Report On Contribution of the Ready-Made Garments (RMG) Sector to the Bangladesh Economy

SUBMITTED TO Ms Imrana Sharmin Senior Lecturer, Dept. of Economics East West University, Bangladesh

SUBMITTED BY Group: 03 Semester Summer 2010. East West University, Bangladesh Name of the students ID No. A. K. M. Ezazul Haque, 2009-2-10-285 Laigy Anam 2009-2-13-025 S. M. Arman Ali 2009-1-10-143 Course Name: Introduction to Macroeconomics Course Code: ECO 102 Section: 8

SUBMISSION DATE: 1 august, 2010

East West University, Bangladesh

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Letter of Transmittal July 25, 2010 Ms Imrana Sharmin Senior Lecturer, East West University, 43, Mohakhali C/A Dhaka 1212, Bangladesh Subject: Submission of Report on Contribution of the Ready-Made Garments (RMG) Sector to the Bangladesh Economy

Dear Madam, This is my pleasure to submit this study on Contribution of the Ready-Made Garments (RMG) Sector to the Bangladesh Economy.

We have done our level best to complete the report in time and with the quality of my expectation. The whole experience of this report enables us to get an insight in to the real life situation. I have really enjoyed working in International Communication Corporation preparing the report. Hope the report will be met your expectation and standard.

I would like to thank you for your supportive suggestion and helping me to carry on this study. Sincerely yours, Group: 03 Course Code: ECO 102 Section: 8. Semester summer 2010. East West University, Bangladesh

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Acknowledgement At first we desire to express our deepest sense of gratitude of almighty Allah.

With profound regard we gratefully acknowledge our respected course teacher Ms Imrana Sharmin for his generous help and day to day suggestion during preparation of the report. She is so much an inspiration and guidance to us that we are, short of words in expression our gratitude.

We like to give thanks especially to our friends and many individuals, for their enthusiastic encouragements and helps during the preparation of this report us by sharing ideas regarding this subject and for their assistance in typing and proof reading this manuscript.

And finally, we thank to all of our group members as they all were serious and prolific towards making this assignment. Once more time to Madam, we owe more than we can mentionmostly for teaching us to see the silver lining in every hard work

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Table of Contents Table of Contents Chapter 1 INTRODUCTION 1.1 Abstract 1.2 Introduction 1.3 Objective 1.4 Scope 1.5 Mythology 1.6 Literature Review Chapter 2 DISCUSSION 2.1 History 2.2 An Overview of The Bangladesh Ready-made Garment Industry. 2.3 Reason behind the Growth of RMG in Bangladesh 2.4 Product Tree 2.5 Exporting Condition of Garments Industry 2.6 Contribution in National Income: 2.7 Problems behind Readymade Garments Industry Chapter 3 ANALYSIS 3.1 SWOT Analysis Chapter 4 CONCLUSION 4.1 Recommendation 4.2 Conclusion References

PAGE No. 05 05 06 06 06 07 08 08 09 10 12 13 14 16 17 17

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CHAPTER 1 INTRODUCTION 1.1 Abstract The ready-made garment (RMG) industry of Bangladesh started in the late 1970s and became a prominent player in the economy within a short Period of time. The industry has contributed to export earnings, foreign exchange earnings, employment creation, poverty alleviation and the empowerment of women. The export-quota system and the availability of cheap labor are the two main reasons behind the success of the industry. Shirts, T-shirts, trousers, sweaters and jackets are the main products manufactured and exported by the industry. Bangladesh exports its RMG products mainly to the United States of America and the European Union. The Ready Made Garments (RMG) sector plays a pivotal role in the economy of Bangladesh. This sector accounts for approximately 76% of the total export earnings and nearly 10% of GDP.

1.2 Introduction Like other 3rd world countries Bangladesh is a developing country. Her economic development depends firstly on Agriculture and secondly on Industry. Although Bangladesh is not developed in industry, it has been enriched in Garment industries in the recent past years. For Bangladesh, the readymade garment export industry has been the proverbial goose that lays the golden eggs for over fifteen years now. Traditionally, the jute industry dominated the industrial sector of the country until the 1970s. Since the early 1980s, the RMG industry has emerged as an important player in the economy of the country. In the field of Industrialization garment industry is a promising step. It is making significant contribution in the field of our export income and in the economical development of our country. At present the government of our country earns billions of dollars by exporting ready-made garments products to other countries. We have not achieved this success over night; we have some elements that help us to achieve this success. At present we are competing with our neighboring country; India and China. Though we are earning a handsome amount of profit each year from this sector, the ready-made garment sector is suffering with a lot of problems. We should solve these negative situations by ensuring proper steps.

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1.3 Objective Followings were the objectives of the study. Broad objective: To gather knowledge about the overall scenario of Ready-Made Garments (RMG) Sector in Bangladesh. Specific objectives: To attain the broad objective following specific objectives were pursued. o To know briefly about economic significant of RMG. o To identify what factors are affecting an entrepreneur o To identify the performance of an entrepreneur

1.4 Scope This report is on a wide exporting sector of Bangladesh. So, mainly we have tried to focus on the following factors: Current scenario of ready-made garment industry. Reasons for a healthy growth Reasons for having comparative advantages in the world market. Economical and financial contribution of this industry in Bangladeshi economy. Beside these, we also brought several foreign benchmarks and statistics for doing the research work in a better way. The detailed analysis of each segment was beyond the scope of our report. We only focused on the general overview of this subject.

1.5 Mythology This report has been prepared on the basis of experience gathered through learning annual report. For preparing this report, I have also get information from website of BGMEA, BKMEA Export Promotion Bureau and many Government and non government organization. I have presented my experience and finding by using different tables, which are presented in the analysis part. The details of the work plan are furnished below: o Relevant data for this report has been collected primarily by direct investigations of different leasing companys annual report and website.

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o The information and data for this report have been collected from secondary sources. The secondary sources of information are annual reports, websites and different manuals. o Data collected from secondary sources have been processed manually and qualitative approach in general and quantitative approach in some cases has been used throughout the study. o Qualitative approach has been adopted for data analysis and interpretation taking the processed data as the base. So the report relies primarily on an analytical judgment and critical reasoning.

1.6 Literature Review Several Organizations have analyzed aspects of the garment industry in Bangladesh. Of the various aspects of the industry, the problems and the working conditions of female workers have received the greatest attention. There are several studies including The Centre for Policy Dialogue (CPD), study by Debapriya Bhattacharya, Mustafizur Rahman and Ananya Raihan (2002) and International Finance Corporation (2007) study on this topic. Both of these studies use accepted survey and research methodology to analyze a wealth of data on the social and economic background, Contribution of the RMG sector. Professor Muzaffar Ahmad looks at the industrial organization of the sector and discusses robustness and long-term viability of apparel manufacturing in Bangladesh. Wiigton (2000) provides a good overview of this industry, especially the developments in the early years. Nidhi Khosla writes on the women worker in
Journal of International Womens Studies (Vol. 11 #1 November 2009).

The Bangladesh Planning

Commission under the Trade and Industrial Policy (TIP) project also commissioned several studies on the industry. Hossain and Brar (2004) consider some labor-related issues in the garment industry. Quddus (2006) presents a profile of the apparel sector in Bangladesh and discusses some other aspects of the industry. Quddus (2006) presents results from a survey of apparel entrepreneurs and evaluates the performance of entrepreneurs and their contribution to the success of this industry. Islam and Quddus (2006) present an overall analysis of the industry to evaluate its potential as a catalyst for the development of the rest of the Bangladesh economy.

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CHAPTER 2 DISCUSSION 2.1 History: Once upon a time the cloth of Bangladesh achieved worldwide fame. Maslin and Jamdani cloth of our country were used as the luxurious garments of the royal figures in Europe and other countries. The British rulers in India didnt develop our cloth industries at all. Rather they destroyed them and imported cloths from England. After the emergence of Bangladesh radical change has come to our garment sector. Garment industries started working from the 10's of the late century.

2.2 An Overview of the Bangladesh Ready-Made Garment Industry The RMG industry is the only multi-billion-dollar manufacturing and export industry in Bangladesh. Whereas the industry contributed only 0.001 per cent to the countrys total export earnings in 1976, its share increased to about approximate 80 percent of those earnings in 2010. Bangladesh exported garments worth the equivalent of $12348 Million in 2010, which was about 3.00 percent of the global total value ($276 billion) of garment exports. The countrys RMG industry grew by more than 15 percent per annum on average during the last 15 years. The foreign exchange earnings and employment generation of the RMG sector have been increasing at double-digit rates from year to year. Some important issues related to the RMG industry of Bangladesh are noted in table 1 Table 1. Important issues related to the Bangladesh ready-made garment industry Year(s) Issue 1977-1980 Early period of growth 1982-1985 Boom days 1985 Imposition of quota restrictions 1990s Knitwear sector developed significantly 1993-1995 Child labor issue and its solution 2003 Withdrawal of Canadian quota restriction 2005 Phase-out of export-quota system Source: Compiled by the author from Quddus and Rashid (2000), Mainuddin (2000) and databases of the Bangladesh Garment Manufacturers and Exporters Association, and the Export Promotion Bureau, Bangladesh Currently, there are more than 4,000 RMG firms in Bangladesh. More than 95 percent of those firms are locally owned with the exception of a few foreign firms located in export processing

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zones (Gonzales, 2002). The RMG firms are located mainly in three main cities: the capital city Dhaka, the port city Chittagong and the industrial city Narayangonj. Bangladesh RMG firms vary in size. Based on Bangladesh Garment Manufacturers and Exporters Association (BGMEA) data, Mainuddin (2000) found that in1997 more than 75 per cent of the firms employed a maximum of 400 employees each. Garment companies in Bangladesh form formal or informal groups. The grouping helps to share manufacturing activities, to diversify risks; horizontal as well as vertical coordination can be easily found in such group activities. Ready-made garments manufactured in Bangladesh are divided mainly into two broad categories: woven and knit products. Shirts, T-shirts and trousers are the main woven products and undergarments, socks, stockings, T-shirts, sweaters and other casual and soft garments are the main knit products. Woven garment products still dominate the garment export earnings of the country. The share of knit garment products has been increasing since the early 1990s; such products currently account for more than 40 percent of the countrys total RMG export earnings (BGMEA website). Although various types of garments are manufactured in the country, only a few categories, such as shirts, T-shirts, trousers, jackets and sweaters, constitute the major production-share (BGMEA website; andante, 2001). Economies of scale for large-scale production and export-quota holdings in the corresponding categories are the principal reasons for such a narrow product concentration.

2.3 Reason behind the Growth of RMG in Bangladesh

The prime reason why garment industries have come out to be the champion in the field of export is obviously the cheap labor. Women contribute to the working force in these garment factories, as they are relatively cheaper than men.

2.3.1 Low cost labor: As Bangladesh is an overpopulated country it is very easy for the garment industries to hire labors at a lower rate. At present the government of our country has announced minimum wage to the garment workers but the industries can still earn a handsome amount of profit by exporting their product. Although it has increase but comparatively it is still low.

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Class Existing Wage Announce Wage Increase in % Grade-1 5,140.00 9,300.00 80.93% Grade-2 3,840.00 7,200.00 87.50% Grade-3 2,449.00 4,120.00 68.23% Grade-4 2,250.10 3,763.00 67.24% Grade-5 2,046.00 3,455.00 68.87% Grade-6 1,851.00 3,210.00 73.47% Grade-7 1,662.50 3,000.00 80.45% Apprentice 1,200.00 2,500.00 108.33% Source: Ministry of Labour and Employment, Bangladesh. July 26, 2010 2.3.2 Export-quota system: The export-quota system in trading garment products played a significant role in the success of the industry. However, that quota system came to an end in 2004. Therefore, the competitiveness issue needs to be addressed, with special attention given to the long-term sustainability of the industry.

Unilateral restriction, short-term arrangement (STA), long-term arrangement (LTA), Multi-fibre Arrangement (MFA) and finally the WTO Agreement on Textiles and Clothing (ATC) are the chronological steps through which the export-quota system was administered until it was finally abolished on 31 December 2004, making worldwide textile and garment trade quota-free 2.3.3 Easy Communication: It is very easy industries to collect raw materials from other countries and they can easily export their produced goods to the other countries.

2.3.4 Government Support: Government is supporting directly and indirectly the industries and monitors their activities so that they can perform properly. Government reduces tariff and supply production factors like electricity and water to them.

2.4 Product Tree Bangladesh exports about 63 items to different apparel markets. Ready-made garments manufactured in Bangladesh are divided mainly into two broad categories: woven and knit products. Shirts, T-shirts and trousers are the main woven products and undergarments, socks, stockings, T-shirts, sweaters and other casual and soft garments are the main knit products. Woven garment products still dominate the garment export earnings of the country. The share of knit garment products has been increasing since the early 1990s; such products currently account

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for more than 40 per cent of the countrys total RMG export earnings (BGMEA website). Although various types of garments are manufactured in the country, only a few categories, such as shirts, T-shirts, trousers, jackets and sweaters, constitute the major production-share (BGMEA website; and Nath, 2001). It needs to be mentioned here that Bangladesh produces a very limited categories of expensive and fashion oriented garments. Economies of scale for large-scale production and export-quota holdings in the corresponding categories are the principal reasons for such a narrow product concentration. Main apparel items exported from Bangladesh is shown in the tree diagram drawn below:

YEAR

KNIT SWEATER 1995-96 1948.81 598.32 1996-97 2237.95 763.3 2004-2005 3598.20 2819.47 2005-2006 4083.82 3816.98 2006-2007 4657.63 4553.6 2007-2008 5167.28 5532.52 6429.26 2008-2009 5918.51 Source: BGMEA, (value in mn. Us$ quantity in mn dozen) WOVEN

TOTAL 2547.13 3001.25 6417.67 7900.8 9211.23 10699.8 12347.77

2.5 Exporting Condition of Garments Industry

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The Ready-Made Garments (RMG) industry occupies a unique position in the Bangladesh economy. It is the largest exporting industry in Bangladesh, which experienced phenomenal growth during the last 20 years. By taking advantage of an insulated market under the provision of Multi Fibre Agreement (MFA) of GATT, it attained a high profile in terms of foreign exchange earnings, exports, industrialization and contribution to GDP within a short span of time. The industry plays a key role in employment generation and in the provision of income to the poor. Nearly two million workers are directly and more than ten million inhabitants are indirectly associated with the industry. Over the past twenty years, the number of manufacturing units has grown from 180 to over 3600. The sector has also played a significant role in the socioeconomic development of the country.

COMPARATIVE STATEMENT ON EXPORT OF RMG AND TOTAL EXPORT OF BANGLADESH TOTAL EXPORT EXPORT OF RMG % OF RMG'S TO YEAR OF BANGLADESH (IN MILLION US$) TOTAL EXPORT (IN MILLION US$) 1983-84 31.57 811.00 3.89 1984-85 116.2 934.43 12.44 2000-01 4859.83 6467.30 75.14 2001-02 4583.75 5986.09 76.57 2002-03 4912.09 6548.44 75.01 2003-04 5686.09 7602.99 74.79 2004-05 6417.67 8654.52 74.15 2005-06 7900.80 10526.16 75.06 2006-07 9211.23 12177.86 75.64 2007-08 10699.80 14110.80 75.83 2008-09 12347.77 15565.19 79.33

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2.6 Contribution in National Income: When the garment industries 1st started to export, the sector was not paid much attention but the situation has changed and at present it is earning the highest amount of foreign currencies in our country. Major Product Export from Bangladesh Product Export % 12347.77 79.33 RMG 454.53 2.92 Frozen Food 12.29 0.08 Tea 148.17 0.95 Raw Jute 421.58 2.71 Chemical Product 2008-09 373.18 2.40 Jute Goods 177.32 1.14 Leather 122.3 0.79 Agricultural Products 1508.06 9.69 Others 15565.19 100.00 Total Source: Export Promotion Bureau, Bangladesh (Value in Million US$) Year

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2.7 Problems behind Readymade Garments Industry: 2.7.1 Backward Linkage: Backward linkage means the use by one firm or industry of produced inputs from another firm or industry (Alan V Deardorff , 2001) That means the finished garment relies on three steps; first level for converting fibers/cotton to yarns, second step for converting yarns to grey fabrics and the final step for converting gray fabrics to dyed, printed of other finished fabrics. Out of three steps, Bangladesh is only capable of knitting, finishing in knitwear sectors but far behind in producing yarn, fabrics which is a major factor for woven section. Only success came to accessories where 80% demand of our country was fulfilled.

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The success of the government industry very much depends on how effectively RMG sector linkages may operate backward and forward. If the manufacturer has effective control over the supply of raw materials, Components and ancillary services needed to produce final product. Then the production is likely to be interrupted. If the company develops an effective marketing service strategies that provide right signal, and if marketing and distributing system as a whole are effective for having the products reach the target markets, then the sales revenue for the company is likely to be maximized. It means that to minimize cost of production and maximize sales revenues both backward and forward linkages need to be integrated. Here the issue of developing backward linkages is discussed with reference to the desirability of having control over the supply of inputs of RMG industry, mainly, fabric, yarn and processing status (Siddique, 2004). These three steps are integrated into each other as shown in table 1. It shows that these three steps are essential for backward linkage integration (BGMEA, January 2005) Some other problems that the industries face: Dependency on different countries for raw materials Illiterate, unskilled and unsatisfied Workers Lacking of Resources Political Instability Low Working Salary: Lack in Marketing Tactics M/C advancement is necessary Absence of easily on-hand middle management. Small number of manufacturing methods Lack of training organizations for industrial workers, supervisors and managers Fewer process units for textiles and garments Incompetent ports, entry/exit complicated and loading/unloading takes much time Time-consuming custom clearance

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CHAPTER 3
ANALYSIS

3.1 SWOT Analysis: 3.1.1 Strengths 1. The biggest foreign currency earning industry. 2. Ancillary services, fees, commission are more. 3. RMG credit experts are available. 4. Competitors like China doesnt have vertical integration

3.1.2 Weaknesses 1. Backward Linkage industry is absent. 2. Automation is not cost effective in our country. 3. External raw materials supply.

3.1.3 Opportunities 1. Investment in Backward Linkage Industry. 2. Liberalized Globalization will push to improve the quality of the RMG products. 3. Composite plants will get advantage by reducing lead time.

3.1.4 Threats 1. WTO agreement 2. Pressure on Compliance issues from consumer groups. 3. Negative image of Bangladesh in the international market for less concern on human and social issues.

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CHAPTER 4
CONCLUSION

4.1 Recommendation: Bangladesh economy at present is more globally integrated than at any time in the past. The MFA phase-out will lead to more efficient global realignments of the Garments and Clothing industry. The phase out was expected to have negative impact on the economy of Bangladesh. Recent data reveals that Bangladesh absorbed the shock successfully and indeed RMG exports grew significantly both in FY07 and (especially) in FY08. Due to a number of steps taken by the industry, Bangladesh still remains competitive in RMG exports even in this post phase-out period. Our Garments Industries can improve their position in the world map reducing the overall problems. Such as management labor conflict, proper management policy, efficiency of the manager, maintainable time schedule for the product, proper strategic plan etc. Government also have some responsibility to improve the situation by providing- proper policy to protect the garments industries, solve the license problem, quickly loading facility in the port, providing proper environment for the work, keep the industry free from all kind of political problem and the biasness. Credit must be provided when the industry fall in need. To be an upper position holder in the world Garments Sector there is no way except follow the above recommendations. We hope by maintaining proper management and policy strategies our country will take the top position in future

4.2 CONCLUSION Optimists see opportunities in challenges; pessimists see only challenges in opportunities. With MFA phase-out US market for apparels is going expand dramatically as uncompetitive US firms are compelled to make their exit. There will be enormous opportunities for competitive players to make new breakthroughs in US market. Bangladeshs objective should be to retain the current share of 2.5% in US market during the first 3 years of phase-out (2005-8). Then enhance the market share to 3% and above. Bangladesh should take the strategy of cautious Optimism.

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References http://www.bgmea.com.bd/ http://www.bkmea.com/ http://www.epb.gov.bd/ http://www.bbs.gov.bd/ http://www.mincom.gov.bd/ http://www.btmadhaka.com/ http://www.epzbangladesh.org.bd/ http://www.bangladesh-bank.org/ http://www.bangladeshknitwear.com/ http://www.nbr-bd.org/ http://www.fbcci-bd.org/ http://www.bdgarments.wordpress.com/history/ http://www.ideas.repec.org/p/pdb/opaper/50.html http://www.en.wikipedia.org/wiki/Bangladeshi_RMG_Sector http://www.libcom.org/tags/bangladeshi-garment-workers https://www.cia.gov/library/publications/the-world-factbook/geos/bg.html