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End of MFA quota: New dimension of debate over the impact on RMG

Md Golam Robbani
***The effect of quota abolition is not going to be like an earthquake or tsunami that have immediate shock; but most likely it is going to be like a climate change that will slowly but surely attack inefficient players. Therefore, highest care should be taken in decision-making with proper analysis of all relevant factors — keeping long-term view in mind. Homegrown problems must be addressed at any cost in order to take the full advantage of globalisation.***
MFA quota regime is over, but not yet the debate over its impact on the economy of Bangladesh. Indeed the Issue has got a new dimension when business community explicitly expressed their profound hope about the better future of RMG export of Bangladesh in the quota-free world - defying the gloomy picture drawn by many researchers throughout the decade. Since RMG industry is directly involved with the welfare of the economy as a whole as well as the everyday life of millions of the poor, its importance can hardly be overstated;-
The debate over the impact of MFA quota phase-out is going on since the signing of the Agreement on Textiles and Clothing (ATC) under the WTO through which it was agreed to abolish the MFA quota system in phase-by-phase over 10 years (1995-2004). As it is widely believed that the miraculous success of Bangladesh was mainly driven by the blessings of quota allocation by major markets, concerns mounted over the issue that the country might not be able to compete in the quota free market, particularly against giants like China and India. Numerous research findings maintain the view that Bangladesh will be at the losers' end. To mention a few, IMF (WP/04/108, June 2004) estimated that RMG export of Bangladesh would decline by 25 percent (35 percent as per a US consulting firm). A report by the WTO expressed that it might decline by even 50 percent.
By contrast, recently some positive statements -- mainly from insiders to the industry — have raised new hope for all concerned. For instance, a report in the New York Times (14/12/2004) opined
that the outlook was not as bleak as many experts had thought. Pointing to the recent increased number of orders for the first-half of the first quota-free year, BKMEA denies any adverse impact of quota phase-out. The special report in the Economist (13/11/2004) has mentioned that buyers were considering Bangladesh next to India. Therefore, the report comments, "It must be doing something right". BGMEA also has assured that there was no possibility of big threat until mid-2006 (Prothom-Alo, 30/12/2004). Furthermore, through various informal communications, some experts from the government seem to have endorsed the optimistic view. These are undoubtedly good news -- not only for the economy as a whole, but also for millions of workers -- nine/tenths of whom are women the most vulnerable section of the society.
Although contradictory to each other, both the views must have logics and evidences in support of their respective opinions. Naturally, the question comes up in mind, "who is right or who is wrong?" To answer this question, we need to critically evaluate their respective positions with a view to have better understanding of the situation. The objective of this write-up is not to prove superiority of any of the divergent views, but to help decision maker to take right decision for the future.
For analytical purposes, let’s label those as 'pessimists' who found that Bangladesh would be at the losers' end in a quota-free environment and those as 'optimists' who think otherwise. It seems that the 'pessimists' are somewhat 'outsiders' to the industry and belong to various research organizations. By contrast, the
'optimists' are mainly insiders to the industry and belong to the entrepreneurs and/or trading groups.
To find out whether a buying house wilt continue outsourcing horn Bangladesh or switch over to competitors since 2005, we need to analyze the underlying factors that buyers usually consider important in making their ultimate sourcing decision. As making money is the ultimate objective of foreign buy-ers/retailers, cost of doing business must be the main factor.
There is no doubt that low wage rate and quota were the two main driving forces behind the startup and subsequent success of RMG industry in Bangladesh. After abolition of quota, time has come to ask how low is the 'low cost of labor' of Bangladesh compared to that of competitors?
In monetary terms, the wage rate in Bangladesh is indeed among the lowest in the region. As per US1TC (2004), average compensation rate in clothing factories is only S0.39/hour in Bangladesh compared to S0.68/hour in China. However, as the productivity of Bangladeshi worker is also among the lowest, the effective cost of labour is relatively high — if not the highest. Therefore, it is difficult to argue that lower wage rate alone will be sufficient to rescue the nation from a plausible downturn.
In the quota-free environment, competitive factors like ability to quick response to the market (shorter lead time), ability to provide full package supply, ability to keep pace with technological advancement and ability to comply with various standards set by buyers will become more important than ever before.
Distance from major markets is the biggest impediment to shortening lead-time. Shipping time front Bangladesh to a US coast is 28 days, .whereas it is only 2 days from Mexico. Latin American countries to the US and Eastern European and Mediterranean countries to EU enjoy the similar advantage. Although the natural barrier is beyond anybody’s control, however, there are some scope of shortening the lead-time through building backward link-
age industries, guaranteeing efficient management of ports, staying away from meaningless hartals (strike), providing improved infrastructure and ensuring better public service. Ability to provide full package supply, to keep pace with information and communication technology of buyers and to comply with various standards needs huge investment. FDI could be an answer. However, we must not forget that generous call for FDI stating "Bangladesh as a heaven for investment" with the most lucrative incentive package does not work in reality, unless our home-grown problems are rectified.
What was missing in pessimists' analysis? They must have missed some points in their analysis. A couple of them are as follows:
1. Pessimists failed to foresee the limitation of China's capacity to serve the world market and particularly the political economy attached to it. Therefore, they
already taken some measure similar to 'voluntary export restraint’ (VER) by imposing taxes on clothing exports from China. They also failed to recognize plausible safeguard measures through the protocol of accession of China to the WTO. The US did impose such safeguard measures on some of the items coming from China on which quota had been abolished since 2002.
Some analysis, if not all, failed to recognize the value of business relationship and long learning curve of entrepreneurs in Bangladesh who are managing such business for more than two decades. This kind of relationship and expertise cannot be built overnight. Even if Bangladesh is comparatively weak in some factors, it will take some time for new entrants to catch up. Therefore, immediate shift may not happen in the initial years of quota abolition, as anticipated by pessimists.
Also, most of them could not
guarantee for better business tomorrow.
2. Probably, optimists loosely take into account the strengths and weaknesses of competitors in their analysis. In most of the socioeconomic and political factors, Bangladesh is hardly better than any of her competitors. Therefore, there are genuine reasons to be worried about the future. Excessively emphasizing on the status quo, optimists might have failed to foresee any potential danger in future.
3. Optimists also failed to consider positive externalities from other sectors of the economy. Textiles and clothing industry cannot grow as expected without solving problems associated with support services. For instance, development of information and communication technology (ICT), improvement of infrastructure, assurance of uninterrupted power supply, guarantee for safety and security of human and physical
quota allocated to her by major markets but also (and more importantly) due to quota restrictions imposed on her competitors like China and India. Abolition of quota will be fierce competition in the market and the rule of the game is the survival of the fittest.
• Although low cost of labor is the second most important factor behind the miraculous success, the nice combination of the initiative of private entrepreneurs, hard labor of workers and favorable policy of the government made the success possible.
• Apart from low wage and a fairly long learning curve, Bangladesh has little 'core competencies' in the 'cutting and making' business. Development of backward linkage industry is still a castle in the sky. The absence in international marketing hardly gives her any power to hold back the golden geese if they start flying out of the nest.
• Bangladesh could hardly take any preparatory measure during the last 10 ATC years to face the challenge of quota phase-out. Merely earmarking of a few crore of taka to retrain probable jobless workers is far from satisfactory. The leaders seem to have failed to recognize the fact that "prevention is better than cure".
• There are numerous home-grown problems — reckless corruption, inadequate infrastructure, inefficient management of ports, frequent hartals (sticks), lack of social security and recently emerged dangerous 'bomb culture' are to mention a few. /Ml are impediments to growing of any export-oriented industry.
• Rapidly capturing over 50 percent of the world market, China seems to have been exhausted. Therefore, immediate threat is not China but existing players like India and new entrants like Cambodia or Viet Nam. A belated but more potendal threat might come from countries in Latin America, Africa and Middle East, which are nearest to the market and somehow beneficiaries to special treatment.
• Trade policy of the US and the EU does matter a lot. The 'production sharing system' or 'outward processing trade' is nothing but the other name of thide-politics: '
Apart from numerous regional trading arrangements, discriminatory market access offered to potential competitors through AGOA, NEPAD or CBERA might appear as deadly threat for Bangladeshi exporters.
• Although there will be no quota, problems with market access (Le. non-tariff barriers) will still be there. Failure to compliance with environmental norms, labour standard, SPS, etc. may become an easy excuse to impose trade restrictions on exports from Bangladesh.
• Apart from political risk, prudent supply management tends to maintain diversification to avoid risks like hurricanes, earthquakes, SARS that can disrupt supply chain. The 'wait and see' policy of buyers might not hit the economy immediately, however, this does not guarantee that they would never shift out in future.
If the pessimists' view is not believable now, would the optimists' hope be sustainable in future? The effect of quota abolition is not going to be like an earthquake or tsunami that have immediate shock; but most likely it is going to be like a climate change that will slowly but surely attack inefficient players. Given the overly dependence of the economy on the sector and millions of livelihoods associated with it, the nation hardly can afford to slide down form the present position. As a matter of fact, it desperately needs steady growth to uphold the millennium development goal; At this moment, it is not that important who is right or who is wrong. What is more important is that the nation cannot afford to bear the burden of further mistake. Therefore, highest care should be taken in decision-making with proper analysis of all relevant factors — keeping long-term view in mind. Homegrown problems must be addressed at any cost in order to take the full advantage of globalisation. Otherwise, the golden geese may start flying again - leaving the nation in an enormous socioeconomic and even political turmoil.
seem to have exaggerated the fact that China will grab the entire world market leaving all quota driven countries in danger. But reality is that, in fear of trade war with US. Chinese government has
take into account the 'wait and see' policy of buyers. No prudent procurement manager would shift their sourcing base without being cautious of such a major change in the world trading environment which was a contentious issue for long. Therefore, again the pessimists failed to see the time lag in having impact of MFA phase-out and, as a result, overstated the gravity of the situation for initial years of quota free market. This has made their analysis less credible, particularly to the people who see no dearth of orders for 2005.
What is missing in optimists' view?
There must be something missing in their assessment. Some of the missing points are as follows:
I. Optimists seem to be happy because they do not see less order than the previous year. Therefore, they have taken that pessimists are grossly wrong and that there is nothing to be worried about. However, this group failed to recognize that the impact of quota abolition might not be so quick. When other small competitors gradually will penetrate into the market, their big smiles of complacency may disappear soon. Without fundamental reasons, good business today cannot be a
resources are definitely important for smooth functioning of any business. Consequently, without proper socioeconomic condition, these essential service sectors cannot grow. Virtually the development of these sectors has been stagnated, to some extent, due to rent seeking attitude of political parties. Bangladesh has failed to attract much-needed FDI, because of the numerous home-grown problems as mentioned before. This is one of the reasons why Bangladesh has not been successful in building backward linkage (textiles) industries. Therefore, optimists' optimism, ignoring the basic complementary services, may not last long.
Before jumping into the conclusion, we should take note of the following facts related to RMG industry of Bangladesh:
• Due to labour intensive and footloose nature, the industry has a century-long history of migrating from one country to another driven by low cost of labor. Bangladesh got the business due the unique nature of the industry. There is no guarantee that it will not lose it, if the same logic emerges again.
• Bangladesh became a famous RMG exporter due not only to quota allocated to her by major markets but also (and more importantly) due to quota restrictions imposed on her competitors like China and India. Abolition of quota will be fierce competition in the market and the rule of the game is the survival of the fittest.
• Although low cost of labor is the second most important factor behind the miraculous success, the nice combination of the initiative of private entrepreneurs, hard labor of workers and favorable policy of the government made the success possible.
• Apart from low wage and a fairly long learning curve, Bangladesh has little 'core competencies' in the 'cutting and making' business. Development of backward linkage industry is still a castle in the sky. The absence in international marketing hardly gives her any power to hold back the golden geese if they start flying out of the nest.
• Bangladesh could hardly take any preparatory measure during the last 10 ATC years to face the challenge of quota phase-out. Merely earmarking of a few crore of taka to retrain probable jobless workers is far from satisfactory. The leaders seem to have failed to recognize the fact that "prevention is better than cure".
• There are numerous home-grown problems — reckless corruption, inadequate infrastructure, inefficient management of ports, frequent hartals (sticks), lack of social security and recently emerged dangerous 'bomb culture' are to mention a few. /Ml are impediments to growing of any export-oriented industry.
• Rapidly capturing over 50 percent of the world market, China seems to have been exhausted. Therefore, immediate threat is not China but existing players like India and new entrants like Cambodia or Viet Nam. A belated but more potendal threat might come from countries in Latin America, Africa and Middle East, which are nearest to the market and somehow beneficiaries to special treatment.
• Trade policy of the US and the EU does matter a lot. The 'production sharing system' or 'outward processing trade' is nothing but the other name of thide-politics: '
Apart from numerous regional trading arrangements, discriminatory market access offered to potential competitors through AGOA, NEPAD or CBERA might appear as deadly threat for Bangladeshi exporters.
• Although there will be no quota, problems with market access (Le. non-tariff barriers) will still be there. Failure to compliance with environmental norms, labour standard, SPS, etc. may become an easy excuse to impose trade restrictions on exports from Bangladesh.
• Apart from political risk, prudent supply management tends to maintain diversification to avoid risks like hurricanes, earthquakes, SARS that can disrupt supply chain. The 'wait and see' policy of buyers might not hit the economy immediately, however, this does not guarantee that they would never shift out in future.
If the pessimists' view is not believable now, would the optimists' hope be sustainable in future? The effect of quota abolition is not going to be like an earthquake or tsunami that have immediate shock; but most likely it is going to be like a climate change that will slowly but surely attack inefficient players. Given the overly dependence of the economy on the sector and millions of livelihoods associated with it, the nation hardly can afford to slide down form the present position. As a matter of fact, it desperately needs steady growth to uphold the millennium development goal; At this moment, it is not that important who is right or who is wrong. What is more important is that the nation cannot afford to bear the burden of further mistake. Therefore, highest care should be taken in decision-making with proper analysis of all relevant factors — keeping long-term view in mind. Homegrown problems must be addressed at any cost in order to take the full advantage of globalisation. Otherwise, the golden geese may start flying again - leaving the nation in an enormous socioeconomic and even political turmoil.