We're Live Bangla Friday, March 31, 2023

Bangladesh Is Clothes-Minded

The Country’s Obsession With Garments Takes An Increasingly Heavy Toll On The Rest Of Its Economy.

Laborers wearing face masks work in a garment factory in Ashulia, Bangladesh, on April 7, 2020. MUNIR UZ ZAMAN/AFP VIA GETTY IMAGES

Bangladesh is feted for its robust growth performance over the last three decades; sterling record of poverty reduction; and well-above-peer-level performance on many health, education, and demographic outcomes. Given its abject poverty at the time of its independence in 1971 and poor rankings on cross-country governance indicators, these achievements have together been labeled a “development surprise.”

A big part of Bangladesh’s success story comes from labor-intensive, export-oriented industrialization. It boasts the biggest manufacturing sector (as a share of GDP) in South Asia, and it continues to grow. In 2001, Bangladesh’s merchandize exports amounted to $6.6 billion; in 2019, they were $47.2 billion, which more than doubles its share of world exports from 0.1 percent in 2001 to 0.25 percent in 2019.

But this success story derived from exports comes from an extreme concentration in garment manufacturing: The share of garments in Bangladesh’s total exports increased from 75 percent in 2000 to more than 86 percent in 2019. For a single product to dominate exports is rare in history; we could call it Bangladesh’s “second development surprise.” Even Vietnam, the fastest growing apparel exporter of the 21st century, has seen its total exports’ share of garments fall from 12.7 percent in 2000 to 11.3 percent in 2019.

Such heavy reliance on garments—also reflected in the fact that one-third of Bangladesh’s total industrial production is garments—is a source of significant concern for Bangladesh’s growth prospects. Bangladesh needs exports for high and sustained growth. Its domestic market is small, and exports have undoubtedly boosted its robust growth performance. Yet sustained export growth is less likely if it continues to be dependent on a single sector.

For some, excessive reliance on garments may invoke thoughts of a “resource curse.” But the analogy may not be quite apposite. A resource curse is said to occur when natural resource endowments lead to mismanagement of revenue arising from the resources, which in turn can undermine the broader development of governance institutions because rent-seeking becomes easy.

Garment manufacturing and exports, by contrast, have historically been a stepping stone to more sophisticated manufacturing for many countries in Asia, including Japan, South Korea, China, Thailand, India, and several others. This is because garment manufacturing enables the development of a wide range of capabilities: production skills, organizational practices (like supplier coordination, inventory management, and production layout), and logistic competencies—which in turn leads to investments in related sectors, such as footwear, light engineering, and eventually more capital-intensive sectors like iron and steel.

The logical question then arises: Why has Bangladesh not yet been able to move beyond garments? Should its expertise in mass manufacturing of garments not have spawned the growth of other (initially labor-intensive) products? Why has this not happened? Can it be corrected? As a rising star in South Asia and a remarkable growth story—in 2026, it will graduate from the category of least developed country—Bangladesh’s future economic path is of broad global interest, not least for other poor countries that are much further behind on the path to development.

It is useful to see how the apparel industry took root in Bangladesh. In 1974, broad-ranging global apparel quotas were imposed via the Multi Fibre Arrangement (MFA). In Europe and the United States, textile and clothing imports have historically been highly regulated to protect domestic production and employment. The MFA was intended to provide developed countries time to adjust to imports, and as a result, exporting countries were shopping around for quota-hopping destinations. A Korean company, Daewoo, established a partnership with Desh Garments in 1978, effectively launching the Bangladesh garment industry. As part of this partnership, Daewoo sent 126 workers from Bangladesh to Busan, South Korea, for intensive, on-the-job training. These workers not only helped Desh grow, but many of them were hired by other firms to impart the training, industry-specific skills and tacit knowledge transfer that could only be provided by on-the-job training. Desh, the pioneering firm, provided these “setup workers” who, in turn, spawned the establishment of secondary sources of transmission.

This initial success was then supported by special trade policy schemes for the sector. Bangladesh’s garment industry has always been highly import dependent, even as the country’s approach to trade has been strongly protectionist, like most of South Asia. To protect the nascent garments sector from high tariffs on inputs, its policymakers implemented a special bonded warehouse regime that provided duty-free inputs—such as yarn, fabrics, zippers, and other accessories—to the garment and garment accessories sector starting in the mid-1980s. Over time, the apparel sector’s strong performance justified a perpetuation and consolidation of this special duty-free regime.

The problem for the rest of Bangladesh’s manufacturing sector is this regime is strongly biased toward apparels. In theory, the bond regime is available to all sectors. In practice, the rules are much more favorable for garments: For example, unlike other sectors, it enjoys longer audit cycles, multiple premises are covered under one bond license, full-time customs staff are not required on the premises, and so on. Moreover, most of the nontransparent rules have been drafted to support the bond regime for the apparel sector. The net result is in 2017 and 2018, non-garment bonds made up only 2.5 percent of total active duty-free bonds. In effect, non-garment exporting sectors end up absorbing a large part of the duty paid on imported inputs, given how poorly the duty-refund scheme for exporters performs, and this impacts their competitiveness and exports.

Of course, the growth of every industry has its own specific constraints. But Bangladesh’s near-single product export concentration is hard to explain except in terms of trade policy. The apparel industry’s success over the last three decades should have spawned a breakthrough in other labor-intensive sectors, such as footwear, which has for long been touted as the next big sector after garments.

In terms of the Observatory of Economic Complexity’s “product space” methodology, leather footwear and garments are clustered close together in terms of the required knowhow to produce them, which means footwear should be relatively easy to export. Moreover, the leather industry, a critical raw material for leather footwear, has been around for five decades. Leather footwear has been exported for at least the last three decades. Recent figures are encouraging: Footwear (including leather) exports grew from $460 million in 2011 to $1,184 million in 2019. But whether the pace of growth in footwear is sustainable, other labor-intensive exports take off, or the garment industry’s dominance declines are open questions.

Bangladesh’s obsession with garments, held across political parties, means the rest of the economy is paying a heavy toll. In this sense, at least, there is some similarity with the natural resource curse, where the abundance of a resource, such as oil, leads to underinvestment in other sectors, such as manufacturing. Bangladesh needs continued export growth to sustain its success in labor-intensive exports and manufacturing, which, in turn, will propel higher quality employment and economic growth. But, as evidence shows, export concentration—and Bangladesh is an extreme version of concentration—can be detrimental for long-term economic growth. This could be because of trade vulnerabilities arising from exposure to a single product (such as emerging competition) and lack of opportunity exploitation for the “discovery” of new products. More broadly, development is a process of structural transformation, and the dominance of garments in Bangladesh hinders that process. Even on the export front, where Bangladesh has been a star performer globally, its export growth from 2000 to 2019 (meaning goods and services) has been overshadowed by Vietnam, China, and India: all countries whose export and domestic production is far more diversified.

To be sure, Bangladesh has several constraints to private sector growth that are common to other South Asian economies, including a general anti-export bias, a lack of high-quality foreign investment, and trade facilitation. However, in addition, Bangladesh has created a unique roadblock to diversification. Its focus on a relatively favorable policy regime for garments means most entrepreneurial energies are still devoted to this sector. Continued success in garments may also have bred a policy complacency, wherein it is assumed that supporting the golden goose is all that is required for manufacturing and export success.

Fortunately, Bangladesh’s product concentration may be amenable to policy correction. With garments enjoying a head start, diversification will, among other things, require correcting the policy bias and providing timely inputs to all current and future export industries at world prices—in a country highly dependent on imported inputs for manufactured exports and domestic production. Tax authorities need to give up their fear of potential revenue leakages through duty-free bonds and instead look at the likely growth outcomes for exports and manufacturing. Of course, there are many other policy fixes required to promote product diversification and move from wages to productivity as the driver of competitiveness, but its trade policies are an obvious weakness.

In 2026, when Bangladesh graduates out of its “least developed country” status, it will also start to lose access to attendant preferences and privileges, such as favorable tariffs on its exports, development grants, and low-cost loans from the World Bank and other multilaterals. This graduation will mean a more challenging environment for apparel and other exports, adding to the above concerns about export and economic growth sustainability and making trade reforms an urgent priority. By 2026, Bangladesh should have started to implement a serious road map for tariff reform, particularly to reduce the anti-export bias that incentivizes the non-garment industry to focus on the domestic market. Reforming the duty-free scheme, whose exclusivity has become a self-inflicted wound and led to an unwelcome development surprise, would be a good place to start.

Sanjay Kathuria is a 2021-2022 fellow at the Wilson Center, an adjunct professor at Georgetown University, part of visiting faculty at Ashoka University, a senior visiting fellow at the Centre for Policy Research in India, and a nonresident senior fellow at the Institute of South Asian Studies in Singapore.