ensured that the work was completed within the prescribed time limits. A few other jobs like cutting, cone winding, etc. nevertheless continue to pay on a piece-rate basis. The combination of indirect recruitment, casual employment and use of time-rate system to ensure quality despite use of variable labour indicates greater control of capital over labour. 5.6 Wage rates Despite periodic wage agreements between trade unions and exporters’ association, and consequent hikes in nominal wage rates, real wage rates have continued to stagnate since the early 1980s (Bhattacharya 2000)17 . Further, given the decline in quantum of employment in a year, it is difficult to anticipate any improvement in the total income earned as well. That the wages do not constitute a ‘living wage’ is clear from the fact that most worker households tend to send more than one member to work in the industry (Vijayabaskar 1999). An oft-cited reason is that income from one person is not sufficient to sustain a household over the year. This is especially true in the context of uncertain and seasonal availability of employment. The knitwear complex therefore sustains a lowcost workforce by employing family labour and paying less than a ‘living wage’ to individual members of the household. However, such wage cost reducing strategies are undertaken despite the relatively low share of labour costs in the total cost of production (Table 3.12). Table 3.12: Break-up of cost of production Cost components Raw materials (yarn) Fabrication Processing Finishing

Percentage share 60-70 2 10-15 15

Source: Vijayabaskar 2000, 12

Labour costs are factored into ‘finishing’ costs, where labour would account for more than 90 percent of the total. Exporters enjoy a margin of 12 to 15 percent while margins are much less at around 8 percent for the sub contractors. The data on production costs indicate 17

Nominal wage rates are already given in Table 3.11.

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that cost reducing strategies can be extended to other components as well, especially that of ‘raw materials’ through productivity improvements in yarn and fabric processing. However, the fact that exporters basically house finishing units where labour costs constitute the bulk of total production cost may direct cost reduction to labour costs. 5.7 Declining unionisation As stated earlier, the knitwear industry in Tiruppur has been characterised by a strong trade union presence despite its confinement to the ‘unorganized’ sector. Throughout the 1970s and early 1980s, a series of strikes that sought to wrest some rights for workers like shorter working day, implementation of a time-rate system, social security benefits, etc were carried out with a fair degree of success. The rise of a decentralised production system with dense layers of subcontracting is, in fact, partly in response to this labour strength (Cawthorne 1993). At present, however, few firms provide these benefits to the workers. Working hours have increased considerably as discussed earlier. Given the high fragmentation of production and casualisation of labour, workers increasingly fall outside the ambit of seeking legal redressal. In the course of interviews with trade union officials, everyone concurred that though they have a significant role to play, in recent years their effectiveness has been undermined due to changes in nature of the product market and the attendant changes in production organization. Demand being seasonal and labour status ‘casual’, employment is available only for six to eight months a year. On the other hand, during peak season, the need to stick to delivery schedules forces labour through long work hours. This insecure employment for which ‘local’ capital is less responsible prevents trade unions from demanding any kind of social welfare and employment security measures from producers. Further, since employment is only seasonal, workers do not have an incentive to organize themselves during peak season as they need to work long hours to compensate for offseason unemployment. Another factor that has rendered worker mobilisation difficult is the large scale use of internal migrant labour, especially that of temporary migrant workers. Even the wage rates fixed after negotiation by trade unions are, however, not adhered to by most firms in Tiruppur. The unionisation levels have declined and at present trade union membership would not exceed 10,000 members among a workforce of over 200,000. As a senior trade union official remarked, “I can’t say that we are completely powerless now. We can call for strikes now and we continue to settle capital-labour disputes at the firm level. However, it is true that the number of people who come to us have declined, especially with women and migrant workers’ entry. You can’t blame them. They have work only for a maximum of eight months a year and they would like to work as much as they can during this period” (Official AITUC, interview by author in Tiruppur, 5/8/2001).

Thus, worker mobilisation has been gradually undermined over the years through an interplay of various factors. Though not necessarily a conscious strategy of local capital, the

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logic of global capital’s need to keep costs down under flexible market conditions has definitely influenced this process. The introduction of process improvements and product innovations has taken place during a period when labour’s bargaining strength has been waning. This appears to indicate that the imperatives of competition at the global level has a definite bearing on labour relations in the region. It can be said that the former has undermined to an extent local labour organization, thereby facilitating the formation of a labour market conducive to flexible accumulation. These changes are very much in congruence with recent trends in characteristics of the global market. In an international survey of the textile and clothing industry carried out by Underhill (1998), the most important contributor to failure was found to be inappropriate products for rapidly changing markets. This has serious implications for workers. The number of buying seasons has doubled in the last few years to between six and eight as retailers are only willing to carry limited amounts of stock in order to respond more quickly to changing trends. Such demands for flexibility are clearly linked to labour conditions since they translate into forced overtime and extended periods of unemployment” (Hale and Hurley, 9). Given such tendency towards greater flexibility in product markets and the onset of more competition among low-income economies, flexibility of labour markets seem to be a necessary condition to compete. However, ‘active’ or ‘functional’ flexibility that enables workers to develop multiple skills, contribute to innovation and enjoy higher wages would be possible only when producers are involved in industrial upgrading and competing through innovation. 5.8 Pressure for labour flexibility Despite the availability of such a flexible workforce, exporters continue to stress on the need to implement fresh labour laws so as to enable them to exercise greater control over labour.18 Such measures are especially seen to be important in the context of a quota-free regime and the need to compete with countries like China where labour is reported to work for longer hours, capable of undertaking multiple tasks, etc. Further, India’s workforce appear to be less ‘flexible’ and enjoy a greater ‘bargaining strength’ as compared to some of its competing countries like China and Indonesia. Though, in the case of Tiruppur, these strengths or labour market rigidity are hardly visible, such macro-indicators along with lower labour productivity levels may be used to highlight the need for labour market reforms. In fact, even in Tiruppur, producers insist on the need to restructure labour markets.19 Formulation of a helpful exit policy is seen as critical to sustain or improve 18

19

“It is, however, the labour laws which the companies seem most opposed to, the policy appearing to be ‘can hire but cannot fire’ …” (Tait 2001, 47). The Tiruppur Exporters Association President has this to say, “ It is essential that the knitwear industry consolidates its strength and remains competitive in the face of aggressive competition from China, Indonesia and Thailand where reportedly labour works faster and do many different jobs at the same time.” (Apparel Fortnightly May 16-31, 2001, Vol. VIII. No.4, pg. 35).

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competitiveness in the world market. To be sure, changes in other realms of policy making have also been demanded like the need to open up the sector to large-scale production, which has been recognized as a means to improve productivity through scale economies and technology upgradation.20 The need for a more flexible workforce however, portends a serious threat to working conditions of the garment workers. Given these macro-trends, the discussion on labour in the Tiruppur knitwear industry would definitely hold good for garment production elsewhere in India, albeit with marginal differences. In fact, trade unions hardly have a presence in most other centres and given the fact that many of them are located in EPZs, labour laws are lax. Child labour is not present to this extent though the share of female labour is higher. Wage rates may be marginally higher or lower, as also wage shares. Nevertheless, pressures of export production is bound to impact upon all firms similarly as long as the output markets they compete in are similar.

6.

Possible impact of removal of quota restrictions

Studies in general point to various possibilities for low-income economies like India in a post-MFA era. While greater access to markets is a distinct possibility under the postMFA environment, competition from other countries may also possibly undermine the market shares. Given the multiplicity of factors determining outcomes of global integration, the outcomes cannot be, however, predicted with a great degree of certainty. Irrespective of the possible trajectories that the sector may assume, the immediate impact of quota removal on labour is likely to be negative. Studies have pointed out that quota restrictions do constrain Indian garment exports (Khanna 1990). It is generally recognized that the removal of quota restrictions would lead to an expansion of export markets for Indian garment producers. On the other hand, the lower labour productivity of Indian labour observed in an earlier section, as compared to some of its competing nations like China, Indonesia and Bangladesh, may threaten India’s competitiveness and hence lead to a decline in exports. Since India seemingly has an edge in the semi-fashion segment where economies of scope rather than scale matter, it is possible that they may continue to retain or expand their shares in such markets. However, respondents from the industry and other secondary sources do indicate an anticipated threat from China even in this segment (Manager, Export firm, interview by the author in Tiruppur, dated 5/8/2001). Given the structure and dynamics of the world garment industry, two possible strategies can be delineated to sustain/enhance apparel exports from India. One requires a spread to the mass market, through improved productivity, ensuring of scale economies by movement to large-scale production, installation of productivity enhancing techniques, etc. Given the presence of a domestic base in cotton, a movement to the large-scale sector would definitely

20

Except for the knitwear sector, which continues to be restricted to the small-scale sector.

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benefit producers to compete in this segment. However, for labour, this movement is fraught with danger, as it would involve increases in competitiveness through productivity increase that may not always be through introduction of new or improved technologies. Rather, it may be due to greater extraction of labour power and a possible downward pressure on wage rates, rather than on extraction of relative surplus. Resistance on the part of labour to this trend may be met with relocation to other, less unionised regions within or outside the country. As borne out by the shifting geography of world apparel production, such a strategy is soon bound to flounder against the rise of new locations that can compete on the basis of still lower wages. Hence, competition based on lowering of wage costs would be detrimental to labour and to the industry as a whole in the long run. To counter the strategy of footloose capital seeking out lower wage locations, it may be required to impose codes of sourcing or producing among manufacturers and importers globally. Such enforcement mechanisms, as has always been the case, would still be difficult to implement and ensure compliance. The continued use of child labour in Tiruppur is a case in point. Alternately, competing countries can come together and decide to co-operatively compete rather than eat into the market shares of each country. Importantly, it is imperative that they agree to the provision of a ‘living wage’ to its workers. Here, trade unions have an important role in ensuring that competition is based on ‘active’ rather than ‘passive’ flexibility. Labour institutions, by resisting downward pressures on wage rates, may force regions to compete through ‘high road’ strategies. We observed earlier that India has a greater comparative advantage vis-à-vis some of its main competing economies in specific product categories. Targeting these specific niches and seeking to build competitiveness in these segments and to move up the value chain may therefore be a better competitive strategy. There may be less likelihood of a downward pressure on wage rates and work conditions, when competition is based on fashion and design rather than on costs. Such competition warrants firms to move into upper segments of the hierarchy of the apparel market or create new niches. The strategy involves higher marketing and selling efforts apart from considerations of quality and timeliness of delivery. This would involve creation of new institutions by the state that would enable producers to compete ‘actively’ as opposed to ‘passive’ competition based on lowering of wage costs. Improvements in process and manufacturing techniques require installation of new machinery that warrants access to institutional credit, which is at present difficult to access for most firms in the apparel sector given their confinement to the ‘unorganized’ sector. In the global commodity chain, given the lack of access to high-fashion markets, producers may continue to face disadvantages. However, as borne out by the experiences of East Asian economies like Hong Kong, Korea and Taiwan, movement along the value chain and backward integration is feasible to an extent. A closer understanding of the experiences of these economies may offer valuable lessons for South Asian garment exporters. Diversification of output markets into new geographical regions would be another key

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component of a ‘high road’ strategy. Another complementary strategy to overcome this hurdle to enable the labour to retain or improve their incomes would involve expansion of the domestic market and competition in the domestic market through design and fashion. Expertise built in the domestic market may serve to build competitiveness in the global premium segments.

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ANNEXURE 2 Table A3.1: Segmentwise composition of Indian garment exports, 1983-91 (in percent value) Year

Handloom garments share

1983 1984 1985 1986 1987 1988 1989 1990 1991

6.9 4.9 3.5 1.9 1.1 0.9 0.6 0.3 0.3

Knitted garments share

Millmade garments share

16.9 17.0 15.6 17.6 19.5 21.2 22.0 22.5 22.7

76.2 78.1 80.9 80.5 79.4 77.8 77.4 77.2 77.0

Source: Chatterjee and Mohan 1993, M-104.

Table A3.2: Segmentwise and fibrewise composition of garment exports, 1991/92 – 1999 (in percent value) Year

1991-92 1992-93 1993-94 1995 1996 1997 1998 1999

Knitted garments

Handloom garments

Cotton

Synthetic

Wool

Cotton

22.1 26.5 26.5 23.3 26.59 29.14 28.11 30.97

0.9 0.9 1.3 1.06 1.6 1.23 1.86 2.28

0.30 1.2 1.8 1.46 2.48 2.52 2.26 2.16

0.4 0.7 0.7 0.82 0.61 0.25 0.16 0.13

Synthetic — 0.2 0.2 0.03 0.01 0.01 0.01 0.03

Source: Handbook of Export Statistics, AEPC, and various issues.

Mill made garments

Wool 0.00 0.00 0.00 0.00 0.02 0.01 0.02 0.03

Cotton 41.3 46.1 47.9 44.8 44.1 42.01 42.51 39.34

Synthetic 28.9 24.2 20.4 25.12 23.08 23.67 24.26 23.88

Wool 0.2 0.5 1.4. 2.29 0.98 1.33 0.81 1.18

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Table A3.3: Ranking of leading apparel exporting countries, 1980-95 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

1980

1990

Hong Kong Italy South Korea Germany Chinese Taipei France UK China US Netherlands Portugal India Thailand Turkey Indonesia

Italy China Hong Kong Germany South Korea France Chinese Taipei Portugal Turkey UK Thailand US India Netherlands Indonesia

1995 China Italy Hong Kong Germany US Turkey France South Korea Thailand UK India Portugal Chinese Taipei Indonesia Netherlands

Source: Calculated from Ramaswamy and Gereffi 998, 124.

Table A3.4: Itemwise composition of India’s garment exports Item description Clothing and accessories Men’s outerwear non-knit Women’s outerwear non-knit Dresses Skirts Blouses Outer garments Undergarments non-knit Men’s shirts Of cotton Of synthetic fibres Outwear knit non-elastic Jerseys, pullovers, etc Outer clothing accessories Undergarments knitted Textile clothing accessories nec Headgear non-textile clothing

1991 -$ Million

1991 -Share

1994 -$ Million

1994 Share

2531.1 94.0 1032.8 191.8 85.5 510.2 166.8 435.5 408.6 325.6 83.0 236.6 70.0 123.5 298.2 106.4 327.5

100 3.7 40.8 7.6 3.4 20.2 6.6 17.2 16.1 12.9 3.3 9.3 2.8 4.9 11.8 4.2 12.9

3711.9 156.8 1409.2 286.0 193.9 617.7 214.6 724.6 659.0 604.5 54.5 338.5 116.0 175.6 480.3 172.6 429.9

100 4.2 38.0 7.7 5.2 16.6 5.8 19.5 17.8 16.3 1.5 9.1 3.1 4.7 12.9 4.7 11.6

Source: Ramaswami and Gereffi (1998, 124)

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Table A3.5: Market share in 16 categories of MFA imports of the US, 1996 Category description

Cotton women’s non knit shirt Cotton men’s knit shirt Cotton men’s non knit shirt Cotton other manufacturers Manmade fibre dresses Cotton other apparel Cotton women’s knit shirt MMF women’s non-knit shirt MMF skirts Cotton dresses Cotton/terry towels MMF women’s coats Cotton skirts Cotton women’s coat Cotton sweaters Cotton men’s trousers Cotton women’s trousers

US imports India $US million all countries 891.6 2919.1 2137.3 812.5 904.6 1157.7 1937.2 555.1 419.7 403.4 264.2 1066.9 345.0 354.4 336.5 2942.2 2288.7

Source: Ramaswami and Gereffi (1998, 127)

24.9 6.4 7.7 21.7 8.7 4.7 2.6 9.0 10.9 8.4 11.5 2.6 7.9 6.3 5.6 0.7 0.9

Bangladesh

Pakistan

Sri Lanka

6.5 1.7 7.6 3.2 0.9 10.5 0.7 2.8 0.6 3.9 3.4 3.1 4.1 4.5 0.7 3.5 1.4

1.5 10.2 1.3 15.4 0.1 2.1 2.4 0.1 0.1 4.1 17.9 0.7 1.9 0.8 0.1 0.8 0.6

5.9 3.0 3.2 1.2 4.9 5.3 1.5 4.2 4.5 3.2 1.0 3.3 7.7 7.6 1.2 1.9 2.1

Indonesia 5.6 2.9 5.9 0.5 6.6 4.6 1.7 15.7 5.3 3.5 0.0 2.9 4.0 2.6 9.6 3.8 2.4

China

Hong Kong

7.2 5.1 2.9 23.9 18.5 15.3 2.5 20.7 8.3 5.4 14.8 15.9 5.6 21.0 8.1 3.8 4.8

24.8 4.1 13.7 0.9 5.7 10.3 10.5 8.6 6.6 6.4 0.4 9.6 14.5 14.3 23.0 8.1 17.4

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Table A3.6: Revealed comparative advantage indices for China, India and Indonesia (Garment exports in 1995) China

India

Indonesia

No

SITC Code

RCA

SITC code

RCA

SITC Code

RCA

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

6216 6213 6207 6208 6116 6201 6202 6103 6211 6203 6204 6209 6110 6109 6107 6206 6205 6108 6102 6214 6104 6112 6101 6212 6217 6215 6117 6210 6111 6113 6114 6115 6105 6106

20.41868 16.97167 13.76015 13.15757 13.03601 10.50433 9.861238 9.814193 8.670356 8.625962 8.084695 7.954618 7.395208 7.388566 7.314404 6.675327 6.602632 6.594367 5.658824 5.21159 5.197849 5.17591 4.389822 4.296899 4.109059 3.861471 3.749343 3.711216 3.506931 3.033534 2.655998 2.64036 0.868824 0.578157

6214 6105 6206 6205 6204 6213 6208 6209 6102 6207 6107 6106 6103 6108 6111 6104 6114 6109 6117 6211 6110 6203 6210 6202 6216 6215 6101 6115 6217 6112 6201 6113 6116 6212

25.47747 23.72659 21.77933 18.29961 8.569124 7.260608 7.053777 6.599515 6.317059 5.751711 5.482587 4.257315 4.172825 3.699704 3.083288 2.573658 2.487196 2.462706 1.864298 1.850897 1.797846 1.671318 1.640403 1.337566 1.252611 0.951947 0.744278 0.701844 0.569176 0.564115 0.544429 0.473302 0.449461 0.083619

6101 6201 6202 6207 6105 6113 6205 6103 6112 6208 6216 6206 6209 6102 6210 6212 6204 6116 6108 6104 6111 6110 6203 6115 6109 6106 6107 6211 6114 6117 6214 6217 6213 6215

12.31565 10.68808 7.458491 6.877363 6.400447 6.216069 5.369276 5.20369 5.006139 4.550881 4.540025 4.030377 3.937918 3.822141 3.677161 3.563028 3.454933 2.943717 2.872122 2.811419 2.772384 2.614283 2.606099 2.353513 2.257602 2.242135 2.19887 1.362646 1.245352 0.726294 0.562155 0.457038 0.154843 0.011023

Note: The products that the SITC codes represent are given in Appendix 1. Source: Calculated from ‘India Trades’, CMIE.

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Table A3.7: Products with highest comparative advantages among the three countries INDIA Women’s or girls’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets, wind-cheaters, wind-jackets) and similar articles, knitted or crocheted, other than those of heading 6101 Men’s or boys’ shirts, knitted or crocheted. Women’s or girls, blouses, shirts and shirt-blouses, knitted or crocheted. Women’s or girls’ suits, ensembles, jackets, blazers, dresses, skirts, divided skirts, trousers, bib and brace overalls, breeches and shorts (other than swimwear). Men’s or boys’ shirts Women’s or girls’ blouses, shirts and shirt-blouses. Shawls, scarves, mufflers, mantillas, veils and the like.

6102 6105 6106 6204 6205 6206 6214

INDONESIA Men’s or boys’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets), wind-cheaters, wind-jackets and similar articles, knitted or crocheted, other than those of heading No. 61.03. Garments, made up of knitted or crocheted fabrics of heading No. 59.03, 59.06 or 59.07. Men’s or boys’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets), wind-cheaters, wind-jackets and similar articles, other than those of heading No. 62.03.

6101 6113 6201

CHINA Men’s or boys’ suits, ensembles, jackets, blazers, trousers, bib and brace overalls, breeches and shorts (other than swimwear), knitted or crocheted. Women’s or girls’ suits, ensembles, jackets, blazers, dresses, skirts, dividend skirts, trousers, bib and brace overalls, breeches and shorts (other than swimwear), knitted or crocheted. Men’s or boys’ underpants, briefs, night-shirts, pyjamas, bathrobes, dressing gowns and similar articles, knitted or crocheted. Women’s or girls’ slips, petticoats, briefs panties, night-dresses, pyjamas, negligees, bathrobes, dressing gowns and similar articles, knitted or crocheted. T-shirts, singlets and other vests, knitted or crocheted. Jerseys, pullovers, cardigans, waistcoats and similar articles, knitted or crocheted. Babies’ garments and clothing accessories, knitted or crocheted. Track suits, ski suits and swimwear, knitted or crocheted. Other garments, knitted or crocheted Panty hose, tights, stockings, socks and other hosiery, including stockings for varicose veins and footwear without applied soles, knitted or crocheted. Gloves, mittens and mitts, knitted or crocheted Other made up clothing accessories, knitted or crocheted; knitted or crocheted parts of garments or of clothing accessories. Women’s or girls’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets), wind-cheaters, wind-jackets and similar articles, other than those of heading No. 62.04. Men’s or boys’ suits, ensembles, jackets, blazers, trousers, bib and brace overalls, breeches and shorts (other than swimwear). Men’s or boys’ singlets and other vests, underpants, briefs, night-shirts, pyjamas, bathrobes, dressing gowns and similar articles. Women’s or girls’ singlets and other vests, slips, petticoats, briefs, panties, night-dresses, pyjamas, negligees, bathrobes, dressing gowns and similar articles.

6103 6104 6107 6108 6109 6110 6111 6112 6114 6115 6116 6117 6202 6203 6207 6208 contd.

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Table A3.7: Products with highest comparative advantages among the three countries (contd.) Babies’ garments and clothing accessories Garments, made up of fabrics of heading No. 56.02, 56.03, 59.03, 59.06 or 59.07. Track suits, ski suits and swimwear; other garments. Brassieres, girdles, corsets, braces, suspenders, garters and similar articles and parts thereof, whether or not knitted or crocheted. Handkerchiefs Ties, bow ties and cravats Gloves, mittens and mitts. Other made up clothing accessories; parts of garments or of clothing accessories, other than those of heading No. 62.12.

6209 6210 6211 6212 6213 6215 6216 6217

Source: Calculated from ‘India Trades’, CMIE.

Table A3.8: SITC codes for garment product categories under the harmonised system Trade classification(SITC) description Articles of apparel and clothing accessories, knitted or crocheted Men’s or boys’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets), wind-cheaters, wind-jackets and similar articles, knitted or crocheted, other than those of heading No. 61.03. Women’s or girls’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets, windcheaters, wind-jackets) and similar articles, knitted or crocheted, other than those of heading No. 61.04. Men’s or boys’ suits, ensembles, jackets, blazers, trousers, bib and brace overalls, breeches and shorts (other than swimwear), knitted or crocheted. Women’s or girls’ suits, ensembles, jackets, blazers, dresses, skirts, dividend skirts, trousers, bib and brace overalls, breeches and shorts (other than swimwear), knitted or crocheted. Men’s or boys’ shirts, knitted or crocheted. Women’s or girls, blouses, shirts and shirt-blouses, knitted or crocheted. Men’s or boys’ underpants, briefs, night-shirts, pyjamas, bathrobes, dressing gowns and similar articles, knitted or crocheted. Women’s or girls’ slips, petticoats, briefs panties, night-dresses, pyjamas, negligees, bathrobes, dressing gowns and similar articles, knitted or crocheted. T-shirts, singlets and other vests, knitted or crocheted. Jerseys, pullovers, cardigans, waistcoats and similar articles, knitted or crocheted. Babies’ garments and clothing accessories, knitted or crocheted. Track suits, ski suits and swimwear, knitted or crocheted. Garments, made up of knitted or crocheted fabrics of heading No. 59.03, 59.06 or 59.07. Other garments, knitted or crocheted Panty hose, tights, stockings, socks and other hosiery, including stockings for varicose veins and footwear without applied soles, knitted or crocheted. Gloves, mittens and mitts, knitted or crocheted Other made up clothing accessories, knitted or crocheted; knitted or crocheted parts of garments or of clothing accessories. Articles of apparel and clothing accessories, not knitted or crocheted

Code 61 6101

6102

6103 6104

6105 6106 6107 6108 6109 6110 6111 6112 6113 6114 6115 6116 6117 62 contd.

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Table A3.8: SITC codes for garment product categories under the harmonised system (contd.) Trade classification(SITC) description Men’s or boys’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets), wind-cheaters, wind-jackets and similar articles, other than those of heading No. 62.03. Women’s or girls’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets), wind-cheaters, wind-jackets and similar articles, other than those of heading No. 62.04. Men’s or boys’ suits, ensembles, jackets, blazers, trousers, bib and brace overalls, breeches and shorts (other than swimwear). Men’s or boys’ shirts Women’s or girls’ blouses, shirts and shirt-blouses. Men’s or boys’ singlets and other vests, underpants, briefs, nightshirts, pyjamas, bathrobes, dressing gowns and similar articles. Women’s or girls’ singlets and other vests, slips, petticoats, briefs, panties, nightdresses, pyjamas, negligees, bathrobes, dressing gowns and similar articles. Babies’ garments and clothing accessories Garments, made up of fabrics of heading No. 56.02, 56.03, 59.03, 59.06 or 59.07. Track suits, ski suits and swimwear; other garments. Brassieres, girdles, corsets, braces, suspenders, garters and similar articles and parts thereof, whether or not knitted or crocheted. Handkerchiefs Shawls, scarves, mufflers, mantillas, veils and the like. Ties, bow ties and cravats Gloves, mittens and mitts. Other made up clothing accessories; parts of garments or of clothing accessories, other than those of heading No. 62.12.

Code

6201 6202 6203 6205 6206 6207 6208 6209 6210 6211 6212 6213 6214 6215 6216 6217

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References Alam, G. (1994). ‘Industrial Districts and Technological Change: A Study of the Garment Industry in Delhi’, in UNCTAD, 257-266. Apparel Export Promotion Council (various years). Export Statistics for Garments and Knitwear (New Delhi: Apparel Exports Promotion Council). Balassa, B. (1965), “Trade Liberalisation and Revealed Comparative Advantage”, The Manchester School of Economic and Social Studies, (33/2: 99-124). Bhattacharya, U. K. (1999). ‘Clouds ‘in the making’ of an Industrial District?: A Note on ‘The Knitwear Cluster of Tiruppur’ in Bagchi A. K (ed.) in Economy and Organization: Indian Institutions Under the Neo-Liberal Regime (New Delhi: Sage), 122-146. Bonacich, E., L. Cheng, N. Chinchilla, N. Hamilton and P. Ong (eds.) (1994). Global Production: The Apparel Industry in the Pacific Rim, (Philadelphia, PA: Temple University Press). Cawthorne, P. M. (1995). ‘ Of Networks and Markets: The Rise and Rise of a South Indian Town, The Example of Tiruppur’s Cotton Knitwear Industry’, in World Development, 23/1: 43-56. Chatterjee, S. and R. Mohan (1993). ‘India’s Garment Exports’, in Economic and Political Weekly, 28/35: M95-119. Christerson, B and R. P. Appelbaum (1995). ‘Global and Local Subcontracting: Space, Ethnicity, and the Organization of Apparel Production’, World Development, 23/8:1363-74. Egan, M. L. and L. Mody (1992). ‘Buyer-Seller Links in Export Development’, in World Development, 20/3: 321-24. Exim Bank of India (1995), Indian Garment Exports: Implications of the MFA Phase-Out Occasional Paper. No.34. (Delhi: India Book House). Fine, B and E. Leopold (1993). The World of Consumption (London: Routledge). Gereffi G, (1994), ‘Capitalism, Development and Global Commodity Chains’, in L. Sklair (ed.), 211-231. Froebel F, J. Heinrichs and O. Kreye (1980), “The New International Division of Labour”, (Cambridge: Cambrige University Press). Gereffi, G. (1995). ‘Global Production Systems and Third World Development’, in Stallings, B. (ed.), Global Change, Regional Response: The New International Context of Development (NewYork: Cambridge University Press), 100-142. Gereffi, G. (1996). ‘The Elusive Last Lap in the Quest for Developed-Country Status’, in Mittelman J. H. (ed), 53-81. Gereffi, G. and M. Korzeniewiecz (eds.) (1994). Commodity Chains and Global Capitalism (Westport, CT: Greenwood Press). Gibbon, P. (2000). ‘Global commodity chains and economic upgrading in less developed countries’, Working Paper: No. 2, (Copenhagen.: Centre for Development Research) Goto, J. (1989). ‘The Multifibre Arrangement and its effects on Developing Countries’ in The World Bank Research Observer 4/2: 203-227. Hoffman, K. (1985). ‘Clothing, Chips and Competitive Advantage: The Impact of Microelectronics on Trade and Production in the Garment Industry’, in World Development, 13/3: 371-92. Hopkins T.K and I Wallerstein, (1986), “Commodity Chains in the World-Economy Prior to 1800,” Review, (10/1: 57-170). John, J. (1998), Dollar City in Tiffin Box, Labour File, 4/8: 3-13.

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Jones P. H. (1971). Asian Textile Survey 1969-1970, American Textile Manufacturers Institute. Kalpagam, U (1981). ‘Labour in Small Industry: Case of Export Garments Industry in Madras’ in Economic and Political Weekly, 16/48: 1957-68. Kalpagam, U. (1994). Labour and Gender: Survival in Urban India (New Delhi: Sage) Kathuria S, W Martin and A Bharadwaj, (2000), “Implications of MFA Abolition for South Asian Countries”, paper presented at the NCAER- World Bank WTO 2000 South Asia Workshop, December 20-21, New Delhi. Keesing, D. B and M. Wolf (1981). ‘Questions on International Trade in Textiles and Clothing’ in The World Economy 4/1: 79-101. Kiely, R. (1998). Industrialization and Development: A Comparative Analysis (London: UCL Press). Khanna, S. (1990), International Trade in Textiles: MFA Quota and a Developing Exporting Country, (Sage: New Delhi). Lash, S. and J. Urry (1987). The End of Organized Capitalism. (London: Polity Press). Linder S.B (1961), An Essay on Trade and Transformation, (Stockholm: Almqvist & Wicksell). Majumdar, M. (1996). ‘The MFA Phase Out and the EU Clothing Sourcing: Forecasts to 2005’, in Textile Outlook International, March, 31-61. Markusen, A. R. (1987). Profit Cycles, Oligopoly, and Regional Development (Cambridge, MA: MIT Press). Mody, A. and D. Wheeler. (1987). ‘ Towards a Vanishing Middle: ‘Competition in the World Garment Industry’, World Development, 15/10-11: 1269-84. Moore, L. (1997), ‘Notes on the Structure of protection for the Textile and Clothing Industries of developed countries and Agreements of Liberalization’, paper presented on 17/10/1997, (Oxford: Queen Elizabeth House), mimeo. Panthaki M.K, (2001), “Have Quota Restrictions increased Indian Garment Exports?, Clothesline, April, pp. 82-88. Ramaswamy, K.V. and G. Gereffi (1998). ‘India’s Apparel Sector in the Global Economy – Catching Up or Falling Behind? in Economic and Political Weekly, 33/3: 122-130. Ramamurthy, P. (2000). ‘The Cotton Commodity Chain, Women, Work and Agency in India and Japan: The Case for Feminist Agro-Food Systems Research’, in World Development, 28/3: 55178. Rhee, Y. W. (1990). ‘The Catalyst Model of Development: Lessons from Bangladesh’s Success with Garment Exports’, in World Develpoment, 18/2: 333-46. Singh, M. (1990). The Political Economy of the Unorganized industry: A Study of Labour Process (New Delhi: Sage). Storper, M and A. J. Scott (1990). ‘Work Organization and Local Labour Markets in an Era of Flexible Production’ in International Labour Review 129/5: 573-91. Taplin, I. and J. Winterton (eds.) (1998). Rethinking Global Production (Aldershot: Ashgate). Tait N (2001), “Indian Garment Exports: Moving Towards 2005”, Clothesline, April, pp. 43-55. Underhill, G. R. D. (1998). Industrial Crises and the Open Economy: Politics, Global Trade and the Textile Industry in the Advanced Economies (London: Macmillan). United Nations Council for Trade and Development (UNCTAD) (1994). Technological Dynamism in Industrial Districts: An Alternative Approach to Industrialization in Developing Countries? (Geneva: United Nations). World Economic Forum (1999), The Global Competitiveness Report, Oxford University Press.

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Web sources Hale A and J. Hurley, “What does the phase-out of the MFA quota system mean for garment workers?”, http://www.poptel.org.uk/women . Sen Gupta D.N, “Effect of Policy on Export Competitiveness: The Case of the Indian Garment Industry” http://www.carleton.ca/ctpl/library/booklibrary/01-01-023-11.htm. http://www.stanford.edu/class/e297c/trade_environment/rights/haddress.html quota20 http://www.sweatshopwatch.org/swatch/industry/cal/retailers.html

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4

Garment industry in Nepal Dinesh Pant Devendra Pradhan

1.

Introduction

1.1 Historical background Ready-made garment industry is relatively a new industry for Nepal. However, the textile industry as part of cottage industry has its own traditional roots in the country. Garment industry started growing sharply only after 1983 (MOF, 1999). This growth has been largely attributed to the export business spilled over from India and other neighbouring countries. When the government of the United States imposed quota on import of readymade garments from third world countries, Nepal became a place of easy access for the Indian exporters to meet their quota deficiencies and manufacture garments for the US market (BM, 1999). Before this, Nepalese industrialists had not realized the potential of garment industry for export. In the beginning, all required materials including workers were supplied to Nepalese garment industries by their Indian partners and then garments produced were shipped to the United States with a “Made in Nepal” label. This was a privilege for the Indian entrepreneurs as they could use both quotas and non-quota facilities provided by the US to Nepal. Gradually, many other Nepalese entrepreneurs were attracted to this industry because of export potential and started to run industries on their own. However, some of them simply registered the industries in their names to enjoy quota premiums by offering partnership with real exporters, both Indian and Nepalese. 1.2 Present status The garment industry sector has not maintained progressive trends that it recorded in its early years. It has shown a mixed picture, both encouraging and discouraging, in recent years as described below. 1.2.1 Number of industries According to Garment Association of Nepal (GAN), the number of registered industries increased from 58 in Fiscal Year 1982/83 to 165 in FY 1983/84 and to 757 in FY 1992/93. It has been found from a separate source that the ‘cumulative’ number of garment industries registered from FY 1991/92 to FY 1997/98 was 1857 (BM 1999). The industries are

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concentrated in Kathmandu valley, with extension to other 50 districts focusing on Morang, Kaski, Parsa, Rupendehi, Chitwan and Jhapa. While production capacity was equivalent to Rs. 7,070 million, the capital investment recorded was equivalent to Rs. 1822.6 million. There are currently over 215 garment manufacturers, which hold capacity to employ over 50000 workers and have total investments shooting above 6 billion (TKP, 2001). Not all the registered garment industries are currently operating. According to GAN, the number of operating industries is 95. In terms of scale of business, 10 are large, 25 are medium and 60 are small. However, the total number of industries may come further down to about 60 when only those industries operating on a full-fledged basis are considered. Presently operating industries are those few large and medium industries which have been able to expand, modernize and develop linkages directly with the American buyers and improve quality of products. They are concentrated among few entrepreneurs in Kathmandu valley and in few other industrial towns. 1.2.2 Export performance The total export performance has been generally in the rising trend (as shown in Fig. 4.1). However, the export figure differs according to the source. As reported by the Ministry of Finance, the total export earning increased from Rs. 10 million in FY 1982/83 to Rs. 470.9 million in FY 1984/85 and to Rs. 1350.3 million in FY 1990/91 (MOF, 1999). According to the Trade Promotion Center of Nepal, which has computed the export figure on the basis of actual garment items, the export figure declined from Rs. 5756.5 million in 1993/94 to Rs. 5357 million in FY 1994/95 whereas it again started growing and reached Rs.11500.2 million in FY 1999/2000. It has recorded a slight decline by 4 percent bringing the export figure to Rs 11030.7 million in FY 2000/01. It was in FY 1998/99 that the garment industry overtook woolen carpet industry, for the first time after more than a decade, as the leading export industry of Nepal. The average rate of annual growth in export earning is 16.6 percent in the last ten fiscal years (1991/92-2000/01), though the growth in total volume during the same period is not encouraging (Annex 4.1). It grew from 25.3 million pieces in FY 1991/92 to 40.7 million pieces in FY 2000/01. The average annual growth in export volume is 10.3 percent for the same period. The export earnings have increased by more than three times (increment by 254 percent); while the total volume has increased only by 61 percent. The high annual growth in earnings is largely attributed to increment in exchange rate of US dollar. Moreover, the present export earnings too have been largely attributed to the export performance of a few large garment industries currently operating in Nepal. 1.2.3 Market segment As regards the country-wise classification of export performance, the United States has been the largest market for the Nepalese garments. Almost 87 percent of total export earning

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and 88 percent of total export volume in FY 2000/01 have been attributed to the US market. However, export earnings and export volume for the US market were 77 percent and 72 percent respectively in FY 1998/99 (Annex 4.2). The export earning from the US market increased from Rs. 2898 million in FY 1991/92 to Rs. 6425.6 million in FY 1998/99 and Rs 9595.4 million in FY 2000/01. Likewise, the volume of export to the US market also increased from 23.4 million in FY 1991/92 pieces to 27.2 million pieces in FY 1998/99 and 35.8 million pieces in FY 2000/01. Figure 4.1: Ready-made garment exports

w

w

1999-2000

2000-01

12000 10000

w

w

w

w

Fiscal Year

1998-99

1997-98

1994-95

w 1992-93

w

1990-91

w 1985-86

w w 1982-83

0

1987-88

2000

w w

1996-97

w

4000

1995-96

6000

1993-94

8000

1984-85

Export value (Rs. in millions)

14000

Source: Trade Promotion Center, Lalitpur, Nepal

However, as shown in Figure 4.2, the share of US market in total export from Nepal has slightly decreased on a percentage basis, if compared with the similar share in the early years of the garment industry. An estimate shows that the share of US market in total export earnings has decreased from 93 percent in 1991/92 to 77 percent in 1998/99 whereas the share of other countries has increased from 7 percent to 23 percent during the same period. Likewise, its share in total export volume has decreased from 92 percent in FY 1991/92 to 72 percent in FY 1998/99 whereas the share of other countries has increased from 8 to 28 during the same period. Nevertheless, the share of US market in total export earnings has increased in recent years; it reached 87 percent whereas the share of other countries has decreased to 13 percent in FY 2000/01. Likewise, the share of US market in export volume increased to 88 percent in FY 2000/01 whereas the share of other countries has decreased to 12 percent during the same period 1.2.4 Niche market The main export items have varied over time since 1983. However, as described above, the exports of garments from Nepal continue to concentrate in the US market as the main market. There are altogether 12 quota categories covering both cotton and rayon products.

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Since 1992, the following categories of garment products have constantly constituted the niche US market for Nepal. Export of cotton shirts (quota category 340) to the US market was the highest with 31, 23 and 24 percents in 1996, 1997 and 1998, respectively. However, it was reduced to the third highest export category in 2000, recording 11 percent of total US export value. Likewise, out of total export, the combined share of quota category 347/348, was 32, 37 and 44 percents in these three years respectively. The category recorded highest level of export (27%) in 2000. The combined share of quota category 336/636 was 19, 20 and 12 percents during the same period. It reduced further to 8 percent in 2000. Nevertheless, the other significant export items in recent years also included terry towels and shop towels (quota category 363-s and 363, respectively). Likewise, the quota category 338 emerged as the second largest export item in 2000. Figure 4.2: Changes in garment export to U.S market 100 90 80 Percent

70 60 50 40 30 20 10 0 1991/92

USA

1998/99

2000/01

Other countries

Source: Trade Promotion Center, Lalitpur, Nepal

This was reflected even in the trend of utilization of quota allocated to Nepal from the US government. Naturally, the quota category 340 was fully utilized (i.e., 100 percent) in both 1996 and 1999, though its utilization slightly reduced to 93 percent in 2000. Likewise, the utilization of quota category 347/348 was 76 percent, 82 percent and 95 percent in 1996, 1999 and 2000, respectively. In the case of quota category 336/636, the utilization rate recorded 51 percent, 58 percent and 82 percent during the same period. On the other hand, utilization of some garment quota categories (i.e., 641 and 341) ranged from as low as 5 to 47 percent in 2000 while it ranged even from 3 to 22 percents in 1996. The concentration of garment industry in some specific categories of products has been justified by sample studies too. For most of sample industries, following products constituted the hot categories for exports to the United States (Annex 4.3):

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- Cotton shirts for men and boys (Quota category 340) - Cotton trousers and shorts for boys and girls (Quota category 347/348) - Cotton /rayon dresses for ladies (Quota category 336/636) 1.2.5 Employment and its patterns and growth Though no authentic data are available, it is estimated that the employment has come down after mid-nineties along with decline in the number of garment industries. It is stated that the current level of employment in the industry is around 25000 to 30000 people (BM, 1999), while the previous level of employment was around 100,000 in early 1990s (Pant, 1998). No data were available to analyze the employment pattern in terms of skill level. However, as shown in Figure 4.3, the ratio of male to female is 85:15 and 40 percent of people employed in this sector are Indians. These ratios have now gradually changed in favour of both females and local labour in individual industries. Figure 4.3: Ratios of male female employment and local foreign labour Male female employment ratio

Local foreign employment ratio

Female 15%

Foreign 40%

Male 85%

Local 60%

Source: Sample study

Some indicative information has been generated through sample studies of nine garment industries presently operating in Nepal. The percentage of females in total employment ranges from 85 percent to less than 1 percent (Annex 4.4). Likewise, the ratio of local and foreign employees/workers ranges from 99:1 to 50:50. The ratio of skilled workers with non-skilled ones ranges from 60:40 to 95:5. In last two years period, while the ratio of females has decreased in some industries (GramMom and GramEna), it has increased in other industries. Likewise, while the ratio of local labour with foreign one increased in some industries (e.g., GramSin), it has decreased in other industries (e.g., GramEna) during the same period. Although the total number of employment in the garment sector has come down with a sharp decline in the number of industries, the employment size has dramatically grown in the sample industries which have been able to survive and grow. Based on sample studies, the growth in employment in individual industry, by comparing the employment in its first year of establishment with the present employment size, has ranged from 80 percent in (GramSin) to 620 percent in (GramMal). It is also noticeable that larger enterprises in the sample have larger percentages of skilled workers.

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1.2.6 Capacity utilization. The overall capacity utilization of garment industries in Nepal cannot be estimated, as many registered industries are not in operation. Since the production capacity of all the industries registered during the 1992-1998 has been estimated to be equivalent to Rs. 7070 million (BM 1999), the export earning recorded in 1998 indicates a situation of full capacity utilization. However, as a study shows, the capacity utilization in nine sample industries has ranged from 50 to 100 percent (Annex 4.5). 1.2.7 Cost of production The cost of production of Nepalese garments continues to be relatively high when compared with similar cost in India and Bangladesh. Transportation is the main cost element for both import of raw materials and export of products. The cost of transportation of goods from Nepal to Calcutta constitutes 70-80 percent of transportation cost from Calcutta port to the US port. This has been the main cost disadvantage for Nepalese exporters compared to those in Bangladesh and India. The cost of loan from commercial banks is relatively high which ranges between 14 to 16 percent whereas it ranges as low as 8 to 10 percent in Bangladesh. It needs to pay about 3 percent for various service fees, excluding the recent increment in export tax and development tax. The cost of labour which ranges from 18 to 30 percent of total production cost (including cost of fabrics) in sample industries is considered to be relatively high compared with similar cost in India and Bangladesh (Annex 4.6). The cost of raw materials such as fabrics and accessories, which are imported mainly from India, is naturally higher than that in India. However, recent government policy of allowing Nepalese entrepreneurs to procure fabrics through letter of credits in US dollar has helped them to reduce the cost of fabrics to some extent. The profit margin in each exported item is not as high as it is generally thought of. During the present study, the garment industrialists were asked even to illustrate the cost composition and profit margin of a particular product on a sample basis. As shown in Table 4.1 below, the profit margin per piece of cotton shirt for men can be as low as US 15 cents. However, the higher value item such as children’s wear can offer as high profit margin as US $ 1.15. Table 4.1: Cost composition and profit margin Cost factors (men’s cotton shirt) Fabrics Others (labour, transportation, accessories, etc) Total cost: Unit price: Profit Source: Sample study

Sample item X (children’s wear) US US US US US

$ $ $ $ $

2.00 1.25 3.25 3.40 0.15

Sample item Y US US US US US

$ $ $ $ $

1.70 1.65 3.35 4.50 1.15

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Data on cost composition of garment products in India and Bangladesh could not be available. However, all the industrialists and experts interviewed during the present study shared the view that the cost factors particularly those relating to fabrics, transportation and labour are relatively low in those countries. 1.2.8 Share in national export In the fiscal year 1998/99, garment industry recorded its export performance as the largest export-oriented industry in terms of foreign exchange earnings. Before this, it continued to be second largest export-oriented industry after carpet industry in the country. As shown in Figure 4.4, the garment export has correspondingly increased with increase in total national exports to overseas countries (MOF, 2001). The share of garment export in total national exports in FY 2000/01 is 43.9 percent, while it increased from 21.7 percent in FY 1992/93 to 48 percent in FY 1999/2000 (details in Annex 4.7). During the last nine fiscal years, the average share of garment industry is around 36.8 percent. Such a growth is partly due to increase in export earnings of garment industry itself in terms of local currency and partly due to decline in the export of carpets from Nepal. Figure 4.4: Garment export in national total exports 3500

w

25000

w

20000 15000

w

w

w

w

w

w

w

n

10000

n

5000

n

n

n

1995-96

n

1994-95

Export value (Rs. in million)

30000

n

n

n

2000-01

1999-00

1998-99

1997-98

1996-97

1993-94

1992-93

0

Fiscal Year

n Export of Garments

w

Total National Exports

* Provisional estimate for the first eight months Source: Economic Survey, Ministry of Finance (1999), Kathmandu.

1.2.9 Value addition The garment industry has been largely based on imported raw materials such as fabrics and accessories (e.g., button, threads, zippers, etc.) and foreign skilled manpower (e.g.,

100 GARMENT INDUSTRY IN SOUTH ASIA

tailor master, cutter, designer, etc). Naturally, the value addition in this industry is not as high as in other labour-intensive industries. According to a study undertaken in 1996 (NPEDC, 1996), the average net value addition of garment industries in Nepal is 35.4 percent. This situation has hardly changed now. The main contributors to such value addition are salary and wages, house rents, utilities such as electricity and water and duties and fees paid to local agencies. Obviously the garment industry has high potential to improve its value addition to the scale of 90 percent if it is able to use local fabrics and accessories and replace foreign workers by local ones. The present status of the garment industry as presented above becomes a basis on which to review its competitiveness and the impact of globalization process. Moreover, it also provides a context to review the employment situation and job quality critically in the succeeding chapters.

2.

Globalization context of garment industry in Nepal

2.1 Globalization process and its meaning in Nepal 2.1.1 Background It has been gradually realized that the immediate impact of globalization in Nepal is on its garment industry sector through the implementation of TCA under the WTO regime. This is because the quota system will be completely dismantled and integrated with the WTO system from 2005. With the removal of quota system, restrictions for neighbouring countries to export unlimited volume of garment product to USA and Europe will be removed and these countries will be able to export large volume of garment products. On the other hand, Nepal’s garment export is feared to decline sharply because of lack of its own unique market. Nepal needs to make preparations seriously to meet the challenges of globalization under the WTO regime, but the preparations seem to have been far from being satisfactory due to frequent political changes and continued confusions among the intellectuals and business communities regarding the country’s membership of WTO. Debates on whether Nepal should be a member of WTO are going on since the establishment of WTO in 1995. However, the government has already submitted a memorandum in July 1998 for its entry into WTO as it applied for the membership of GATT in the wake of trade and transit impasse with India in 1989. Nepal participated in the last ministerial meeting of WTO in Seattle as an observer. Nepal has entered into various rounds of bilateral and multilateral negotiations for accession to WTO and is likely to get accession after the conclusion of negotiation and endorsement by WTO authorities. The WTO regime will have profound influence on Nepal’s economy. The Uruguay agreement allows for subsidies for countries having less than $1000 per capita on industrial products as long as it is less than 3 percent of domestic market.

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There are some special provisions for landlocked and economically weak country like Nepal which can guarantee freedom of transit, access to permanent international market and attract foreign investment in the country, thereby helping to boost its production. On the other hand, Nepal will also have to allow products of other countries on the basis of Most Favoured Nation treatment which means Nepalese industries will have to directly compete with industries from the neighbouring countries including India and China along with the industries of the world. Nepal, with a very weak industrial base, will have hard time competing with superior products of the neighbouring countries and the world at lower prices. 2.1.2 Uruguay agreement on textile and clothing and its implications for Nepal The Textile and Clothing Agreement (TCA) is a vital component of the Uruguay round of negotiations which concluded in 1993 and came into affect with the emergence of WTO from 1st of January 1995. Developing countries were long trying to remove Multi-Fiber Agreement (MFA), which was in force from 1974 allowing developed countries to impose quota on exports of garments from third world countries and integrate textile and clothing sector in the mainstream WTO rule. The present TCA has aimed to phase-out bilateral quotas under the MFA within 10 years from 1995 to 2004 on a product-by-product basis. This will be achieved in three phases by progressively integrating currently restricted products with the WTO regime and at the same time simultaneously accelerating growth of quotas of remaining restricted products to eventually allow full market access by the year 2005. The three stages in which the quota will be phased out are: First Stage: Second Stage: Third Stage:

36 months (1Jan 1995 to 31 Dec 1997) 48 months (1Jan 1998 to 31 Dec 2001) 36 months (1Jan 2002 to 31 Dec 2004)

In the beginning of the first phase, 16 percent of the total import (in 1990) were to be phased out. While 17 percent were to be phased out in the beginning of second stage, 18 percent has to be phased out in the beginning of the third stage. The remaining 49 percent will be removed after the completion of phase out period on 1 January 2005, from which the textile and garment sector will be completely governed by the WTO rules. A mechanism called Textile Monitoring Body has been set up to oversee implementation of the TCA. It has a provision for special treatment to certain countries, e.g. new entrants, non-members of MFA, small suppliers and least-developed countries. In 2000 November, the United States has passed the African Growth and Opportunity Act (AGOA) which allows quota free and duty free access to garment exports from around 33 Sub-Saharan African countries to the US markets (TKP, 2001). Similar provisions are in consideration for the Caribbean countries. Moreover, Bangladesh is also requesting the US government for special facility to promote its garment export to US markets. It has made such a demand on behalf of least developed countries too.

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2.2 Competitiveness and productivity of garment industry and impact of globalization As describe in earlier chapter, the garment industry has been prospering in recent years as the top export-oriented industry of Nepal. But it will now have to improve its productivity and competitive edge to survive and prosper in the emerging competitive world market after the full-fledged implementation of the WTO system. In this context, it is necessary to review its present structure, performance, competitiveness, productivity and future prospects in the context of globalization. 2.2.1 Industrial structure and export performance Data were collected from nine garment industries to analyze their structures and performances (Annex 4.8). This was done with a view to observing the changes in the garment industry sector that could be attributed to effects of globalization process in general and phasing out of quota system in particular. Majority of these industries were established in the mid-eighties with few industries established in the early nineties. They have now transformed their technology from piece-rate system to assembly line system, though a few industries are still using both the piece-rate system and assembly line system depending upon the types of product. Such a transformation in manufacturing system has been made through replacements of the traditional Indian machines by modern Japanese machines. Similarly, employment size in each of these industries has gone up significantly, in sharp contrast to overall reduction of employment in the garment industry as a whole due to closure of many small industries in recent years. Garment entrepreneurs have made some efforts towards market diversification, but the export of garment industries of Nepal is still largely concentrated in the US market. However, as stated in earlier chapter, the share of US market is on slight decrease with increment in share of European and Asian markets after 1990. All nine sample garment industries that were covered by the present study were performing well in terms of their export business. They have now recorded export performance that is more than double of their first year of establishment. In some cases, the increment ranges from as high as 3 to 23 folds (Annex 4.8). This has been compatible with the increasing trend of total garment exports from Nepal (details in Annex 4.1 and 4.2) Nepal has been enjoying duty free imports of fabrics from India when payments are made in dollar as India provides 20 to 30 percent subsidy on their fabric export through duty draw back scheme when transactions are made in US dollar. Such a situation has indeed been favourable for Nepal, and it has contributed towards making Nepalese products slightly competitive. According to the WTO rule, developing countries with per capita income of less than $1000 can subsidize their export product as long as the domestic consumption is not greater than 3 percent. India is likely to subsidize its fabric export even after the year 2005. It means cheap fabric import will continue to help Nepal to become competitive in this respect for some time to come unless there is change in India’s subsidy policy.

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Although all the fabrics and accessories used to be imported from India in the early years of industrialization in the garment sector, almost 50 percent of raw materials were imported from third countries in recent years (Table 4.2). This is a clear evidence of diversification and up-scaling of sourcing of input materials. Such a recent trend in imports indicates that the Nepalese garment industries, especially the big and medium industries, are increasingly becoming quality conscious. Some industrialists have already started preparations to appoint their representatives abroad to ensure outsourcing of materials and export markets. This is one of the effects of globalization and this kind of outsourcing of materials is likely to be intensified in the future to meet the challenges of WTO from the year 2005. Table 4.2: Import of raw materials and accessories for garment industries (I) From India (Rs. in million) Year Cotton Textile Cotton Thread Synthetic Textile Synthetic Thread Button and Fastener

1993/94

1994/95

1995/96

1996/97

1997/98

1738.9 531.6 NA NA NA

1402.8 407.3 119.7 76 8.5

1569.8 587.5 243.8 123 9.6

1094.4 664.9 127.5 53.3 7.2

1249.5 438.8 143.2 332.9 7.8

(II) From Overseas (Rs. in million) Year

1992/93

Synthetic Thread Cotton Textile Button Textile Dyes Cotton Thread Other Thread Other Textile Fastener Synthetic Textile

630 117 10.6 55.3 2.7 327.5 285.5 75 57.1

1993/94

1994/95

1995/96

1996/97

1997/98

748.7 0 0 94.9 0 0 0 0 332.8

402.5 60.8 20 42.4 27.5 627.5 357.5 141 60

470.7 164.5 19.2 73.9 9.5 505.1 292.3 115 133.9

372.7 416.8 42.5 56.5 7.5 233.8 347 322 169.2

304.4 283.3 45 43.1 19.5 290.8 431.2 366 274.1

Source: BM (1999)

The major trends as presented above indicate that the first two phase-out of export quota had hardly any adverse effect on the structure and export performance of the garment industry sector in Nepal. One possible reason is that 35 percent of the products in the U.S. market and 37 percent of products in European markets were not protected from the beginning. The real challenge of globalization is feared to be strongly felt by the end of 2001 when 51 percent of the existing quota will be dismantled while the remaining quota will also be increased by 27 percent. This means Nepalese garment industry, especially that part

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which largely depends on the spill-over effect from India and other neighbouring countries, will start feeling the pressure of globalization as early as two years from now. 2.2.2 Comparative review of competitiveness and productivity Nepal’s export performance is relatively quite low in SAARC region (consisting of seven countries). For instance, while the total exports of Bangladesh and Sri Lanka were comparable at around US $ 3473 million and US $ 3798 respectively in 1995, Nepal’s total exports were quite low to the tune of US $ 354 million in the same year (Joshi, 1999). On the other hand, the share of garment export as percentage of GDP was relatively high in Nepal, indicating a small base of both the industry sector and the national economy (Table 4.3). Such a situation continues to remain unchanged even in recent years. Table 4.3: Garment export as percentage of GDP Country

Garment export in percentage of GDP

Nepal India Sri Lanka Bangladesh Pakistan

2.00 0.25 2.60 1.40 0.20

Source: BM (1999)

As shown in Table 4.4, the share of Nepal in the US garment market is the lowest among other SAARC countries. While Nepal’s share is 0.4 percent, India’s share is the highest with 4.6 percent followed by Bangladesh, Sri Lanka and Pakistan with 2.6 percent, 2.1 percent and 1.8 percent, respectively. Table 4.4: Share of South Asian countries in total garment import of U.S.A Total import from World (Total) India Bangladesh Pakistan Sri Lanka Nepal

Total value of 1993-97 (in ‘000 dollar) 64477911 2940689 1697340 1149765 1365718 232053

Percent 100.0 4.6 2.6 1.8 2.1 0.4

Source: Trade Promotion Center, Lalitpur, Nepal

The situation has worsened further in recent years. In 1999, the share of SAARC region in total import of garments by US, valued US $ 10174 billion, was merely 1.45 and the share

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of Nepal’s export was 0.0174. Likewise, Nepal’s share in total US import of garments from SAARC region was merely 2.04 percent while it was 33.76 percent for Bangladesh (Table 4.5). In fact, its share in total US import from SAARC region is in itself least, being the sixth after Maldives. Table 4.5: US imports from SAARC region in 1999 Total imports Country India Bangladesh Pakistan Sri Lanka Nepal Maldives Total

Value (US$ in million)

Garment imports Percent

Value (US$ in million)

Percent

9071.50 1921.80 1742.30 1744.00 177.60 54.90

61.67 13.06 11.84 11.85 1.21 0.37

1962.6 235.2 1140.3 1315.6 142.2 53

28.17 33.76 16.64 18.89 2.04 0.76

14712.10

100

6965.7

100

Source: Primary data from Trade Promotion Center, Lalitpur, Nepal.

With the complete phasing out of the quota system for garment exports to the USA from the year 2005, Nepal will have to compete with many countries, particularly its neighbouring countries such as India, Bangladesh, Pakistan and Sri Lanka. Nepal tends to be little behind its neighbouring countries in terms of its competitiveness for garment export business. This is obvious from many points of view presented earlier in this report. Many of the neighbouring countries are in a hurry to speed up the process of ending the MFA to integrate it with the WTO rules. Nepal on the other hand is not in too much of a hurry to see the quota system dismantled. This is because most of the neighbouring countries having favourable conditions are in a position to gain from this process while Nepal on the other hand will have to struggle to survive. The competitive strength of Nepal compared to its most immediate neighbours can be assessed in terms of cost structures of garment products. As illustrated by an experienced Nepalese garment entrepreneur some time ago, also shown in Table 4.6, Nepal’s cost structure is relatively higher than its immediate competing neighbouring countries. For example, when export value of a garment product such as men’s shirt is US$ 3.40, cost structure and profit margin have shown relative competitiveness of three South Asian countries. This is a conservative estimation considering cost of fabric in cost structure to be constant for all competing countries which may not reflect reality of Nepal, except in the case of import from India by paying US dollar. This situation either leaves very small profit margin for Nepalese entrepreneurs or puts pressures on them to charge price that is higher than other exporting countries.

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Table 4.6: Comparative cost structure and profit margin (in US dollar) Factors: Cost of fabrics Other costs (cutting/finishing, etc) Total cost Export value Profit

Nepal

Bangladesh

India

2.00 1.25 3.25 3.40 0.15

2.00 0.70 2.70 3.40 0.70

2.00 1.00 3.00 3.40 0.40

Obviously, Nepal is weaker than its neighbouring countries in terms of cost competitiveness. The average cost of production of garments in Nepal has been estimated to be about 30 percent higher than in major competing neighbouring countries. The average value addition of garment industry in Nepal is only 35 percent while it is generally considered to be about 70 percent in Bangladesh and about 95 percent in India. The cost of bank loans in Nepal is also significantly higher compared to other South Asian countries. A study (NPEDC, 2000) shows that the labour productivity index in Nepal has relatively decreased in the last decade, especially in manufacturing sector (details in Annex 4.9). As estimated by some Nepalese garment entrepreneurs, labour productivity in Nepal is about 35 percent lower than other neighbouring countries. As illustrated by an experienced industrialist, if the Bangladeshi garment workers can produce 3000 pieces from 100 machines, Nepalese garment workers can hardly produce 1000 pieces from the same number of machines. A comparative review by the Asian Productivity Organization also indicates increasing trends in productivity indexes of some Asian countries in manufacturing sector, unlike Nepal. Details are given in Table 4.7. Table 4.7: Manufacturing labour productivity indices of selected Asian countries

Bangladesh India Indonesia Pakistan Philippines Sri Lanka Thailand

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

100 100 100 100 100 100 100

NA 104.4 106.6 95.1 97.6 NA 97.5

NA 107.2 115.8 114.1 98.4 NA 120.5

48.3 119.8 106.8 115.2 101.4 NA 117.6

NA 133.7 113 118.1 109.3 130 134.9

62.4 137 119.8 134.8 99.6 122.2 124.1

NA 128.4 126.1 139.1 91.9 131.6 129.6

NA 136.3 131.2 158.9 96 146 139.7

NA 135 141.1 177.4 95.9 141.1 146.7

NA 144.6 NA 177.8 104.7 131.6 NA

Source: APO (1997)

Infrastructure, which influences competitiveness and productiveness, is also poor, adding to the cost of production of Nepalese garment entrepreneurs besides causing other problems. For instance, electricity and water supplies are not only expensive but also insufficient. Likewise, general conditions of roads and other modes of transportation are relatively poor. Imported products at the airport often get damaged because of poor storage conditions. The

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idea of dry port, though being materialized through necessary construction work, is yet to come in operation. Industrialists and experts tend to believe that the only advantage Nepal has currently over other neighbouring countries is labour cost. The average labour cost component, which is currently about 20 percent to 30 percent of the total cost of a product, often varies depending on the cost of fabric and other accessory materials. High quality, skilled manpower is still not adequately available. This is compensated by the employment of foreign workers whose salary or wage rate is much higher than those compared to similar high quality worker in India or Bangladesh. However, with improvements in technology and modernization of industry, some Nepalese products have built an image in the international markets. In terms of quality, the Nepalese products can well compete with those of Bangladesh and those of northern parts of India. Some Nepalese entrepreneurs have already established direct linkages with the reputed buyers without relying on the middlemen. For the past five or six years, there is some positive indication that Nepal has been able to develop its own unique market. If Nepal has been performing well in garment industry sector in spite of many obstacles, it is mainly due to resourcefulness, business manoeuvring and managerial capabilities of a few Nepalese garment entrepreneurs. Nevertheless, government too has been making some liberal policy changes in favour of garment industrialists for the past five or six years and it is still in the process of making efforts to extend incentives for the promotion of garment industry and its export business. Most importantly, the policy makers are beginning to feel the challenges of globalization process and understand that the garment industries will have difficulty surviving in Nepal without substantial supports from the government. Some of the initiations taken by the government in this regard are the construction of Inland Container Depots (ICD) at Biratnagar, Bhairahawa and Birgunj, which are the major sites for transportation and transaction of goods. There are some positive indications that the ICD at Birgunj has been completed recently and this alone, if used, is expected to decrease transportation cost by 20 percent to 30 percent. The government is also planning to establish Export Processing Zones near these depot areas. Nepal is making progress in the area of telecommunication with the introduction of Internet and cellular phones. All these actions in process are expected to help the garment entrepreneurs to be competitive in the future. 2.2.3 Niche market Many believe that Nepal’s present so-called niche market is artificial and, if it exists, is very minimum. It will disappear with the emergence of fully globalized competitive market under the WTO regime. This is because the so-called niche market of Nepal has existed mainly due to quota system. Since Nepal has virtually no ancillary industries to support the present garment industry, everything has to be imported from India and other countries making the cost of production higher than in other countries. Only a few Nepalese

108 GARMENT INDUSTRY IN SOUTH ASIA

garment industries have exported products that are made from Nepalese fabrics with unique Nepalese designs. In most cases, buyers have determined the types of fabric to be used in the products, including specific designs and colors. Nepal still has not been able to export non-quota items significantly enough to carve a unique place for itself in the international market. The impact of globalization on the present niche product market of Nepal, as hinted in earlier chapter, is unpredictable as it will continue to largely depend on the consumers’ demands and dynamics of market forces. However, the globalization process will affect not only the niche products but will extend to the whole garment market. Nepal has only about three years to strengthen its capabilities, and there is now tremendous pressure on both the government and private sector to take concrete measures for developing skilled manpower and a sound R&D base to create a real niche market that can withstand the pressures of globalization. The situation for Nepal will deteriorate fast with the offering of special facility to other countries such as Sub-Saharan African countries and Caribbean countries. Garment exporters in Nepal can not ignore Bangladesh’s attempt in particular to enjoy such a special facility either. 2.3 Challenges and pressures of globalization on garment industry in Nepal Globalization means both opportunities and problems (threats) in Nepal. The benefits of globalization to developing countries seem to be extremely limited as the developed countries have very stringent migration laws that restrain the free movement of labour contrary to the spirit of globalization (Dahal, 1999). Nevertheless, there are two extreme views about the challenges of globalization to Nepalese garment industries. While one is pessimistic, the other is optimistic. Some of the threats of globalization challenges are related to the following situations which need to be tackled carefully for garment industry to survive in Nepal. n

The complete phasing out of quota system would put tremendous pressures on the Nepalese garment industries to be competitive enough to survive since the present spill-over business resulting from the quota restraints in neighbouring countries would no longer exist.

n

Although a large industries which are running with their own special efforts can survive for a few years after 2005, majority of medium and small industries, which outnumber large industries and heavily depend on quota privileges, will decline due to lack of ability to survive in the open competitive market.

n

With the challenge on a few surviving garment industries to be more productive and competitive, there well be pressures on industries to reduce their cost of production in a massive scale which will mean in particular downsizing of employment of labour and reduction or stagnation in wage rate and other facilities

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n

n

n

n

n

n

for the workers. Globalization in this sense is likely to give birth to problems of unemployment and labour unrest. Many entrepreneurs tend to be confused about what to do, nor have they been able to understand the concept of WTO clearly. The present pace of government to devise strategies and policies to face the challenges of the globalization process under the WTO regime is very slow while the time is running out. Considering what has been done in the past, one can not expect miracle to happen in the next three years to prepare Nepal for facing the challenges of globalization. It will be very difficult for Nepal to improve its competitiveness in the garment industry with the existing level of efforts and work culture. Decline in garment industry, which is currently the leading foreign-exchange earning industry of Nepal with export business of over US $140 million and capacity of employing some 50 thousand people, will have profound negative impact on the entire economy. To prevent this, government needs to take a lead role to bring all the key players to devise long–term strategies for countering the likely adverse situation from the year 2005. There is a possibility of deeper penetration of the Nepalese market by the Indian capital and labour with very little gains for the mass of population and disruption in their traditional livelihood patterns (Acharya, 1999). Nepalese economy, being a satellite of Indian economy for more than four decades of planned development, is still isolated from global economic revolutions that created many bubble economies in the SAARC and the ASEAN countries (Dahal, 1999). It is unlikely that Nepal will get rid of the continued Indianization process that is deeply rooted in behaviours of many Nepalese people (e.g., Acharya 1999, Shrestha, 1999). The process will continue to affect Nepal’s garment industry considering in particular the fact that Indian manufacturers and workers originally induce the industry. If the skilled Indian workers go back home because of demands in their own country for producing garments for unrestricted, open world market, it is also likely to create a problem of deficiency in skilled manpower required for the garment industry of Nepal. Being a land-locked country, Nepal cannot significantly reduce its present transport cost. The problem is further compounded by such factor as low productivity of labour, ineffective labour laws with little concern for efficiency and absence of backward and forward linkages in the garment industry. If the present unfavourable situation continues to prevail, it will be very difficult for Nepal to keep up its present performance after the year 2005. The present interest rate (around 15 percent) on bank loan in Nepal is considered to be high in the South Asian region. Some industries have already started feeling the pressure of repayment of bank loans. Furthermore, because of the uncertain

110 GARMENT INDUSTRY IN SOUTH ASIA

n

future of the industry itself with the phasing out of the quota system, some industrialists are starting to hold “wait and see” attitude refraining from investing further in their industries. As illustrated earlier, the cost of production in Nepal is much higher than in Bangladesh and India. There will be pressure now to improve this situation for the Nepalese garment industry because of the intense competition among all countries after the year 2005.

n

Some industries have procured expensive machines in their drive towards modernization and for being more productive to face the challenges of globalization. But many of these machines have not been used because of lack of technicians to operate and make repairs when needed. Lack of skilled technical manpower is a serious problem that needs to be solved if Nepal is to be more productive and compete with other countries.

n

Present pace of infrastructure development, including policy designs and commitments of the government, is very poor. If this status quo situation exists without significant improvement after the year 2004, then it will be difficult for garment industry to survive. In fact, Nepal does not need to wait for next three years to see declining situation of its garment industry if other countries start enjoying special facility for easy access to US markets from now.

n

Nepal does not need to wait for next three years to see declining situation of its garment industry if other countries start enjoying special facility for easy access to US markets from now.

n

Nonetheless, things are not so gloomy. There are some indications that globalization process can be a blessing in disguise for the development of ready-made garment sector in Nepal, provided that some well thought out strategies are devised in advance and some of the present positive trends are maintained. Hence, some of the challenges are related to the following situations which, if capitalized carefully, will turn globalization process into opportunities for Nepal.

n

Despite the possibility that many small and medium scale garment industries will close down, some garment industries will not only survive but also excel in their performance after the year 2005. With an eye on competition, some industries have already started not only exploring new avenues of market, but also making necessary arrangements for outsourcing of raw materials considering the likely demands of the markets.

n

The locally available labour, if trained, can be a strength for the industry. Some industries have prioritized employing local labourers and providing them on-the job training to cope with the likely shortage of manpower at local level and reduce dependency on foreign workers. With the use of local manpower, the cost

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n

n

n

n

n

of labour is expected to come down while both the supply and quality of manpower will also improve. With the removal of quota barriers, Nepal will be able to compete freely with other developing and less developed countries for having a reasonable share in the world market. Likewise, with reduction in tariff and non-tariff barriers, the size of the world market will increase by creating new market opportunities. It is also likely that cheap products coming from the developing countries could displace certain market share of the developed countries. This will lead to immense export market possibilities for the garment sector of Nepal. Least developed country like Nepal can also resort to export subsidy for their export products as well as zero duty access to other market. There will be immense possibilities of increasing export from Nepal, provided that Nepal can negotiate for enjoying privileges of a least developed country. Since only a few best and sophisticated industries can survive after 2005, their job quality and working conditions for workers can be expected to be better than those in many industries operating with low quality outputs targeted for ordinary buyers. These few best industries are producing quality products for the reputed standard buyers such as J.C. Penny, Walmart, Target and GAP which require that the industries maintain certain standards of working environment for their workers which will lead to improvement of working condition and better facilities for the workers. Large industries have increasingly realized that they can survive only by reducing their cost of production and improving product quality. Such a realization is likely to result in proactive initiatives of private sector, with support of the government, in areas such as R&D and skilled manpower development. Market positions have been much better than in the past and the government also has started offering some important facilities in recent years. Likewise, there have been some gradual changes in technology by replacing the traditional inferior Indian machines by the modern, superior Japanese and German machines. This has facilitated the process of transformation in production system from piece-rate system to assembly line system. Quality of the Nepalese products is generally considered to have improved significantly. Such a transformation in production system along with improvement in quality of products and export performance is an indication of improvement in productivity and willingness of the industrialists to face the challenges of competitive globalized market. About 20 percent of present export are estimated to be on non-quota items. Likewise, the concentration of export business in the US market is also slowly decreasing with expansion of European and other Asian markets. These are positive indications that give hope for withstanding the pressures of globalization.

112 GARMENT INDUSTRY IN SOUTH ASIA n

More recently Nepal has started importing raw materials from third countries in an equal footing with that of India. This will enable the Nepalese entrepreneurs to enjoy both cheap and quality products after the full-fledged implementation of WTO concepts.

n

Although total number of people employed in the garment industry has decreased in recent years because of gradual decline in small and medium garment industries, there are some positive indications with regard to employment situation and job quality, particularly in the case of a few large industries (to be elaborated in Chapter III).

n

Considering the nature of the national economy, even a dozen of big garment industries of Nepal with Momento’s (presently the largest garment industry) size, can easily face the challenges of globalization beginning from the year 2005. Large-scale industries can have various advantages in globalisation age. Performance and the size of some of the medium and large garment industries are getting better compared to six or seven years ago. If this trend continues till the year 2005, then it will be possible to maintain as well as increase the pace of industrial growth even after the quota is phased out.

Because of similar development thrusts in South Asia and similar experiences in the field of garment export business, the Nepalese entrepreneurs can explore some areas of collaboration with garment exporters of other neighboring countries and make some joint efforts for capturing a sizeable share of the world market. Such a collaboration is likely to be meaningfully utilized in minimizing cost of production and transportation and promoting export market. Productivity, as a means to generate competitive advantage, is a fundamental tool for enhancing competitiveness in the era of globalization (Bajracharya, 1999a). On the other hand, while competitive capacity is partly determined by external factors; such as, international environment, character of international competition and competitive policy of the chief rivals, and the competitiveness of the country (Bossak and Nagashima, 1997). Nepal, at present, is directly competing with its neighbouring countries in terms of both price and quality of products. Therefore, the most important challenge facing garment industry sector in Nepal in the wake of globalization is to improve its productivity to be competitive in the open world market. n

3.

Employment and quality of jobs in garment industry in Nepal

3.1 Employment situation No hard evidence exists to ascertain the exact number of people employed in garment industry sector in Nepal. As noted in earlier chapter, Nepalese garment sector has shown both growth and declining trend in its employment size. At present, its employment capacity

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is estimated to be some 50 thousand people while it provided direct and indirect employment to more than one hundred thousand people a few years back. However, this sector has now shown some improvements in other areas. While this industry started with 100 percent involvement of Indian entrepreneurs, more than 90 percent of garment industries are currently owned and operated by Nepalese entrepreneurs. Likewise, the share of employment of Nepalese labour has increased from being negligible to some 60 percent today (BM, 1999). The total number of people employed in garment industry sector has decreased in recent years because of decline of many small and medium garment industries. Although 215 industries are currently in existence, only a few large and medium industries are actually performing with tangible results. The reduction in employment size was partly due to increasing shift in technology and manufacturing systems from piece rate system to assembling line system by using imported sophisticated machines. Moreover, smaller industries have been dying out because of strong competition from both inside and outside the country. Even though garment industry is basically women-oriented industry, majority of garment workers in Nepal are men. In the garment industry sector as a whole, the ratio of male workers dominates female workers in Nepal by 85 percent to 15 percent. Nevertheless, the largest garment exporting industry in Nepal, with annual export to the tune of $ 13 million, has employed females constituting about 85 percent of the 2500-3000 workforce. This indicates that with more sophistication and development in the garment industry structure the male dominance in the overall workforce can gradually decrease in Nepal in the future, like in other neighbouring countries. In the beginning, the industries were dominated by Indian workers and technicians. Such a situation has not completely changed now as many industries still employ foreign workers due to unavailability of skilled manpower in the local market. However, as indicated earlier, the percentage of local workers in total employment in the garment industry sector as a whole has increased from a negligible percent in early 1980s to 60 percent in 1999. It should be noted here that employment size of the sector has in overall declined but has grown for those few industries that have been able to survive and improve export performance. The industrialists claim that they have not only increased employment opportunities but also improved quality of jobs. Employment size in each of nine selected industries has increased significantly compared with employment figure in its early years (Annex 4.4). It has grown by 60 percent in minimum and 620 percent in maximum. The assumption that while dying industries reduce number of employees, those who survive can ultimately provide larger number of employment opportunities and better job quality is true, as this is exactly what is happening right now in Nepal. 3.2 Review of present job quality The quality of job in garment industries was reviewed by examining the earlier publications for the purpose of the present research study (e.g., Adhikari, 1993; Decenzo and

114 GARMENT INDUSTRY IN SOUTH ASIA

Robbins, 1997; MOLJ, 1992). The main criteria for the review were working-hours, salary and allowances, skill development opportunities, promotion opportunities, safety at work place, job security, retirement benefits, gender distribution in employment, use of local labour and indirect employment through labour contractors. In this section, job quality in garment industry sector is reviewed by analyzing data drawn from nine sample garment industries. 3.2.1 Working-hours All industries have eight-hours’ work day, with one day off every week as per the labour law. While a few industries have designed workdays on a shift basis employing people through mutual understanding, other industries have normal work hours from 9.0 clock in the morning to 5.0 clock in the afternoon. The work beyond these hours is considered as overtime work that offers allowances. 3.2.2 Salaries / wages and allowances In Nepal, the minimum wage determined by the government has occasionally changed over the years. As of 1997, minimum wages of different levels of manpower range from Rs. 1800 to 2150 according to skill level, though market wages are considerably higher (Dahal, Karki and Upadhaya, 1999). However, it has often been argued that minimum wages should be determined and enforced strictly on the basis of clear and standardized norms keeping in view the subsistence cost. The argument further goes that additional benefits to the workers should be tied with productivity (Bajracharya, 1999b). Only 75 percent of presently running garment industries are paying wage by following the minimum rates determined by the government; the average pay scale in the rest is less than the standard minimum wage (BM, 1999). However, all the nine industries covered by the present study have followed the minimum wage rate periodically determined by the government under the existing labour law as the main basis for fixing minimum wage for their workers. Some industries have now paid even more than the government rate as their minimum wage (Annex 4.10). There is no maximum salary limit. It is different from industry to industry depending on their ability and level of competence of the persons employed. No industry has adopted differential salary rate for male and female workers. The minimum wage ranges from the government rate to Rs. 3000. The maximum salary ranges from Rs. 9000 to Rs. 60000. However, it was found during the study that the salary received by majority of workers and employees within an individual industry ranges from Rs. 3000 to Rs. 6500. With regard to allowances, all industries have provided overtime allowance for working more than eight hours on a workday. Most industries have paid 150 percent increment in basic salary rate for over-time work. Likewise, they have provided food allowance to workers/ employees for working more than three extra hours in a workday. The allowance ranges from Rs. 20 to 45 according to paying ability of the industry and level of workers and

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employees. Likewise, some industries were found paying incentive allowance depending on the efficiency level of the workers. For instance, GramMom, the largest industry, offers different incentive allowances for those who meet from 80 to 200 percent of work targets. Some 30 percent of workers of this industry are reported to have enjoyed such incentive allowance. 3.2.3 Skill development opportunities Except few, all industries have provided skill development opportunities to their staff and workers in the form of on-the-job training. They first employ their employees as unskilled labour and make them learn by doing and sharing know-how from their colleagues and supervisors. Some industries have employed a few people who have been trained from government’s garment training institute. But such trained people need re-training in the real job situation. The need for technical manpower has been fulfilled by employing cutters, masters and designers who are mostly from India and are trained elsewhere either through formal training courses or practical experiences. Only one industry, the largest in the country, has well-organized on-the-job training in a wider scale. Most people in this industry are first recruited as trainees with allowance and then they are gradually shifted to their real jobs according to the skill level they achieve. However, most industries do not have positive attitude in sending their staff and workers, especially female workers, for formal training courses. Two of the sample industries had bad experiences of losing money by training female workers few years back because these trained workers left the organization after training. Likewise, GramMom, which organizes on-the-job training on a regular basis, has been reported to have been losing hundreds of females every year for social reasons such as marriages and other family obligations. 3.2.4 Promotion opportunities All industries do not have formal system of evaluating performance of workers and staff and promoting them to higher level jobs on a regular basis. Few industries have awarded promotion to their staff such as promoting from junior master to master, tailor to master or supervisor. But, as noted by industrialists, promotion practices largely depend on availability of jobs and competency of existing staff and workers to meet the requirements of those available jobs. One industry was found to have occasionally awarded promotion to the staff and workers by increasing salary and wage rate when they improve their job performance. This is awarded even to those working on a daily wage basis. 3.2.5 Safety at work place Though the garment industry is not hazardous by its nature, a number of provisions have been made by many industries to ensure safety at the work place. Most industries

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reported provisions of gloves for cutters and adequate lighting system. Some industries such as GramIna, GramPun and GramCot have developed and maintained safety system that include safe drinking water, fire exits (double exits) and fire-alarms according to the standards set by their American buyers, e.g., WalMart, J.C. Penny, etc. They were required to do so to satisfy the requirements occasionally specified by their buyers. In overall, the safety system in most industries was observed to be sufficient while one industry had minimum safety (Annex 4.11). Industries having their own factory buildings have some reasonable safety measures, while those operating in rented houses had only minimum safety arrangements. 3.2.6 Job security Job security has often been a matter of grievance expressed by the labour unions. In an estimation, about 70 percent of workers were employed on contract or piece-rate basis, while 14 and 16 percent workers were employed on permanent and temporary service basis respectively (IGWU 1996). In most garment industries covered by the present study, only a few staff and workers were employed on a permanent service basis. Majority staff and workers are working on either contract or daily-wage basis. Appointment letters were issued only to the permanent ones (also temporary ones in a few industries). Moreover, some industries have used contractors (suppliers) for employing workers in some cases, i.e., employers are not directly responsible for these workers. The percentage of permanent staff in industries has ranged from almost 0 to 50 percent (Annex 4.12). The employers are evidently hesitant to issue appointment letters to temporary workers as these workers become entitled to permanent service after completing 240 days according to the existing labour laws and are hence entitled to enjoy job security and benefits as provisioned in the laws. For this, they often prefer to employ workers on a temporary basis even for years without issuing appointment letters. Employers have been criticized for using labour contractors to exploit the workers indirectly (IGWU, 1996). They have allegedly used contractors for employing workers in their industries simply to avoid dealing directly with workers with regard to working hours, salary and benefits. In this case, the relationship between employers, who are running registered industry, becomes indirect and the workers are prone to exploitation by the contractors who do not have as legitimate existence as industry itself. There are already some incidents of fleeing of contractors without making payments due to the workers. While such practice has been widely criticized by workers, labour unions and government officials responsible for labour administration, employers assert that it is their business compulsion in order to avoid labour problems. Nevertheless, the situation has been gradually changing with decreasing trend of employment of contractors in industries.

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3.2.7 Retirement benefits A few industries claimed that their provisions of provident fund, gratuity and accident insurance for permanent staff and workers are as per the labour laws. However, most industries were found to have failed to comply with provisions of labour laws for such retirement benefits. While this has been an area of criticism of labour union and government labour officials, employers attribute it to the vulnerable situation of the industry itself and their financial inability to make long-term financial commitments to their workers. 3.2.8 Other welfare provisions While a few industries have welfare schemes such as medical insurance, heath service and child-care, most industries have not done so despite the requirement to do so under the labour laws. However, some industries claimed that they have offered music entertainment to workers on the job. 3.2.9 Gender issues Except in an enterprise (GramMom), each of eight sample industries has a small number of female workers, ranging from almost 0 to 25 percent. Some industries were found to employ female workers in supervisory positions too. GramMom has about 5 percent of working women in supervisory positions, but all others have hardly 1 percent of total workforce in supervisory positions. A half of the surveyed industries employed no woman in a supervisory position. However, the industries have not discriminated between male and female workers in determining wage rate. Although this industry sector has potentialities to offer employment opportunities to female workers and reduce the gender gap in overall employment structure, there seems to be some hesitation on the part of employers to employ females due to their high dropout rate and some other reasons. Female workers were reported to have the tendency of leaving the industry after marriage or delivery of child or joining schools and colleges. Moreover, the Nepalese society likes to avoid sending their girls to factory except under an acute economic compulsion. As complained by the union leaders, there are some incidents of sexual exploitation and harassment of female workers by the male employees, supervisors and even employers in the work place. 3.2.10 Local workers in employment While three of nine sample industries have largely employed local labour (90% and above), remaining industries have significant number of foreign staff and workers. The share of foreign labour in five industries ranged from 20 to 75 percent, while one industry has employed mostly foreign labour (details in Table 1.4.) Different opinions prevail about the use of foreign labour in garment industries in Nepal. The industrialists assert their right to employ those who are fit for their job. Even

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among available workers, industrialists prefer foreign workers because foreign workers are more efficient and less problematic compared to local ones. Nepalese workers generally demand for better benefits and working conditions and are often prone to quick politicization resulting in unproductive work culture. For industrialists, there are some genuine reasons for preferring foreign workers to local ones. However, employment of foreign workers has often been a subject of criticism labeled by local workers, labour unions and government officials. The industrialists have allegedly employed foreign people even by paying salary and wage that are several times more than the salary and wage paid to the local ones. Industrialists dismiss such allegations by saying that they are eager to pay more even to local people if they can work parallel to their foreign counterparts and also that they are not prohibited by law to employ foreign labour. 3.2.11 Benefit sharing Except few, all industries do not have mechanism for benefit sharing. They do not have bonus payment system to workers as provisioned in the labour laws nor do they have provision to increase salary as per profitability and inflation situation, except when the government itself fixes such a minimum wage rate. However, as noted earlier, only one sample industry reported having a pay-incentive system according to workers’ ability to achieve pre-set work targets. Moreover, most industries provide some financial incentives (equivalent to salary or wage of one to four weeks) during Dashain festival, which vary both across persons and industries. Industrialists attribute their inability to have benefit-sharing mechanism due to their low profitability rate as well as uncooperative attitudes of local workers. However, labour unions, government officials and experts tend to hold the view that such benefit sharing mechanism is acutely lacking in the garment industry sector for maintaining the workers’ motivation. 3.2.12 Labour-management relations Overall, the present state of industrial relations in Nepal tends to be unhealthy. There exists tremendous gap between the workers and management – in their perception, thinking and style of working and unless such a gap is narrowed down, there is little room for harmonious industrial relations in the country (Manandhar, 1999). Currently, some garment industries that employ more than 200 people have labour unions at enterprise level. Moreover, there is one central level union called Independent Garment Workers’ Union that coordinates the activities of unions that are set up at enterprise level and maintains close working relationships with the Garment Association of Nepal, formed by the garment industrialists. Such a central union is part of the central level trade union called GFONT, affiliated with the UML which is currently the main opposition political party.

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Five out of nine sample industries reported the existence of labour unions within their respective industry (Annex 4.13). One of them has recently turned the existing labour union into a joint committee represented by both labourers and management. Most of these industries had no history of strikes. Even the incidents of strikes in some industries were reported to be less serious. The general scenario as seen by the industrialists is peaceful, despite the report that the scenario is likely to deteriorate in one sample industry. However, industrialists, union leaders and workers reveal some mixed and problematic situations. There seem to be misunderstanding between employers and workers about their respective roles as they often complain about each other. Industrialists tend to criticize the workers and union leaders for their inefficiency level, low productivity, uncooperative attitudes and politicized work behaviours. On the other hand, workers and union leaders express their dissatisfaction over general disregard on the part of the employers towards the local workers’ feelings, favouritism to Indian workers, use of contractors, non-issuance of appointment letters, low pay and non-conformance to provisions made in the existing labour laws. Labour-management relations continue to be a critical factor for development of garment industry in Nepal. The present findings are similar to those reported in an intensive study conducted by NPEDC in 1997 for the Ministry of Commerce (NPEDC, 1997). 3.3 Overall impressions of job quality The existing job quality in garment industry sector in Nepal has been perceived differently by different groups directly or indirectly concerned with development of the industry. 3.3.1 Employers’ perceptions The industrialists hold the view that the existing job quality as stated above is more than reasonable compared to job quality in other sectors of the Nepalese economy. People employed in the industry have been able to earn more than the minimum wage rate determined by the government and those who are competent can earn substantial amount of money that is more than what is offered in other employment sectors. With regards to safety and other working conditions, workers are less likely to find other places that are better than in the garment industries as these work places have been built and maintained according to standards set by foreign buyers by going beyond the Nepalese standards. The employers are eager to increase the size of financial package for skilled and efficient people and to further modernize the work place according to their business level and profitability. They also express their readiness to pay more to workers and improve level of job security if the workers maintain their discipline in work places and help in developing productive work culture. Female workers have been provided with relatively comfortable and safe work place in terms of nature and volume of work and working hours. The present industrial environment is perceived to be relatively peaceful by all the industrialists.

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However, industrialists strongly feel that the existing labour law has not been favourable for improving productivity as they can not hire and fire workers at discretion to maintain discipline among the workers and provide different incentives depending on their efficiency level. They have to think twice to employ local workers instead of foreign workers. There is always a fear of being caught in the trap of existing labour law and threats of strikes by unions, making it difficult to take actions even against those local workers who are unproductive and undisciplined. There is a feeling among employers in general that the present labour laws are not formulated in a balanced way. As it has been argued, labour law should specify not only the right but also duties of the workers, unions, management and owners/ shareholders. Necessary hiring and firing, disciplinary actions and layoffs have to be made easy since the employers can not afford to keep unproductive or undisciplined workers and lose profits on investment (Jyoti, 1992). 3.3.2 Workers’ perceptions Workers in general are not dissatisfied with the present job quality in garment industries. They often express grievances over the discrimination between local and foreign workers as regards to financial packages and insecurity of their employment as they have not received appointment letters or have permanent job even after completing the period of work prescribed by the labour laws. The employers are allegedly not taking care of the workers but exploiting them for their business interest. Workers feel that they have been largely deprived of the rights and benefits as envisaged in the existing labour laws, especially the rights and benefits related to issue of appointment letters, job security, provident fund, gratuity and working hours. They also expressed their grievances over the occasional misbehaviours of employers and senior staff towards female workers and their inhumane treatment to workers in difficult situations such as those arising from illness and family obligations. As the union leaders observed, employers have hardly shown any concern for improving quality of job in garment industries as their concerns have been limited to making artificial temporary arrangements during the inspection visits by the buyers. It is also argued that there are adequate skilled garment workers in Nepal, but the industrialists do not like to use them because labour law requires employers to give permanent jobs to workers once they work continuously for 240 days. 3.3.3 Government officials’ perceptions The government officials, especially those oncerned with labour administration, do not see existing job quality as satisfactory one. They do not like present tendencies of garment industrialists to employ workers on a temporary basis, use contractors and foreign workers and provide no increase in financial benefits even after making high profits involving millions of dollars. They emphasize the need for improving job quality in garment industry especially

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in the areas of financial package, job security and use of contractors and foreign workers. Even other government officials concerned with foreign trade and industrial promotion share the views similar to those of labour administration officials. 3.3.4 Experts’ perceptions The industrial relations system in Nepal has been viewed as a blurred one. It has been a mix of informal custom and practice and a set of formal structures and rules as provided by labour legislation as there are still some aspects of labour relations that are governed by traditional values and mutual understanding between employers and employees (Pant 1991). There are two extreme views expressed by the experts in matters relating to employment and job quality. One view is that the present rate of salary and wage in garment industry sector is high considering the high cost of production and low labour productivity. The industry can not improve competitiveness in the international markets, when compared against Bangladesh, without reducing the cost of production including cost of labour. Workers should be paid to match their productivity level. The job security is considered to be a non-issue for improving productivity and competitiveness. On the other hand, it has been viewed that the existing job quality is not adequate to cope with the demands for improving productivity and competitiveness. The existing job quality including wage level should be improved by exploring other areas of cost reduction. It is also relevant here to review how some experts have assessed job quality situation in the context of industry sector as a whole. At present, improvement in the Quality of Working Life (QWL) can be a new but significant dimension in harmonization of work in Nepalese shop-floor, though it is not clear how far the industrial sector has succeeded towards this direction during the last 50 years of industrial history in Nepal (Adhikari, 1993). Certain ILO standards are being considered by the Government of Nepal in taking administrative and legislative measures to update the country’s labour laws. Since these standard setting activities are generally believed to have been largely influenced by the experiences of the developed societies, it has been felt in Nepal that the ILO standards should be flexible and realistic to the prevailing peculiarities of the national socio-economics of the participating countries (ILO, 1998). 3.3.5 An overall impression Job quality in the initial phase of industrialization process in the garment sector was poor. With the development of professionalism and increase in the export market, job quality has started improving. The existence of labour laws and establishment of labour unions have improved the situation of the workers at least by setting standards of job quality in the form of minimum wage rate, work hour, allowances, safety, job security and retirement benefit. With growth in garment industry since the mid-eighties, job quality has also continued to improve, albeit, slowly and mostly in medium and large garment industries.

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For the past six or seven years, government has gradually come to regard garment industry as one of the country’s important industries providing not only huge foreign exchange but also significant employment opportunities. The industry has started attracting educated professional entrepreneurs who understand that treating workers fairly and providing them with reasonable facilities will enhance their productivity. Moreover, some reputed buyers (e.g., Walmart, J.C. Penny, GAP, Target, etc) seem to be contributing a great deal in improving job quality of workers by putting pressures to maintain their standards in the factory. By showing humanitarian concerns and accepting to buy only from those industries which meet their standards and specifications, they have in fact been more effective in bringing about improvements in job quality of garment workers than any other parties concerned. Nevertheless, job quality in many industries is yet to be satisfactory as it is far below the world standard. Both industrialists and experts in general feel that the hire-and-fire rule should be introduced in favour of industrialists particularly in sensitive export-oriented industries like garment industry. This is because industrialists are now unable to discipline workers to raise their relatively low productivity. Present job quality in garment industries is apparently offering different pictures to different groups. However, it is important to review the existing level of job quality to assess the likely impact of globalization, especially after the present quota system is fully phased out by forcing the garment industries to operate in a fully globalized, competitive market. The following section attempts to assess the possible impacts of globalization on the job quality in garment industry sector in Nepal. 3.4 Possible impact of globalization on employment and quality of job The possible impacts have been assessed mainly in two areas: employment situation and quality of job for those who are employed. 3.4.1 Employment situation The garment industries have declined in Nepal in terms of establishments and total employment size. Moreover, the export business too (in terms of both value and volume) has shown declining trend since the last year. Particularly after 2005, without considering the impact of recent US preferential policies for some countries, it is likely that only those industries will survive in this sector which can be competitive in the market. The industrialists are likely to operate their business by reducing the cost of production. In this process, they might reduce the size of employment through optimum utilization of existing labour and added automation in work process. It means there is high possibility of retrenchment in the size of present employment in the garment industry sector. As indicated in earlier chapter, one serious concern over the impact of globalization in employment sector in general is the fear of Indianization of national economy. The

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globalization process in Nepal might turn into a process of deeper penetration of the Nepalese market by the Indian capital and labour with very little gains for the mass of population. However, some different perspective also can be presented as far as the present garment industry sector is concerned. It is also likely that the employment size may even increase if the garment industry sector grows with large industrial establishments that have competitive strengths. Naturally, small industries with traditional technology and limited market are less likely to be competitive enough to survive in the free, competitive world market. A growth of large-scale garment industries, each employing 4000 to 5000 people, even in small number will contribute to promotion of employment opportunities in the country. But all these situations are dependent upon how the present garment industry sector moves to improve its productivity and competitiveness. 3.4.2 Job quality It is expected that despite the possibility of decline in the number of industries and their total employment size, the quality of jobs in the industries will improve. The logic is that only those industries that are competitive can exist in the age of globalized competitive market and the competitiveness often requires improvement in productivity at firm levels that in turn demands improvements in job quality. The entrepreneurs will be required to modernize their industries through new investments in modern technology, development of human resources and improvements in job quality that may include various schemes to retain and attract competent manpower. In such a situation, those who get employment in the garment industry will be able to enjoy improved job quality. The apprehension that employers will reduce cost of production including cost of labour is less likely to be proved completely true. The cost reduction drive may limit to downsizing of manpower, but it may not result into deterioration in job quality. Almost all interviewees, including industrialists, government officials, workers and experts also tend to hold similar view. The entrepreneurs, even if they may like to do it, are unable to reduce the wages to workers, or degrade the work place simply to minimize the cost of production because these cost reduction measures will have negative impact on their productivity improvement drive for enhancing their competitiveness. They will be forced to explore new areas for reducing the cost of production and increasing profit margin. Moreover, big buyers such as Walmart and J. C. Penny will continue to show their concerns for the humanitarian aspects of garment workers and this will help improve job quality even though there will be pressure for industrialists to decrease their cost of production. However, as some union leaders and workers argue, the concept of discretionary hireand-fire by the employers, if applied in garment industry, may have negative impact on the job quality of workers since it will reduce the bargaining power of workers. It is likely that supply of foreign workers will diminish from the year 2005, because they will then prefer to work in their own country. Industrialists will then have to hire Nepalese workers and even think about training Nepalese workers seriously. But there is some apprehension that employers

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will further exploit the local workers because of their abundant supply from within the country. On the other hand, not all union leaders and workers are worried about the possible deterioration in job quality, instead they are concerned with the existence of industry and job after 2005. They also seem to believe that only competitive industries can survive in the globalized competitive markets and for this these industries will be forced to further improve their job quality. During studies of sample industries which happen to fall under category of modernized industries, workers were found to be optimistic about improvement in job quality in the future. 3.5 Inter-linkages of job quality with productivity improvement drive for competitiveness As the concepts of productivity and competitiveness are closely inter-linked, the quality of job is also directly linked with the productivity improvement drive at enterprise level. In fact, the linkages among job quality, productivity and competitiveness are circular as shown in Figure 4.5. Accordingly, in garment sector of Nepal, improvement in productivity is not possible without improvement in job quality while job quality can not be improved without improvements in competitiveness. Moreover, productivity and job quality interact bilaterally too. Figure 4.5: Interactive relationships between job quality, productivity and competitiveness Improvement in Job Quality

¢ ¡

Improvement in Productivity

¢ ¡

Improvement in Competitiveness

Productivity improvement for competitiveness requires among others state-of-the-art technology, market promotion, modernization of work place, human resource development and motivation schemes that include opportunities for staff and workers to utilize competency and develop careers besides enjoying competitive financial packages. Moreover, it requires restructuring of organization and redesign of jobs in the form of job enlargement and job enrichment. In overall, productivity improvement drive calls for development of a work culture that is people-centered (priority for development and utilization of human resources), performance driven, goal-oriented, innovation-inclined, quality obsessed, and clientcommitted. The work culture that possesses these features manifest in itself the high quality of job in the enterprise. The globalized market hence calls not only for improvement in productivity and competitiveness but also for improvement in quality of job. Considering the present low level of productivity and competitiveness in garment industry sector, emphasis will have to be strategically placed on improvements in productivity. Keeping in view the present job quality, there is also a broader scope for improving productivity through improvements in job quality. A few garment industrialists have already

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realized it and started improving productivity and job quality to enhance their competitiveness to face challenges of the globalized, free market.

4.

Strategies for improving competitiveness, productivity and job quality in garment industry

4.1 Repositioning of Nepalese garment products in the world market Whatever the role of present quota system and the present strength of garment industry itself, there is an urgent need to improve competitiveness of garment industry of Nepal in order to reposition the industry in the competitive, quota free world market. The process of factory modernization, product quality enhancement, image building and market promotion through direct relationships with buyers initiated by some large industries should be further improved. There should be a consensus over the view that the Nepalese garment industry can not afford to operate in a fashion it used to do in the past to survive and grow in the borderless competitive world market. In order to face the challenges of globalization under quota free competitive world markets, the main strategies for developing the garment industry sector in Nepal should be directed towards bringing about improvements in three areas such as competitiveness, productivity and job quality. 4.2 Strategies for improving competitiveness Competitiveness in the context of garment industry in Nepal should mean improving quality and price competitiveness as these are the main means utilized (e.g., Bossak and Nagasimha, 1997) by the competing countries. It should also mean producing such products that carry high value and are not supplied by the competitors in the world market. An improvement in such competitiveness also requires application of manufacturing and management systems that are superior to those of the competitors. The garment industry needs to do a lot of homework to be competitive in the world market by identifying both its competitive advantages and disadvantages. For this, it has to identify its main competitors and their present strengths and weaknesses and develop its own strategies. Some suggestions are presented below. 4.2.1 Focus on high value products. Most of the garment products exported are of low value, ranging from 3 to 6 US dollar on an average. The profit margin ranges from 25 cents to 1 US dollar. The profit, if any, has been made simply because the business takes place in bulk. The business is risky as it involves huge amount of money in transaction and many other problems associated with carrying and forwarding. It should be highly beneficial for garment industries in Nepal to switch from producing low value products to quality products carrying high value to compete

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with existing strengths of neighbouring competitors. The fact that the Nepalese products have gradually built their image through quality in the international market also supports such a proposition. As shown in a study, South Asian countries are still exporting products that can be categorized as low-wage and labour-intensive and exports from these countries have not yet shifted to high value added products as has been the case with some of the East and South East Asian countries (Joshi, 1999). In this perspective, Nepal can improve its competitiveness by focusing on export of high value products. 4.2.2 Product diversification The garment industries, presently focusing on such products as cotton shirts for boys and men, cotton trousers and skirts for girls and women and children wears, should also produce some other new products that are in demand but are short in supply. It can be sheets for bed, pillow, table, sofa, cushion, etc. The growth in exports of terry towels and shop towels from Nepal to USA in recent years shows feasibility of new non-garment products. Possibility of using new and unique materials should be explored to offer products of unique look in the market. Garment products made by Dhaka fabrics and pashmina products seem to have prospects as proven by recent surge of export of pashmina shawls. The uniqueness of Dhaka products having its traditional roots and growing popularity of Nepal’s pashmina products in European markets tend to offer opportunities to improve competitiveness in the world market. 4.2.3 Market diversification In recent years, Nepal has promoted export to some European and Asian markets. This obviously calls for efforts towards exploring new markets by reducing reliance on the US market. In the era of quota free globalized market, the US and other developed European markets are likely to be encroached by neighbouring countries such as Poland, Bulgaria, Cyprus and Latin American countries as the main competitors. Through exploration of new markets such as European countries, Korea and Japan, Nepal can have some competitive advantage, especially in terms of transportation cost. 4.2.4 Development of backward-linkage industries It is necessary to recognize the fact that the main problem of garment industry in Nepal for improving its competitiveness is the high price due to high cost of production. Some 60 percent of the total cost of production consists of imported raw materials such as fabrics and accessories (e.g., button, threads, zipper, etc). As a result, the garment industry sector has not been able to increase its value addition to national economy from its present level of 35 percent. All this justifies the need for establishing some industries that produce fabrics and accessories required by garment industry sector and help the sector reduce cost of production

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and improve competitiveness. Initiatives from both the government and garment industries are required to attract both local and foreign investments in such industries. 4.2.5 Development of dry ports Being a land-locked country, Nepal can never have free access to sea. It is a hard fact that can not be changed except making compromises and developing alternative measures to cope with such a limitation. Nepal has already started building dry ports in the three main cities bordered with India. One of the dry ports is also being linked with India through construction of a railway line. This is expected to reduce the present transportation cost by 20 to 30 percent. Hence it is suggested that the government completes these projects in time and both the government and industrialists fully utilize these facilities. 4.2.6 Establishment of export processing zone It is desirable that development of dry ports be accompanied by development of export processing zone (EPZ). This is consistent with the proposition made in the existing Industrial Policy of the government. Once these dry ports are extended to be EPZs they should have facilities enjoyed by EPZs in other countries. Garment industries should be included in EPZs to enjoy the facilities offered by them so that they can have access to comfortable bank loans, subsidized carriage and forwarding facilities, insurance services, exemptions of service fees charged by the government offices, etc. 4.2.7 Utilization of provisions for least developed countries under WTO regime Under the WTO regime, least developed countries are expected to be entitled to some privileges for next five years after taking memberships. These include enjoyment of zerotariff and provision of bilateral trading arrangements with developed nations. Although Nepal has not yet joined WTO, it is making preparations to obtain its membership. Being a LDC, it should make some deliberate attempts to utilize the provisions made by the WTO for LDCs. In South Asia, Nepal is one of the three LDCs, the other two being Bangladesh and Bhutan. It can improve its competitiveness by enjoying LDCs’ privileges compared to India, Pakistan and Sri Lanka for promoting its garment industries. 4.2.8 Preparedness of industrialists and government It may be relevant here to quote Singh (1995), “In an era of increasing competition, survival will depend on inspired planning, constant innovation and total flexibility. New product development, identification of niche markets and application of creative strategies will be the vital ingredients for success. Information gathering must be accepted as a major priority on a continuing basis to enable companies to respond quickly to change. Quality, cost, and delivery (QCD) will be the important criteria for competitiveness.”

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Garment entrepreneurs can develop infrastructures for R&D centers and training institutes especially designed for garment industry sector. They could set up market promotion and liaison offices in foreign countries to capture export market for them through establishment of direct contacts with the buyers and exhibition of exportable products. Furthermore, they can develop communication network among garment industrialists and buyers through internet. It is also necessary that they go for group advertisements by creating web page in the internet and by placing advertisements in leading international magazines. Nevertheless, government has many important roles to play. Globalization does not limit the role of government in the name of economic liberalization. It should make investments for development of infrastructure and creation of congenial business and industrial environment because such investments would promote national competitiveness. As noted by Lohani (1999), public investment should ultimately enable the private sector in broadbased efforts to improve productivity. 4.2.9 Forming strategic alliances Both government and individual entrepreneurs should take necessary initiatives in search of opportunities for manufacturing and exporting garments in collaboration with foreign partners and attract foreign investments so that Nepal can capture a sizeable world market with competitive edges. The alliance can be instrumental in many areas such as reducing cost of production (e.g., minimizing transportation cost), improving product quality and promoting market. 4.2.10 Coping with the immediate threats It has been almost certain that the present garment industry can not survive and develop in Nepal without necessary preparations for improving its competitiveness in the free globalized market. Its competitiveness level is also influenced by how other countries are offered special privileges by importing countries such as duty and quota free access to US markets given by the US government under its AGOA for 33 African Sub Saharan countries. If other countries continue to enjoy preferential treatments from the USA, Nepal’s garment industry does not need to wait for 2005 for feeling the pressures of competitive market and is likely to decline without having time even for preparations for coping with the competitive situations. It is therefore highly desirable that serious efforts are made at government level to seek special treatments from the importing countries, especially the US, at least to buy some time to save the industry from pre-matured death and to build its competitive strengths. 4.2.11 Focusing on price competitiveness Nepal has very low price competitiveness, estimated to have about 30 percent higher price compared to the price charged by the main competing neighboring countries. In this context, all efforts to promote the garment industry in the country should be solely directed towards reducing such a gap in price competitiveness.

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However, the situation is less likely to improve simply by improving the price competitiveness. Because of its geographical location, Nepal is likely to continue facing the problem of competitiveness in lead time required for delivery (i.e., receiving order, procuring raw materials, manufacturing and dispatching). Hence, this issue also needs to be well addressed in improving the national competitiveness. 4.3 Strategies for improving productivity It has been widely emphasized that productivity drive be linked with the efforts towards enhancing competitiveness (e.g., Bajracharya 1999a; Joshi, 1999). Since productivity improvement is mainly concerned with the act of optimum utilization of resources, it helps to reduce cost of production, which also means increase in cost saving and profit margin that can be utilized for improving the quality of products as well as reducing their price. The high quality and low price often help to improve competitiveness and increase sales and profitability that can again trigger new investments for expanding production as well as improving productivity. Hence, the improvement in productivity leads to further improvement in productivity and competitiveness in a cyclic form (Figure 4.6). Figure 4.6: Cyclic linkages between productivity and competitiveness

Productivity

¢

Cost Saving/Profit

¢ New Investments

¢

Productivity

¢ Competitiveness ¡

It is in this context that garment industries should direct their efforts towards improving productivity in order to enhance their competitiveness and strengthen position in the international market. The garment industries can develop various strategies for improving productivity, which are suggested in subsequent sections. 4.3.1 Human resource management Although it is difficult to combine physical capital and educated workers to increase output per worker like in fast growing economies in East Asia, human resource management is a critical factor in improving productivity (Joshi, 1999). It has a strategic role to address all the issues that motivate employees and channel their physical, emotional and creative energies towards corporate goals (Monga, 1999a). Many garment industries covered during the present study have employed foreign technicians and workers. As shown by sample studies, the percentage of such foreign workers employed in an individual industry ranges from 10 to 75 percent. They are highly paid

130 GARMENT INDUSTRY IN SOUTH ASIA

compared to local ones. Moreover, they are provided accommodations within or outside factories. The garment industries can save money spent on wage and salary and reduce cost of production by replacing foreign technicians and workers by Nepalese ones. Every garment industry should have a series of skill upgrading training programs on a formal and regular basis for their staff and workers, besides making provisions for planned job rotation and on-the-job training. Senior and experienced workers can be sent to certain training institutes or well organized garment industry to develop them as trainers and utilizing them later for training large number of workers in work places. Local workers and staff should be given preference in offering training opportunities to make best use of them. Effective human resource management for productivity improvement should also involve the following: l l l l l

l

l l

proper placement of workers on the job; competitive rate of salary and allowance; providing a sense of job security; designing and implementing reward and punishment systems; securing commitments and winning trust of the workers through transparent and humane treatment; involving staff and workers in productivity improvement activities by forming and activating quality circles and making them implement productivity improvement techniques such as 5s; introducing productivity-based incentive system; and adopting a system of gain-sharing scheme.

Various options are available to introduce productivity gain sharing and incentive schemes. Some of these are suggested later in relevant sections. 4.3.2 Upgrading of technology In Nepal, while the assembling line manufacturing systems are facilitated by the use of the Japanese machines (also German machines in one sample industry), piece-rate systems are being operated through Indian machines. Although majority of garment industries visited during the present study were using modern technology by switching from piece-rate system to assembly line system, most of the industries currently operating in Nepal are using traditional technology by following piece rate system. Both the Indian machines and piece rate manufacturing system can not meet the present needs for two reasons. First, they can not meet quality standards to compete with others in the international market. Second, industries can not have large-scale production to enjoy economy of scale and consequently reduce cost of production. It is therefore necessary for industries to make new investments in technology and modernize manufacturing systems by considering type of markets to be served and the

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technology of present and potential competitors. Emphasis should also be placed on full utilization of the installed capacity. Moreover, there should be an in-built periodic maintenance system to minimize repair and maintenance cost and avoid breakdowns affecting capability of industries to meet the orders in time. 4.3.3 Methods of operation Manufacturing system adopted in an industry largely influences the methods of operation. Nevertheless, they also include all management procedures and methods, starting from planning to organizing, co-ordinating, supervising and controlling functions of the industrial enterprise. Improvements in methods of operations for productivity improvement should include: l Simplifying the work processes (steps to be followed) in relation to procurement of raw materials, storage and transportation to the work place, manufacturing and assembling, and packing and dispatching. l Developing detailed work manuals and job descriptions in a written form and orienting the concerned staff and workers to follow them. l Applying performance goal or target setting systems to facilitate workers for efficient performance and relating incentives with the performance of targets. l Making necessary arrangements to apply modern productivity management such as benchmarking, total quality management and Japanese techniques popularly known as KAIZEN, 5s, JIT, with required adaptation. l Exploring several other measures to improve methods of operation that improve quality, cost-effectiveness and delivery system, also known as QCD. l Developing a management information system and modeling through computer applications on targeting, scheduling and monitoring. l Extending electronic communications to both buyers and suppliers. A mechanism needs to be devised at the enterprise level to continuously monitor the work processes and improve them. 4.3.4 Materials management As the garment industry uses various materials, mostly imported ones, material management constitutes an important area of consideration for productivity improvement at enterprise level. Development of backward linkages to industries such as textile, accessories (like button, threads, zipper), and packing materials may seem to be difficult for the export oriented garment industries. There are some measures that should be adopted by garment industries as cited below: l Making necessary arrangements for outsourcing of raw materials with genuine parties in foreign countries based on comparative advantages of quality, price and transportation cost.

132 GARMENT INDUSTRY IN SOUTH ASIA

Collaborating with other local garment industries for making investment in setting some supporting industries related to textiles and accessories. l Developing a sound inventory system to ensure that right volume of materials is ordered and stored for maintaining smooth production process. l Integrating procurement system with the production planning system and scheduling. Materials management can no longer be ignored for improving productivity at enterprise level. This has to be prioritized particularly because the present situation in which the buyers themselves supply raw materials, directly or indirectly through middlemen, along with their purchase order, is less likely to continue in the age of free competitive globalized market. The garment industrialists will have to choose materials by themselves predicting the demands even before the order is received with a view to promoting markets through advertisements. Besides these conventional methods, various new approaches need to be pursued for improving productivity. Such approaches include total quality management, business process reengineering, benchmarking, strategic cost management and activity-based costing and value chain. Productivity improvement should be concerned with design and delivery of products to satisfy customer needs and desires at the cost they can afford since the productivity concept, which focuses only on reducing input consumption, serves no purpose in the present globalized environment in which materials, people, ideas and capital move much more freely between countries (Monga, 1999b). Moreover, since economic co-operation and global integration based on free markets and free flow of goods and services are the concepts of the future, co-operation between countries in harmonizing their approaches with transformation programs is an essential factor to productivity growth (Prokopenko, 1995) However, it is also equally important to emphasize the fact that productivity improvement drive can not be effective without improving the quality of job at enterprise level. l

4.4 Strategy for improving quality of jobs Job quality is in fact a relative concept and it is also influenced by the well-being of the enterprise that is demonstrated by its levels of productivity and competitiveness. However, decisions to undertake organizational changes aiming at improving job quality often hinge on the potential gain for the enterprise as a whole (Adhikari, 1993). Some deliberate efforts need to be made by the garment industries for improving quality of jobs as part of their drive for improvement in productivity and competitiveness. Some suggestions are provided below. 4.4.1 Opportunities for skill development Workers should be given opportunities to upgrade their skills through training. Considering the present trend towards assembling line of manufacturing, it is desirable that the training is not limited to one specific part of production process; and workers are logically and gradually shifted to different important parts of the production system. In this connection, the

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suggestion that garment producers should have a separate training institute to train their staff and workers through benchmarking of garment industries in Nepal and abroad is worth considering. Workers should also have opportunities to make a fuller use of their skills and competency. It is necessary that all of them are first employed as apprentices within certain time limit of adhering the minimum wage concept. The skilled workers should be entitled to extra financial incentives for working as trainers. Moreover all managerial decisions relating to appointment, placement, job security, salary increment and promotion of the workers should also be tied with their training performance. 4.4.2 Gain sharing Although there have been conceptual and operational gaps with regard to productivity and its linkages with wages (Dahal, Thapa and Upadhaya, 1999), financial incentives continue to deserve importance for both maintaining and improving efficiency of workers in work place. Financial packages (including minimum salary, allowances for working beyond regular hours, observing festivals such as Dashain and Tihar, health services, gratuity, etc.) should be devised and offered in an equitable manner, without discriminating in terms of skill level and sex. Moreover, the packages should be fair and adequate as per the profitability of the enterprise and the prevailing rate in the industry sector, besides making it not less than the rate fixed by the labour law. Moreover, as suggested by experts (e.g., Bajracharya, 1999b), minimum wages should be strictly maintained with productivity-tied differential additional benefits. In this connection, it is essential that the staff and workers be provided incentives for meeting production targets and that increment in salary and allowance rate be based on the efficiency and productivity levels as defined before hand. Emphasis should be placed on employing the workers by applying a piece-rate system, along with a determination of the minimum level of work that should be met for earning the basic salary. Bonus system should be compulsorily put into practice by ensuring that the bonus is fairly distributed for those who have worked for a period specified by the respective law. Periodic awards for the best quality circle or best work unit or worker of the week, months or year can be introduced. The schemes such as benefit-sharing based on team work, additional payments for special knowledge and skills and production above individual or group norms and two-tier wage by paying new workers lower wages than senior workers for a period of time (e.g., Dahal, Thapa and Upadhaya, 1999) can result in improvements in both job quality and staff motivation. 4.4.3 Job security The present practice of not offering appointment letters to the workers even after completing the period specified by the labour law, if any, should be avoided. All the

134 GARMENT INDUSTRY IN SOUTH ASIA

employment related transactions should be made transparent to win the confidence of workers and trade unions. Those, who have worked for more than six months either as temporary or seasonal workers, should be entitled to benefits designed specifically for such work in advance. Other practices of recruitment in consideration of the seasonal nature of business need to be closely examined. 4.4.4 Safety and comfort at work place The industry, though not hazardous by its nature, needs to have some safety measures to improve quality of jobs for its workers. They should not think of making safety provisions in the work place merely as a part of requirements of buyers. It should be made a part of normal work feature of the industries. The present practice of temporary installation of safety measures to please the buyers and removing them after the departure of visitors, as complained by union leaders, should be avoided. Minimum safety measures should exist in workplace; such as, provision of fire-exits, fire-alarms, gloves for those involved in ironing, cutting and washing parts of production functions, aprons and face cover for protection, safe drinking water, comfortable temperature system and clean toilet. Besides these, some measures required for the comfort of workers need to be adopted. The main welfare schemes expected in these industries are insurance, gratuity, provident fund and child-care centers. 4.4.5 Labour-management relations based on benefit sharing This has been one important area for improvement to enable the garment industry sector to offer high job quality and at the same time to be more productive as well as competitive. Both garment industry and union leaders claim that their industry is the most organized sector as compared to other sectors of the national economy. Though they enjoy relatively peaceful work situations, their relationship does not look warm and healthy considering the type of perception they have made for each other. While the industrialists view local workers as inefficient, undisciplined and problematic, the workers and union leaders often complain that their employers have exploited them and are biased against them in favour of foreign workers in matters of employment opportunity and pay even if they are not inferior. The workers are often apprehensive of the intentions of their employers as the latter are openly asking government either for non application of existing labour laws or formulation of a new one specifically designed for their industry under which both the trade union and its right to strike will be prohibited and the employers will enjoy the right to hire-and-fire the workers at their will. It is suggested that both employers and workers carry out dialogue for winning confidence and maintaining trust of each other. They should realize that while the garment industries can not improve productivity and competitiveness without competent workforce, workers also may not have their rights if industries themselves do not survive and progress. There

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is also a need for change in the managerial orientation with regard to industrial relations. Management and labour should seek for more bipartite solutions than tripartite solutions (Manandhar, 1999). Likewise, both management and labour should adopt such a code of conduct which provides agreed rules for their relationship (Pant, 1991). Many of the misunderstandings that prevail between employers and workers in present day garment industry sector can be resolved through social dialogue. It can compensate the need for having a separate labour law for the garment sector. A feeling should be cultivated among the workers that if their industry can perform better, they too can increase their earnings. As a matter of priority, the concept of benefit sharing should be incorporated in the framework of labour-management relations as it has direct bearing upon improving not only job quality but also productivity and competitiveness. How well Nepal can withstand the challenges of globalization by being productive and competitive depends on how well both the government and the private sector can tackle the emerging situations, particularly in next three years, through their joint efforts to shape Nepal’s own unique position in the world market. All these efforts will also determine level of improvement or deterioration in employment situation and job quality in garment industry of Nepal.

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Appendix 4.1

Methodology Data collection The study utilized both primary and secondary sources of information. Various documents (published and unpublished) relevant to the theme of the study were collected from various sources and reviewed during the study. Required instruments such as checklists and interview schedules were developed to collect data and information. The instruments included: l l l

l

l l l

Interview schedule for officials of Garment Association of Nepal (GAN) Checklist to collect basic data/information from GAN Interview schedule for officials / experts of government and non-government organizations Checklists to collect data from government and non-government organizations (e.g., Ministry of Commerce, Trade Promotion Centre, etc.) Interview schedule for garment industrialists Checklist to collect basic data/information from garment industries Interview schedule for workers and trade union leaders

These schedules and checklists were used simply as guidelines as there was flexibility in using the sequence of questions and skipping certain questions as per the needs. The following were selectively interviewed to assess the present and likely situations in the garment industry sector in Nepal. l l l l l

garment industrialists officials of garment association government officials dealing with the issues of foreign trade, industry and labour union leaders and workers experts in the fields of labour management, industrial development and international trade

Sample industries Altogether nine garment industries located in three districts Kathmandu, Bhaktapur and Lalitpur were visited to gain first-hand knowledge of industries. Such a selection of industries was based on the assumption that most garment industries operating in Nepal were located in Kathmandu valley. Attempts were made to take an analytical approach in both identifying and addressing the issues concerning productivity, competitiveness and job quality in the garment industry sector in Nepal.

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Timing The study was undertaken first between November-December of 1999. It was revised later on keeping in view the changes that have taken place between then and now. In this connection, four of nine sample industries were studied twice in July 2001 to update data and information about them. List of interviewees and visited industries Persons interviewed: -

-

Government officials (including Secretary, Special / Joint Secretaries of the Ministry of Commerce, Joint Secretary of Ministry of Industry, Director Generals of Department of Industry and Department of Labour), etc. Garment industrialists (including senior officials of Garment Association of Nepal such as President, ex-presidents, vice-presidents and general secretary) Workers and union leaders Expert(s)

Industries visited: 1. 2. 3. 4. 5. 6. 7. 8.

Elina Garments Prasuna Garments Sirin Garments Logo Garments Prabha-belt (Tribeni) Garments Radiant Fun Wear Fashion (Krishna) Garments Cotton Comfort Garments Mahalaxmi Garments

Note: For the purpose of this report, these sample industries are coded on an arbitrary basis.

Number

8 13 9 2

138 GARMENT INDUSTRY IN SOUTH ASIA

Annex A4.1: Export performance of garment industry in Nepal Fiscal year 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01

Export value (NC in million) 3112. 0 3723.4 5756.5 5357.0 5414.7 5617.5 6783.0 8368.2 11500.2 11030.7

Growth (Percentage)

Export volume (Pieces in million) 25.3 22.8 40.1 33.5 28.0 30.0 34.9 37.7 42.5* 40.7*

19.4 54.6 -6.9 1.1 3.7 20.7 23.3 37.4 -4.1

Growth (Percentage) 9.9 75.9 -16.5 -16.4 7.1 16.3 8.0 12.7 -4.2

Source: Trade Promotion Center, Lalitpur, Nepal * Excluding export volumes for towel items and countries other than the US.

Annex A4.2: Country-wise export performance of garment industry in Nepal Fiscal year Export value (in million rupees) USA 1991/92 2897.9 1992/93 3258.3 1993/94 5216.4 1994/95 4636.6 1995/96 4671.1 1996/97 4692.7 1997/98 5626.0 1998/99 6425.6 1999/00 10646.3 2000/01 9595.4

Export volume (in million pieces)

Growth

Others

Growth

12.4 60.1 -11.1 0.7 0.5 19.9 14.2 65.7 -9.9

214.1 465.1 540.1 720.4 743.6 924.8 1157.0 1942.6 853.9 1435.3

117.2 16.1 33.4 3.2 24.4 25.1 67.9 -56.0 68.1

Source: Trade Promotion Center, Lalitpur, Nepal * Excluding export volume of towel items

USA 23.4 19.2 36.0 26.9 22.5 22.3 24.9 27.2 42.5* 35.8

Growth

Others

Growth

-17.9 87.5 -25.3 -16.4 -0.9 11.7 9.2 56.2 -15.8

1.9 3.6 5.0 6.6 5.5 7.7 10.1 10.5 NA 4.9

89.5 38.9 32.0 -16.7 40.0 31.2 4.0 NA NA

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Annex A4.3: Present niche market of sample industries (in terms of types of products) Sample industries

Quota categories / Product types

GarmIna* GarmSin* GarmPun* GarmLog GarmRaf GarmCot GarmMom* GarmPra GramMal

347/348, 340 Shirts, trousers, skirts Ladies shirts, trousers, dress Ladies wears All mixed categories Shirts, trousers, children wears 341, 338/389, 351, 342, 336, 347/348 347, 340, 348 and 336 340, 347, 348

Note: Basic data for sample industries were collected towards the end of 1999. However, data about those with star mark (*) were also updated in July 2001.

Annex A4.4: Employment: growth and present patterns Sample

GramIna* GramSin* GramPun* GramLog GramRaf GramCot GramMom* GramPra GramMal

Employment size

Employment patterns

Starting

Male

250 125 125 66 80 280 1800 80 125

Now 600 225 2000 200 200 700 2500-3000 450 900

95% 75% 80% 100% 80% 80% 15% 99% 87%

Female 5% 25% 20% 20% 20% 85% Bel.1% 13%

Skilled

Unskilled

Local

60% 95% NA NA 70% 80% 60% 60% 94%

40% 5% NA NA 30% 20% 40% 40% 6%

80% 50% 80% NA 50% 50% 99% 99% 25%

Foreign 20% 50% 20% Some 50% 50% Below 1% Below 1% 75%

Note: Basic data for sample industries were collected towards the end of 1999. However, data about those with star mark (*) were also updated in July 2001.

Annex A4.5: Capacity utilization in industries (in terms of installed machines) Sample industries GramEna* GramSin* GramPun* GramLog GramRaf GramCot GramMom* GramPra GramMal

Level of capacity utilization (Percentage) 70 75 60-70 66 80-100 100 70-80 100 75

Note: Basic data for sample industries were collected towards the end of 1999. However, data about those with star mark (*) were also updated in July 2001.

140 GARMENT INDUSTRY IN SOUTH ASIA

Annex A4.6: Indicative labour cost Sample industries

Labour cost (in percentage of total cost of production)

GramIna* GramSin* GramPun* GramRaf GramCot GramMom* GramPra GramMal

40** 18 Not to be revealed 30-35** 20-25 25 20 20

Note: Basic data for sample industries were collected towards the end of 1999. However, data about those with star mark (*) were also updated in July 2001. ** Percentage of total cost of production excluding the cost of fabrics.

Annex A4.7: Share of garment exports in total national exports Fiscal year 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01*

Export of garments (Rupees in million) 3390.3 5943.2 5139.3 5374.8 5955.0 7015.4 9701.9 13924.9 9304.6

Total national exports (Rupees in million) 15644.8 16884.5 14514.9 16198.5 17410.3 18719.1 23145.6 29004.3 21207.7

Source: Economic Survey, Ministry of Finance (1999), Kathmandu. *Provisional estimate for the first eight months

Share in national exports (in percentage) 21.7 35.2 35.4 33.2 34.2 37.5 41.9 48.0 43.9

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Annex A4.8: Structure and performance of garment industries in Nepal Name

Year of

Technology

of industry

establishment

GramIna* GramSin* GramPun* GramLog GramRaf GramCot GramMom* GramPra GramMal

1985 1989 1984 1995 1983 1986/87 1994 1992 1984

Market

Assembly Semi-Assembly (new machines) Piece-rate to Assembly (90%) Assembly Piece-rate Piece-rate to Assembly Assembly Piece-rate to Assembly Piece to Assembly

Export value

U.S.A U.SA USA Germany USA USA USA USA USA (Canada, Spain in 1996)

Early years

Present (1999-2000)

$900,000 $790,000 $120,000 $1million $400,000 $700,000 $1.8 m $400,000 $200,000

$2.7 million $1.6 million $1.5 million $2.4 million $850,000 $4 million $13 million $1.1 million $4.6 million

Note: Basic data for sample industries were collected towards the end of 1999. However, data about those with star mark (*) were also updated in July 2001.

Annex A4.9: Laour productivity index of Nepal Description

1984/ 1987/ 1990/ 85 88 91

Agriculture, Fisheries & Forestry

100

110

128

1992/ 93

1993/ 94

1994/ 95

1995/ 96

1996/ 97

1997/ 98

1998/ 99

1999/ 2000

127

137

138

144

151

153

158

167

Mining & Quarrying

100

92

82

76

74

70

73

71

66

62

60

Manufacturing

100

79

60

62

60

53

50

46

40

37

35

Electricity Gas & Water

100

102

111

82

76

74

77

69

59

54

54

Construction

100

52

26

17

13

11

8

7

5

4

3

Trade, Restaurant & Hotel

100

93

83

79

78

76

73

69

67

63

61

Transport, Communication & Storage

100

65

46

37

33

30

26

23

20

18

16

Finance & Real Estate 100

90

90

87

86

83

83

80

79

77

75

Community & Social Services

95

86

84

83

80

77

73

71

70

68

Source: NPEDC (2000)

100

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Annex A4.10: Salary and allowances Sample industries

Salary range (in Rs.)

GramIna* GramSin* GramPun* GramLog GramRaf GramCot GramMom* GramPra GramMal

Mean salary (of majority)

2116-14000 3000-10000 2116-15000 2500-9000 2150-16000 1800-25000 2400-20000 1800-60000 2000-16000

3000 6500 5000 6500 4500 4500 3500 6500 4500

Overtime

Allowances Food Incentive for efficiency

150% Rs.30 150% Rs.45 Yes Yes 150% (+shift) No Yes Yes Yes Yes 150% Yes 150% Yes 150% Rs.20-30

No NA No No Yes Yes Yes Yes No

Note: Basic data for sample industries were collected towards the end of 1999. However, data about those with star mark (*) were also updated in July 2001.

Annex A4.11: Safety at work place Sample industries

Safety provisions

GramEna* GramSin* GramPun* GramLog GramRaf GramCot GramMom* GramPra GramMal

Safe water, gloves, fire exists, etc Sufficient (+ recent improvements) Sufficient (US standards) Sufficient Minimum Sufficient Sufficient Sufficient Moderate

Buyers’ standards WalMart/ J.C. Penny Not specified WalMart/ J.C. Penny Periodic visits by buyers Not specified GAP/WalMart Not specified WalMart Not specified

Note: Basic data for sample industries were collected towards the end of 1999. However, data about those with star mark (*) were also updated in July 2001.

Annex A4.12: Job security level Sample industries GramEna* GramSin* GramPun* GramLog GramRaf GramCot GramMom* GramPra GramMal

Nature of service Permanent Temporary 25% 50% 10% Few 14% 50% 75% 8% 4%

75% 50% (+daily wage) 90% 99% 86% 50% 25% 92% 96%

Issuance of appointment letters

Existence of contractors

For both services No For both services No For permanent In a few cases No (renewable contract papers) Yes (for some jobs) 85% Yes Mostly (No foreign) Yes (for ironing job) For both services In a few cases 8% No 8% Yes (for female)

Note: Basic data for sample industries were collected towards the end of 1999. However, data about those with star mark (*) were also updated in July 2001.

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Annex A4.13: Industrial relations situation Sample industries

Existence of labour union

Strike history

General scenario

GramEna* GramSin* GramPun* GramLog GramRaf GramCot GramMom* GramPra GramMal

No (joint committee) No No No Yes (two unions) Yes Yes No Yes

Once No Once No No Once Once No No

O.K Deteriorating O.K O.K O.K Peaceful Peaceful Peaceful Peaceful

(not serious) (2days closed)

( half a day closed) (not serious)

Note: Basic data for sample industries were collected towards the end of 1999. However, data about those with star mark (*) were also updated in July 2001.

144 GARMENT INDUSTRY IN SOUTH ASIA

References Acharya, Meena (1999), “Globalization Process and the Nepalese Economy”, in Madan K. Dahal (ed.), Impact of Globalization in Nepal, Kathmandu: Nepal Foundation for Advanced Studies (NEFAS) and Friedrich-Ebert-Stiftung (FES), pp. 26-45. Adhikari, D.R. (1993), “Quality of Work Life in Nepalese Manufacturing Enterprises” in Prem R. Pant and Narayan Manadhar (ed.), Industrial Relations in Nepal: A Book of Readings, Kathmandu: Industrial Relations Forum (in collabouration with Fredrich Naumann Foundation, Germany), pp. 265-272 APO (1997), Productivity Statistics, Tokyo: Asian Productivity Organization. Bajracharya, Pushkar (1999a), “Productivity in the Age of Globalization”, in Dinesh Pant, Pushkar Bajracharya and Madhav Pradhan (eds.) Current Issues on Productivity, National Productivity and Economic Development Center, pp. 27-38 Bajracharya, Pushkar (1999b), “Salient Features of the Industrial Relations Dynamics in Nepal””, in Prem R. Pant and Narayan Manadhar (ed.), Industrial Relations in Nepal: A Book of Readings, Kathmandu: Industrial Relations Forum (in collabouration with Fredrich Naumann Foundation, Germany), pp. 92-95. BM (1999), Business Manager for Managers, June, 1999, pp. 17 and 27-36 Bossak, Jan and Nagshima, Soichiro (1997), Corporate Strategies for a Borderless World: Sharpening Your Competitive Edge, Tokyo: Asian Productivity Organization. Dahal, Madan K., (1999), “Impact of Globalization on Nepalese Economy: Agenda for Development in the Next Millennium,” in Madan K. Dahal (ed.), Impact of Globalization in Nepal, Kathmandu: Nepal Foundation for Advanced Studies (NEFAS) and Friedrich-Ebert-Stiftung (FES), pp. 1-25. Dahal, M.K., Karki, Bharat B. and Upadhaya, Umesh (1999), Productivity, Wages, Advanced Studies (NEFAS) Employment and Labour Market Situations in Nepal, Kathmandu: Nepal Foundation for and Friedrich-Ebert-Stiftung (FES). DeCenzo, David A. and Robbins, Stephen P. (1997), Personnel/Human Resource Management (Third Edition), New Delhi, Printice-Hall of India, ILO (1998), Labour Administration: Profile on Nepal, Kathmandu: International Labour Organization. Joshi, Gopal (1999), “Regional Competitiveness and Productivity Among Selected Asian Countries”, in Dinesh Pant, Pushkar Bajracharya and Madhav Pradhan (eds.) Current Issues on Productivity, Kathmandu: National Productivity and Economic Development Center, pp. 39-61. Jyoti, Padma (1992), “Industrial Relations: Employer’s Perspective” in Prem R. Pant and Narayan Manadhar (eds.), Industrial Relations in Nepal: A Book of Readings, Kathmandu: Industrial Relations Forum (in collabouration with Fredrich Naumann Foundation, Germany), pp. 92-95. Lohani, Prakash (1999), “A Note on the Impact of Globalization in Nepal”, in Madan K. Dahal (ed.), Impact of Globalization in Nepal, Kathmandu: Nepal Foundation for Advanced Studies (NEFAS) and Friedrich-Ebert-Stiftung (FES), pp. 167-169. Manandhar, Narayan (1999), “Scenario of Industrial Relations in Nepal” in Prem R. Pant and Narayan Manadhar (ed.), Industrial Relations in Nepal: A Book of Readings, Kathmandu: Industrial Relations Forum (in collabouration with Fredrich Naumann Foundation, Germany), pp. 31-35. MOF (1999), Economic Survey (1998/99), Kathmandu: Ministry of Finance MOF (2001), Economic Survey (2000/01), Kathmandu: Ministry of Finance

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Monga, R.C. (1999a), Managing Enterprise Productivity and Competitiveness, Geneva: International Labour Organization (ILO). Monga, R.C. (1999b), “Productivity: A Conceptual Framework”, in Dinesh Pant, Pushkar Bajracharya and Madhav Pradhan (eds.) Current Issues on Productivity, Kathmandu: National Productivity and Economic Development Center, pp. 3-24. IGWU (1996), Poshak, Kathmandu, Nepal Independent Union of Garment Workers NPEDC (1996), A Study on Value-addition of Ready-made Garment Industry in Nepal (in Nepal), Kathmandu: National Productivity and Economic Development Center. NPEDC (1997), Labour-management Relations in the Ready-made Garment Industry in Nepal (In Nepali), Kathmandu: National Productivity and Economic Development Center. NPEDC (2000), Productivity Measurement (at Macro Level), Kathmandu: National Productivity and Economic Development Center. Pant, Pushkar Dev (1998), “Ready-made Garment Industry in Nepal: Challenges and Strategies” (in Nepali), in Khula Bazar, Year 1, No. 5, pp. 53-55 Pant, Prem R. (1991), “Industrial Relations and Development: The Future Perspective”in Prem R. Pant and Narayan Manadhar (ed.), Industrial Relations in Nepal: A Book of Readings, Kathmandu: Industrial Relations Forum (in collabouration with Fredrich Naumann Foundation, Germany), pp. 303-309. Prokopenko, Joseph (1995), “New Trends in Productivity: The ILO Experience”, in New Trends in Productivity, Tokyo: Asian Productivity Organization, pp. 32-51 Shrestha, Badri P. (1999), “Impact of Globalization in Nepal: An Observation”, in Madan K. Dahal (ed.), Impact of Globalization in Nepal, Kathmandu: Nepal Foundation for Advanced Studies (NEFAS) and Friedrich-Ebert-Stiftung (FES), pp. 173-176. Singh, U.S. (1995), “Productivity in the Age of Competitiveness: Strategies for Achieving Productivity Growth”, in Productivity in the Age of Competitiveness (Prize Winning Essays), Tokyo: Asian Productivity Organization, pp. 27-72 TKP (2001), “Garment Industry Braces for Another Setback” in The Kathmandu Post (TKP), Vol IX No. 139, July 6, 2001.

146 GARMENT INDUSTRY IN SOUTH ASIA

147

5

Garment industry in Pakistan* Asir Manjur

1.

Introduction

The textile apparel sector lies at the apex of the textile value chain starting from cotton and synthetic fibres. Over the past decade there has been a consistent increase in the value of global market share of high value textile apparel in comparison to the products lying at the lower end of the value chain. This phenomenon is driven by factors like frequent movements in the global fashion scene, niche marketing resulting in higher unit price realizations and enhanced usage of diverse fabrics and materials particularly in the women’s apparel segment. The South Asian economies have established themselves as important global players in the apparel trade. Predominantly the reasons lie in the very nature of the industry that is labour intensive. Increasing wage rates in the developed countries resulted in the relocation of the industry to developing countries. Global exports markets, the USA and EU, in order to protect their domestic industry regulate the imports from developing countries by imposing quantitative import restrictions, these are managed under a formal agreement known as the Multi Fibre Arrangement (MFA). The Uruguay round, a major milestone in liberalization of international trade paved the way for extinction of non-tariff restrictions on trade including textiles. The new arrangement, Agreement on Textiles and Clothing (ATC) governs the global textile trade regime, which aims at removal of quantitative barriers by 2005. MFA phase-out is likely to open new vistas of opportunities for developing countries that have developed a strong and a diversified product base, particularly in the product segments at the top of the textile value chain. At the same time it would adversely affect the growth of exports from developing countries dependent on a limited product range and competing in the global markets on price rather than quality. The eradication of trade barriers will start an era of increased competition and countries having the advantage of low labour costs will only be able to survive through development of strategies aimed at enhancing the productivity of the work force, broadening of the product as well as market base and process improvements leading to high cost efficiencies.

* Presented by Mr. Nabeel Goheer on behalf of Mr. Asir Manjur, Small and Medium Enterprise Development Authority (SMEDA), Lahore, Pakistan.

148 GARMENT INDUSTRY IN SOUTH ASIA

2.

Global market

The textile and apparel sector is an important part of the global trade. It has a significantly high share of 6 percent within the global trade in goods and merchandise that is estimated to be around US $ 5 trillion. A further break-up of the textile trade depicts that over the last decade or so the clothing trade has surpassed the trade in textile products such as yarns and fabrics. Currently the split of textile and clothing trade is 47 percent and 53 percent respectively. The estimated import market of the apparel products is approximately US $ 160 billion (Figure 5.1). The import market for the selected product categories (table given in Annexure I) has increased at an annual growth rate of 4 percent. Imports have increased from US $ 133 billion to US $ 160 billion over a period of five years (1995-99). Annexures at the end of this chapter provide the breakdown of imports by the US and EU countries. Figure 5.1: Volume of world apparel imports in billion dollars 180.0 160.0 140.0

147.0

156.1

159.6

160.2

1996

1997

1998

1999

138.4

120.0 100.0 80.0 60.0 40.0 20.0 0.0 1995

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

2.1 Product mix of imports In terms of values of the global imports the share of both the knit and woven garments at a broader level is almost equal (Figure 5.2). At a product level the woven garments for men and women apparel categories enjoy a 50 percent share in the global imports, which also include a major part of the hosiery category because mostly imports are in the women’s under garments and night wear in the form of woven garments. The knit garments segment comprising mainly t-shirts and knitwear have a share of 38 percent in the total world imports. Due to unavailability of disaggregated data of knit garment in men and women’s categories, it is not possible to come up with exact market size. Over a period of five years, the knit garments have grown at a faster pace than the woven garments; the share of woven garments has been reduced by almost 5 percent during this period. Analysis of gender split of the apparel import market shows that the women’s garment (knit and woven) segment is the single largest product category with a share of 31 percent in the import markets. Products such as sports-wear and baby-wear have a very small share of 3 percent each respectively in the total imports.

PAKISTAN 149

Figure 5.2: World imports of apparel – product split Product split of world imports 1999 Hoisery 9%

T-Shirts 25%

World imports of apparel1995

Woven Men 23%

Hoisery 9%

T-Shirts 22%

Woven Men 25%

Sports Wear 4%

Sports Wear 3% Baby Wear 3%

Knit Women 7%

Woven Women 24%

Knit Men 6%

Baby Wear 2% Knit Women 6%

Woven Women 27%

Knit Men 5%

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

The world imports of large categories like woven and knit garments have grown at an average annual growth rate of 1 percent and 6 percent respectively from 1995-1999. Imports of woven garments in men’s category increased from US $ 34.99 billion to US $ 36.18 billion in 1995-99 representing an average annual growth rate of 0.8 percent (Figure 5.3). Whereas imports of the woven garment in women category increased at an average annual growth rate of 1.9 percent, the imports increased from US $ 36.42 billion in 1995 to US $ 39.23 billion in 1999. In the knit garments category imports for men’s wear increased from US $ 7.18 billion to US $ 9.12 billion during the same period, showing an average annual growth rate of 6.1 percent. The imports of knitted garments for women had an average annual growth rate of 5.5 percent, resulting in an increase of volume from US $ 8.96 billion in 1995 to US $ 11.11 billion in 1999. The figures depict the growth and performance of various categories comprising the global imports. Figure 5.3: Trend of world imports of apparel World imports of apparel 1995-1999 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0

l l

l

l

n

n

n

w

w

w

w

w

1996

1997

1998

1999

1995

w

l

World imports of apparel 1995-1999

Baby Wear

n

Sports Wear

n

n

l

Hosiery

40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

n

n

wl

wl

n

wl

w

n ~

n ~

n ~

n ~

n ~

1997

1998

1999

n

l

1995

w

l

n

w

Woven Men Knit Women

n

1996 n

l

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

Woven Women T-Shirts

~

Knit Men

150 GARMENT INDUSTRY IN SOUTH ASIA

2.2 Asian countries and global market Asian countries dominate the apparel markets of the world. Almost 45 percent of the total exports in the apparel markets originate from the Asian countries which include key players like China, Hong Kong, Thailand, Turkey, Bangladesh, India and Pakistan. Their total share in apparel markets increased at an annual average growth rate of 5 percent over a period of five years from 1995-99 (Figure 5.4). In absolute terms, the exports from Asia have increased from US $ 52 billion to US $ 63 billion. Figure 5.4: Global imports from Asia in billion dollars 30 25 20

n

n

n

n

n

15 10 5

~

~

n

w

w

~

~

~

l

l

l

1996

1997

n

l

w ~

~ w

~ w w

w w

w ~ w

~

n

n

n l

0 1995

w n

1998

South Asian

n

China

Hong Kong

l

~

Thailand

Indonesia

~

Korea Rep.

1999 w

Turkey Japan

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

China holds the lion’s share in the overall exports of the apparel from Asia; its exports constitute almost 40 percent of the total exports of Asian region. Other important contributors include Hong Kong with a share of 14 percent, Turkey with a share of 10 percent, Thailand with a share of 5 percent, and Indonesia and Korea with shares of 6 and 4 percent respectively. 2.3 South Asia and apparel exports South Asian countries export apparel products worth US $ 12.5 billion and have a combined share of 20 percent in Asian exports (Figure 5.5). Within the South Asian region, Bangladesh dominates the exports by constituting almost 8 percent towards the net exports of Asia. India follows Bangladesh with a 7 percent share, and Pakistan has a meagre share of 2 percent in the total Asian exports. The apparel sector of Bangladesh has experienced tremendous growth, its exports were limited to less than US $ 2 billion in 1995 and increased to almost US $ 5 billion in 1999 that translates into an overall increase of 140

PAKISTAN 151

percent in exports. The growth in apparel exports from Pakistan during a similar period has been stagnant. Figure 5.5: Apparel exports from South Asia in billion dollars 5.0 4.5

n

4.0 3.0 2.5 1.5 l

1.0

w

w

w

2.0

w

n

n

n

3.5

wn

l

l

1996

1997

l

l

1998

1999

0.5 -

1995 l

n

Pakistan

India

w

Bangladesh

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

3.

Apparel exports

The Apparel exports of Pakistan were US $ 1,321 million in 1999 (Figure 5.6), which means that the share of Pakistan’s apparel exports in the global market is only 0.82 percent. The apparel products exports have increased at an average annual growth rate of 4.92 percent from US $ 1,090 million to US $ 1,321 million during 1994-99. Although the growth in the exports of Pakistan matches with the growth in the global import markets but in case of Pakistan it is being driven by a limited product categories. The details of Pakistan’s exports are provided in Annexure VI Figure 5.6: Pakistan’s exports to world in million dollars 1,400 1,200

1,274

1,238

1,305

1,321

1,090

1,000 600 400 200 1995

1996

1997

1998

1999

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

152 GARMENT INDUSTRY IN SOUTH ASIA

The main focus of the Pakistan’s exports have been on two major markets USA and EU. In 1999 the exports of apparel product to USA were US $ 751 million and exports to EU were US $ 463 million (Figure 5.7). This reflects that around 92 percent of the Pakistan’s exports are directed towards EU and USA, which are major quota markets. The rest of the exports are made to other countries including Canada, Middle East, Australia and other Asian countries. Over the past five years the apparel exporters seem to have adopted an exit strategy in the non-quota countries as more and more exports are now towards quota markets. During 1995, the total exports to non-quota market had a share of 14 percent, whereas the exports to the USA and EU constituted 49 percent and 37 percent. A greater tendency of exports to quota markets is obvious from the figure. This situation makes Pakistan highly dependent on the quota-restricted markets. Figure 5.7: Split of Pakistan’s exports 1999 Other countries 8%

EU 35%

USA 57%

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

3.1 Product mix of exports Pakistan operates in the global apparel markets with a few product categories having a strong bias in favour of men’s wear which constitutes 69 percent of the total exports, whereas globally the market share of the women’s wear is higher than the men’s wear. Traditionally Pakistan has tried to focus and increase its penetration in a smaller global market i.e. men’s wear by ignoring a larger market. For this reason only 15 percent of Pakistan exports comprise women’s garments. When the existing product mix of apparel exports from Pakistan is analysed, both the woven and knit garments seem to have an equal split. In actuality the knit garments dominate the export product mix because of the fact that almost 100 percent exports in T-shirts category are also that of knitted garments (Figure 5.8). Even the hosiery segment in Pakistan is also dominated by knitted garments. On the contrary, the hosiery segment in the world

PAKISTAN 153

imports is predominantly that of woven garments. Even in the knit garments segments, Paksitan’s presence in the men’s garment category is extremely high, which is unlike the world import markets in which the share of women knit garments is higher as compared to men’s garments. The main reason behind the exporters pursuing production in men’s wear is that over the years they have been able to accumulate the quotas in this category. Diversification to other product categories is not possible without incurring additional costs, which restricts diversification of the apparel sector. Figure 5.8: Share of knit and woven garments in Pakistan’s exports

100% 80%

486

645

655

605

576

333

365

366

489

537

1995

1996

1998

1999

60% 40% 20% 0 1997 Knit

Woven

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

3.1.1 Men and women’s garments The major category of woven garments for men and women has increased at an average annual growth rate of 4.34 percent during 1994-99. In this category, exports increased from US $ 486 million to US $ 576 million. The exports of the women garments in this category were US $ 116 million, and men’s garments were US $ 460 million in 1999. The exports of the men’s garments increased at an annual growth rate of 7.49 percent, whereas the women’s garments shrunk at an average annual rate of 4.78 percent. Even though the share of the woven garments is higher in Pakistan’s exports, the comparison with the exports split of 1995 shows that the share of the woven garments has slightly declined from 45 percent to 43 percent (Figure 5.9). But the split of the men and women’s woven wear has completely changed. The share of women’s wear has fallen to only 9 percent which was earlier 13 percent. The next big category is of knit garments taking a share of 41 percent, and the exports of this category increased from US $ 333 million to US $ 537 million, representing an average annual growth rate of 12.71 percent. The women’s garments exports were US $ 80 million and that of men’s garments were 457 million. In this category, the exports of men’s garments increased at an average annual growth rate of 13.63 percent. When the exports of 1999 are compared with 1995, it is evident that the share of knit garments in the Pakistan’s

154 GARMENT INDUSTRY IN SOUTH ASIA

exports have increased from 30 percent to 41 percent over 1995-99. The reason for the exports being biased towards men’s wear is that the exporters have the benefit of mass production and the stable profits in this category. While in the global trade the market for the knit garments has not increased, Pakistan’s price realization in the knit garments category indicates upward trend. Figure 5.9: Trend in Pakistan’s apparel export Split of Pakistan’s apparel exports 1999 Baby Wear 2%

Sports Wear 1%

T-Shirts 5%

Hosiery 8%

Knit Women 6%

Knit Men 35%

Woven Women 9%

Woven Men 34%

Split of Pakistan’s exports 1995 Baby Wear 2%

Sports Wear 2%

T-Shirts 8%

Hosiery 13%

Knit Women 5%

Knit Men 25%

Woven Women 13%

Woven Men 32%

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

In smaller categories, the exports of the baby wear increased at an average annual growth rate of 13.81 percent from US $ 16 million to US $ 27 million. The exports of other categories like sports wear, hosiery and T-shirts have shrunk at an average an annual rate of 11.55 percent, 8.47 percent and 7.19 percent respectively. The main reason being that the exports are becoming more in favour of men’s wear. Whereas globally the export market for women’s wear is much larger than men’s wear and the imports of T-shirts is increasing but in case of Pakistan the exports of T-shirts has shrunk. The Pakistani exporters are not exporting the smaller categories such as baby wear and others because market size is not large due to which the size of the orders in quantity terms is very small. Exporters do not like to pursue these niche markets as these are considered as specialised garments. 3.2 Exports to EU The European market is the major target for Pakistan’s exports of apparel products even though the quotas are placed in the EU market. The exports of apparel product to EU were US $ 462.6 million in 1999 (Figure 5.10). This represents that the share of Pakistan’s apparel exports in the European market is 0.71 percent, and this share has increased from 0.67 percent. This mainly reflects that more and more of Pakistan’s exporters are venturing into the European market. The apparel product exports to EU have increased at an average annual growth rate of 3.27 percent from US $ 462.6 million to US $ 406.7 million during 1994-99. An analysis of the garments imports by the EU countries is provided in Annexure II.

PAKISTAN 155

Figure 5.10: Pakistan’s exports to EU in million dollars 464.4

500.0

406.7

417.1

428.2

462.6

400.0 300.0 200.0 100.0 1995

1996

1997

1998

1999

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

3.2.1 Product mix of exports In the European market, 60 percent of the Pakistan’s exports are of men’s wear whereas women’s wear exports total up to 16 percent of the exports (Figure 5.11). The market size of the women’s wear is larger than the men’s wear in EU, and the exports of Pakistan are in favour of men’s wear. The reason for not increasing the share of women garments is that the women’s garments require sophisticated processing procedures and fine fabric due to which the conversion cost of the garments is higher than the men’s wear. Pakistan’s exports in the woven category are the highest with a share of 54 percent. Between 1995 and 1999, export has increased in this category from US $ 204.7 million to US $ 245.7 million with an annual average growth rate of 4.67 percent. The men’s garments and women’s garment exports were US $ 194.7 million and US $ 50.99 million respectively in 1999. The average annual growth rate of 6.67 percent was realised in the men’s garments and the women’s garments shrunk at the rate of 1.58 percent from 1994 to 1999. This also shows that the percentage decline in the women garments is taken up by the more reliance on the men’s garment exports to EU market. The exports of knit garments have a share of 22 percent and the exports of this category increased from US $ 70 million to US $ 104 million. Representing an average annual growth rate of 10.29 percent. The women’s garments exports were US $ 23 million and that of men’s garments were US $ 81 million. In this category the exports of men’s garments increased at an average annual growth rate of 12.40 percent. The exports of Pakistan in smaller categories show a similar pattern to the exports to world. It was in the baby wear category that there was some increase in exports while the exports of sports wear, T-shirts and hosiery have realised a negative growth rate. This reflects that the Pakistan’s exports are being concentrated on men’s garments and thus shrinking the share of other categories, while the trend should have been focused on adding up on new product categories in the product mix or catering the women garments market and moving towards higher value added products.

156 GARMENT INDUSTRY IN SOUTH ASIA

Figure 5.11: Split of exports to EU Split of exports to EU 1999

Split of exports to EU 1995 T-Shirts 5% Sports Wear 4% Baby Wear 3%

Hosiery 21%

Woven Men 37%

Sports Wear 2%

T-Shirts 4%

Woven Men 43%

Hosiery 14%

Baby Wear 4% Knit Women 5%

Knit Men 12%

Woven Women 13%

Knit Women 5% Knit Men 17%

Woven Women 11%

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

The comparison of Pakistan’s exports to EU during 1995-99 shows that the product mix of Pakistani exports is mostly in favour of woven garments and knit garments in the EU market. The same trend is seen in the overall exports of Pakistan in the apparel sector. The woven garments exports to EU had a share of 50 percent in 1995, and it increased to 54 percent in 1999. Similarly, the share of the knit garments have increased from 17 percent to 22 percent. The share of the T-shirts, which is globally increasing has decreased in Pakistan’s case. 3.3 Exports to US American market, being the largest in the world for the apparel products, is the dominant importing country. Pakistan exported upto 57 percent of its apparel to the USA market in 1999 totaling to US $ 750.9 million. Pakistan’s apparel products take up a share of 0.92 percent of the USA market. This shows that the Pakistan’s exports are highly dependent on the USA market trends and demands. The exports of Pakistan have increased from US $ 529 million to US $ 751 million reflecting that the average annual growth rate is 9.16 percent during 1995-99 (Figure 5.12). An analysis of the garments imports by the US is provided in Annexure I. 3.3.2 Product mix of exports In the American market, the share of the men’s wear is 76 percent and a small share of 14 percent is of women wear (Figure 5.13). The main reason for the exports inclined towards men’s wear is that the volume of exports is higher for men’s wear and the benefits of mass production are more attractive than going for higher value. In the USA market too, the size of the women’s wear is larger than the men’s wear. Pakistan’s exports in the knit garments category are the highest for USA with a share of 53 percent. The exports increased in this category from US $ 232.4 million to US $ 400.7

PAKISTAN 157

million with an annual average growth rate of 14.59 percent. The men’s garments and women’s garment exports were US $ 347.9 million and US $ 52.8 million respectively in 1999. The average annual growth rates for men’s garments and women’s garments were 15.04 percent and 11.82 percent respectively, thus reflecting that the consumers prefer the knit garments for their softer and durable qualities. Figure 5.12: Pakistan’s exports to USA in million dollars 751

721

800 648

654

700 529

600 500 400 300 200 100 0

1995

1996

1997

1998

1999

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

The Woven garments category has a share of 37 percent and the exports of this category increased from US $ 198.8 million to US $ 275.4 million. Representing an average annual growth rate of 8.49 percent. The women’s garments exports were US $ 53 million and that of men’s garments were US $ 222 million. In this category the exports of men’s garments increased at an average annual growth rate of 12.32 percent. Figure 5.13: Split of exports to US Split of exports to USA 1999

Split of exports to USA 1995

Sports Wear 1.3%

T-Shirts 10.0%

Hosiery 6.9%

Woven Men 26.4%

Baby Wear 0.2%

Knit Women 6.4%

Sports Wear 1% Baby Wear 1%

T-Shirts 5% Hosiery 3%

Woven Men 30%

Knit Women 7%

Knit Men 37.6%

Woven Women 11.2%

Knit Men 46%

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

Woven Women 7%

158 GARMENT INDUSTRY IN SOUTH ASIA

The share of knit and woven garments together is 90 percent in the exports of Pakistan to USA and the rest of 10 percent are shared amongst the baby wear, sports wear, T-shirts and hosiery categories. The baby wear category increased at an average annual growth rate of 52.85 percent and its exports were US $ 6.2 million in 1999. Besides baby wear category, sports wear, hosiery and T-shirts category declined at an average annual rates of 8.56 percent, 8.10 percent and 8.19 percent. this clearly shows that the Pakistan’s exports are concentrating on two major garments exports namely men’s wear and women’s wear and all other categories are being ignored and not significantly developed. The comparison of the share of the exports to USA during 1995-999 shows that the share of the woven garments exports have shrunk and it has shifted towards the exports of knit garments. This shows that the exports of Pakistan are becoming more and more vulnerable by focusing on only smaller market rather than focusing on the market which is very big. In both of these categories, the share of the men’s garment exports of Pakistan are very high; and the share of women’s wear is very small. This also shows that the Pakistan’s exporters are overlooking the fact that the market for the women’s wear is larger than market of men’s wear. The reasons for focusing on men’s wear are that the quotas for women’s garments are expensive to buy and the conversion costs are slightly higher due to complexity in women’s garment manufacturing. Other reasons include limited domestic availability of wide range of fine and blended fabrics that often need to be imported. Due to these reasons, the industry continues to maintain a strong bias in favour of the men’s garments production.

4.

Unit price realization

The unit price realization of product categories is an excellent indicator to determine the sustainability of the export growth and to develop an understanding about the competitiveness in various product segments. It also gives a fair idea about the positioning of the apparel products in different tiers of the market, i.e. high-end and low-end product segments. 4.1 Men’s wear unit price realization 4.1.1 Woven garments In the men’s woven wear category, the major exports by Pakistan are trousers and shirts. On the per piece basis trousers are exported at US $ 3.67, while the cotton shirts and shirts of other textile material are exported at the rate of US $ 3.74 and US $ 2.89 respectively. These prices are the lowest in comparison to all other countries under review (Table 5.1). Sri Lanka has been able to get the highest price per piece of US $ 6.44 for trousers, Thailand in cotton shirts for US $ 7.51 and India in shirts of other textile material for US $ 6.16. This gives a decent idea that Pakistan’s presence in the woven garment segment is limited to the low-end market comprising discount stores.

PAKISTAN 159

Table 5.1: Comparative unit price realization of men’s wovenwear exports $/Piece SITC code

Product description

8414 84151 84159

Trousers, etc. Cotton shirts Shirts of other textile material

Pakistan

Bangladesh

India

Sri Lanka

China

Thailand

3.67 3.74 2.89

4.21 4.82 4.17

3.91 5.59 6.16

6.44 6.15 5.72

5.74 4.02 5.28

6.35 7.51 4.85

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

4.1.2 Knit garments In the men’s knit wear exports, the major categories of Pakistan exports are trousers and shirts. On the per piece basis trousers are exported at US $ 3.21, while the cotton shirts and shirts of other textile material are exported at the rate of US $ 4.06 and US $ 3.81. These prices are better than prices of Bangladesh (Table 5.2). Also in the trousers category Pakistan is able to fetch higher prices than India and China reflecting that the Pakistan’s exports are much more competitive in the men’s knit wear. Sri Lanka has been able to get the highest price per piece for trousers i.e., US $ 3.90, Thailand in cotton shirts for US $ 7.48 and China in shirts of other textile material for US $ 8.14 on per piece basis. Table 5.2: Comparative unit price realization of men’s knitwear exports $/Piece SITC code

Product description

84324 84371 84379

Trousers etc. Cotton shirts Shirts, other textile material

Pakistan

Bangladesh

India

Sri Lanka

China

Thailand

3.21 4.06 3.81

3.17 2.97 3.45

2.80 4.53 4.62

3.90 7.44 6.08

2.04 5.49 8.14

3.29 7.48 3.34

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

The trend may be seen that Sri Lanka is able to get higher prices in the trousers category be it a woven garment or a knit garment. On the other hand, Thailand has specialised in producing cotton shirts be it a woven or knit garment. Pakistan seems to be competing in the international market on the basis of providing the international buyers with garments in large volumes and at cheaper prices. Thus, Pakistan is exporting products of lower quality. Another contributing factor here is that Pakistan over the years has established itself as a mass producer of garments and internationally competes on prices only, while the factor of quality is completely absent which is also reflected in low unit price realizations in the USA market. As far as brand development is concerned, currently no domestic apparel exporter has his presence with an exclusive brand name in the international market. The

160 GARMENT INDUSTRY IN SOUTH ASIA

industry relies heavily on the buying houses that are the major providers to mass markets and discount stores. A very limited number of buyers are able to deal with high-end labels such as Levi’s, Ralph Lauren and Nike, etc. 4.2 Women’s wear unit price realization 4.2.1 Woven garments The market perception of Pakistan even in this category is that of a low quality, high volume supplier. The price level in the skirt category is US $ 4.04 per piece, which is better than Bangladesh’s price of US $ 3.47 (Table 5.3). As far as trousers and blouses are concerned Pakistan’s prices are the lowest among the Asian countries at US 3.67 and US $ 3.14 per piece. China has a very high unit price realization in skirts followed by Thailand. The basic reason is the indigenous availability of numerous fabric blends. China and its neighbouring countries are the largest producers of man-made fibres and filaments which give them competitive edge over other countries particularly in the global women’s garments market. Table 5.3: Comparative unit price realization of women’s wovenwear exports $/Piece SITC code Product description 8425 8426 8427

Skirts & divided skirts Trousers, breeches etc. Blouses, shirt-blouse, etc

Pakistan Bangladesh 4.04 3.67 3.14

3.47 4.55 3.28

India

Sri Lanka

China

Thailand

4.77 4.22 3.94

5.39 5.87 5.69

7.53 5.85 6.77

6.05 7.13 7.04

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

4.2.2 Knit garments In the knit wear category for women, Pakistan has been able to fetch the highest price for the skirts category among the Asian countries and in the trousers category the price realised was US $ 2.90 per piece (Table 5.4). China, Sri Lanka and Thailand are price leaders in the knit trousers category. Although the unit price realization of Pakistan is very high in the knitted skirts segment but the volumes of export in this category are very low; and it is unable to make a significant impact on the overall export performance of Pakistan. Table 5.4: Comparative unit price realization of women’s knitwear exports

$/Piece SITC code Product description 8425 8426

Skirts & divided skirts Trousers, breeches etc.

Pakistan Bangladesh 5.68 2.90

0.00 2.59

India

Sri Lanka

China

Thailand

2.92 3.74

4.85 4.82

3.13 6.78

4.41 4.54

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

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4.2.3 T-shirts & pullovers T-shirts are imported in large volumes in the USA. In Pakistan’s apparel export portfolio, the t-shirts category has a pivotal position, as it is the third largest apparel product exported from the country. The unit price realization comparison among the selected Asian countries shows that the Pakistani exporters are not able to attain the higher price for their product. The exporters are relying on mass production and gain the profits in this manner. This clearly indicates that Pakistan’s exports are directed mainly towards the bottom tier of apparel market and the exporters mainly deal with buyers like discount chain stores, with the exception of few exporters that deal with established brand names and labels. Again the volume of exports is not very high, as a result, the average unit price realization of the overall apparel industry is very low. Table 5.5: Comparative unit price realization of exports of T-shirts & pullovers

$/Piece SITC code

Product description

Pakistan

8453 8454

Jerseys, pullovers, etc. knit 3.45 T-shirts, other vests knit 2.83

Bangladesh

India

Sri Lanka

China

Thailand

3.06

5.36

6.19

4.57

7.06

1.69

4.26

4.21

2.93

3.68

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

Other factors contributing towards low unit price realization of Pakistan, as mentioned above, include limited availability and production of blended garments as well as finishing techniques that are used to add value in garments.

5.

Apparel industry structure

The textile exports of Pakistan are US $ 5.615 million whereas the apparel exports constitute a total of US $ 1.658 million. This represents only 14 percent of the total textile exports. Whereas globally the trend is that the share of the exports of the apparel products is nearly 70 percent. This reveals that the Pakistan’s exports are basically concentrated on the low value added products like exports of cotton/textile fabric, cotton yarn/thread and other items (Figure 5.14). Apparel products being the highest value added category in the textile exports does not have a large share. If the secondary data sources are consulted in order to determine the size of the apparel sector in Pakistan, these sources are highly under-reported. The Census of Manufacturing Industries (CMI 1995-96) gives the total number of registered apparel manufacturing units as one hundred and 30 only (130) and the number of persons engaged in these units is around fourteen thousand (14,000). Similarly, according to the Survey of Household and Manufacturing Industries (SHMI 1996-97) the number of total apparel stitching units in the

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informal sector is around four thousand (3,839 precisely). The total number of persons engaged is highly underestimated at seven thousand. Figure 5.14: Split of textile products, 1999-2000 Apparel, 14% Cotton Yarn, 9%

Others, 68%

Cotton Fabric, 9%

Source: Export Commodities of Pakistan during 1999-2000, Export Promotion Bureau of Pakistan

High tendency of under-reporting the number of employees exists in the business community to circumvent the labour levy contributions on behalf of employees. Also the numbers represent direct employment, whereas contract employees and piece rate employees are not captured by the secondary data sources. 5.1 Imports of stitching machines and size of apparel sector Imported stitching (sewing) machines are used mostly for industrial purposes, whereas domestically manufactured machines are used for household purposes. The volume of imports of sewing machines in Pakistan gives a fair idea of the total size of the apparel sector. Table 5.6 reveals that the total number of sewing machines in the country is around 400,000. Considering the fact that stitching units either of knit garments or woven garments require other human resource as well such as helpers, cutters and trimmers, etc the total employment in the sector is more than 700,000 individuals. Out of this workforce, the total number of skilled workers is probably half the size of total employment. 5.2 Knit and woven apparel segment At a broader level, the industry can further be classified in two broad categories i.e. the knit garments segment and the woven garments segment. The knitting industry in Pakistan has traditionally focussed on integrated units. An estimated number of 700 vertically integrated units constitute the knitwear sector of Pakistan. These units perform in-house knitting, dyeing and processing and stitching of garments. An estimated number of 15,000 knitting machines are installed in this segment, mostly these units cater to the export markets with limited presence in the domestic markets; almost 80 percent of the production is exported.

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Table 5.6: Number of stitching machines installed Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 Total

Machines installed 1992 1993 1994 1995 1996 1997 1998 1999 2000

62,400 61,599 44,948 28,402 18,513 25,408 47,435 37,709 20,377 346,791

Stitching Machines Imports (Machines imported prior to 1990 can be considered as scrapped) Source: Federal Bureau of Statistics

In the woven garments segments although the number of manufacturing units is much high but these are dedicated stitching units which only convert fabric into garments. The segment is dominated by SMEs which operate with small number of stitching machines ranging from 30 to 40 machines per unit. A large number of the woven garments stitching units also cater to the demands of the domestic apparel market. 5.3 Gender split in employment The apparel manufacturing industry in Pakistan is the single largest industrial employment provider in the country. The male workers who comprise almost 90 percent of the total labour force dominate the employment in the sector. The industry prefers to hire male workers as stitchers whereas, female workers are only hired as helpers in the trimming and packing sections. Key factors given by the industry includes the following: q Labour laws in the country impose restriction on women employment after 7 P.M. Due to the cyclic nature of the apparel industry and depending upon orders obtained by a specific unit, it becomes difficult for female workers to work extra time. q The entrepreneurs also avoid hiring female workers because of the maternity benefits that are to be provided to a female employee. The maternity benefits include paid leave for fixed period of time. q The apparel industry heavily relies on ‘Ustaad-Shagird’ tradition (apprenticeship on the job training). Mostly the stitching masters are male, and they tend to have a gender bias against training of women workers. Although generally the women workers are considered to be more productive by the apparel industry as compared to male workers, male workers are given a preferential treatment by the apparel sector on the basis of the above mentioned factors.

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5.4 Production efficiency and losses An important factor that undermines the productivity of the apparel sector in Pakistan is the high production losses (Table 5.7). These losses are to the extent of 30 to 40 percent in the knitwear sector. An important element is the lack of specialization and presence of integrated units within the knitwear sector. These losses are significantly reduced in the woven garments segment due to specialization in production processes. Table 5.7: Extent of losses in the knitwear industry Cut to Shipment Rejection Knitting losses Dyeing & Finishing Losses Cutting & Stitching Losses

2-3 % 2% 4-7 % 15-18%

Source: Textile Vision 2005, SMEDA

The level of wastage at various stages in knitwear industry by no standards can be compared to international benchmarks that consider any process to be commercially unviable if the extent of losses is more than 4 percent. 5.5 Skill development in apparel sector There are a very limited number of training institutes that provide stitching training in the country. The output of these institutes is not sufficient to meet the requirements of the apparel sector. The apparel industry develops its human resource through ‘Ustaad-Shagird’ system. The stitching masters induct young apprentices and impart stitching training. Due to this particular aspect, the modern production techniques and process improvements rarely happen within the system. This aspect also limits the capability of the apparel sector to bring about improvements in the existing product lines and develop new products. The industry in Pakistan is highly production oriented and lacks innovation in both the processes and product. 5.6 Competitiveness of apparel manufacturing in Pakistan Even with increasing labour costs and the costs of other inputs, Pakistan is still highly competitive in apparel manufacturing. The total cost of garments is below the average unit price realization of different competitors. Table 5.8 represents the cost structures of the apparel sector in the three selected product categories. The highest cost content, almost 80 percent, in any garment is that of the inputs including fabric, trimming and accessories. The labour cost per garment is within the range of 7 percent to 11 percent, depending upon the type of garment produced.

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5.7 Wages and salaries in the apparel industry in Pakistan The labour force in the apparel industry in Pakistan can be classified into three categories, the first category is that of supervisors supervising a particular department such as stitching and cutting, the second category is that of skilled workers performing a specific function in apparel manufacturing such as stitching and finally there are a number of helpers and workers performing basic recurring functions in each department constituting the semiskilled and unskilled workers. Interestingly majority of the female workforce is only employed to perform semiskilled operations. It is for this reason that there is high presence of women in the clipping, and packaging sections meaning thereby that the female workers are the lowest paid in the apparel sector (Table 5.9). Table 5.8: Competitiveness of apparel manufacturing in Pakistan Cost of goods /garment (Rs)

Denim Jeans

Fabric (RS) 132.61 Pocket Lining fabric (RS) 6.50 Accessories (Rs) 21.15 Packing cost/garment (Rs) 5.00 Electricity charges per garment (Rs) 1.81 Maintenance Costs (Rs) 0.30 Labour (Rs) 14.00 Total CGS Rs 181.37 Total CGS $ 2.83 Financial Charges 2.80 Admin/Overheads 2.82 Cost/garment including Admin & Financial Charges 186.99 Total Cost including admin & Financial Charges $ 2.92

% of total cost

PK polo % of t-shirt total cost

70.92 3.48 11.31 2.67 0.97 0.16 7.49

72.12 0.00 11.76 5.00 1.66 0.47 12.00 103.01 1.61 2.16 4.70

% % % % % % %

1.50 % 1.51 %

65.64 0.00 10.70 4.55 1.51 0.43 10.92

% % % % % % %

1.97 % 4.28 %

Woven pants % of cotton total cost 141.40 6.50 18.70 5.00 1.91 0.65 16.00 190.16 2.97 2.50 4.64

109.87

197.30

1.72

3.08

71.67 3.29 9.48 2.53 0.97 0.33 8.11

% % % % % % %

1.27 % 2.35 %

Note: * One US $ equal to PKR 65 Source: SMEDA Textile Sector Research

Along with the presence of integrated units, which perform knitting, dyeing and finishing operations in-house, there exist a breed of stitching units which only perform commercial operations on a ‘Cut, Manufacture and Trim (CMT)’ basis. These units work for direct exporters, and salaries in these units are paid on a ‘Piece Rate’ basis. As far as the efficiency and productivity of the workers are concerned, piece rate workers are more productive as compared to the workers employed on fixed wages.

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Table 5.9: Average monthly salaries based on skill levels in the apparel industry in Pakistan Rs/month Structure of labour force Supervisory Level (Cutting, Stitching and Finishing Supervisor) Skilled Worker (Stitching Machine Operator, Clipping incharge, etc) Semi-Skilled and Unskilled Workers (clippers, stain removers, packers and helpers)

Wages Pak Rupees/month

US $/ month ($ to PKR @ 63)

8,000

127

5,000 to 6,000

79 to 95

2,000 to 3,000

32 to 48

Source: SMEDA Textile Sector Research

5.8 Comparative wages and productivity Despite consistent inflationary pressures, Pakistan is still highly competitive in labour costs as compared to developed countries. The average hourly wage in the apparel industry is within the range of US $ 0.22 to 0.30 (Table 5.10). This makes it competitive with the developed countries even if the productivity of the labour force is only 50 percent to that of the USA. In developing countries like India and Bangladesh, the average wages are even lower than that of Pakistan. The competition with these economies is only possible by enhancing productivity and curtailing process wastage. Table 5.10: Apparel industry average hourly wages Countries USA Dominican Republic Malaysia Mexico Thailand Indonesia India Bangladesh Pakistan

US $ / hour 8.00 1.15 1.15 0.85 0.65 0.15 0.20 0.18 0.22

Source: Kart Salmon Associates

5.9 Working conditions in the apparel industry Almost all the apparel manufacturing units, which deal with institutional buyers with brand names or labels or even with chain stores, have to comply with the ‘Standards of Engagement (SOE)’ imposed by the buyers. These standards lay down specific conditions in which the workers can be employed including the ventilating requirements, water facility, hygienic working conditions, etc. Certain buyers also require that these standards are also displayed in the manufacturing premises to create awareness amongst the workers about

PAKISTAN 167

their rights. However at the same time, labour welfare schemes providing social cover and other benefits are only implemented in the formal sector. 5.10 How would globalization affect quality of employment? With the process of globalization, a new regime of standards will be put in place by the developed countries to source goods from developing countries. Although some of the standards such as ISO 9,000 and 14,000 deal with product quality and process improvement and documentation and have a direct effect on the productivity of the workforce, certain other standards strictly deal with working conditions of the labour force. Case in point is the SA-8,000 (Social Accountability) standard, which the European market can impose on the suppliers. These standards have been formulated to take into account the social dimension thereby meaning that the welfare of workers is the responsibility of the entrepreneur. With the swift movement towards implementation of similar standards, the quality of employment in apparel industry is likely to improve. An interesting feature is that compliance with these standards is not limited to a certain manufacturing facility, whereas the standards are imposed on production of a product across numerous stages. If such standards are implemented properly, this would definitely lead to improvement in job quality in the apparel sector particularly where small process vendors perform specific processes and their workforce neither enjoys the benefits of social security nor is provided with the right kind of environment. The MFA phase-out in 2005 is likely to trigger competition among the developing countries to retain the market shares and thus are likely to be forced to comply with international standards as mentioned above. 5.11 Impediments in diversification Despite the fact that the production process of stitching is fairly flexible to switch between different product categories. The major constraint is the quota policy that favours the production of a specific product category without having any negative implications on the cost structures. The cost structure of garments given above does include quota costs. If an enterprise wishes to enter in a new product category, it has to buy quota from the open market. Consequently, the cost incurred only to acquire quotas would inflate the cost of one garment by almost US$ 2.5, thus leaving the enterprise un-competitive in the international markets. Without any provision of quota allocation for potential investors and new entrants, the quota policy serves as a major deterrent towards widening of the apparel industry’s product base. 5.12 Availability of inputs The fabric and other accessories constitute almost 80 percent to 85 percent of the total garment cost. The knitting industry due to its structure is capable of meeting its fabric

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requirements indigenously. The woven garments segment due to its dependency on domestic weaving industry has a limited capability to produce a wider product range. The production of weaving industry in Pakistan is concentrated in coarse fabric (low density cotton fabrics) which makes it feasible for the apparel sector to produce cotton based trousers and bottoms. Due to this the availability of fine fabrics used for producing tops (woven shirts) is very limited. This forces the domestic garments segment to increase its existing share in men’s wear thus neglecting a large global product segment of women wear. The Government, in order to facilitate the apparel manufacturing, has created a system for temporary imports of inputs. These include the ‘No Duty No Drawback schemes (NDND),’ but due to procedural requirements the small sized apparel manufacturers are unable to import fabric through these schemes. However, the large ones import fabric from numerous sources to meet the requirements of buyers of woven garments. 5.13 Marketing of products Marketing in the apparel segment is driven by three main elements. Firstly, it is the capability of an enterprise to produce a particular product; secondly, it is the buyer that requires the product; and thirdly, it is the capability of the manufacture/exporter to meet the orders and deliver on time. Unfortunately, due to quota restrictions, the first consideration even for buyers is the availability of a specific product quota with the supplier; as only this can ensure timely delivery of the product. This attribute of the industry has constrained the ability of the apparel manufacturers to market their products and even diversify. The apparel industry of Pakistan has positioned itself as a mass producer of garments, particularly in the knitted garments segment. Due to which majority of the industry exports to the low end markets whereas high-end markets are rarely targeted by the industry. This also results in low unit price realization in the international markets. 5.14 Global apparel market segmentation The pyramid in Figure 5.15 shows the structure of the apparel market. The tip of the pyramid, although very small in size, is a high price segment primarily dominated by the apparel designers such as Georgio Armani and Versace, etc. These products can be classified as high value-added products. The base of the pyramid depicts the low-end discount stores such as K-mart and Walmart, etc, where the need of the international buyers is quantity with limited consideration given to quality of the product. These buyers in the apparel market segment can be classified as commodity buyers. The movement from top to bottom of the pyramid results in increased volumes and decrease in unit price realization. Exhibit 5.1 below represents buyers’ preference in different apparel market segments. The low-end buyers, as represented by the base of the pyramid, give top priority to price while negotiating with the suppliers and apparel manufacturers. The second most important factors considered by this segment is delivery according to commitment, whereas the element

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of quality of products and flexibility to produce diverse range of products comes at the end of the pecking order. On the contrary the high-end market gives high consideration to quality of a product and diversity in product line. Figure 5.15: Apparel market segments

▲

Haute Couture

Designer Shops

Department Stores

Mass Market

Discount Low-end Chain Stores

▲ Exhibit 5.1: Buyers preference in apparel market segments Commodity products Price Delivery Quality Flexibility

High value added products Quality Flexibility Delivery Price

Majority of the Pakistani apparel exporters are geared towards catering to the market needs of the last three market segments, i.e department stores, mass market and discount stores. The size of this market in terms of volumes is very high but there is ceiling in price realizations. The other high-end market currently seems to be out of the reach of the apparel sector due to narrow product base and comparatively low product quality as these factors constitute important elements of buyers’ preference in this segment.

6.

Quotas in textile trade

The textile trade is governed by quota restrictions imposed by the developed countries including the USA, EU and Canada. The basic objective was to protect the domestic industry from competitive imports from the developing countries. All the quota restrictions in numerous sub-sectors of textiles were governed by the Multi Fiber Arrangement (MFA). With the

170 GARMENT INDUSTRY IN SOUTH ASIA

completion of the final round of WTO in 1994, the quota restrictions on textiles were found to be in conflict with the basic principles of WTO which stressed upon removal of any nontariff barriers. As a consequence a new regime called the Agreement on Textiles and Clothing (ATC) replaced MFA. The key objective of the ATC is to phase out the quota restrictions over a period of ten years. The MFA will cease to exist after December 31, 2004. The process in which the developed countries are phasing out quotas according to their commitments with WTO is very interesting to evaluate, as the current level of liberalization is not in accordance with the committed volumes as well as categories of products which need to be integrated in the non-quota trade regime. This raises serious concerns about the future of ATC. An issue that still needs to be dealt with is the complete implementation of ATC in 2005. 6.1 Quota for textiles and apparel in Pakistan The USA and the EU comprise vital textile markets particularly for the apparel products. More than 90 percent of the Pakistan’s exports of garments are directed towards these two regions of the world. Trade in both these markets is governed by quantitative restrictions. Every year Pakistan is allowed to export a fixed number of garments based on the quota allocated by the countries/region. In this particular section, the performance of the domestic apparel industry will be evaluated on the basis of its utilizations of quota in various garments categories. This will be helpful in developing an understanding about the level of preparedness that the country has so far achieved in order to meet the challenges of the post MFA scenario. 6.1.1 Quota utilizations of Pakistan in the US The USA is Pakistan’s largest export market for textile apparel. Almost 50 percent of the apparel trade is directed towards the USA. The overall average quota utilization of Pakistan in the American market is slightly above 75 percent (Table 5.11). This is not a very encouraging figure as other competitors like China and India have overall average quota utilizations of more than 90 percent in the American market. The main reason is limited product base of Pakistan textile apparel. One thing is evident from the quota utilization figures of Pakistan in various apparel categories. Pakistan’s presence in the American market is dominated by the male garment segment and that too heavily dependent upon the cotton knit segment. High quota utilizations in knitted product categories speak volumes of the inclination of the domestic apparel industry towards men and knit garments. The female garment segment in the USA driven by the quickly changing fashion scenarios makes it difficult for the apparel sector of Pakistan to cope with the changing trends. Limited use of man-made fibres in the spinning and weaving sector also hampers the domestic availability of fashion fabrics to meet the requirements of this dynamic market.

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Another important linkage within the whole textile value chain is the processing and finishing industry for the woven fabric. This is a highly capital intensive sector which is at the initial stages of development and does not facilitate the downstream industry with the availability of different fabric textures and finishes, which are critical to the development of a solid woven apparel segment. Table 5.11: Pakistan’s quota utilizations in the USA (in percent) HTS codes*

Product

1997

1998

1999

331/631 334/634 335/635 336/636 338 339 340/640 341/641 342/642 347/348 351/651 352/652 359/659 638/639 647/648

Gloves and Mittens Men and Boy Coats Women and Girl Coats Dresses Men and Boy Knit Shirts Women and Girl Knit Shirts and Blouses Men and Boy Shirts (not knitted) Women and Girl Shirts and Blouses (not knitted) Skirts Men and Boy Trousers, Breaches and Shorts Nightwear and Pyjamas Underwear Other Cotton Apparel Men and Boy Knit Shirts Women and Girl Trousers, Breaches and Shorts

77.5 88.1 67.7 61.7 93.5 77.4 90.0 27.3 18.4 81.9 85.1 69.2 89.5 36.0 73.8

81.9 58.2 56.4 73.1 77.1 72.9 61.0 77.9 55.7 73.2 84.3 76.4 74.2 19.9 69.8

67.8 78.0 38.3 51.6 88.0 83.9 69.8 24.6 38.0 92.7 74.9 52.0 84.7 75.4 65.7

Source: US Department of Customs

6.1.2 Export product mix and apparel quotas in the USA Despite a highly regulated apparel sector imports in the USA, a significantly high proportion of products is free from the quota regime. These products are referred to as nonquota items. There are a total of 78 MFA categories (quota categories) that constitute the Figure 5.16: Composition of apparel trade with US USA apparel import composition and Pakistan (value) Untapped categories by Pakistan, 14%

Composition of Pakistan’s apparel exports to the USA Exports in unrestricted categories, 1%

Imports in unrestricted categories, 3%

Imports under quota, 83%

Source: Textile Vision 2005, SMEDA

Exports under quota, 99%

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apparel segment out of which the exports of Pakistan to the US are restricted in 30 categories. The value of exports in this segment was US$ 714 million out of which US$ 708 million came from the quota-restricted categories and only US$ 6 million came from the unrestricted categories. The division of the apparel market of US according to the previously mentioned three-segment criterion is shown in Figure 5.16. Due to the concentration and dependence of Pakistan’s apparel sector on quota products, 99 percent of Pakistan’s exports to the USA comprise quota products. This particular phenomenon leaves a high proportion of American market untapped by the Pakistani apparel manufacturers and exporter. The categories in which Pakistan has been completely unable to penetrate comprise almost 15 percent of the total USA apparel market (in US $ terms it is around 7 billion). An important reason which restricts diversification of apparel exporters is the quota policy of Pakistan that favours concentration in few categories thus limiting the entrepreneur’s capability to have a broader product line, the issues of quota policy in Pakistan will be discussed later. 6.1.3 Quota utilizations of Pakistan in the European Union (EU) The EU constitutes an important market for Pakistan’s textile products, the total textile exports of Pakistan including yarn, fabric and textile made-ups and apparel are to the tune of US $ 1.5 billion (Table 5.12). Imports in textile apparel are also restricted by quantitative restrictions by the EU countries. The mechanism of limiting imports by quota is that EU announces specific quota limits for the coming calendar year. This quantitative limit is adjusted in each year in accordance with the flexibility provisions contained in the ATC. The EU has an integrated system of licenses (SIGL), which is linked with computerised network connecting the European Commission with the departments in various countries that issue import licenses. When the licenses issued reach the designated quota, European Commission orders the issuing departments to cease the issue of licenses. Table 5.12: Quota utilization in EU (in percent) SIGL

4 5 6 7 8 18 26

Description

Shirts, T-shirts Jerseys, pullovers, waistcoats Woven trousers, shorts of wool, cotton Women’s blouses, shirts Men’s shirts of wool, cotton, MMF Briefs, nightshirts, pyjamas &similar Women’s dresses of wool, MMF

Source: Textile Vision 2005, SMEDA

Pakistan 1997

1998

1999

91.0 91.3 90.9 66.4 55.2 40.1 37.0

91.0 89.5 90.4 69.4 46.9 39.8 19.3

90.8 92.1 88.9 25.5 31.3 40.7 16.0

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6.1.4 Apparel quota utilization of Pakistan in EU The categorisation of products within the EU to allocate quotas is fairly simple as compared to that of the USA. A large majority of products are lumped for simplification purposes. If the quota utitilisations of Pakistan are observed closely it becomes evident that Pakistan’s utilization is very high in cotton based knit and woven garments segments. In product categories like t-shirts, pullovers and jerseys and woven trousers and shorts the utilization is to the extent of 90 percent and in certain cases exceeds 90 percent. Due to focus of the industry on cotton textile products the utilizations in man-made fibre and blended fabric based apparel is very limited. This can also be viewed in the table where the quota utilizations in products such shirts of MMF and blended fabric for men is as low as 30 percent. It is for the same reason that Pakistan’s utilization in other products like lingerie and undergarments is also very low. Similarly for women apparel categories, the utilizations of quota are very low. A major reason is the high dependence of the industry on the silver fiber. Due to limited usage of the man-made fiber in the upstream industry the production of blended fabrics is very limited which makes it convenient for the apparel industry to compete in international markets with a limited range of apparel products, primarily based on cotton. In both the USA and EU markets the quota utilizations reveal that the Pakistan apparel sector is highly dependent upon firstly on cotton products and secondly on male garments. Another attribute relates to the presence in the knit garments segment and a weak woven garment segment. In the woven garments Paksitan’s exports are predominantly in low count fabrics (twills) where as fine count high density and blended fabrics are used in a very small proportion. This significantly restricts the capability to develop a niche in high value garment segments such as women tops and blouses, undergarments (bras and pantyhose) and nightwear. The quota markets (EU and USA) are of vital importance to the apparel sector of Pakistan for the very reason that more than 90 percent of apparel exports are targeted towards these markets. This makes Pakistan highly vulnerable in the post MFA trade scenario. The emerging exporters particularly countries like Mexico and other South American states will offer stiff competition in products like knit garments where they are developing strong industrial presence. 6.2 Quota policy of Pakistan A large number of products ranging from cotton yarn to ready-made garments are under quota restraint. Pakistan has bilateral textile trade agreements with USA, EU and Canada regarding its exports of textiles. The USA has imposed quotas on 39 items (Cotton and MMF). In EU, there are 15 categories of cotton and MMF products, which fall under quota restraints, whereas a large number of categories falling under apparel group are still outside quota restraint. The Canadian market has 10 textile categories under quantitative restrictions.

174 GARMENT INDUSTRY IN SOUTH ASIA

In Pakistan textile quota management was handed over to the private sector in 1997. For this purpose a Quota Supervisory Council (QSC) and product group committees were set up. All the quota management matters are defined by the Quota Policy, announced by the Government of Pakistan. The Government has announced different quota policies over the last many years in order to make quota utilization and management more effective. 6.2.1 Salient features of existing quota policy l

l l

l l

The basic criteria for allocation of quotas is on the basis of performance i.e. the performance holders receive allocation of quotas equal to the actual quantity exported by them under each category during the preceding year to a specific quota country. It makes the quota allocation 100 percent on the past performance. Unit price realization is not accorded any consideration in quota allocations. The growth quotas and the residual quotas available to the Government under bilateral arrangements with the quota countries are auctioned in the market to earn revenue for the Government. Quotas can also be transferred from one firm to another by selling them. There are no provisions for allocation in the existing quota policy for the potential investors and new entrants in the apparel business.

6.3 Previous quota policies of the Government The Government of Pakistan has tried repeatedly varied strategies to implement a quota policy that ensures sustainability in textile sector growth but to no avail. This is reflected in the review of the past quota policies. 6.3.1 Inconsistency in quota policies During the past decade the Government has revised the quota policy a number of times. An interesting feature of these policies is that no quota policy was able to complete its tenure. This phenomenon of radical changes in quota policies overlaps with the changes in the Government itself. The new Government used to scrap previous Government’s policy because of corruption and nepotism. 6.3.2 Lack of long term strategy The sudden revision in quota policies both at the macro level as well as the micro level raises apprehensions amongst the stakeholders about the future of prevalent quota regimes and the exporters face a difficult time in planning and devising future strategies. 6.3.3 Competitiveness of firms The changes in quota policy play havoc with the cost structures of the exporting firms. In case quota is allocated on past performance the entrepreneurs are provided an incentive to accumulate stocks in terms of greater exports, making them eligible for greater quota

Exhibit 5.2: Key features of textile quota policy in Pakistan – I Attributes

1992-93

1994

1995

1996

Defined Time Period

Jan.92-Dec.96

1994-Dec.96

1995-Dec.96

Newcomer

No provision

Allocation Basis

Performance Holders: 50% Q:50% V

-10% of growth quota for new units -25% of growth quota for rural areas and transferable Only on Quantity based

-10% of growth quota for new units -25% of growth quota for rural areas and transferable Only on Quantity based

1997-98

1999-2000

Jan.96-Dec.96

Jan.97-Dec.99

-10% of growth quota for new units -25% of growth quota for rural areas and transferable Only on Quantity based

All discretionary quotas abolished including new units and rural areas.

For the year 1999 & Year 2000 separately. No Provision

1st Year: 75%Q:25%V 2nd Year:65%Q:35%V 3rd Year onward: 50%Q:50%V Based on Quantity

“Q” represent Quantity and “V “represents Value Source: Quota Supervisory Council of Pakistan

Exhibit 5.3: Key features of textile quota policy in Pakistan – II Attributes Defined Time Period

1992-93 Jan.92-Dec.96

1994 1994-Dec.96

Residual Quota Through auction Through auction and non-transferable

Quota Transfer Transferable

Source: Quota Supervisory Council of Pakistan

1996

1995-Dec.96

Jan.96-Dec.96

1997-98

1999-2000

Jan.97-Dec.99

For the year 1999 & Year 2000 separately. Through auction Through auction Growth and residual Growth and residual and transferable and non-transferable quota both through quota both through auction and nonauction and nontransferable transferable -For performance -performance and -performance and -performance and holders open market open market open market transfer transferable transferable transferable able -auction quota -auction quota -auction quota non-transferable non-transferable non-transferable -New passbook holders have to ship 90% of quota allocated.

PAKISTAN 175

-For performance holders transferable -non performance holders, not transferable

1995

176 GARMENT INDUSTRY IN SOUTH ASIA

allocation in the coming years. In case of a sudden switch in quota policy from past performance to value additions, exporters having invested heavily in quota suffer humongous monetary losses. The inconsistency in policy ultimately results in erratic export performance of the apparel sector, leading to negative effect on the overall exports of the country. 6.3.4 Quality vs. quantity As mentioned earlier that the existing quota allocation is entirely on the basis of past performance. The greater the volumes of exports, the greater are the chances of increasing exports in the future. The particular aspect of the quota policy encourages to invest heavily in quotas and undermines the diversification capability of the industry. An example in this regard makes it easier to understand. Category 338 in the USA is for knitted shirts. Pakistan has a very high quota allocation in this category due to the strength of local cotton. The exporters of knit garment try to focus on this particular product while exporting and tend to build high volumes in order to get additional quota in future. It is for this reason that occasionally the cost per dozen of quota in this particular category rises to Rs 2200 (US $ 2.5/piece), if the quota is purchased from open market. For a firm not having past performance it becomes difficult to export in 338 category. This specific feature of the quota policy makes it convenient for firms to concentrate on simply one apparel product category, resulting in an overall narrow product line in international export markets. The benefits of having a mix of value and volume in quota allocation are much higher than simply having the quota allocation on past performance. It not only enables the exporters to maintain their export performance in existing product categories but also provides an incentive for further value addition. The feature of value addition also enables the exporting firms to diversify their product lines as well as markets, as they no longer enjoy the benefit of allocation primarily based on mass production. 6.4 Importance of quota policies in post-MFA scenario Quota policy in any country can serve the purpose of an effective tool to prepare the apparel sector so as to make it globally competitive in the post MFA scenario. A well designed policy can determine the future direction of the apparel sector exports by balancing different variables, i.e. through encouragement of value addition and diversification, otherwise it is likely to play a catalytic role in the deterioration of future export earnings by focussing only on limited products. In Pakistan the existing quota policy not only discourages diversification but also hampers the entry of new exporters through imposition of high entry barriers in terms of large investments required in quota procurement. 6.4.1 Quota policy, employment and skill levels It has been established that the sole dependency of quota allocation on only performance (quantity) restricts the industry’s capability to diversify and innovate. This in turn hampers

PAKISTAN 177

skill development within the apparel sector in general. Workers at all levels are equipped with certain set of skills that make them experts in handling a few products efficiently, whereas a switch to other product categories directly reduces productivity. This phenomenon is particularly true for the women’s garments segment in which Pakistan’s quota utilizations are extremely low. A large majority of garments in this segment are produced through diverse fabrics, including blends and other synthetic materials. In order to handle the production of synthetic and blended fabrics, a greater degree of skill and precision is needed. The skills to handle women’s garment line can be acquired, but given the existing situation where the industry as a whole is dedicated to the production of men’s garments and at the same time dependent upon on-the-job skill development, it would become very difficult to reposition itself as a quality supplier of women’s garments by simultaneously developing human resource capable of handling this diverse and dynamic product range. The limited product portfolio that appears to be the result of quota policy of the Government can have a two pronged effect on the apparel sector in Pakistan. Firstly, the entrepreneurs will have to respond quickly by diversification to sustain the existing level of exports in the international markets; and secondly, they will be confronted with the problem of finding human resource with the right set of skills to meet their needs. This can also have negative bearing on the cost structures of the apparel sector.

7

Issues, concerns and suggested strategy thrust for apparel sector development in Pakistan

7.1 Limited market exposure The foremost problem confronted by the apparel sector of Pakistan is the limited market exposure of the products. The exports are only targeted towards two major markets i.e the USA and EU. Both of these markets comprise quota countries where imports are restricted by quantity. In non-quota markets Pakistan is merely present, these include large markets like Japan, middle-eastern countries and Australia. The market mix of Pakistan’s apparel products gives the impression that mostly the manufacturing base has been established due to quota restriction where a fixed basket of goods to be imported by the developed countries were allocated to Pakistan. High dependence on quota countries can offer stiffer competition to Pakistan’s apparel sector after 2004. The solution lies in market diversification, a broader market exposure can only ensure sustainable development even beyond 2004. 7.2 Limited product base Besides the disadvantage of having a limited market mix the apparel industry of Pakistan also faces another problem of a limited product base. Unfortunately due to quota policy, the industry has positioned itself as a mass producer of garments in a few product categories.

178 GARMENT INDUSTRY IN SOUTH ASIA

Predominantly, the industry has developed itself into a hub of men’s wear, whereas the market for women’s wear offer greater opportunities due to the size of the global market. An important reason cited by the industry in this regard was that the range of men’s garments offers high degree of flexibility in mass production and leads to greater commercial viability. Although this limited product base of the apparel sector negatively affects the growth in the post MFA scenario where the international buyers would have a greater choice in sourcing, an exporter with a diversified and balanced product portfolio will be in a better position to catering to a wider apparel market. 7.3 High dependence on cotton The apparel industry in Pakistan relies heavily on cotton based garments. Being an indigenous input cotton provides greater competitive advantage to the domestic industry. At the same time, the industry has to realign and reposition according to the international demand patterns. When the international trends in consumption of manmade fibres are observed, they clearly indicate that the global consumption as well as production of manmade fibers and filaments is greater than that of cotton, the international production of which is stagnant at the same level for the past ten years (Figure 5.17). This can also be observed in the figure. On the contrary the mill consumption of manmade fibres is very limited in Pakistan, the spinning and weaving segments of the textile value chain have also contributed to this end by not realising the importance of realignment in accordance with the global patterns. Due to lack of availability of inputs the apparel industry has not been able to develop its capacities in switching or at least balancing the ratio of cotton and manmade fibres in the product mix. This particular feature also impedes the industry’s access in the women’s garment segment, where the market is highly dynamic and demands a variety of fabric textures and blends. Figure 5.17: Global consumption of fibres in million bales 140 120 100 80 60 40

w w w w w w w ~ ~ ~ ~ ~ w ~ ~ ~ ~ ~ ~ ~ ~ w w w ~ w ~ w n n w ~ w w n n n

n

n

n

n

84

85

86

87

88

n

n

n

89

90

91

n

n

n

n

92

93

94

95

96

n

Polyester

20 0

~

Cotton

w

Source: Textile Vision 2005, SMEDA.

MMF

97

98

99

PAKISTAN 179

7.4 Regional trade blocs The regional trade blocs are likely to play an important role in the post MFA scenario. During the transition period of quota liberalization, the developed countries have sucessfully formed effective trade blocs. More than 60% of the total trade within the EU is intraregional. In North American Free Trade Area (NAFTA), a similar situation prevails; and this will certainly increase with the complete implementation of WTO. Mexico being a member of NAFTA has over the past ten years successfully developed a diverse and a well balanced apparel manufacturing base. An ideal example is the knitwear sector where the exports of Mexico to the US have experienced an unprecedented increase. Figure 5.18 provides the trend in US import of men’s knit garments from Mexico. Figure 5.18: US import of men’s knit garments from Mexico 500

w

400

300

w

200

w

w 100

w

0 1995 US $ million 75

1996 153

1997 239

1998 296

1999 400

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

These emerging exporters, besides having the geographical advantage, also have the competitive advantage of low labour wages. The South Asian coutries are not the only ones having this cost advantage in this labour intensive sector. Such economies have all the ingredients to provide tough competition to countries like Pakistan. Pakistan on the other hand does not enjoy the advantage of being a member of any trade bloc. The South Asian Association for Regional Cooperation (SAARC), of which Pakistan is a member, has no comparison with big economic blocs as mentioned above. The intra regional trade between SAARC countries is only 3% of the total trade. 7.5 Preferential treatments A few regional blocs also offer preferential treatments to their trading partners based on the economic conditions of a particular country. The European Union provides such an incentive for textile products to Bangladesh under its Generalised System of Preferences

180 GARMENT INDUSTRY IN SOUTH ASIA

(GSP). Under GSP Bangladeshi products enjoy an average 12 percent duty exemption in EU countries. This particular incentive has turned Bangladesh into a massive converter of fabrics into garments. All of this has happened without any investments in the up-stream industries like spinning, weaving and knitting. The exporters are free to import fabrics from any part of the world and then export after adding value. In Pakistan, the import of woven fabrics is firstly not permitted and is also protected by tariff. For exports purposes, there exist a number of temporary import schemes which allow duty free imports of fabrics and other inputs. All this is complicated through a wide array of compliance requirements. Due to limited access to inputs, the industry relies on domestically produced fabrics and is unable to diversify. 7.6 Upstream industry and linkages The upstream industry in case of woven garments is heavily dependent on the weaving and spinning sector. The major portion of fabric, almost 65 percent, is still produced on power looms in Pakistan. The use of this obsolete technology only permits the sector to weave low-density fabrics of coarse cotton yarn. These machines are not equipped to manufacture high-density fabrics of finer yarn counts. If the production of spinning industry is evaluated, almost fifty percent of the total yarn produced in the country falls in the coarse count categories. Similarly, the spinning industry’s production of blended yarns is also not in line with the global production trends. The polyester-cotton (PC) and polyester-viscose (PV) yarns comprise only twenty-five percent of the total yarn production. On the other hand, the knitting industry, although not dependent on other sub-sectors due to large presence of integrated units but due to huge investments in specific quota categories, has been unable to diversify its product base. Such factors prevalent in the upstream industry do not provide the apparel sector with the requisite inputs necessary to meet the diverse needs of a global apparel markets. If similar conditions and trends continue to prevail in the country then it would become very difficult for the small apparel sector of Pakistan to compete in the value added products internationally. 7.7 Reactive vs. proactive selling The apparel exporters in Pakistan do not pursue any proactive marketing techniques, with the exception of few progressive exporters. Mostly the exporters produce according to buyers’ specification. It is very rare that exporters develop and design garments in-house and then try to market them. This specific feature has resulted in the lopsided development of the apparel sector, which is restricted to a limited number of products. Participation of exporters in international trade events and fairs is also not very encouraging. Although a large majority of exporters have developed their websites but do not consider it to be a very reliable source of marketing. Most believe that their long-term

PAKISTAN 181

relationship with the buyers will ensure their success even after the year 2004. This situation is alarming for the apparel industry of Pakistan, as lifting of quota barriers will make it convenient for the buyers to source from any part of the world that offers a better bargain. 7.8 New product development Reliance on the foreign buyers in production of garments has not allowed the industry to develop itself as an innovative sector of the economy. There are very rare cases in Pakistan apparel sector where an exclusive designing facility exists. Due to lack of demand of such skills in the industry, the human resource development in this critical area has also not taken place. With the liberalization of quantitative restrictions, the requirement for this skill is likely to enhance. However, currently the industry is not geared up to meet the requirements of international markets based on indigenous designing and product development. 7.9 Mobility of inputs A strong apparel manufacturing base guarantees the development of a solid up-stream textile industry. In order to make the apparel manufacturing the engine of exports growth, a liberal import regime needs to put in place. This would ensure the availability of inputs such as diverse range of fabrics required by the woven garments sector and accessories including zippers, buttons, etc. The current facilitating mechanisms including temporary import schemes have failed to achieve the results of growth in the apparel segment. The apparel industry in Pakistan mainly comprises small and medium sized units, which due to capacity constraints are unable to utilise these facilitating mechanisms. These facilitating mechanisms need to be revised and simplified, wherever possible, to bring about an increase in their usage. 7.10 Technical barriers to trade and apparel industry The complete implementation of the Agreement on Textiles and Clothing (ATC) will result in strict enforcement of quality standards by importing countries particularly the developed countries. These include standards like ISO 9002, SA 8000 (social accountability), Eco labels and environment standards (ISO 1400), etc. These standards are not likely to affect the existing direct exporters/manufacturers. Underlying factors include the implementation of Standards of Engagement (SOEs) imposed by foreign buyers. Most of the integrated knit garment manufacturers in Pakistan are already ISO certified and also comply with SOEs of buyers. The integration within the knitwear sector will keep it protected from the technical barriers to trade due to their inherent compliance capacity. In the woven garment segment, the specialised garment manufacturing dominates the industry structure. Sub-contracting and out-sourcing is a key feature within this segment. The sub-contractors in the woven garment segment (manufacturers of labels, small washing units, embroidery units, etc.), due to lack of capacity to implement standards, will accentuate

182 GARMENT INDUSTRY IN SOUTH ASIA

the problems faced by the woven garment exporters. Most of the standards require that the garment should be produced through a homogenous and standardised process, meaning thereby that the entrepreneur has to ensure the implementation of SOEs at all the stages of production, even if the production of a particular process is sub-contracted. Ensuring implementation of SOEs and other standards at the stage of process vendors and subcontractors seems to be a far-fetched idea at this stage. This factor of ensuring compliance through all the production stages will also negatively affect the overall growth in the apparel industry. The phasing out of MFA will start another era of non-tariff barriers for the developing countries leading to high compliance costs thus undermining the competitive advantage of the industry. Currently the Government of Pakistan through the Ministry of Science and Technology (MOST) provides a fixed subsidy to firms which acquire ISO 9000 certification. In order to even maintain the existing level of exports the Government would have to broaden the sphere of this particular incentive by bringing in other quality systems. 7.11 Quota policy and diversification Quota policy of Pakistan has been discussed at length in the quota section of the report. The existing quota policy does not provide any incentive for diversification. However, it can be used effectively to achieve the desired level of both market and product diversification. The ideal strategy in this regard would be to allocate a certain portion of quotas to new and potential investors in categories where the quota utilization of Pakistan is low. Similarly, an incentive can also be provided to exporters in non-quota countries through allocation of quotas in selected product categories. Such measures would lower the barriers to entry in the apparel export markets and would also be helpful in enhancing the exports to non-quota countries, where the current level of exports is minimal. 7.12 Effect on employment in the post-MFA scenario The analysis of the exporting firms of Pakistan clearly indicates that the development of the apparel industry, particularly the knitwear sector was triggered by high quota allocation to Pakistan. Even in the woven garments segment, Pakistan relies on the quota markets. The phasing out of quotas in the year 2004 will make the environment highly competitive for the domestic apparel industry. Such a stiff competition will play a catalytic role in stagnating the exports growth if timely requisite measures such as market and product diversification are not adopted. A narrow product base can also lead to significant decline in overall exports level, both in terms of value and volume, which would in turn negatively affect the employment within the apparel sector. Estimation of exact labour force reduction is beyond the scope of the paper but if the industry maintains its existing product portfolio, it would negatively affect the employment in the sector.

PAKISTAN 183

ANNEXURE I

Composition and nature of US market 1.

The US market

The American market is the second largest import market for apparel products. The current size of the American market is around US $ 51 billion. The USA has a 32 percent share of the global imports of apparel products. Due to high consumption patterns in the American markets, the imports of apparel products have increased at an annual average rate of 10 percent during the period of five years from 1995 through 1999 (Figure A 5.1). Figure A5.1: US import of apparels In billion dollars 60

49

51

43

50 35

37

40 30 20 10 0 1995

1996

1997

1998

1999

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

1.1 Product mix of imports The market composition of imports in apparel products is almost the same as that of the world. The woven garment segment both for men and women has a total share of 46 percent in the overall apparel imports (Figure A 5.2). The knit garments including t-shirts and knitwear constitute another 39 percent of the imports. A major chunk of imports in the hosiery category constitutes woven under-garments and nightwear with high presence of women’s garments. On the basis of this the share of woven garments in the total imports can be safely estimated to be more than 50 percent. As mentioned earlier, the trends in the American market are similar to the global market. A closer look at the USA’s import shows that the share of the women’s garment is more than the men’s garment. The women’s garment represents 30 percent of the total imports of USA, while the men’s garments have a share of 28 percent. It becomes virtually impossible to comment on the share of men and women’s garments in the t-shirts category as these are only reported as knit shirts.

184 GARMENT INDUSTRY IN SOUTH ASIA

The imports of the woven garments have increased from US $ 19 billion to US $ 30 billion in 1995-99 and showing an average growth rate of 6.7 percent. In the woven garments category, imports for the women’s garments stand at US $ 12.5 billion with share of 24 percent; and for men’s garments it is US $ 11.5 billion having a share of 22 percent in 1999. The contributing factor in increasing the share of this category is the women’s wear which increased at an average annual growth rate of 7 percent, whereas the men’s wear showed an annual growth rate of 6.3 percent during 1995-99. Figure A5.2: Types of US imports USA’s imports breakup 1995 T-Shirts 20%

Hosiery 8%

USA’s imports breakup 1999 Woven Men 25%

T-Shirts 27%

Hosiery 9%

Woven Men 22%

Sports Wear 4% Sports Wear 3%

Baby Wear 3% Knit Women 7%

Knit Men 7%

Woven Women 26%

Baby Wear 3%

Knit Women 6%

Knit Men 6%

Woven Women 24%

Source: PC-TradeAnalysis System database of International Trade Centre (ITC)-Geneva

The knit garments segment including T-shirts and men and women’s knitwear in absolute terms contribute almost US $ 20 billion. The high growth segment in the knit garments is the T-shirts category which has increased at an annual average growth rate of 17 percent from 1995 through 1999. Currently, it holds 27 percent share in the total imports with total imports of US$ 13 billion. The other product segments including baby-wear and sports-wear show a consistent growth trend by maintaining their overall shares. In value terms, these markets constitute US$ 3 billion in the total apparel imports. 1.2 Asian countries and US market Asian countries are exporting apparel products worth US $ 21 billion to the USA market and with a share of almost 41 percent of USA’s apparel imports. The women’s garments, having a share of 37 percent, dominates the exports from the Asian countries (Figure A 5.3). The share of men’s garments that currently stands at 25 percent is fairly small as compared to the women’s garments exports by Asian countries. The woven garments including tops and bottoms of all types of woven fabrics dominate the American market with a share of 52 percent in the overall imports followed by the Tshirts category, which has acquired a share of 25 percent in the total exports of the Asian countries. These exporting countries have consistently maintained pace with the growth in apparel demand of the woven and knit garments in the USA. The exports of Asian countries

PAKISTAN 185

of the woven garments increased from US $ 9.6 billion to US $ 11 billion through 199599. In this category, the share of the women’s wear is almost 60 percent. Although the difference between the volume of imports in the woven women’s wear and men’s wear is not very high, but the high share of women’s wear in overall imports is the result of high unit value of the women’s garment in the American market. This phenomenon is not only limited to American market alone but generally the average unit price realization of women’s wear is significantly high as compared to the men’s wear. As is the case with world apparel markets, China has the largest share of 25 percent of the overall Asian countries’ exports to the USA, which gives them a share of almost 10 percent in the American market. Among the selected Asian countries, Hong Kong is the second largest exporter to the USA with a total exports of over US$ 4 billion. Pakistan enjoys a 4 percent share in the Asian exports to the USA, but the size of exports is half the size of Bangladesh’s exports. Bangladesh has consistently strengthened its position in the American market by developing a strong woven garments manufacturing base. The importance of South Asian countries in the American market is quite obvious as they constitute almost 10 percent of the total apparel exports in the USA. Figure A5.3: Split of Asian exports to US, 1999 T-Shirts 25%

Hosiery 7%

Woven Men 20% Turkey 4%

Sports Wear 3% Baby Wear 3%

Others 19%

Bangladesh 7% China 25%

Thailand 7% Knit Women 5%

Knit Men 5%

Woven Women 32%

Sri Lanka 6%

Pakistan 4%

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

India 8%

Hong Kong 20%

186 GARMENT INDUSTRY IN SOUTH ASIA

ANNEXURE II

Composition and nature of EU market 1. The European Union market The European Union market comprises of fourteen countries namely Germany, United Kingdom, Netherlands, Austria, Belgium, Denmark, Finland, France, Greece, Italy, Portugal, Spain, Ireland and Sweden. The European market is the world’s largest market for the imports of apparel products. The size of the European market is US $ 66 billion. The imports of EU are around 41 percent of the global imports of the apparel products. The imports of apparel products have increased from US $ 61 billion to US $ 66 billion in 1995-99 representing an average annual growth rate of 2 percent (Figure A 5.4). Figure A5.4: EU imports of apparel In billion dollars 70.0

66.1

65.6

64.1

50 40

67.1

60.7

60.0 20 10 50.0 1995

1996

1997

1998

1999

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

1.1 Product mix of imports The imports of EU have a prominent bias towards the woven garments, the estimated share of which is around 55 percent (Figure A 5.5). Although the woven men and women’s garments combined together constitute 47 percent of EU’s imports; but due to the fact that the hosiery segment comprises mainly of women garments including under-garments and nightwear, etc. manufactured from woven fabric, the estimated share of woven garments is high. In the woven garment category, the women’s wear imports were US $ 16 billion; and the imports of the men’s wear were US $ 15 billion. The women’s wear showed an average annual growth rate of 0.5 percent, whereas the imports of men’s wear declined at annual average rate of 0.6 percent during 1995-99. This basically reflects that the market for the women’s wear is very well developed in EU as compared to men’s wear. In the T-shirts category, the imports have increased from US $ 13 billion to US $ 16 billion with an average

PAKISTAN 187

annual growth rate of 6 percent. The T-shirts category, which can be considered as a subcategory of knit garments, showed the highest level of growth in the EU market. The level of imports of other knit garment segment representing both the men and women’s garments is to the tune of US $ 7 billion with a share of 11 percent in the EU apparel imports. The smaller categories include baby wear, sports wear and hosiery. Among these three categories, hosiery has the highest share of 10 percent; and in value terms the imports of hosiery increased from US $ 6 billion to US $ 7 billion registering an average annual growth rate of 1.1 percent. The baby wear category showed an average annual growth rate of 5 percent, and it increased from US $ 1.4 billion to US $ 1.8 billion. The imports in the sports wear category have declined at an annual average rate of 1 percent from US $ 2.6 billion to US $ 2.5 billion. Figure A5.5: Types of EU imports, 1999 EU’s imports breakup 1995

EU’s imports breakup 1999

Hosiery 10%

T-Shirts 21%

Hosiery 10%

T-Shirts 25%

Woven Men 27%

Woven Men 23%

Sports Wear 4% Baby Wear 2%

Sports Wear 4% Knit Women 6%

Knit Men 4%

Baby Wear 3%

Woven Women 26%

Knit Women 6%

Woven Women 24%

Knit Men 5%

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

1.2 Asian exports to EU market Asian countries are exporting apparel products worth US $ 22 billion to the EU market, and this represents 34 percent of EU’s apparel imports (Figure A 5.6). The Asian countries’ exports to the EU market have increased at an average annual growth rate of 4.3 percent Figure A5.6: Breakup of Asian exports to EU, 1999

T-Shirts 26%

Hosiery 11% Woven Men 20%

Woven Women 22%

Sports Wear 5% Baby Wear 4%

Knit Women 7%

Knit Men 5%

Bangladesh 8%

Others 17% Turkey 21%

China 21%

Thailand 4% Sri Lanka 3%

Pakistan 2%

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

India 7%

Hong Kong 17%

188 GARMENT INDUSTRY IN SOUTH ASIA

from US $ 19 billion to US $ 22 billion. The women’s garments, having a share of 29 percent, dominate the exports of the Asian countries followed by men’s garment with a share of 25 percent. The combined share of these two is 54 percent. The analysis of the product mix of Asian exports to EU reveals that the trends in exports are very balanced and compatible to the import trends in the EU market. The woven garments are the biggest category with a share of 42 percent and the second largest category is T-shirts with a share of 26 percent in the EU’s imports. The imports of the woven garments increased from US $ 9.15 billion to US $ 9.18 billion through 1995-99. In the woven category the share of the women’s wear and men’s wear is US $ 4.81 billion and US $ 4.37 billion respectively. The overall share of women’s wear is high as compared to men’s wear. In the T-shirts category Asian exports increased from US $ 3.9 billion to US $ 6.0 billion in the same period representing an average annual growth rate of 11 percent. The knit garment category involves exports of US $ 2.65 billion and the share is 12 percent. The imports of the knit garments increased at an average annual growth rate of 6.6 percent. In the knit garment category the imports of women wear are around US $ 1.62 billion and in the men’s wear it is US $ 1.03 billion. The share of knit garments is obtained by adding the exports of both t-shirts and the knitwear, which combined together, constitutes almost 41 percent of the total EU apparel exports. Key players in the EU apparel market includes China with a share of 21 percent in the total Asian exports to the EU. China also has the benefit of having a very well balanced and diverse product portfolio that enables it to maintain its share in the EU market. Whereas its South Asian rival including Pakistan and India try to retain their market share through a fixed number of products mainly the knitted garments. Similarly, Bangladesh relies on the strength of woven garment industry to maintain and even increase its penetration in the EU market. Another advantage that Bangladesh enjoys in the EU is the preferential treatment. Bangladesh is allowed to export duty products to EU as a part of the Generalized System of Preferences (GSP), which allows its products to be on an average 12 percent competitive than its other South Asian rivals.

PAKISTAN 189

ANNEXURE III - World apparel trade

World imports in the apparel categories SITC

Product description

(in million US $)

1995

1996

1997

1998

1999

Average annual growth

34,992.2 375.2 1,203.8 4,631.1 532.5 337.1 3,132.0 13,209.2 7,280.8 2,412.7 1,877.9 7,182.2 1,485.3 361.6 55.9 151.5 132.5 958.3 3,114.2 868.7 54.3

36,347.2 374.4 1,235.8 5,049.6 584.2 302.1 3,190.7 14,633.5 7,049.6 2,044.7 1,882.7 8,251.2 1,730.4 370.7 61.8 168.0 155.2 1,167.3 3,556.5 969.2 72.1

36,706.5 418.9 1,230.2 5,230.8 454.3 229.3 3,178.9 15,339.3 6,788.1 1,912.5 1,924.3 9,713.2 1,857.5 530.1 104.3 238.9 241.4 1,539.1 3,949.9 1,150.7 101.3

37,091.2 443.9 1,115.5 4,863.4 625.5 298.9 3,018.0 16,013.3 7,070.5 2,036.7 1605.3 9,585.2 1,963.8 497.6 69.0 160.4 173.1 1,403.4 4,060.0 1,162.6 95.2

36,183.6 423.7 1,057.8 4,357.3 563.5 251.6 2,747.7 16,505.3 6,557.5 2,176.9 1,542.3 9,115.2 1,989.7 617.7 58.0 174.0 176.9 1,496.4 3,488.0 1,017.5 97.6

0.84% 3.08% -3.18% -1.51% 1.43% -7.05% -3.22% 5.73% -2.58% -2.54% -4.80% 6.14% 7.58% 14.33% 0.93% 3.52% 7.49% 11.79% 2.87% 4.03% 15.81%

42,174.5

44,598.4

46,419.8

46,676.3

45,299.4

1.80%

36,419.6 2,561.9 1,536.2 1,017.3 4,225.5 4,232.4 3,741.2 8,621.4 7,790.8 2,692.9 8,964.1 362.3 115.7 427.8 372.5 1,214.8 650.2 2,775.8 2,557.7 487.3

38,389.0 2,818.5 1,578.9 925.1 4,563.4 4,473.4 3,639.5 10,180.4 7,449.6 2,760.2 9,497.7 417.5 122.1 405.6 421.5 1,170.0 598.0 2,935.9 2,913.4 513.7

38,589.0 2,831.6 1,385.4 720.8 4,595.9 4,017.6 3,227.9 11,669.4 7,444.3 2,696.2 11,310.1 667.9 183.8 344.2 497.6 1,282.0 595.4 3,412.3 3,664.3 662.6

39,549.6 2,511.8 1,419.0 817.7 4,641.9 4,121.1 3475.4 12,940.0 7,349.0 2,273.7 11,267.8 677.5 100.9 351.7 445.7 1,288.6 624.8 3,387.8 3,836.1 554.8

39,230.8 2,512.1 1,239.6 731.9 3,921.3 3,935.9 3,587.1 13,957.5 7,002.2 2,343.1 11,114.4 756.1 84.6 335.8 444.3 1,319.6 747.0 3,171.8 3,704.2 551.0

1.88% -0.49% -5.22% -7.90% -1.85% -1.80% -1.05% 12.80% -2.63% -3.42% 5.52% 20.19% -7.53% -5.88% 4.51% 2.09% 3.53% 3.39% 9.70% 3.12%

45,383.8

47,886.7

49,899.1

50,817.5

50,345.2

2.63%

MEN’S WEAR Woven 84111 84112 84119 84122 84123 8413 8414 84151 84159 84587 Knit 84121 8431 84321 84322 84323 84324 84371 84379 84389

Overcoats etc. wool, hair Overcoats etc. oth. textls Oth. mens outerwear etc. Suits, textile materials Ensembles Jackets and blazers Trousers, breeches, etc. Cotton shirts Shirts, oth. textile matrl Men’s, boy’s apparel nes Suits of wool, fine hair Overcoats, outerwear etc. Suits, mens boys, knit Ensembles, mens boys knit Jackets, blazers, m&b knit Trousers, breeches etc. Cotton shirts, mens boys Shirt, oth. textile matrl Other mens underwear knit

Total

WOMEN’S WEAR Woven 84211 84221 84222 8423 8424 8425 8426 8427 84589 Knit 8441 84421 84422 84423 84424 84425 844265 8447 84489 Total

Overcoats, cloaks etc. Suits Ensembles Jackets Dresses Skirts & divided skirts Trousers, breeches etc. Blouses, shirt-blouse, etc Women, girls apparel nes Overcoats, oth. coats etc. Suits, womens girls. knit Ensembls, women girls, knt Jackets, women girls, knit Dresses, women girls, knit Skirts, divided skirts Trousers, women girl, knit Blouses, shirt-blouse, etc Other underwear etc. knit

190 GARMENT INDUSTRY IN SOUTH ASIA SITC

Product description

1995

1996

1997

1998

1999

Average annual growth

Babies’ cloths not knitted

1,117.1

1,150.0

1,133.3

1,252.7

1,174.8

1.27%

Babies’ clothes knitted

2,071.1

2,296.0

2,554.3

2,911.1

3,057.2

10.23%

3,188.2

3,446.0

3,687.5

4,163.8

4,232.0

7.34%

3,401.5 2,630.3 277.3 83.8 410.0 1,861.2 123.1 770.7 954.4 13.0

3,464.7 2,757.4 256.7 87.5 363.2 2,128.4 134.3 919.7 1,056.9 17.4

3,654.3 2,895.4 312.3 85.3 361.2 2,250.4 122.8 908.4 1,201.1 18.1

3,349.8 2,727.9 265.9 95.1 261.0 2,211.8 134.1 1,037.8 1,017.3 22.7

3,116.4 2,515.9 266.8 109.1 224.6 2,098.3 146.5 1,126.1 811.1 14.5

-2.16% -1.11% -0.97% 6.82% -13.96% 3.04% 4.46% 9.94% -3.99% 2.78%

5,262.7

5,593.1

5,904.7

5,561.6

5,214.7

-0.23%

21,432.9 8,840.5

22, 818.8 9,881.8

25,428.7 10,087.3

26,726.5 11,533.7

28,637.5 12,765.6

7.51% 9.62%

30,273.4

32,700.6

35,516.1

38,260.1

41,403.1

8.14%

306.4 316.3 328.2 102.9 809.0 993.4 1,003.4 126.1 1,171.6 2,606.2 559.3 1,401.9 316.4 2,079.5

325.1 331.9 301.7 94.4 819.8 933.0 1,066.6 98.1 1,323.6 2,731.6 533.0 1,716.9 239.5 2,235.9

361.1 361.8 327.7 101.2 843.3 1,180.8 1,564.9 267.5 1,618.3 3,083.3 553.3 1,861.1 251.7 2,303.3

385.0 373.0 285.3 108.4 891.3 1,050.3 1,393.6 94.3 1,458.9 3,229.0 574.9 1,767.7 258.3 2,291.9

464.5 329.9 258.1 96.1 849.2 875.0 1,285.2 140.7 1,276.9 3,359.8 546.8 1,615.8 262.5 2,365.5

10.96% 1.06% -5.82% -1.69% 1.22% -3.12% 6.38% 2.77% 2.17% 6.56% -0.56% 3.61% -4.57% 3.27%

12,120.6

12,751.1

14,679.2

14,162.1

13,725.9

3.16%

138,403.1

146,976.0

156,106.4

159,641.4

160,220.4

3.73%

BABIES WEAR Woven 84511 Knit 84512 Total

SPORTS WEAR Woven 84219 84561 84563 84581 Knit 84562 84564 84591 84592

Other womens outerwear Male swimwear not knitted Fem. swimwear not knitted Ski suits, not knitted Male swimwear knitted Fem. swimwear knitted Track suits, knitted Ski suits, knitted

Total

T-SHIRTS & PULLOVERS Knit 8453 8454

Jerseys, pullovers, etc. knit T-shirts, othr. vests knit

Total

Hosiery 84161 84162 84169 84281 84282 84289 84381 84481 84483 84551 84552 84621 84622 84629

Underpants and briefs Nightshirts and pyjamas Other male underwear etc. Slips and petticoats Nightdresses, pyjamas Other underwear etc. Underpants, briefs, mens Slips and petticoats Nightdresses & pyjamas Brassieres Girdle, corset, braces, etc. Panty hose, tights, knittd Women’s hosiery, knitted Other hosiery, knitted

Total Grand Total

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

PAKISTAN 191

ANNEXURE IV - US apparel imports

US imports in the apparel categories SITC

Product description

(in million US $)

1995

1996

1997

1998

1999

Average annual growth

8998.3 53.6 99.5 1,403.1 58.5 11.0 392.4 3,589.8 2,480.0 662.4 247.9 2,327.0 419.3 68.3 1.8 0.7 3.0 238.4 1,362.9 222.4 10.2

8,997.0 55.8 83.6 1,493.1 70.0 9.8 411.2 3,840.5 2,241.6 550.0 241.2 2,643.4 460.5 79.1 1.9 0.9 3.9 301.6 1,542.1 238.0 15.5

10,357.4 72.0 100.6 1,863.0 68.7 7.3 489.7 4,656.9 2,349.6 523.8 226.0 3,071.2 511.8 107.6 3.1 0.6 4.5 353.0 1,789.6 273.7 27.2

11,255.4 72.9 90.4 1,748.5 68.8 6.6 513.3 5,398.8 2,599.6 564.5 192.0 3,424.1 589.4 120.8 3.5 0.4 7.1 405.1 1,933.8 323.7 40.3

11,476.0 60.9 73.9 1,359.1 80.5 8.0 501.7 6,004.1 2,482.1 705.9 199.7 3,288.8 589.5 149.3 2.7 0.1 8.8 536.9 1,650.7 314.1 36.8

6.27% 3.25% -7.14% -0.79% 8.30% -7.78% 6.34% 13.72% 0.02% 1.60% -5.26% 9.03% 8.89% 21.57% 9.68% -38.41% 30.75% 22.51% 4.91% 9.02% 37.78%

11,325.3

11,640.4

13,428.6

14,679.5

14,764.8

6.85%

9,511.4 225.7 330.0 33.6 943.8 1,250.8 886.6 2,873.7 2,078.6 888.6 2,356.6 90.7 5.7 5.6 27.7 280.7 114.4 909.3 810.3 112.3

10,114.5 237.2 356.8 34.2 1,078.9 1,328.4 964.2 3,209.5 2,008.3 897.1 2,384.3 110.3 4.6 2.2 36.9 329.2 91.2 853.1 827.7 129.1

11,314.6 307.7 343.4 26.0 1,136.7 1,352.6 870.6 4,247.8 2,219.7 810.1 2,826.5 154.8 4.3 3.3 46.4 366.4 102.7 987.4 992.4 168.9

12,235.8 296.1 376.6 40.7 1,128.8 1,368.9 979.4 4,989.7 2,331.5 724.0 3,135.6 179.8 4.4 5.0 39.3 398.7 137.2 1,052.0 1,095.5 223.7

12,513.5 262.2 322.3 41.9 778.8 1,441.7 1,047.7 5,451.1 2,405.1 762.9 3,228.1 208.3 7.4 5.1 45.2 451.9 216.2 998.3 1,062.3 233.6

7.10% 3.81% -0.59% 5.67% -4.69% 3.61% 4.26% 17.36% 3.71% -3.74% 8.18% 23.09% 6.49% -2.37% 13.03% 12.64% 17.26% 2.36% 7.00% 20.10%

11,868.0

12,498.7

14,141.1

15,371.4

15,741.6

7.32%

MEN’S WEAR Woven 84111 84112 84119 84122 84123 8413 8414 84151 84159 84587 Knit 84121 8431 84321 84322 84323 84324 84371 84379 84389

Overcoats etc. wool, hair Overcoats etc. oth. textls Oth. mens outerwear etc. Suits, textile materials Ensembles Jackets and blazers Trousers, breeches, etc. Cotton shirts Shirts, oth. textile matrl Men’s, boy’s apparel nes Suits of wool, fine hair Overcoats, outerwear etc. Suits, mens boys, knit Ensembles, mens boys knit Jackets, blazers, m&b knit Trousers, breeches etc. Cotton shirts, mens boys Shirt, oth. textile matrl Other mens underwear knit

Total

WOMEN’S WEAR Woven 84211 84221 84222 8423 8424 8425 8426 8427 84589 Knit 8441 84421 84422 84423 84424 84425 844265 8447 84489 Total

Overcoats, cloaks etc. Suits Ensembles Jackets Dresses Skirts & divided skirts Trousers, breeches etc. Blouses, shirt-blouse, etc Women, girls apparel nes Overcoats, oth. coats etc. Suits, womens girls. knit Ensembls, women girls, knt Jackets, women girls, knit Dresses, women girls, knit Skirts, divided skirts Trousers, women girl, knit Blouses, shirt-blouse, etc Other underwear etc. knit

192 GARMENT INDUSTRY IN SOUTH ASIA SITC

Product description

1995

1996

1997

1998

1999

Average annual growth

BABIES WEAR Woven 84511 Knit 84512

Babies’ cloths not knitted

309.8

297.6

329.3

387.5

372.9

4.74%

Babies’ clothes knitted

689.4

742.9

903.7

1,108.7

1,110.7

12.66%

999.3

1,040.6

1,233.1

1,496.2

1,483.6

10.38%

1,053.8 859.8 162.5 4.2 27.2 200.1 3.1 157.7 39.0 0.3

1,029.8 854.3 147.0 4.7 23.8 223.5 2.2 184.2 36.9 0.2

1,207.3 1,030.9 147.8 6.3 22.4 278.5 3.7 231.5 42.9 0.5

1,118.8 946.4 146.5 6.1 19.9 329.1 4.8 269.7 54.2 0.4

976.4 794.9 150.9 12.9 17.7 369.0 4.9 328.5 35.2 0.4

-1.89% -1.94% -1.84% 32.26% -10.23% 16.53% 12.03% 20.13% -2.54% 10.50%

1253.8

1253.2

1485.8

1448.0

1345.3

1.78%

5,704.6 1,321.6

5,932.7 1,711.2

7,408.1 2,242.5

8,695.0 2,820.9

9,883.1 3,312.5

14.73% 25.83%

7,026.2

7,643.9

9,650.6

11,515.9

13,195.6

17.07%

149.1 82.6 80.4 24.1 359.1 298.4 263.8 16.3 347.4 874.1 78.4 213.8 11.8 148.4

174.7 70.4 82.5 24.4 378.2 302.9 339.7 16.3 372.4 804.3 82.1 230.0 11.1 175.5

191.6 74.0 95.8 25.4 370.7 332.6 449.6 24.6 414.7 896.4 96.7 292.9 14.7 272.2

213.7 87.6 115.8 19.4 409.2 318.0 501.8 30.0 481.9 1,041.6 101.1 318.0 12.0 375.6

282.1 87.5 123.7 31.8 400.2 321.6 605.8 31.3 537.0 1,295.3 112.9 349.2 23.4 501.1

17.29% 1.44% 11.37% 7.11% 2.75% 1.89% 23.10% 17.79% 11.51% 10.33% 9.55% 13.04% 18.63% 35.56%

2,947.7

3,064.5

3,551.9

4,025.6

4,702.9

12.39%

35,420.3

37,141.4

43,491.0

48,536.6

51,233.9

9.67%

Total

SPORTS WEAR Woven 84219 84561 84563 84581 Knit 84562 84564 84591 84592

Other womens outerwear Male swimwear not knitted Fem. swimwear not knitted Ski suits, not knitted Male swimwear knitted Fem. swimwear knitted Track suits, knitted Ski suits, knitted

Total

T-SHIRTS & PULLOVERS Knit 8453 8454

Jerseys, pullovers, etc. knit T-shirts, othr. vests knit

Total

Hosiery 84161 84162 84169 84281 84282 84289 84381 84481 84483 84551 84552 84621 84622 84629

Underpants and briefs Nightshirts and pyjamas Other male underwear etc. Slips and petticoats Nightdresses, pyjamas Other underwear etc. Underpants, briefs, mens Slips and petticoats Nightdresses & pyjamas Brassieres Girdle, corset, braces, etc. Panty hose, tights, knittd Women’s hosiery, knitted Other hosiery, knitted

Total Grand Total

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva.

PAKISTAN 193

ANNEXURE V - EU apparel imports

European Union imports in the apparel categories SITC

Product description

(in million US $)

1995

1996

1997

1998

1999

Average annual growth

15,675.0 148.3 662.1 1,877.7 221.7 155.4 1,679.9 6,025.1 3,113.7 925.9 865.1 2,487.2 619.5 105.9 22.6 74.1 54.2 372.7 891.1 313.3 33.8

16,076.5 158.0 669.0 1,880.1 252.4 129.9 1,625.0 6,709.5 3,034.4 766.0 852.3 2,831.4 718.5 114.4 25.7 75.0 60.4 448.7 996.7 350.4 41.6

15,655.3 171.6 735.3 1,987.5 244.4 130.5 1,574.0 6,430.0 2,728.5 702.7 950.8 3,601.9 687.4 241.2 76.3 163.1 154.3 658.3 1,070.7 491.8 58.8

15,935.9 184.3 690.6 2,008.8 317.0 128.8 1,612.6 6,673.4 2,750.8 775.8 794.0 3,298.5 744.8 186.9 26.0 77.3 73.4 469.3 1,230.0 452.6 38.1

15,311.4 196.6 652.8 1,842.0 361.1 138.6 1,442.4 6,608.2 2,482.4 800.5 786.9 3,089.2 763.8 208.0 28.3 90.3 73.9 463.8 1,071.6 343.0 46.4

-0.59% 7.29% -0.35% -0.48% 12.96% -2.82% -3.74% 2.34% -5.51% -3.57% -2.34% 5.57% 5.38% 18.39% 5.81% 5.05% 8.08% 5.62% 4.72% 2.29% 8.24%

18,162.3

18,907.9

19,257.2

19,234.4

18,400.6

0.33%

15,648.6 1,243.0 544.2 548.0 1,971.7 1,771.1 1,811.4 3,293.2 3,503.1 962.9 3,713.3 117.3 53.9 252.0 189.8 580.0 348.1 1,208.5 705.6 258.2

16,077.8 1,289.3 597.1 479.6 2,002.5 1,869.7 1,634.5 3,965.4 3,254.8 985.0 3,923.7 132.7 57.8 238.6 214.8 481.5 323.8 1,377.5 840.1 256.9

15,744.7 1,381.7 511.5 427.1 2,058.9 1,517.1 1,417.4 4,205.8 3,140.4 1,084.7 4,995.9 322.1 134.2 208.7 272.8 520.1 315.5 1,701.1 1,146.7 374.6

16,431.7 1,357.9 560.8 443.5 2,303.1 1,612.7 1,559.1 4,672.9 3,083.8 837.9 4,478.8 258.2 50.7 210.0 223.5 496.5 299.6 1,658.7 1,068.1 213.6

15,934.8 1,345.1 493.2 426.1 2,067.5 1,481.7 1,513.2 5,138.6 2,718.1 751.4 4,187.3 304.5 41.1 194.3 220.0 507.9 299.3 1,504.3 920.2 195.6

0.45% 1.99% -2.43% -6.10% 1.19% -4.36% -4.40% 11.77% -6.15% -6.01% 3.05% 26.93% -6.53% -6.29% 3.76% -3.26% -3.70% 5.63% 6.86% -6.70%

19,361.9

20,001.5

20,740.6

20,910.5

20,122.1

0.97%

MEN’S WEAR Woven 84111 84112 84119 84122 84123 8413 8414 84151 84159 84587 Knit 84121 8431 84321 84322 84323 84324 84371 84379 84389

Overcoats etc. wool, hair Overcoats etc. oth. textls Oth. mens outerwear etc. Suits, textile materials Ensembles Jackets and blazers Trousers, breeches, etc. Cotton shirts Shirts, oth. textile matrl Men’s, boy’s apparel nes Suits of wool, fine hair Overcoats, outerwear etc. Suits, mens boys, knit Ensembles, mens boys knit Jackets, blazers, m&b knit Trousers, breeches etc. Cotton shirts, mens boys Shirt, oth. textile matrl Other mens underwear knit

Total

WOMEN’S WEAR Woven 84211 84221 84222 8423 8424 8425 8426 8427 84589 Knit 8441 84421 84422 84423 84424 84425 844265 8447 84489 Total

Overcoats, cloaks etc. Suits Ensembles Jackets Dresses Skirts & divided skirts Trousers, breeches etc. Blouses, shirt-blouse, etc Women, girls apparel nes Overcoats, oth. coats etc. Suits, womens girls. knit Ensembls, women girls, knt Jackets, women girls, knit Dresses, women girls, knit Skirts, divided skirts Trousers, women girl, knit Blouses, shirt-blouse, etc Other underwear etc. knit

194 GARMENT INDUSTRY IN SOUTH ASIA SITC

Product description

1995

1996

1997

1998

1999

Average annual growth

BABIES WEAR Woven 84511 Knit 84512

Babies’ cloths not knitted

523.6

558.1

536.7

542.1

540.9

0.81%

Babies’ clothes knitted

915.7

1,018.6

1,056.0

1,143.2

1,220.1

7.44%

1,439.3

1,576.7

1,592.7

1,685.4

1,761.0

5.17%

1,496.4 1,214.7 43.8 51.1 186.8 1,092.8 79.4 410.5 594.7 8.2

1,527.1 1,247.4 46.6 51.0 182.0 1,280.9 87.9 484.0 696.3 12.8

1,706.9 1,346.1 88.6 47.8 224.0 1,345.1 77.8 397.7 856.6 13.0

1,,582.8 1,315.7 51.4 54.2 161.5 1,251.8 87.0 462.3 683.6 18.7

1,385.2 1,141.3 53.7 62.9 127.3 1,111.3 95.3 469.4 536.4 10.3

-1.91% -1.55% 5.22% 5.33% -9.13% 0.42% 4.66% 3.41% -2.55% 5.67%

2,589.2

2,808.0

3,052.0

2,834.6

2,496.5

-0.91%

8,326.6 4,518.9

9,180.5 5,053.8

9,969.9 4,816.1

9,941.2 5,776.0

10,230.5 5,979.7

5.28% 7.25%

12,845.5

14,234.3

14,785.7

15,717.1

16,210.2

5.99%

94.4 119.8 93.4 30.2 318.6 340.6 669.1 89.6 685.3 1,265.7 285.1 889.4 117.9 1,345.2

94.2 132.4 94.6 30.6 334.9 320.7 676.8 72.3 709.3 1,385.4 298.6 938.8 125.4 1,395.9

86.0 123.9 109.2 27.4 327.8 304.0 739.7 125.0 743.1 1,368.2 327.0 858.3 135.8 1,359.9

102.4 123.7 102.4 36.0 315.8 326.4 753.8 37.2 684.6 1,640.0 280.5 790.7 156.0 1,357.0

97.7 120.3 88.8 32.8 328.9 323.4 748.6 33.3 699.7 1,599.6 279.7 718.1 154.4 1,391.3

0.88% 0.11% -1.26% 2.11% 0.80% -1.29% 2.85% -21.94% 0.52% 6.03% -0.48% -5.21% 6.96% 0.85%

6,344.3

6,610.0

6,635.1

6,706.7

6,616.6

1.06%

60,742.5

64,138.5

66,063.4

67,088.6

65,607.0

1.94%

Total

SPORTS WEAR Woven 84219 84561 84563 84581 Knit 84562 84564 84591 84592

Other womens outerwear Male swimwear not knitted Fem. swimwear not knitted Ski suits, not knitted Male swimwear knitted Fem. swimwear knitted Track suits, knitted Ski suits, knitted

Total

T-SHIRTS & PULLOVERS Knit 8453 8454

Jerseys, pullovers, etc. knit T-shirts, othr. vests knit

Total

Hosiery 84161 84162 84169 84281 84282 84289 84381 84481 84483 84551 84552 84621 84622 84629

Underpants and briefs Nightshirts and pyjamas Other male underwear etc. Slips and petticoats Nightdresses, pyjamas Other underwear etc. Underpants, briefs, mens Slips and petticoats Nightdresses & pyjamas Brassieres Girdle, corset, braces, etc. Panty hose, tights, knittd Women’s hosiery, knitted Other hosiery, knitted

Total Grand Total

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

PAKISTAN 195

ANNEXURE VI - Pakistan apparel exports

Pakistan exports in the apparel categories SITC

Product description

(in million US $)

1995

1996

1997

1998

1999

Average annual growth

344.31 0.01 0.97 27.54 33.18 23.27 123.36 116.42 5.39 14.19 274.05 0.01 0.09 10.35 0.02 2.77 6.65 248.32 5.55 0.29

444.69 0.09 1.24 29.92 41.73 31.56 159.20 158.51 6.51 15.95 303.63 0.39 10.85 0.08 2.57 10.62 271.97 6.89 0.27

519.17 1.00 2.25 38.83 37.35 199.31 179.73 6.75 53.95 314.00 0.03 0.89 12.04 0.01 4.44 9.95 277.18 9.32 0.12

467.39 0.07 0.93 22.10 21.84 25.84 216.32 130.08 6.16 44.06 420.54 0.01 0.44 29.27 0.08 3.78 12.15 367.56 7.03 0.23

459.64 0.39 3.45 49.54 2.41 26.45 232.39 104.02 3.43 37.57 456.88 0.14 0.21 19.68 0.17 6.92 16.66 405.45 6.95 0.71

7.49% 183.94% 37.34% 15.81% -48.08% 3.26% 17.16% -2.78% -10.70% 27.56% 13.63% 92.39% 22.58% 17.44% 63.14% 25.68% 25.82% 13.04% 5.78% 25.33%

618.36

748.32

833.17

887.93

916.52

10.34%

141.70 2.63 27.46 0.20 2.29 36.80 4.54 15.66 21.20 30.92 58.78 0.14 14.95 0.37 0.69 3.64 0.34 2.50 35.25 0.88

200.38 2.41 58.32 0.02 4.50 32.14 6.25 22.26 26.96 47.53 61.38 0.11 16.79 0.14 0.57 5.17 0.27 5.25 31.90 1.19

135.86 1.02 15.44 0.00 3.52 37.66 2.83 29.65 18.95 26.77 51.62 0.85 13.41 0.06 1.03 3.58 0.08 3.94 28.18 0.50

138.03 3.32 28.82 0.15 2.88 16.18 3.31 38.78 22.33 22.27 68.22 0.34 20.86 0.22 1.39 4.76 0.37 4.50 35.36 0.42

116.47 1.20 29.79 0.51 3.17 7.48 6.47 32.19 18.20 17.47 80.18 0.12 18.64 0.39 2.37 7.72 0.79 4.84 44.11 1.22

-4.78% -17.87% 2.05% 26.40% 8.42% -32.85% 9.27% 19.74% -3.75% -13.30% 8.07% -4.29% 5.66% 1.65% 36.15% 20.64% 23.02% 17.88% 5.76% 8.37%

200.48

261.76

187.48

206.25

196.65

-0.48%

MEN’S WEAR Woven 84112 84119 84122 84123 8413 8414 84151 84159 84587 Knit 84121 8431 84321 84322 84323 84324 84371 84379 84389

Overcoats etc. oth. textls Oth. mens outerwear etc. Suits, textile materials Ensembles Jackets and blazers Trousers, breeches, etc. Cotton shirts Shirts, oth. textile matrl Men’s, boy’s apparel nes Suits of wool, fine hair Overcoats, outerwear etc. Suits, mens boys, knit Ensembles, mens boys knit Jackets, blazers, m&b knit Trousers, breeches etc. Cotton shirts, mens boys Shirt, oth. textile matrl Other mens underwear knit

Total

WOMEN’S WEAR Woven 84211 84221 84222 8423 8424 8425 8426 8427 84589 Knit 8441 84421 84422 84423 84424 84425 844265 8447 84489 Total

Overcoats, cloaks etc. Suits Ensembles Jackets Dresses Skirts & divided skirts Trousers, breeches etc. Blouses, shirt-blouse, etc Women, girls apparel nes Overcoats, oth. coats etc. Suits, womens girls. knit Ensembls, women girls, knt Jackets, women girls, knit Dresses, women girls, knit Skirts, divided skirts Trousers, women girl, knit Blouses, shirt-blouse, etc Other underwear etc. knit

196 GARMENT INDUSTRY IN SOUTH ASIA SITC

Product description

1995

1996

1997

1998

1999

Average annual growth

BABIES WEAR Woven 84511 Knit 84512

Babies’ cloths not knitted Babies’ clothes knitted

Total

13.72

15.58

16.36

21.52

17.38

6.09%

2.67

2.96

3.23

3.90

10.11

39.40%

16.39

18.53

19.59

25.42

27.49

13.81%

0.05 0.05 0.00 0.00 24.63 0.13 23.92 0.58

0.03 0.02 0.01 0.00 26.07 0.00 26.03 0.04

0.41 0.22 0.18 0.00 22.13 0.00 22.02 0.11

0.37 0.06 0.14 0.17 24.93 0.01 24.73 0.19

0.25 0.02 0.02 0.20 14.86 0.04 14.77 0.06

50.61% -16.80% 32.00% 21.08% -11.87% -27.69% -11.36% -43.38%

24.68

26.10

22.54

25.30

15.11

-11.55%

3.62 82.18

6.32 81.74

5.68 49.71

7.59 49.34

11.91 51.76

34.70% -10.91%

85.80

88.06

55.39

56.93

63.67

-7.19%

0.27 0.13 44.58 0.24 0.48 1.39 1.19 0.00 12.26 1.33 0.23 15.84 66.34

0.11 0.42 38.04 0.07 0.26 0.90 0.22 0.02 12.52 1.11 0.06 19.19 58.05

0.43 0.61 42.57 0.16 0.67 0.63 0.23 0.03 10.63 0.73 0.11 20.93 41.83

0.50 0.72 36.30 0.03 2.53 2.99 0.94 0.17 11.71 1.17 0.00 23.23 23.23

0.41 0.76 45.86 0.11 2.66 4.36 1.28 0.18 9.34 0.34 0.06 24.46 11.48

11.05% 54.37% 0.71% -18.65% 53.18% 33.20% 2.01% 126.80% -6.58% -29.04% -28.39% 11.47% -35.51%

144.28

130.96

119.54

103.53

101.27

-8.47%

1,089.99

1,273.72

1,237.71

1,305.36

1,320.71

4.92%

SPORTS WEAR Woven 84219 84561 84563 Knit 84562 84591 84592

Other womens outerwear Male swimwear not knitted Fem. swimwear not knitted Male swimwear knitted Track suits, knitted Ski suits, knitted

Total

T-SHIRTS & PULLOVERS Knit 8453 8454

Jerseys, pullovers, etc. knit T-shirts, othr. vests knit

Total

Hosiery 84161 84162 84169 84281 84282 84289 84381 84481 84483 84551 84621 84622 84629

Underpants and briefs Nightshirts and pyjamas Other male underwear etc. Slips and petticoats Nightdresses, pyjamas Other underwear etc. Underpants, briefs, mens Slips and petticoats Nightdresses & pyjamas Brassieres Panty hose, tights, knittd Women’s hosiery, knitted Other hosiery, knitted

Total Grand Total

Source: PC-Trade Analysis System database of International Trade Centre (ITC)-Geneva

197

6

Garment industry in Sri Lanka Saman Kelegama and Roshen Epaarachchi*

1.

Introduction

1.1 The state of the Sri Lankan garment industry The Sri Lankan Garment industry experienced phenomenal growth after the late 1970s and continues to be the strongest manufacturing sub-sector in terms of its contribution to the GDP, exports, foreign exchange earnings, and employment generation. The contribution of the garment sector to GDP has risen from 3.88 percent in 1985 to 6.64 percent in 1997. In 1998, for instance, the garment industry accounted for 52 percent of total exports and 44 percent of industrial output (Annex A6.1 and 6.2). In 1978, the industrial sector accounted only for 15 percent of export earnings; and by 1998, it had increased to 75 percent. The garment sector alone recorded more than 50 percent of the total export earnings in 1998 (for more details, see Annex A6.3 to 6.5). Figure 6.1. Quantity of garment exports (Mn Pcs) 500 450 400 350 300 250 200 150 100 50 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: SLAEA, various issues.

Garment exports have demonstrated a significant increasing trend over the last 18 years (Figures 6.1 and 6.2). While export quantities have declined on average between 1996 and 1999 by almost 26 percent, the value of production (in US $) has increased during the same * Institute of Policy Studies of Sri Lanka

198 GARMENT INDUSTRY IN SOUTH ASIA

period by almost 33 percent. This indicates a shift in the production and export of standard garments to higher value garments. In the first quarter of 1999, however, Sri Lanka’s garment industry recorded a drop in its foreign exchange earnings due to the adverse impact of the East Asian financial crisis (see Figure 6.1). Sri Lanka can be considered to have a comparative advantage in the manufacture of garments. While this comparative advantage is significantly higher than in other industries, it is comparable to the rubber and tea/coffee/spice export oriented industries, as indicated by the Revealed Comparative Advantage (RCA) figures in Annex A6.6.1 Figure 6.2. Value of garment exports (US $) 3000

2500

2000

1500

1000

500

0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: SLAEA, various issues.

This impressive growth record and the evolution of the comparative advantage in the manufacture of garments (Athukorala and Rajapatirana, 2000) over the past twenty years were supported by a number of factors. The first of these were the market-oriented economic policies introduced in 1977. These reforms placed greater emphasis on export-driven industries; and the government extended numerous measures of support to the sector, in the form of subsidies and duty rebate schemes, duty-free imports of machinery and raw materials and lower corporate taxes, including tax holidays, etc. In addition, the quantitative restrictions imposed under the MFA provided a certain degree of protection for the industry, in the form of increasing export volumes to assured markets. The quota system also induced a significant inflow of foreign direct investment (FDI) into the industry in the earlier years, particularly

1

These RCA figures compare the ratio of Sri Lanka’s exports in each of the products to its total exports, with the ratio of the world as a whole. RCAs with a value greater than one, indicate that a country’s exports in a particular commodity are a larger proportion of its total exports than the world average, and more specifically, that it has a comparative advantage in that commodity.

SRI LANKA 199

from a number of East-Asian producers whose country-quota allocations were exhausted.2 Given the fact that Sri Lanka is a labour-surplus economy, foreign investments in a labourintensive industry such as garments proved to be extremely fruitful. In 1977, there were 5 garment factories in operation and earning US$ 10 million for their exports and by 2000, export earnings were recorded at around US$ 2,710 million by a total of 891 factories. Of these factories, approximately 80 percent are categorized as small and medium scale enterprises employing up to 500 employees (Table 6.1). The garment sector provided direct employment to approximately 280,000 employees in 1999. While local industrialists own about 85 percent of garment factories, 25 garment manufacturers produce 52 percent of total garment exports (SLAEA, various issues). Out of the 891 factories, 417 have received Board of Investment special status (commonly known as “BOI status” where the enterprise is entitled to duty free importation of inputs, off-shore borrowing facilities, ‘one-stop shop’ facilities, etc. – see BOI, 1995). The rest do not enjoy these privileges but account for over 55, 000 employees in the garment sector (SLAEA, 2000a). Table 6.1: Distribution of factories by size Category Small Medium Large Extra Large Total

Number of employees 0-100 101-500 501-1000 Over 1000

No. of factories

Percentage

282 445 131 33 891

32 50 14 4 100

Source: TVEC (1999).

In 1992, the 200 Garment Factory Programme (GFP) was initiated with the dual objective of fuelling growth in the industry and solving the problem of rural unemployment. Under this programme, investors were offered quotas liberally (more quotas were offered if the factory was located in a so-called remote area) as well as a number of concessions including tax holidays, duty-free importation, and access to off-shore finances (BOI status). One condition of the 200 GFP was the employment of at least 500 workers in each factory. By the end of 1996, 154 garment factories had begun commercial operations in rural areas providing 76,821 employment opportunities. In an increasingly competitive environment, the size of the enterprise is becoming far less important; and garment operations are more recently being considered in terms of those that are “strong” and “weak”. The relative strength of an enterprise can be gauged by its capacity to remain competitive.3 2

3

The main garment producing countries tend to exhaust their quota allocations early, and international buyers then place their orders with other garment producing countries. “Strong” manufacturers are those who can absorb the external shocks and become competitive suppliers of garments to the world market. Those manufacturers who cannot do so are considered “weak’, and the categorization does not depend on the size of enterprise.

200 GARMENT INDUSTRY IN SOUTH ASIA

Over 70 percent of garment manufacturers are concentrated in or around the Western Province, as shown in Table 6.2, due to better infrastructure and close proximity to seaport and airport facilities. Similarly, about 65 percent of total employment has been generated in the region. Large employment generation has created congestion in the Western Province; and yet the living standards, working environment and welfare facilities of the employees have remained poor in quality as described in subsequent sections. Table 6.2: Geographical distribution of garment establishments and numbers of employees, 1999 Province

Establishment

Employment

Number

Percentage

Number

Percentage

Western Southern Central Eastern North Western North Central Uva Sabargamuwa Northern

638 51 54 8 60 21 20 36 3

72 6 6 1 7 2 2 4 -

181329 19488 17056 3512 22398 10426 6559 15419 634

65 7 6 1 8 5 2 6 -

Total

891

100

276821

100

Source: TVEC (1999).

By the end of 1998, 14.3 percent of the 6 million people in the country’s total working labour-force were employed in the manufacturing sector. Out of the total manufacturing sector labour-force, approximately 32 percent were engaged in the garment industry. Table 6.3 shows the gender composition in labour force by occupational categories in the garment industry. Female dominance – about 87 percent — is one of the most conspicuous characteristics of the garment industry. Females hold 53 percent of the management categories and 72 percent of front line management occupations such as supervisors, while males are dominant in the upper management occupations. The share of females in occupations of machine operators and others is over 90 percent. There is equal participation of both sexes in pattern making, quality controlling, merchandising, designing and quality assurance. 1.2 Sri Lanka’s major export markets During the past two decades, Sri Lanka has enjoyed a relatively assured export market for garments through bilateral agreements with the USA, the EU, Canada, Norway, Sweden, and Finland. Sri Lanka’s largest market is the USA, with 60 percent of Sri Lanka’s garments being exported to this destination, followed by 30 percent of exports to the EU. The buyers of Sri Lanka’s garments within the EU are shown in Figure 6.3. Other importers of Sri Lanka’s garments include Canada, Australia, Japan, South Korea and Switzerland.

SRI LANKA 201

Table 6.3: Garment industry gender composition in labour force by occupational categories, 1998 Grade

Occupational category

Management Grade

Senior Managers Middle Level Managers Front Line Managers Quality Assurance Managers Cutting Managers Quality Controllers Pattern Makers Merchandisers Work Study Officers Designers Mechanics Operators Helpers Checkers Line Leaders Cutters Ironers Others

Technical Grade

Operative Grade

Total

Grand Total

Male (%)

Female(%)

2,120 3,229 6,739 454 391 2,950 645 824 581 128 3,041 124,444 69,255 21,572 3,207 2,585 6,919 7,905

84 62 28 52 90 28 50 50 64 50 99 6 9 7 11 68 30 30

16 38 72 48 10 72 50 50 36 50 1 94 91 93 89 32 70 70

257,026

13

87

Source: TVEC (1999).

Figure 6.3: Sri Lanka garment exports to EU, 1999 France 6%

Belgium 7%

Germany 17%

Netherlands 7% Italy 3% Others 5%

United Kingdom 55%

Source: SLAEA, various issues.

Two new market opportunities have emerged during the last two years. First, the IndoSri Lanka Bilateral Free Trade Agreement (that came into operation in March 2000) permits 8 million pieces of garments at 50 percent duty concession to the Indian market. It is however characterized by a plethora of problems, and thus Sri Lanka has not been able to reap the benefits of the offer (Kelegama, 2001). Second, the Trade and Development Act (TDA) of 2000 provides duty free entry to USA for garment exports from Caribbean and sub-Saharan African countries (SLAEA, 2000b). The rules of origin are quite liberal during the first four years for most Sub-Saharan African countries. This has provided an opportunity for Sri Lankan garment industrialists to relocate in Sub-Saharan Africa and target the US market.

202 GARMENT INDUSTRY IN SOUTH ASIA

1.3 Quota and non-quota exports More than 90 percent of Sri Lanka’s garment exports are ready-made garments (RMGs), which are primarily concentrated in casual wear for women and men. Most garment manufacturers are geared to produce standard, low value added garments for the major markets under export quotas. In the context of the USA, Sri Lanka is subject to quotas under 30 categories, covering over 50 clothing items, including specific categories such as knitted shirts and blouses, trousers, underwear, overalls, terry and other pile towels, etc. The nonquota garment exports attempted are primarily higher value added garments, which cater to niche markets and designer labels such as Victoria’s Secrets, Triumph International, British Home Stores, Marks & Spencer, C & A., etc. Exports to the EU are predominantly non-quota (Table 6.4). The government of Sri Lanka signed an agreement with the EU in December 2000 to lift the quantitative restrictions of Sri Lanka’s garment exports to the EU from March 2001. The agreement lifts all textile quotas with Sri Lanka in exchange for tariff reductions by Sri Lanka and binding of all its tariffs for the textile and clothing sector with ATC. Sri Lanka bounded its rates of duty for the entire textile and clothing sector at zero percent for raw materials, 5 percent for fibres and yarns, 10 percent for fabrics and 17.6 percent for clothing products. The EU will suspend the application of four quantitative restrictions currently maintained on imports of textiles and clothing products from Sri Lanka. These quotas relate to trousers (category 6), cotton blouses (category 7), cotton shirt (category 8), and anoraks (category 21). Under the agreement, all EU countries will no longer apply quotas on these garment products from Sri Lanka. Table 6.4: Quota and non quota exports4 Year

USA Total quota

1994 1995 1996 1997 1998 1999 2000

EU Total non quota

83.62 77.60 68.40 68.80 63.70 61.20 62.03

16.36 22.39 31.60 31.20 36.30 38.80 37.96

Total quota 14.99 15.87 n.a. 0.08 24.67 22.54 16.93

CANADA Total non quota 85.01 84.13 n.a. 99.92 75.33 77.46 83.07

Total quota 87.14 89.14 n.a. 75.10 87.70 101.87 98.77

Total non quota 12.85 10.85 n.a. 24.90 12.30 -1.87 1.23

Source: SLAEA, Various issues.

Sri Lanka’s dependence on quotas has been increasing; and, in 1997, 62 percent of total exports were still quota-based (Table 6.5). This is partly due to the operational mode of the phasing out of the MFA (Weerakoon and Wijayasiri, 2000). However, non-quota garment 4

As a percentage of MFA.

SRI LANKA 203

exports to the USA have doubled during the last five years. The Textile Quota Board (TQB) is a statutory body under the Ministry of Industrial Development, responsible for the disbursement of export quotas. Generally, quotas are distributed to manufacturers depending on their size, capacity and past performances.5 Table 6.5: Percentage share of quota and non quota garment exports (million pieces)

Year

1994 1995 1996 1997

National garment exports Quota

Non quota

49.6 46.8 62.0 61.7

50.4 53.2 38.0 38.3

Source: SLAEA, various issues.

Sri Lanka and other South Asian garment producing countries export mainly a few categories of items to the main markets, the USA and the EU. The composition of Sri Lanka’s category-wise garment exports is shown in Annex A6.7. Women’s outerwear and men’s outerwear exports accounted for approximately 45 percent and 15 percent, respectively, of the total garment exports. Some of these garments have low market value and demand and are categorized as standard garments. An item-wise composition of garment exports of South Asian economies, including Sri Lanka, also indicates a high concentration of a few items across all countries (Annex A6.8). South Asian countries largely compete with one another in the garment sector, particularly because they supply similar products to the same markets in the USA and the EU. More than 90 percent of total garment exports of South Asian economies find their way to these two major markets.

2.

Major issues facing the industry

2.1 The phasing out of the Multi-Fibre Agreement The Multi-Fibre Agreement (MFA) came into existence in 1974, whereby a mechanism of quantitative restrictions was used to manage world trade in textiles and garments. Restrictions in the form of quotas were placed on the importation of apparel into industrialized countries as a form of protection for their domestic industries. Under the MFA, the developed countries negotiated bilateral agreements with individual trading partners in order to restrict the quantity of exports of specific product categories. The MFA, with around 100 bilateral restraint agreements, is estimated to cover almost 80 percent of the world textile and garment trade. 5

There have been various modalities of quota distribution over the years, but the general distributional pattern has been governed by the criteria as described.

204 GARMENT INDUSTRY IN SOUTH ASIA

The MFA is responsible for severely restricting potential trade in the garment sector and, in particular, reducing the volume of exports of some developing countries. New and more competitive producers may also have been discouraged as traditional suppliers were protected to a certain extent under the quota system and assured markets, even in the event of a loss of competitiveness. The most efficient producers have been adversely affected due to export tightening. However, some developing countries like Sri Lanka and Bangladesh benefited from the MFA by having assured markets in a competitive environment during the early years of production in the 1980s (Athukorala, 1995). The quota system has helped to attract foreign investors to set up manufacturing operations in these countries. In addition, buyers whose quota allocations were exhausted in other countries turned to manufacturers in these countries to supply the remainder of their markets. The new Agreement on Textiles and Clothing (ATC) has been integrated into the normal GATT rules, and quantitative restrictions are to be phased out within a ten-year period, from January 1995 to January 2005. Any quotas that were in place in December 1994 under the old MFA were carried over into the new agreement. Importing nations agreed to liberalize 16 percent of their textile imports on 1st January 1995; 17 percent in 1998; 18 percent in 2002; and the remaining 49 percent at the end of the transition period, on 1st January 2005. The annual quotas are not to be lower than trade in a specified twelvemonth period, and they must be enlarged by not less than 6 percent every year. While the agreement focuses largely on the phasing-out of MFA restrictions, the ACT recognizes that some members would maintain non-MFA restrictions not justified under a GATT provision. These would be brought in line with GATT within one of the agreements or phased-out progressively by 2005. The agreement also contains a specific transitional safeguard mechanism, which could be applied to products not yet integrated into GATT. Action under the safeguard mechanism could be taken against individual exporting countries if it can be demonstrated by the importing country that overall imports of a product were entering the country in such quantities from a particular country that they threaten the domestic industry. Action under the safeguard mechanism could be taken either by mutual agreement, following consultations, or unilaterally. A safeguard restraint could remain in place for up to three years without extension or until the product is integrated into the GATT. The agreement specifies that all members abide by GATT rules and regulations so as to improve market access, ensure the application of policies relating to fair and equitable trading practices, and avoid discrimination against imports in the area of textiles and clothing. The agreement also has provisions for special treatment for countries, which have been subject to MFAs, for new entrants, small suppliers and least developed countries. As discussed in Section 5, due to various loopholes of the agreement, the operation modality has been twisted by developed countries in their favour (Weerakoon and Wijayasiri, 2000 and ESCAP, 2000).

SRI LANKA 205

The presence of the quota system has virtually guaranteed markets for many Sri Lankan manufacturers, especially those manufacturing standard garments and competing on price. This guaranteed period would be over in 2005 with the dismantling of the quota regime, which will compel the industry to compete for its market share in an intensely competitive global market. There are a large number of garment manufacturers who depend predominantly on quota-based business. With the phasing out of the MFA, these manufacturers will have to thoroughly assess the structure and functioning of their operations, in order to remain competitive in a quota free world. 2.2 Globalization The term ‘globalization’ can be broadly defined as the integration of markets and is visible in the garment industry where production is spread over national boundaries. As a result of globalization, pressures and changes amongst buyers and in consumer countries can have fast and significant bearings on manufacturers in producer nations (Ramaswamy and Gereffi, 1998). This is visible already in the Sri Lankan garment industry where the internet has transformed the garment business to a ‘buyers’ market’ and where buyers have stressed on the need to adhere to international standards for labour and factory conditions, to upgrade technology, and for faster response times and improved service. There is a strong consensus on new emerging issues in the international trading environment that can impinge on the marketability of most products. Environmental and labour issues are likely to affect the industry in the future with producers and consumers becoming more aware of the conditions prevailing internationally and locally. International buyers are now placing on their suppliers increasing importance on the worker welfare to the extent that they send their inspection groups to investigate and report on the working conditions of the factory workers prior to placing orders. In the context of the changing global environment, garment producers, therefore, have to be informed of changing consumer preferences in order to meet necessary environmental, labour, health and safety standards. There are other concerns that are influencing the pattern of trade in the global economy. The global trading environment has shown the emergence of strong trade blocs during the recent past. The most noteworthy for the Sri Lankan garment industry has been the emergence of the North American Free Trade Agreement (NAFTA) involving the USA, Canada and Mexico. As a result of NAFTA, Mexico has become the dominant supplier of apparel to the US market at the expense of supplier countries although there has not been a direct adverse impact on Sri Lankan garment exports to USA (Kelegama, 1997). As stated, the Trade and Development Act of the 2000 has granted the Caribbean Basin and the Sub-Saharan African countries zero duty preferential treatment; and consequently, they will emerge as key suppliers of apparel to the US by cutting into Asia’s market shares in the USA. In addition, tax relief has been granted in the Caribbean and El Salvador. Increased access for East European countries into the EU and the long-term impact of Turkey’s entry into the Customs

206 GARMENT INDUSTRY IN SOUTH ASIA

Union with the EU are also potential threats in terms of restricting access for Sri Lankan garment exporters.

3.

How competitive is the Sri Lankan garment industry?

In the recent past, the global garment industry has been subject to significant changes in terms of changes in consumer demands, changes in technology, and fierce competition. These changes have also filtered down to the Sri Lankan garment industry, and there is now considerable pressure on the industry to reach higher standards of production and service. As the garment industry is a relatively low skilled and labour-intensive operation, over time there has been a shifting of production from countries such as Hong Kong, South Korea, and Taiwan to low-wage countries; such as Bangladesh, India and Sri Lanka. As this process of shifting (or shifting comparative advantage) has continued, Sri Lanka has gradually lost its low labour cost comparative advantage. As the majority of Sri Lankan manufacturers currently produce standard garments where competition is primarily based on price, Sri Lanka faces stiff competition from other developing countries of South and South East Asia where production cost is low (India, Bangladesh, Pakistan, Indonesia, Cambodia, Laos and Vietnam). China has also emerged as a dominant force in the global apparel industry with its massive supply capability and low costs of production. These countries have a lower ranking in terms of cost of production in comparison to Sri Lanka. Given this situation, there is a need for Sri Lanka to move to the top end of the market as a reputable and dependable supplier of quality apparel in Asia. In the higher value-clothing segment, countries such as Malaysia, Korea, Singapore, Hong Kong, and Japan are serious competitors. In Bangladesh, the share of total export earnings from garments increased from 12 percent in 1985 to over 73 percent in 1998. India is less dependent on garments for her export earnings. The Indian garment industry is based on a system of decentralized production; and relative to Sri Lanka, exports have been niche-based, focusing on low volume and high variety of outputs, within the broad area of fashion clothing and especially ladies outwear (Kathuria, et al., 1998 and 1999). Garment exports constitute only 12 percent of India’s merchandise exports. India’s share of world exports of garments increased from 1.5 percent in 1980 to 2.6 percent by 1994. The share of garment export earnings accounted for 60 percent of Pakistan’s economy. While Sri Lanka’s global market share, has been recorded at 1.5 percent, more recent estimates indicate that there has been a marginal increase and stands at 2 percent of the global garment market. During the period 1995 to 2000, Sri Lanka maintained a 19 percent export earning growth in the garment industry (Table 6.6). If there is a lifting of the US tariff barriers for Sri Lanka’s apparels then there would be an increase of exports by around 50 percent.6 As mentioned earlier, although over 90 percent of Sri Lanka’s garment exports are 6

This is the view of the Chairman of the National Apparel Exporters Association of Sri Lanka.

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destined for the USA and the EU, Sri Lanka does not rank amongst the top exporting nations to the EU (Annex 6.9). Sri Lanka ranked 20th and 15th place among suppliers of apparel products to the EU and the USA market, respectively, in 1998. The positive feature is that the Sri Lankan garment manufacturers, in general, have built up a good rapport and sound reputation the world over. It is a great advantage when compared to her competing neighbours. Table 6.6: Growth in garment industry (export earnings as percentage) Country

1980-1985

1985-1990

1990-1995

Sri Lanka Bangladesh Nepal Pakistan India

20.9 14.2 42.6 4.5 -0.3

18.7 21.6 19.3 26.1 21.6

19.6 20.3 7.8 12.2 13.3

Total Export

6.1

14.8

11.2

Source: World Bank (1997).

Buyers now have a range of sources from which to choose; and countries such as Mexico (supplying to the USA) and Turkey (supplying to the EU) have the added advantages of being in close proximity to their major markets, lower transport cost and shorter turnaround times. Moreover, Mexico and Turkey possess competitively priced labour, good quality products and quota free access to their major markets. One factor contributing to this reduced level of price-competitiveness is the increasing cost of labour in Sri Lanka compared to other garment producing nations. Labour costs have been steadily increasing and currently constitute between 15 - 30 percent of the total production costs in the average Sri Lankan garment manufacturing firm (Table 6.8). 7 Table 6.7 highlights hourly wage rates of a number of garment manufacturing nations and indicates that Sri Lanka’s competitors currently have relatively lower wage cost structures.8 For those competitors who have higher wage cost structures (and higher global market shares), their strengths lie particularly in their high levels of productivity. Available studies show that total factor productivity (TFP) in the garment industry has improved after 1977 liberalization policies (Kelegama, et. al., 1999 and Athukorala and Rajapathirana, 2000). “Among the industries which exhibited impressive and consistent improvements in productivity, textiles and clothing tops the list” (Athukorala and 7

8

UNIDO ( 2000) has found out that the average labour cost is around 20 per cent of the cost of production in the garment industry. Apart from this, in the Greater Colombo area, costs for land and buildings ( rent payment) amount to 17 per cent, the cost for interest payments of small and medium enterprises amount to 3 per cent. Sri Lankan wage rates are currently at least 30 per cent higher than rates in Vietnam and Cambodia.

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Rajapathirana, 2000: 165). However, the Kelegama et. al. (1999) study shows the TFPG for the textiles, clothing, and leather products sector (ISIC No. 32) declining from 6 percent in 1981-87 to 1.2 percent during 1987-93. The study also shows that when textiles (ISIC No. 321) and clothing (ISIC No. 322) are removed from the entire sector (ISIC No. 32), the TFPG improves from 2.0 during 1981-87 to 5.1 percent during 1987-93. Clearly, there has been a decline in factor productivity in the textiles and clothing sector in the latter period of 1987-93. Whether this decline happens in the textiles sector or the clothing sector is difficult to judge from the study. Data on unit labour cost in the textiles and clothing sector show that it has increased over the two periods of comparison. Moreover, there has been a decline in labour productivity growth (measured both in terms of real output per employee and real value added per employee) for the textiles and clothing sector for the two periods of comparison. The finding of the study is that there has been a general decline in the competitiveness of the textiles and the clothing sector. Table 6.7: Hourly labour costs including social & fringe benefits (US $), 1996 Country

(US$)

Japan Taiwan Hong Kong S. Korea Malaysia Mexico Thailand Philippines Sri Lanka Indonesia Vietnam Bangladesh China Pakistan

16.29 5.10 4.51 4.18 2.52 1.08 1.06 0.62 0.41 0.34 0.32 0.31 0.28 0.26

Source:Fonseka and Fonseka (1998).

Looking at most developing nations, garment manufacture has been concentrated primarily in low quality, low value-added, standard garments. As such, the cost based strategy of lowering costs and improving productivity, in competing garment manufacturing nations, can be seen in their shift from reliance on labour-intensive manufacture to advanced technology. Improvements in technology (e.g., Korean textile industry) have been determinant for improved productivity and competitiveness. As Table 6.8 shows, there are reasons to believe that Sri Lanka’s productivity in the garment sector has not improved relative to some of its competitors.

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Table 6.8: Selected characteristics of the wearing apparel sector in selected South Asian countries, (annual data), 1993/4 Country

India Nepal Sri Lanka

Value added

Wages

Percentage in output

per employee (1000 dollars)

per employee (1000 dollars)

Costs of input materials etc

3.4 1.6 1.9

0.6 0.5 0.7

Costs of labour

68.8 59.7 55.4

5.3 11.4 15.5

Operating surplus 25.9 28.9 29.1

Source: UNIDO (1998).

4.

Contributing factors to low productivity

While these low levels of productivity are seriously affecting Sri Lanka’s ability to remain competitive, it is essential to understand that productivity is affected by the quality of jobs in the industry. Based on discussions with a range of garment manufacturers, according to their labour cadres and capacity utilization, Exhibit 6.1 portrays the dependence of competitiveness on improvement in productivity and job quality.9 Exhibit 6.1: Dependence of competitiveness on productivity and job quality

➝

Low Level of International Competitiveness

➝

Low Productivity · · · · · · · · · ·

Poor Working Conditions Poor Incentives for Workers High Labour Turnover and Absenteeism Inadequate Human Resource Development Strained Employer-Employee Dialogue Restrictive Labour Regulations Low Investment in Technology Slow Turn-Around Time No Garment Factory Standardization Lack of Professionalism in the Industry

4.1 Poor working conditions One of the most important factors affecting the productivity of labour is poor working conditions. In many of the factories, especially those belonging to the small and medium category, hazardous factory layout with cramped workspace for the workers are not conducive 9

Based on discussions with a range of garment manufacturers. According to their labour cadres and capacity utilization, we categorize them as small, medium and large, or ‘weak’ and ‘strong’ enterprises.

210 GARMENT INDUSTRY IN SOUTH ASIA

to improving output. Some factories also lack basic facilities such as canteens, toilets, etc., and in many cases, regular breaks for using these facilities are not provided. Within the factory itself, a common problem for many of the female workers has been harassment, and in particular, sexual harassment.10 The Sri Lanka Apparel Exporters Association, since of late, has come up with a new code of business conduct in factories to address this problem, but monitoring mechanisms appear to be weak; and the coverage does not exceed 50 percent of factories. While working hours have been specified by labour regulations, there are numerous instances where workers are required to work longer hours to achieve production targets. For the additional hours of input, most often the workers are not entitled to extra payment. In some garment factories, workers are required to work on continuous shifts. For workers required to work night shifts, though some factories provide transport, most do not. Moreover, some of the surrounding roads are not adequately lit at night; and female workers in some cases encounter harassment and other unsafe situations. For workers travelling long distances, infrastructure weaknesses such as poor and unpunctual public transportation services contribute to a certain degree of stress even prior to starting of the work. The resulting worker stress has significant adverse effects on productivity. In many cases, factory workers are from rural areas and are compelled to find accommodation in the vicinity of the factory (Exhibit 6.2). The available accommodation for the workers are generally of poor condition due to increasing congestion around the urban garment factories and Free Trade Zone areas. The lodging facilities are commonly small rooms with limited additional facilities and inadequate sanitation (for details, see Wellawatte, 1999). Furthermore, the rent can constitute a significant proportion of the workers’ salaries. In 1999, the Government constructed a new hostel complex for female workers in the Katunayake Free Trade Zone to address some of these problems. It was far from adequate to address the problems of all the workers in the industry. In fact, since mid-2000 there has been 12,000–18,000 vacancies in the garment factories, particularly in the ones located in the Free trade Zone. The solution to the problem lies partly with the industrialists. While the majority of manufacturers maintain that the costs of providing accommodation for their workers are too high for them to stay in business, the stronger enterprises have demonstrated that improving workers’ living conditions have long run dividends by in terms of improved productivity. Enhanced working conditions are inexorably linked to improved productivity, and the failure to acknowledge this has contributed to low productivity and has eroded Sri Lanka’s competitive advantage. In an increasingly competitive international environment, foreign buyers now place greater pressure on manufacturers to upgrade their factories and worker standards in order to satisfy buyer requirements. Of course, there are significant capital costs 10

These facts and information were disclosed during the face-to-face interviews with the Workers’ Council of the garment factories and NGOs working in the field of welfare of workers in the Export Processing Zone, Katunayake, Sri Lanka.

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and future maintenance costs involved in this process, and manufacturers are under increasing pressure to conform. It could be considered as a “blessing in disguise”. Exhibit 6.2: Transport and hostel facilities available for garment workers Facilities provided Transport

Hostel

Large scale producers

Middle grade producers

Small scale operators

Transport provided but late comers for work are not permitted entry. Extra payments made for achieving targets. Absenteeism around 1% or less.

Some factories provide transport for the night-shift only. Others do not provide transport at all. Around 5 % are normally late for work. No extra payment for target completed. Work till late to complete the given targets.

No transport provided. 95% of the workers normally live in the vicinity. High absenteeism due to extra engagements. No extra payments.

Some factories provide hostel facilities and the government has constructed hostels for the EPZ workers. 99% of the workers are in hostels or lodges. High congestion and various social harassment.

No hostel provided. Around 80% of workers come from private boarding places. Poor nutritional condition has led to lethargy or other physical disorders. 20% of workers travel from distances of 20 to 40 Km radiuses and spend an average of two hours travelling.

No hostel facilities provided. Around 95% come from their own residences. Low salaries inadequate to meet minimum nutritional standards. Working capacity is far below the average.

Source: Based on interviews conducted for the study.

When stress increases over an optimal level, work performance deteriorates, unfavourable reactions develop, which if not controlled will gradually result in psychological stress. The direct consequences are that the person’s productivity gets diminished with feelings of low achievement, and increased absenteeism. Other factors, which contribute to such situation, are poor interpersonal relationships at the work place, autocratic management style, lack of variety in work, low use of skills, poor pay, and low value given to work in the society, especially for the female garment labour. 4.2 Poor incentive structures Another serious constraint to enhancing productivity is the poorly structured incentive and pay systems that employers have set up. In most factories, allowances are not linked to productivity; and in the cases where productivity payments are made, they are in fact only flat-rate allowances rather than incentive systems.11 The Sri Lanka Apparel Exporters’ Association has suggested that wage increases should be linked to increase in productivity, but the Wages Board for the Garments Manufacturing Trade has still not agreed to this 11

Flat rate includes: food allowance, attendance bonus, transport allowance, etc. (EFC, 1998).

212 GARMENT INDUSTRY IN SOUTH ASIA

suggestion. However, stronger enterprises, such as MAS Holdings, have conducted “time and motion studies” and implemented well-structured incentive schemes for workers, which have significantly improved productivity levels.12 Gain sharing schemes have not been implemented in any of the garment factories. 4.3 Labour turnover and absenteeism Shortage of skilled labour available to the industry is another factor adversely affecting productivity.13 Consequently, it is more difficult to use the existing labour in the most efficient manner; and as the supply of labour is less than the demand, low productivity results. The garment sector has recorded average labour turnover rates of around 55 percent per annum, with the highest rate of 60 percent being recorded for factories in the Western Province (Table 6.9). Absenteeism is another serious problem contributing to low productivity. The average rate of monthly absenteeism amongst labour in the garment industry is approximately 7.4 percent (Garment Gazette, June 1999). However, the ‘stronger’ enterprises, which devote significant resources to improving labour productivity, manage to maintain their monthly labour absenteeism rates at around 1- 2 percent.14 Garment manufacturers who spent 30 percent or more of their turnover on human resources development (HRD) and workers’ welfare, have maintained very low labour turnover, and absenteeism around 1 percent or less. Some garment manufacturers have invested on social development programmes such as construction of schools and maintenance of daycare centres for workers’ children in the village where the factory is located. They have also provided transport facilities for the factory workers and made attempts to integrate the garment factory to be a part of village life. Table 6.9: Garment industry labour turnover and absenteeism (percentage) Province

Monthly labour turnover (%)

Western Southern Central Eastern North Western North Central Uva Sabaragamuwa Northern All-island Average

5.9 3.1 3.4 7.2 5.2 2.5 1.2 3.3 8.0 4.9

Absenteeism (monthly %) 8.5 5.3 7.5 8.1 6.5 3.4 6.4 4.4 12.0 7.4

Note: North includes only Vavuniya. Source: TVEC, 1999. 12

13 14

Each machine is connected to a computer which indicates the productivity per hour / per employee, and each employee is thus aware of his or her efficiency. Designers, Cutters, Technicians, etc., are in short supply. Based on a survey done and interviews with industrialists.

SRI LANKA 213

There are a number of reasons attributed to the high rates of labour turnover and absenteeism. A poor working environment and worker-stress are among the main reasons. Workers’ facilities greatly vary among the garment factories, with only a few of the ‘stronger’ enterprises having satisfactory working conditions. Differences in allowances and facilities among factories have resulted in the continual movement of labour to enterprises where working conditions are better. A poor social image of factory workers is another factor contributing to high labour turnover. Due to the bad reputation the industry has gained for harassment of women workers and the poor working conditions, the factory worker has a social stigma.15 These factors too have led to high labour turnover, which in turn has impeded the productivity of labour and affected Sri Lanka’s international competitiveness. 4.4 Inadequate training Inadequate training of managers and workers alike is an important factor constraining productivity and competitiveness. There is little emphasis placed on the importance of training and its role in improving productivity by factory owners/ managers. Often, managers do not view training as an investment and are unwilling to incur expenditure on it. While most workers are trained during recruitment, this initial training is not sufficient to ensure consistently high levels of labour productivity and product quality. Table 6.10: Mode of training in garment industry (percentage), 1999 Method of training Occupational category Senior Management Middle Management Front Line Management Mechanics Operators Helpers Checkers Line Leaders Cutters Ironers Other

In house training/ Industry training 55 50 47 74 93 95 91 84 87 100 94

Public sector Training institute 25 36 47 21 5 3 6 13 10 -

Local private sector Training institute 11 8 6 5 2 2 3 3 3 6

Foreign training 9 6 -

Source: TVEC (1999).

In-house/industry training is the most common form of training in the garment industry, followed by training received predominantly at public sector institutions and then private 15

Based on interviews and the survey done with garment workers (female) and employers. The average number of vacancies is 15 to 20 in a garment factory in the country. Especially, sewing machine operator grades are highly vulnerable. Industrialists disclosed that the industry has faced a more severe labour shortage in this operative grade, especially female employees.

214 GARMENT INDUSTRY IN SOUTH ASIA

sector institutions (Table 6.10). Over 90 percent of the operative grades are trained in-house. Some ‘strong’ garment factories have their own training units, which have separate training instructors and trainers who are paid an allowance during the training period. However, in most ‘weak’ garment factories, focus is more on minimizing the training costs. Industrybased training is favoured for its hands-on approach and the ability to cultivate industrial culture directly at the site. Training conducted by other institutions tend to be in short courses and with less practical exposure in the course content. Currently, there are only a few institutions, predominantly run by the government, conducting training programmes for the garment industry (Exhibit 6.3). The governmentestablished Clothing Industry Training Institution (CITI) is one of the main organizations, which the garment industry relies heavily upon for its training requirements. As the capacity of the CITI is not sufficient to cater to industry training requirements, there have been concerns raised within the industry as to the institution’s ability to provide high quality training courses.16 A course at the CITI can cost between US $ 55 -110 per worker, and manufacturers claim that the standards have not met their expectations in many cases. Exhibit 6.3: Present garment industry training institutes and programs Organization

Training programme

Department of Textile and Clothing Technology, University of Moratuwa Textile Training and Service Centre

Production Organization and Management of the Garment Industry

Clothing Industry Training Institution

Phoenix College of Clothing Technology Vocational Training Authority Sri Lanka National Apprentice and Industrial Training Authority National Youth Services Council

Textile Technology for the Garment Industry Fabric Inspection for Textile & Garment Knitting Machine Mechanics Marketing Management for Textile & Garment Quality Aspects of Fabrics Training Personnel in the Industry Advanced Pattern Cutting, Grading Garment Design Garment Technology and Management Quality Control for the Sewing Industry Sewing Machine Maintenance Clothing Technology and Management Pattern Technology and Grading Clothing Production Technology Training of Sewing Machine Operator by 65 Training Centres of throughout the Country Sewing Machine Operator Training Programme Sewing Machine Operator Training Programme

Source: CITI and other Institutions’ Reports, various issues. 16

CITI syllabuses have not been revised to keep up-to-date with new trends in the garment industry.

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There are no recognized graduate level advance courses on fashion designing, pattern making, fabric painting, etc. in the recognized universities in Sri Lanka. While the government Labour Department has designed and conducted training programmes to educate employees in the garment industry, both within the Export Processing Zones (EPZs) and outside, these have been ad hoc measures which have not been developed under a broader framework. To fill this lacuna, the ADB is considering giving a grant to the Government of Sri Lanka to establish a Clothing Fashion and Design Centre. The Government has set up a special unit to undertake skill development programmes called the Skills Development Fund for the industrial sector. Financial grants will be given to private enterprises to establish training units to increase their productivity. The garment sector has hardly been able to utilize the funds from this unit up to this date. 4.5 Strained employer-employee relations The poor relationship between employers and their employees in the garment industry is another constraint to improving productivity. Strained relationships are reflected in the demands made by management upon workers in cases where unrealistic targets are set and the workers are pressured to perform beyond their capacity. This can be attributed to absenteeism, the lack of adequate training amongst middle and upper level managers as well as to a lack of professionalism in the industry. Some employers tend to believe that the fact that they create employment should absolve them from any obligations. Consequently, laws ensuring statutory rights of the workers are evaded in a significant scale. For example, according to the available data, only 35 percent of the registered employers comply with the provision of the Employment Provident Fund Act (Gunatilake and Kelegama, 1996). Some managers see no role for trade unions in bringing about productivity increases, believing that they are an obstacle to the process. Most labour laws are evaded in most Free Trade Zone factories using the “culture of attempting to contain any problem within its boundaries” (Amerasinghe, 1999: 170). Trade Union formation is discouraged.17 The most common form of worker participation in management in the garment industry within the Free Trade Zones is in the form of Joint Consultative Councils or Employees’ Councils which are, in principle, established to encourage the mutual cooperation of the employer and employees, to promote employee welfare and to settle disputes.18 The Council is purely a consultative body and its decisions are not binding on the management. They are ineffective in influencing the management in regard to worker issues, and this has severely strained the relationship between employers and employees.

17 18

In fact the first trade union in the free trade zone was formed in January 2001. The Joint Consultative Workers’ Council consists of seven office bearers, four members nominated by the employer and three members appointed by election.

216 GARMENT INDUSTRY IN SOUTH ASIA

4.6 Restrictive/stringent labour regulations The consensus amongst the majority of garment manufacturers is that the current labour regulations governing employment are too restrictive and adversely affect Sri Lanka’s international competitiveness. The Government of Sri Lanka advocated specific legislation applicable to the garment manufacturing industry in September 1963, covering particular employment terms and conditions specific to the garment trade. Similarly, the Wages Board for the Garments Manufacturing Trade was set up in October of the same year. Regulations were based on legislation such as the Trade Unions Ordinance No. 14 of 1935, the Wages Board Ordinance No. 27 of 1941, the Factories Ordinance No. 45 of 1942 and the Industrial Disputes Act No. 43 of 1950, amongst others. While some of these regulations have been subject to minor revisions, others have remained as they were, thus making them an impediment for modern day factory operations. Under the Termination of Employment of Workmen Act (TEWA), employers must follow a stringent process to dismiss workers, which industrialists are strongly opposed to, and prefer a more structured, but flexible system (Gunatilake and Kelegama, 1996). In addition, the Factories Ordinance No. 45 stipulates that workers can only be employed for 100 overtime hours per year, which has proved to be impractical in the manufacturing process and has thus limited Sri Lanka’s overall productivity compared to competing manufacturing nations. Factories in the Free Trade Zone follow it in the breach. Many employees are willing to work through the additional time-period in specified shifts for appropriate remuneration. As international buyers of garments also strictly assert that local labour regulations must be adhered to, as a pre-condition for purchasing the goods, this places the manufacturer in an inflexible situation. A minority of ‘strong’ manufacturers has been able to circumvent this international pressure by developing a close understanding with their buyers; however, for the majority of manufacturers, buyers cannot accept the stringency of the local labour regulations. The Sri Lanka Apparel Exporters’ Association has appealed to the government to amend this Act to suit the modern day needs of the garment industry (SLAEA, 2000a). The employer is legally bound to consider the outcomes of collective bargaining with a recognized trade union (more than 40 percent worker representation). Many industrialists are opposed to this legislation on fears of the workforce becoming politicized by large, external, politically motivated trade unions. However, the minority of ‘stronger’ manufacturers maintain that positive and solid employer - employee relations within an organization should result in minimal conflicts and disputes, regardless of such amendments. 4.7 Low investment in technology The garment manufacturing industry has become a hi-tech industry worldwide. For the Sri Lankan garment industry to develop a competitive edge, it has to shift to higher value

SRI LANKA 217

added products. In order to achieve the quality standards required to penetrate higher value markets, it is necessary for manufacturers to invest in advanced technology. Without such investment, garment manufacturing will be limited to the area of standard garments where they are currently shielded by the quota system. Once this protective umbrella is lifted, Sri Lankan manufacturers will have to face intense competition from rival countries, which can produce standard garments at lower costs. Large international competitors in the higher value added segment of the global garment market are technology-driven and this has given a “wake–up call” to Sri Lankan manufacturers to upgrade their technology in order to remain competitive. The manufacturers are generally unwilling to acknowledge the importance of investment in technology due to the massive capital costs they would have to incur and the resulting increases in overhead costs. They ignore the fact that initial high costs can be outweighed in the long run by gains in productivity, quality and subsequently higher margins. This unwillingness and inability is seriously constraining the growth and competitiveness of garment manufacture in Sri Lanka. One reason for the slow switching to new technology is that the garment industry was promoted by the state as an employment generator. The 200 GFP virtually rubber-stamped this view and under the programme the ratio of workers: machines was 2.5:1 which is quite high. In fact, the 200 GFP has ballooned the Sri Lankan overall average of workers:machine to 1.8:1 compared to, for example, Hong Kong, which has the ratio of 1.2:1. There are cases in Sri Lanka where, for example, a stitching of a pocket is done by 10 workers whereas it could be done by one person with a suitable machine. Most garment factories continue with Juki sewing machines with an average age of five years. Some medium size factories have invested in new cutting machines and high speed sewing machines during the last 6 years. In fact, only 5-10 factories have invested in CAD/CAM machinery during the last three years. The Government has imposed a cess of Rs. 1 per piece of garment to develop a consolidated fund with a view to upgrade technology in the industry. The accumulated funds have been utilized for budgetary management instead of upgrading technology in the industry. The Sri Lanka Apparel Exporters Association has suggested to the Government that a technology upgrading fund should be put into operation to address the current needs. The matter remains pending. There is a tendency among ‘weak’ garment manufacturers to spend on personal luxury of the owners, such as purchasing a BMW car, and also to wait till the last moment in 2005 to do the necessary switching to high technology. The ‘stronger’ enterprises maintain that emphasis should be placed on long-term and progressive financial management in order to absorb, and benefit from, the costs of investment. 4.8 Slow turn-around time Despite the fact that the Sri Lankan garment industry has achieved phenomenal growth over the last two decades, the development of backward linkages has been poor. The industry is heavily dependent on imported inputs, such as fabric and accessories, and over 90 percent

218 GARMENT INDUSTRY IN SOUTH ASIA

of fabric requirements are imported. On average, over 65 percent of material inputs are imported and this comprises almost 70 percent of manufacturing costs (Kelegama and Foley, 1999). As shown in Figure 6.4, the import costs to the garment industry have been increasing against garment exports over the past decade. Figure 6.4: Total value of export of garments and value of imports to the garment industry, 1990-1998 2500

n n

2000 n

n

1500

w

n n

n n

500

w

n

1000

w

w

w

w

w

w

w

0 1990

1991

1992

1993

w

1994 Import

1995 n

1996

1997

1998

Export

Source: Sri Lanka Customs.

Other garment manufacturing countries such as Hong Kong, South Korea and Taiwan, which have their own domestic sources of required inputs, in addition to high productivity, have a significant comparative advantage in production. Most inputs needed for the Sri Lankan garment industry – fabric and accessories, like buttons and zippers are imported from other countries. Buyers normally have their own suppliers. They often direct manufacturers to purchase garment inputs from these sources. The cost of raw materials, which the industry depends on the sources outside the country, has been increasing steadily in real terms. The manufacturers must thus explore other avenues to maintain competitiveness. In addition, importation of raw materials results in longer lead time, which has become another serious threat to the international competitiveness of the industry. Lead time of Sri Lanka’s garment exporters also is longer than that of some of her competitors. According to Sri Lanka’s industrial sources, the lead time, after an order is placed is 80 to 120 days, while in other garment producing countries, it is less than 60 days (Kelegama and Foley, 1999). It would be vital therefore, to reduce lead time to 30 – 60 days from 80 –120 days to compete effectively in a world of free trade.

SRI LANKA 219

Sri Lanka made concerted efforts to promote backward linkages, particularly fabric industries, in the early 1990s. But attempts failed since the conditions required for high capital intensive industries were not prevalent in the country. Kelegama and Foley (1999) argued that state-led ‘forced’ promotion of backward linkages could be counter-productive and in fact could kill the garment industry. They argued that formation of backward linkages in a developing economy like Sri Lanka is time dependent and will emerge in the long run with industrial deepening. Since the late 1990s the government has given less emphasis on promoting backward linkages. On the recommendation of the Sri Lanka Apparel Exporters Association, the Government is attempting to reduce the turnaround time by streamlining the documentation requirements and procedures and by computerizing customs office by introducing an electronic data flow system. The new trend in the industry is ‘Just-In-Time’ production, whereby the buyer minimizes the fashion risk by placing the orders closer to the season and in smaller quantities thus transferring the financial risk to the manufacturer, which demands a more different and more efficient linkage between the fabric suppliers, contractors, manufacturers and retailers. In other words, the orders have become smaller, lead times have become shorter, and buyers demand not a simple product but an ‘on-line service’. It is a quick response technique. To face this situation, the ‘stronger’ factories have introduced ‘supply management’ techniques and effectively networked with the required players of the production process. Moreover, they practice designing process through internet or on-line services and get the approval from the buyers. Very little has been done by the ‘weaker’ factories to face this new challenge. 4.9 Low garment factory standardization Under the current international competitive pressures, the standardization of garment factories has become essential to conform to the required standards of major international buyers. Although the Sri Lanka Apparel Exporters Association has ensured that the basic minimum standards in regard to fire safety, etc. are maintained, there are a number of shortcomings in most of the factories at present. For example, basic facilities such as toilets, ventilation, and working space are not up to international standards in most factories. In the post-MFA era, ISO 9000 Certificate may become an important factor for most buyers. Moreover, factory inspection has already started before securing orders by major international buyers. Many factories, which are currently operating, do not comply with factory standards and will lose potential market share as a result. While some consider such standards to be non-tariff barriers, others take it as an opportunity to improve productivity in the production process. The lack of standardization of factories has impeded the potential to achieve technical economies of scale by designing production lines. It is difficult for the industry to enjoy financial economies of scale such as obtaining better discounts on orders of raw materials, or enhanced prices for their finished products without adhering to international standards.

220 GARMENT INDUSTRY IN SOUTH ASIA

4.10 Lack of professionalism in the industry At the initial development stage of the garment industry, more than 90 percent of the Sri Lankan entrepreneurs managed their enterprises as family businesses. Most of the factory activities, purchasing and higher level management were conducted by themselves and amongst many enterprises it continues to be the case even today. There is an evident lack of professionalism in the industry as most entrepreneurs are unwilling to invest in human resources to manage the various functions of their business professionally. Besides, financial discipline and planning have not been systematic and efficient either.

5.

Impact of globalization on garment industry

Given that there are a number of obstacles to overcome and that the industry is faced with the pressures of globalization and the phasing-out of the quota system, the next question that is commonly asked is “How will the garment industry be affected by the phasing out of the MFA and globalization?.” While it is difficult to predict with certainty the future impact of the phasing-out of the MFA and the advent of globalization on labour in the garment industry, Exhibit 6.4 highlights some of the likely impacts and outcomes. Exhibit 6.4: Possible impact of globalization on garment industry Possible impacts

Response for/against

Is the Garment Industry likely to ‘shrink’?

Yes, the ‘weaker’/non-competitive enterprises may go out of production. Although there may be some unemployment in the short-term, labour is likely to be absorbed into the remaining ‘strong’ and expanding enterprises in the medium and long term. While there is no clear evidence to indicate whether working conditions will/will not deteriorate in the short-term, it is likely that, in the long-term, labour conditions will improve due to increasing global pressure from buyers for adherence to international labour standards and the need to comply with WTO regulations. No, because the national labour regulations stipulate minimum wages. Yes, labour productivity in the industry can be increased by improving job quality.

Is unemployment likely to result?

Are working conditions/job quality likely deteriorate?

Are wages likely to be reduced? Will there be a link between improved job quality and improved productivity? Source: Based on interviews conducted for the study.

5.1 Is the garment industry likely to ‘shrink’? While there are diverse opinions amongst industrialists and others associated with the garment industry, there is a general fear that the industry will suffer significantly once

SRI LANKA 221

quotas under the MFA are phased out. Some surveys reveal that 50 percent of the industry would be forced to close down, because, more than 60 percent of the garment exports still depend on quota-based items, and on an average 80 percent of the small and middle level factories do not operate according to the demand in the exports market. Some of the reasons for the fears expressed are described below. The majority of enterprises in the Sri Lankan garment industry are “weak” in terms of low labour productivity, poor working conditions and factory standards, demonstrating a lack of professionalism and financial discipline and poor work ethic, as discussed in preceding sections. In addition, lack of investment in technology and low levels of value addition as well as weak relationships with buyers are also factors that make small and medium enterprises vulnerable to a quota free environment. Quota utilization is restricted to the hot categories; consequently, annual quota utilization rate is around 60 percent . This indicates that Sri Lanka has still not gone into the production of variety of items for which a quota is available. In other words, it is also an indication of the supply potential. Buyers can now access unlimited supplies from anywhere in the world. As long as Sri Lanka concentrates mainly on the manufacture of standard garments (which are dependent on price), buyers are at liberty to purchase cheaper items from countries; such as, China, India and Bangladesh. Unless the supply potential is improved by diversifying the product range, it is going to be difficult to survive in a quota free environment for small and medium scale industries. Furthermore, as buyers are now extremely particular about factors other than the product itself (i.e., labour conditions, factory conditions, environmental concerns, etc.), it is likely that buyers may not give preference to Sri Lankan manufacturers if Sri Lanka does not meet these requirements. Most garment manufactures have still not shifted from an export marketing mode to an international marketing mode. Fonseka and Fonseka (1998) have shown that climbing in the export ladder has been slow with very few brand names. Due to the geographic distance from Sri Lanka’s major markets which are US, EU and Canada, it has become necessary to establish promotional outlets in these markets in order to maintain convenient accessibility and fast transactions with buyers. So far very little has been done by the Sri Lanka Apparel Exporters Association with the Sri Lanka Foreign Ministry to establish such outlets via the Sri Lankan Diplomatic Missions. Besides, the formation of lobby groups that are favourable to Sri Lanka in the foreign markets has been slow to emerge. The entire marketing strategy for the garment sector needs a radical transformation. Sri Lanka has not felt the impact of the phasing out of the MFA yet. Developed countries have not strictly adhered to the mechanism of phasing out the MFA. For instance, by 1 January 1998, compared to the target of 33 percent of product integration, USA and EU had integrated only 1 percent and 7 percent, respectively (ESCAP, 2000: 71). Moreover, developed countries have exploited a loophole of the MFA, where ATC does not provide

222 GARMENT INDUSTRY IN SOUTH ASIA

any obligation on countries to limit their integration to particular products subject to restrictions. It has been estimated that the products to be relaxed by 2002 constitute only about 4 percent of all restricted products currently exported by Sri Lanka to USA. The remaining 96 percent of the restricted products are expected to be under restraint until the end of 2004 (Weerakoon and Wijayasiri, 2000). Thus a sense of complacency has crept in for last minute adjustment. This can have severe adverse consequences. However, the freight rate increases resulting from the terrorist attack at Colombo airport in mid-2001 and the terrorist attack in New York in September 2001 have triggered a business re-engineering exercise in most Sri Lankan garment factories thus taking off some of the complacency that had crept in earlier. 5.2 Is unemployment likely to result? In an effort to answer this question two scenarios need to be considered — the short term and medium-long term. In the short term, there is likely to be some unemployment. Why? l The survival of each garment manufacturing operation is based solely on the ability to attract and maintain orders from buyers. As the quota system is phasedout, if buyers turn to other countries (for some of the reasons highlighted earlier), the ‘weaker’ Sri Lankan manufacturers (of standard garments) may face tough competition to obtain orders. If they cannot maintain orders over a period of time, their factories will become unprofitable and they will be forced to wind up operations. The likely impact is that such businesses will have to claim redundancy and retrench workers, which is legally acknowledged by local labour regulations as the employers’ right in such situations. Compensation may also have to be paid to workers, which is also covered by local labour regulations under specified conditions. However, in the medium-long term, some labour will be absorbed into the remaining strong and expanding enterprises. Why? l In the medium-long term, ‘stronger’ enterprises will have the opportunity to expand further as quota barriers are lifted, and given the high quality of their product, the high level of value addition and good relationships with buyers, they can obtain larger volumes of unrestricted orders from these buyers.19 To be able to increase their capacity to cater to the increased demand, these enterprises will have to expand their factories and production as well as employ existing skilled labour. Since most large factories are automated, their labour absorption capacity will be low especially of unskilled labour.

19

This argument is generally prevalent among authorities, and the Director General of the BOI himself supported this view in an interview (see Business Today, Vol. 3, No. 10, February, 1999).

SRI LANKA 223 l

As there is currently a high rate of labour vacancies in the garment factories, the expansion of these enterprises in the post-quota era will allow for some of the excess unskilled labour to be absorbed.20 Moreover, Sri Lankan industrialists now functioning in countries like Bangladesh, Madagascar, etc., are planning to expand their units in Sri Lanka once the quotas in those countries are exhausted. These units too will absorb some labour.

5.3 Are working conditions and job quality likely to deteriorate? Once again this question can be viewed from a short term and a medium-long term perspective. In the short term: l During the short-term or transition period after the quotas are phased-out, there is a strong possibility that working conditions could deteriorate. As the volume of orders start declining (in standard garments especially), manufacturers will not be able to maintain the same facilities for their employees. Most manufacturers are likely to try to minimize costs by reducing workers’ allowances, facilities and other costs (as salaries are protected by labour regulations). However, this is likely to prevail only temporarily as they will be forced to wind up their factories if they are unable to obtain and maintain orders from buyers. However in the long term, working conditions are likely to improve. Why? l One of the main reasons working conditions will improve is the increasing global pressure. Most of the end users of garments are in Western countries. They are becoming concerned on issues such as labour and environment standards in developing countries where garments are manufactured. These consumers place increasing demands on international sellers of clothing to purchase from manufacturers in developing countries who adhere to internationally acceptable labour and other standards. Moreover, buyers are also concerned about legally binding international conventions. Consequently, buyers are now starting to insist that local manufacturers adhere strictly to local labour regulations as well as accepted factory standards and working conditions. In addition, they are beginning to implement tough inspection procedures and, in most cases, are willing to travel to production sites regularly to ensure that these standards are being maintained. l Workers themselves are now demanding better working conditions in their workplaces and will continue to do so in the future as well. For example, in January 2001, the first Trade Union in the Free Trade Zone came into operation. Employers are also legally bound to take employee rights and requests into consideration. 20

There are averages of 15 to 20 vacancies in 80 per cent of the garment factories with a greater number of vacancies in the sewing machine operator grades.

224 GARMENT INDUSTRY IN SOUTH ASIA

5.4 Are wages likely to be reduced? Wages are not likely to be reduced. The national labour regulations, specifically the Wages Board Ordinance No. 27 of 1941, strictly stipulate minimum wages, which cannot be reduced. These regulations are strictly enforced throughout the country and are based on international conventions. Wages are likely to continue to increase as they have been doing in the recent past. The stipulated minimum wage rate is around Rs. 3000 per month per worker (US $ 33). In addition, there are also other allowances, which vary from factory to factory, location to location and according to labour performance. 5.5 Will there be a link between improved job quality and improved productivity? Labour productivity in the industry can be increased by improving job quality. How? l Enhanced job quality and working conditions have undeniably been linked to improved labour productivity, as explained earlier. The failure to recognize this fact has been one of the significant weaknesses of Sri Lanka’s garment industry and has undoubtedly played a role in the erosion of Sri Lanka’s competitive advantage. l Increases in global pressure will definitely result in a need to improve labour productivity which will, in turn, motivate manufacturers to improve the job quality of their workers through better investment in human resource development, well structured incentives and allowances, and improved dialogue with workers.

SRI LANKA 225

6.

Key strategies for improved productivity and competitiveness in Sri Lanka’s garment industry

Strategy

Implementation

Productivity

Labour productivity is the key factor determining the levels of international competitiveness of Sri Lanka’s garment industry. Factor productivity has been traditionally low, except for the cost of labour, which is now increasing. Proper factory designs, improved working conditions, improved incentive pay structures must be developed in order to improve productivity and to secure a competitive advantage in this industry. Fabric Base Industry A strong fabric-manufacturing base (for accessories and trims) is required to support the garment export sector and to reduce costs of imported raw materials. The lack of such base is a serious impediment to the future development of the garment industry. Infrastructural support may be required to facilitate the development of such a capital intensive industry. Information Technology A future challenge for garment manufacturers is to now adopt the internetdriven approach to speedy delivery and more efficient service in the export of garments. Many of the leading buyers and retailers in the US and Europe now operate e-commerce sites. As a garment manufacturing country competing globally, Sri Lanka will have to access this route also to remain competitive and to ensure faster reaction times, shorter lead times and more flexible manufacturing. Human Resource Development Human resource development is considered one of the most important strategies for improving labour productivity in this labour-intensive industry. More attention is required to improve the skills of the workforce and their standards of work. Labour training programmes need to be improved to maintain high labour productivity and quality levels in the industry. While there are several institutions conducting similar training programmes, the quality and duration of the programmes need to be revised. Private sector involvement in training should be increased in the future as well. In addition, there is room for significant improvement of the skills of middle and lower management. Investment in Technology The industry must address the need to invest in technology in order to improve productivity and competitiveness. The acquisition of new technology also requires the efficient implementation of technological know-how, transfer of product technology, quality control and marketing of the finished products. Therefore, prior planning and sound financial discipline are vital in prioritizing and planning for future investments in technology. Product Differentiation Product differentiation is an important strategy in maintaining and developing orders in an internationally competitive environment. While most Sri Lankan garment manufacturers are producing standard garments, which are low value added products, it is essential to move into the higher value added niche clothing markets. It is also essential for manufacturers to specialize in a few higher value clothing categories to reap higher margins, given the inability to be price competitive in standard garments. contd.

226 GARMENT INDUSTRY IN SOUTH ASIA

Key strategies for improved productivity and competitiveness in Sri Lanka’s garment industry (contd.) Strategy Product Integration

Code of Business Conduct

Improving factory standards and working conditions

Moving to higher value products

Improving Product Quality

Improving backward linkages

Building Export Alliances

Implementation Garment manufacturers now need to provide accessory products along with garment items, which increase the level of value addition. Buyers expect a wider spectrum of ancillary services related to the business, and it is important to market clothing and accessories as one complete package in order to establish a competitive advantage. The recognition and adoption of an internationally accepted code of business conduct is important to maintain high levels of factory and working conditions, to improve productivity and to remain competitive. Manufacturers can now obtain a ‘Certificate of Conformity’ locally to guarantee that certain conditions are met. Such industry-wide conformity to standards helps to build international confidence in the Sri Lankan garment industry and improves the ability to compete in the global market with high levels of business ethics, integrity, social accountability, quality, value and service. Factories, which are not standardized, have been impeded from achieving technical economies of scale through poor production line design. At present, it is difficult for the industry to enjoy financial economies of scale such as obtaining better discounts on orders of raw materials and better prices for their finished products. In addition, there is a lack of knowledge or reluctance on the part of the manufacturers to acknowledge the fact that satisfactory working conditions lead to higher yield and is a major contributing factor. Improved working conditions are a critical factor in enhancing the productivity of this industry. The domestic value-addition of this industry is extremely low due to high dependency on imported raw materials. The Sri Lankan exporters will have to target middle and upper level markets and will have to move from “export marketing mode” to “international marketing mode”. Placing increased emphasis on quality is important, as Sri Lanka needs to develop a non-price based comparative advantage in garments. As buyers and customers in Western markets are now more quality conscious, Sri Lanka can cater to this demand by concentrating more on this area. In order to reduce lead-time due to the reliance on imported raw materials, the development of backward linkages is essential. Quick delivery period and quick response times are taken as given in a highly competitive trade environment, and heavy reliance on imported raw materials can seriously affect the industry in meeting these demands. The small and medium scale garment enterprises can form export alliances, as their production is not unique and is mainly low value added, standard garments. As these manufacturers are hampered by a lack of funds for promoting their products and attracting buyers, a mutually beneficial system can be developed to reduce the time and cost burden.

SRI LANKA 227

Annex of Tables Table A6.1: Composition of exports (percentage)

Agriculture Tea Rubber Coconut Other Agriculture Industrial Garment Gems Other

1978 88.2 48.5 15.3 12.9 5.5 14.7 3.6 4.0 2.4

1980 61.8 35.1 14.7 7.0 5.1 33.8 10.4 3.8 0.6

1985 52.5 33.2 7.1 8.5 3.8 39.5 22.0 1.6 5.6

1990 37.7 25.9 4.0 3.6 4.2 54.2 32.8 3.9 4.3

1995 21.8 12.6 2.9 2.7 3.5 75.4 48.7 2.0 0.8

1998 22.9 16.4 0.9 2.0 3.6 74.9 52.0 1.2 0.9

1999 20.5 13.4 0.7 2.8 3.6 77.0 52.6 1.3 1.0

2000 18.2 12.6 0.5 2.2 2.8 77.6 54.0 1.7 2.5

Source: Estimated from data available from the CBSLAR (various issues).

Table A6.2: Share of industrial output (as percentage of total) ISIC category 31 32 33 34 35 36 37 38 39

1978

1980

1985

1990

1995

1999

2000

Food, beverage and leather 29.5 Textile, wearing apparel, etc. 11.4 Wood and wood products 1.4 Paper and paper products 4.2 Chemical, petroleum, etc. 37.0 Non metallic mineral products 6.7 Basic metal products 2.5 Fabricated metal products, etc. 6.7 Other manufactured products 0.6 Total 100.0

21.3 10.5 1.6 2.6 51.4 6.3 2.6 3.4 0.3 100.0

27.1 24.6 1.8 3.1 33.9 4.8 0.3 4.1 0.3 100.0

25.3 32.2 0.8 2.2 24.4 8.7 1.2 4.8 0.3 100.0

23.8 43.1 0.8 2.0 16.6 7.2 0.7 3.4 2.3 100.0

23.8 44.9 0.7 1.5 15.7 6.7 0.8 3.6 2.3 100.0

22.8 46.6 0.7 1.4 16.1 6.1 0.7 3.4 2.1 100.0

Source: Estimated from data available from the CBSLAR (various issues).

Table A6.3 (a): Rate of growth of export earnings (US$ terms) , 1990-1999

Agriculture Export Industrial Export Textile & Garment Manufacturing

1990

1991

1992

1993

1994

1995

1996

1997

1998

17.9 31.2 28.4 27.4

-11.0 19.4 28.0 22.7

-5.7 42.5 51.0 46.3

8.2 19.1 16.2 18.4

7.3 14.3 10.0 14.9

18.1 19.6 19.4 20.2

16.1 5.0 2.9 4.3

10.4 14.3 19.6 15.0

2.3 3.2 8.2 4.1

Source: CBSLAR, Various Issues

228 GARMENT INDUSTRY IN SOUTH ASIA

Table A6.3 (b) : Textile and clothing exports (as a percentage of total and industrial exports) Year

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Total export US$ Mn 1904 1933 2337 2784 3174 3613 3993 4639 4735 4609 5522

Industrial exports US$ Mn 1032 1192 1680 2047 2372 2721 2936 3436 3544 3550 4283

Textile and clothing exports US$ Mn

Percentage share of total export

631 762 1114 1323 1457 1657 1752 2172 2316 2430 2710

33 39 48 47 46 46 44 47 50 53 49

Percentage share of industrial export 61 64 66 65 61 61 60 63 65 68 63

Source: Annual Report Central Bank of Sri Lanka, Various Issues.

Table A6.4:

Global market share of Sri Lankan garments (as a percentage of total export earnings)

Destination

1980

1987

1996

1997

1998

1999

2000

USA EEC Japan Canada Switzerland S. Korea Norway Australia Middle East Other

54.60 24.10 0.50 n.a n.a n.a n.a n.a. 3.80 17.0

64.60 22.90 0.30 n.a. n.a. n.a. n.a n.a 1.00 11.2

58.68 35.53 0.78 2.21 0.36 0.52 0.27 0.40 n.a 1.25

61.62 33.75 0.53 1.76 0.37 0.11 0.26 0.50 n.a 1.69

64.19 31.47 0.40 1.66 0.21 0.02 0.24 0.43 n.a. 1.39

60.5 34.9 0.40 1.40 0.20 n.a n.a 0.40 n.a 2.20

61.97 32.87 0.43 1.66 0.18 0.07 0.17 0.43 n.a 2.22

Source: CBSLAR, Various Issues and SLAEA, Various Issues.

SRI LANKA 229

Table A6.5: Garment exports: quantity and value Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Quantity (Million pieces) 51.51 58.64 65.98 84.09 150.66 156.16 171.31 198.89 185.02 185.17 212.44 241.84 315.77 362.59 413.56 447.63 471.50 312.47 319.12 350.47 468.30

Total value (US$ mn.) 101.4 147.0 161.1 185.1 291.9 263.0 276.8 286.3 411.2 420.8 619.6 742.8 1069.0 1258.1 1379.5 1569.3 1654.3 2052.5 2203.6 2205.0 2710.6

Total value (US$ mn.)

Per unit value (Rs )

1826 3021 3435 4627 7535 7899 9629 12387 13581 16831 24933 31627 49176 62349 68945 84806 93814 121083 142332 155214 20635.9

35 51 52 55 50 51 56 62 73 91 117 131 156 172 167 189 198 387 446 443 440

Note: Data from 1997 on ward was taken from the Journal of Sri Lanka Apparel Exporters Association. Source: Ministry of Industrial Development (Textile Division), Textile Statistics of Sri Lanka, various issues.

Table A6.6: Revealed comparative advantage for Sri Lankan manufacturing industries, 1994 Items Coffee, tea, cocoa, spices Clothing Rubber, crude, synthetic Non metal mineral manufs. Travel goods, handbags Tobacco and manufs. Rubber manufactures, nes Animal oils & fats Crude animal, vegetable mat Textile fibres Fish & preparations Footwear Fruit & Vegetables Textile yarn, fabric etc. Manufactures not classified Source: Abe (1996).

Revealed comparative advantage 18.66 14.78 10.26 4.07 3.92 3.27 2.39 1.93 1.85 1.47 1.46 1.36 1.27 1.14 1.07

230 GARMENT INDUSTRY IN SOUTH ASIA

Table A6.7: Top 15 exports from Sri Lanka, 1999 Rank HS code 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Items

Value US$ million

6204 Women’s or girls’ suits, ensembles, jackets, dresses, skirts, divided skirts, trousers etc 6203 Men’s or Boys’ suits, jackets, blazers, trousers, shorts etc. 6206 Women’s or girls’ blouses, shirts and shirt blouses 6205 Men’s or boys’ shirts 6105 Men’s or boys’ shirts, knitted or crocheted 6109 T-shirts, singlets and other vests, knitted or crocheted 6110 Jerseys, pullovers, cardigans, waistcoats. 6208 Women’s or girls’ singlets and other vests, slips, petticoats, panties, nightdresses etc. 6212 Brassieres, girdles, corsets, braces, suspenders, and garters. 6108 Women’s or girls’ slips, petticoats, briefs, panties, nightdresses etc. 6116 Gloves, mittens and mitts, knitted or crocheted 6111 Babies’ garments, clothing accessories, knitted or crocheted. 6211 Track suits, ski suits, and swimwear 6106 Women’s or girls’ blouses, shirt and shirt blouses, knitted or crocheted. 6104 Women’s or girls’ suits, ensembles, jackets, dresses, skirts, bib and brace.

Percentage share of total garments export

469 282 212 151 128 118 112

21.3 12.8 9.6 6.8 5.8 5.4 5.0

108 86

4.9 3.9

64 64 59 57

3.0 2.9 2.7 2.6

50

2.3

49

2.2

Source: SLAEA, various issues.

Table A6.8: South Asian market share in 16 categories of MFA imports of the US, 1996 Items 335 336 338 339 340 341 342 345 347 348 359 363 369 635 641 642

Cotton women’s coats Cotton dresses Cotton men’s knit shirts Cotton Women’s knit shirts Cotton men’s non knit shirts Cotton Women’s non knit shirts Cotton skirts Cotton sweaters Cotton men’s trousers Cotton women’s trousers Cotton other apparel Cotton /terry towels Cotton other manufactures MMF women’s coats MMF Women’s non knit shirts MMF skirts

Source: Ramaswamy and Gereffi, 1998.

Total US imports US$ million 354.4 403.4 2919.1 1937.2 2137.3 891.6 345.0 336.5 2942.2 2288.7 1157.7 264.2 812.5 1066.9 555.1 419.7

Sri Lanka 7.6 3.2 3.0 1.5 3.2 5.9 7.7 1.2 1.9 2.1 5.3 1.0 1.2 3.3 4.2 4.5

India 6.3 8.4 6.4 2.6 7.7 24.9 7.9 5.6 0.7 0.9 4.7 11.5 21.7 2.6 9.0 10.9

Bangladesh 4.5 3.9 1.7 0.7 7.6 6.5 4.1 0.7 3.5 1.4 10.5 3.4 3.2 3.1 2.8 0.6

Pakistan 0.8 4.1 10.2 2.4 1.3 1.5 1.9 0.1 0.8 0.6 2.1 17.9 15.4 0.7 0.1 0.1

SRI LANKA 231

Table A6.9: Leading apparel exporters to the USA and EU Top apparel exporters to USA21 , Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Mexico China Hong Kong Dominican Rep. Honduras S. Korea Bangladesh Taiwan Indonesia Philippines Thailand India Canada El Salvador Guatemala Sri Lanka

2000 (%) 14.68 7.85 7.82 4.24 4.12 3.95 3.69 3.60 3.58 3.30 3.18 3.12 3.04 2.79 2.60 2.56

Top apparel exporters to EU, Country EU China Turkey Hong Kong India Tunisia Morocco Poland Romania Bangladesh Indonesia Hungary USA Pakistan Thailand

44.5 7.7 6.1 5.6 3.3 3.3 2.9 2.8 2.0 1.9 1.8 1.4 1.1 1.1 1.1

Source: SLAEA, various issues.

Table A6.10: Total value of imports to the garment industry Year

Value of import (US$ Mn)

1990 1991 1992 1993 1994 1995 1996 1997 1998 Source: People’s Bank (1999).

21

Apparel Imports to USA by value US$ mn.

426 612 795 922 1,110 1,237 1,220 1,442 1,395

1996 (%)

Value of export (US$ Mn) 619.6 742.8 1069.0 1258.1 1379.5 1569.3 1654.3 1975.6 2099.9

232 GARMENT INDUSTRY IN SOUTH ASIA

APPENDIX 1 Garment industry project contact list Organization

Contact name

Date

1.

Textile Quota Board Ministry of Industries

Mr Jayamaha (Consultant), Chairman Textile Quota Board

February, 2000

2.

Ministry of Industrial Development

Mr. W.C. Deerasekera (Additional Secretary)

January, 2000

3.

Postgraduate Institute of Management

Dr. Tilak Fonseke (Head Research Division) Post Graduate Institute of Management Mr. Mahesh Amalean (Chairman)

January, 2000

March , 2000

4.

Sri Lanka Apparel Exporters Association

Ms Sunetha Kannangara (Secretary) Mr. Mahinda Madihahewa, Commissioner –General

January, 2000 January, 2000

5.

Ministry of Labour Dept. of Labour

Mr. Gunapala Deputy Commissioner, Labour – Workers’ Education Mr. Sarath Ranaweera, Deputy Commissioner (Labour Standards)

January, 2000

February, 2000

6.

Ministry of Vocational Training and Rural Industries

Mr. Erly Fernando Programme Coordinator Skill Development Fund

March, 2000

7.

Federation of Chambers of Commerce

Mr Lioyd Yapa Director General

January, 2000

8.

UNIDO –Textile Quota Board Garment Meeting

Prof. Lakdas Fernando

February, 2000

9.

Forbes Textiles

Mr. Gihan Nanayakkara Managing Director

February, 2000

10. Dial Textiles Industries

Mr. Neil Umagiliya Managing Director

March, 2000

11. Falcon Apparels (Pvt) Ltd

Mr Mansoor Akbarally

March, 2000

12. Hirdaramani (Industries) Ltd

Mr Janak Hirdaramani Director

March, 2000

13. Exotic Collection Pvt Ltd

Mr Gihan Nanayakkara Director

February, 2000

14. Kings Apparel

Mr. Dissanayake (Chairman) Mr. Gunasekera (Managing Director)

February, 2000

15. Chirathu Garment Industries

Mr. Gunawardene Chairman

February, 2000

SRI LANKA 233 Organization

Contact name

Date

16. TriStar Apparel Exporters Pvt Ltd.

Mr. Shanta Kumara Executive Director

March, 2000

17. MAS Holding (Pvt) Ltd

Mr. Mahesh Amalean Chairman

March, 2000

18. “Kantha Handa” NGO Work related to female labour issues

Ms Siva Ranaweera

March, 2000

19. “Mitura Sevena” NGO-Labour Dispute Handling in FTZK atunayake

Ms Mashida Ibrahim

March, 2000

Author’s discussions with Industrialists, Bureaucrats, NGOs

234 GARMENT INDUSTRY IN SOUTH ASIA

APPENDIX 2 Questionnaire- Sri Lanka garment industry Garment Factory Name

No

1. Company Registration under Board of Investment (BOI)

Yes/No

2. Location, Industrial Zone Out 3. Number of Employees …………………….. 4. Business under Quota or Non quota (Percentage) Quota

Nil

0-10

11-20

21-30

31-40

41-50

51-60

61-70

71-80

81-90

5. Category-wise Business Percentage Standard Garments Non Standard Garments Non Apparel Other 6. Has company developed brand name?

Yes/No

7. If not, What are the brand names used? 1…………………………. 2………………………… 3………………………… 8. Working Condition- Factory Condition Yes A/C Meal Provided Breakfast Lunch Transport Provided Hostel Facility Provided Medical Facility Provided Recreation Facility provided (Gymnasium)

No

91-100

SRI LANKA 235 9. Workers’ Absenteeism and Labour turnover (Percentage) Monthly Absenteeism (%)

1-2%

3-4%

5-6%

7-8%

9-10%

>10%

Labour turnover/month (%)

1-2%

3-4%

5-6%

7-8%

9-10%

>10%

10. Number of current vacancies and grades Operator

Designer

Cutters

Ironies

No. Vacancies 11 Is there workers’ insurance scheme?

Yes/No

12. During the last five Years (1995 to 2000), the number of incidents of Number of Incidences Strikes Lockouts Work to Rule Go Slow Boycott Picketing 13.Export Destinations Country

Percentage

1 2 3 4 5 14. Number of Machines Used CAT/CAM

Sewing machines

15. Availability of Internet facility

Computers

Yes/No

16. Production specification Embroidery

Designing

Printing

17. Access to the raw materials Percentage Locally purchased Imported

Other

236 GARMENT INDUSTRY IN SOUTH ASIA 18 Has the factory recognized Labour Unions Workers Councils 19 Cost of Production As a percentage of total cost Labour Raw material/Fabric Other 20 Productivity Measurements Number of pieces per hour Number of pieces per labour Number of pieces per machine per hour 21. Value Addition of production (Percentage) Nil

90

22. No of employees training per annum Mode of Training

Number of Persons per Annum

Foreign Local In house 23. Expenditure on Human Resource Development (as a percentage of total expenditure) 50

SRI LANKA 237 27. Marketing Strategy / Advertising Mechanism Yes

No

International Magazine Buying House Personal channel 28. Rank these problems in descending order, (Most crucial problem =1) 1 Poor Infrastructure 2 Politicization of Labour 3 Lack of Capital 4 No good Training Institutes 5 Lack of Skilled Labour 6 sluggish manner of public sector supportive services 29. What adjustments have you suggested for the operation after elimination of MFA quota. Check if appropriate 1. Foreign Incumbent 2. Developing Brand Name 3. Downsizing 4. Productivity Improvements 5. Expanding markets 6. Changing production 7. Product Diversification 8. Factory modernization 9. None 30. Remarks.

Profile of garment industries studied Company

No of employees

No of Machines

Annual capacity

Product Range

In house facility

Remarks

T-shirts, Shirts, Jackets, Non- garment items

Embroidery Printing Smocking

80 % non-quota transaction, compliance ISO standard, During the last five years no labour disputes, Main marketsCanada, UK. 95% non quota

1. Forbes Textiles (Pvt) LTD.

275

113

2. Falcon Apparel (Pvt) LTD.

250

150

16,500 Doz BA

Shirts, T-shirts, Uniform

Embroidery

3. Kings Apparels (PVT) LTD.

200

110

360,000 Pcs

Hospital/Hotel Factory Uniform

Non- fashion garment / Uniform etc

4. Janatha Garment Manufacturers Ltd.

726

421

5. Facination Exports (Private) Ltd.

425

200

6. Dial Textile Industries.

3200

7. Exotic Collection (Pvt) Ltd. Prime Collection (Pvt) Ltd. Prime Vision (Pvt) Ltd.

255

160

8.Colmons Garment Industries (PVT) Ltd

1260

500

2.3 million pcs

9. Chirathu Industries

191

109

280,000 pcs

Not standard garments No labour disputes

Embroidery Washing 50,000 Doz

Jackets, pants, Shorts,

No Exact Quantity

No inhouse facilities, hire those if necessary

90 per cent quota UK and USA are main markets

Design Apparel Conditions provided for and non-apparel workers all inclusive Ladies’ Nightwear, Lingerie

Embroidery Printing

Most garments items are non-quota items.

Embroidery Ladies’ Blouses, Overcoats

Embroidery

-No labour disputes during the last five years

contd.

238 GARMENT INDUSTRY IN SOUTH ASIA

APPENDIX 3

Profile of garment industries studied (contd.) Company

No of employees

10.Mas Holdings Bodyline Factory Shadowline Factory Slimline Factory

2400

11 TriStar Apparel Exporters Pvt, Ltd. (Ratmalana Factory) TriStra Group has 26 factories and 6 factories located in Colombo.

750

No of Machines

325

Annual capacity

Product Range

In house facility

Remarks

No exact quantity

Brassieres, Panties Ladies’ Nightwear Baby clothes, Sportswear

Design / fashion wear undergarments

1.2 Million Pcs

Children’s wear, Ladies’ wear, shirts and all items

Cutting to About 70 per cent finishing of quota and 30 per cent garment items non-quota. (Subsidiary Main market - UK factories have inspection done by all the facilities) foreign experts for Embroidery, quality control. printing, All the facilities Smocking, etc. are available for workers

-Over 60% non-quota 35% non quota, No labour disputes, Cat/Cam machine use, Main markets-USA, UK, Holland, Germany.

Note 1: Selection based on the size of the factory according to their work cadre; location of the factory in the city and outskirts of the city, or in the Free Trade Zone, and the apparel and non apparel producers. Note 2: Labour disputes during the last five years were considered (1995-2000). Approximately, 95 per cent of the factories or more had not experienced labour disputes during this period. Note 3: The minimum wages are decided by the Wages Board Ordinance, but in absolute terms, all the factories are paying more than the wages stipulated by the Wages Board. because, there is a movement of labour from lower to higher salary segments. Source: Field surveys and interviews with industrialists

SRI LANKA 239

240 GARMENT INDUSTRY IN SOUTH ASIA

References Abe, S., (1996), “Development of Trade and Investment of Japan to South Asian Countries”, a paper prepared for the Fifth South Asia Forum, February 14-15 1996, Ministry of Foreign Affairs, Japan. Amerasinghe, F. (1998), Employee Relations and Industrial Law in Sri Lanka, Aitken Spence Press, Colombo. Athukorala, P. and S. Rajapatirana (2000), Liberalization and Industrial Transformation: Sri Lanka in International Perspective, Oxford University Press, Delhi. Athukorala, P. (1995), Foreign direct investment and manufacturing for export in a new exporting country: the case of Sri Lanka. The World Economy, 18(4) 543-564. BOI (1995), BOI Incentives, Board of Investment, Colombo. CBSLAR (various issues), Central Bank of Sri Lanka Annual Reports, Central Bank of Sri Lanka, Colombo. Clothing Industry Training Institute (various issues), “Clothing” , Clothing Industry Training Institute, Sri Lanka. Department of Sri Lanka Customs (1999), Sri Lanka Customs Tariff Guide 1999, Policy Planning and Research Division, Sri Lanka Customs, Colombo. EFC (1998), Wages and Fringe Benefits 1998, Employers’ Federation of Ceylon, September 1998, Colombo. ESCAP (2000), Development through Globalization and Partnership in the Twenty-First Century: An Asia-Pacific Perspective for Integrating Developing Countries and Economies in Transition into the International Trading System on a Fair and Equitable Basis, ESCAP, United Nations, New York. Fonseka, A.T. & D.Fonseka (1998), Garment Industry of Sri Lanka: Challenges and Responses, Sri Lanka Journal of Management, Vol. 3, Nos. 3&4, July, December 1998. Pp.250-291. Gunatilaka, R. and S.Kelegama (1996), Study on the Impact of Labour Legislation on Labour Demand in Sri Lanka, Department of National Planning, Ministry of Finance and Planning, Colombo. Kathuria, S. and A. Bhardwaj (1998), Export Quotas and Policy Constraints in the Indian Textile and Garment Industries, Policy Research Working Paper 2021, World Bank, New Delhi. Kathuria, S, W. Martin and A. Bhardwaj (1999), “Implications of MFA Abolition for South Asian Countries”, Paper presented at the NCAER-World Bank WTO 2000 South Asia Workshop, December 20-21, New Delhi. Kelegama, S. (2001), ‘Indo-Lanka FTA: Progress of Sri Lankan Exports in Year 2000’, Sri Lanka Exporter, Vol. 34, June –August. Kelegama, S., P. Samararatne, and M. Knight-John (1999), Productivity and Labour Cost in Manufacturing Industries: Sri Lanka, SAAT, ILO, New Delhi. Kelegama, S. and Fritz Foley (1999), ‘Impediments to Promoting Backward Linkages from the Garment Industry in Sri Lanka’, World Development, Volume 27, No. 8. Kelegama, S. (1997), ‘Risks to the Sri Lankan Garment Industry from NAFTA’ Development Policy Review, Vol. 15, No. 3. People’s Bank- Economic Review (1999), Apparel Industry, Economic Review, June – July 1999, Colombo. Presidential Committee and the BOI (1999), “Safety and Welfare of Export Processing Zone Women Workers”, Special Committee recommendations, Presidential Secretariat, Colombo.

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Ramaswamy, K.V. and G. Gereffi, (1998), “ India’s Apparel Sector in the Global Economy: Catching Up or Falling Behind”, Economic and Political Weekly, January 17, 1998. SLAEA (2000a), Comprehensive Industry Document, Sri Lanka Apparel Exporters Association. SLAEA (2000b), Sri Lanka Garments, Vol. 02, No. 77, Sri Lanka Apparel Exporters Association, Colombo. SLAEA (various issues), Sri Lanka Garments, Vol. 01,02, 03/99, No. 74/75, Sri Lanka Apparel Exporters Association, Colombo. SLCGE (1999), “Garment Gazette” Issues No. 6, June, Sri Lanka Chamber of Garment Exporters, Colombo. Sri Lanka Customs (various years), Data Sheets/Tapes, Colombo. Sri Lanka Labour Gazette (1996), “The Wages Board Ordinance: The Garment Manufacturing Trade”, Ministry of Labour, Colombo. TVEC (1999), Sector Profile – Garment Industry, Industry Sector Profile Series, Issue No. 1, November 1999, Tertiary and Vocational Education Commission, Labour Market Information Unit, Colombo. UNIDO (1998), International Yearbook of Industrial Statistics, United Nations Industrial Development Organization, Edward Elgau Publishing Ltd, Cheltenham, UK. UNIDO (2000), Master Plan Study on Industrialization and Investment Promotion in Sri Lanka – Apparel Industry (Phase 11), Integrated Industrial Development Support Programme, May. Wellawatte, J. (1999), ‘The Workers in the Ready-Made Garment Industrial Sector: A New Way of Life’, Economic Review, Vol. 25, Nos. 3 & 4(June/July), People’s Bank. Colombo. Weerakoon, D. and J. Wijayasiri (2000), ‘WTO and the Textile and Garment Sector: Implications for Sri Lanka’, South Asia Economic Journal, Vol. 1, No. 2. World Bank (1997), South Asia’s Integration into the World Economy (prepared by Pigato Miria et. al.), The IBRD/ World Bank, Washington, D.C.

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7

Sub-regional meeting on competitiveness, productivity and job quality in the garment industry in South Asia, Kathmandu, 25-26 September 2001

Proceedings and conclusions A two-day Sub-regional Meeting on Competitiveness, Productivity and Job Quality in Garment Industry in South Asia was organized by the ILO (International Labour Organization) in Kathmandu during 25-26 September 2001. A copy each of the programme and the list of participants is attached at the end of these proceedings. Thirty-one participants from five South Asian countries - Bangladesh, India, Pakistan, Sri Lanka and Nepal - representing various government agencies (such as Ministries of Labour, Industries, Textile and Commerce), workers and employers’ organizations, garment manufacturers and exporters’ associations, and resource persons participated in the meeting. The purpose of the meeting was to discuss the issues being faced by the garment industries due to impending removal of the quota system upon termination of the MFA (Multi Fibre Agreement) by the end of the year 2004. It was expected that the cross-country experiences of the participating countries would help devise ways to minimize the adverse impact on job quality and to further improve productivity and competitiveness.

1.

Inauguration

The workshop was opened by Mr. Palten Gurung, Minister for Labour and Transport Management, who stated that development of a strategy to improve productivity and job quality in the garments industry has become urgent since increasing globalization has already started to place pressures on the quantity and quality of employment. The Minister further stated that the Ministry of Labour and Transport Management in Nepal realizes the importance of social dialogue for enhancing productivity. The Labour Act and the Trade Union Act are being amended in Nepal to further increase tripartite coordination. He urged the participating countries to develop a strategy for alternative options to compete in the global market since the garment industry in general has been so far dependent on quota for its growth. Earlier welcoming the participants, Ms. Leyla Tegmo-Reddy, Director, ILO Kathmandu pointed out that the ILO has been naturally extremely concerned about potential job losses in large numbers and the deterioration of the working environment as a result of competitive pressures resulting from phasing out of MFA. Speaking on behalf of the SAARC Secretary General (South Asian Association for Regional Cooperation), Mr. Amit Dasgupta, SAARC

244 GARMENT INDUSTRY IN SOUTH ASIA

Secretariat Director for Economic Trade and Transport, stated that there is a need for greater degree of coordination among apparel industries in South Asia. He suggested that SAARC Secretariat could play a role in facilitating the process of setting up a mechanism for greater cooperation and complementarity among the garment industries across the sub-region. Employers and workers’ representatives spoke about the importance of improving efficiency and job quality in the industry, for which social dialogue would play an important role. Mr. Suraj Vaidya representing the FNCCI and EC (employers) in Nepal and Mr. Jitendra Lal Karna of DEFONT (workers) also spoke during the occasion. Mr. Vaidya pointed out that there is a need for modernization of technology and management system and the whole working attitude. He stated that all three social partners – the government, entrepreneurs and the workers have a stake in the survival of the garment industry, and there is a need for all these partners to work together.

2.

Technical sessions

Two technical presentations were made by Mr. Gopal Joshi, Senior Enterprise Specialist SAAT New Delhi. Providing an overview of the garment industry in South Asia on the first day, Mr. Joshi pointed out that there has been a phenomenal rise over the last few years in garments exports and employment in the industry, with large percentages of female workers (as much as 90% for Bangladesh and Sri Lanka) joining the manufacturing jobs. These jobs are, however, increasingly in jeopardy as the garment industry has grown on the basis of the availability of the quota from developed countries, which is going to be removed at the end of the year 2004 upon termination of MFA. He further stated that as the competitive pressures increase, the garments industry in South Asia can take the ‘low road’ of price competitiveness with low wages and bad working environment or ‘high road’ of high value addition and better job quality. During the second presentation on international perspective, Mr. Joshi pointed out that there is a trend of increasing regional trade to benefit from proximity and flexibility and from integration and complementarity across the countries and continents at the level of enterprises so as to enhance their competitive position in the world market. The industries operating in the fringes of value chain, offering heavily discounted commodity, are bound to come under heavy pressures as globalization takes effect. Therefore, it is imperative that both the countries and industries need to increase their cooperation and complementarity to increase their competitiveness.

3.

Country presentations

Country presentations describing the state of employment, job quality and competitiveness in the respective garment industry in five South Asian countries were presented by the respective resource persons.

PROCEEDINGS AND CONCLUSIONS 245

3.1 Bangladesh Presenting the country paper on Bangladesh, Dr. Nasreen Khundkar pointed out that the growth of garment industry in Bangladesh is the direct result of the MFA and other trade agreements. It has had free market access to EU markets and the US which also gave Bangladesh sizeable quota thus turning it into one of the important suppliers to both American and European markets. The economic importance of the garment industry for Bangladesh is signified by the fast rise in its share from 4 percent of the total exports in 1983 to 76 percent in 1999-2000. The industry employs 1.5 million workers, 90 percent of whom are female workers. Once quota is removed, Bangladesh is expected to suffer from its lack of textile industries and poorly developed infrastructure. Although Bangladesh seems to enjoy the low wage cost advantage, it also suffers from low productivity and poor job quality. Dr. Khundkar predicted that the initial impact of the phasing out of the MFA would be highly disruptive. Thousands of jobs will be at stake, particularly for women workers, and working conditions are expected to further deteriorate. The strategy for further improving competitiveness of Bangladesh garment industry should include: (a) market diversification; (b) product diversification to include high value fashion wear; (c) backward linkages to reduce the high dependence on imported inputs; (d) productivity improvement through improved job quality; and (e) responsiveness to consumer ethics and labour standards. 3.2 India Presenting the country report on India, Dr. M. Vijayabaskar stated that in the initial phases of Indian apparel exports, USSR and Eastern Europe were the largest markets, but by 1999 a major share of Indian garments exports was destined to the US and European markets. Indian exports to these counties have been subject to quantitative restrictions. Since quota given to India in most developed countries have been fulfilled, analysts expect that the removal of the MFA restrictions would enhance the ability of Indian exports to penetrate these markets. Exports to non-quota countries have recently grown at a much higher rate than that for quota countries, indicating a degree of competitiveness of Indian apparel. However, 51 percent of the garment exported continues to be governed by quota restrictions. The presentation outlined the possible elements of the strategy to be followed in the post-MFA environment for enhancing competitiveness as: (a) promotion of mass marketing for achieving the scale of economy; (b) enforcement of international labour standards; (c) moving up the value chain by targeting the specific niches; and (d) creation of a competitive environment in the domestic market through promotion of fashion design facilities.

246 GARMENT INDUSTRY IN SOUTH ASIA

3.3 Nepal Dr. Dinesh Pant presented the country study of Nepal. He pointed out that the employment in the garments industry has come down to 25-30,000 workers from 100,000 in early nineties along with decline in the number of garment industries. Remaining jobs are expected to be further threatened as the quota system is abolished since the garment industry in Nepal has grown as a spillover from the neighbouring country. The competitiveness of the garment industry in Nepal is particularly constrained due to transportation costs and low productivity. Workers in the industry state the lack of contract and other rights and benefits normally available to the manufacturing workers. They seem to feel that the situation is further aggravated due to existence of the foreign workers in the industry. On the other hand, employers are likely to seek to reduce the wage costs as the competitive pressures build up after the removal of the quota at the end of 2004. The country report recommended formulation of a national strategy with: (a) focus on high value products; (b) product and market diversification; (c) development of backward linkage industries; (d) completion of dry port projects; (e) utilization of WTO provisions for least developed countries; (f) improvement in human resource management for enhancing productivity; and (g) upgradation of technology and processes. 3.4 Pakistan On behalf of Mr. Asir Manjur, SMEDA (Small and Medium Enterprise Development Authority), Mr. Nabeel Goheer stated that with more than 700,000 workers, the garment industry is the single largest industrial employment provider in Pakistan. The labour force in the industry is dominated by male workers (90 percent) as labour laws in the country have regulatory restrictions on women’s employment, like working hours, maternity benefits, etc. Phasing out of the MFA is likely to open new opportunity in the product segments at the top-end of the textile value chain. At the same time, it would adversely affect the growth of exports from developing countries; such as Pakistan, which are dependent on a limited product range and are competing in the global market on the basis of the price advantage rather than quality. In Pakistan, the existing quota policy not only discourages diversification but also hampers the entry of new exporters through imposition of high entry barriers in the shape of huge investments in quota procurement. In the areas of labour costs and the costs of other inputs, Pakistan is still competitive in apparel manufacturing. The total cost of garments is below the average unit price realization of different competitors. The country report recommended a strategy that would include: (a) human resource development; (b) diversification of export destinations; (c) tapping the regional market; (d) seeking preferential treatment from developed countries as a regional bloc; (e) innovative product development through promotion of design facilities; and (f) instituting liberal import regime for importation of the inputs and equipment

PROCEEDINGS AND CONCLUSIONS 247

3.5 Sri Lanka Presenting the country report on the Sri Lankan garment industry, Dr. Saman Kelegama from IPS stated that the industry has experienced phenomenal growth after the late 1970s and has continued to be the strongest manufacturing sub-sector in terms of its contribution to total exports, foreign exchange revenue, GDP and employment. The quota system has virtually guaranteed markets for many Sri Lankan manufacturers, especially those manufacturing standard garments and are competing on price. This guaranteed period would be over in 2005 with the dismantling of the quota regime, which will compel the industry to compete for its market share in an intensely competitive global market. Posing the question with regard to the likely impact of the phasing out of the MFA on labour in the Sri Lankan Garment Industry, Dr. Kelegama provided the following scenarios based on the responses received from the industry: ü The weaker garment industries are likely to shrink. ü There may be some unemployment in the short term, which is likely to be absorbed into the remaining enterprises in the long run. ü Labour conditions will improve due to buyers’ increasing labour standard requirements. ü Wages are not likely to be reduced. ü Improvement in job quality would definitely have a positive impact on productivity. The presenter suggested formulation of a national strategy for the garment industry with the resolve to: (a) improve productivity; (b) undertake human resources development; (c) develop product quality; (d) increase investment in technology; (e) develop codes of business conduct; (f) implement the standards on working conditions; and (g) develop export alliances.

4.

Panel discussions

Panel discussions were held at the end of country presentations, during which the panelists representing the government, employers and workers made comments on the country papers presented and further raised the issues for discussion. Mr. Atul Chaturvedi, Joint Secretary Ministry of Textiles, Government of India, chaired the first panel discussion on the presentations on Bangladesh, India and Nepal. Mr. Mohammad Abu Taher, Joint Secretary, Ministry of Labour and Employment, Bangladesh, chaired the second panel discussion on the presentations on Pakistan and Sri Lanka. During the discussions, Government representative from Bangladesh pointed out that the country has been exporting under the GSP (General System of Preferences), which is not exactly the quota system. However, this arrangement is also subject to the discretion of the developed countries. The employers’ representative from Nepal pointed out the need for the strategic alliance among the garment manufacturers and exporters throughout the sub-region.

248 GARMENT INDUSTRY IN SOUTH ASIA

The employers’ representative from India stated that there should also be networking of the firms within the country as a strategy to deal with the removal of the quota system. The need for labour market flexibility was raised during the discussion for the firms to be able to compete in the globalized market. However, it was pointed out by the workers’ representatives that the flexibility should be based on the employability of the workers, who have opportunity to upgrade their skills and choose employment opportunities in the labour market. The employers’ representative from Sri Lanka pointed out the need for intensified training of the workers with the establishment of training schools catering solely to textile and garments. The employers’ representative from India pointed out the need for formalizing the training being given by various training organizations. Lack of clarity in the labour laws in South Asia was pointed out by the employers’ representatives. Workers’ representative from Sri Lanka pointed out the need for labour law reform. He also urged inclusion of labour standards in the social charter of SAARC (South Asian Association for Regional Cooperation). Regarding job quality and productivity in the garment industry, workers’ representatives from participating countries pointed out the need for gain-sharing schemes, which would provide incentives for improvement in productivity. The workers’ representatives emphasized that incentive for the workers would help in the improvement in job quality and productivity of the workers. It was pointed out by the representative from India that female dominated industry has had traditionally lower wages. The government representative from Sri Lanka however pointed out that the wages for both male and female are the same, but the female workers endure other forms of difficulty, i.e., harassments, hardship in travel to and from work, dual responsibility of family and work, etc. Regarding the temporary workers, the workers’ representatives noted that as the garment industry depends more on external factors; such as, seasonal demand and tight delivery schedule, sub-contracting resulting in hiring of temporary workers is quite prevalent. The workers’ representative from Pakistan pointed out that since no registration of contract workers takes place and since many of them are migrant workers, they are deprived from the regular benefits available to other workers. The employers’ representative from Sri Lanka stated that the buyers from importing countries do not allow casual labour in the industry. However, the workers’ representative disputed by stating that though trade unions have fought for permanent employment and welfare provisions, there was no legal binding for the household units to provide any permanent provision to the workers. It was generally agreed that the lack of social security system has been a major disadvantage for the temporary workers. It was, therefore, agreed that a tripartite discussion needs to be organized for working out the safety net for temporary workers. The chairmen of the panel discussions provided their concluding remarks at the end of each of the panel discussions. Small and micro enterprises may have difficulty in surviving the full force of globalization as the quota system is removed. There needs to be greater cooperation among the countries in the sub-region for promoting complementarity among

PROCEEDINGS AND CONCLUSIONS 249

the respective industries and in attaining vertical integration among different levels of enterprises within the industry. Until now, the basic foundation of this industry has been low wages accompanied by low productivity and low value added. One of the suggestions floated during the discussion was that South Asian garment manufacturers need to move up in the value addition chain because they have so far remained as suppliers of the garments at the lower end of the chain.

5. Conclusions The participants were then divided in three groups for discussion on the issues raised during the meeting and for providing recommendations for consideration by the governments and social partners. The representatives from the governments and social partners presented the conclusions of the group discussions. 5.1 Employers The employers’ representatives summarized the conclusions reached during the group discussion by pointing out the challenges faced and strengths inherent in the garment industries in the sub-region. The challenges were mainly concerned with weak infrastructure, rising competition, unemployment, weak implementation of labour standards and low product quality. The industries also have inherent strengths of domestic demand potential, large pool of labour and local fabric in some of the countries. While trying to mitigate the weaknesses, the industries need to utilize the inherent strengths to the extent possible. It has been concluded that each of the three parties - employers, workers and governments - has roles to play in formulating a strategy to deal with the post-MFA environment of competitive environment in garments trade. The employers in the participating countries were urged to: w w w w w w

adopt and implement the labour standards and monitor the compliance among the SAARC countries; explore new market for diversification of the export destinations; regularly liaison with the government, ILO, SAARC secretariat and other related agencies in establishing improved working methods; further upgrade the manufacturing facilities and re-strategize and right size the structure for meeting the new challenges; reactivate the SAARC- Japan Fund for establishment of social infrastructure, such as hostel/ residential facilities for workers employed predominantly in EPZ; establish a SAARC backed capital market funded by World Bank/IMF/ADB for financing business activities, upgradation of technology and infrastructure, and providing grants and soft lending for compliance of international standards;

250 GARMENT INDUSTRY IN SOUTH ASIA

w

w w

take initiatives for establishing among the SAARC countries a comprehensive data bank for sharing of information regarding new technologies, markets, best practices and trade/investment opportunities; take steps for improving product quality and value addition through enhancement of job quality; and improve industrial relations through regular social dialogue and improve the responsiveness of the industry to labour standards and trade ethics.

The employers recognized the important role of the workers’ organizations in the social dialogue, particularly from the standpoint of fostering the work culture and attitude for improvement in the product quality and value addition. It was believed that harmonious industrial relations environment across the industry would contribute to furthering the job quality and productivity. The employers recommended that the governments need to: w w

w

w

take appropriate macro economic measures for creating enabling and conducive environment; take steps to considerably improve the infrastructure and logistic support required for the industry to be able to improve its competitiveness, particularly in its response and delivery capabilities; reduce procedural requirements, eliminate bottlenecks and restrictive hurdles in importing required inputs, operating the plants and exporting the finished products; and collectively strive for establishing a common system of currency and banking service network within the SAARC region.

5.2 Workers The workers’ representatives summarized the conclusions reached during the group discussions and presented the role to be played by the workers’ organizations in readying the garments industry in facing the post-MFA environment of globalization. The workers’ group pointed out the common challenges of job security, job quality improvement, and compliance to labour standards and trade union rights as the competitive pressures build up on the garments industry with the removal of the quota system. In such an environment, the workers’ group recommended to the ILO constituents in South Asia in developing a common strategy of: w w w w

skills development; raising awareness towards the effect of globalization, specifically abolition of quota; including ILO’s labour standards into the SAARC social character; and forming a coalition of SAARC trade unions.

PROCEEDINGS AND CONCLUSIONS 251

The workers’ group further recommended improving productivity and job quality by: w w w

enhancing mutual understanding and trust among the employers, workers and governments; agreeing not to compromise on job security, job quality and social security; and acknowledging the trade unions as important partners in improving productivity and competitiveness in the industry.

In order for implementing the above recommendations, the workers’ group suggested to: w w

constitute a tripartite forum at the national and regional levels; and educate the workers for cooperation among the tripartite constituencies.

5.3 Government The government representative summarized the group discussion relating to the roles of the governments in facing the situation arising out of the removal of quota on the garments industry. The following recommendations were made by the meeting to the governments of the South Asian countries. w Government needs to assume the role of a facilitator rather than acting as an arbiter. w Government’s activities need to be service oriented. w Liberalization of rules and regulations should be carried out to simplify the procedures. w In the conflict between the employers and the workers, the role of the government needs to be like a referee. w In imparting education and skills training to the working population, government needs to play an active role. w Information technology (IT) needs to be promoted in creating a database and making available market information to the industry. w Uniform quality control has to be maintained through total quality management (TQM), which needs to be taken up as a long-term campaign. w Political commitment should be displayed in carrying out required reform in the policy and regulatory environment, so as to make it conducive for the further growth of the garments industry. w Social recognition should be provided to the exporters and the manufacturers by way of treating them as commercially important persons and providing awards, trophy, etc. w Logistic and infrastructure support needs to be improved for enhancing the efficiency of the industry.

252 GARMENT INDUSTRY IN SOUTH ASIA

6.

Closing

The workshop was concluded with a closing statement by Ms. Moti Shova Shrestha, Joint Secretary, Ministry of Labour and Transport Management. Reiterating that the garment industry is one of the most important industrial sectors of the sub region in providing employment as well as generating exports earnings, she pointed out the problems relating to low productivity, poor quality of product, cumbersome and lengthy export procedures and lack of adequate fiscal and financial measures. Impending removal of the quota system after the end of Multi-Fibre Agreement in 2004 is bound to pose a serious challenge to sustain the employment in garments industry in South Asia. To cope with the problems associated with this sector, a series of policy and administrative reforms are needed. Improvement in productivity should be undertaken not only through innovation and technology upgrading, enhancement of product and service quality and expansion of market opportunities but also through deliberate efforts in enhancing job quality and conditions of work. The countries in the sub-region should adopt a strategy involving high level of competitiveness, high value product, product diversification, product design and diversification, backward linkages, reduction in production led-time and intra-regional corporation among the SAARC countries as. Attention should be directed in implementing the International Labour Standards. The standards on fundamental human rights and trade union rights must be implemented without regard to short-term gains that could be had by ignoring them. Implementation of the standards is expected to enhance constructive labour-management relations promoting social dialogue to resolve conflicts. Ms. Shrestha emphasized that the difficulties arising out of the removal of the quota system may be a blessing in disguise since the industry may emerge with new strength and vigour to compete in the liberalized trade environment. It is expected that the discussion and conclusions of the meeting will provide the impetus towards strengthening of the resolve for improving the productivity and competitiveness in the industry through improvement in job quality.

PROCEEDINGS AND CONCLUSIONS 253

APPENDIX I

Sub-regional meeting on competitiveness, productivity and job quality in garment industry in South Asia Kathmandu, 25-26 September 2001 PROGRAMME

Tuesday, 25 September 2001 0830-0915 hrs.

Registration Closed Door Meeting of Workers and Employers

0915-1015 hrs.

Opening Welcome Remarks by Director ILO Kathmandu (Ms. Leyla Tegmo-Reddy) Address by SAARC Secretary General (Mr. Nihal Rodrigo)

delivered by Mr. Amit Das Gupta Address by Employers’ Representative (Mr. Suraj Vaidya, VP FNCCI) Address by Workers’ Representative (Mr. Jitendra Lall Karna, DECONT) Inaugural address by the Chief Guest (Mr. Palten Gurung, Minister for Labour and Transport Management) 1015-1030

Tea Break

1030-1130

Technical Presentations I (Mr. Gopal Joshi, Senior Enterprise Speciaist, ILO-SAAT) Managing Social Issues - Challenges and Opportunities Overview of garments industry in South Asia Discussion

1130-1300

Country Presentations I (to be continued after lunch) Bangladesh (Dr. Nasreen Khundker) India (Dr. M. Vijayabasker)

254 GARMENT INDUSTRY IN SOUTH ASIA

1300-1400

Lunch

1400-1530

Country Presentations I (continued) Nepal (Dr. Dinesh Pant) Panel Discussion

1530-1700

Group Discussion I

Wednesday, 26 September 2001 0900-1100

Technical Presentations III (Mr. Gopal Joshi, Senior Enterprise Specialist, ILO-SAAT) International Perspective of garments industry Productivity and job quality Discussion

1100-1300

Country Presentations II Pakistan (Mr. Nabeel Goheer on behalf of Mr. Asir Manjur, SMEDA) Sri Lanka (Dr. Saman Kalegama and Mr. Mr. Roshen Epaarachchi, IPS) Panel Discussion

1300-1400

Lunch

1400-1600

Group Discussion II

1600-1700

Closing Conclusions by government, workers and employers Closing Remarks by Joint Secretary (Ms. Moti Shova Shrestha)

PROCEEDINGS AND CONCLUSIONS 255

APPENDIX II

List of participants Bangladesh 1. Mr. Pradip Kumar Kundu Additional Secretary (cc) Social Sector Development (SSD) Bangladesh Garment Manufacturer and Exporters Association (BGMEA) Dhaka

7. Mr. Anil P. Anand (Council of Indian Employers) Joint Managing Director M/s Harjas Apparel Pvt. Ltd. A-84, Okhla Industrial Area, Phase II, New Delhi - 110 020

2 Mr. Shahadat Hossain Chowdhury Chairman Standing Committee on Labour Arbitration Bangladesh Garment Manufacturer and Exporters Association (BGMEA) Dhaka

8. Ms. Vinita Kumar Director Ministry of Labour, Government of India, New Delhi

3. Mr. Nasiruddin Ahmed Deputy Secretary, Ministry of Commerce, Dhaka 4. Mr. Mohammad Abu Taher Joint Secretary Ministry of Labour and Employment Government of the People’s Republic of Bangladesh, Dhaka 5. Mr. Louis A. Costa President President BFTUC Dhaka city committee General Secretary, BAKSOP and adviser Federation of Garment Workers Care of: Bangladesh Free Trade Union Congress (BFTUC), Dhaka India 6. Mr. Atul Chaturvedi Joint Secretary (Exports) Ministry of Textiles, Government of India New Delhi

9. Mr. Ranjit Singh Senior Vice President All India Garments Manufacturers’ Association, New Delhi Nepal 10. Ms. Moti Shova Shrestha Joint Secretary Ministry of Labour & Transport Management 11. Mr. Himal Thapa Section Officer Ministry of Industry, Commerce & Supplies 12. Mr. Narayan Bajaj Treasurer Garment Association of Nepal 13. Mr. Shishir Kumar Jha Executive Member Nepal Trade Union Congress (NTUC) 14. Mr. Suraj Vaidya Vice President, FNCCI 15. Mr. Megh Nath Neupane Executive Director, FNCCI

256 GARMENT INDUSTRY IN SOUTH ASIA

Pakistan

Resource Persons

16. Mr. Muhammad Bashir Shakir Joint Secretary All Pakistan Federation of Trade Unions (APFTU) Bakhtiar Labour Hall, 28, Nisbet Road, Lahore

24. Dr. Nasreen Khundker Dhaka, Bangladesh

17. Mr. Majyd Aziz President, MHG Group of Companies Employers’ Federation of Pakistan D/49, SITE, Karachi 75700 18. Mr. Mukhtar Simon Deputy Social Security Adviser Ministry of Labour, Manpower and Overseas Pakistanis Government of Pakistan, Islamabad Sri Lanka 19. Mr. H. Wijeratne Deputy Commissioner Ministry of Labour 20. Mr. Roy Jayasinghe Additional Secretary Ministry of Trade and Industrial Development 21. Mr. S. Amarasekara General Manager Polytex Garments Ltd. 22. Mr. R.L.P. Peiris Deputy Director General Employers’ Federation of Ceylon (EFC) 23. Mr. Anton Marcus General Secretary Free Trade Zone Workers Union (FTZWU)

25. Mr. M. Vijayabaskar Bangalore, India 26. Dr. Dinesh Pant Nepal Administrative Staff College Lalitpur, Nepal 27. Mr. Nabeel Goheer Small and Medium Enterprise Development Authority (SMEDA) Government of Pakistan 43-T, Gulberg II, Lahore 54660 28. Dr. Saman Kalegama Director, Institute of Policy Studies Colombo, Sri Lanka 29. Mr. Roshen Epaarachchi Research Officer Institute of Policy Studies Colombo, Sri Lanka Observers 30. Mr. Jitendra Lal Karna General Secretary Garment Workers’ Union (DECONT) Nepal 31. Mr. Hari Dutta Joshi General Federation of Nepalese Trade Unions (GEFONT) Nepal