Contents V Friedrich-Ebert-Stiftung in Southeast Asia Vii Editorial Axel Schmidt

Contents v Friedrich-Ebert-Stiftung in Southeast Asia vii Editorial Axel Schmidt

1 The Post-MFA Challenges for Small Developing Countries Denis Audet

13 Trends in the Garment Industry in South Korea Joon-Soo Jon

23 Taiwan’s Textile and Garment Industry and Its Implications Lee-in Chen and Kai-Fang Cheng

35 A Survey of China’s Apparel Industry Xingmin Yin

51 The Philippine Garment Industry after MFA Rene E. Ofreneo

61 Indonesia’s Garment Industry before and after the Crisis Thee Kian Wie

73 Mauritius’ Garment Industry in the New Situation Sawkut Rojid

83 Ready-Made Garment Exports: The Case of Sri Lanka Saman Kelegama

93 The Ready-Made Garment Industry of Bangladesh Nazneen Ahmed

107 Myanmar’s Garment Industry in Sustainable Development Myo Myo Myint

113 The Garment Industry in the Lao PDR Syviengxay Oraboune

125 Garment Exports: The Case of Cambodia Kum Kim and Seng Sovirak

135 Textile and Garment Industry in Vietnam’s Economy Le Van Dao iii Friedrich-Ebert-Stiftung in Southeast Asia

Friedrich-Ebert-Stiftung has been present in Southeast Asia for more than 30 years. Its country offices in Bangkok, Jakarta, Manila and Hanoi have been active in implementing national cooperation programmes in partnership with parliaments, civil society groups and non-governmental organisations, academic institutions and ‘think-tanks’, government departments, political parties, women’s groups, trade unions, business associations and the media.

In 1995, the Singapore office was transformed into an Office for Regional Cooperation in Southeast Asia. Its role is to support, in close cooperation with the country offices, ASEAN cooperation and integration, Asia-Europe dialogue and partnership, and country programmes in Cambodia and other ASEAN member states where there are no Friedrich-Ebert-Stiftung offices.

Its activities include dialogue programmes, international and regional conferences (e.g. on human rights, social policy, democratisation, comprehensive security), Asia-Europe exchanges, civil education, scholarship programmes, research (social, economic and labour policies, foreign policy) as well as programmes with trade unions and media institutes.

Dialogue + Cooperation is a reflection of the work of the Office for Regional Cooperation in Southeast Asia of Friedrich-Ebert-Stiftung in Singapore: it deals with ASEAN cooperation as well as the Asia- Europe dialogue.

Dialogue + Cooperation will tell you about our activities in Southeast Asia by publishing important contributions to our conferences and papers from our own work. Dialogue + Cooperation will contribute to the dialogue between Asia and Europe by systematically covering specific up-to-date topics which are of concern for the two regions. Dialogue + Cooperation will be an instrument for networking by offering you the opportunity to make a contribution and use it as a platform for communication.

Head of Office: Axel Schmidt

Address: 7500A Beach Road #12 - 320/321/322 The Plaza Singapore 199591 Tel: (65) 62976760 Fax: (65) 62976762

E-mail: [email protected]

Web site: http://www.fesspore.org

v Editorial Dialogue + Cooperation 2/2006

Dear Reader,

With the expiry of the WTO Agreement on Textiles and Clothing (ATC) on 31 December 2004, it was feared that those garment-producing countries that previously benefited from the quota system would be the big losers in terms of export earnings and jobs. This has been a particular concern in countries that earn their export revenues predominantly from textiles and clothing, many of them with least developed economies (LDE). Experts forecast that in the global competition, China and India would seize the lion’s share of the market.

After more than a year of a quota-free world market, the picture is somewhat mixed. China and India have gained market share, but not to the extent predicted. Even some LDE, among them prominently Cambodia, were able to expand their exports. The main reasons for this development are twofold. Due to domestic administrative and technological constraints, India is not yet able to throw its full weight into the world arena. With regard to China, the US and the EU have invoked temporary safeguards that will curb textile and clothing imports from China into those markets until end of 2008. These circumstances have given some LDE a small breather.

However, there is no doubt that the post-quota world trade in garments will follow a different logic. Whereas previously investments in the garment sector were based on considerations such as the preferential margins of a given country and low labour costs, nowadays domestic and foreign direct investment will be determined by quite different factors and considerations. The increasing importance of lead time and design also in low-priced market segments implies that low labour costs are not sufficient to ensure competitiveness. High costs of utilities, poor infrastructure and long and unpredictable lead times carry more weight than the lower labour costs in many LDE, particularly in those located far from major markets.

Before 2005, the sourcing of clothing was largely influenced by quotas in the sourcing country, and the availability of raw materials was a secondary consideration. After 2005, in the absence of quotas, the availability of raw materials and a country’s capacity to process them will become more crucial. Vertically integrated production of textiles and clothing—from the design to the packaging of the final product—will provide an important competitive advantage to exporting companies and countries. Purchasers will most likely concentrate on those countries that are competitive in terms of cost, quality, delivery time, productivity and compliance with labour standards.

All these factors will lead to the restructuring and relocation of the garment industry on a global scale. Even if the end of quotas has potential benefits for development in the long run, the changes in the trade regime will concern hundreds of thousands of enterprises and millions of workers in both developed and developing countries. The most vulnerable people, in particular women, and the most vulnerable countries, in particular the LDE, are likely to suffer most.

In order to minimise the costs and maximise the benefits of the liberalised trade in garments, vii the textile and clothing producing countries need to undertake adjustments. With the new trade regime, some countries will not be able to compete. They will have to develop and implement restructuring policies to move away from textile and clothing production and reduce their dependency on trade in that sector. Other countries will still have a competitive advantage under the new environment. However, the long-term survival of their textile enterprises in the global market will require restructuring oriented towards product upgrading and market diversification. Thus, restructuring will be an important issue throughout the next years. In the process, however, some workers will lose their jobs, and alternative employment will have to be found for them. Those whose jobs are maintained will have to improve their skills to meet the changing requirements of the market.

Socially sensitive restructuring at national and enterprise levels can mitigate the negative economic and social impacts of rapid and major structural change and ease the transition to new opportunities. Governments have an important role to play in facilitating restructuring. They can, in consultation with the social partners, offer guidelines and incentives in developing a coherent industrial policy in which the contribution of the industry to social and economic development would be clearly identified. They can ensure a legal and regulatory environment in which enterprises can restructure, and they can limit social costs through active labour market policies.

Against this background, the Cambodian Institute for Cooperation and Peace and the Singapore-based Friedrich-Ebert-Stiftung Office for Regional Cooperation in Southeast Asia organised in Phnom Penh, Cambodia, on 5-8 June 2006 a conference on “Sustaining Development through Garment Exports: Cambodia and the Least Developed Economies”. It aimed to take stock of the textile and clothing sector in some of the prominent producing countries one and a half years after the expiry of the ATC. The objectives were:

■ to identify the strengths and weaknesses of these economies in coping with the new order of the world garment market; ■ to evaluate the efforts of economic, social and political actors to develop strategies for change; ■ if possible, to recommend appropriate measures for the transitional period of adjustment.

The current issue of D+C presents some selected contributions from this conference. Setting the tone for the conference, Dennis Audet argues that in the post-ATC period, countries that seek to maintain an export-led strategy in textiles and clothing should not call for an extension of the old quota system. They rather should shift from mere manufacturing to the higher value-added segments of the supply chain. His argument seems to be valid for most of the textile-producing developing countries. To achieve this goal, Audet urges these countries to tackle competitive weaknesses and domestic obstacles to growth through a market-based agenda of adjustment measures. His appeal merits closer attention. A look into the success story of those two east Asian countries that started their industrialisation with an export-led garment industry seems to give his view some support.

South Korea’s textile and clothing industry ranked until 2002 as the country’s third industry in terms of trade surplus, after electric/electronics and machinery. However, since then it has substantially lost ground. As Joon-Soo Jon points out, the reasons for this trend are threefold. Firstly, South Korea has over the years remained in the produc- viii tion and OEM (original equipment manufacturing) segment of the value chain. Sec- ondly, its companies have neglected to invest in the production of a larger variety of high value-added products. Thirdly, South Korean companies proved to be inflexible towards diversifying fashion trends.

In contrast, the history of Taiwan’s textile and garment industry can be regarded as a manual for industrial development. Taiwan has mastered all major crises in the sector during the last 50 years through a mix of structural adjustments, sound industrial policies, innovation and diversification. Starting from low-end cotton weaving, going on to import- substitution of cotton by inventing synthetic fibres, Taiwan is today at the top end of the value chain. Nowadays, the textile and garment sector has lost its significance in the industrial landscape of Taiwan. Lee-in Chen and Kai-Fang Cheng, however, maintain that the experiences gained in the garment sector served to expand Taiwan’s economy into other manufacturing sectors and to transform the agrarian country poor in natural resources into a high-tech economy.

At odds with evolutionist thinking about economic development is the Chinese laboratory. Here we find at the same time low-end, ‘sweatshop’ types of textile manufacturing as well as high-end fashion factories where labour is ‘decently’ remunerated. It’s the sheer magnitude of China and its human resources that allows this simultaneity. In particular, the huge potential of China to produce on the low-end and export cheap clothing puts pressure on all developing countries competing in this market segment. Xingmin Yin’s affirmation that the Chinese apparel industry plays only a very minor role in China’s overall export performance doesn’t seem to quiet the fears. However, China in the next years will not be self- sufficient in textiles, and it is the world’s second largest textile importer. Therefore, China should be regarded not only as a threat but also as a huge market for other garment exporting countries.

In post-quota garment manufacturing, some southeast Asian countries will face considerable competition and pressure. Benefiting from previous privileged access to the US market, the garment sector there neglected to invest in skills upgrading and technology and stagnated at the low end of the value chain. According to Rene Ofreneo, the garment industry in the Philippines will decline. The future of Indonesia’s garment sector seems better. Despite the constraints from which Indonesian manufacturers suffer like others in developing countries, Thee Kian Wie is prudently optimistic. With a high product diversification and often the latest machinery, Indonesia’s apparel industry can produce at competitive costs to meet the international demand for garment products from the lower to the upper end of the scale. However, it is worrying that in neither the Philippines nor Indone- sia do government, the private sector and social partners seem to be aware of the dimensions of the changes to the world apparel market and their implications.

A look at an African garment exporting country reveals similar features. Mauritius, the African economic miracle, has been hit by the post-quota era. All the efforts to develop the previous sugar cane-dominated economy into a sophisticated, fully fledged apparel industry seem at stake. Sawkut Rojid, however, argues that Mauritius will keep some advantages over other garment exporting countries. On one side, high labour costs are compen- sated by a high labour productivity. On the other side, government and garment manufacturers are restructuring the sector to move further up the production and value chain. In

ix addition, Mauritius benefits until the end of 2007 from privileged access to the US and the EU markets.

The garment industries in Asia’s least developed economies share similar features. In general, they have no supporting industries or lack industrial backward integration. There- fore they have to import raw materials and machinery, are imbedded in a poor infrastructure and face administrative or bureaucratic hurdles. The sole asset of Asian LDE is the abundance of cheap labour. In the absence of other productive sectors, garment industries play a significant role in the national economies and absorb a substantial portion of the labour force that would otherwise be unemployed and struggling in the informal sector. Finally, most Asian LDE benefited in the past from quota and privileged quota-free access to the US and EU markets. What prospects does the liberalised trade in garments offers Asia LDE?

Under the quota regime, the garment industry became a vital part of Sri Lanka’s economy. Manufacturing, however, remained at low productivity levels, and rising competition on a world scale in post-quota times puts Sri Lanka’s garment industry under enormous strain. According to Saman Kalegama, there are divergent views of the perspective for the garment sector. Pessimists forecast that most of the industry will not survive. On the other side, optimists state that Sri Lanka is one of the few developing countries that has prepared itself for the aftermath in terms of public awareness, restructuring policies and skills upgrading. These factors would be beneficial for Sri Lanka in the medium term. Bangla- desh, another Asian country depending heavily on garment exports, may lose considerably in open competition with China if, according to Nazneen Ahmed, no serious efforts are being made to overcome domestic structural bottlenecks that hamper the garment sector.

Due to market reforms, the garment industry in Myanmar experienced a boom in the late 1990s and became in 2000-2001 the largest source of foreign exchange earnings. In response to the deteriorating domestic political climate in Myanmar, international consumer boycott campaigns in 2002 and US sanctions in 2003 forced probably 50 per cent of Myanmar’s manufacturers out of business and laid off some 50,000-80,000 workers. Due to unreliable statistical data, it is impossible to evaluate how Myanmar may position itself in the liberalised garment market. Therefore, Myo Myo Mint cautiously recom- mends that Myanmar’s garment manufacturers search for non-US markets to compensate for the loss induced by international boycotts.

Landlocked Laos rejoices in a small but for the national economy significant garment industry. The second largest foreign exchange earner, after electricity, the garment sector provides some 20,000 jobs and additional incomes for the mainly rural population. Laos cannot compete with its larger neighbours and in particular not with China. However, it may maintain a garment industry if it specialises in upper-end niche products. In order to achieve this goal, Syviengxay Oraboune writes, the garment sector needs to improve at enterprise and industry level.

Contrary to common assumptions that Cambodia’s garment exports would suffer considerably from the end of the ATC, they have experienced robust growth since then due to several circumstances. When the USA and the EU invoked temporary safeguards in 2005 to curb textile and clothing imports from China, Taiwanese manufacturers relocated their x production from China to Cambodia in order to benefit from its still privileged access to both markets. Furthermore, international buyers increased their purchases in Cambodia, honouring the industry’s adherence to the ‘Better Factory’ initiative, a programme of the International Labour Organization for improvement of working conditions in the garment industry.

Since the mid-1990s, Cambodia has experienced a tremendous expansion of its garment sector. The country is highly dependent on this industry for export earnings and manufacturing jobs. Whether Cambodia can turn these momentary gains into a sustainable development depends on more than only compliance with core labour standards. Buyers decide their sourcing upon four factors: price, quality, lead time and social compliance. Cambo- dian labour costs are still among the lowest in Asia, a third of those in the Chinese textile industry. Labour productivity and product quality appear to be improving. However, with regard to lead time, Cambodia lags far behind all other Asian garment export countries, as Kum Kim and Seng Sovirak point out. Besides additional costs for unofficial payments and lengthy administrative procedures, these are the challenges the Cambodian government and to a lesser extent the garment manufacturers have to master if they don’t want to be outrun by countries such as Vietnam.

Over the last 10 years, the garment industry in Vietnam has registered a remarkable growth and become the second largest export earner of the country. When the last barriers and quotas for Vietnamese apparel are removed with Vietnam’s accession to the WTO by the end of 2006, the sector may experience a further boost but fierce competition as well. Vietnam is generally considered to be competitive in garment manufacturing because of low labour costs, high labour productivity and a high working ethos. Although Vietnam shares similar production parameters with Cambodia, there is one striking difference. Whereas in Cambodia fewer than 10 per cent of the garment factories are owned by Cambodians, in Vietnam some 60 per cent of all textile and garment firms are in private Vietnamese hands, according to Le Van Dao. The Vietnamese apparel industry needs considerable investments to move up the production and value chain. But with ambitious domestic entrepreneurship, it may succeed.

All papers and statements reflect the opinions of the individual authors. The Singapore office of Friedrich-Ebert-Stiftung would like to express its sincere appreciation to all con- tributors to this edition.

The Editor Friedrich-Ebert-Stiftung Office for Regional Cooperation in Southeast Asia

xi The Post-MFA Challenges for Small Developing Countries

The Post-MFA Challenges for Small Devel- oping Countries

Denis Audet *

Overview

Rules governing world trade in textiles and jumped from 40 per cent to 65 per cent clothing have changed drastically with the between 1980 and 2000 and has provided demise of quantitative restrictions on tex- valuable production and trade benefits to a tile and clothing imports at the end of 2004 large number of developing and least de- as agreed under the WTO Agreement on veloped countries (LDCs). Table 1 shows Textiles and Clothing (ATC). The end of the increase of clothing exports to the Eu- the quota period occurred in an increas- ropean Union (EU 25) between 1995 and ingly globalised world economy, in which 2004, which exceeded 50 billion euros. production and marketing activities depend The end of quotas also highlighted a con- on business decisions that respond to com- cern that a few of the larger developing petitive opportunities around the world. It countries, i.e. China and India, may cap- represents a systemic change that is chal- ture a disproportionate share of the eco- lenging the global sourcing channels formed nomic benefits arising from the liberalised over decades of artificial trade protection, market. China and India have increased and it entailed adjustment for all parties their clothing exports to the world’s largest involved in the supply chain. markets (the European Union and the United States) by more than 40 per cent Seen from a longer term perspective, the and 25 per cent respectively, and thus cap- end of quotas is part of an adjustment proc- tured more than 100 per cent of the total ess that has taken place over both the WTO- import growth of these markets in 2005 scheduled 10 year phase-out period (1995 (in effect displacing imports from other to 2004) and the long-term adjustment sources). Despite the imposition of safe- process in which industrial activities mi- guard measures on Chinese exports by both grate with the industrial evolution of coun- the United States and the European Union, tries. Over the last quarter century, more few other countries have increased their than 4.5 million textile and clothing jobs total exports in 2005. As a result, the anxi- have disappeared in developed countries as ety about the competitive strength of Chi- suppliers have responded to competitive nese suppliers remains unabated a year af- pressures by shifting production towards ter the end of quotas. faster growth products, modernising their equipment and adopting new working Concerned countries, particularly the methods involving the transfer of sewing LDCs, are seeking improved preferential activities to low-wage countries. In spite of access to developed countries’ markets as a the quantitative trade restrictions, the de- way to help them minimise their adjust- veloped countries’ share of clothing imports ment hardships and to compete more ef- originating from developing countries fectively with China and India. These re-

* Denis Audet is an independent consultant specialising in trade policies. He was the lead drafter of A New World Map in Textiles and Clothing: Adjusting to Change, the OECD publication released in 2004 on the adjustment challenges resulting from the elimination of MFA quotas. 1 Dialogue + Cooperation 2/2006

launched by WTO members in 2001. Other T.1elbaT .1elbaT .1elba IstropxEdesaercnI stropxEdesaercnI stropxEdesaercn initiatives are also discussed in the Doha t4002-5991,52UEot 4002-5991,52UEot 4002-5991,52UEo negotiations, such as the zero-tariff sectoral initiative for textiles sponsored by the EU, stropxE CyrtnuoC yrtnuoC yrtnuo the status quo initiative sponsored by Tur- )noillimRUE( key for tariff harmonisation and the calls to preserve preferential tariff margins in C2anih 88,51 favour of developing countries (preference erosion). With still no consensus in sight T3yekru 89,8 for the formula tariff cut for industrial products (including textiles and clothing) at this R6ainamo 37,5 advanced stage of the Doha negotiations, B4hsedalgna 05,5 freer trade in textiles and clothing remains elusive. I0aidn 87,1 Under relentless pressure to adjust, coun- T5aisinu 47,1 tries aspiring to maintain an export-led strategy in textiles and clothing need to B5airaglu 46,1 shift their industrial expertise from manufacturing to the higher value-added seg- M1occoro 95,1 ments of the supply chain. National suppliers need to place greater emphasis on P5natsika 69 education and training of services-related skills, such as design, material sourcing, C2aidobma 59 quality control, logistics and retail distribution, and to encourage the establishment I5aisenodn 58 of joint structures in which domestic sup- S9aknaLir 77 pliers can share market knowledge and offer more integrated solutions to prospec- V8mantei 17 tive buyers. T4dnaliah 96 Against this increasingly competitive environment, government actions should be 26-16SH,seiresedartngierof,tatsoruE:ecruoS devoted to strengthening the capacity of the private sector to deal effectively with rapid quests emerged in the context of the Doha change and growing competition in order Round of multilateral trade negotiations to capture trade opportunities.

I. The Multi-Fibre Arrangement period

The elimination of quantitative restrictions ment (MFA) regime of quantitative trade under the WTO ATC at the end of 2004 restrictions when it entered into force in challenged the global sourcing channels that January 1995 and set up the multilateral were formed over decades of trade restric- trade framework for trade in textiles and tions and entailed considerable adjustment clothing applicable for all WTO members. for all concerned, especially clothing assem- The ATC provided for the elimination by blers in remote low-wage countries. The 31 December 2004 of all forms of quanti- ATC superseded the Multi-Fibre Arrange- tative restrictions applied to trade in tex- 2 The Post-MFA Challenges for Small Developing Countries tile and clothing products, including those access to mask the competitive weaknesses that originated from the MFA regime. The of textile-exporting countries. These weak- ATC phased itself out of existence at the nesses must be addressed if countries want end of 2004. to maintain an export-led development strategy. The import quotas initially imposed under the MFA contributed to the international While low wages can still give developing fragmentation of the supply chain by accel- countries a competitive edge in world mar- erating the diversification of supply. This kets, quick turnaround times are now play- process worked to the disadvantage of the ing a far more crucial role in determining more efficient and quota-constrained sup- international competitiveness in the fash- pliers, many of which subcontracted cloth- ion-oriented and time-sensitive textile and ing assembly into low-wage third countries. clothing markets. The comparative advan- Hence, the MFA benefited the least com- tage of developing countries in the assem- petitive suppliers, most of which were lo- bly process, i.e. the sewing process, based cated in small developing countries and on low wages, does not necessarily carry LDCs. over into a comparative advantage in the management of the entire supply chain During decades of MFA-related quotas, the when all services-related dimensions are textile industry did not migrate to develop- taken into consideration. Countries that ing country locations as fast as the clothing aspire to maintain an export-led strategy in industry. In the post-ATC period, there are textiles and clothing need to shift their in- no more artificial obstacles, i.e. quotas, to dustrial expertise from manufacturing to the prevent the emergence of high-quality tex- higher value-added segments of the supply tile capacity in developing countries and chain. This can be done by upgrading their stronger clusters of expertise. Moreover, domestic skills in design, material sourcing, there are neither quantitative trade restric- quality control, logistics and retail distri- tions nor MFA-related guaranteed market bution.

II. Trade Developments in Textiles and Clothing in 2005

Both the European Union and the United exceeding 40 per cent and 25 per cent from States used safeguard measures against China and India respectively. Chinese imports in 2005 in response to The trade situation of Canada (the other import surges. These measures contributed country that still applied MFA quotas at to reducing their total clothing import the end of 2004) offers similarities to the growth for 2005 to 7.7 per cent and 5.6 EU and the US import developments, with per cent respectively. Nevertheless, China increased Chinese exports in 2005 exceed- stands alone as the outstanding beneficiary ing the total Canadian import growth. De- in 2005, with export growth exceeding 40 tailed Canadian data covering domestic per cent in both destinations. In fact, in- shipments and exports, shown in Table 3, creased Chinese clothing exports to the EU provide some insights into the substitution in 2005 (EUR10,735 million) exceeded the effect that resulted from the removal of overall increase of clothing imports of the quotas. The relatively small textile and cloth- EU (EUR7,679 million). Few other exporting import growth in 2005 of 2.7 per cent ers gained in 2005, with the exception of masked a sharp drop in domestic produc- India. The trade story for the United States tion (-8.9 per cent) and exports (-9.2 per is basically the same, with import growth cent) which in turn translated into a sharp 3 Dialogue + Cooperation 2/2006

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drop in employment of 10.1 per cent. The tile production. The four countries— anxiety level of Canadian suppliers relative China, India, Turkey and USA—that gained to the competitive strength of China and, the most in the EU 25 market in 2005 all more generally all import sources, remains have in common an integrated textile and high. The recent appreciation of the Cana- clothing production. The proximity of high dian dollar relative to the US dollar and to quality textiles in these countries gives a other Asian currencies (de facto tied to the competitive advantage to their clothing US dollar) has also contributed to this sharp manufacturers in meeting short production domestic adjustment. and delivery commitments. The end of quotas has exposed the vulnerability of a EU clothing imports for 2005 confirm the fragmented supply chain and the competi- competitive advantage of exporting coun- tive strength of a domestically integrated tries that have a tradition of domestic tex- supply chain. Thus it should not be sur-

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)BIM(etarotceriDselitxeT&lerappA,adanaCyrtsudnI:ecruoS 4 The Post-MFA Challenges for Small Developing Countries prising to see that US clothing manufac- tiveness will arise at the end of 2008, when turers increased their exports to the Euro- Chinese exports are no longer constrained pean market by 110 million euros or about by safeguard measures. Even with lower 20 per cent when, simultaneously, Bangla- wages than in China, preferential market desh exports to the European market de- access in developed markets and the effect clined by 443 million euros or about 6 per of safeguards, these countries did not gain cent despite their low wages and preferen- export market share in developed markets tial access. in 2005.

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III. Trade Policy Challenges in the Post-MFA Period

Trade policies other than MFA-related quo- preferential trade arrangements, such as tas have also had a major impact on the regional trade arrangements (RTAs) and development of geographical patterns of Generalised System of Preferences (GSP) trade in textiles and clothing. It is argued regimes. The magnitude of economic ben- that the elimination of import quotas has efits accruing under these arrangements reduced the attractiveness of outward varies greatly because of differences in processing programmes (OPP) and, con- scope and the specificity of the rules of versely, increased the attractiveness of other origin that confer preferential access.

Outward Processing Programmes

Outward processing or production-sharing total clothing imports by the United States programmes involve the temporary export in 1999 (WTO 2001). Since then, the im- of textiles or pre-cut fabrics from the OPP portance of outward processing trade has initiator country to low-wage countries for considerably diminished in the European final assembly, with the finished articles then Union with the entry into force of several being re-imported under preferential provi- free trade agreements (FTAs) with neigh- sions. For low-wage countries, the assembly bouring countries that made OPP almost of imported fabrics into clothing is a simple redundant. In a less pronounced way, the form of industrial activity. OPP eligibility importance of outward processing trade for often acts as a booster for their export-ori- the United States has diminished with the ented strategies by giving them instant ac- implementation of the North American cess to high-quality inputs and foreign dis- Free Trade Agreement (NAFTA), but OPP tribution networks. For developed countries, eligibility was expanded under the Trade outward processing transactions strengthen Development Act of 2000, and outward the competitive position of domestic sup- processing trade accounted for 10.9 per pliers by enabling them to transfer labour– cent of clothing imports in 2003. intensive sewing activities to low-wage countries. To make outward processing transac- Without the trade-distorting impact of quo- tions worthwhile, the cost savings associated tas, the inherent vulnerability of business with low-wage assembly in offshore centres models developed under OPP is exposed. and tariff reductions must exceed the inher- On the one hand, outward processing trans- ent additional costs of production fragmen- actions remain economically attractive only tation, namely two-way shipments, longer if the margin of preferential duty exceeds and larger inventory and added coordina- the difference between the OPP-related cost tion to manage the fragmented supply chain. and the logistical cost incurred by competitive suppliers. With distance and time act- Under the MFA-related quota regime, the ing as trade barriers, there are no net cost inherent cost inefficiencies of outward advantages from outward processing trans- processing transactions were partly masked actions involving offshore assembly centres by the trade-distorting impact of quota al- that are either geographically remote from locations. Moreover, outward processing the OPP initiator country or nearby cen- transactions provided a protected market tres with poor transportation infrastructure. for textiles made in OPP initiator countries. Outward processing trade accounted On the other hand, there are instances for 15 per cent of the EU’s external trade where offshore centres will be able to offer in textiles in 1995, and for 24 per cent of lower prices to buyers of clothing products 6 The Post-MFA Challenges for Small Developing Countries assembled from third country textiles. It portunities from developed countries to means that the textile industry in OPP ini- assist them in competing with the most tiator countries loses its protected OPP competitive suppliers. Most requests con- textile export markets and has to adjust to cern the negotiation of FTAs with devel- intensified foreign competition in its do- oped countries and/or improved GSP ac- mestic market. Simultaneously, OPP recipi- cess. In any of those options, the improved ents that have gradually developed their access will mean more competitive pres- expertise are conscious of their vulnerabil- sure on the domestic textile industry of ity and are requesting improved trade op- developed countries.

Regional Trade Arrangements

In the post-ATC period, comprehensive ponents imported from the United States. RTAs can provide a useful policy frame- With NAFTA, the trade rules have changed work to underpin the development of a and all activities of the supply chain, not regionally integrated textile and clothing only sewing, can be performed in Mexico supply chain and to facilitate economic di- (and in Canada). In the context of NAFTA, versification strategies for members, but Mexico has been able to promote the con- they don’t necessarily imply competitive- solidation of its regional clusters of textile ness. It is argued that a comprehensive and clothing expertise and to move along RTA is a necessary but insufficient condi- the supply chain from the simple assembly tion to promote trade flows and qualita- of imported components, thereby bringing tive transformation in textile and clothing backward and forward linkages to the do- production. Although production and mestic economy (Gereffi et al. 2002). In a trade opportunities are created under com- similar way, the customs union between prehensive RTAs, certain domestic factors Turkey and the European Union has im- play instrumental roles in reaping the trade proved opportunities for further integrat- opportunities. Among these factors are: ing the Turkish textile and clothing mar- the ability to attract the right kind of lead kets into larger European markets. How- retailers, brand name marketers and ever, despite their integration process into manufacturers; a pre-existing cluster of ex- larger regional markets, neither Mexico nor pertise; a striving and vibrant entrepre- Turkey is shielded from the need to adjust neurial environment; and geographical to external competitive pressures as prod- proximity to minimise the transit time of ucts originating from other countries, e.g. shipments. China, are increasingly competitive in both European Union and NAFTA markets. In- Prior to NAFTA, access to US markets for deed, Mexican textile and clothing exports Mexican suppliers was primarily driven by to the United States dropped by 7.1 per outward processing transactions in which cent in 2005, displaced by increased im- Mexican suppliers merely assembled com- ports from China.

Stringent Rules of Origin for Textiles and Clothing

Rules of origin are a necessary part of preferential treatment of trade for member coun- erential trade arrangements, such as GSP, to tries—to avoid the problem of trade deflec- ensure that the trade preference is granted tion, where imports enter the region through to products that really originate from the the member country whose import tariff is beneficiary countries. Similarly, they are a the lowest. There are considerable dispari- necessary part of FTAs to preserve the pref- ties in the rules of origin applied under vari- 7 Dialogue + Cooperation 2/2006

ous preferential arrangements and in the from regional partners, rules of origin may utilisation rates of respective arrangements. encourage a vertical integration of the production chain which may not reflect the Specific and more stringent rules of origin least cost opportunities in a globalised en- are often applied on sensitive products, such vironment. A further problem with specific as textiles and clothing, which make it more rules of origin is that the determination of difficult for suppliers to achieve the regional regional content for yarns, fabrics and fi- content. This creates an incentive for manu- nal products requiring multiple components facturers to source inputs from regional can become so burdensome and costly for suppliers and may act as a trade barrier on suppliers that they prefer not to use the its own. By limiting the sourcing of inputs preferential arrangements

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Several countries have recently improved sation rate was the inability of preference- their GSP regimes by broadening the scope receiving countries to exploit the available of eligible textile and clothing products and/ preferences fully when these are subject to or offering comprehensive duty-free and strict origin requirements and related ad- quota-free treatment for products originat- ministrative requirements. ing from LDCs. Table 6 shows the rate of utilisation of the GSP regimes for textiles It is argued that while rules of origin are and clothing originating from LDCs in necessary elements to ensure that prefer- 2001 and 2002. It shows very low utilisa- ential trade actually benefits its targeted tion rates for the United States and Canada countries, overly restrictive rules may not (before its modified regime in 2003), and provide meaningful access and could lead about half of eligible imports qualified for to an under-utilisation of preferential ac- GSP preferential rates in the EU and Ja- cess schemes. By contrast, liberal rules of pan. In other words, slightly less that half origin may not benefit the targeted group of total textile and clothing exports did not of countries as much as originally intended, meet the rules of origin and thus duties on and the associated preferential access can imports were imposed at the MFN rates. invert the structure of tariffs with conse- Brenton and Manchin (2002) have argued quential problems for national manufactur- that the main explanation for the low utili- ers. Moreover, liberal rules of origin do not 8 The Post-MFA Challenges for Small Developing Countries necessarily confer competitiveness. Inher- ing on its liberal commitments, Canada ent competitive factors explain which coun- announced a series of new tariff cuts in early tries are likely to gain the most benefits 2004 to address the problems caused by from preferential arrangements. The dis- inverted tariff protection and, simultane- tance between remote trading partners en- ously, launched a programme designed to tails long periods for shipments, and the improve production efficiency of Canadian amount of expertise in beneficiary coun- suppliers. tries seems to matter. Finally, the identity of foreign investors also appears to influ- One important lesson to be drawn from ence the patterns of input procurement.1 the Canadian experience is that liberal rules of origin require a comprehensive approach Canada’s modifications to its GSP regime to ensure that the domestic processing in- offer interesting lessons. In 2003, Canada dustry also benefits from trade liberalisa- granted duty-free and quota-free entry to tion programmes. The Canadian policy all textile and clothing imports originating change regarding rules of origin has been from LDCs that met the requirement that highly controversial and met strong oppo- 25 per cent of content originate from any sition at the time from domestic suppliers. LDC, a GSP beneficiary or Canada. Four main issues are worth noting in the present One year after the demise of the ATC, the context: anxiety about the competitive strength of China remains unabated, and vulnerable (1) The liberal rules of origin granting the exporting countries are reiterating their de- right to accumulate content percentage from mands to access developed countries’ mar- any LDC or GSP beneficiary have allowed kets on an improved preferential basis as a LDCs drastically to boost their clothing means to compete more effectively with exports to Canada within a very short pe- China and India. Because there is virtually riod of time. no production of high-quality textiles in LDCs, any preferential access arrangements (2) The improved access has enabled many in favour of LDCs must take into account LDCs to expand their exports, but the dis- that they have to use textiles originating from tribution of gains was nevertheless concen- third countries to compete on export mar- trated in two beneficiary countries, Bang- kets. In these circumstances, it seems inevi- ladesh and Cambodia. table that in providing preferential access to LDCs, there will be some collateral benefits (3) Large trade gains also accrued to the for the suppliers of high-quality textiles. largest developing countries, such as China and India, which shipped textiles to LDCs In the context of the Doha negotiations, that were subsequently assembled into LDCs are requesting tariff- and quota-free clothing products and later exported to access to developed countries for all their Canada. exports. While there are favourable signals from most developed countries regarding (4) The duty-free treatment of clothing such access, some are seeking to exclude products has inverted the structure of tar- trade-sensitive products, e.g. textiles and iffs with consequent problems for Cana- clothing, from such access. Moreover, there dian manufacturers, who have claimed un- are no signals that duty-free access would fair competition. But instead of backtrack- come with less stringent rules of origin.

1. For a comprehensive discussion of the impact of rules of origin in textile and clothing trade see OECD (2004), Chapter 2: Market Developments and Trade Policies. 9 Dialogue + Cooperation 2/2006

WTO members are still far apart on sev- are most vulnerable to competition from eral key aspects of the Doha negotiations, the large and integrated suppliers in China and the LDC request is one element of a and India. Any improvement in the rules complex package of requests and offers that of origin under preferential trade arrange- need to be settled. For policy makers in ments would also increase the competitive developed countries, one challenge is to pressure on the domestic textile industries draft rules of origin for their preferential of developed countries, a prospect that arrangements that would mainly benefit raises the apprehension of textile suppliers LDCs and small developing countries that in those countries.

High Tariff Protection in Textiles and Clothing

There are considerable differences in the to offer it substantial concessions, a rather level of tariffs applied on textiles and cloth- unlikely event. ing and the occurrence of tariff peaks among developed countries. It is worth Among other developing countries with noting that the tariffs applied on textiles strong export interests in textiles and cloth- and clothing in China in 2002 were ing, such as India and Bangladesh, tariff roughly equivalent to the average applied protection remains stubbornly high, if not tariffs of OECD countries. All of China’s prohibitive. Indeed, tariff protection prior tariffs are bound in the WTO, and most to the Doha Round was much higher for bound rates at the end of the implementa- textile and clothing products than for manu- tion period will be much lower than its factured goods in both developed and de- 2002 applied tariffs. This means that veloping countries. In OECD countries, China is reducing its tariff protection over tariffs on manufactures averaged 6.2 per the period (OECD 2002). Moreover, hav- cent, on textiles 9.4 per cent and on clothing reduced its protection within the con- ing 16.1 percent. The corresponding fig- text of its 2001 WTO accession, China is ures for developing countries were 13.5, reluctant to make further tariff reductions 18.1 and 23.0 per cent (UNCTAD World unless key trading partners are prepared Integrated Trade Solution Database).

The Doha Round

In the context of the Doha Round or ‘De- ing a harmonisation of prevailing high tar- velopment Round’, India and other devel- iff protection with no commitment to tar- oping countries expect a rebalancing of iff reductions. This would, unfortunately, market benefits in their favour, whereby maintain the existing high tariff structure developed countries would make larger compared to tariffs imposed on other concessions than those offered by develop- manufactured products. The only real tar- ing countries (non-reciprocity). iff reduction proposal on the negotiating table is the ‘zero-tariff sectoral initiative’ for To protect their preferential access to de- textiles sponsored by the EU. veloped countries’ markets, several developing countries, in particular LDCs, hope Within the ongoing Doha negotiations, tex- that developed countries will resist calls for tiles and clothing are dealt with within the non-discriminatory tariff reduction in tex- negotiating group on non-agricultural mar- tiles and clothing with a view to protecting ket access (NAMA), encompassing all in- their margins of trade preference. In a dustrial products. Ultimately, NAMA ne- somewhat similar move, Turkey is propos- gotiating trade-offs will not be made exclu- 10 The Post-MFA Challenges for Small Developing Countries sively on the basis of textile and clothing ing, remains elusive given the widespread interests, but within a larger set of economic anxiety regarding the competitive strength and trade interests of WTO members. of China, the strong calls for rebalancing trade benefits and the absence of negoti- In mid-2006, a consensus on a uniform ating progress in agriculture (a preroga- tariff reduction formula across all indus- tive for any progress in the Doha negotia- trial products, including textiles and cloth- tions).

IV. Concluding Remarks

At the outset, the best adjustment strat- workforce; faster customs clearance and egy for countries seeking to maintain ex- quick tariff relief programmes for in- ports of textiles and clothing should not puts; rest on tariff protection or preferential (2) an improved regulatory environment for access, but on a thorough domestic strat- essential business services, i.e. transpor- egy that tackles the country’s competitive tation, telecommunications, electricity weaknesses and addresses domestic obsta- and financial services; cles to growth. The opportunity provided (3) stimulated collaborative innovation by the safeguard actions taken against processes in dissemination and techno- Chinese exports in 2005 will lapse by the logical transfers; and end of 2008; therefore competing coun- (4) negotiation of improved market access tries should waste no time in reinforcing for textiles and clothing, especially seek- their competitive strengths by focusing on ing to eliminate remaining obstacles to a market-based agenda of adjustment the establishment of retail distribution measures involving: systems and to end distorting produc- (1) investment in qualified pools of exper- tion subsidies, e.g. US cotton subsidies. tise and the adaptability of the

References Brenton, P. and M. Manchin. 2002. Making EU Trade Arrangements Work: The Role of Rules of Origin. Working Document No. 183, March. Centre for European Policy Stud- ies. Gereffi, Gary, D. Spener and J. Bair (eds.) 2002. Free Trade and Uneven Development: The North American Apparel Industry after NAFTA. Philadelphia: Temple University Press. OECD. 2002. China’s Tariff Regime. CCNM/TD(2002)9/FINAL. Paris: OECD. OECD. 2004. A New World Map in Textiles and Clothing: Adjusting to Change. Paris: OECD. UNCTAD. 2003. Trade Preferences for LDCs: An Early Assessment of Benefits and Possible Improvements. Geneva: United Nations. WTO. 2001. Trade Policy Review of the United States. Geneva: WTO.

11 Trends and Structural Characteristics of the Garment Industry in South Korea

Trends and Structural Characteristics of the Garment Industry in South Korea

Joon-Soo Jon*

The exports of South Korea’s textile and cloth- ary 2005, when the quota system was coming industry are significant for the country’s pletely abolished under the WTO. It has thus economic development. During the early become mandatory for the South Korean 1960s, the textile and clothing industry was industry to cope strategically with the new nurtured to lead the country’s export-oriented global trade environment in order to enhance industrialisation with strong government its competitiveness and increase exports. support. The industry continued its rapid growth until it accounted for 35.8 per cent However, it was clear that there is still a way of Korea’s total exports in 1970. to go before its textile and clothing industry can cope with the new environment, for sev- The textile and clothing industry ranked eral reasons. First, South Korea still depends third, after electrical and electronics and on OEM (original equipment manufactur- machine industry, in terms of trade sur- ing) deals to allow its textile and clothing plus during 1988-2002. During this period, industry to produce exports in volumes. Sec- the textile and clothing industry posted an ond, there is a lack of the investment needed annual trade surplus of $10 billion or more. to produce a larger variety of high-value- However, the surplus then began to decline: added products under the customised pro- from $10 billion in 2002 to $9.4 billion in duction system. Third, South Korean com- 2003 to $8.8 billion in 2004. panies were found to cope ineffectively with the new diversified and personalised demand This drop became a cause for concern that trend and demand for a new breed of crea- led government, business and universities tive, specialised designers. to discuss the reasons for the decline and seek solutions for the problems. The country faces even tougher barriers as emerging countries enter the international It was generally agreed that South Korea’s market as cost-effective exporters of tex- garment products were losing competitive- tiles and garments, paying only a tenth or a ness in the world market. Thus there was a twentieth of labour costs in South Korea. need for multiple measures aimed at making the country’s textile and garment prod- The purpose of this study is to establish ucts more competitive internationally. pro-active strategies for garment industry exports. These strategies are based on long- The world trade in garments moved into a term trends in the world market and borderless free trade environment in Janu- changes in export garment products.

Trends in the Industry

We will examine trends in the South Ko- 1961 to 2005. Table 1 shows the figures on rean garment trade during the period from import, export and trade balance for coun-

* Dean of College of Business Administration, Sogang University. 13 Dialogue + Cooperation 2/2006

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14089 24.949 10.3 23.639 .3 There was a shift in textile shipments to

10589 44.054 16.6 41.334 .1- China and the United States during the 2000s. The US share of South Korean tex- 1699 0 87.910 19.05 72.868 .31- tile exports was on the decline, while those

17599 43.189 14.180 35.009 .21- to China and Vietnam were on the rise.

29000 56.930 13.713 35.227 .3 There was almost no significant overseas

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.knaBtropmIdnatropxEaeroK:ecruoS 14 Trends and Structural Characteristics of the Garment Industry in South Korea at home, caused by a shortage of labour per cent of total overseas textile investment and large wage rises. Investment in China by South Korea in 1995. It also shows that has been on the rise since the normalisa- the economic crisis of 1997 led overseas tion of diplomatic relations between the investment to drop. Indonesia, Vietnam and countries in 1992 (Table 3). the US trailed China as the top destinations for South Korean textile overseas in- As Table 3 shows, China accounted for 52 vestment.

Problems and Structural Changes

With the removal of the Multi-Fibre Ar- it possible for textile manufacturers to focus rangement (MFA) in 2005, liberalisation exports on their more competitive items, replaced protectionism as the new rule gov- and thereby to increase export volumes. As erning the trade of garment products. The a consequence, price competition in the MFA was launched to protect developed world market is likely to intensify. Also, the country textile and garment industries fact that quotas no longer need to be bought through quota restrictions on imports. Af- should bring down export unit prices. ter textiles were included in the Uruguay round multilateral trade negotiations in South Korean garment exporters were con- 1986, the Agreement on Textiles and Cloth- cerned about the liberalisation of the gar- ing (ATC) became effective. ment trade. And their fears began to become reality. After the scrapping of textile As part of the goal of a phased liberalisa- quotas, China and other developing coun- tion of the textile trade within the WTO, tries made rapid inroads into major export the ATC phased out the MFA restrictions markets, resulting in a drastic cut in South during the period 1995 to December 2004. Korean shipments of garments. The number of the textile and garment items designated for liberalisation in the The US accounts for half of South Korean ATC list stood at 795. garment exports. Therefore, the impact of the US scrapping quotas is felt more by The end of the textile quota system has made South Korean garment exporters.

Reduction in Garment Exports

South Korean garment exporters suffered turned to anti-dumping charges as a method a setback as developing countries eroded of regulating textile imports. In the period their overseas markets. The won gained from 1999 to June 2005, South Korean tex- value against the US dollar, making South tile exports were subject to anti-dumping Korean products less price competitive. The measures more often (29 times) than those textile industry did not differentiate itself of any other country (followed by China from other Asian nations, remaining with with 23 and Taiwan with 20). Also, over- a low value added and general production seas investments by South Korean garment and export structure. China and other de- companies have surged. As a result, gar- veloping countries have attracted foreign ments produced in the offshore plant of investment, ramped up production and in- South Korean companies have replaced creased exports. Since the scrapping of tex- some Korean-produced garments in the tile quotas, importing countries have world market. 15 Dialogue + Cooperation 2/2006

Surge of Chinese Garment Imports

South Korea’s import of garments has rap- Garment imports increased by 9.1 per cent idly increased, from $125 million (accord- in 2005. In that year, China accounted for ing to the Korea Institute of Industry and 76.1 per cent of South Korea’s total gar- Technology Information; $151 million ac- ment imports, up from 70 per cent in 2000. cording to UN statistics) in 1990, although There is an increasing transfer of garment it slipped after the economic crisis of 1998. production from South Korea to China and Garment imports grew steadily, reaching a active competition among distributors to total of $2.812 billion at the end of 2005 import low-priced Chinese garments. This (again, there are differences between Ko- has been a blow particularly to small South rean and UN figures). There has been a Korean garment producers. surge of Chinese-made products into the low-end market and an increase of luxury A decline in the country’s garment imports garments from Italy and France. Lately, from Asian countries such as Vietnam, In- South Korean textile companies have india and Indonesia was reversed after tex- troduced international prestigious brands tile quotas were scrapped. Imports of gar- and actively promoted them. ments from Thailand have steadily increased. The import of Asian-made gar- Also, South Korean companies are re-im- ments has increased because these items porting garments produced in their offshore meet local consumers’ demand for reason- factories. Overseas investment by the gar- ably priced low-to-middle-market garments. ment industry is expected to increase, be- The US and European share of South Ko- cause of higher domestic wages and pro- rea’s garment imports has declined, although duction costs, leading to continued in- imports of high-priced quality garments are creases of garment imports. still on the rise.

Big Fall in Trade Competitiveness

The trade balance of the textile and cloth- Garment exports fell 21.8 per cent to $3.56 ing industry has weakened since it posted billion during 2005, while imports in- a trade surplus of $5.7 billion in 2000. The creased by 9.1 percent, resulting in a trade weaker post-crisis won helped South Ko- deficit on clothing of $90 million. rean garment producers to increase exports for a while. But the all-textiles trade sur- China gained most from the scrapping of plus continued to drop until it turned into the MFA. Since then, China’s share of the a $500 million deficit in 2005, the first time US garment market has increased sharply that the industry recorded a trade deficit. at the expense of South Korea. The latter’s share of the US garment market has de- The deficit was due more to a steep fall in clined from 9.8 per cent in 1990 to 1.6 per exports than to an increase in imports. cent in the first half of 2005.

Development Strategies on the Value Chain

Position of South Korean Garment Industry

The value chain is the process of taking the two phases of programming and imple- products through the three phases of plan- mentation. Programming involves prepa- ning, production and sales. Its elements are ration for and management of each func- 16 Trends and Structural Characteristics of the Garment Industry in South Korea tion before implementation. Implementa- tion involves carrying out the necessary It takes a high level of investment, technol- function as it has been programmed. ogy and information capabilities for the industry to add the planning and sales func- It is relatively easy to obtain garment pro- tions. These requirements are not normally duction technology. Therefore, planning met in low-wage countries. and sales functions play a more important role than the production function on the South Korean garment companies specialise garment industry’s value chain. Within the more in the implementation than in the pro- value chain, planning and sales yield a gramming element of the value chain. Sub- higher value than production. In general, contractors who have a sewing factory with a planning and sales functions tend to be more wage-based business model are typical of pro- knowledge- and information-intensive than duction implementation. These subcontrac- production. Production tends to be labour- tors do more sewing work rather than pat- intensive and offers low value added. tern production or fabric purchasing.

Of the value chain elements, programming Since the end of the 1980s, there has been tends to be information- and knowledge- an ongoing migration from production intensive and offers high value added. Im- implementation to production planning, plementation tends to be labour-intensive because of changes in the industrial envi- and low value-added. ronment in both domestic and overseas markets. In 1999, wages for labour-inten- The more mature a country’s garment indus- sive sewing work in Korea were 15 times try, the more diversified and more personal- higher than in China and 13 times higher ised is the demand that that industry can meet. than in Vietnam. The country has developed the planning and sales functions to cope better with a diversi- As a result, in most cases South Korean com- fied demand for garment products. panies have transferred their production implementation to offshore factories, while keep- There has been a continuing transfer of the ing production planning at home. This means low-value-added areas and elements into low- that they are using the home factory for work wage countries. South Korea has scaled down like designing, making patterns, grading and on or phased out the domestic production marking fabrics, while they use offshore af- of garments, while stepping up its offshore filiates as low-wage sewing factories. production capacity in order to cope with growing pressures such as wage rises, for- Some South Korean exporters have entered eign exchange burdens, high interest rates the domestic market specialising in plan- and labour shortages. This shift took place ning and sales functions for their domestic as the country experienced a rapid rise of sales to overcome the limits of an OEM the electronics, machinery, heavy, chemical exporter and to enhance their international and construction industries. competitiveness.

However, most such moves were limited South Korean companies, even if they to setting up low-cost offshore production. started business with their own brands, tend But South Korean companies did not move to maintain OEM business for export. But much into functions such as sales, produc- they are seeking to move upmarket by mi- tion and planning that would enable them grating from production implementation to to create information- and knowledge-in- production programming in order to cre- tensive high values. ate a higher value added. 17 Dialogue + Cooperation 2/2006

South Korean Garment Industry’s Competitive Status

The industry is generally weak in its plan- based on the OEM business model, they are ning capabilities, particularly in the core sold through the sales network of the buying function: the ability to develop creative countries. Therefore, South Korean compa- concept brands. Companies tend to imi- nies have little experience in this area. tate or come up with better versions of existing brands by attending overseas exhibi- Most South Korean garment exports are tions or reading fashion magazines. While sold in the US, Europe and Japan, with their companies often have an outstanding crea- unit import price fixed. It is because of tivity, they tend to lack ability to combine this fixed import price that exported gar- creativity with marketing. ments sometimes lag behind domestically sold garments in quality and design. Also, Having lost their low-cost, skilled-labour most small and medium garment exporters competitiveness, South Korean companies tend to depend on general trading compa- are striving to move up the value chain to nies or garment specialists to export their the planning function. As well, they have products, since they do not have their own acquired know-how in the management of export marketing ability. offshore factories—something that overseas buyers do not have. There are many cases Export marketing requires big investment in which South Korean companies have set and involves a lot of risk, so even large up their offshore factories at the request of companies cannot easily decide to make their buyers. the investment. Domestically, the back- wardness of distribution and practice is South Korean companies are weak in sales another cause keeping the industry’s sales competition. Since their exports are usually competitiveness low.

A Strategy to Maximise the Value Chain

South Korea’s garment industry is moving ble option to make the garment industry out of production implementation into pro- more competitive is to enhance the production programming on the global value duction-implementation function by im- chain. The industry has carried out OEM- proving quality. Improved quality could based production in the low-value-added bring a higher unit export price. Also, im- segment of the world market. Meanwhile, proved quality could enhance the overall the merchandising function—creating high image of the country as well as the image value added—has been carried out by ad- of its garment industry. vanced countries. South Korea’s role has been limited to being a manufacturing base Also needed are increased efforts to im- for these advanced countries. This function prove the quality image of garment prod- has now been handed over to emerging ucts, along with a transfer of production- countries as they try to catch up. implementation to offshore factories. This could best be achieved by switching the There are strategies by which Korea’s gar- domestic function from production-implement industry can develop on the value chain. mentation to production-programming.

Switch within the value chain functions Concern has been voiced about the ero- (implementation programming). Under sion of the domestic manufacturing base the current circumstances, the most feasi- as a result of transferring production of low- 18 Trends and Structural Characteristics of the Garment Industry in South Korea to-middle-priced products to offshore fac- Milano project), launched in March 1998, tories. However, it is a necessary part of with the aim of nurturing Daegu’s textile functional migration within the value chain. industry to become a strategic industry by transforming it into an up-to-date, high- Switch across value chain functions (pro- value-added industry. It consists of 17 duction duction planning and sales). It is neces- projects in four areas: six projects aimed sary to enhance the competitiveness of pro- at adding high value to textile products, motion companies. Their use is a transi- three projects to bolster the fashion design tional option from production-implemen- industry, two projects for building textile tation to merchandising. Competitive pro- industry infrastructure and six projects for motion companies could help achieve a developing technology and improving pro- switch from OEM to branded companies. ductivity. It has also been suggested to build Promotion companies can cope rapidly with regionally based clusters, such as a knitting new global trends so that garment compa- industry research institute in Ilsan, a tex- nies can increase export opportunities by tile technology assistance centre in Gongju, attending overseas exhibitions or auctions. a silk research institute in Jinju, a textile technology assistance centre in Gyunggi and It might make sense for companies to spin a dyeing pilot plant in Shihwa. off and farm out their production implementation so that they can specialise in the Advancement and globalisation of fashion planning-programming and thereby re- design. The ‘hallu’ wave of Korean cultural spond swiftly to global market changes. products has swept across Asia. It could provide a chance to extend marketing It would make strategic sense to replace small spread into overseas markets and bolster promotion companies with a global market- the fashion design industry by nurturing a ing entity. It could also expand marketing new breed of creative fashion designers. and planning through production of promo- tional materials, provision of exhibition ven- In 2005, a Korea Textile Fashion Contest ues, connection with foreign buyers etc. was held successfully in Shanghai. A similar event could be held in major cities of Establish a textile industry cluster to fit Brazil, Russia, India and China that can regional characteristics. It has been agreed serve as South Korea’s overseas marketing there is a need to switch the focus of the hubs. They can be a base to provide infor- South Korean textile and garment industry mation such as surveys of buyers and local from production-implementation to high- market trends, and to hold exhibitions or value systems for a variety of products in operate regular showrooms. limited batches. To this end, it is necessary to nurture the demand-triggering industries Also, attempts are to be made to expand such as fashion and design, and to support the export of fashion branded products into the associated technology, information and the advanced countries like the US or labour infrastructure. France to compete better with advanced counterparts and to globalise the fashion The model is the Daegu textile project (or design industry.

Conclusion

We have studied the pattern of structural ferences that set the South Korean garment changes undergone by South Korea’s gar- industry apart from the rest of the world’s ment industry. Then we identified the dif- major garment exporters. 19 Dialogue + Cooperation 2/2006

In order for the garment industry to con- middle-priced garment segment. tinue its growth, it must move beyond production-centred functions on the value Third, it must develop its own trademark chain, and switch to the planning and sales that can yield high value added. South Ko- functions. It has achieved significant rea could learn from major garment export- progress in its strategy to move from pro- ing countries like the US, Italy and France duction implementation to production that have achieved high values for their own planning. On this basis, it needs to seek a trademarks on the basis of their develop- swift move towards the high-value-added ment and marketing ability. A combination functions in the way that advanced garment of global marketing and originality is what exporters have moved. keeps them ahead.

Second, it must make the most of the off- It is inevitable that South Korea’s garment shore production that has become part of industry will stay with the current OEM South Korea’s production planning. The la- exports in the short term. However, it is bour-intensive nature of the garment indus- necessary gradually to increase the share of try has caused the world’s advanced coun- planning and suggestion types of OEM ex- tries to transfer production processes to de- ports. The country will eventually have to veloping countries or turn to foreign direct switch from a production-centred to a sales- investment, while bolstering their industrial and planning-based export system under base by investing in automating and improv- which it will be exporting high-value-added ing their domestic production facilities. garment products with their own brand. Small-to-medium companies might team It could make strategic sense for South together to build a joint overseas sales en- Korea similarly to move upmarket into tity or to develop a joint trademark. high-value-added production. Meanwhile, it could use foreign direct investment as a The reversal of the garment trade from sur- means to transfer its low-priced, mass-pro- plus to deficit in 2005 should be taken as a duced products to obtain a local sales foot- wake-up call to increase efforts to switch hold to increase its share of the low-to- to higher level value chain functions.

References

2005. “Liberalization of Textile Trade and Strategies for Improving International Competi- tiveness”. KIET Industry Economics. 2005. “The Change of Trade in Garment Industry After Textile Quota Abrogation”. KIET Industry Economics. Cline, W. 1987. The Future of the World Trade in Textiles and Apparel. Washington, DC: Institute for International Economics. Hunter, N.A. 1990. Quick Response in Apparel Manufacturing: Survey of the American Scene. Manchester: Textile Institute. IMF. 2001. International Financial Statistics. International Textile News. 2002.02.18. International Textile News. 2002.03.04. 20 Trends and Structural Characteristics of the Garment Industry in South Korea

OECD, International Trade by Commodities Statistics CD-ROM. Ji Hye Kyung. 2002. “Trends and Structural Characteristics of Clothing Trade in Korea: 1962-2000”. Department of Clothing and Textiles, Graduate School of Seoul Na- tional University. Kim Lee Pack 2003. “A study on the restructure of Korean textile industry”. Graduate School of Economics, Yonsei University, Kim Mi Sun. 1999. “A study on the strengthening of international competitiveness for Korean garment industry”. Department of Foreign Trade, Graduate School of Trade, Sungkyunkwan University. Korea Federation of Textile Industries. 2005. The Status of Textile Trade and Trade Compe- tition Agreement. Korea Institute of Industry and Technology Information, Korean Apparel Industry , 1989. Korea Research Institute. 2006. Trade Environment and Export/Import Forecast, 2005. Korea Textile News. 2001.05.06. Park Jin Soo. 1994. “A Study on Korean industrial competitiveness: A criticism and revi- sion of Porter’s diamond model”. Department of Economics, Graduate School of Seoul National University. Park Nam Gyoo. 1991. “Empirical analysis on international competitiveness life cycle of Korean industries”. Department of Business Administration, Graduate School of Seoul National University. Park Seung Chan 2003. “A Study on Usage Patterns and Performance of TPL”. Ph.D. Programme in International Trade, Graduate School of Konkuk University. Samsung Economic Research Institute, 2000. 21C Development Strategy of Korean Major Industry. Textile Intelligence Limited. 2001. Textile Outlook International. January. UN, Commodity Trade Statistics. UN, International Trade Statistics Yearbook. UN, Statistics Division, Commodity Trade Statistics Data Extract Service. UN, Statistical Division, http://unstats.un.org.

21 Taiwan’s Textile and Garment Industry

Taiwan’s Textile and Garment Industry and Its Implications for Less Developed Countries

Chen Lee-in and Cheng Kai-Fang*

1. Introduction

Taiwan’s economic development from the cial attention to such policies. 1960s to 1980s was so successful that it was hailed as an ‘economic miracle’ (Fei, Industrial policy can not ignore the prin- Ranis and Kuo, 1978, 1979; Kuo, Ranis ciples of industrial economics. For labour- and Fei, 1981; Ranis, 1992). Taiwan’s suc- intensive industries, market competition cess story is marked by growth and struc- is better than oligopoly or monopoly; pro- tural shifts (Kuznets, 1979). During this duction efficiency can be achieved via scale period, Taiwan achieved an average an- economies or economies of scope. Tai- nual GDP growth rate of 9 per cent along wan’s textile development went through with relatively little income inequality. Gov- economies of scale in cotton-yarn weav- ernment macroeconomic reform and indus- ing and then pursued economies of scope trial policy can be regarded as major fac- (wool and various artificial fibres). Cam- tors in this performance. The textile and bodia and other least developed countries garment and electronics sectors were the (LDCs) need to assess their conditions most important industries in producing the (including climate, raw materials supply, miracle. Even though economic perform- labour quantity and quality, technology and ance slowed in the 1990s, growth rates re- education) in order to achieve sustainable mained between 6.30 and 7.85 per cent development. before the Asian financial crisis. After 1997, GDP growth rates fell to between -2.17 and This paper elaborates the above concepts 6.07 per cent. The share of the textile and to explain Taiwan’s textile development. garment industry is no longer as important Section two examines the history of Tai- in GDP and exports. wan’s textile development in six stages and with some statistical evidence. Section three Regardless of whether a country is big or elaborates the role of government policy and small, when its government adopts a policy its effects. Here, policies and measures to of exporting in order to establish one par- foster many small and medium enterprises ticular industry, complementary macroeco- to achieve competition and textile-specific nomic measures on international trade, policy, regulations and institutes should foreign exchange, tax incentives and infra- draw special attention. Section four de- structure are needed. Industry-specific scribes the current labour market in the measures also need to be added, revised or textile industry. Section five draws conclu- innovated periodically. This paper pays spe- sions and policy implications for LDCs.

* Dr. Chen Lee-in is a research fellow at the Chung-hua Institute for Economic Research. Dr. Cheng Kai-Fang is deputy director, Centre of Industrial Economics, Intelligence and Training, Taiwan Textile Research Institute (TTRI). The data and basic information provided by the TTRI are highly appreciated. However, the opinions expressed here are those only of the first author, not necessarily of the TTRI. 23 Dialogue + Cooperation 2/2006

2. Development History of Taiwan’s Textile Industry

Taiwan was colonised by Japan for 51 years were destroyed during World War II. There- before 1945. Very few cotton-yarn textile fore, the development history of the textile factories and weaving mills existed, and most and garment industry begins in 1945.

Recovery Stage (1945-51)

After WWII, Taiwan was left with only two TnraYnottoCfoyrevoceRehT.1elbaT nraYnottoCfoyrevoceRehT.1elbaT nraYnottoCfoyrevoceRehT.1elba cotton-yarn factories and 14 weaving mills W)15-5491(gnivaeW )15-5491(gnivaeW )15-5491(gnivae and about 800 filament weaving machines. YrYnaeY ae raeY rae CnraynottoC raynotto nraynottoC nraynotto WgnivaeW gnivaeW gnivae OtuptuO tuptuO tuptu The overall length of cotton cloth produced ()seldnips( )seldnips( )seldnips msenihcam senihcam senihca ()m$TN( )m$TN( )m$TN in that year was only some 2 million yards. The equipment was out of date; supply 15491 5491 549 88862, 24 could not meet demand and therefore im- 16491 6491 649 14466,0 97 ports were huge. To meet basic demands, 17491 7491 749 17465,4 801 the government (the Republic of China) encouraged the establishment of new facto- 18491 8491 849 11801,8 971 ries. Along with protective measures, such 19491 9491 949 27787,3 2555 .07 as control of textile imports, the government contracted weaving services and pro- 10591 0591 059 56020,0 3023 .682 vided capital and material resources. Due 11591 1591 159 95635,8 5802 .026 to a high rate of return on investment, the .2591,.lateeeL:ecruoS textile industry grew very quickly (Table 1). It proved to be very helpful to the boom of the industry that several textile companies cotton, which made up about 20 per cent of withdrew from mainland China as the ROC total material aid. According to Lin (1994), government relocated to Taiwan in 1949. there were about 200 private weaving mills in 1950. By 1953, the total had increased to The most crucial factor for Taiwan was US 1,228 firms, one-tenth of the total number aid. During 1951 to 1957, the US govern- of private firms at the time, second only to ment provided US$230 million worth of food processing factories and kiln mills.

Cotton Product Development Stage (1952-61)

The major textile products at this stage were various tax incentives, many private firms still made from cotton. Three years after imported weaving machines and materials. withdrawal from the mainland and with As a result, the textile industry entered a expertise from US aid, the ROC govern- stage of speedy growth. The value of cot- ment began working on the first four-year ton-yarn production doubled within four national development plan (1952-55). The years. With further encouragement in the development goal for the textile industry second four-year plan (1956-59), which was to support the manufacturing import focused on meeting domestic demand and substitution policy. For the textile indus- improving quality, the cotton-yarn industry, the government set the policy slogan, try finally gained some export contracts in ‘Importing yarn is better than importing 1960. Exports grew very quickly. Only three cloth; importing cotton is better than im- years later (1963), the volume of export sales porting yarn’. With encouragement from of cotton cloth had exceeded domestic sales. 24 Taiwan’s Textile and Garment Industry

Exports of cotton yarn exceeded the do- materials for the textile industry. It proved mestic demand in 1966. Taiwan’s capability of developing the textile industry from end-products to upstream Another notable development during this fibre manufacturing. The new artificial fi- stage was the first locally produced artifi- bre was named after Lai-Chu (the queen of cial fibre, by the China Man-Made Fibre an ancient empire, who invented silk pro- Corporation in 1957. This innovation was duction from worms three thousands years intended to develop self-sufficiency in raw ago) to honour the historic achievement.

Stage of Export Expansion and Emerging Product Scope (1962-71)

The cotton yarn and cloth weaving indus- as dyeing, printing and finishing. Integra- tries continued growing . Weaving spindle tion laid the foundation for the further de- production grew from 430,000 in 1962 to velopment of Taiwan’s synthetic fibre indus- 1.25 million in 1971. Export capability try in the 1980s. continued to strengthen, which steadily increased the export share of production and On the other hand, because the US govern- transformed the cotton textile industry into ment inaugurated import quotas on cotton an export-oriented sector by the early 1970s. products, the national four-year development plan started to pursue adding value in in- US aid ceased in 1968. This significantly dustries linked to textiles, and the garment influenced the internal structure of the tex- industry began to grow from this stage. tile industry. The supplies of cotton and capital were suddenly suspended. To cope with Improved technology was reflected in export this, Taiwan textile manufacturers started to statistics of artificial fibre and textile prod- invest in artificial fibre plants so as to diver- ucts. During this stage the value of textile sify sources of raw materials. The product products grew at an average annual rate of assortment diversified to Lai-Chu, nylon and 22.7 per cent. The added value ¨share of polyester filaments. Various artificial fibre textile products in all manufacturing indus- products grew rapidly, laying the foundation try grew from 16.3 per cent in 1959 to 20.3 of an artificial fibre processing industry. The per cent in 1972. In the same period, the diversification began with the China Man- employment share of the textile industry grew Made Fibre Corporation, which in 1964 set from 22.4 per cent (110,000 persons) to 28.9 up a polyester fibre factory with a capacity per cent (350,000). of 250,000 polyester filaments daily. In the same year, the CMFC proposed a second During this period, Taiwan’s textile indus- plant for producing polyester staple. Formosa try made significant progress quantitatively Plastic entered the market and started to and qualitatively. This period was also criti- produce acrylic staple in 1967. Then many cal because material and components sup- other artificial fibre companies were estab- ply chains were formed and a manufactur- lished; by 1970 there were 16 companies ing division of labour was fostered within producing artificial fibres. Most of the com- domestic enterprises. Textiles became the panies were set up with a vision of develop- most important export industry and source ing fibre production linked to processes such of foreign exchange.

Growth Stage (1972-81)

The industry’s continued growth led to a ended weaving machines, with 3.54 mil- great increase in weaving shuttles and open- lion and 650,000 spindles respectively in 25 Dialogue + Cooperation 2/2006

1981. The market for traditional cotton bre business faced a crisis that eventually yarn and cloth had become saturated. Arti- led to closures, restructuring and mergers ficial fibres became the basis of the second of competing firms. wave of Taiwan’s textile industry. Textile import quotas were another impor- Thanks to flourishing exports, Taiwan’s ar- tant issue. In 1961 the US enforced the tificial fibre plants expanded to the level ‘Short-Term Agreement on Cotton Textile of economies of scale, dramatically reduc- Products’ on Taiwan, which inaugurated a ing the average product cost. The core new era of international quotas. The US technology focused on developing synthetic government used the same agreement with fibre. Among various human-made fibres, Taiwan in 1962 and 1967. Quotas were even nylon and polyester grew most rapidly. applied to wool products in 1971. The Eu- ropean Community followed with a similar During this stage, the world encountered two import quota in 1970. In 1974, when the energy crises. In 1973, as the price of pet- Multi-Fibre Arrangement (MFA) became rochemical raw materials sky-rocketed, the effective, the US, Canada and EC signed price of artificial fibres rose accordingly. bilateral agreements with the Taiwan gov- Since the increase in prices was much greater ernment. By then, quotas had been extended than the increase in production costs, the to the export of cotton, artificial fibres, wool, profit on artificial fibres at one point reached yarn, cloth and garments. The quotas ap- 40 per cent, which led to over-investment plied to various processing levels. in fibre factories. Within only four years, 12 new plants were built. At the end of 1974, Even though quotas had become such a it was estimated that Taiwan’s artificial fibre sensitive issue, the ROC government still production capacity was 1,700 kilograms a encouraged the export of textiles and gar- day, making it number four in the world in ments. Garment and accessory exports in production of artificial fibres. When the sec- particular gradually became Taiwan’s core ond oil crisis occurred in 1979, the oil price export products in this stage, due to mar- rose more than 60 per cent, which induced ket demand, technology and financing. The the price of artificial fibre to soart again. export value of the textile and garment in- However, due to over-capacity, and because dustry increased from US$1.24 billion (or the demand of downstream production did NT$47.1 billion) in 1973 to US$4.12 bil- not increase as much, Taiwan’s artificial fi- lion (NT$148.3 billion) in 1980.

Maturity and Upgrading of Technology (1982-91)

The 1980s in general were a stable growth industry were highly improved and achieved period for the world economy. Leading international competitiveness. economies strove to recover from the two oil crises. Taiwan’s textile entrepreneurs The peak year of Taiwan’s textile and gar- sought to solidify their technology and mar- ment industry was 1987. The total of textile ket shares. The government proposed a 10- production (including artificial fibres, weav- year national development plan (1980-89), ing and garments) reached NT$559.34 bil- and developing textile machinery was iden- lion, and the share in that of garments was tified as one of the major industrial poli- also the highest ever, 37 per cent. Afterwards, cies. High speed equipment was intro- due to mainland China’s high demand for duced; no-shuttle weaving machines re- Taiwan’s yarn and fibre, the export of those placed the traditional machines. Product two textile materials increased very rapidly quality and the technology of the textile while the share of garments in textile ex- 26 Taiwan’s Textile and Garment Industry ports dropped steadily. By 2004, the share For those remaining in Taiwan, technologi- of artificial fibre increased to 31 per cent cal breakthrough had become the major and garments dropped to 11 per cent. goal. Although polyester fibre was still the key product, leading firms started to de- In the latter part of this stage, protection- velop polyester filament and nylon staple ism in international trade and the rise of for possible industrial use. The new R&D new textile producers led to an increase in focused on hyper-thin fibres. On the basis international competition. As well, Taiwan of its integrated structure, Taiwan’s textile faced the pressure of a labour shortage, ris- industry had been transformed from labour- ing wages and appreciation of the NT dol- intensive to capital- and technology-inten- lar. Some labour-intensive textile firms sive. The core competence had shifted to started to move their factories to southeast artificial fibres and their related weaving Asian countries (at this time, investment products. Taiwan became internationally in mainland China was illegal). known as a leading synthetic fibre country.

Transformation, Outward Investment and Innovation (1992-)

Due to changes in the external and domes- trial e-commerce infrastructure; tic economic environment, such as labour ■ SMEs’ lack of financial support for shortages, NT$ appreciation, trade liberali- R&D; sation, the rise of new textile producers and ■ lack of human resources in R&D and a division of labour across the Taiwan Strait, international marketing; the textile industry began losing its interna- ■ lack of an information sharing system tional competitive advantage in the 1990s. for international production, marketing Especially the labour-intensive parts of pro- and new technology; duction, which was mainly conducted by ■ marketing problems, such as oversupply small and medium enterprises, moved to of artificial fibres, small domestic mar- China so quickly that the original supply and ket, textile materials production overly value chains were broken. Up to 2004, there focused on garments, higher prices than were only 142 and 155 cases of outward FDI the competition and dependence on high by textile firms and garment and footwear price/quality imported products. firms respectively, while there were 1,055 and 554 cases respectively of those sectors Losing competitive advantage in labour-in- indirectly investing in mainland China. In tensive types of international production, the 2005, the contribution of the garment in- textile enterprises remaining in Taiwan, with dustry dropped to 1.07 per cent of Taiwan’s government assistance and R&D redirec- manufactures and 0.35 per cent of GDP. tion, strove to transform themselves into manufacturers of high value products. In The irreversible trend of competition from addition to utilising their existing advantage low-cost producers has been the biggest of upstream artificial fibre links and econo- challenge since the mid-1990s. The indus- mies of scale, the production of middle and try is currently encountering several chal- downstream products is focusing more on lenges, which can be categorised as follows: newly developed materials and technologies. ■ technological breakthroughs in various new functional fibres or materials; Nowadays global textile competition can be ■ environmental standards of pollution classified as low labour costs vs. high unit emission; prices and innovation. Taiwan is taking its ■ shortage of testing and verification ca- position as the latter. Firms and the gov- pacity regarding technology and indus- ernment are moving to research and de- 27 Dialogue + Cooperation 2/2006

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velop high-value industrial usage and func- and innovated in Taiwan’. The new R&D tional textile products. It is expected that focuses are nano-textiles, technology, com- the composition of clothing, home decora- fort, health and new synthetic textiles. Inte- tion and industrial use of textile products grating diversified industry wisdom into the will change from 8:1:1 in 2000 to 6:2:2 in new materials and products is critical. . 2010. This transformation will need domestic and international collaboration as well Due to outward investment, the value of as cross-industry cooperation. textile and garment output has declined in recent years. Total production declined from After textile quotas, Taiwan’s textile industry NT$578,299 million in 2000 to faces more intense competition and chal- NT$526,936 million in 2004. The relative lenges. The government encourages textile value shares of artificial fibres, textiles and enterprises to devote themselves to transmut- garments/accessories have changed from ing the image ‘made in Taiwan’ into ‘invented 21:63:16 in 2000 to 33:57:10 in 2005. 3. Government Policy and Its Effect

The Taiwan government adopted policies growth of small and medium enterprises. in each stage to provide a suitable busi- Industry-specific policies to respond to ness environment for the development of internal and external environmental manufacturing industry. Among them, one changes were also crucial. This section of the most important was fostering the elaborates on those policies.

National Economic Development and Planning

Taiwan is well known not only for textile cal machinery together became Taiwan’s top exports. After 1984, electronics and electri- exports (although textiles remained most 28 Taiwan’s Textile and Garment Industry important for foreign exchange because these (1960), the tax-exempt warehouse/factory exports do not rely as much on imported system (1962) and the Statute for Develop- materials). An export-friendly environment ing and Managing Export Processing Zones contributed to the shift from an agriculture- (1964) were passed or established. These based economy to an industrialised one. actions fostered a promising environment for foreign and domestic investors. The first important administrative action was tax exemption for export goods in 1954. To The policy slogan in the 1970s was ‘the sec- encourage exports to be produced with lo- ond phase of import substitution and steady cal materials and thus save foreign exchange, export expansion’. To promote exports, the the government kept interest rates low for China External Trade Development Coun- export firms and implemented a high im- cil was set up in 1970. To deepen manufac- port tax. To protect infant domestic indus- turing R&D, the Industrial Technology Re- tries, the average import tax rate of indus- search Institute was established in Hsin- trial products was 46 per cent in 1957. Two Chu county in 1974. To promote high-tech critical reform packages to encourage for- industries, the Hsin-Chu Science Park was eign direct investment were passed, regard- established in 1980 and the Statute for Pro- ing the trade and foreign exchange system moting Industry Improvement was enacted in 1958 and 19 articles of economic and in 1991. These policies helped businesses finance reform in 1959. In the following to grow and entrepreneurs to run them years, the Statute for Promoting Investment more professionally.

Development of Small and Medium Enterprises

One profound influence on the economic million in 1967 to NT$20 million in 1977, structure of Taiwan has been the Statute to NT$40 million in 1982, to NT$80 mil- for Developing Small and Medium Enter- lion in 2000 as SMEs increased their abil- prises. It deserves separate analysis. ity to raise capital.

From the very beginning of economic de- The textile industry has become one of the velopment, the government paid attention most fruitful fields for SMEs in Taiwan. As to maintaining an SME-friendly macroeco- Table 3 illustrates, in 2005 small and me- nomic environment. Policies were adopted dium firms were 98.81 per cent of all tex- to help them obtain capital and materials. tile enterprises, had 55.68 per cent of ex- Some funds for bank loans were designated ports and 58.53 per cent of total sales. for SMEs only. Therefore the definition of However, the share of SMEs in manufac- SMEs has been an important evolving stand- turing is decreasing under the impact of ard as the economy grows. From 1973 the globalisation and the innovation age. To definition of SMEs in the garments and maintain this unique economic structure, electronics industries included companies the government is encouraging Taiwan employing up to 300 people, a higher SMEs to become involved in the develop- number than for other industries due to ment of tertiary sectors such as trade, lo- the labour-intensive nature of manufactur- gistics, knowledge management and serving in these industries. The standard was ice industries, especially those serving reduced to 200 persons in 1995, reflecting manufacturing. Taiwan’s entry into a more capital- and technology-intensive stage of manufacturing. In the 21st century, with an increasingly The legal definition of SMEs in terms of fierce economic environment domestically paid-up capital was changed from NT$5 and internationally, the government has 29 Dialogue + Cooperation 2/2006

encouraged SMEs to concentrate on five TyrtsudnItnemraGs'nawiaT:3elbaT yrtsudnItnemraGs'nawiaT:3elbaT yrtsudnItnemraGs'nawiaT:3elba areas so as to retain their vitality: SeziSmriFyberutcurtS eziSmriFyberutcurtS eziSmriFyberutcurt 1. achieving product segmentation with N-bmuN -bmuN -bmu EstropxE stropxE stropx SselaS selaS sela mainland China in terms of quality and ererer ()m$TN( )m$TN( )m$TN ()m$TN( )m$TN( )m$TN price; giB 520 2268,1 67,94 2. accessing government resources elec- 2 sesirpretne tronically; 0 S1sEM 4357, 3340,7 08,98 3. enhancing competitiveness through pub- 0 1 lic and private sector resource integra- %6sEMS 999.8 648.2 3.46 tion giB 4. development of local industries; 669 2426,2 14,34 2 sesirpretne 5. keeping a close eye on developments in 0 e-commerce. 0 S9sEM 4294, 3014,3 43,38 2 Textile-Specific Policies and Institutes %9sEMS 924.8 556.9 7.56

giB 553 2738,0 91,54 To encourage exports of textiles, the Min- 2 sesirpretne istry of Economic Affairs (MOEA) adopted 0 several administrative regulations in the 0 S7sEM 4543 3711,2 57,97 1960s, such as the ‘Cotton-Weaving Im- 3 %0sEMS 958.8 636.0 8.36 provement and Cooperation Programme’, ‘Tax Refund Regulation for Export Goods’, giB 505 2539,1 20,15 ‘Textile Export Quota Distribution Scheme’ 2 sesirp;retne and ‘Programme for Speeding Textile In- 0 0 S1sEM 4733, 2678,9 27,67 dustry Improvement’. Textile experts en- 4 tered the government to help draft regula- %5sEMS 977.8 566.7 0.06 tions and a long-term plan that were an giB important backup for textile development. 512 1359,9 47,94 2 sesirpretne 0 Besides industry-specific regulations, the 0 S0sEM 4033, 2770,5 12,07 government also set up two important in- 5 stitutions to deal with textile issues. One is %1sEMS 988.8 536.5 5.85 the Textile Expansion Committee, in charge norepapetihwmorfdetaluclaC:ecruoS of quota distribution and marketing tasks affAcimonocEfoyrtsiniM,sEMS .6002,sri (daily administration and short-term functions). The other is an institution for long- term growth and development planning. ing and certification. From 1980 onwards, more emphasis was put on research and de- The organisation now named the Taiwan velopment. The CTTRC was restructured Textile Research Institute (TTRI) originally and renamed the China Textile Institute in developed from the technical department of October 1989. The CTI took the major role the Taiwan Cotton Spinners Association; it in technical R&D projects and technical was separated from the TCSA and became guidance authorised by the MOEA. The an independent organisation called the Tai- major R&D tasks after 2000 stress the pro- wan Textile Testing Centre in December duction of technical, functional and com- 1959. In June 1971, it was renamed the fortable textiles and further concentration on China Textile Testing and Research Centre. promoting industrial services. The CTI was The emphasis was on quality control, test- renamed TTRI in September 2004. 30 Taiwan’s Textile and Garment Industry

Among the TTRI’s various functions, it is ning, the first subsidiary institute of the worth mentioning the technology services: TTRI was inaugurated in Yuen-Lin county technical guidance and training, testing and to serve textile enterprises in southern Tai- certification services and industrial services. wan. The whole institute is now aiming to Those services can be provided to less de- become one of the most important inter- veloped countries for a fee. For example, national textile R&D and technical service there are five categories of training courses: institutes, especially for Asian countries. apparel and home textiles development technology; technical textiles development For R&D on raw materials, yarn and prod- technology; key manufacturing technology; uct development, the TTRI stresses areas textile evaluation and testing technology; such as far infrared textiles, anti-static tex- and textile high technology. tiles, UV-cut textiles, electromagnetic shield- ing textiles, anti-bacterial and anti-fungal On 15 May 2006, after nine years of plan- textiles, anti-mite textiles and nano-textiles.

Development of Complementary Industries

Inter-industrial collaboration in developing machinery in the 1990s. This important Taiwan’s textile materials and products has complementary machine technology has been a significant feature. During the proved very helpful for the innovation and 1960s, the first locally produced sewing development of high-tech textile materials machine was made. However, textile ma- and products since the late 1990s. Taiwan’s chines still had to be imported; at that time textile technology was developed following the machinery industry tried to produce the line of market demand: cotton and wool some textile machine components needed weaving in the 1960s; synthetic fibre tech- for urgent repairs. In the 1970s, Taiwan nology in the 1970s; filament technology started the production of simple tool-mak- in the 1980s; high-speed filaments and ing machines. Gradually the whole set of hyper-thin fibres in the 1990s; since 2000 complex tool-making machines and textile multiple-function materials, nano technol- machines was developed in 1980s, followed ogy, instant response and function design by the move to precision instruments and techniques. 4. Labour Market

A Labour Standards Law was promulgated affairs and the labour movement gradually in 1984 and the Council of Labour Affairs came onto the administrative agenda of the established in 1987. Taking care of labour government.

Work Hours and Wages

Taiwan’s comparative advantage in manu- manufacturing sector, regular monthly facturing is seen to lie in instant response wages normally are about 80 per cent of to clients’ orders. The famous ‘just in time’ total monthly earnings. If services and production needs a highly cooperative la- other industries are included, the propor- bour management system. Earnings of tion is about 82 per cent, so the wage sys- employees normally can be divided into tem for manufacturing labour is more flex- ‘regular monthly wage’ and ‘overtime ible. Working hours also differ from in- wages’ or ‘performance bonus’. In the dustry to industry. 31 Dialogue + Cooperation 2/2006

The lower the skill level, the lower the earn- eraged 183.5 hours and earnings averaged ings is the iron rule of the labour market. NT$40,611. If the statistics include work- In the labour-intensive textile and garment ers in the construction and service sectors, industries, workers work longer hours while the average monthly earnings go up to earning less. In 2004, the average monthly NT$43,021. However, the earnings of tex- work for textile workers was 192.9 hours tile and garment workers are nevertheless and average earnings NT$30,943. For the nearly double the minimum wage manufacturing sector as a whole, work av- (NT$15,840 since 1997).

Labour Unions

There are now 4,093 labour unions in Tai- ions have been decreasing in recent years: wan, of which 1,109 (27 per cent) are in- 14,017 cases in 2002, 12,204 in 2003, dustrial (with 593,907 members) and 3,024 10,838 in 2004. Of 11 categories of dis- are occupational (with 2,370,704 mem- putes, wages disputes (48.8 per cent), con- bers). Assuming that each worker is a mem- tract disputes (44.8 per cent) and disputes ber of only one union at a time, then the related to accidents at work (8.5 per cent) union participation rate of all employed were the top three causes (some disputes workers (9,942,000 persons at the end of had more than one cause). According to 2004) is nearly 30 per cent. Among the officials who deal with labour disputes, industrial unions, manufacturing unions workers in the textile and garment indus- number 795 (71.7 per cent). Among occu- tries are less active in unions than other pational unions, technicians and related workers. The peak period of union activity workers have 994 unions (32.9 per cent), was from 1987 to 1989, when many facto- service and sales persons 596 (19.7 per ries closed down and moved to China or cent) and unskilled workers and labourers other countries. The Council of Labour 362 (12.0 per cent). Affairs reported 224 labour disputes in the textile and garment industries in 1989, the Reported cases of disputes involving un- same number in 1990 and 138 in 1991.

5. Conclusion and Implications

The critical factor that influenced the During the process of economic develop- growth and expansion of the textile and ment, in addition to SME entrepreneur- garment industries through the six stages ship, government officials’ professional and outlined above was the goal of expanding administrative abilities in regulating and product scope and the related professional managing economic and trade affairs was training and education system in the 1960s also crucial. This paper points out the im- and 1970s. As a country lacking natural portance of ensuring an investment-friendly resources, Taiwan imported cotton and environment: (1) tax and financial reforms used US aid cotton as the first stepping for better macroeconomic environment, (2) stone. Following the first artificial fibre in bank loans, land and labour markets for 1964, there were five well-known technol- SME to foster their ability in trade, invest- ogy senior high schools or college department and labour management, (3) indus- ments of textile research. Technology and try-specific policies and institutes, (4) de- innovation based on the education system velopment of complementary industries in laid the foundations of Taiwan’s high tech different stages. The lesson from the devel- industries in 1980s. opment of the textile and garment indus- 32 Taiwan’s Textile and Garment Industry tries is that those policies are equally appli- The textile manufacturing supply chain is cable to local and foreign companies. Tai- globalising. Regional synergies determine the wan fostered many successful SMEs, which development partners and path of a coun- led to the later big investment in China and try. For a long time, Cambodia has main- other developing countries. tained cordial relations with the People’s Republic of China. China’s FTA policy rides Many LDC governments think that spe- on its ‘new diplomacy’. The development of cial economic zones to attract FDI will textile and garment industries requires a automatically lead to sustainable industrial great amount of natural and artificial fibres. and economic development. Drawing from Since China signed the Early Harvest Pack- Taiwan’s experience, this is overoptimistic. age on agricultural products with Cambo- Many other important issues, such as school dia, Laos, Myanmar and Vietnam in 2004, education, work ethics, professional edu- a many-sided cooperative international pro- cation, quality control and financial mar- gramme, taking account of the global manu- kets friendly to SME, have not been in- facturing supply chain, can be designed. A cluded in this paper. regional manufacturing supply chain Cam- bodia, Laos, Myanmar and Vietnam can Cambodia and those newly rising LDCs involve natural materials (cotton, wool) from dispose of no more natural resources than China, manufacturing technology and equip- Taiwan. Taiwan’s experiences in developing ment from Taiwan and training in technol- the textile and garment industries are wor- ogy, fashion design and marketing from Brit- thy of imitation by those countries. ain, France or Germany. The precious experiences of the TTRI in After two decades of a changing global divi- training the trainers for textile technology sion of labour in manufacturing, textile and and education can be the seedbed for peace- garment markets have changed dramatically. ful economic cooperation in east Asia.

References

Akamatsu, K. 1962. ‘A Historical Pattern of Economic Growth in Developing Countries’, Developing Economics, 1. Chang, Mao-Hsio. 1982. ‘The Development of Taiwan’s Textile Industry’, Bank of Taiwan Quarterly, 33:4, pp.30-46. Chieh, Ming-Juan. 2002. [The Development of Taiwan’s Machinery Industry] (in Chi- nese), National Policy Report, NPR Foundation. Chiu Chen, Lee-in. 1992. ‘The Economic reunion of Taiwan and Mainland China—The Impact on Industrial Development’. CIER Discussion Paper 9203. Chiu Chen, Lee-in. 2004. ‘Economic and Political Interaction across the Taiwan Strait Facing the Trend of Economic Integration in East Asia’. KIEP CNAEC Research Series 04-05. Chiu, Hsien-Tong. 2003. [Strategic Planning Report for Textile Field] (in Chinese). Chow, Chia-Ming. 1981. ‘The Prospect and Current Situation of Taiwan’s Chemistry Fiber Industry’, Bank of Taiwan Quarterly, 32:2, pp.1-18. Chow, Shien-Wen. 1980. [Taiwan Economic History] (in Chinese). Taipei: Kai- Ming Book Publisher, pp. 530-569. Dowling, M. and C.T. Cheng. 2000. ‘Shifting Comparative Advantage in Asia: New Tests of the “Flying Geese” Model’, Journal of Asian Economics, 11, pp. 443-463. 33 Dialogue + Cooperation 2/2006

Fei, J.C.H., Gustav Ranis and Swy Kuo. 1978. ‘The Growth and the Family Distribution of Income by Factor Components’, Quarterly Journal of Economics, 50. Fei, J.C.H., G. Ranis and Swy Kuo. 1979. Growth with Equity: The Taiwan Case. World Bank, Oxford University Press. Galenson, Walter (ed.). 1979. Economic Growth and Structural Change in Taiwan. Ithaca: Cornell University Press. Kuo, Shirley, G. Ranis and J. Fei 1981. The Taiwan Success Story. Boulder, Colorado: Westview Press. Kuznets, Simon. 1979. “Growth and Structural Shifts”, in Walter Galenson (ed.), Eco- nomic Growth and Structural Change in Taiwan: The Postwar Experience of the Re- public of China. Ithaca, NY and London: Cornell. Lee, P., C.T. Lu and H.H. Lee. 1952. [Special Issue of Taiwan’s Textile Industry], Commer- cial Times, Taipei, pp. 1-3. Lin, Chung-Zhen. 1994. ‘The Study on Textile Development Policy in Taiwan’, National Science Council (830301H001036). Lin, Bun-Hsung. 1970, ‘A Study on the Development of Cotton Textile Industry in Tai- wan’, Bank of Taiwan Quarterly, 21:1, pp. 111-137. Lin, Chung-Hwa. 1978. ‘A Study of Cotton Textile Industry in Free China’ (in Chinese), Tai-Chung, pp. 5-20. Meier, Gerald M. and James E. Rauch. 2000. Leading Issues in Economic Development, 7th edition. Oxford University Press. Porter, M. E. 1986. Competition in Global Industries. Boston: Harvard Business School Press. Ranis, Gustav (ed.). 1992. Taiwan: From Developing to Mature Economy. Boulder, Colo- rado: Westview Press. SMEA. 2002. [White Paper on Small and Medium Enterprises in Taiwan], Small and Medium Enterprise Administration and Chung-hua Institute for Economic Re- search. SMEA. 2005. [White Paper on Small and Medium Enterprises in Taiwan], Small and Medium Enterprise Administration & Chung-hua Institute for Economic Research. Suzuki, K., Changing Flying Geese: Measuring Structural Change in East Asia with Asian International Input-Output Table. Stockholm School of Economics Working Paper 172 (2003). TTRI. 2005. ‘New Ideas in Technology, New Future of Textiles’. Wong, J.R. 1978. ‘How we created economic miracle’, Reading Times, Taipei, p. 25. Ying, Tsung-Jung. 1961. ‘A Decade of US Aid and Taiwan’s Economic Development’, Bank of Taiwan Quarterly, 12:1, p. 71.

34 A Survey of China’s Apparel Industry

A Survey of China’s Apparel Industry

Yin Xingmin*

I. Introduction

The economic development of China is put Export-oriented industrialisation theory forward as an example of the success of an has had a significant impact on economic export-oriented strategy. In this strategy, policy in China since the end of the 1970s. industrial development is conceptualised as China was the world’s third leading ex- an outcome of perfect competition and the porter in 2005, with a world export share free development of market forces. Until of 8 per cent. Based on international ob- the end of the 1970s, China’s industrial and servations, a few studies have investigated foreign trade policies were regarded as the effects of garment exports on China’s those of the closed planning economies; industrial development and economic ac- foreign trade was understood as a tool to tivity. However, this study is concerned enhance import substitution and achieve with the questions: What have been the industrial self-sufficiency and economic characteristics and course of development independence in the long run. of the apparel industry since 1999? How have China’s garment exports evolved, as During the past 15 years, China’s economy the foreign trade generated by the apparel has been increasingly integrated with the sector has accounted for 11-16 per cent world economy. Imports and exports have of China’s exports since the mid-1990s? risen significantly as a percentage of gross What has changed for the regional clus- domestic product. It is well known that ters of apparel production? This study will China’s exports increased dramatically, illustrate the evolution of trade and em- from 5 per cent of GDP in 1980 to 35 per ployment in the apparel industry and pro- cent in 2005. The export volume of manu- vide a brief survey and assessment of the factured products reached US$762 billion industry. in 2005, in comparison to US$18.12 billion in 1980.1 Many manufacturing sectors The paper is divided into six sections. have grown in response to strong interna- Section II provides general information tional demand for China exports. Macr- on the apparel industry in China. Sec- oeconomic policy has generally favoured tion III examines the trends of garment exportable goods, which tend to be inten- exports and the role played by foreign sive in unskilled and semi-skilled labour. firms. Section IV describes the employ- One of the notable features of rising ex- ment, labour costs and economic per- ports of manufactured products is that the formance of this sector. Section V high- garment industry contributed a great part lights several special trends, particularly of the export growth and the job creation the regional clusters and industrial con- in China during 1990-2004, particularly in centration. The last section is conclud- 2000-2004. ing remarks.

* Professor, China Centre for Economic Studies, Fudan University, Shanghai 200433, China. Email: [email protected] 1. China Statistical Yearbook, 2005, p. 633. 35 Dialogue + Cooperation 2/2006

II. Overview of China’s Apparel Industry

It is claimed that the dynamic effects of ket, from 20.7 per cent in 1997 to 26.6 export growth are reflected in variations in per cent in 2004, which is regarded as a productivity and changes in resource allo- major advance in the globalisation of gar- cation, technology, efficiency and compara- ment production. tive cost advantages, all of which are significant elements of a successful develop- The growth of the apparel industry revealed ment strategy.2 by exports is also observed in increased employment and output. However, the ap- Economic theory argues that the produc- parel industry supplies only a tiny share of tion and trade of labour-intensive products employment in China. Nationally, it ac- promote national industrialisation. This counted for only 0.56 per cent of non-farm also explains the growth of a populous coun- employment in 2000, and 0.78 per cent in try with huge reservoirs of surplus labour. 2004. Based on China’s experience, it is also argued that exports generate greater capacity Table 1 summarises the general trends of utilisation in industries, greater horizontal China’s apparel industry during 1985-2004. specialisation, increasing familiarity with It is important to stress several points. technology and greater learning-by-doing effects, and that they result in internation- First, the output of the apparel industry has ally competitive prices and higher quality increased quickly since 1995, from 147.02 products. The apparel industry has been one billion yuan in 1995 to 229.12 billion yuan of the most successful sectors in shifting in 2000, and to 387.98 billion yuan in from domestic orientation to exports since 2004. However, its share of total manufac- 1980. China substantially increased its turing output decreased to 2.38 per cent in share of apparel exports in the world mar- 2004 from 3.08 per cent in 2001.

TanihCniyrtsudnIlerappAehtfosrotacidnI.1elbaT anihCniyrtsudnIlerappAehtfosrotacidnI.1elbaT anihCniyrtsudnIlerappAehtfosrotacidnI.1elba AsAttessA tess stessA stess EtnemyolpmE nemyolpm tnemyolpmE tnemyolpm OtuptuO uptu tuptuO tuptu raeY R%noillibBM '%nnosrep000 sR%oillibBM

14589 860. 101. 1351, 237. 129.9 4.2

13099 165.9 101. 1251, 360. 494.1 4.2

15599 190.62 105. 1257, 322. 120.74 0.3

28000 198.57 165. 2851, 328. 251.92 0.3

28100 175.09 118. 2373, 532. 286.95 0.3

26200 298.70 188. 2656, 597. 264.19 9.2

23300 267.73 128. 2298, 509. 396.24 6.2

25400 200.77 137. 3402, 681. 389.78 3.2 sierahS.slatipacgnitalucricdnastessadexiffoeulavtenehtedulcni0991dna5891nistessA:setoN .yrtsudnignirutcafunamotevitaler :secruoS ,koobraeYlacitsitatSanihC .seussisuoirav ,koobraeYlacitsitatSymonocEyrtsudnIanihC suoirav seussi .

2. World Bank, 1991. 36 A Survey of China’s Apparel Industry

Second, total assets include circulating capi- dustry in the early 21st century. The most tal, long-term investment, fixed assets, in- important issue affecting the sector since tangible assets, deferred assets and other 1995 is related to the dynamic growth of assets. Apparel industry assets increased by electronics and other capital-intensive sec- 58 per cent from 2000 to 2004, while tors. For instance, the electronics and com- manufacturing industry increased its total munication industry has significantly in- assets by 71 per cent, from RMB9,554.8 creased its share of output from 1.85 per billion to RMB16,324.03 billion, in the cent in 1980 to 5.22 per cent in 1995 and same period.3 13.15 per cent in 2004, becoming the largest manufacturing sector in terms of out- Third, the apparel industry created more put as well as assets. than 1 million new jobs in China from 2000 to 2004. Compared to the late 1990s, em- To trace the effects of globalisation in la- ployment in the early of 21st century grew bour demand on employment and output at a very fast pace. growth, we turn to identify the factors such as exports and foreign direct investment; and It is most important to understand the struc- also trace its dynamic efforts in the face of tural changes in China’s manufacturing in- strong global demands on Chinese garments.

III. Patterns of Export-Oriented Growth

It is clear that the world garment market International Labour Organisation, China has become more open, subject to strong including Hong Kong accounted for 36.4 price and quality competition. China has per cent of world clothing exports in 1997 increased its share of world garment ex- and 38.0 per cent in 2004.4 ports become the major exporter of textiles. The growth rate, however, becomes More importantly, the combined ratio of less impressive, when it is recognised that textiles and textile goods to China’s GDP the strong growth of China was closely re- is relatively low. It reached 4.24 per cent lated to a decline in the exports of Hong in 1999 and increased to 5.4 per cent in Kong. According to the estimates of the 2004.

A. Trends of Garment Export Growth

It is necessary to give some explanations ports shows that the more labour-intensive on the classification of the apparel sector. garment industry has increased faster than Data on exports of apparel products in textiles over the last decade and represented 1999-2004 is based on the calculation of 74 per cent of China’s total textile and tex- four categories of textiles and textile arti- tile product exports in 2004, compared to cles: knitwear and crocheted fabrics; knit- 66 per cent in 1999. ted or crocheted garments and clothing accessories; garments not knitted or cro- Trade liberalisation has been particularly cheted; and other textile products and sec- successful in integrating China into the ond-hand garments. An analysis of the com- world economy. Economic theory stated position of textiles and textile products ex- that the opening of the economy to inter-

3. China Statistical Yearbook, 2001, p. 411; and 2005, p. 491. 4. Ernst et al., p. 3. 37 Dialogue + Cooperation 2/2006

national trade would provide an outlet for China is a good example of how export surplus productive capacity and promote expansion can be promoted under the new economic growth. China’s apparel sector conditions, including China’s entry into the had already begun its integration into the World Trade Organisation. Table 2 shows global market before 1990. For instance, that the trade surplus for garment exports garment product exports increased to reached US$34.52 billion in 2000, and sig- US$2.05 billion and a garment trade sur- nificantly increased to US$62.23 billion in plus of US$0.44 billion in 1985. Arguably, 2004.

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E$SU(stropxE $SU(stropxE $SU(stropx %latoTfo% latoTfo% latoTfo YraeY raeY rae G)%(htworG )%(htworG )%(htwor TsulpruSedarT sulpruSedarT sulpruSedar m)noillim )noillim )noilli EstropxE stropxE stropx

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17099 6148, 107.1 .11

18199 8299, 354.1 .21

15999 2681,7 -08.21 110.6 19,42

29000 3120,7 362.6 118.4 25,43

29100 3964,7 181. 164 0. 88,43

28200 4869,2 106.4 142.3 02,04

24300 5834,4 226.6 174.2 83,15

22400 6465,5 254.0 170.1 22,26

.seussisuoirav,koobraeYlacitsitatSanihC:ecruoS

The growth of apparel exports between tages to intermediate technology in the com- 1990 and 2004 was driven by a surge in ing decade. exports to the US market in the mid-1990s, and thereafter by a surge in exports to all China’s apparel industry is typical of an world markets thanks to the advantage pro- export-oriented growth pattern. Table 3 vided by China’s entry into the WTO. The shows the ratio of exports to sales of the apparel industry was one of the fastest grow- apparel industry. The regional data for ing manufacturing industries in the 1980s. Shanghai and Jiangsu are presented as a What has been the net effect of these grow- complement to the general trends for the ing exports on its importance in total ex- apparel industry. ports? The apparel industry did not account for a high share of total exports, the share First, the ratio of exports to sales had not of 16 per cent in 1999 decreasing to 11.05 changed much in recent years, although per cent in 2004. It is commonly expected both increased significantly in this period. that the garment share of manufacturing Second, Jiangsu’s industry has been one of exports will decrease bit by bit due to the the country’s major industrial bases, includ- structural changes of industry based on the ing its apparel sector with about 19 per cent quick shift of China’s comparative advan- of total national apparel production in the 38 A Survey of China’s Apparel Industry past five years. The ratio of exports to sales TtnemraGfosoitaR.3elbaT tnemraGfosoitaR.3elbaT tnemraGfosoitaR.3elba remained around 50 per cent from 1999 EselaSotstropxE selaSotstropxE selaSotstropx to 2004. Third, it is well known that Shang- EstropxE stropxE stropx SselaS selaS sela EselaS/xE selaS/xE selaS/x YraeY raeY rae (nb( nb( nb (nb( nb( nb hai was the largest base of China’s apparel ()%( )%( )% industry before the early 1980s. For exam- y)nauy )nauy )nau y)nauy )nauy )nau ple, Shanghai produced 25 per cent share NlanoitaN lanoitaN lanoita of national garment output in 1980. From 24100 155.53 285.15 8.35 1990, however, the Shanghai metropolitan 21200 174.45 293.38 4.45 government adopted a major strategy of 24300 128.18 300.33 6.45 restructuring manufacture and shut down textile and textile goods production to set JusgnaiJ usgnaiJ usgnai up new capital-intensive industries. As a 15999 160.8 387.5 4.05 result, the Shanghai apparel industry de- 20100 237.4 478.9 5.94 creased its national share quickly, from 25200 279.5 552.5 9.64 10.13 per cent in 1991 to 7.99 per cent in 2004. In the same period, Shanghai’s ratio 27300 288.8 671.0 9.74 of exports to sales also decreased, from 27400 335.5 735.0 .05 4

60.12 per cent to 50.36 per cent. SiahgnahS iahgnahS iahgnah

It is important to note that although the 17599 867. 135.4 2.06 share of garment products in exports is 14999 134.1 120.9 1.06 decreasing, both output and exports of ap- 21000 181.3 266.3 3.55 parel are still rising. Export growth for all 23100 107.3 220.5 .45 9 manufacturing is impressive. The leader here, as in other areas, is the electronics 21200 144.4 257.7 9.15 and communications sector. The electron- 25300 112.6 239.9 3.45 ics industry alone accounted for almost 40 28400 143.5 365.0 3.05 per cent of total exports in 2004, up from :secruoS iahgnahS,koobraeYlacitsitatSusgnaiJ 15 per cent in 1995, while apparel prod- eYlacitsitatS ,koobra seussisuoirav ucts decreased its share of exports from 16.10 per cent in 1999 to 11.05 per cent the apparel industry in manufacturing ex- in 2004. It is predictable that the role of ports will continue to decrease.

B. Role of Foreign Direct Investment

As expected, export success tends to be ventures are an important innovation that correlated with a liberal policy towards for- allowed foreign capital to exploit excess la- eign investors. This arises from the fact that bour to produce exportable goods. Since many exportable goods that are made 1979, China has been one of the most suc- cheaply in small local firms require large cessful nations in attracting FDI, accumu- global marketing firms to reach foreign lating to US$620 billion between 1979 and buyers. The apparel industry has strong 2005. In general, the most relevant trend marketing economies of scale although pro- over the 1979-2005 was the increased share duction may have small economies. Thus a of FDI in manufacturing. Two important policy of encouraging foreign direct invest- periods can be highlighted for these investment (FDI) was announced in the early ments: 1979-1991 and the period from 1980s. Barriers to FDI have been consist- 1992 to now. In the first period, FDI in ently eliminated. Among the reforms, joint China accumulated to US$23.35 billion. 39 Dialogue + Cooperation 2/2006

Realised FDI accumulated to nearly global production networks. From calcula- US$600 billion for 1992-2005. tions based on the statistical yearbooks, the exports of foreign-invested enterprises China’s development experience in the ap- (FIEs) reached US$338.61 billion and ac- parel industry is relevant from several view- counted for 57 per cent of total exports in points. Generally, FDI reflects the commer- 2004.5 What have been the most signifi- cial interests of overseas firms in search of cant tendencies in terms of FDI in China’s market access and competitiveness for their apparel industry?

TrTytsudnIlerappAnismriFdednuF-ngieroF.4elbaT tsudnIlerappAnismriFdednuF-ngieroF.4elba rtsudnIlerappAnismriFdednuF-ngieroF.4elbaT rtsudnIlerappAnismriFdednuF-ngieroF.4elba YrYsaeY ae raeY rae AstessA tess stessA stess %%s%% JsboJ bo sboJ sbo %%t%% OtuptuO uptu tuptuO tuptu %%% ()nauynb( )nauynb( )nauynb ()000'( )000'( )000' ()nauynb( )nauynb( )nauynb 26000 719.9 152.11 .84 20100 827.3 439.3 1911 45.6 104.91 .64 25200 935.2 485.4 131.23 .54 22300 115.60 488.4 1144 55.0 149.85 .64 23400 1062 3. 476.5 1516 57.0 182.58 .74

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Table 4 illustrates the market share of for- ing role from a development perspective. eign-invested firms in the garment indus- FDI increased its weight from 46.9 per try in the past five years. With the gradual cent of garment industry employment in opening up of the economy, many of the 2001 to 50.5 per cent in 2004, although FIEs are export oriented. They became it accounted for only 45-48 per cent of major entities in the apparel industry in total output, while its share of the capital the past decade. Usually, foreign-invested was stable at 45 per cent during 2000- firms recruited unskilled cheap labour from 2004. The fact that FIEs hold a lower pro- the rural sector and skilled workers from portion of assets than of employment in the urban sector. They have had a direct the apparel industry indicates that FDI in impact on exports and provided a high de- this industry is involved in labour-inten- gree of export-orientation for the apparel sive production. Third, the number of sector. Thus, three points can be drawn employees in FIEs was 1.62 million, 50 from our analysis. per cent of the apparel labour force in 2004. Thus, over 2001-2004 FIEs, cre- First, one way to compare the export per- ated half a million new jobs and also ac- formance of FIEs in China’s apparel in- counted for 61 per cent of job creation dustry is to analyse their shares of total for China’s apparel industry, providing output and employment. These indicators more jobs for unskilled labour. describe the real role of FDI in the growth of this industry. The proportion of FIEs The foregoing analysis suggests that exports in total sales was 48 per cent in 2000, while may contribute to employment growth. the share of exports reached 50 per cent Exports enabled FIEs to grow rapidly with in 2004. Second, FDI played an increas- China’s surplus labour and led to growth of

5. China Statistical Yearbook, 2005, p. 642. 40 A Survey of China’s Apparel Industry employment in the apparel sector. FDI is tral and local governments. FDI flows can relatively labour intensive in comparison be characterised as a search for efficiency— with the total apparel industry. However, through exports and distribution of global recent trends in the apparel sector are also activities—as well as for access to the do- relevant since they show that Chinese firms mestic market. require joint ventures or different forms of association with foreign firms to compete As expected, output growth of leads to in- even in the Chinese market. Not only huge creased labour demand. The expansion of investments but also foreign firms’ experi- export markets has been only one impulse ence, quality control and technological de- driving the growth of China’s apparel in- velopment are some of the reasons for this. dustry, and domestic demand also provided The evidence in Table 3 seems to clear that a strong incentive for the establishment of the production of FIEs is more labour in- firms and the expansion of productive ca- tensive than that of the domestic sector, pacity. So China’s domestic firms, mainly and therefore a unit increase in exports private, also increased their presence in requires relatively high quantities of labour apparel production as well as exports. Do- compared to domestic production. mestic apparel firms accounted for 62.68 per cent of investments in urban areas in Thanks to China’s low labour costs and 2004, while investments from Hong Kong, trained productive labour force, this indus- Macao and Taiwan were 19.18 per cent, try attracts investors mainly from Asia. FDI and 18.14 per cent from foreign firms. in the apparel sector is mainly related to Therefore, it may be foreseen that the ma- low labour costs, low trade barriers and jor players in China’s apparel industry will other preferential policies from both cen- be domestic firms very soon.

C. Market Diversification

A high level of market diversification that garment exports accounted for 73-75 means that a country exports to a large per cent of total textiles and textile arti- number of countries; a low level means cles in 2002-2004. that exports are concentrated in just a few countries, particular in neighbouring From Table 5, China’s export gain is enor- countries—such as Mexico exporting mous, through increasing its garment ex- more than 85 per cent of its garments to ports to the European Union from the United States. A country with a high US$3.24 billion in 2000 to US$8.49 bil- product diversification exports a wide lion; to the United States from US$4.79 range of goods. Clearly, a high degree of billion to US$8.26 billion in the same market diversification contributes to a period. China has an excellent market di- high level of stability in exports. versification in garment exports. Japan has been the largest buyer of China’s garment Export destinations give us more insight exports in the last decade. The United into the market for China’s garment ex- States and the EU have had strong quota ports. The total of textiles and textile arti- systems for garment exports from devel- cles exported reached US$57.85 billion in oping economies. The US market for 2002, US$73.35 billion in 2003 and China has slightly decreased, from 13.31 US$88.77 billion in 2004.6 It is calculated per cent of total garment exports in 2000

6. China External Economic Statistical Yearbook, 2004, pp. 32-78, and 2005, pp. 46-81. 41 Dialogue + Cooperation 2/2006

TrTsaeYdetceleS:snoitanitseDtropxEtnemraGs'anihC.5elbaT aeYdetceleS:snoitanitseDtropxEtnemraGs'anihC.5elba raeYdetceleS:snoitanitseDtropxEtnemraGs'anihC.5elbaT raeYdetceleS:snoitanitseDtropxEtnemraGs'anihC.5elba )noillib$SU( R6noige 1099 2100 2200 2300 2400 002 gnoH 6006. 626. 518. 883. 997. 2.11 gnoK J1napa 891. 144.1 188.1 149.1 194.3 0.51 htuoS 0556. 191. 5.1 aeroK E8U 241. 352. 343. 452. 599. 4.8

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to 12.59 per cent in 2004, while the EU Japan, the United States and the European market for China has increased from Union, which together accounted for 48.57 10.38 per cent to 12.75 per cent in the per cent of China’s garment exports in 2004. same period. However, because China is a large-scale exporter, it can serve many different coun- On the one hand, export opportunities for tries. In addition, quotas imposed by the China’s apparel products have mainly come US and the EU have also forced China to from three major developed economies: diversify its export markets.

IV. Employment Creation and Related Performance

The production and export of textile prod- industry. Demand growth triggered a large ucts grew rapidly from the late 1990s, as job creation, and we now focus on this previously described. While this growth part of the adjustment process by exam- testifies to the success of the globalisation ining the complicated relations of em- policy of encouraging exports of labour- ployment, wages, labour productivity and intensive products, it also exposed a capital intensity in the China’s apparel in- number of structural weaknesses of this dustry.

A. What is the Comparative Advantage of China’s Apparel Industry?

China has a large, diversified and versatile est, labour costs worldwide. The labour base in apparel goods. Labour costs are force is fairly young and fairly educated, certainly an important, but not a unique or the average worker having about nine years decisive, factor in international competi- of formal education. This estimate is based tiveness. China has low, but not the low- on the nine-year compulsory education sys- 42 A Survey of China’s Apparel Industry tem announced in 1993. Therefore, young the manufacturing sector and preferential workers should have at least nine years of access to dynamic markets provide a win- normal schooling. ning combination that encourage firms to invest.7 China combined many of these As economists from International Labour factors to increase its competitiveness in Organization point out, low production the global garment market, which created and distribution costs, full-package pro- more jobs for unskilled labour. In com- duction systems, a certain level of prod- parison to other developing economies, uct and market diversification, a favour- China was well placed to take advantage able macroeconomic environment such as of low labour costs and other factors re- a low real exchange rate, a favourable in- lated to institutional reforms and industry vestment environment, public support for policy.

B. Employment Growth

An acceleration in the employment growth trial enterprises above the designated size rate seems to be a general feature of Chi- (We may call this definition 1) and total na’s manufacturing if 1999 is used as the employment in all manufacturing indus- starting point rather than 1995. The growth try (definition 2). It seems that 36.9 mil- in employment in the early 21st century lion persons were not counted in manu- seems to have been driven by exports, con- facturing industry in 2002. sidering the ratio of more than 50 per cent For employment growth, there is also a of exports to sales in the apparel industry. problem of a lack of reliable data on the national level. Therefore, we estimate em- The number of workers in the apparel in- ployment with a data set of labour in re- dustry was 3.2 million in 2004. However, gional areas. In order to show the real if we consider the total manufacturing la- picture of employment for the apparel in- bour force, the number of workers in the dustry, we choose employment data from apparel industry is larger than suggested Guangdong, Jiangsu and Shanghai to in Table 1. Estimates of employment in complement the explanation of national manufacturing vary with the definition and employment change. These three regions data sources. The data of the China Sta- plus Zhejiang province accounted for tistical Yearbook neglects employment in more than 70 per cent of China’s garment smaller enterprises, so both values and em- output as well as garment exports. This ployment are underestimated. Table 6 is the best we can do due to the lack of shows the difference between data on all data. state-owned and non-state-owned indus- Examination of employment growth from Table 7 and related information illustrate TfosnoilliM.6elbaT fosnoilliM.6elbaT fosnoilliM.6elba some of the salient features. First, increased MniseeyolpmEgnirutcafunaM niseeyolpmEgnirutcafunaM niseeyolpmEgnirutcafuna DsnoitinifeDtnereffiD snoitinifeDtnereffiD snoitinifeDtnereffi exports generated a surge in employment, which went from 2.03 million in 1999 to Y2rae D1.fe D1.fe -2 3.20 million in 2004, as illustrated in Table 23100 808.0 433.5 5.53 1. The share of the apparel industry in to- 27200 870.3 401.6 9.63 tal manufacturing employment rose to 6.14 :ecruoS ,koobraeYymonocEyrtsudnIanihC .3002-2002 per cent in 2004 from 3.88 per cent in 2000.

7. Ernst et al., p.8. 43 Dialogue + Cooperation 2/2006

tnemyolpmEyrtsudnIlerappA.7elbaT industry as a whole created more employ- snoigeRlatsaoCeerhTni ment for unskilled labour. However, it seems Y-rae noitaN -gnauG J-usgnai gnahS that increases in apparel exports have not la gnod iah provide a considerable demand for labour 17999 2a20, n0. 298 71 in the past two years; that is to say, the 26000 2a51, na. n1. 02 pace of job creation in this sector has 21100 2a73, n9. 345 12 slowed. For instance, the Guangdong apparel industry created only 27,000 jobs 27200 2456, 655 480 22 between 2003 and 2004. 22300 2998, 720 452 32 23400 3602, 723 428 22 The evolution of employment and employ- .snosrepdnasuoht:stinU ment share in the apparel sector provides :secruoS ,koobraeYlacitsitatSanihC suoirav ;seussi ,koobraeYlacitsitatSusgnaiJ ;seussisuoirav an interesting picture of China’s recent in- ,koobraeYlacitsitatSgnodgnauG .seussisuoirav dustrialisation. First, the apparel sector is relatively less important for China’s manu- Second, using regional data sources for a facturing industry in terms of employment period of five years allows us to get a feel- and exports. Second, the electronic and ing about the evolution of employment in communications industry increased its the apparel industry. Guangdong increased employment from 1.96 million in 2000 to its jobs by 82,000 in 2002-2004, Jiangsu 3.33 million in 2004, creating 1.37 mil- by 123,000 in 2001-2004, and Shanghai lion workers new jobs, and electrical ma- by 56,000 in 1999-2003. In contrast with chinery increased its employment from three coastal regions, however, Shanghai has 2.29 million to 2.99 million, creating experienced a fall in employment in the 690,000 new jobs in the same period. apparel industry since 2003. This is not just Third, the increase of jobs in the apparel the result of increased productivity, but is industry is equal to approximately a 12 per also due to a decline of production and a cent increase of the 6.90 million workers deliberate pulling out of this industry. Third, in all manufacturing industry during 2001- all these trends indicate that the apparel 2004.

C. Efficiency Assessment

It is necessary to present explanations of when surplus labour is drawn from the ru- special definitions in the Chinese context. ral sector to the export sector. The perform- a.a.a. Overall labour productivity of industrial ance of the apparel industry seems to be enterprises refers to the average output in worse than the overall performance of the value terms per employed person in indus- manufacturing sector. trial enterprises. At present, the value added and the average number of staff and work- First, it is important to stress that labour ers of industrial enterprises in a given pe- productivity has increased significantly riod are used to calculate the overall labour for manufacturing as a whole. Overall productivity. b... Total profits refer to the labour productivity for the manufactur- profits gained by the enterprises. ing sector rose from US$5,518 in 2000 Most of our focus below will be on what is to US$8,825 in 2003, an increase of 60 happening to an apparel industry that faces per cent, while labour productivity in the low productivity. The data in Table 8 sug- apparel industry increased only 15 per gest that export orientation does not induce cent. The ratio of apparel to manufactur- increased efficiency in the use of labour ing productivity decreased continuously. 44 A Survey of China’s Apparel Industry

TyrtsudnIlerappAniytivitcudorP.8elbaT yrtsudnIlerappAniytivitcudorP.8elbaT yrtsudnIlerappAniytivitcudorP.8elba Ylrae erappA niegarevA /lerappA erahStiforP foerahSxaT $SU( tuptuo erutcafunaM erutcafunaM .funaMfo erutcafunaM )nosreprep )%( )%( )%( 16599 2873, 2597, 8 26000 3813, 5015, 66371. 0.2 29100 3005, 6692, 51302. 2.2 22200 3193, 7722, 48206. 1.2 29300 3528, 8328, 45241. 0.2 2.400 n.a. n.a. n4a. 148. 8.1 :ecruoS ,koobraeYlacitsitatSanihC .seussisuoirav

There is not a tendency to high growth Second, the profit share of apparel in of labour productivity in the apparel sec- manufacturing declined from 3.16 per tor, and the export-oriented apparel in- cent in 2000 to 1.84 per cent in 2004. dustry represented one of the slowest Simultaneously, value-added tax payable growing of China’s manufacturing indus- by the apparel industry decline from a tries. Increased export-orientation in the 2.07 per cent to 1.84 per cent share. case of apparel creates increased employment opportunities because exports of China’s performance in garments trade has garment products are labour intensive. been excellent, especially in terms of growth This can also be understood in terms of rates. However, in terms of labour produc- one of the objectives of trade and do- tivity, the indicators in Table 8 seem to be mestic market-based reform policies: to poor because of the surplus of labour from allow comparative advantage to work. the rural sector.

D. Wage Movements

Mostly, there is a clear relationship between at both national and local levels, real wages low labour productivity and low wages in a grew quite rapidly along with labour pro- competitive market. We examine the ef- ductivity in the period 1999-2004. Clearly, fects of wages on job creation in manufac- structural industrial changes profoundly turing industry, with special reference to affected labour costs. Wages in the total the garment sector. economy as a percentage of GDP rose slightly, from 11.91 per cent in 2000 to It is claimed that economic prosperity cre- 12.34 per cent in 2004. ates employment, rising real wages and increasing participation rates of the labour Wages are one of the most important force. However, it is also recognised that sources of income. One of the most rel- intense price competition in manufactur- evant effects of economic growth has been ing, particular in labour-intensive products, its positive impact on real wages. Average could force companies to strive for cost wages and manufacturing wages have in- reduction, there by putting downward pres- creased continuously. sure on wages. What has been the impact of the export-oriented strategy on China’s Table 9 displays the difference between wages? Although there is still a shortage of wages in manufacturing and the economy information on wages in the apparel sector on average. The last column describes the 45 Dialogue + Cooperation 2/2006

TsegaWlaunnAegarevA.9elbaT segaWlaunnAegarevA.9elbaT segaWlaunnAegarevA.9elba extent, the situation worsened between the ()raeyrep$SU( )raeyrep$SU( )raeyrep$SU start of the 1990s and the beginning of the Y-rae unaM -onocE /.naM new millennium, as highlighted in Table 9. erutcaf ym .nocE This may be attributed, in part, to fiercer )%( global competition and resulting downward 0991 4733 494 .69 pressure on manufacturing wages. 5991 6991 695 .39 6991 6797 794 .09 For the apparel sector we have no reliable 7991 7161 778 .19 data for wages, so we can not calculate 8991 8335 950 .49 trends. However, in estimating wages for 9991 9824 1500 .39 apparel workers, we assume that labour 0002 12750 1431 .39 productivity can substitute as an indicator that can approximate to be level of wages. 1002 13181 1013 .09 2002 11923 1505 .88 It would be expected that workers in the 3002 6961 apparel industry would earn a lower wage 4002 6391 than manufacturing workers, because this :ecruoS ,koobraeYlacitsitatSanihC ,5002 .626,651-151.pp industry produces low-value goods and employs a mainly unskilled workforce. Thus, ratio of manufacturing wage to average combining the data on labour productivity wages in the economy generally. and wages for manufacturing, one can think of a number of results. In contrast to the Average wages have increased at a differ- earlier results on employment, fairly clear ent pace for manufacturing and the overall differences in the dynamic of wages occur economy. While average wages for the across industries. The level of manufactur- whole economy almost doubled between ing wages is also smaller that that of the 1997 and 2002, the wage of manufactur- national average. ing workers only rose 85.6 per cent. Gen- erally, the average wage rose substantially The inference that a slowdown in wages in the past decade, from US$659 in 1995 growth in manufacturing encouraged an ac- to US$1,936 in 2004. The ratio of manu- celeration of employment growth needs to facturing wages to the national average be tested. In rest of this section, we turn to gradually decreased, from 94.5 per cent in discuss changes in capital intensity in this 1998 to 88.5 per cent in 2002. To a large industry.

E. Changes of Capital Intensity

This issue is also macro-economically rel- Rates of investment in the apparel industry evant because it shows that the apparel show a very striking pattern in the past 15 industry requires more investment that years. The net fixed assets to output ratio creates technology. For the sake of sim- declined slightly throughout this period, plicity and because of data constraints, from 20.86 per cent in 1992 to 17.78 per the apparel industry is analysed in com- cent in 2004. parison to all industry instead of in comparison to the manufacturing sector, but The number of industrial workers increased the two indicators are likely to be simi- from 41.02 million in 2000 to 60.98 mil- lar. In general, manufacturing accounts lion in 2004. Total capital in industry infor about 75-78 per cent of industrial creased from 12621.12 billion yuan to capital in China. 19526.17 billion yuan in the same period. 46 A Survey of China’s Apparel Industry

TyrtsudnIlerappAniytisnetnIlatipaC.01elbaT yrtsudnIlerappAniytisnetnIlatipaC.01elbaT yrtsudnIlerappAniytisnetnIlatipaC.01elba AlAyerappA erapp lerappA lerapp IyrtsudnI rtsudn yrtsudnI yrtsudn A/lerappA /lerappA /lerapp YraeY raeY rae AstessA stessA stess Y/nauY /nauY /nau GhtworG htworG htwor Y/nauY /nauY /nau IyrtsudnI yrtsudnI yrtsudn )nauynoillib( PnosreP nosreP nosre RetaR etaR eta PnosreP nosreP nosre ()%( )%( )% 13099 165.9 1138,1 1412,80 9.01 28000 168.57 8265,1 3186,70 5.62 28100 145.09 8585,2 162. 3197,25 4.23 26200 268.70 7912,8 -05.5 3511,29 1 9.9 23300 267.73 8002,2 521. 2956,39 9.72 25400 280.77 8305,6 502. 3202,02 0.72 :secruoS ,koobraeYlacitsitatSanihC .5002-1002

In other words, the rate of capital forma- tal-intensive industries since 1999. tion in China’s apparel industry was not proportional to the growth of employment. These results are not surprising consider- The supply of capital can explain the sever- ing that the apparel industry is quite labour ity of the fall in the investment rate in the intensive in comparison to overall industry early 21st century. Profitability declined, but and the fact that capital intensity must be not dramatically. As shown in Table 8, the increased in the face of rising labour costs, profit share of the apparel industry in particular in some well-industrialised regions manufacturing decreased from 3.16 per cent such as Shanghai, which has already shifted in 2000 to 1.84 per cent in 2004. The eq- some of its garment production capacity uity market has been guided towards capi- to other parts of China.

V. Industrial Clusters and Concentration

The four regions mentioned above are the from 12.77 per cent in 1991 to 18.35 per major engines of China’s economic growth cent in 1999 and has maintained one of in the past 15 years. Guangdong has the larg- the dominant positions with about 19 per est regional economy with 11.72 per cent of cent of market share. Zhejiang dramatically national GDP, Jiangsu is second with 11.25 increased its share, from 8.42 per cent in per cent. Zhejiang with 8.21 per cent and 1990 to 21.42 per cent in 2003, and there- Shanghai with 5.44 per cent ranked fourth after decreased to 18.21 per cent in 2004. and fifth respectively in 2004.8 In sum, these Shanghai has decreased two percentage four coastal regions accounted for 36.62 per points since 1999 and more than five percent of China’s GDP and 38.55 per cent of centage points since 1995. The apparel in- industrial value added.9 The share of each dustry has lost its importance as an em- region in the Chinese market demonstrates ployer in Shanghai, with the driving force an interesting picture for apparel industrial shifting from labour-intensive to capital- development from 1991 to 2004. Data on intensive sectors such as electronic goods industrial output of apparel products show and automobile. In the same period, Shang- a great rise and sharp fall in different re- hai has experienced a reduction in employ- gions (Table 11). ment in the apparel industry, from 235,000 in 2003 to 222,000 in 2004. Guangdong has kept its dominant position with about 22 per cent of market share. What can we conclude from analysis of the Jiangsu significantly increased its share, above tables? The garment industry is driven

8. Shandong province, another coastal region, has risen to be the third largest regional economy. 9. China Statistical Yearbook, 2005, pp. 51-58, p. 489. 47 Dialogue + Cooperation 2/2006

TsnoigeRlatsaoCruoFnituptuOyrtsudnIlerappA.11elbaT snoigeRlatsaoCruoFnituptuOyrtsudnIlerappA.11elbaT snoigeRlatsaoCruoFnituptuOyrtsudnIlerappA.11elba GgGunodgnauG nodgnau gnodgnauG gnodgnau JuJgsgnaiJ sgnai usgnaiJ usgnai ZgZinaijehZ naijeh gnaijehZ gnaijeh SiahgnahS ahgnah iahgnahS iahgnah `YraeY raeY rae BnoilliB noilliB noilli %fo% fo% fo BnoilliB noilliB noilli %fo% fo% fo BnoilliB noilliB noilli %fo% fo% fo BnoilliB noilliB noilli %fo% fo% fo ynauy nauy nau nlanoitan lanoitan lanoita ynauy nauy nau nlanoitan lanoitan lanoita ynauy nauy nau nlanoitan lanoitan lanoita ynauy nauy nau nlanoitan lanoitan lanoita otuptuo tuptuo tuptu otuptuo tuptuo tuptu otuptuo tuptuo tuptu otuptuo tuptuo tuptu 19099 324. 8.4. a.n 18199 676. 117.2 580. 905. 533. 1.01 19599 211.6 1.8.7 n0a. 136.9 3.31 9991 3514.7 183.8 346.1 125.5 185.9 .9 5 2.000 n.a. n8a. 251.4 5.01 24100 557.6 268.1 583.1 137.9 565.0 104.9 266.5 8.9 21200 695.3 297.1 584.6 183.9 545.9 254.0 236.8 8.9 22300 745.5 230.2 627.1 180.8 723.3 214.1 353.0 8.8 29400 861.5 229.1 760.2 145.8 716.0 122.8 390.1 9.7 :secruoS ,koobraeYlacitsitatSanihC J;seussisuoirav v,koobraeYlacitsitatSusgnai ;seussisuoira gnaijehZ ,koobraeYlacitsitatS ;seussisuoirav ,koobraeYlacitsitatSgnodgnauG .seussisuoirav

by price-based competition among small base to more remote regions where wages manufacturing establishments. Shanghai were much lower. This strategy will be fol- wage levels greatly exceeded those of com- lowed by Guangdong, Jiangsu and Zhejiang petitors in inland or western regions. Be- provinces in the coming years. cause regional wages were too high relative to the labour productivity of Shanghai ap- The pace of resource relocation for the apparel workers, Shanghai manufacturers parel industry grew quite rapidly in the early operated at a significant cost disadvantage. 21st century, while the less developed regions As a result, Shanghai-based apparel manu- in China have taken over market share from facturers had to relocate their production coastal areas in textiles and textile products.

B. Industrial Concentration by Firms

The final issue we consider in this sec- firms are usually thought to reflect the tion is market structure. We look at the conditions of entry into the industry. change in the number of firms within Obviously, low barriers to entry will aid 15 years, particularly the years from new entrants. An increase in the number 2000 to 2004. The apparel industry has of firms will tend to lower concentra- had an atomised market structure; that tion because the market share obtained is, there is no barrier to the entry of by new firms will lower the relative share new firms. Changes in the number of of incumbent firms.

TyrtsudnIlerappAnismriFforebmuN.21elbaT yrtsudnIlerappAnismriFforebmuN.21elbaT yrtsudnIlerappAnismriFforebmuN.21elba YrYlaeY ae raeY rae NlNuanoitaN anoita lanoitaN lanoita JuJisgnaiJ sgnai usgnaiJ usgnai SiSgahgnahS ahgnah iahgnahS iahgnah ZgnaijehZ naijeh gnaijehZ gnaijeh GgnodgnauG nodgnau gnodgnauG gnodgnau 11099 1.42,7 n.a. n4a. 1.37, a.n 24000 7.60, n6a. 1.83, n.a. a.n 27100 8130, 1322, 1644, 1.64, a.n 21200 9860, 1714, 1654, 1978, 59,1 27300 9917, 1245, 1814, 2940, 60,2 21400 1509,0 1367, 1040, 2072, 11,2 :secruoS ,koobraeYlacitsitatSanihC J;seussisuoirav ,koobraeYlacitsitatSusgnai ;seussisuoirav gnaijehZ ,koobraeYlacitsitatS ;seussisuoirav ,koobraeYlacitsitatSgnodgnauG .5002-3002 48 A Survey of China’s Apparel Industry

The long-term competitive performance of of firms revealed a lower degree of indus- firms producing apparel goods will be trial concentration that must have occurred shaped by their ability to respond rapidly in this period. Nationally, there was an av- to domestic and international market de- erage of 298 employees for one produc- mand, while minimising their costs. Table tion unit in the category of all state-owned 12 provides a general picture of industrial and non-state-owned enterprises above the concentration within the industry. However, designated size, but not for all firms in the the basic measure of concentration used in industry. Clearly, with expansion of the many studies is the share of the largest four market, the opportunities for business de- or eight firms in an industry. These ratios velopment in apparel production were sig- measure the extent to which a small number nificant, and inevitably investors set up new of firms account for a small, medium or firms to meet the strong market demand. large proportion of an industry’s output, employment or assets. Since the market The second concerns the principal regional structure for the apparel industry is com- trends in terms of output, which show the monly regarded as a very competitive one, association between rapid growth in the and here there is another shortage of data, number of firms and rapid growth of the we just show the number of firms, which industry, the only exception being Shang- is a good description of the concentration hai’s decline in the number of firms in 2004, changes. for reasons already discussed.

With fast growth of an industry, new en- Generally speaking, because the apparel trants are encouraged by the attraction of sector is dominated by small firms, con- higher profits, and also barriers to entry centration and strategy are based on deci- may appear less formidable in an expand- sions at the level of the firm. The level of ing market. Many apparel clusters are lo- production concentration is still very low, cated in special export-processing zones and and there are no barriers for new entrants small industrialising towns in the Yangtze into the industry. This is reflected in the delta (Shanghai, Jiangsu and Zhejiang) and fact that 3837 new firms joined the apparel Pearl delta (Guangdong). At least two im- industry after 2000. The price of garment portant lessons can be drawn from changes products in China has been so seriously of this industrial concentration. competitive that it is impossible for any single firm to influence price determina- The first concerns the increase in the tion. number of firms in the period 2000-2004, which showed a great change in market The new entrants greatly contributed to the concentration. The growth in the number expansion of China’s apparel exports. VI. Concluding Remarks

This survey assesses the gains and losses of First, trade competitiveness leads to strong the apparel sector from export-oriented output and employment creation. Export growth and quantifies the extent to which growth in this way has created consider- growth is driven by exports. A discussion able job opportunities for China. Further- of industrial and trade development leads more, from a policy standpoint, the issue to four broad issues regarding the growth of how the benefits of globalisation are dis- of the garment sector since the implemen- tributed is important because increasing tation of an open-door policy in China, exports is expected to help developing particularly since the late 1990s. economies to create more jobs. This was 49 Dialogue + Cooperation 2/2006

true for China’s apparel industry in the pe- Exports of high-quality garments need more riod 1999-2004. investments in technology, so it is reasonable to expect that more capital will be in- Second, export expansion by China’s ap- jected into this industry. parel industry was also based on foreign direct investment. This experience is also Fourth, this industry is still important in of utmost importance for other developing terms of employment even though the share economies trying to establish an export- of garment employment in the manufac- oriented apparel industry. Clearly, a friendly turing sector is extremely low. It can be environment for FDI is needed at both predicted that apparel industry resources national and local levels. will be shifted into other sectors and other parts of China under massive regional in- Third, China’s apparel industry has not industrialisation programmes. If we take creased its capital intensity greatly and la- Shanghai’s apparel industry as a sign of the bour productivity in garment production times, the driving force of China’s exports has not increased as rapidly as the manu- of apparel products will move to non- facturing average. However, this industry coastal regions sooner or later. will have to increase its capital intensity due to wages rising in the overall economy or Clearly, China benefited from its integra- reorganise production towards relatively tion into the global production system of high value-added products. The future of the apparel industry. However, a winner will China’s apparel industry depends, to a large turn into a loser if it can not maintain and extent, on its specialisation in specific prod- increase its competitiveness in global gar- ucts and its choice of production system. ment markets.

References

Almanac of China’s Foreign Economic Relations and Trade, 1988-2002. China External Economic Statistical Yearbook 2003-2005. Beijing: China Statistics Press. China Industry Economy Statistical Yearbook, various issues. China Statistical Yearbook, various issues. Enright, Michael J. 2005. ‘Rethinking China’s Competitiveness’, Far Eastern Economic Review, October, pp.16-20. Ernst, Christoph, Alfons Hernandez Ferrer and Daan Zult. 2005. ‘The End of the Multi- Fibre Agreement and its Implication for Trade and Employment’, ILO Employ- ment Strategy Papers 2005/16. Guangdong Statistical Yearbook, various issues. Jiangsu Statistical Yearbook, various issues. Kuijs, Loutis. 2005. ‘China’s Pattern of Growth’, World Bank Policy Research Working Paper 3767, November. World Bank. 1991. World Development Report 1991. New York: Oxford University Press. Zhejiang Statistical Yearbook, various issues.

50 The Philippine Garment Industry after MFA The Philippine Garment Industry after MFA

Rene E. Ofreneo*

The garment industry is the second biggest TstropxEtnemraGenippilihP.1elbaT stropxEtnemraGenippilihP.1elbaT stropxEtnemraGenippilihP.1elba export industry in the Philippines, contrib- YrYtaeY ae raeY rae GtnemraG nemra tnemraG tnemra %latoTfo% latoTfo% latoTfo uting close to 10 per cent of the country’s EstropxE stropxE stropx EstropxE stropxE stropx US$30 billion annual export earnings. It is a distant second to the electronics assem- AFM-erP bly industry, which accounts for more than 11079 372.6 1.3 60 per cent of total export earnings; how- 16379 569.7 9.4 ever, the garment industry, labour-intensive l2579 160.70 6.4 as it is, has remained the leading employer, with more than 300,000 workers. FM doirepA 17679 188.48 1.7 The industry is quota-driven. It grew rap- 17779 226.94 9.7 idly from the mid-l970s up to the mid-l990s because of the quotas provided under the 14879 333.62 5.9 Multi-Fibre Arrangement (MFA). Growth in 12979 482.40 7.8 this period was further aided by the shift in 14089 540.00 6.8 the country’s industrial policy regime—from the import-substituting industrial strategy of 11189 697.71 7.01 the l950s-1960s to the export-oriented in- 12289 583.14 7.01 dustrial programme from the l970s onwards. 12389 592.54 8.01 The latter provided the justification for the establishment of export processing zones 10589 660.32 4.31 (EPZs) and the bonded warehousing manu- 11689 725.15 5.51 facturing units engaged in re-export manu- 13789 196.790, 1.91 facturing. Garment exporters are based in the warehousing units, EPZs or the private 14889 121.713, 6.81 industrial parks registered with the Philip- 12989 149.475, 1.02 pine Export Processing Zone Authority. 19099 102.677, 7.12 With the phasing out of the MFA in Janu- 10199 156.068, 0.12 ary 2005 under the Agreement on Cloth- 14299 273.041, 7.12 ing and Textiles of the World Trade Organi- 10399 270.272, 9.91 sation, there have been widespread fears that the Philippine export-oriented garment 10499 210.573, 6.71 industry would collapse. 13599 239.956, 7.41

sraeytuo-esahpAFM How sustainable is the industry? Is there life for the Philippine garment industry af- 10699 297.224, 7.11 ter the MFA? How about the textile indus- 12799 21, 4.843 3.9 try? And how about the workers and un- 16899 294.653, 9.7

* Dr. Ofreneo is director of the Centre for Labour 10999 270.762, 4.6 Justice, School of Labour and Industrial Relations, .eciffOscitsitatSlanoitaN:ecruoS University of the Philippines-Diliman 51 Dialogue + Cooperation 2/2006

ions in these industries? What kinds of ad- the two industries and strengthen the rights justments are needed to preserve jobs in of workers to jobs and unionism?

Historical Overview of the Industry

The garment industry grew rapidly from its foreign debt generated a lot of invest- the mid-l970s up to the mid-1990s, becom- ment uncertainties and made it difficult for ing the country’s leading export industry producers to import needed raw materials until it was eclipsed by the rapidly expand- as a result of an ensuing crisis in letters of ing electronics assembly industry in the mid- credit. l980s. However, as early as the mid-1990s, the Growth was quota-driven, the industry’s industry, unions and government were al- rapid expansion taking place during the ready intensely debating what to do given quota period 1976-1995. Around 80 per the agreement in the WTO on phasing out cent of total garment exports were destined quotas. Also, there were ominous signs that for the quota countries—the United States, the Philippines was losing out in global European Union and Canada (Ofreneo et competition, given the rising number of al., 1996). The non-quota markets were garment factories shutting down and relo- Japan, United Arab Emirates and Hong cating to cheaper sites in Asia such as Kong. (Exports to Hong Kong were viewed China, Indochina and Bangladesh. with suspicion given its role as the export platform for Chinese-made textiles and In 1996, the Regional Tripartite Wages and wearing apparel; the interpretation was that Productivity Board of Metro Manila asked Hong Kong was utilising the unfilled Phil- a research group from the University of the ippine quotas and mixing Philippine-made Philippines’ School of Labour and Indus- garments exports those coming from trial Relations (UP SOLAIR) to do a China.) ‘SWOT’ analysis of the industry for deliberation by the board’s members. In its re- Philippine quota under-utilisation fluctu- port, the UP SOLAIR team (Ofreneo et ated through the years—ranging from 1 to al., 1996) came up with the following ma- 28 per cent for US quotas and from 4 to jor conclusions and recommendations: 66 per cent for quotas set by the EEC (ILO- DAP, 1999). The country’s under-utilisation 1. Accurate employment statistics were dif- of its quotas was the reason for the entry of ficult to gather because ‘the whole industry garment investors from other countries, is basically a subcontracting, re-exporting mainly from the Asian NICs (Hong Kong, industry in which raw materials are shipped Taiwan, South Korea and Singapore), who from abroad for processing (cutting, em- were labelled ‘quota refugees’, investors in broidery, sewing, etc.) and then re-exported search of other countries’ quotas under the to principals abroad’. Production was done MFA. partly in the factory of the exporter, partly in the production facilities of subcontrac- Growth could have been stronger in the tors and partly by household-based domes- 1980s were it not for the politico-economic tic outworkers contracted to do piece-rate crisis that hit the country in 1982-85. The jobs such as embroidery. It was estimated political succession crisis during the wan- by the Bureau of Rural Workers that there ing years of the Marcos regime and the fail- were more than half a million home work- ure of the national government to service ers and about 300,000 factory workers as 52 The Philippine Garment Industry after MFA of 1993, or over 800,000 workers in all. ness due to low productivity amid rising wages. A study of GTEB showed that the 2. In the 1992 statistics of the Garments hourly labour cost in the Philippines gar- and Textiles Export Board (GTEB), there ment industry, amounting to $0.72, was were 300,000 factory workers deployed in way above those of Sri Lanka ($0.41), In- about 3,125 garment and textile factories. donesia ($0.33), India ($0.29), Pakistan However, only 424 enterprises, mainly the ($0.29), Vietnam ($0.29), China ($0.25), big ones employing 50 or more workers, Bangladesh ($0.20) and Myanmar ($0.13). had unions. But the number of organised And yet, Ofreneo et al. noted that, apart establishments had been declining due to from closure and relocation, the other more closures and ‘re-engineering’ or break-up common adjustment measure of produc- of the big factories into smaller non-union- ers was to ‘casualise’ labour to make it ised firms with new names. cheaper instead of investing in productivity-enhancing programmes such as mod- 3. Strikes were endemic in the industry in ernisation of technology and improving la- the first half of the l980s, presumably be- bour-management relations. Ofreneo et al. cause of the politico-economic crisis of this observed that evading labour rights through period. Strikes, averaging 23 a year, and casual hiring was self-defeating, since there strike notices, averaging around 190 a year, is no way the Philippines can offset the mushroomed again in the first half of the cheaper labour cost of other countries ex- l990s, this time because of factory closures, cept through investments in higher produc- investment relocations, re-engineering ex- tivity. ercises and bargaining deadlocks. The biggest closure was that of Aris Garments, 6. Without the quotas, most of the gar- employing more than 8,000 workers, which ments exporters feared that they would lose was reported to have relocated to China. out to cheaper producers in the Asia-Pa- cific region and elsewhere. 4. The erosion of the number of formal factory jobs due to the above reasons was 7. Given the precarious situation of the accompanied by a decline in outsourcing industry as outlined above, the study came of work to domestic outworkers. This was up with a ‘Tripartite Agenda’ calling for the partly due to the rise of small formal enter- ‘renewal and modernisation’ of the sector, prises doing subcontracting jobs of a higher close consultation and cooperation between quality, for example using computers in labour and management on adjustment embroidery work. Also, big factories were measures, relocation and retraining assist- downsizing operations in favour of in- ance for workers, government-industry co- creased outsourcing to ‘satellite’ firms operation in overcoming bottlenecks that where quality inspectors could be detailed. lengthened turnaround time (roughly averaging 120 days), investments in textile dye- 5. According to the Confederation of Gar- ing and finishing to improve garments-tex- ments Exporters of the Philippines, the in- tiles linkages and an international campaign dustry was losing international competitive- for observance of labour rights everywhere.

After 1995

As to the reforms outlined in the above sponse. The government and industry had study, not much happened in terms of a their own sectoral initiatives involving mini- tripartite and coordinated industry re- mal union or employee participation. 53 Dialogue + Cooperation 2/2006

But the much-anticipated collapse of the of the industry in the 10-year phase-out industry did not happen either, although period. there was a decline in export values in 1996- 99 (Table 1). In 2000, the government even First, the phasing out of quotas under the proudly proclaimed that garment exports WTO, especially by the United States, was (including textiles) topped the US$3 billion done at a relatively less rapid rate because mark. However, exports declined precipi- of the fears of the quota countries that big tously in 2001-2003 and recovered moder- exporters such as China might expand their ately in 2004 (Table 2), obviously as a re- global shares rapidly at the expense of sult of garment exporters’ anticipation of smaller developing countries. Second, the the impact of the MFA total phase-out. 1997-98 Asian financial crisis had a damp- ening impact on plans of certain investors to relocate production in nearby countries TdnastnemraGfotropxE.2elbaT dnastnemraGfotropxE.2elbaT dnastnemraGfotropxE.2elba such as Indonesia (in fact, there were un- T40-0002,selitxeT 40-0002,selitxeT 40-0002,selitxe verified reports that at the height of the Asian contagion, some producers based in Y0rae 2100 2200 2300 2400 002 Indonesia shifted some job orders to the Philippines). Third, there are indications eulaV 36770, 2398, 2337, 2436, 76,2 that the country’s garments exports have )m$( shifted to higher value added, with Philip- pine exports of stone-washed denims, bras- .ITD,BETG:ecruoS sieres, T-shirts and, lately, lingerie rising rapidly, while exports of baby dresses, one of the first items to be de-listed in the quota There are several reasons for the survival schedule, contracted.

Restructuring in the Industry: Contrasting Views and Images

The last factor explains why the overall ex- Given the emphasis of the brand retailers port values had not declined below the 1995 on ‘corporate social responsibility’, the do- level. It also explains why unions as well as mestic brand producers or subcontractors the Department of Labour and Employment have also readily embraced the campaigns (DOLE) were expressing alarm over the of the ILO and the United Nations for the continuing trend of closures and lay-offs in Decent Work Programme and the UN’s the industry, especially in unionised firms. ‘Global Compact Initiative’ (GCI), empha- Those producing garments for the mass sising the importance of employer observ- market were being replaced by producers ance of core labour, human and environ- for brand names such as Gap, Ann Taylor, mental rights. Both the Decent Work Pro- Liz Claiborne, Polo, Ralph Lauren and so gramme and the GCI are actively being on. Gap, in fact, has become the single big- promoted by the Employers Confederation gest buyer of Philippine garments, purchas- of the Philippines, which at one time was ing as much as $200 million of goods an- headed by Donald Dee, a prominent gar- nually (Bolte, 2004). On the other hand, ment exporter and now president of the Luen Thai, an US-Hong Kong firm doing Philippine Chamber of Commerce and business Asia-wide, has become the big- Industry. gest employer, exporting Polo and other branded products out of several production Likewise, the major exporters have been facilities in various parts of the country. cooperating with their international buy- 54 The Philippine Garment Industry after MFA ers regarding quality, labour and social au- down with the loss of 23,500 jobs between dits under these buyers’ ‘codes of conduct’ 2000 and the middle of 2003, there were or ‘terms of engagement’ or the suggested also 313 new companies organised in the ‘certification process’ regarding quality as- same period, generating 35,024 new jobs surance (ISO 9000), environmental friend- (GTEB Update, 10 March 2004). liness (ISO 14000), labour and social accountability (ISO 8000), health and safety On the other hand, the unions, DOLE and standards (OSHAS 18000) and the like. a number of industry players in the old They have also supported the GTEB’s ‘trans- Garments Business Association of the Phil- formation’ programmes, which include ori- ippines (GBAP) were not as optimistic. entation on how to comply with the foregoing certification process. GTEB even In 2002, the following items were removed dangled incentives such as higher quota al- from the US quota list: luggage, dressing locations for compliance and subsidies to gowns and baby clothes. According to Dr. cover the cost of certification (up to Carolyn Sobritchea of the University Wom- US$1,200). Companies were also encour- en’s Studies Centre of the University of the aged to become accredited in the GTEB’s Philippines, the share of the Philippines in social standard dubbed as the ‘Responsible the US luggage market shrank by 54 per Apparel Production Principles’ (Bolte, cent that year, while the share of China 2004). increased by 664 per cent. For dressing gowns, the Philippine share went down by The problem is that not all garments pro- 37 per cent, while China’s rose by 698 per ducers are engaged in the production of branded items, nor are all, especially second- or third-level subcontractors, in a po- T'stsilairtsudnItnemraG.3elbaT 'stsilairtsudnItnemraG.3elbaT 'stsilairtsudnItnemraG.3elba sition to comply with the expensive and V)%(AFM-tsoPsweiV )%(AFM-tsoPsweiV )%(AFM-tsoPswei time-consuming corporate social responsibility audits and certification processes. It -htO yrogetaC Yose N can only be presumed that most of the pain- re ful labour-shedding exercises have been tak- fotcapmiesrevdA ing place in the sector producing for the 846 1 mass market and among those engaged in satouqfodne household-based subcontracting of piece- esaercedgnicneirepxE 77 rate sewing and embroidery. sredroni

As to the actual impact of the MFA quota IerihotgnidnetnI erihotgnidnetnI erihotgnidnetn 1001 001 00 phase-out on an enterprise-by-enterprise msrekrowerom srekrowerom srekrowero basis, therefore, different institutions give ,nwodtuhsyraropmeT contradictory views on the short- and long- 682 3 term prospects of the industry. rsekrowetator,ffo-yal S0tuognitcartnocbu 703 GTEB, on the basis of relatively sustained exports as outlined above and the increas- 81 niniamerotdnetnI ing demand for high-end garments prod- 757 ton 6002llitssenisub ucts, has been gung-ho about the industry, erus declaring since 2002, the year the GTEB’s ‘industry transformation programme’ was 46fo,5002lirpA31,yevruSPABG:ecruoS launched, that there is nothing to fear. It PABGfo%53gnitneserper,stnednopser reported that while 159 companies closed .pihsrebmem 55 Dialogue + Cooperation 2/2006

cent; and for baby clothes, the Philippines’ under new names in China, Indochina, share shrank by 17 per cent, while China’s Bangladesh and even faraway Nicaragua. surged by 826 per cent (Sobritchea, 2004). Incidentally, Filipino migrant workers in Bangladesh consist mainly of garment line Thus, it is understandable that in 2002-04, supervisors, who were brought in by the on the eve of the MFA quota phase-out, relocating garment investors-exporters. most of the above actors were extremely worried and in a crisis mood. Many of the The industry was ‘ripping at the seams’ in big factories employing thousands of un- 2003-04. Table 3 sums up the anxieties and ionised workers, such as Aris, Novelty, crisis of uncertainty being felt by industry Gelmart and Karayom had already closed players associated with GBAP and presum- down and were reported to have relocated ably by other non-GBAP members.

Varied Sectoral Responses to the Quota Phase-out

Naturally, most of the affected sectors raised of unpaid social security benefits of work- alarms over the impending quota phase-out. ers, remittance of social security premi- ums and punishment for employers vio- In 2003, around 13 federations and big un- lating rights of workers. There were other ions formed a ‘Labour Forum Beyond the consultations made by DOLE, the Na- MFA’ and criticised the government for its tional Commission on the Role of Fili- failure to deliver the ‘safety nets’ it promised pino Women and others seeking or pro- in 1994, when the government ratified Phil- moting safety nets for workers. ippine membership in the WTO. The forum came up with an eight-point agenda on A multi-sectoral conference, ‘Women’s Jobs market access and trade facilitation (with on the Brink: How Can the Garment in- social dialogue and a tripartite programme dustry Be Transformed?’, was also organ- to push for markets), employment (govern- ised by the Fair Trade Alliance on 10 March ment supporting job-creating programmes), 2004. The multi-sectoral meeting came up social protection and safety nets (government with a list of demands: support to post-employment programmes), ■ creation of jobs for garment union mem- skills development/education/training, la- bers; bour relations and social accountability (to ■ preservation of existing jobs; strengthen labour rights), strengthening wage ■ review of the modernisation/restructur- compliance, observance of decent working ing programme; conditions and facilities in economic zones ■ seeking of niche markets for garment and structural reforms (with focus on revival companies to preserve business; of the Garment and Textile Tripartite Indus- ■ legislation requiring employers to post try Council and the strengthening of GTEB). a bond to cover payment of workers’ benefits upon company closure. In February 2004 a ‘Garments Mini-Tri- partite Session’ was held in support of wel- The Confederation of Garments Exporters fare programmes for displaced workers of the Philippines, the largest association such as micro-finance credit facilities, of garment export manufacturers, signed speedy adjudication of labour cases to fa- up to the Istanbul Declaration in June 2004, cilitate release of workers’ benefits, more formally joining the other 78 exporter transparency by garment/textile firms re- groups from 36 developing and developed garding their financial situation, release countries calling for a three-year extension 56 The Philippine Garment Industry after MFA

T5002-3002,tnemyolpmEyrtsudnItnemraGenippilihP.4elbaT 5002-3002,tnemyolpmEyrtsudnItnemraGenippilihP.4elbaT 5002-3002,tnemyolpmEyrtsudnItnemraGenippilihP.4elba

enilced% enilced% 24300 2500 002 40-3002 50-4002

sretropxEevitcAfo.oN 9754 808 715 64. .51

srotcartnocbuSfo.oN 10490, 793 730 39.3 .2

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.srekrowemohdnatceridnisedulcnitnemyolpmelatoT:etoN .6002hcraM61,CTITCfogniteemht8:ecruoS of the MFA. Later, the confederation has the early l990s. However, in the March 2006 also been advocating a free trade agreement meeting of the Clothing and Textile Indus- between the Philippines and the US in an try Tripartite Council (CTITC), distressing apparent bid to restore the quota via a new figures on an industry on a decline were pre- bilateral trade arrangement. sented (see Table 4). In 2003-04 alone, industry employment was estimated to have But there are no certainties about any of shrunk by more than 40 per cent. That such these initiatives. a drastic and dramatic decline was not met with widespread mass protests in the strike- The only thing clear is that industry employ- prone Philippines can probably be explained ment continues shrinking despite the con- by the fact that most of the big unionised trary claims of the GTEB. The DOLE re- factories closed much earlier, mainly in the gional offices in the National Capital Re- l990s and early 2000s. More recent job dis- gion, Region III and Region IV have been appearances took place mainly among the reporting downsizings and closures in the distressed marginal factories with declining industry. The share of the quota-driven Phil- job orders, small subcontracting firms and ippine garment industry in the world’s total depressed urban and rural villages in and garment output was roughly 4 per cent. With around Metro Manila doing home-based the quota phase-out, this share is projected outworking. The Pambansang Tagapag- to shrink to 2 per cent of the global total Ugnay ng mga Manggagawa sa Bahay, a na- (Financial Times, 19 July 2004). tional association of home-based workers, has been reporting high rates of joblessness As pointed out earlier, it is difficult to gather in Taytay, Rizal, and Pandi, Bulacan, two accurate statistics on employment in the gar- towns heavily dependent on home-based ment industry given its multi-layered sub- working, and a need for greater ‘social pro- contracting system. Moreover, the GTEB and tection’ for domestic outworkers. DOLE have been unable to monitor the employment impact (adverse or favourable) of The most affected workers are women, who the industry restructuring taking place since predominate at all levels of the industry. Structural and Labour Weaknesses of the Industry

The employment and adjustment crisis exaggerated and unsustainable’ nature of gripping the industry in the post-MFA the industry. period can be traced to what Angelito Mendoza, a CTITC member and head of Value added in the industry is only 30 per the Garments and Textile Council alliance cent, meaning that for every dollar worth of garment unions, called the ‘artificial, of exports, only 30 cents are earned by the 57 Dialogue + Cooperation 2/2006

Philippines. This is because the industry is ippines. The simple truth is that most Phil- dependent on imported textiles, yarns and ippine garment exporters are subcontrac- machines. This is why the EPZs, bonded tors for these international buyers, branded warehousing manufacturing units and duty- or not, with CSR certification or not. free privileges for the imports of garment exporters are crucial to the industry. Thus, one direct outcome of the pressures of global efficiency-raising benchmarking The low value added, mainly the labour on the Philippine garment industry is the component, is due to the absence of link- effort of the local industry to reduce the ages with a well-developed domestic textile cost of labour, which is the main cost item, industry such as is found in China, India, and increase the overall productivity of Pakistan, Vietnam and the developed coun- workers. The problem is that in many cases, tries. In fact, the growth of the textile in- employers resort to low-level types of industry has been stunted partly by the growth dustrial relations and human resource man- of the export garment industry. Cheaper agement practices and adjustments such as and tax-free imported textiles, yarns and the non-regularisation of the workforce (re- accessories, stored by licensed garments moving workers from the payroll before they exporters in their duty-free bonded ware- reach mandatory regularisation), union houses located in the EPZs, industrial parks busting and so on. A few exemplary com- and their own production facilities, have panies adopt the high-end types of adjust- found their way into the domestic market, ments such as multi-skilling and motivat- easily displacing the products of the domes- ing workers through better compensation tically oriented textile industry. systems, better working conditions and investments in training. The latter, however, The absence of a well-developed textile in- are few in number. dustry supplying the requirements of the export-led garment industry is one source Another downside is neglect of the potential of the lack of competitiveness of the latter. of the domestic market. With 85 million It prolongs turnaround time, especially if Filipinos, the garment and textile industry there is a need to import certain raw ma- has a large market to cover and a base for terials. Costs of the imported textiles and sustainable growth and development. other materials are also dependent on the suppliers, usually the principals themselves Ironically, this market has been captured engaged in international subcontracting of by foreign exporters, mainly those engaged garment production. in smuggling brand-new as well as slightly used garments from Hong Kong and other These principals, given their global purchas- countries. These imports can be found being system and their partner garment inte- ing retailed nationwide, in the malls as well grators, mostly companies from the Asian as in the informal markets in all cities and NICs, can easily go in and out of a coun- big towns. Thus, while the Philippines tries try, relocating to other places around the to sell garments in the global market, its globe what they deem to be the more ex- own domestic market has been flooded by pensive (‘inefficient’) activities of the Phil- foreign-made apparel.

Sustainability of the Export-Led Garment Industry

The export-led garment industry has sur- all employment shrinking severely. A pre- vived the end of the MFA. However, a pain- liminary report by a Philippine study team ful restructuring is taking place, with over- to the UNDP Asia-wide garment tracking 58 The Philippine Garment Industry after MFA project (Francia et al., 2006) showed that Attaining such competitiveness, however, garment exports increased slightly, by 6.34 depends on many things, such as the abil- per cent, from US$2.11 billion in 2004 ity to develop niches for Philippine-made to US$2.24 billion in 2005. This means garments, the capacity of the government the industry is indeed surviving, and prob- to reduce the cost of doing business (re- ably even growing. Of the top 10 major ducing the cost of power and overcoming export markets for garments in 2005, the infrastructure bottlenecks) and the ability United States remains the top destination, of the government, industry and labour to with a 78 per cent share of value com- overcome other handicaps in global compared to 75.1 per cent in 2004. The value petition (for examples, lack of a textile-gar- of exports to the US increased by 10.3 ments linkage) through other sources of percent (see Table 5). competitiveness such as better and original designs, productivity enhancement and However, it is too early to say that the the like. increase will develop into a definitive trend. In the first place, the industry was helped The truth, unfortunately, is that other coun- mainly by the reassurance from the United tries are also thinking along the same lines. States that it would continue to impose It is a question of how decisive the Philip- limits on Chinese garment exports up to pines is in coming with up an integrated 2008. Without the United States, the Phil- and forward-looking programme for the in- ippines has very little market to speak of. dustry. This US market is what the GTEB and other policy makers are telling the indus- Another fundamental issue is how survival try players is a challenge for upgrading their and competitiveness can be achieved with- operations so that they can be competi- out displacing workers and without sacrific- tive globally in the long run. ing labour rights.

T5002-4002,stnemraGedaM-enippilihPfosnoitanitseDtropxE.5elbaT 5002-4002,stnemraGedaM-enippilihPfosnoitanitseDtropxE.5elbaT 5002-4002,stnemraGedaM-enippilihPfosnoitanitseDtropxE.5elba )BOF$SU(

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U5setatSdetin 1650,586,485, 790.5 1875,683,847, 738.7 3.01

U3K 8249,108,2 309. 9469,219,2 411. 2.21

J7napa 6394,589,3 370. 6008,917,0 207. 1.5-

C9adana 6949,930,1 258. 5069,562,8 246. 5.4-

F2ecnar 3307,904,4 116. 41827,0 63, 168. 3.81

G9ynamre 5082,308,4 246. 3378,916,6 186. 1.33-

N6sdnalrehte 3286,923,6 177. 2220,693,7 192. 5.42-

H5gnoKgno 1601,8 17,5 098. 2776,990,4 110. 1.33

I7ylat 1086,320,9 099. 2114,273,0 099. 0.7

M5ocixe 1730,061,4 086. 1960,077,7 097. 4.52

O3sreht 428,1 33,93 637. 1576,428,71 532. 9.61-

T2lato ,014,690,542 110.00 2098,381,111, 140.00 3.6 59 Dialogue + Cooperation 2/2006

References

Adhikari, Ratnakar and Yumiko Yamamoto. 2006. Sewing Thoughts: How to Realize Hu- man Development Gains in the Post-Quota World. Colombo: UNDP RCC. Austria, Myrna. 1994. Textile and Garments Industries: Impact of Trade Policy Reforms on Performance, Competitiveness and Structure. Makati: Philippine Institute for Devel- opment Studies. Bolte, Patrick. 2004. The Global Compact, Corporate Social Responsibility and Textile and Garment Companies in the Philippines. Berlin: Freie Universität Berlin. Clothing and Textile Industry Tripartite Council. Minutes and materials of the 16 March 2006 and 13 April 2005 meetings. Francia, Joseph, Errol Ramos and Angelito Mendoza. 2006. Philippine Trade in Garments, Textile, Yarn and Fabric and Other Made-Up Textile Materials. Preliminary Report to the UNDP’s Garments Tracking Project in the Post-MFA Period, UNDP Regional Centre, Colombo. Ibon Databank and Research Center. 2001. The Philippine Garment and Textile Industries. Manila: Ibon Foundation, Inc. ILO-PDC/DAP. June 1999. Productivity Improvement, Competitiveness and Quality Jobs in the Philippine Garment Industry, Mandaluyong: Development Academy of the Phil- ippines. ILO. 2005. Promoting fair globalization in textiles and clothing in a post-MFA environment, Geneva: ILO. Jonquieres, Guy de. 2004. ‘Clothes on the line: the garment industry faces a global shake- up as quotas end’, Financial Times, London, 19 July. Labour Forum. 2004. ‘Beyond MFA: Labour Action, Policy and Legislative Agenda Toward Industry Transformation’, resolutions of IGTF-affiliated unions in the Philippines. Mendoza, Angelito, 2004. ‘Will there be life for the Philippine garment industry after the death of the MFA?’, paper presented at the Labour Conference on the COC and the MFA, Instituto de Formacao de Turistica, Macau, in August. Ofreneo, Rene, Marina Durano and Nenita Fernando. 1996. Garments and Textile Indus- try Report. Manila: Regional Tripartite Wages and Productivity Board. Ofreneo, Rosalinda and Jurgette Honculada. 2003. ‘The Philippine social protection study’, in Francie Lund and Jillian Nicholson (eds.), Chains of production, ladders of protection. Durban, South Africa: School of Development Studies, University of Natal. Oxfam Hong Kong, 2003. The Multi-Fibre Agreement (MFA) and the Agreement on Textiles and Clothing (ATC): Looking at Winners and Losers in the Textile Trade. Hong Kong. Sobritchea, Carol. 2004.. ‘Presentation’ at the conference on ‘Women’s Jobs on the Brink: Can the Garment industry Be Transformed?’, held at the University of the Philip- pines, 10 March 2004.

60 Indonesia’s Garment Industry before and after the Asian Economic Crisis

Indonesia’s Garment Industry before and after the Asian Economic Crisis

Thee Kian Wie*

Since the mid-1980s, Indonesia’s garment other developing countries, particularly industry has emerged as one of the most China, Vietnam, India and Bangladesh. important export-oriented industries, generating a rising stream of foreign exchange This paper will first give an overview of the and many job opportunities because of its development of the garment industry before labour-intensive production process. How- the Asian economic crisis. It will then dis- ever, after the Asian economic crisis, gar- cuss the development of this industry after ment exports declined because of declining the crisis, the problems it is facing at present competitiveness and strong competition from and the prospects for its revitalisation. Before the Economic Crisis

The Period of Rapid Growth

Indonesia’s garment industry is relatively and medium-scale garment plants in opera- young, emerging as a factory activity only tion, which together employed an estimated since the mid-1970s in response to grow- 63,576 workers, most of them female. In ing export opportunities and the expand- addition, there were also 6,963 registered ing domestic market. Until the 1970s, gar- small-scale garment establishments employment production was largely conducted in ing 46,940 workers. In addition to these the many tailor shops all over the country small, medium, and large establishments, (Hill, 1992: 8). there were numerous cottage or home establishments engaged in garment produc- Growth of the industry was quite rapid from tion (Wymenga, 1991b: 212). the late 1970s in response to rapidly rising demand in the domestic market and im- Production capacity increased rapidly due proving opportunities in export markets to the rapid increase in the number of gar- (Pangestu, 1997: 31). The export orienta- ment plants, from about 250 in 1975 to tion of garment firms was also encouraged more than 2,000 in 1991 (Pangestu, 1997: by Indonesia’s competitive advantage in la- 33) and the corresponding rapid increase bour costs and unutilised quotas in the large in the number of sewing machines during quota-constrained export markets of the US the period 1980-1990 and a rapid increase and the EC (Wymenga, 1991b: 212). in the number of workers, from 14,350 to 105,007, a six-fold increase. Fabric con- By 1975 there were 72 industrial garment sumption by the garment industry rose 78 establishments, in which 2,804 workers percent between 1985 and 1990 (World were employed. In the same year, about Bank, 1994: 21). As a result, garment out- 4,800 persons, mostly females, were em- put increased from 50,400 tons in 1978 ployed in small-scale garment production. to 171,250 tons in 1989. As the garment However, in 1986 there were 565 large- industry became export-oriented in the late

* Senior economist, Economic Research Centre, Indonesian Institute of Sciences (P2E-LIPI), Jakarta. 61 Dialogue + Cooperation 2/2006

1980s, garment exports during the same portant manufactured exports, with ply- period rose rapidly, from US$42.9 mil- wood accounting for 21.3 per cent and lion to US$1,248 million (Sastromihardjo, garments 10.6 per cent of total manufac- 1991). By 1989 garment exports and ply- tured exports. wood ranked as Indonesia’s two most im-

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S:kitsitatStasuPnadaB:ecruoS .raseBnadhagneneMirtsudnIkitsitat

The data in table 1 show that although the in 1990, 35 were garment plants and 15 garment industry is not very significant in footwear plants. terms of gross manufacturing value added, in terms of manufacturing employment it During the first half of the 1990s, local pri- is an important industry, employing 10 per vate garment firms dominated the industry, cent of the workers in the manufacturing making up 91.9 per cent of the total in 1990 sector. and still 84.6 per cent in 1993, after many foreign firms from the east Asian NIEs had Unlike the spinning and weaving industries, already entered to use Indonesia as a lower in which there is a significant presence of cost export platform (Pangestu, 1997). foreign investors (26 per cent and 16 per cent respectively), the garment industry is The increasing export orientation of the in- dominated by domestic private firms. How- dustry, particularly local private firms, from ever, since the late 1980s foreign firms have the mid-1980s was mainly caused by the in- also entered the garment industry as inves- creasing attractiveness of the export market tors from the east Asian newly industrial- and the sluggish growth of the domestic mar- ised economies (NIEs), particularly South ket following the end of the oil boom era in Korea, Taiwan and Hong Kong, relocated 1982. Exporting became a profitable under- most of their labour-intensive operations taking with the shift from import-substitu- to lower wage countries in southeast Asia, tion to export promotion policies. The Indo- including Indonesia. Most of these opera- nesian government from the mid-1980s in- tions in Indonesia consisted of garment and troduced a series of trade reforms to reduce footwear plants. For instance, according to the ‘anti-export bias’ of its highly protection- data provided by the Jakarta office of ist trade regime and also pursued a realistic KOTRA (Korean Trade Association), of the exchange rate policy to maintain the exchange 100 Korean plants operating in Indonesia rate at a competitive level (Thee, 1991: 7). 62 Indonesia’s Garment Industry before and after the Asian Economic Crisis

The most important trade reform was the and girls and cotton trousers for men and May 1986 deregulation package, which boys. Fabrics and other raw materials were introduced a duty exemption and drawback imported for high quality garments. For scheme that enabled export-oriented manu- standard garments, raw materials were usu- facturing firms (defined as firms exporting ally sourced in Indonesia (Wymenga 1991a: at least 85 per cent of their output, later 213). lowered to 65 per cent) to purchase their inputs, whether imported or locally made, In addition to the trade reforms and the at international prices. Export-oriented gar- sensible exchange rate policy, other factors ment firms, particularly new firms, were contributed to making garment exports at- able to benefit from this scheme because tractive. First, the availability of they imported most of their raw materials underutilised import quotas as provided (Wymenga, 1988: 6). Abolishing restrictive under the Multi-Fibre Agreement (MFA) import licences was very helpful for the in the major export markets for garments, export-oriented garment firms. As a result, namely the US and to a lesser extent the garment exports rose steadily over the pe- European Community, was a strong incen- riod 1986-1996, although after 1993 growth tive to produce garments for the export became more uneven (Table 2). market even before the mid-1980s. The availability of these unutilised quotas and Indonesia’s leading garment exports in- the strong comparative advantage of Indo- cluded shirts of synthetic fibre for men and nesia’s garment industry, which was largely boys, blouses of artificial fibres for women based on its low labour costs, attracted garment firms from the East Asian NIEs, notably Hong Kong, South Korea and Taiwan, TtnemraGs'aisenodnI.2elbaT tnemraGs'aisenodnI.2elbaT tnemraGs'aisenodnI.2elba to set up new garment plants in Indonesia. E6991-6891,stropxE 6991-6891,stropxE 6991-6891,stropx These garment plants thus served as export platforms to supply the quota countries, YrY)aeY ae raeY rae V)noillim$(eulaV noillim$(eula )noillim$(eulaV )noillim$(eula including the US, Canada and the EC coun- 17689 25 tries, as well as the non-quota countries, including Japan, Australia, New Zealand, 14789 16 Singapore and countries in the Middle East (Thee et al., 1989: 22). 12889 28 However, by the end of the 1980s the quota 18989 42,1 ceilings set under the MFA for a variety of 10099 75,1 garment categories had been reached and therefore became an important constraint 13199 02,2 on further export growth, particularly for the cheaper garments at the lower end of 12299 12,3 the market. Since about 90 per cent of In- donesia’s garment exports at the time were 15399 93,3 directed at the MFA-constrained markets, 16499 90,3 particularly the US and the EC (Hill, 1992), redirection to non-MFA-constrained mar- 14599 23,3 kets was imperative. The great dependence of garment exports on a single export mar- 16699 80,3 ket, the US, is indicated by the fact that in 1989, 49 per cent of these exports were .aisenodnIknaB:ecruoS directed at the US, while the second larg- 63 Dialogue + Cooperation 2/2006

est market, West Germany, absorbed only mestic market continued to enjoy a high 8.5 per cent, followed by the Netherlands level of effective protection on their value with 6.3 per cent (BPS, 1989). added. Because of this dual structure of protection, there was a sharp dichotomy Although from the mid-1980s many new between the firms that were internationally export-oriented garment plants were estab- competitive and which exported and those lished, notably in the Bandung area in West firms that were not competitive and which Java province and in the Cakung Export therefore served the domestic market Processing Zone in the vicinity of Jakarta’s (World Bank, 1994: 22). Tanjung Priok harbour, many garment firms in the late 1980s still catered mainly to the Other types of regulations also penalised domestic market (Thee et al., 1989: 21). For export-oriented textile and garment firms. instance, in 1986 only about 36 per cent of These included the imposition of a com- the value of gross output of the garment in- pulsory levy on garment exports to coun- dustry was exported. Garment firms oriented tries applying quota restrictions, granting towards the domestic market consisted a single designated firm the sole right to mainly of small-scale firms catering mainly import cotton and synthetic fibres required to local or individual requirements. For this by the spinning industry (rescinded after reason, they played an important role in tai- industry complaints) and the operation of loring, in subcontracting for large garment a non-transparent system for the allocation firms and in producing textile handicrafts of export quotas (Thee and Pangestu, 1998: (Wymenga, 1988: 3). 218).

That the garment industry, even after the Several export-oriented garment firms said trade reforms of the late 1980s, was still that the Multi-Fibre Agreement was the largely domestically oriented was due to the major obstacle to their future growth. While fact that both textiles and garments contin- some firms appeared to experience no prob- ued to enjoy tariff protection and various lem in obtaining quotas, others complained import restrictions, such as import sur- about the lack of transparency and premi- charges, import licensing procedures and ums having to be paid. On paper, the gen- selective tariff exemptions. Although nomi- eral allocation of quotas was based 80 per nal tariffs had been falling over time since cent on past export performance and 20 the mid-1980s, effective rates of protection per cent to new exporters and small firms. on import-competing goods remained The annual increase in quotas was given to higher than on export-competing goods, these new exporters and small firms (World thus imparting a persistent bias in favour Bank, 1994: 22). of firms selling in the domestic market rather than in export markets. Given the remaining ‘anti-export bias’ of the trade regime in the late 1980s and other While export-oriented garment firms could restrictive measures, the question arises purchase their tradable inputs at interna- why garment exports were nevertheless able tional‘ prices (whether imported or locally to increase so rapidly. The most important made), they still had to purchase their non- factor appears to be the duty exemption tradable intermediate inputs at ‘above free and drawback scheme, which enabled ex- trade prices’, with the result that their export-oriented firms to procure their inter- port sales received negative effective pro- mediate inputs at international prices with tection. few bureaucratic hurdles. In this way, they were able to operate as though they were However, garment firms selling in the do- in an export-processing zone (Hill, 1992: 64 Indonesia’s Garment Industry before and after the Asian Economic Crisis

31-33). Another important factor in the from government protection or implicit or surge of manufactured exports, including explicit subsidies, Bali’s garment industry garment exports, from 1987 was Bank In- did not receive any government subsidy. donesia’s ability to maintain the real effec- In fact, the rapid growth of this industry tive exchange rate at a competitive level had been neither anticipated nor planned (Thee and Pangestu, 1998: 219). by the government (Cole 1997: 2).

Two other factors accounting for the rapid The major factor that triggered this suc- expansion of Indonesia’s garment exports cess was the presence of foreign buyers/ were the strong linkages with foreign buy- entrepreneurs from Australia and later from ers that were established from the mid-1980s the US, Europe and Japan, many of whom and the improved reputation among these initially came as tourists, who were able to foreign buyers about the garment industry’s establish direct contacts with local entre- ability to provide quality products and keep preneurs. Through the vital information to tight delivery schedules (HIID, 1995: transfer and technical and managerial as- E.5). The linkages with foreign buyers were sistance (for instance in plant layout, ad- established when buying agents from Hong vice on the purchase of the most appropri- Kong, acting on behalf of foreign buyers ate machines and quality-control tech- (mostly department stores in the developed niques) provided by the foreign buyers/en- countries) to look for low-cost sites in south- trepreneurs to the small and micro Balinese east Asia, approached Indonesian garment firms, these firms were able to achieve high firms to start making garments according levels of efficiency and accuracy. This as- to the stipulated designs of the foreign buy- sistance was provided on a for-profit basis, ers. since it was specifically tied to tangible product outputs (Cole 1998: 275; Thee & Hamid The crucial role of foreign buyers is par- 1997). ticularly evident in the interesting case of the garment industry in Bali, which from The ongoing interaction of these two par- the mid-1970s through the early 1990s ex- ties started a virtuous cycle of technologi- perienced rapid export growth. The re- cal improvements and learning that was self- markable growth of Bali’s exports was based replicating and largely self-financing, which on crucial information flows that Balinese led to rapid and sustained export growth firms received through strategic business (Cole 1998: 275). This export performance alliances with foreign firms and could be sustained even after the onset of businesspeople (Cole 1998: 257). the Asian economic crisis, since these foreign buyers/entrepreneurs, unlike foreign The remarkable thing about the export suc- investors, still kept visiting Bali after the cess of Bali’s garment industry is that it crisis because the island was largely spared mostly consisted of rural-based small and the unrest and breakdown in safety and law micro enterprises largely owned and run and order that afflicted some other regions by pribumi (indigenous) Indonesian entre- in Indonesia, at least until the devastating preneurs. Another remarkable feature of bomb attacks in Bali on 12 October 2002 Bali garment exports was that this industry and again in late 2005. Not surprisingly, was able within a relatively short time to these bomb attacks led to a much reduced produce highly competitive products for the inflow of foreign tourists, including foreign international market, and that these prod- buyers. ucts were largely made from domestic material inputs. Moreover, unlike many large As regards relative export orientation, three domestic firms that were able to benefit categories of garment firms in Indonesia 65 Dialogue + Cooperation 2/2006

can be distinguished, namely local private Many of the best equipped garment plants firms, government (state-owned) firms and with modern cutting equipment were joint foreign-invested firms. Since foreign gar- ventures, mostly with South Korean and Tai- ment firms established their plants in In- wanese garment firms. About 90 per cent of donesia primarily to serve export markets, the garment exporters worked on a CMT it is not surprising that they were more (cut, make and trim) basis for overseas buy- export-oriented (in the sense of having a ers, with little local design input. While the higher export-output ratio) than the local local firms’ lack of a design department private firms (Table 3). helped keep overhead costs down, this also limited the scope for the firm to offer alter- TsoitaRtuptuO-tropxE.3elbaT soitaRtuptuO-tropxE.3elbaT soitaRtuptuO-tropxE.3elba native ideas and to work on a more equal basis with foreign buyers. However, some o)%(39-0991,smriFtnemraGfo )%(39-0991,smriFtnemraGfo )%(39-0991,smriFtnemraGf firms, particularly the joint ventures, started 1013991 99 0991 099 13991 99 3991 399 to invest in computer-aided design (CAD) equipment. For several garment firms, a constraint on expanding output and main- etavirPlacoL 385.8 .73 taining product quality was difficulty in recruiting skilled and experienced middle tnemnrevoG 442.6 .37 management and technicians. As a result of the excess demand for skilled technicians, ngieroF 534.7 .56 their pay was in many instances higher than .63.p,7991,utsegnaP:ecruoS that of their counterparts in Thailand or Sin- gapore (World Bank, 1994: 22).

The Period of Sluggish Growth

From 1994 through 1996, the garment in- China were making profits, while their In- dustry grew at a more sluggish rate, as gar- donesian plants were struggling to survive ment exports growth slowed. Garment ex- (HIID, 1995: E.5). ports increased only marginally in 1993, declined in 1994, recovered slightly in The slowing in the growth of garment ex- 1995, and then declined again in 1996 (Ta- ports was not really surprising. The surge ble 2). These disappointing results were of garment exports that started in the late primarily a result of falling prices, quota 1980s was possible because of the unfilled limitations and sharp international compe- quotas in the US and the EC. However, tition (HIID, 1995: E.1). these quotas were mostly utilised by the mid-1990s (Pangestu, 1997: 49). The ex- Interviews with several garment exporters port opportunities that opened up as a re- by a Harvard Institute of International sult of the relocation of garment plants from Development (HIID) team in 1995 revealed South Korea and Taiwan had also been ex- that they faced serious difficulties because hausted by the early 1990s (HIID, 1995: of the intensified international competition, E.5). which caused many firms to close or relocate to lower cost sites in other countries, However, quotas alone could not account such as Vietnam. The press in that period for the sluggishness of garment exports, reported that as many as 76 garment firms because after an agreement between the had closed in 1994. Hong Kong-owned Indonesian and US governments, quota al- garment firms stated that their factories in locations for Indonesia were increased by 66 Indonesia’s Garment Industry before and after the Asian Economic Crisis more than 35 per cent (Thee and Pangestu, Vietnam, the Philippines, China, India, 1998). As a result, for some garment cat- Pakistan, Sri Lanka and Bangladesh (James, egories there were unfilled quotas. The big- 1995: 22-5). gest decline in garment exports took place in non-quota markets, caused by strong Assessing the weakness of the Indonesian competition from other low-wage coun- garment industry, a report submitted in tries, including China, India and Bangla- 1995 by Sanjaya Lall and Kishore Rao to desh. The competitiveness of Indonesian Indonesia’s National Development Planning garment exports was further eroded by the Board (Bappenas) concluded that the indus- government’s mandatory minimum wage try had to raise its productivity, design and policy, which was not matched by a corre- local content in order to raise its export sponding rise in labour productivity competitiveness. In addition, the domesti- (Pangestu, 1997: 49). As a result, per unit cally oriented firms had to be encouraged labour costs rose relative to those of Indo- to produce for export markets also, which nesia’s competitors. required that their domestic skills and technology be raised (Lall and Rao, 1995: 139). Another source of difficulty for exporting garment firms was that much garment pro- Lall and Rao recommended that steps be duction depended on imported fabrics. taken in investment and financing and the Hence, delays in delivery of fabric seriously improvement of market analysis. In regard extended the tight turn-around times re- to investment and financing, the declining quired for the production of middle and rate of equipment imports by the industry high-end garments. Unfortunately, local had to be reversed so that more value added sourcing of fabrics was hampered by the could occur within Indonesia. lack of textile finishing capacity, general lack of export quality fabrics, lack of high qual- Improving market analysis was also strongly ity cotton fabrics, the unwillingness of tex- recommended because the Indonesian firms tile manufacturers to meet small frequent had to keep close track of trends in differ- orders, difficulties with the tax office in ent garment categories and markets. While reclaiming the value added tax on domes- large firms had few problems in doing mar- tic fabrics and the protection enjoyed by ket analysis, the smaller firms were gener- fabric producers, which allowed them to ally unable to undertake the investment re- get higher prices from domestically oriented quired and thus remained completely de- firms than from export-oriented firms pendent on foreign buyers. For these firms, (HIID, 1995: E.12). a detailed market share analysis and com- parisons with major competitors would be One important indication of the garment crucial to devising coherent and timely re- industry’s reduced competitiveness was responses to changing needs (Lall and Rao, vealed by a study that found that Indone- 1995: 139). sia’s garment exports had declined most sharply in the non-quota markets, with a A World Bank study concluded that, to small decline in volume accompanying a achieve sustained growth, the garment in- larger decline in unit value. In contrast, in dustry would also have to shift to higher the quota markets, volume declines ex- quality products, with more own design ceeded value declines. Garment exports content to achieve higher value added. Since from 1994 experienced a decline in mar- the industry had already gone through the ket share, indicating that Indonesia was basic skills learning curve, it would hence- facing increasingly tough competition from forth need to strengthen its market posi-

67 Dialogue + Cooperation 2/2006

tion by improving its skills in production and logistics, and also add an element of management, product quality improvement own design input (World Bank, 1994: 23).

After the Economic Crisis

The severe Asian economic crisis of 1997 However, after 2000 export growth decel- and 1998 had a devastating impact on the erated sharply, since these firms seemed Indonesian economy. The crisis struck in unable to compete with China, Vietnam mid-1997, but its greatest impact was felt and other low-cost producers. While inter- in 1998, when the economy contracted by national competition in the industry has an unprecedented 13.1 per cent. The manu- intensified, Indonesia’s garment industry facturing sector, which after the end of the has become less competitive (Aswicahyono oil boom era in 1982 had emerged as the and Hill, 2004: 289-90). major engine of growth and the major source of export revenues, contracted by The size and dynamism of the Chinese 11.1 per cent, while the textile, leather and economy, its cost advantages and its large footwear industry (ISIC 32) contracted by pool of labour resources have changed the 14.9 per cent. rules of international competition (James, Ray and Minor, 2003: 93). For Indonesia The economy recovered slightly in 1999 in particular, with its dependence on low- with a positive but minuscule growth rate skill, labour-intensive exports, China’s in- of 0.8 per cent, while the manufacturing creasingly dominant position as a supplier sector grew 3.9 per cent and the textiles, of textiles and garments is a matter of great leather products and footwear industry grew concern. In recent years there has been a 8.5 per cent. In the following years, growth large and growing overlap between China’s rates picked up, the economy growing at labour-intensive exports and the labour-in- an average annual rate of 4.6 per cent over tensive exports of southeast Asian countries, 2000-2004, compared to an average of 7 particularly Indonesia and Thailand, to the per cent during the 30 years of the Soeharto US market, the largest market for their era. manufactured exports for both China and southeast Asia. Also during 2000-2004, the manufacturing Because of the large overlap in the US mar- sector grew at an average annual rate of ket between China’s and Indonesia’s manu- 5.2 per cent, while the textile, leather prod- factured exports, particularly in labour-in- ucts and footwear industry averaged 4.9 per tensive products such as garments, Indo- cent (BPS). During the Soeharto era, the nesia is the southeast Asian country most manufacturing sector averaged growth at exposed to the strong competition from double digit rates. China. Indonesia’s garment industry is likely to lose market share in its export markets. The vibrant textile, garments and footwear industries, which spearheaded Indonesia’s Analysis indicated that Indonesia’s garment labour-intensive, export-oriented industri- industry was losing its competitiveness long alisation from the late 1980s to the crisis, before the Asian economic crisis. Although are now facing great difficulties. During a the garment industry’s unit labour costs short period immediately after the crisis, (wage costs adjusted for labour productiv- export-oriented firms, including the gar- ity) appeared to remain competitive, the ment industry, benefited from the sharp but industry was not able to translate Indone- short-lived exchange rate depreciation. sia’s labour cost advantage into growing 68 Indonesia’s Garment Industry before and after the Asian Economic Crisis penetration into export markets impose only a limited number of taxes, the (Aswicahyono and Hill, 2004: 290; effectiveness of this decree has yet to be Aswicahyono, Atje and Thee, 2005). tested.

With the phasing out of the MFA, trade in Moreover, under the new freedoms intro- garments as of January 2005 was conducted duced after the fall of Soeharto, many new under the rules of the WTO. This meant labour unions have been created, resulting that Indonesia’s garment industry would in much more vocal and aggressive de- henceforth face strong competition in all mands for higher wages, higher severance its export markets, including in its former payments and better working conditions. protected quota markets. A worrying development is that Indonesia’s garment in- The government has also introduced costly dustry has in recent years also lost not less dismissal procedures and social security than 40 per cent of market share in Japan, regulations that have increased the cost of the world’s largest non-quota market employing labour (Aswicahyono and Hill, (Aswicahyono and Hill, 2004: 292). In ad- 2004: 291). dition, with trade liberalisation in ASEAN markets, Indonesia’s garment industry is The creation of many new labour unions also facing strong competition there from and the new union-friendly Labour Law lower wage countries such as Vietnam and have led to many industrial disputes and Cambodia. lost working days. A recent effort by the government to revise the controversial La- Another problem facing Indonesia’s gar- bour Law of 2003 has led to mass demon- ment industry is that in the global trading strations, including during the 2006 May system, preferential trade agreements Day celebrations, when many workers left (PTAs) that liberalise trade among mem- their jobs, causing billions of rupiah in bers, but discriminate against non-mem- losses to the plants. bers, have been proliferating. Countries constituting the major export markets have been negotiating new PTAs that divert trade TtnemraGs'aisenodnI.4elbaT tnemraGs'aisenodnI.4elbaT tnemraGs'aisenodnI.4elba away from low-cost non-member countries, such as Indonesia (James, Ray and Minor, E3002-7991,stropxE 3002-7991,stropxE 3002-7991,stropx 2003: 93). EstropxE stropxE stropx YraeY raeY rae Unfortunately, Indonesia’s ability to respond ()noillim$SU( )noillim$SU( )noillim$SU to these demand-side pressures are con- 11799 81,4 strained by rising domestic transaction costs. Under the regional autonomy legis- 17899 18,3 lation introduced in January 2001, both textile and garment firms have been and 17999 77,3 are increasingly burdened with new taxes 21000 85,4 (often referred to as ‘nuisance taxes’ by businesspeople) imposed by regional gov- 24100 31,4 ernments, charges and other levies, as local governments look for ways to increase 22200 47,3 their revenues (James, Ray and Minor, 2003: 93-94). Although the central govern- 24300 49,3 ment has recently issued a decree that re- .aisenodnIknaB:ecruoS gional governments are now allowed to 69 Dialogue + Cooperation 2/2006

Despite the problems faced by the garment garment exports has been quite uneven. industry, garment exports after the Asian Although post-crisis garment exports have crisis have not declined from the years just exceeded pre-crisis exports, they have been before the crisis, but they have not experi- uneven, sometimes rising and then declin- enced a steady growth either (Table 4). ing. Talks with industry representatives indicate that they do not expect a substantial Table 4 shows that the trend in post-crisis improvement in export performance. Conclusion

Despite the fears of some government offi- istry of Economy, Trade, and Industry has cials, businesspeople and academic econo- introduced a flexible manufacturing system mists, even before the Asian economic cri- for fully automated garment production, in sis, that the garment industry is a ‘sunset which labour input has been reduced to a industry’ with little prospect of future dy- tenth of its former level, while the lead time namic development, there is a strong case has been shortened through computerised for strengthening and upgrading the indus- control of design, cutting, patterning and try. With more moderate rises in minimum sewing (Yamazawa, 1982: 7). wages accompanied by rising labour productivity that will restrain per unit labour In the US, the most important technologi- costs, Indonesia still has a competitive ad- cal development has been the application vantage in labour-intensive industries like of microelectronics to garment production the garment industry. In view of the grow- technology. The use of these microelectron- ing unemployment problem (more than 10 ics-based innovations, however, has been per cent of the labour force of 105 million mainly limited to large firms (Hoffman, is openly unemployed), it makes good eco- 1985: 376). nomic sense to strengthen and upgrade labour-intensive industries. Although the equipment which embodies these technological developments is very Facing strong international competition in expensive, the government may be able to exports and domestically, Indonesia’s gar- assist garment firms, particularly the larger, ment industry should gradually move away better endowed firms, but also smaller firms from the lower end of the market, where grouped in cooperatives, to purchase this international competition is fierce, and shift equipment, for instance by providing sub- to up-market, high quality garments, includ- sidised loans. ing designer clothes and beach wear popu- lar with tourists, as the Bali case has shown. Since skills of workers in the garment in- To make this possible, the garment indus- dustry are quite low, the industry could es- try should send qualified staff to study de- tablish training centres to improve their sign in, for instance, Hong Kong’s well- skills, particularly in the operation and known design institute. maintenance of high-tech equipment. This is training is very important since garment Although the garment industry is generally producers are being asked to use cutting- regarded as a low-skill, labour-intensive edge computer technology to provide de- industry, in the advanced countries, such signs and patterns to buyers (USAID and as Japan and the US, it has during the past SENADA, 2006: 88). two decades experienced important technological developments. In Japan the Min- Lastly, the government can help the manu- 70 Indonesia’s Garment Industry before and after the Asian Economic Crisis facturing sector and the garment industry clamping down on corruption, the govern- by improving the country’s investment cli- ment could do a great deal to help manu- mate, which is generally rated as the worst facturing firms reduce the high transaction in east Asia. By substantially simplifying the costs that contribute to making the garment cumbersome and time-consuming licens- industry less competitive. ing procedures, providing legal certainty and

References Aswicahyono, Haryo and Hal Hill. 2004. ‘Survey of Recent Developments, Bulletin of Indonesian Economic Studies, Vol. 40, No. 3, December,’ pp. 277-305. Aswicahyono, Haryo, Raymond Atje and Thee Kian Wie. 2005. Indonesia’s Industrial Competitivenes—A Study of the Garments, Auto Parts and Electronic Components In- dustries. Report to the Development Economics Research Group. Jakarta: World Bank, March. BPS. 1990. Indonesia’s Foreign Trade Statistics—Exports 1989, Vol. II. Jakarta: Badan Pusat Statistik, April. BPS. The National Income of Indonesia. Jakarta: successive issues. Cole, William. 1997. ‘Bali’s Garment Industry—An Indonesian Case of Successful Strate- gic Alliances’. Unpublished paper, Jakarta. Cole, William. 1998, ‘Bali’s garment export industry’, in Hill and Thee (eds.), pp. 255-78. Ernst, Dieter; Tom Ganiatsos and Lynn Mytelka (eds.). 1998. Technological Capabilities and Export Success in Asia. London and New York: Routledge. HIID. 1995. ‘Prospects for Manufactured Exports During Repelita VI’. Report submitted to the Department of Industry and Trade, Republic of Indonesia. Jakarta: Harvard Institute of International Development. . Hill, Hal. 1992. Indonesia’s Textile and Garment Industries—Developments in an Asian Per- spective. Singapore: ASEAN Economic Research Unit, Institute of Southeast Asian Studies. Hill, Hal and Thee Kian Wie (eds.). 1998. Indonesia’s Technological Challenge. Canberra: Research School of Pacific and Asian Studies, Australian National University, and Singapore: Institute of Southeast Asian Studies. Hoffman, Kurt. 1985. ‘Clothing, Chips and Competitive Advantage: The Impact of Mi- croelectronics on Trade and Production in the Garment Industry’, World Develop- ment, Vol. 13, No. 3. James, William E. 1995. ‘Survey of Recent Developments’, Bulletin of Indonesian Eco- nomic Studies, Vol. 31, No. 3, December, pp. 3-38. James, William E., David J. Ray and Peter J. Minor. 2003. ‘Indonesia’s Textiles and Ap- parel: The Challenges Ahead, Bulletin of Indonesian Economic Studies, Vol. 39, No. 1, April, pp. 93-103. Lall, Sanjaya and Kishore Rao. 1995. Indonesia: Sustaining Manufactured Export Growth. Report Submitted to the National Development Planning Board (Bappenas), Ja- karta, August. 71 Dialogue + Cooperation 2/2006

Mihira, Norio and Sanjoto Sastromihardjo, (eds.),. 1991. Indonesia’s Non-Oil Exports— Performance and Prospects. Tokyo: Institute of Developing Economies. Pangestu, Mari E.. 1997. ‘The Indonesian Textile and Garment Industry: Structural Change and Competitive Challenges, in Pangestu and Sato (eds.), pp. 29-62. Pangestu, Mari E. and Yuri Sato (eds.). 1997. Waves of Change in Indonesia’s Manufacturing Industry. Tokyo: Institute of Developing Economies. Thee, Kian Wie, 1991, Technological Development and Its Implications for Indonesia’s Gar- ment Industry. Paper presented at the Trade and Development Seminar, organised by the Economics Division, Research School of Pacific Studies, Australian Na- tional University, Canberra, 9 July. Thee, Kian Wie and Ahmad Hamid. 1997. Perkembangan Industri Garmen di Bali sesudah tahun 1990 (The development of the garment industry in Bali after 1990). Paper presented at the Conference of the Association of Indonesian Economists (Ikatan Sarjana Ekonomi Indonesia), Malang, 19 December. Thee, Kian Wie, Ahmad Hamid, Sukarna Wiranta and Harry Sudarsono. 1989. Employ- ment Consequences of the Plywood and Textile Product Export Surge: Report of an ILO Study. Jakarta: International Labour Organisation/United Nations Development Program. Thee, Kian Wie and Mari Pangestu. 1998. ‘Technological capabilities and Indonesia’s manufactured exports’, in Ernst. et al. (eds.), pp. 211-65. USAID and SENADA. 2006. ‘Indonesia’s Competitive Environment—Current Condi- tions’. Jakarta, March. World Bank. 1994. Indonesia—Industrial Policy-Shifting into High Gear. Washington, DC. World Bank. 2003. Comparative Study of Industrial Competitiveness in East Asia—A Re- search Proposal, Washington, DC: Development Economics Research Group, Janu- ary. Wymenga, P.S.J. 1988. The Textile Industry in Indonesia. Industry Planning Project, Centre for Data Processing and Analysis, Department of Industry. Wymenga, P.S.J. 1991a. ‘The Textile and Garment Industry’, in: P.S.J. Wymenga (ed.), 1991b, pp. 211-21.Wymenga, P.S.J. (ed.). ‘Prospects of Industrial Development in Indonesia’, Final Report of the Industry Analysis Project DTa-256, submitted to the Department of Industry, Jakarta, July. Wymenga, P.S.J. 1991c, Prospects of Industrial Development in Indonesia. Jakarta: Centre for Data Processing and Analysis, Department of Industry, and Netherlands Eco- nomic Institute, July. Yamazawa, Ippei. 1982 ‘Renewal of the Textile Industry in Developed Countries and World Textile Trade’. RUEE Working Paper No. 82-6, July.

72 Mauritius’ Garment Industry in the New Situation

Mauritius’ Garment Industry in the New Situation

Sawkut Rojid*

Over the last 25 years Mauritius has expe- Mauritian economy to find a way to di- rienced an impressive economic achieve- versify the sugar monoculture economy. ment that has improved and modernised Meade advocated the setting up of labour- the living standards of the citizens and intensive industries to avoid falling into opened a window to the world. Its outward- the ‘Malthusian trap’. oriented strategies have transformed this small low-productivity agricultural island The clothing sector plays an important role into a significant exporter of manufactures in the economy in terms of employment, within a very short time. With a GNI per foreign exchange earnings and share of capita of Rs 140,856 (US$ 5,030) in 2004, GDP. In 2003, around 65,000 people— Mauritius is categorised as an upper-mid- more than 60 per cent of the manufactur- dle-income economy. The two sectors that ing labour force—were engaged in the have boosted manufacturing performance Mauritian clothing sector. It accounted for are sugar milling and clothing. However, 22.4 per cent of GDP in 2002. In 2001 the textile sector is now at stake, which wearing apparel accounted for 56 per cent means that new sectors or improvement of of Mauritius’ total exports of goods and existing sectors will probably come into play. around 82 per cent of manufactured ex- The textile and clothing sector appeared ports. Table 1 shows the evolution of the on the government’s agenda for the first number of firms in the textile and clothing time in the Meade Report of the 1960s. sector and the evolution of employment James Meade conducted a study on the over the same period.

T)5002-0002(seeyolpmEdnasmriFgnihtolCdnaelitxeT.1elbaT )5002-0002(seeyolpmEdnasmriFgnihtolCdnaelitxeT.1elbaT )5002-0002(seeyolpmEdnasmriFgnihtolCdnaelitxeT.1elba MhcraM hcraM hcra MhcraM hcraM hcra MhcraM hcraM hcra MhcraM hcraM hcra JenuJ enuJ enu JenuJ enuJ enu DetaD etaD eta 20002 0002 000 21002 1002 100 22002 2002 200 23002 3002 300 24002 4002 400 25002 5002 500 T5smrifelitxe 62695753414

C5smrifgnihtol 315 384 332 321 292 12

M5ela 2687, 38,2 elitxeT -yolpmE F4elame 1965, 24,1 see TlatoT latoT lato 90012, 8581, 7499, 7987, 4543, 62,4

M2ela 1939,7 40,81 gnihtolC -yolpmE F0elame 3601,7 76,33 see TltoT atoT alatoT lato 76018,2 7267,5 6489,9 6243,8 5530,5 27,15

.atadOSC:ecruoS

* The writer is an economic consultant and researcher. 73 Dialogue + Cooperation 2/2006

As can be seen from Table 1, the number of textile and wearing apparel firms fell of firms and the number of employees have from 420 to 260, and the number of em- been decreasing throughout the period. ployees in that sector fell from 82,020 to From March 2000 to June 2005, the number 55,990.

Concentration of Firms

The bulk of activities in the textile and cloth- sic categories, the greater the competition ing sector of Mauritius are geared towards that Mauritius faces from countries like the manufacture of ready-made garments (94 China and India, which produce basic in per cent of total textile and clothing exports bulk. Aside from shirts, around 80 per cent in 2004). In 2004, there were 224 firms in of production is intermediate and basic. One the ready-made garments sector, along with strategic approach to survival in the wear- four spinning firms and three weaving firms. ing apparel market is to move up-market Within the ready-made garment sector, the into high end high value added products, product base is fairly narrow, with only four where price competition is less severe and main products produced. These four prod- the products are in short supply. ucts accounted for 91 per cent of clothing exported in 2004: T-shirts (43 per cent), Since the beginning of the 1990s, exports pullovers (19 per cent), shirts (12 per cent) of Mauritian clothing have been mainly and trousers (18 per cent). directed towards three markets, which account for more than 80 per cent of total The quality component of different product clothing exports. The shares of these three lines is shown in Table 2. The more that markets in 2004 were: USA 29.3 per cent, production falls into intermediate and ba- UK 28.4 per cent and France 24.1 per cent.

Problems Faced by the Industry

The textile and clothing sector can be re- had to be imported to increase production. garded as having gone through two phases. Firms started complaining that high wages The first was during the 1970s, when the were rendering their exports uncompetitive. export processing zone started. During these years the very first textile and clothing firms From January 2005, the sector entered a began operating in Mauritius. However, the third phase due to changing world trading growth in number of firms and job creation conditions. Firms now have to be even became stagnant very quickly. The second more competitive in the international mar- phase started with the boom in the textile ket. The effect of MFA phase-out was felt sector in 1983. During the 1980s and early even before January 2005, because some 1990s, textile and clothing firms mush- importers had already shifted their imports roomed all over the island. Foreign inves- (especially basics) towards lower cost pro- tors were attracted to Mauritius because of ducers. The value of Mauritius’ garments a pool of cheap educated labour and the in- exports decreased by around 10 per cent vestment-friendly environment set up by the in 2003 compared to the previous year. government. Firms in the textile and clothing sector rose from 74 in 1983 to 435 in Jhamna M. (2000) conducted a survey of 1988. However, in the 1990s, due to full the clothing sector of Mauritius. He ranked employment, wage rates in the textile and the problems that its garment manufactur- clothing sector began to increase and labour ers faced. In order, they were: rising wages; 74 Mauritius’ Garment Industry in the New Situation

T)4002(%ni,seniLtcudorPtnereffiDfotnenopmoCytilauQ.2elbaT )4002(%ni,seniLtcudorPtnereffiDfotnenopmoCytilauQ.2elbaT )4002(%ni,seniLtcudorPtnereffiDfotnenopmoCytilauQ.2elba

KraewtinK raewtinK raewtin LstinKthgiL stinKthgiL stinKthgi AlerappA lerappA lerapp BsmottoB motto smottoB smotto SstrihS trih strihS strih ()revolluP( )revolluP( )revolluP ()strihS-T( )strihS-T( )strihS-T 56 tekram-pU 200 202

53 etaidemretnI 800 208

cisaB 06

.noitaicossAenoZgnissecorPtropxEsuitiruaM/CEJ:ecruoS limited pool of labour; potential loss of mar- TdelliksnUfostsoC.3elbaT delliksnUfostsoC.3elbaT delliksnUfostsoC.3elba kets; adapting to technological change; low T7991,ruobaLelitxeT 7991,ruobaLelitxeT 7991,ruobaLelitxe productivity. Rynoige Ctrtnuo soC The survey also asked about the relocation )rh/$( policy of firms. Factors attracting firms to G5ynamre 2 new locations were ranked in the following DCEO U3K 1 order: low wages; investment incentives; U4AS 1 government support; good infrastructure; political stability; skilled workers. -noN H4yragnu .2 DCEO eporuE T2yekru This made it clear that high wages were C5anih 5.0 the main factor causing firms to relocate aisA from Mauritius to countries like Madagas- I5aidn 6.0 car and Mozambique. In 2002, firms were M2iwala 5.0 facing a limited pool of skilled labour, but htuoS M5suitirua 9.0 today there exists a pool of around 20,000 nacirfA -poleveD S5acirfAhtuo 3.2 workers who were laid off from the textile tnem and clothing sector and are looking for jobs. ytinummoC Z5aibma 9.0 Z5ewbabmi .0 Samson Muradzikwa (2001) studied the awkizdaruMnosmaSmorfdetpada:ecruoS southern African regional clothing and tex- .)1002( tile industry, comparing Mauritius, Malawi and Zimbabwe in his study. He presented clearly Zimbabwe has advantages over its the hourly labour costs for a number of counterparts in both the SADC and other countries (Table 3). In terms of labour costs, regions.

Spurs for Garment Manufacturing

As stated, during the 1980s and 1990s, for- low wages and the investment-friendly envi- eign investors were attracted to Mauritius ronment set up by the government. Several by a pool of educated unemployed labour at international factors also contributed.

Conducive Environment for Investment

Since the 1970s, the government has im- conducive environment to the private sec- plemented policies that have provided a tor. Export promotion began with the en- 75 Dialogue + Cooperation 2/2006

actment of the Export Processing Zone Act promotions to boost foreign investors and in 1970. The EPZ was launched in 1971. export value. The devaluation of the rupee, The act provided incentives and conces- creating a realistic exchange rate, helped sions, including a 10-year tax holiday. to make exports competitive. The rupee was devalued by 30 per cent in 1979, fol- As part of liberalising the economy, the lowed by a further 20 per cent in 1981. government successfully implemented five successive stand-by arrangements and two During the 1980s Mauritius had a pool of structural adjustment programmes between semi-educated inexpensive labour. Although 1980 and 1986, which put in place the pre- the majority of the available workers were conditions of sustainable export-led growth. unskilled, they were very versatile and adapted themselves easily to working con- In 1983, the government established the ditions in the textile sector. Investors, Mauritius Export Development and Invest- mainly from abroad, took advantage of this ment Authority (MEDIA, now MIDA) to readily available labour force by setting up undertake investment missions and export textile and clothing firms.

Exogenous Factors

The success of the sector is partly attribut- and a lower debt servicing burden, arising able to factors outside the control of from the depreciation of the overvalued US Mauritian authorities. dollar in 1984. During the same period, Taiwanese investors set up industries in The textile and garment exports of low-cost Mauritius because of an appreciation of the countries, especially in Asia, declined un- Taiwanese dollar and thereby a fall in Tai- der the MFA restrictions during the 1980s. wan’s competitiveness on the world market. Thus Mauritius did not have to face tough competition in its exports to the USA. After 1984, demand in European and US Owing to the third Multi-Fibre Agreement markets increased sharply, particularly with signed in 1982, several countries faced se- the appreciation of European currencies in rious constraints on their exports. It was relation to the rupee, causing Mauritian in this context that investors from Hong goods to become more competitive. Kong came to set up in Mauritius. This policy of relocation helped them in export- During the 1990s, political uncertainty over ing to the EEC quota free and to take ad- the future of Hong Kong’s reintegration into vantage of unexploited quotas to the USA. China encouraged investors to look for a safe haven, and some relocated to Mauri- Mauritius’ foreign exchange problem was tius, bringing capital, marketing networks eased by a combination of lower oil prices and technological know-how.

Preferential Trading Arrangements

Favourable terms of trade combined with EU and the US, under the Lomé Conven- ready market access to developed countries tion and the GSP (now AGOA). attracted foreign investors to set up textile and garments firms in Mauritius. Both The Lomé Convention, signed in 1975, was domestic and foreign investors have ex- replaced by the Benin/Cotonou Convention ploited the preferential market access in 2000 for a period of eight years. Under granted by developed countries, mainly the this agreement, African, Caribbean and Pa- 76 Mauritius’ Garment Industry in the New Situation cific (ACP) countries gained duty-free and Act (AGOA), enacted on 23 May 2000, quota-free access to EEC countries. This provided qualifying sub-Saharan countries bestowed considerable advantages on Mau- with duty-free access to the US market for ritius because non-ACP countries’ exports a period ending in September 2008. The are liable to a 17 per cent duty. act offers potentially vast benefits for qualifying African countries, while setting strin- The US Africa Growth and Opportunity gent and thorough qualifying conditions.

Third Phase

However, in the third phase, which began opment of SMEs and at integrating them in January 2005, firms have to be even more into the industrial landscape. It applies to internationally competitive. Mauritian policy enterprises whose production equipment makers have proposed several incentive does not exceed Rs 10 million in value. schemes to counter the negative effects of Under this scheme, the incentives given the MFA phase-out on employment and to the manufacturing firms are: no cus- growth. Most of the incentives and policies toms duty on production equipment; 15 of the government are aimed at increasing per cent corporate tax; concessionary loan the competitiveness of all manufacturing schemes; SME industrial estates equipped firms, not just textile and clothing firms. with IT facilities.

Enterprise Mauritius was incorporated on Export Enterprise Scheme. An Export En- 22 October 2004 under the Companies Act terprise Certificate is granted to enterprises 2001 as a public company. Its primary pur- that export their entire production, al- pose is to provide seamless and responsive though authorisation to sell a small portion services to enterprises within an integrated (10-20 per cent) on the local market may framework in order to enhance their com- be obtained, depending on the nature of petitiveness. The establishment board devel- the activity. Incentives given to firms that oped the core strategy and defined the main qualify for the scheme are: duty-free im- objectives of Enterprise Mauritius as follows: port of raw materials and equipment; cor- ■ to act as a technology watch and a focal porate tax of 15 per cent; no capital gains point for technology diffusion; tax; free repatriation of profits, dividends ■ to provide market information, develop and capital; 60 per cent remission of cus- competitive intelligence and cater for toms duties on buses of 15-25 seats used export promotion; for the transport of workers; concession- ■ to identify, track and coordinate skills ary registration fee on purchase of land and needs and trends; buildings by new industrial enterprises. ■ to facilitate strategic partnership and networking; SSStrategic Local Enterprise Scheme. This ■ to provide advisory services on enter- scheme is intended for local manufactur- prise development; ing enterprises that contribute to the eco- ■ to provide consultancy services; nomic, industrial and technological devel- ■ to carry out other activities conducive opment of the country. Incentives under to the attainment of the above objects. this scheme are a 15 per cent corporate tax and no tax on dividends. Some recent initiatives are described below. MMModernisation and Expansion Scheme. This Small and Medium Enterprise Scheme. scheme aims to accelerate the modernisa- This scheme aims at promoting the devel- tion, expansion and diversification of exist- 77 Dialogue + Cooperation 2/2006

ing manufacturing enterprises by encourag- and is an efficient provider of information ing them to invest in modern equipment, about import and export markets. computerisation and pollution control technology. The incentives are: no customs duty The Mauritius Export Processing Zone As- on production equipment; an income tax sociation is also a private sector institution. credit of 10 per cent (spread over three years) Its role is to sustain, promote and develop for investment in new plant and machinery, export activities and quality awareness, to provided at least Rs 10 million are spent organise workshops and to run training pro- within two years of the date of issue of the grammes for its members. The associa- certificate; this is in addition to existing capi- tion has about 130 members. tal allowances, which amount to 125 per cent of capital expenditures; an additional allow- The mission of the Export Processing Zones ance of 30 per cent over the normal initial Development Authority (EPZDA) is to pro- allowance of 50 per cent on investment made vide support to existing enterprises to en- on anti-pollution machinery or plant. able them to reach international standards of competitiveness. This institution pro- Industrial and commercial institutions are vides services such as technical assistance, playing an important role in the development training, documentation and consultancy to of a number of industries, including textiles enterprises to enable the export-oriented and clothing. Some of these institutions and sectors of the economy to acquire the tech- their roles are described below. nical and managerial skills needed for the transition of the country from a labour- The Mauritius Industrial Export Develop- abundant to a skills-abundant nation. ment Authority (MIDA) has the responsibility for export promotion and the con- The Small and Medium Industries Devel- struction of industrial buildings. It also pro- opment Organisation was set up to help to vides market intelligence through the Trade develop SMEs. It is a facilitator and adviser Information Centre, helps to organise the to SMEs in all sectors, including textiles and Mauritius International Clothing and Tex- clothing, and provides various schemes and tile Exhibition and has several overseas of- grants to help to modernise SMEs. fices to promote exports. A report by the Ministry of Manpower Re- There has been a new wing created at the sources and Vocational and Technical Train- Board of Investment, called the Investment ing in 1994 emphasised the importance of Promotion Department. It helps potential technical know-how and highlighted the low investors and existing industrialists to iden- educational level of the textile and clothing tify investment opportunities, joint-venture operatives, who, for the most part, had come partners, land and factory buildings and to from the sugar industry. The main recom- obtain the various clearances required prior mendation of the report was a strategy of to start-up. shifting the textile and clothing sector toward less labour-intensive, more high-tech The Mauritius Chamber of Commerce and production methods, methods that would Industry is the leading private-sector organi- succeed, however, only if the labour force sation involved in the promotion of trade, could adjust. The report focused on the need industry and tourism. It is also a privileged to learn some skills and upgrade others. spokesperson of the private sector vis-à-vis the government and other bodies. The cham- Lall and Wignaraja (1998), studying the ber provides services mainly related to pro- export competitiveness of the economy, cedures for customs, imports and exports argued that Mauritius is exceptionally vul- 78 Mauritius’ Garment Industry in the New Situation nerable because, not only is it heavily de- sor Basdeo Bissoondoyal College. pendent on a few products, but also because more than 80 per cent of its manu- At least five training institutions are regis- factured exports come from one product tered with the Industrial and Vocational group—clothing. Within the clothing sec- Training Board to cater for training needs tor, they argued, once exporters’ wage cost in textiles and clothing, while the tertiary advantage is exhausted, export growth will education sector caters for middle manage- depend upon the ability to add value by ment positions in design and production backward integration (into textiles) and, of textiles and clothing. within clothing, to upgrade quality and flexibility. And to improve the quality of gar- The National Productivity and Competi- ments, investment is required not only in tiveness Council carried out an analysis of equipment, but also in organisational and the textile and clothing sector in October labour skills and quality management, de- 2003. Its objective was to formulate a cor- sign, marketing and response capabilities. porate diagnosis of individual companies, using performance benchmarks, to iden- A survey prepared for the Industrial and tify their strengths and weaknesses in areas Vocational Training Board in 1997 identi- such as management, organisation of pro- fied most of the shortcomings in skills and duction, finance and marketing. The study training and recommended more active used the Ramsey Productivity Models, a participation by the board in the human- tool for measuring the contribution of each resources development for the sector (CITA unit of input to final output. 1997). It also suggested what the board should do to improve labour productivity. The assessment of the productivity indica- The board now coordinates a network of tors and meetings with enterprises con- vocational training institutes and cooper- firmed that the majority of textile and gar- ates with major international institutes to ment enterprises were performing poorly ensure training in the most modern and and having difficulties, to varying degrees, sophisticated technologies. It also offers a in these main areas: Higher National Diploma in fashion and ■ materials utilisation and procurement; design. There are a number of other insti- ■ productivity planning and budgeting; tutions which offer courses related to the ■ human resource management; textile and clothing industries. ■ financial management; ■ inventory management; The Clothing Technology Centre, the tech- ■ technology enhancement; nical arm of the EPZDA, utilises experts in ■ international marketing; textile and clothing from Mauritius or abroad ■ competitive pricing. to teach a variety of courses year round, for example: industrial pattern making, circu- Further discussions with enterprises re- lar knitting, optimal sewing methods, screen vealed a number of financial issues affect- printing and line management. ing enterprise reactivity and performance, namely: excessive delays in loan process- The Textile Technology Department of the ing from banks, collateral requirements for University of Mauritius also offers a B.Sc. loans and high interest on loans, overdrafts degrees in textile technology and textile fash- and penalty costs. ion and design. The Manchester Metropoli- tan University offers a Higher National Some enterprises have developed innova- Diploma/B.Sc. in clothing production man- tive approaches to address some of the con- agement in collaboration with the Profes- straints confronting them. For example, 79 Dialogue + Cooperation 2/2006

seven companies are pooling to reduce The main industry indicators show that, freight costs. Other enterprises are: on average, SMEs have been investing more ■ reducing interest on loans by borrow- than bigger companies, SMEs have been ing in foreign exchange; slightly more productive, and SMEs on the ■ implementing lean manufacturing or whole have higher capital productivity. restructuring to improve enterprise productivity; The Total Productivity Measure1 for the ■ improving lead times through restruc- industry in 2002 was 0.9706, a decline turing, reducing unnecessary delays and from 1.0119 in 2001. This was due to in- reducing reliance on air freight; put costs rising faster than output. This ■ expressing interest in sharing orders with would tend to show that the clothing in- other enterprises due to low capacity. dustry in aggregate is not productive. However, a breakdown of the indicators Similar positive experiences have to be reveals that performance is uneven from shared, multiplied and supported through- one enterprise to another, from one prod- out the industry. They represent opportu- uct group to another and from one size to nities for improvement that can be tapped another. The industry is not homogene- with little or no significant monetary in- ous, and this makes it risky to prescribe vestment by enterprises. across-the-board solutions.

Labour Markets The labour force in Mauritius is now more of India and China and a productivity level educated, skilled and expensive to hire. It below those countries. Tagg (2002) consid- is important to note that although the wage ered labour productivity in terms of pieces rate has increased, so has the productivity per operator per day and noted the follow- of labour. ing results: 18 in Mauritius, 18.2 in Tai- wan, 19.8 in Thailand and 20 in China. Hourly labour costs grew at an average com- pounded rate of 4.4 per cent per annum Therefore the Mauritian apparel industry over the period 1990 to 2000. This has led faces a very serious difficulty: its produc- to an erosion of competitiveness over time. tivity is lower than its competitors’ while unit labour costs are higher. Although unit Not only has there been an increase in the labour cost is not the only cost factor, we wage level over the years, but also the wage stress it because the production of wearing level for Mauritius has become much higher apparel is highly labour intensive and la- than in some Asian countries. Mauritius bour costs are a significant share in total has an hourly labour more than double that production costs.

Long-Term Growth and Structural Change

The conditions mentioned above as the ba- vate sector, there are changes in the exog- sis for the successful Mauritian textile and enous and some of the endogenous factors. clothing sector are no longer the same. Al- though the policies implemented by the gov- Although countries are no longer restricted ernment still act as incentives for the pri- by quotas on their textile and clothing ex-

1. This shows the amount of output generated by each rupee spent. If the measure is less than 1, it means that losses are being made—the enterprise or industry is not using effectively its inputs and factors of production. 80 Mauritius’ Garment Industry in the New Situation ports, Mauritian exporters still benefit from We believe that skilled labour should be re- preferential tariff rates. On the US market, garded as an asset that needs to be protected Mauritius still has duty-free access under the in the search for improved competitiveness. AGOA. This implies a tariff preference of Mauritius is working towards positioning 17 to 18 per cent compared to some textile itself to remain an important supplier of and wearing apparel exporters, such as quality products. Competing with giants like China. The AGOA will, however, phase out China and India in lower end products is in 2008. Until then, the immediate com- out of the question. Mauritius should take petitors for Mauritian clothing exports in the opportunity to find a place as a niche the US market are countries that equally producer in the fashion market and in other benefit from the AGOA or any other type segments of the industry where the use of of preferential treatment on duties, such as technology is intensive. Advanced technol- under the Caribbean Basin Trade and Part- ogy-based production complemented by an nership Act or Mexico under NAFTA. educated and skilled labour force should open a window for successful production and On the EU market, Mauritius will continue export of high end products. The Mauritius to benefit from duty-free access under the Export Processing Zone Association has Cotonou Agreement until 2008, followed by identified four principles on which the a 12-year transition period of liberalisation. Mauritian textile and clothing firms’ produc- This implies a tariff margin of around 12 tion should be based. They are: per cent (the EU most favoured nation tariff ■ producing the right product rate on clothing). The EU has such an array ■ at the right price of preferential agreements in one form or ■ at the right time another that only 10 countries worldwide ■ under the right conditions. are subject to the full MFN treatment. Like Mauritius, other ACP countries are signa- Producing the right products calls for train- tory of the Lomé/Cotonou Convention and ing and multi-skilling the existing labour therefore have duty-free access for their ex- force and the development of quality aware- ports to the EU. The ‘Everything but Arms’ ness among both producers and employ- initiative provides tariff- and quota-free ac- ees. At national level, the government re- cess to the EU for almost all products from cently initiated a ‘training scheme for un- least developed countries. The recent en- employed job seekers’. This was indeed an largement of the EU hinders Mauritian excellent initiative. However, some im- clothing exports to the EU because more provements are needed to better meet the countries can trade freely within the group. current needs of the market. The scheme should be more detailed so that labour can After the phasing out of the Cotonou and be trained in each and every task involved AGOA preferences in 2008, Mauritius will in the production process. If necessary, we most probably cease to benefit from a tar- should import the services of highly skilled iff preference margin in both the EU and labour to train our labour force. the USA. Some other countries currently benefiting from these arrangements will also Although the labour cost in Mauritius is suffer. But other countries currently ben- quite high compared to developing coun- efiting from other preferences in these two tries, when compared to countries produc- markets will continue to benefit from those ing high value products, it seems low. preference even after 2008 (e.g. Mexico will Therefore producing at the right price continue to be in NAFTA), and Mauritius does not necessarily mean at the lowest will therefore have to be much more com- price (with the lowest wages). Strategies petitive then. should be developed to reduce lead time, 81 Dialogue + Cooperation 2/2006

to use technologically advanced methods multi-skill workers in the sector. of production, to reduce the cost of keeping stock volumes. Currently in Mauri- Set up schools of design so that creative tius, many firms are revisiting their mar- designers and stylists are available in the ket strategies in the light of changing market whenever needed. They would pro- worldwide textile consumption patterns, vide the necessary impetus in going up- modifying production structures towards market and to create a niche market for a more integration and larger units to ben- Mauritian brand. efit from economies of scale and to cope with a more concentrated demand. They Set up training schools so that firms do not can thus upgrade their technology and face the problem of finding skilled workers enter the higher value added market seg- on the market. ments. Some initiatives that should be taken to help clothing firms to restructure Provide financial support at low cost to and adapt to the current market needs are: firms so that they can reorganise their plants, modernise and equip them with technologi- Organise awareness campaigns so that pro- cally advanced production techniques. ducers are aware of the opportunities open to them, for example exports under the Commission studies at different levels and AGOA. in different fields to understand the needs of the producers and their worries and then Continuously search for potential markets take action accordingly. and potential clients, to provide market information, establish links with agents in Commission clustering and benchmarking the value chain, develop competitive intel- exercises on a large scale on a continuous ligence and cater for export promotion. basis. Benchmarking should be based not only on past performances but also vis-à- Provide training facilities to retrain and to vis other firms in the industry.

References CITA (Clothing Industry Training Authority). 1997. Final report on the training needs for the textile sector. Report prepared for the Industrial and Vocational Training Board. Jahmna M. 2000. Restructuring the clothing industry in the light of new trade agreements. Lall and Wignaraja. 1998. Mauritius: Dynamising Exports Competitiveness. Muradzikwa Samson. 2001. The Southern African Regional Clothing and Textile Industry: Case Studies of Malawi, Mauritius and Zimbabwe. Tagg, S. 2002. Transaction Costs and Clothing and Textile Trade in SADC. DPRU Working Papers, University of Cape Town, no 02/64.

82 Ready-Made Garment Exports: The Case of Sri Lanka

Ready-Made Garment Exports: The Case of Sri Lanka

Saman Kelegama*

The textile and clothing (T&C) industry of the detriment of smaller, less competitive Sri Lanka has risen from modest beginnings countries that thrived under the quota sys- in the 1950s to become the country’s larg- tem. Sri Lanka faces a number challenges, est industrial sector, demonstrating tremen- and the future of the country’s garment in- dous growth over the last three decades. dustry will depend very much on the man- The industry now constitutes a vital com- ner and speed with which the government ponent of the economy, accounting for 58 and industry leaders face these challenges. per cent of industrial export earnings and nearly 50 per cent of total export revenue In 2004, textiles and clothing contributed (CBSL, 2005). 48.8 per cent of the total value of exports, bringing in US$2.808 billion in export rev- Ready-made garments (RMG) amount to enue (CBSL, 2005). The industry accounted more than 90 per cent of all T&C exports for approximately 6 per cent of GDP, 6 per of Sri Lanka. The RMG sector has estab- cent of the labour force and nearly 40 per lished a prestigious customer base, manu- cent of the value of industrial production. facturing clothing for a wide range of in- In 2003, a reported 830 garment firms ternationally reputed brand names includ- employed a total of 340,367 workers. ing Abercrombie and Fitch, GAP, Liz Around 87 per cent of RMG industry work- Claiborne, Marks and Spencer, Nike, ers are female. More than 70 per cent of Pierre Cardin, Ralph Lauren, Tommy RMG factories are concentrated in West- Hilfiger and Victoria’s Secret. ern Province due to better infrastructure and close proximity to seaport and airport Heavy reliance on the RMG industry for facilities, and around 65 per cent of total growth and development makes Sri Lanka RMG employment has been generated in vulnerable to global economic shifts and the region. Around 1.2 million people—6 policy changes. In particular, the expiry of per cent of the total population—depend the Multi-Fibre Arrangement (MFA) in on the RMG industry for their livelihood December 2004 brought an end to the (Kelegama, 2005). quota-based system of T&C exports, which was a driving force behind the RMG sec- The RMG sector displayed immense and tor’s phenomenal growth. The industry is consistent growth after market liberalisa- now no longer protected under a system tion policies were implemented in Sri Lanka that assures market access, in particular, in 1977. Prior to that, when both imports to developed country markets. In the new and exports were highly restricted, RMG quota-free world, low-cost RMG manufac- were manufactured by a few domestic com- turers with economies of scale, such as panies mostly for the domestic market, China and India—who were the main los- while textiles were essentially a state-con- ers under the MFA—are expected to in- trolled import-substitution industry that crease greatly their global market share to provided fabric inputs for domestic RMG

* Executive Director of the Institute of Policy Studies (IPS), Sri Lanka. 83 Dialogue + Cooperation 2/2006

firms. In 1977, textiles and garments ac- The main issues are weak backward inte- counted for just 2 per cent of exports; by gration, high turn-around time, low pro- 1990, they accounted for 33 per cent ductivity and rising production costs. The (CBSL, various issues). In 2004, Sri Lanka RMG sector has less unionised labour than was among the top 20 exporters of RMG most other industries; while this feature is in the world. attractive to investors, it is also contributes to low worker productivity and high The MFA was one of the main drivers of labour turnover. Furthermore, producers this growth, allowing the industry to ben- have limited direct contact with leading glo- efit from ‘quota hopping’ investments from bal buyers; around 65 per cent of RMG foreign firms that relocated their operations are exported via intermediary buying of- in Sri Lanka. Underutilised quotas also pro- fices based in Sri Lanka, the disadvantage vided room for domestic entrepreneurs to being that many foreign buyers and inves- enter the industry. With the quota system tors are simply unaware of Sri Lanka’s po- in place, Sri Lanka was able to export heavily tential (Kelegama and Wijayasiri, 2004). to two specific markets, the United States and the European Union. In 2004, 63 per In 2004, the MFA’s impending termination cent of RMG exports went to the US and produced fear of the unknown like that of 30 per cent to the EU. Sri Lanka’s quota the Y2K scare in 1999. Two opposing views dependence gradually declined during the emerged on the future of the industry. Pes- decade prior to the MFA phase-out, in par- simists stated that the RMG sector in ticular when quota-free entry to the EU was quota-dependent countries would be se- granted in March 2001. In 2004, 55 per verely affected by those who would gain cent of overall RMG exports were quota from the lifting of restrictions, namely dependent. China and India. Optimists stated that the preparations made by most developing The industry has been hampered by a countries like Sri Lanka with a large RMG number of problems since the MFA years, sector would considerably alleviate the per- and these need to be addressed if Sri Lanka ceived adverse impacts of the post-MFA is to prosper in the new quota-free world. scenario.

The Asia-Pacific Region

The T&C sector in Asia as a whole relies the expense of the least competitive coun- mostly on the US and the EU as its chief tries. Fiji, the Maldives, Mongolia and export markets. Asia’s share of US and EU Nepal in particular have undergone a con- imports of T&C currently exceeds 50 per siderable reduction in their T&C exports cent (Tables 1 and 2). In the transition to the US and the EU. However, even in from MFA to post-MFA, China has been countries that enjoyed reasonably good by far the best performer, while India T&C export growth in 2005, factory clo- ranks a distant second. Sri Lanka has been sures are taking place with job losses due a moderate performer along with Bangla- to structural transformations. Indonesia and desh, Cambodia, Indonesia, Lao PDR, Sri Lanka are two examples. Pakistan, the Philippines, Thailand and Vietnam. Continued restrictions on Chinese exports until 2015 provide some room for less com- Those who have made gains during the petitive economies to restructure their transition period have done so mainly at T&C industries and enhance their com- 84 Ready-Made Garment Exports: The Case of Sri Lanka

TTTable 1: SSable harharhare in US IIe mpormpormports of TTTextiles and Clothing Prrroductsoductsoducts

Notes: 1. 37 African countries that are eligible for AGOA (African Growth and Opportunity Act) benefits. ROW=Rest of the World. Source: USITC (United States International Trade Commission) Interactive Tariff and Trade Data Web, http:// dataweb.usitc.gov/, reproduced in UNDP (2006). petitiveness. China will be subjected to TTTable 2: SSable harharhare in EU IIe mpormpormports ofofts safeguards and anti-dumping legislation TTTextiles and Clothing Prrroductsoductsoducts from 2005 to 2008, and then to anti- dumping regulation only from 2009 to 2015. After 2015, China will no longer be a “non-market economy” and will be an equal player in the field. Hence, Chi- na’s competitors have until December 2008 to overhaul their T&C sectors or they are likely to face hard times. Accord- ing to some forecasts by the World Bank, China’s global share of RMG exports is expected to rise dramatically, from 20 per cent to 50 per cent by 2010, while the share of other Asian countries is expected to decline from 32 per cent to 20 per cent. If this is the case, Sri Lanka will be in the difficult position of grappling for an increasingly shrinking share of the global Source: Asian Development Bank (2006), reproduced T&C industry. in UNDP (2006). 85 Dialogue + Cooperation 2/2006

Sri Lanka’s Current Situation

Comparing Sri Lanka’s performances in firms shrinking while the large firms sur- 2004 and 2005 (i.e., MFA and post-MFA) vive (Ceylon Chamber of Commerce, 2006, reveals that despite the termination of quo- cited in UNDP, 2006). Although some small tas, T&C exports grew 3.4 per cent in value firms shut down, several may have been (UNDP, 2006). In 2005, T&C exports acquired by, or merged with, larger firms. amounted to US$2.894 billion, or 45.6 per cent of total export revenue, making a 14.5 Nevertheless, the number of workers di- per cent contribution to overall export growth rectly employed in the RMG industry has between 2004 and 2005 (CBSL, 2005). dropped sharply, from 340,367 in 2003 to 273,600 in 2005, a decline of nearly one- However, the volume of exports to both the fifth (UNDP, 2006). Most displacements US and the EU declined in 2005, while the occurred in the small and medium indus- value of exports to the EU market declined. tries in which 130,000 of the total 2003 This decline is reflected in a gradual shrink- workforce were employed. Of the factories ing of the domestic RMG sector, from 830 that closed down in 2005, many did so factories in 2003 to 733 factories in 2005, without adequate notice and most did not a decrease of 11.7 per cent (UNDP, 2006). pay any form of compensation to their This may be partly due to structural changes workers (Oxfam, 2005, cited in UNDP, within the industry, the number of small 2006).

Strengths

Despite the negative picture painted by the increased by 909.9 per cent, while exports above statistics, Sri Lanka’s RMG sector of HS 621210 (brassieres) to the US grew has some distinct competitive advantages by 38.9 per cent (UNDP, 2005). Total ex- over some of its rivals. The share of the ports of HS 621210 rose by 18 per cent in top five products (all RMG) in overall T&C 2005, accounting for more than 11 per cent exports is lower than that of most other of T&C exports (UNDP, 2006). At present, Asia-Pacific countries that have limited Sri Lanka is in a favourable position to capacity in textile production; for exam- advance further in this particular niche ple, Sri Lanka’s top five export items ac- market because the country possesses a count for 33 per cent of T&C exports, while better educated and skilled labour force Nepal’s account for 76 per cent (UNDP, than many other Asian economies (UNDP, 2006). Hence, Sri Lanka has an advantage 2006). in not being overly reliant on a few specific product types. One of Sri Lanka’s biggest competitive strengths is that it has already established Sri Lanka has made a conscious effort to itself as a reliable manufacturer of quality specialise in high value-added RMG or garments with competitive pricing and ap- ‘niche’ products, namely women’s under- propriate capabilities. Compliance with wear, in which the country has a compara- international labour and environmental tive advantage. These products have shown standards has further benefited the coun- exceptional export growth. From January- try as an increasing number of buyers de- September 2004 to January-September mand that standards of health, labour, en- 2005, exports of HS 610821 (women’s or vironment and occupational safety be met girls’ cotton briefs and panties) to the US by manufacturing countries. In February 86 Ready-Made Garment Exports: The Case of Sri Lanka

2004, under the Generalised System of with China, will become a dominant player Preferences (GSP), the EU granted Sri in the T&C trade, enjoying an increasing Lanka a 20 per cent duty concession for its demand for its RMG manufactures. Sri compliance with international labour stand- Lanka could benefit from the spill-over ef- ards; this was in addition to an earlier 20 fects of this increased demand. Further- per cent duty concession granted under the more, Sri Lankan textile producers that GSP’s General Arrangement. Moldova is operate in India, such as Brandix Lanka, the only other country that has achieved could achieve economies of scale by pro- GSP concessions for labour standards. ducing fabric inputs for both Sri Lankan and Indian garment manufacturers. Cur- Sri Lanka has the opportunity to enhance rently, companies operating in Sri Lanka its competitive strengths by exploiting its face the constraints of a relatively more geographic proximity to India. India, along costly small-scale production.

Weaknesses

One distinct weakness is the lack of acces- ever increasing cost of production. Utili- sory industries for RMG—such as hand ties, transport facilities and transactions are embroidery, beading, printing and wash- relatively expensive in Sri Lanka compared ing—particularly in the intimate wear sec- to its Asian competitors. Poor infrastruc- tor. Workers skilled in pattern-making, bra ture—roads, telecommunications, water, technology, fabric technology and mould- electricity and fuel—further contributes to ing are scarce. The country’s small textile high production costs. industry does not possess the capacity to supply quality fabric inputs to the garment The T&C industry is becoming less and less sector. Thus, Sri Lanka’s garment industry attractive to both high-skilled and low-skilled is heavily dependent on imports of textiles workers, especially young women, due to and accessories; an estimated 80-90 per cent long working hours, monotonous work and of fabrics and 70-90 per cent of accesso- the negative social image surrounding the ries are imported (Kelegama and sector. The sector is deficient in several ar- Wijayasiri, 2004). The lack of backward eas of ‘decent work’ as stipulated by the ILO integration is a problem now compared to (Busser, 2005). The high concentration of the MFA era, although Sri Lanka can still RMG factories in Western Province, par- mange without it. ticularly in the free trade zones, has led to population congestion and an unhealthy work Increased competition is putting pressure on environment with limited welfare facilities. RMG manufacturers to reduce lead-time Trade union activity is hindered by employ- (the time between the placing of an order ers in the zone; wages are low, with women and its delivery). However, the paucity of receiving lower pay than men for work of backward linkages and resulting dependence equal value; workers are sometimes forced on imported inputs severely hinder produc- into working overtime and are often denied tion speed. Sri Lanka’s geographic distance their legal entitlements; women are fre- from its major input suppliers lengthens its quently harassed at the workplace and on lead time to an estimated 90-150 days as their way to work; and living conditions are compared to the ideal lead-time of 60 days low, with poor transport, sanitation and utili- (Kelegama and Wijayasiri, 2004). ties (Busser, 2005).

Another major weakness is the high and Hence, although the country’s unemploy- 87 Dialogue + Cooperation 2/2006

ment level has stood at around 8 per cent to manufacturers. Between 100,000 and in recent years, the RMG industry has 120,000 RMG workers—the majority of suffered a shortage of labour. Currently, whom are skilled workers—have sought there is a major scarcity of sewing op- employment in foreign countries due to erators, the majority of whom are women. better pay and better economic and so- High absenteeism in the workplace and cial opportunities (Kelegama and high labour turnover have proven costly Wijayasiri, 2004).

The Five-Year Strategy

In order to prepare Sri Lanka’s garment The following steps were identified as key sector for the post-MFA period, a number measures to transform the industry into a of associations representing various as- provider of fully integrated services: pects of the industry collaborated with ■ encourage backward integration; the government to establish the Joint ■ improve human resource capital/tech- Apparel Associations Forum (JAAF) in nology; 2002. The JAAF identified industry weak- ■ change labour laws and regulations; nesses and came up with a comprehen- ■ promote Sri Lanka’s image as a com- sive five-year strategy aimed at laying the plier with high labour standards; groundwork for healthy post-MFA ■ cater to the needs of small and medium growth. Nine subcommittees composed industries; of industry leaders and government offi- ■ strengthen bilateral and multilateral links cials were formed to implement the strat- with key nations; egy, which consists of the following five ■ lobby the government for improved in- objectives: frastructure; ■ mobilise funds to implement changes. ■ Increase industry turnover from its 2001 level of US$2.3 billion to US$4.5 bil- As mentioned earlier, the industry faces lion by 2007, taking into account the major challenges with regard to labour. industry growth rate of 18.5 per cent Currently, Sri Lanka’s worker productiv- over the period 1989-2000 and the pos- ity levels are far from satisfying compared sibility of a post-MFA reduced growth to cost-competitive countries. Hence, rate of 12 per cent. human resource development (HRD) is ■ Transform the industry from a ‘contract of particular importance if post-MFA manufacturer’ to a ‘provider of fully in- challenges are to be met. The HRD sub- tegrated services’ because leading buy- committee of the JAAF has set the ulti- ers will increasingly focus on consoli- mate goal of raising worker productivity dating brand names while channelling levels through the creation of a compe- all other functions to suppliers. tent and skilled human resource pool ■ Focus on high value-added RMG instead beyond mere technological improve- of low-cost RMG, and penetrate pre- ments; the committee also looks to un- mium market segments. dertake the even greater challenge of ■ Consolidate and strengthen the indus- changing social attitudes such that pro- try. ductivity becomes an integral component ■ Establish an international reputation as of people’s thinking (Amalean, 2006). a superior manufacturer in four prod- The committee is looking to implement uct areas – sportswear, casual wear, chil- the following six measures to achieve this dren’s wear, and intimate apparel. goal: 88 Ready-Made Garment Exports: The Case of Sri Lanka

■ strengthen marketing capabilities; 2004 with the aim of increasing productiv- ■ create design capabilities; ity at 200 selected garment manufacturing ■ improve productivity within organisa- plants by 30 per cent by the year 2007, and tions; reducing the cost of manufacturing to ■ develop technical competence; US$0.05 per minute. A team of trained ■ enhance grass-root skills; graduates from the programme collaborates ■ encourage a cohesive focus for apparel with core groups of employees of the par- and textile education. ticipating factories to set benchmark figures and regularly monitor the factories’ Five landmark initiatives have either already productivity gains over a period of two been implemented or are in the process of years. being implemented. 4. PP4. ararartnership with Norororth CarCarth olina SSolina tatetatetate 1. 1. The BBThe achelor of Design PPesign rrrogrammeogrammeogramme UUUnivnivniversityersityersity. The HRD committee has built (2001). (2001). A four-year bachelor of design pro- an alliance between the Clothing Industry gramme was established at the University Training Institute (CITI), the Textile Train- of Moratuwa in June 2001 with the sup- ing and Services Centre (TTSC) and North port of the London College of Fashion, Carolina State University (NCSU). NCSU University of the Arts, London. Twenty stu- is internationally recognised for its techni- dents graduated in 2005, and the demand cal education programmes focused on tex- for the programme has been high. Students tiles, and it will assist CITI and TTSC to have the opportunity publicly to showcase raise their training programmes to meet their designs to domestic industrialists and world-class standards. The project is funded foreign buyers. Conferring academic sta- by the government and will focus specifi- tus on an integral component of garment cally on technical competence, supply chain manufacturing is an important step in prop- development, management and industrial ping up the image of the industry and out- engineering. lining its significance to the national economy. 5. Grass RRrass oots SSoots kills TTTraining PPraining rrro-o-o- gramm e. gramme. The HRD committee has joined 2. 2. The GGThe raduate DDraduate iploma in Apparpparpparelelel hands with USAID to create four model MMMarararketing (2002). In June 2002, the training centres for the apparel industry. HRD subcommittee collaborated with the The project is intended to enhance the Chartered Institute of Marketing (CIM)- training that currently takes place; at UK to launch the graduate diploma in ap- present, only 31 of 189 vocational train- parel marketing, a worldwide first. The ing centres are geared towards providing programme is expected to strengthen the apparel-related training, and even these existing weak link between domestic aim only to produce sewing machine op- manufacturers and foreign buyers so as erators. USAID funds will be utilised to to provide better marketing opportuni- upgrade infrastructure, equipment and ties for local industrialists. The diploma resource people at four of the 31 training is recognised by CIM-UK and is open to centres. The improved centres will pro- both industry insiders and outsiders. The vide an education in multiple disciplines programme has produced 80 graduates and will guarantee employment upon com- so far. pletion of the programme. The project will receive industry accreditation. It is ex- 3. 3. The Prrroductivity Imprmprmprooovvvement PPement rrro-o-o- pected to meet the demands of the apparel gramme (2004). This government-funded industry while empowering rural youth programme was launched in November with valuable skills and knowledge. 89 Dialogue + Cooperation 2/2006

External Trade Links

As mentioned earlier, Sri Lanka received as much access to the Indian market as was substantial duty concessions from the EU’s initially expected. The main reasons are the GSP scheme. In July 2005, Sri Lanka be- continued existence of various non-tariff came eligible for duty-free entry into the barriers imposed by India and the strict European market in accordance with the rules of origin governing the agreement. new GSP-plus system, specifically, under the General Arrangement and the Sustain- The Sri Lankan government and the JAAF able Development and Good Governance are pursuing a free trade agreement with Arrangement. However, GSP-plus privi- the US. Currently, the two countries have leges for Sri Lanka are conditional upon a trade and investment agreement, signed fulfilling regional cumulation criteria un- in July 2002. However, the conditions im- der the rules of origin (ROO). In Sri Lan- posed by the US are far more stringent that ka’s case, this means that South Asian As- those of the EU—implementation of sociation for Regional Cooperation TRIPS-plus, liberalisation of the services (SAARC) country inputs must be used in sector and the capital account of the bal- the production process. However, 58 per ance of payments etc. The Sri Lankan gov- cent of Sri Lanka’s textile imports for RMG ernment would encounter difficulties in production come from three non-SAARC meeting these requirements. Hence, a free countries—Hong Kong, South Korea and trade agreement with the US does not seem Thailand (Kelegama, 2005). Hence, Sri likely in the near future (Kelegama, 2005). Lanka finds it difficult to make full use of However, Sri Lanka is seeking support from the GSP-plus scheme. The government is the US Congress for preferential duty con- now lobbying for a relaxation of ROO cri- cessions for RMG exports as a tsunami teria to include ASEAN+3 in addition to relief measure. the SAARC countries, i.e., to expand the regional cumulation into a super-regional Finally, the government is no longer look- cumulation. ing to activate the IMF’s Trade Integration Mechanism (TIM).1 Massive capital inflows The India-Sri Lanka Free Trade Agreement in 2005 for tsunami reconstruction built (ISLFTA), which came into operation in up central bank reserves and averted the March 2000, has been disappointing from danger of a balance of payments crisis in a Sri Lankan RMG perspective. It has not the face of trade liberalisation measures. provided the country’s RMG products with Hence, the TIM is no longer required.

New Thinking Evolves

Industry leaders agree that specialising in also believe that targeting select customer the production of specific product cat- groups will transform Sri Lanka from a egories will enable Sri Lankan manufac- basic manufacturer into a high-value- turers to streamline their production added service provider catering to promi- processes and develop skills that will ul- nent retailers in the US and the EU. Af- timately make them worldwide experts in ter careful deliberation, industry leaders their chosen product categories. They have suggested that the apparel industry

1. The TIM, announced by the IMF in April 2004, is a means of financing developing countries during a balance of payments deficit resulting from the implementation of trade liberalisation measures. 90 Ready-Made Garment Exports: The Case of Sri Lanka should focus on producing knitted tops, rooms. This project would require much knitted bottoms, woven tops, woven bot- support from the government, particularly toms and cotton and synthetic bras and with regard to obtaining land at briefs, while targeting specialty stores and Katunayake as well as soliciting domestic selected discount stores in the US, UK, and foreign investors. Italy, France and Germany. The apparel industry of Sri Lanka is aim- One of the fundamental weaknesses of Sri ing to be the best supplier of clothing not Lanka’s apparel industry is the lack of scale only with regard to quality, price and speed economies, resulting in high production but also design and innovation, execution, costs. Hence, Sri Lankan companies are logistics and compliance with ethical stand- planning to collaborate with Indian firms ards. Industry leaders are striving to exceed to manufacture fabrics and garment acces- customer expectations while raising the sories to achieve economies of scale by country’s competitive position in the glo- catering to both the Indian and Sri Lankan bal market. With this in mind, the private markets. The acquisition of scale econo- sector is being strongly encouraged to es- mies in conjunction with the establishment tablish a product development centre for of a product development centre will pro- the primary purpose of enhancing the in- vide some local manufacturers with prod- dustry’s speed and flexibility. Today, inquiries uct management capability. Experts believe from buyers need to be turned into sample that Sri Lanka should move in this direc- garments within three days. However, ex- tion within the next three years in order to perts believe that Sri Lanka should aspire keep at par with India’s apparel industry. to match Hong Kong, where design concepts are transformed into sample garments It is further suggested that Sri Lanka make within a period of just six hours. maximum use of duty concessions under the EU’s GSP-plus scheme by taking ad- The Katunayake Export Processing Zone vantage of Pakistan’s strong woven fabric is the suggested location for the product (cotton) industry to import textiles for development centre, giving foreign buy- RMG manufacture, thus fulfilling the GSP’s ers easy access to airport and hotel facili- regional cumulation criteria. ties. The centre should be a one-stop shop where buyers can simply walk in with a Cooperation with SAARC countries is vi- concept and walk out with approved sam- tal for Sri Lanka since retailers consider ple garments. Moreover, the centre is plan- strategic sourcing at a regional level instead ning to focus on the specific product cat- of a company level. Brand owners such as egories listed above. Bonded warehouses GAP and Nike are currently looking to and duty-free imports of sample yardage build collaborative relationships with their are considered for overseas suppliers op- supply chain partners to develop regional erating stalls at the centre, while domestic centres of expertise ranging from design to vendors will be allowed to set up sample manufacture.

Concluding Remarks

The strategies described above may be in- standards for the Sri Lankan RMG indus- corporated into a comprehensive agenda try. The key to Sri Lanka’s future success that might be in place by the end of 2008. is to create and implement innovative Such a strategy will go a long way toward measures to eliminate supply-side con- acquiring internationally competitive straints. In this regard, human resource 91 Dialogue + Cooperation 2/2006

development will be given priority. Mean- ating with other south Asian countries for while, producers should reduce their de- improved market access. Such strategic pendence on developed countries for mar- moves will complement the new strategy kets, capital, technology and training, in place and reposition the RMG sector while placing more emphasis on cooper- towards sustainable development.

References Amalean, Mahesh. 2006. ‘The Apparel Industry of Sri Lanka: an Analysis of the Past, Present and Future in a Global Context’, Apparel Update, Sri Lanka Apparel Insti- tute, May-July. Busser, Esther. 2005. ‘Social Protection and Decent Work in Textiles and Clothing in Sri Lanka’, in Saman Kelegama (ed.), South Asia after the Quota System: Impact of the MFA Phase-out. Institute of Policy Studies, Sri Lanka. CBSL. Central Bank of Sri Lanka, Annual Report, various issues. Colombo: Central Bank of Sri Lanka. Kelegama, Saman. 2005. ‘Impact of the MFA Expiry on Sri Lanka’ in Saman Kelegama (ed.), South Asia after the Quota System: Impact of the MFA Phase-out. Institute of Policy Studies, Sri Lanka. Kelegama, Saman and Janaka Wijayasiri. 2004. ‘Overview of the Garment Industry in Sri Lanka’ in Saman Kelegama (ed.), Ready-Made Garment Industry in Sri Lanka: Facing the Global Challenge. Institute of Policy Studies, Sri Lanka. UNDP. 2005. Flying Colours, Broken Threads: One Year of Evidence from Asia after the Phase-out of Textile and Clothing Quotas. UNDP. 2006. Sewing Thoughts: How to Realise Human Development Gains in the Post- Quota World.

92 The Ready-Made Garment Industry of Bangladesh

The Ready-Made Garment Industry of Bangladesh: Sustainability in the Post-MFA World

Nazneen Ahmed*

1. Introduction

Ready-made garments (RMG) evolved as the During the last decade, several changes in main export product of Bangladesh during international trade have generated new chal- the late 1980s. Starting as a non-traditional lenges and opportunities for the export-ori- export in the late 1970s, RMG achieved this ented RMG industry of Bangladesh. There status within a short time. While export earn- are also several domestic challenges. In the ings from the industry were barely $1 mil- international market, implementation of the lion in 1978, they were more than $5 bil- rules and regulations of the World Trade lion in 2004, comprising 75 per cent of the Organisation and preferential trade arrange- country’s total export earnings and 80 per ments among different groups of countries cent of manufacturing export earnings. In are of special concern for Bangladesh. In the 2004 RMG production was 11 per cent of domestic market, the challenges include lack total GDP and 29.7 per cent of manufactur- of backward linkage (supply of inputs) for ing GDP (Statistical Yearbook of Bangladesh RMG, low efficiency of workers and lack of 1982; World Bank 2005). Some bold entre- efficient infrastructure (Mlachila and Yang preneurs without any experience in exports 2004; World Bank 20051). Thus the main started RMG production, and later their export industry of Bangladesh faces impor- success stories motivated others to come tant challenges that may have large welfare forward (Quddus and Rashid 2000). consequences for those who are directly and indirectly dependent on this industry as well Both domestic and international policies as for the economy as a whole. stimulated the rapid growth of the industry, as did the availability of cheap labour. For This paper provides an overview of the Bang- the last two decades, RMG have been the ladesh RMG industry—its emergence, main source of growth of exports and formal growth, strengths, weaknesses and future employment in Bangladesh. This industry challenges. Section 2 provides a brief de- directly employs nearly 1.9 million people, scription of production, export and employ- 40 per cent of manufacturing employment; ment in the industry. Section 3 discusses in- 90 per cent of them are females (Razzaque ternational factors behind the growth of the 2005; Mlachila and Yang 2004), mainly mi- industry, while section 4 discusses the do- grants from rural areas, usually from the mestic factors. Domestic challenges are taken poorest rural households (Afsar 2001). This up in section 5 and challenges originating in industry has generated new employment the international market in section 6. Sec- rather than replacing jobs in other industries tion 7 discusses some post-MFA reality. Fi- (Kabeer and Mahmud 2004). nally, section 8 draws some conclusions.

* Research Fellow, Bangladesh Institute of Development Studies. 1. I was a member of the core team undertaking this study and worked on the value chain analysis of different industries. 93 Dialogue + Cooperation 2/2006

2. Production, Export and Employment

Production Chain

In the production chain of RMG in Bang- two broad categories of RMG products— ladesh, natural or artificial fibres are spun woven and knitted. These two categories use into yarn. The yarn is then woven or knit- different types of yarn, fabric, machines and ted into fabrics, which in turn are cut and manufacturing technology. These two types sewed into RMG. of RMG factory also differ in terms of labour use: woven RMG use mostly female Up to the fabric stage, the product is con- workers and knitted RMG mostly male sidered a textile. There are various interme- workers, because of differences in skill re- diate stages between textile and RMG. For quirements. More skilled workers are re- example, fabrics may need to be dyed and quired in knitted RMG, and female skilled printed before cutting and sewing. There are workers are relatively scarce in Bangladesh.

Emergence and Growth

Since the early 1980s, Bangladesh RMG Given that average family size is 5.6 (Statis- exports have grown at a very fast pace in tical Yearbook of Bangladesh 1999), Table 3 both value and share of total exports (Table shows that 10-12 million people depend di- 1). The (raw and processed) jute-dominant rectly and indirectly on the RMG industry. export bundle of the early 1980s has shifted to an RMG-dominant export bundle. While A consequence of the rapid growth of the woven and knitted RMG together contrib- labour-intensive RMG industry is the growth uted only 0.4 per cent of total export earn- of employment. While the industry employed ings in 1980-81, they were 75.7 per cent 0.1 million people in 1985, it was employing in 1999-2000 and 74.2 per cent in 2004- nearly 1.9 million in 2003 (Razzaque 2005). 05. It is evident from Table 1 that RMG Ninety per cent of the workers in the indus- exports were the main force behind the total try are females (Bhattacharya and Rahman export growth of Bangladesh. ‘Other manu- 2000a). Moreover, 90 per cent of the work- factured goods’ also show a steady growth ers migrated from rural areas (Afsar 2001). over time. Under this category, some prom- Employment in this industry has made women ising industries are light engineering, visible in national employment statistics and chemicals, agro-processing and electronics. has brought about a social change (Zohir However, they are still infant industries, not 2001). In Bangladesh a factory job is one of in a position to replace RMG. the few socially acceptable ways for unedu- cated or poorly educated women to earn a Initially Bangladesh produced and exported living. In rural areas women live in a tradi- only woven RMG. Production and export tional atmosphere that does not permit them of knitted RMG started in the early 1990s to go to cities alone (or even outside the vil- and experienced very robust growth (Table lage in some cases). Rural women remain 2). While the share of knitted RMG was largely outside the visible cash economy, func- 15.1 per cent in total RMG exports in 1991, tioning primarily in the domestic and infor- it became 33.7 per cent in 2003. The mal economies. Thus it is quite a new devel- number of RMG factories rose from 134 opment for a large number of women to work in 1983-84 (Zohir 2001) to 3093 in 2005 in the city-based RMG factories, inevitably (http://www.bangladeshgarments.info/). changing their status and economic relevance. 94 The Ready-Made Garment Industry of Bangladesh

TsTltropxEhsedalgnaBfoerutcurtS.1elbaT tropxEhsedalgnaBfoerutcurtS.1elba stropxEhsedalgnaBfoerutcurtS.1elbaT stropxEhsedalgnaBfoerutcurtS.1elba atotfo)%(dnanoillim$SU( )stropxe EtropxE tropxE tropx 118-0891 8-089 18-0891 18-089 11109-0991 9-099 19-0991 19-099 10140-9991 0-999 00-9991 00-999 24250-3002 0-300 40-3002 40-300 250-4002 0-400 50-4002 50-400 902 603 964 8.584 846 sdoogyramirP )4.92( )8.71( )2.8( )4.6( )94.7(

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3. International Reasons for the Growth of the RMG Industry

The RMG industry of Bangladesh flourished ensuring a market for Bangladesh RMG in under the umbrella of the Multi-Fibre Ar- the USA (Bhattacharya and Rahman 2000b). rangement (MFA). The first MFA, in 1974, provided rules for the imposition of import During this period, political problems in quotas, through either bilateral agreements Sri Lanka and the anti-export environment or unilateral actions, on trade in textiles and in India, then the two major south Asian RMG between individual developed coun- RMG producers, induced buyers to shift try importers and developing country export- to Bangladesh (Spinanger 2000). Another ers.2 Although the system was to restrict ex- important stimulator of RMG growth in ports, it helped the industry in many devel- Bangladesh was tariff- and quota-free ac- oping countries like Bangladesh. Relatively cess to the European Union under the Gen- less restrictive quotas for Bangladesh than eralised System of Preferences (GSP), pro- for traditional exporters (Korea, Hong Kong, vided that Bangladesh met the rules of ori- Japan, China) acted as a blessing in disguise, gin requirement. The GSP allows EU im-

2. After 1974, the MFA was renegotiated four times, and each modification brought increasingly restrictive measures—covering a broader range of products and reducing flexibility in the system. 95 Dialogue + Cooperation 2/2006

T)htworgrof%,noillim$(,3002-1991stropxEGMRhsedalgnaB.2elbaT )htworgrof%,noillim$(,3002-1991stropxEGMRhsedalgnaB.2elbaT )htworgrof%,noillim$(,3002-1991stropxEGMRhsedalgnaB.2elba YrYdaeY ae raeY rae KdKhettinK ettin dettinK dettin GhGntworG twor htworG htwor WnWhevoW evo nevoW nevo GhGltworG twor htworG htwor TlThatoT ato latoT lato GhtworG twor htworG htwor 11199 153 763 68

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porters to claim full tariff drawback on becomes zero under the GSP. This made imports from Bangladesh (Bhattacharya and the EU the largest RMG export market of Rahman 2000b). On average, the tariff rate Bangladesh. Table 4 shows that Bangladesh of RMG in the EU is 12.5 per cent, which is also relatively less restricted in the US.

4. Domestic Reasons for Growth

After achieving independence in 1971, Programmes of the World Bank and IMF, Bangladesh adopted trade and investment average nominal tariff rates in Bangladesh policies promoting large-scale public sec- came down from 89 per cent to 17 per cent tor enterprises, widespread quantitative during 1992-2000 (CPD 2001). Easier ac- restrictions on imports, high import tar- cess to imported raw materials and incen- iffs, foreign exchange rationing and an over- tives for export activities reduced the ‘anti- valued exchange rate. These resulted in an export’, bias in Bangladesh and encouraged ‘anti-export’ bias, fiscal imbalance and lack export-oriented investments. of incentives for industrialisation. From the early 1980s, to enhance economic growth, The main export incentives received by the Bangladesh initiated steps to deregulate, RMG industry include duty drawback on decontrol and liberalise the economy. As a inputs used to produce exports, bonded result of various liberalisation policies and warehouse facilities,3 cash incentives4 and reforms under the Structural Adjustment back-to-back (L/C) facilities.5 Foreign ex-

3. These allow a firm to delay payment of tariffs until it is ready to consume imported inputs, and if these inputs are used to produce export products, then it is not required to pay the tariff. 4. Domestic suppliers to export-oriented RMG factories receive a cash payment equivalent to 10 per cent of the value added of the exported RMG. This incentive is expected to be completely phased out by the end of 2006. 5. Under this system, exporters of RMG are able to import inputs against the export orders placed in their favour by the final RMG importers, obtaining credit from commercial banks to pay for imported inputs. This provision allows exporters to avoid investing their own resources as working capital. 96 The Ready-Made Garment Industry of Bangladesh change liberalisation making the Bangladesh TatayrtsudnIGMRhsedalgnaB.3elbaT atayrtsudnIGMRhsedalgnaB.3elbaT atayrtsudnIGMRhsedalgnaB.3elba currency (taka) convertible also stimulated GecnalG ecnalG ecnal imports of inputs and RMG exports. N3seinapmocforebmu 903 En)3002(tcerid:tnemyolpm oillim9.1 In addition, the availability of workers at in)2002(seirtsudniyrosseccan oillim8.0 low wages is a major competitive advantage of Bangladesh. In 2003 the wage per in)2002(tnednepedyltceridn oillim01 worker in Bangladesh was 39 per cent of E8latot:)noillim$,3002(stropx 45,6 the wage in China. Data for current com- G2stnemra 19,4 parisons are scarce, but in the late 1990s, the wage in Bangladesh was 40 per cent K3dettin 56,1 lower than in India. There is an almost W8nevo 52,3 unlimited supply of mostly young unmar- )1002-0002(stinugniylppustupnI ried females willing to migrate from rural areas and maintaining a close link with the S2sllimgninnip 41 rural economy, which makes it easy to W9sllimgnivae 01 employ them at a low wage. D4rehto,gnihsinif,gnitnirp,gniey 01

C%)4002(PDGotnoitubirtno 5.9 5. Domestic Challenges )noillim$,3002(stekramtropxerojaM

Dependence on Imported Inputs E0U 04,3

U0setatSdetin 01,2 Most of Bangladesh’s RMG exports are made from imported textiles. Bangladesh is a net C0adana 71 importer of textiles and net exporter of J8napa 01

RMG. Ultimately there is a trade surplus H0gnoKgno 9 from the combined textile and RMG trade. In 2002 Bangladesh imported $1.8 billion I4aidn 8 noitomorPtropxE,)4002-3002(AEMGB:ecruoS of textiles and related inputs and the trade ,)3002-2002(hsedalgnaBfouaeruB 41dessecca(/ofni.stnemraghsedalgnab.www//:ptth surplus was $2.8 billion (Mlachila and Yang .)5002(knaBdlroWdna)5002hcraM 2004). The domestic textile industry cannot fill the growing demand for raw materials TxaTtropxE.4elbaT xaTtropxE.4elbaT xaTtropxE.4elba for RMG. There are three types of RMG 666 manufacturing in Bangladesh: i) integrated EtnelaviuqE tnelaviuqE tnelaviuq otropmIfo tropmIfo tropmIf Q3002,satouQ 3002,satou manufacturing, in which companies import 3002,satouQ the cotton and do the rest of the production RGRsMRMGMR GM TselitxeT elitxe selitxeT selitxe process (spinning, weaving/knitting, cutting PrecudorP recudorP recudor UAUUSUSASU AS EUEEAUEU UAUUSUSASU AS EUEUEU and sewing) on their own; ii) factories im- -algnaB porting yarn and then doing the rest of pro- 000. 06. 70. .0 duction; iii) companies importing fabric and hsed sewing the RMG, known as ‘cut, make and aidnI 300. 10. 20.0 .02 trim’ (CMT) factories (World Bank 2005). anihC 200.0 10. 30.6 .45 Most of the knitted RMG factories in Bang- natsikaP 948. 93. 12.0 .9

6. Export tax equivalent (ETE) of quotas is expressed ecirpatouqehtnodesaberasetamitsE:etoN as a percentage of f.o.b. price (net of quota price). .aidnInahtrehtoseirtnuocrofnoitamrofni For detail on ETE, see the document by Joseph morfdetalopretnierasetamitseaidnIroF Francois and Dean Spinanger at http:// .atadnoitasilituatouq www.gtap.agecon.purdue.edu/resources/download/ ,gnaYdnaalihcalMninoitamrofnI:ecruoS 723.pdf (accessed on 9 April 2005). 4002 97 Dialogue + Cooperation 2/2006

ladesh belong to the first two categories, and of the export value (Bhattacharya and woven RMG factories belong to the third. Rahman 2000b). Because of less depend- Thus knitted RMG are relatively less de- ence on imported inputs, the knitted RMG pendent on imported raw materials than industry has a higher value added, between woven RMG. While 85 per cent of the fab- 40 and 60 per cent. Thus, although the ric used in woven RMG is imported, this is RMG industry has a share of 75 per cent true of only 25 per cent of the yarn and fab- in total exports, its net export earning is rics used in knitted RMG (World Bank, only 40 per cent of the total (Rahman and 2005).7 In addition to fabrics, other Bangla- Razzaque, cited in Bhattacharya and desh RMG industry imports include raw cot- Rahman 2000b). Dependence on imported ton, cotton and synthetic yarn, synthetic fi- inputs also lengthens the time required for bre and textile accessories.8 filling an export order. It is too costly for manufacturers to keep an inventory, be- As a result of the heavy dependence on cause woven RMG are produced on orders imported inputs, the value added of the from the buyers, who specify the type and RMG industry is quite low. For woven colour of fabrics. At most, manufacturers RMG, value added is only 25-30 per cent keep inventories of very basic fabrics.

Product and Market Concentration of RMG Exports

Although woven RMG are the larger part desh’s RMG export to the USA in 2004. of Bangladesh exports, knitted RMG are Bangladesh’s RMG product concentration growing faster. However, the RMG ex- is much higher than India’s and China’s ports are highly concentrated on a few (Islam 2001). products. Only five categories (SITC code 8423, 8429, 8441, 8451 and 8461) made Moreover, Bangladesh’s RMG exports are up almost 85 per cent of total RMG ex- concentrated in two markets, the USA and ports in 1997 (Islam 2001). Ahmed (2005) the EU. These two markets together ac- has also noted that nine categories9 (340, counted for 94 per cent of the total in 2002- 341, 347, 348, 352, 359, 634, 647 and 03, when 56 per cent went to the EU and 659) constituted 60 per cent of Bangla- 38 per cent to the USA.

Worker Productivity

Although the wages of RMG workers in Sri Lanka. The average number of opera- Bangladesh are low, so also is their produc- tives per sewing machine is 2.5 to 3, in tivity. Value added per worker in Bangla- contrast with just over 1 in modern facto- desh is lower than for its competitors. Based ries (Spinanger 2000). on data from 1980 to 1992, Islam (2001) showed that labour productivity in Bangla- Moreover, capital intensity is low in Bang- desh is less than half of that of India and ladesh factories. The World Bank (2005) has

7. Discussions with experts (among others Dr. Abdul Hye Mondal, senior research fellow, Bangladesh Institute of Development Studies) reveal that the main reason for the better integration of knitting RMG factories is the relatively low investment and simpler manufacturing technology required. 8. The major exporters of woven cotton fabrics to Bangladesh in 1996 were Hong Kong, China, India, Pakistan and Taiwan. For woven fabrics of artificial fibres, Bangladesh relies on imports mainly from China, Singapore, Hong Kong, Thailand, South Korea and Japan (Islam 2001). 9. US product categories are different from HS or SITC categories. To compare between different systems, see Major Shippers Report, US Department of Commerce, Office of Textiles and RMG, at www.OTEXA.com (accessed on 10 August 2005). 98 The Ready-Made Garment Industry of Bangladesh shown that average capital per worker in other exporters of similar products, the RMG factories of Bangladesh is $1500, prices of Bangladeshi products are low. Is- while in China it is $4000. Low productiv- lam (2001) noted that for 11 out of 20 se- ity partially offsets low wages as a competi- lected RMG categories imported into the tive advantage. USA, the unit price of Bangladesh is lower than the world average. Bangladesh RMG Bangladesh produces low value-added RMG are also characterised by a narrow product for the low- and medium-price quartiles in range, mainly basic tops, shirts, trousers the EU and USA. Even compared to the and unstructured jackets (Gherzi 2002).

Infrastructure Bottlenecks

The World Bank (2005) identified three case of Bangladesh. Chittagong port, the main sources of comparative disadvantage country’s main seaport, lacks modern for Bangladesh’s export industries: infra- equipment. Its container terminal can han- structure, corruption and the high cost of dle only 100-105 lifts per berth per day, finance. Electricity production, telecommu- less than half the productivity standard of nications and port facilities are inefficient, 230 lifts. Moreover this port performs which reduces the competitiveness of Bang- poorly because of corruption and ineffi- ladeshi exporters, reducing the quality of cient governance (Hossain 2002), which production, increasing costs and extending increases lead times and prices of prod- the time needed to supply commodities. ucts. The World Bank (2005) has pointed In Bangladesh the lead time for RMG ex- out that infrastructure bottlenecks in elec- ports varies between 120 and 150 days, tric power, gas, port facilities and telecom- whereas the corresponding time for Sri munications are negatively affecting Bang- Lanka is 19-45 days and for India only 12 ladeshi exports, including RMG. The days for similar products (Bhattacharya and study also found that bribes paid when Rahman 2000b). As a result of irregular importing equipment for the knitted RMG electric power supplies, most factories industry can raise the equipment cost by maintain their own generator, which costs 6-10 per cent. 2.5 times the cost of power from the grid (World Bank 2005). The large growth of Bangladesh RMG exports despite all the infrastructure bottle- Limão and Venables (2001) identified in- necks reveals that Bangladesh could pro- frastructure as an important determinant duce at an even lower price if these bottle- of transport cost. This is observed in the necks were removed.

Restrictions on Foreign Direct Investment and High Cost of Finance

Except for the export processing zones, for- rowing from the local banking system is eign direct investment (FDI) in the RMG high compared to competitors (e.g. India industry is highly restricted in Bangladesh. and China). The real interest rate in Bang- Although this protects local entrepreneurs, ladesh in 2002 was 12.4 per cent, more the industry suffers in terms of a restricted than twice the rate prevailing in China (5.6 flow of modern technology and skills. per cent) and also much higher than that in India (8.7 per cent) or Sri Lanka (4.5 per While FDI is restricted, the cost of bor- cent). 99 Dialogue + Cooperation 2/2006

6. International Challenges

The changing features of the international in 2003) than intra-Asia trade ($25.2 bil- market pose various challenges to the lion in 2003). Asia mainly exports RMG Bangladeshi RMG industry. RMG ac- to North America and the EU. There is counted for 3.1 per cent of world mer- more concentration among the leading chandise exports and 4.2 per cent of manu- importers than among the exporters of facturing exports in 2003. In the same year, RMG. According to 2003 statistics, Bang- textiles accounted for 2.3 per cent of world ladesh is the eighth largest RMG exporter, merchandise exports and 3.2 per cent of supplying 1.9 per cent of the world’s RMG manufacturing exports. Western Europe is exports. China is the largest exporter and the leading importer and Asia the leading the USA the largest importer (as a single exporter of RMG. Trade in RMG within country). China’s share in exports is ris- the EU is more important ($55.5 billion ing very rapidly.

Quota Abolition and US Market

Import quotas under the MFA, which as- for Bangladesh’s RMG, and because there sisted the growth of the RMG industry in is no tariff preference here, quota-free com- Bangladesh, have been abolished since 1 petition may force Bangladesh out of this January 2005. Removal of MFA import market. The effects of import quota re- quotas has generated doubts about the fu- moval mainly depend on how restricted the ture growth or even survival of the RMG exports of a country were under the MFA industry of Bangladesh and many other least regime, in absolute terms and relative to developed countries. Possible impacts of the competitors. In the USA, Bangladesh was phasing out of textile and RMG import facing import quotas on 30 items (in 2001- quotas have received attention in a number 02), and 69 per cent of RMG imports from of studies. In general, these studies have Bangladesh were under import quotas. The concluded that ending the MFA will result average import quota fill rate of Bangladesh in an increase in world trade of RMG and was also very high (Mlachila and Yang 2004). a decrease in consumer prices. But impacts will vary between countries. In the case of The ETE of quotas for Bangladesh was rela- Bangladesh, pessimistic predictions have tively lower than for its competitors. been made by studies like Lips et al. (2003) Mlachila and Yang (2004) noted that in 2002 and Mlachila and Yang (2004). Bangladesh was the second most restricted Asian country, after China. However, they Until the end of MFA, Bangladesh faced further pointed out that in 2003 and early import quotas only in the USA, quotas and 2004, the ETE of quotas for Bangladesh had tariff restrictions in other markets having fallen to a large extent compared to its com- been removed earlier,10 while many competitors. Therefore it was predicted that re- petitors were still facing tariff and quota moval of quotas might increase most the restrictions. With the removal of import exports of RMG from competitors of Bang- quotas, Bangladesh faces increased compe- ladesh like China and India. The competi- tition in both the USA and the EU. The tion in a quota-free regime was predicted to USA is the second most important market be stronger because of a high degree of simi-

10. The four quota countries/regions were USA, EU, Canada and Norway. Under the GSP, Bangladesh did not face any restrictions in the EU; Norway’s import quotas had all been removed, while tariffs on exports from LDCs were removed in 2002; Canada allowed tariff- and quota-free access for all LDCs from January 2003. 100 The Ready-Made Garment Industry of Bangladesh larity between the export products of Bang- Looking further into the cost structure of ladesh and those of several other strong RMG the same product, materials and adminis- exporters. The export similarity index cal- trative costs are two major cost compo- culated by Mlachila and Yang (2004) shows nents. Seventy-eight per cent of the total China and India to be exporting similar prod- cost is for materials, mainly imported cot- ucts as Bangladesh to the USA and Pakistan ton fabric (93 per cent of total material cost). to the EU. Administrative costs are 12 per cent and include profits, which are 40 per cent of To predict the possible consequences of total administrative costs. Sewing/assem- abolition of the MFA, it is useful to look at bly is 4.7 per cent of product cost, and la- the domestic resource cost of RMG pro- bour is 67 per cent of the sewing cost. Thus duction in Bangladesh. The f.o.b. price can higher administrative cost and material cost be considered as an indicator. The f.o.b. pose challenges in the post-MFA world. price (without any cost of quota) for a 180 gram T-shirt (HS 6109) was calculated by Furthermore, the RMG products of Bang- the World Bank (2005) as $1.30 in Bangla- ladesh face high import tariffs (15 to 20 desh, $0.90 in China, $1.20-1.50 in India per cent) in the USA. The estimates of and $2.00 in Nepal. Thus, after quota abo- Razzaque (2005) suggest that tariff-free ac- lition, the competitive position of Bangla- cess to the USA could increase Bangladeshi desh may deteriorate. exports by $530 million.

The EU and Rules of Origin

Textile and RMG exports from Bangladesh ROO in the EU market. The ROO require have enjoyed preferential market access in 51 per cent domestic value added, which is the EU under the GSP since the early 1980s. often difficult, especially for woven RMG, By contrast, many of Bangladesh’s competi- which are heavily dependent on imported tors faced quota restrictions in this market inputs (section 3). The knitted RMG indus- (Table 4). The countries facing import quo- try can meet this criterion, because the value tas included China, India, Pakistan, Sri added in knitted RMG is higher, around 60 Lanka, Indonesia, Thailand and Vietnam. per cent (Bhattacharya and Rahman 2000b). Many of them also faced tariffs at an average rate of 12.5 per cent. Therefore, the Since 2001 Bangladesh, as an LDC, has been post-MFA competition in the EU can be included under an EU special arrangement more intense than in the USA. The prefer- under the GSP, the Everything but Arms ential position of Bangladesh may decrease (EBA) initiative. The EBA extends tariff- and as its competitors get quota-free access to quota-free access to all products originating the market. (However, Razzaque [2005] in LDCs, except arms and ammunition. predicts that Bangladesh’s RMG may main- However, because the ROO provision retain a better competitive position in the mains the same under EBA as it is in the EU than in the USA because, unlike the GSP, there is no extra benefit for the RMG USA, the EU applies no tariffs.) industry of Bangladesh. It was expected that the EU would soften the ROO criteria un- Moreover, the heavily import-dependent der its new GSP scheme for the period 2006- Bangladesh RMG industry may find it diffi- 2015, but this did not happen. Now the cult to meet the rules of origin (ROO) re- change is expected to evolve under the so quirement in the EU. Exports from Bangla- called regional or South Asian Association desh face restrictions in the form of the for Regional Cooperation (SAARC) cumu- 101 Dialogue + Cooperation 2/2006

lation. At the moment the EU GSP includes dia, which is much higher than for Bangla- the possibility of regional cumulation. Un- desh. der this treatment, a product produced in a country in a regional group and then proc- The EU’s free trade agreements (FTA) with essed in another country in that group will other countries are imposing extra chal- be considered as the product of the country lenges for Bangladesh, specially that with where the final processing took place. How- Mexico. The FTA between the EU and ever, the value added in the final processing Mexico officially entered into force on 1 has to be higher than the highest customs July 2000. It will liberalise more than 96 value of the products used originating in any per cent of EU-Mexico trade by 2007 at of the other countries of the group. Since the latest. As the export similarity in RMG the local value added of RMG of Bangla- is high between Bangladesh and Mexico (Is- desh, especially woven RMG, is only 25-30 lam 2001), Bangladesh may lose markets per cent, Bangladesh was unable to benefit in the EU. Moreover, the enlargement of from this regional cumulation facility. If fab- the EU and its tariff reduction agreements rics are imported from India, and the local with the central and east European coun- value added is 25 per cent and value added tries might divert trade from Bangladesh. by India is 75 per cent, the EU will consider Further enlargement of the EU might also the product as originating from India, and be a threat, especially because of the possi- the tariff will be the rate applicable for In- ble membership of Turkey.

Regional Preferential Trade Arrangements

Apart from the multilateral trade rules, trade cern for the RMG trade of Bangladesh are in textiles and RMG can be affected by re- the North American Free Trade Agreement gional preferential trade arrangements (NAFTA) and the SAARC Preferential Trad- (PTAs). The effects of regional PTAs on ing Arrangement (SAPTA), later transformed member and non-member countries have into the South Asian Free Trade Area received attention in both the theoretical (SAFTA). NAFTA is a special concern for and the empirical literature (e.g. Krugman Bangladesh because it gives special privileges 1991; Ahmed 2001). These studies consid- to Mexico in the USA. US tariffs on RMG ered both quantity and terms of trade ef- originating in Mexico have been eliminated fects of PTAs. The member countries of a since 1 January 1999. All tariffs on textiles PTA face trade creation and/or trade di- and RMG traded between Canada, the USA version, which may be welfare-increasing and Mexico were eliminated by 2003. How- or welfare-decreasing for them. Non-mem- ever, the NAFTA preferential tariff applies bers may be affected unfavourably both in only to products originating from a mem- quantity (exports may decline as a result of ber country. For RMG, the triple transfor- trade diversion) and in terms of trade.11 If mation rules of origin must be met. That is, a PTA is large and receives a terms of trade the yarn, fabric and garment must be made gain by reducing its trade with the rest of in NAFTA countries, and RMG goods the world in favour of its own members, qualify only if the non-NAFTA content is 7 then the rest of the world suffers a terms of per cent or less. Islam (2001) has noted that trade loss. trade diversion effects caused by NAFTA can include increased imports from Mexico The regional PTAs that are of special con- at the expense of Asian countries. While the

11. Non-members have to reduce pre-tariff prices of their exports to the PTA market and thus the terms of trade deteriorate for them. 102 The Ready-Made Garment Industry of Bangladesh impact of NAFTA is a concern for Bangla- Jamaica and the Dominican Republic, which desh, another concern is the implementa- are competitors of Bangladesh. tion of the US Trade and Development Act 2000 (TDA 2000). Under this act a total of Although SAPTA was structured in the 72 countries (48 from sub-Saharan Africa early 1990s and went through several tar- and 24 from the Caribbean basin) receive iff reduction stages, it has not had a sub- tariff- and quota-free access to the USA for stantial impact. Later it was transformed textiles and RMG products if they meet cer- into SAFTA. Implementation of SAFTA tain eligibility criteria. For the Caribbean might help to strengthen the competitive- countries, this is a process of facilitating their ness of Bangladesh’s RMG by allowing low- ultimate participation in the Free Trade Area cost imports of inputs from the region. of the Americas. In many cases they will Although there are possible trade diver- receive NAFTA treatment for their exports. sion effects from SAFTA, it has high po- This act might have impacts on RMG ex- tential to extend trade creation and other ports from Bangladesh to the USA, espe- (often non-economic) benefits among its cially because of preferential treatment of members.

Concerns about Workers’ Rights

Increased competition arising from lib- bour Organisation) have become con- eralised international trade compels en- cerned about this, and importers are re- trepreneurs to reduce the cost of produc- quiring exporters to maintain certain tion while maintaining the quality of codes of conduct in their factories. These products. This is often done at the cost requirements often pose additional costs of violating the rights of the workers in for the entrepreneurs and could decrease the export-oriented manufacturing sector. price competitiveness. Moreover, prob- However, various stakeholders (e.g. con- lems arise when importers’ requirements sumers, trade unions, International La- are conflicting.

7. Experiences of Bangladesh in Post-MFA World

Quite a number of studies analysed the products have experienced a downturn, e.g. possible consequences of abolition of MFA cotton underwear and women’s coats. It is quotas before the event. These studies too early to conclude about the impacts of mostly predicted a decrease in apparel ex- MFA quota abolition. These impacts can be ports from Bangladesh, although the results short term in nature, and the medium to varied under different assumptions or sce- long-term effects will depend on the how well narios. Mlachila and Yang (2004) show that Bangladesh can adjust to the changed com- the results depended on the assumed petitive environment. Moreover, Chinese elasticities of substitution between products exports of many of the important export from different countries (the higher the products of Bangladesh to the US market elasticities, the greater the impacts). are under safeguard quotas. Therefore, the real competitiveness of Bangladesh will be Almost a year and a half have passed since revealed after this safeguard against Chinese the abolition of MFA quotas. Looking at exports is abolished. For nine out of the top the actual performance, there has been a 19 10 export products of Bangladesh to the US per cent growth in Bangladeshi RMG ex- market in 2005, China was facing safe- ports to the USA. However, some apparel guards. 103 Dialogue + Cooperation 2/2006

8. Conclusions

Bangladesh’s RMG industry has grown very Domestically, various structural bottlenecks rapidly with the help of MFA import quotas associated with low labour productivity and and an abundant supply of cheap workers, low levels of investment are intensifying the but without a strong domestic backward link- international challenges. age. Too much product and market concentration and imported input dependency have The challenges should be handled carefully raised questions about the future of this in- because the fates of 10 million people are dustry in a quota-free regime. In addition associated with this industry. Any shrinkage to import quota removal, negative impacts will make many workers unemployed. The (from trade diversion or terms of trade ef- domestic problems need immediate atten- fects) from various regional PTAs are also tion, because competitiveness in a quota- of special concern for the RMG industry. free world depends on quick delivery of qual- At the same time, joining a regional PTA ity products at a low price. This requires like SAFTA could positively affect the RMG better infrastructure, more investment and industry and also the economy as a whole strong backward linkage. Especially the im- through economic (including trade creation) provement of transport and port facilities is and non-economic effects. In the US mar- important to ensure timely delivery of prod- ket, the future of top RMG products of Bang- ucts. Lifting the ban on yarn imports from ladesh is uncertain because China is facing India coming overland can reduce the trans- safeguard quotas for most of those products. port costs of these imports. To ensure timely When those quotas are removed after 2008, delivery, the setting up a central bonded Bangladesh’s RMG exports to the USA may house could reduce the inventory cost of decline drastically. Duty-free entry to the US individual firms. The rights of the workers market is necessary for the future growth or have to be addressed, which increases cost even the sustainability of the RMG industry of production but in turn could help to im- of Bangladesh. prove the efficiency of workers.

Bibliography

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106 Myanmar’s Garment Industry in the Sustainable Development Process

Myanmar’s Garment Industry in the Sus- tainable Development Process

Myo Myo Myint*

Myanmar had a long history of domestic since 1993 and has contributed to the textile and garment production, but it was country’s economy. Garments were just left behind by other countries during the under 7 per cent of total exports in 1998- socialist era (1962-1988). In the early 1990s, 99, when agriculture took the first place the government turned to an open market with 26.75 per cent. The years 1999 and economy, and garment manufacturing be- 2000 witnessed remarkable growth, a gar- came a productive sector that was slowly ment industry ‘boom’. In 2000-2001, ex- attracting foreign direct investment. Gar- ports of garments peaked at almost 30 ment manufacturing for export in Myanmar per cent of total exports, becoming the was successful for a time due to favourable largest source of foreign exchange earn- circumstances such as an under-utilised ings. This proved the potential of the in- quota from the EU and the US, low labour dustry, but garment exports decreased costs and easy start-up. Unfortunately, the markedly in the following years due to success of the industry did not last long the sanctions. Had sanctions not been because of sanctions imposed by the US. imposed, garment manufacturing would have continued to be the largest foreign The garment industry has been promoted exchange earner.

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The factors driving the Myanmar garment rangements. The CMP system is subsumed sector’s growth were comparatively low under TIP (temporary inward processing) wages, set-up costs lower than in other coun- and is entitled to tax exemption. CMP rates tries and a quota offered by the EU on all depend on the types of products. Nearly all items and by the USA on six items under (95-99 per cent) of raw materials, apart from the Multi-Fibre Arrangement (MFA). packaging, are imported. Overseas buyers Myanmar garment exports are based on do everything but production: they find cus- cutting, making, and packing (CMP) ar- tomers, design clothes with detailed specifi-

* A Myanmar national, the author is a master’s degree student in regional integration at the Asia-Europe Institute, University of Malaya, Malaysia. 107 Dialogue + Cooperation 2/2006

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1. U Myint Soe, Myanmar Garment Manufacturing Association (MGMA). 2. Ibid. 108 Myanmar’s Garment Industry in the Sustainable Development Process

Garment Labour Force

Because garment manufacturing is labour- stopped production, dismissed workers or intensive, it is important to study the so- went bankrupt. About 160 factories com- cial impact of the Myanmar garment in- pletely shut down. The number of garment dustry. There were about 400 garment firms firms or factories decreased to about 180 or factories (including subcontractors not by mid-2005, and it was estimated that directly related to exports) at the peak of about 80,000 workers (70,000 female and the industry around 2000-2001. Total em- 10,000 male) were laid off. Total employ- ployment in the garment industry was esti- ment was estimated to be 55,000 to 60,000 mated at about 135,000 in 2001.4 in 2004 (Kudo 2005:13) and it remained more or less same in 2005 (MGMA). Being affected by US sanctions, many firms

Age and Gender

As in other economies, the garment indus- cent of workers are aged 22 years or try in Myanmar is predominantly made up younger. The major age group working in of young women working in the lower tier the industry is in the range of 18 to 25, of employment as helpers and sewing ma- accounting for 73 per cent of total em- chine operators. According to surveys, ployees. women constitute 85-90 per cent of the workforce in the Myanmar garment sec- Seventy per cent of the workforce are un- tor. The small percentage of male workers married, mainly young women. There are are typically supervisors and quality con- married women who work in the industry trollers. to support their families. Due to the ever rising cost of living in Myanmar, women In the garment industry workforce, 70 per tend to work even after they are married.

Level of Education

Levels of education among garment work- workforce to supplement the incomes of ers vary. Forty-three per cent have attained their families. secondary school and 35 per cent higher school; 16 per cent are currently univer- Although educational attainment is not sity students (distance education) and 6 taken directly into account for promotion per cent are graduates. It is evident that and wage increases, a certain level of edu- the opportunity for women to earn income cation is considered preferable and neces- serves as an incentive to leave school early sary for improving the capacity of workers and to join either the rural or urban to absorb technology.

Reasons for Choosing to Work in Garment Industry

People shifted from rural to urban areas ex- their native towns and villages, and some pecting to have a better life. Workers mi- workers still want to do further study (such grated to urban areas, where there are more as university distance education) while they job opportunities. They cannot find jobs in are working. Eighty per cent of workers

3. Kumuda Weekly, No. 219, 12 May 2006. 4. U Myint Soe. 109 Dialogue + Cooperation 2/2006

migrated from rural areas; 67 per cent of starting garment factory work. them came straight to work in the garment industry, while 13 per cent came through Monthly wages in the industry, as found by suburban areas where they studied or worked the author’s survey in May 2006, were: for some time. The factors that drove work- a) Unskilled worker, US$17-22 ers from rural to urban areas were indus- b) Semi-skilled worker, US$22-27 trial development in urban areas (not only c) Skilled worker, US$27-35 garment manufacturing but also others such d) Clerical and administrative staff, US$30- as production of cold drinks, foodstuffs etc.) 45 (mostly same as skilled worker) and the declining economy in rural areas. e) Technical staff, US$30-45 (mostly same Workers not only from villages but also from as skilled worker) small towns where there are limited job op- f) Junior managerial, US$45-60 portunities have moved into Yangon’s indus- g) Senior managerial, US$60 and over trial sector. The rural-urban differential is a key factor explaining the high mobility... The average hourly wage is about US$0.08 and has remained unchanged since 2000. Although a variety of reasons are given for Almost all workers employed for a year or choosing garment work, the author’s quan- more in the same factory receive an end titative survey showed that 70 per cent of of year (new year) bonus. In addition, gar- respondents entered garment work when ment workers are given an attendance they were younger than 20 and unmarried. bonus (for perfect attendance), efficiency The majority are migrants: 78 per cent of bonus (for completing the production tar- respondents were born in rural areas. get on time) and a production bonus (for Some may have migrated to semi-urban meeting the targets). The survey revealed and urban areas earlier, but a significant no gender discrimination; equal work is proportion moved in association with paid equally.

Working hours and conditions

Usually work is eight to ten hours per day, leave or casual leave on weekdays/work- six days per week. Overtime varies according days can be considered on a case by ing to the factory. If there are very tight case basis with certain deductions from orders, workers need to work overtime. bonuses. In some exceptional cases, work- Sometimes in busy seasons, they are ers can take only three days’ leave per an- forced to work 28 days a month. Taking num.

Future Intentions

Of the current labour force of the garment of them have no intention of living there in industry, 80 per cent of respondents would the future because they believe there is no like to change their jobs and 60 per cent better life in their home town or village. would like to work abroad. Workers appear to think that working abroad is the Although garment work is hard, 82 per cent only way to earn more. About one-fifth (18 of workers who responded came to the in- per cent) are expecting promotion because dustry because they want to gain experi- they have been working in this industry/ ence that can be used in the future. Also, it factory for more than five years. Sixty-seven is easy for them to find jobs or move to per cent do not intend to visit their home another factory fter they have gained some town in the coming year, and three-fourths experience. Most of them do not want to 110 Myanmar’s Garment Industry in the Sustainable Development Process work for a long time in the industry and shift from one factory to another. A fur- expressed an intention of doing business ther shift is a regional shift (from Yangon on their own. (Two hundred and fifty work- to the Thai border) due to being laid off as ers were surveyed from 10 factories—two a result of sanctions imposed by the US. 100% foreign-financed firms, four joint They get higher wages and then seek other ventures and four locally owned firms.) opportunities in that area. It was found that workers shifted for better wages, but some- In summary, labour shifting in Myanmar’s times they shifted even for the same wages garment industry can be categorised under because they were tired of the current three main motives. Workers’ moving from workplace and wanted to try new jobs. In rural to urban areas can be attributed to some rare cases, workers who shifted from rural poverty and young people looking for rural areas to urban industry and then better opportunities. Then the workers see shifted to another industry, found them- opportunities for better wages, overtime selves unfit for both industries and went and incentives within the industry and they back to their home towns. Major Findings and Constraints

Constraints currently faced by the Myanmar Lack of banking and financing facilities. garment manufacturing sector are: Letters of credit cannot be used as a credit guarantee in Myanmar. This makes gar- FFFormalities and delays in document ment manufacturers only conduct CMP processing.processing.processing. Import and export documen- business by importing raw materials for a tation is unnecessarily time-consuming. particular order and restricts the garment Since garment orders are based on the industry to manufacturing/processing serv- trendy and seasonal, it is very important to ice. Financing or funding agencies could make shipments on time. Delays in import- support manufacturers in importing raw ing raw materials stop the whole process material on their own accounts and make because garments are produced in a stream- raw materials available domestically. If this lined process. Sometimes workers are could be done in one way or another, the forced to work overtime to finish orders lead time for imports could be reduced, because of the late arrival of raw materials orders could be completed on time, and or are paid for no work while waiting for transportation cost for multiple single ship- import permit document processing. ments for a particular order would be avoided. That would reduce the total pro- SSShorhorhortage of electricity... This hurts both duction cost and improve market competi- employers and workers. An unreliable elec- tiveness at a lower price with a higher profit tricity supply forces factories to use gen- margin. erators instead. The cost of petrol for the generators adds a significant amount to Similarly, the garment industry could sup- production costs. Wages cannot be raised port related local raw material firms to grow because the money goes to pay for petrol. up along with it. But this is not happening The electricity infrastructure has not been in the Myanmar garment industry at developed in line with the expansion of in- present due to a lack of cooperation and dustry. According to an industry survey, 25- the inefficient operations of financial insti- 40 per cent of operating costs (almost the tutions. Raw material costs are higher than same amount as wages) goes for petrol. in other countries. This is one of the extra Petrol-fired generators cost 10 times as charges. Therefore the problem finally much as ordinary electricity. comes straight to labour cost as the only 111 Dialogue + Cooperation 2/2006

way out. Under these circumstances, the In this industry, the wages are not signifi- garment industry has to find ways to main- cantly different from one factory to another, tain labour costs at the present or an even but even small differences make labour move. lower level. Another reason for workers’ shifting is to work in the garment factories at the Thai Currently Myanmar faces a lack of skilled border (Mae-Sot), where the wages are more labour in the garment industry. Garment than double. The factories in Myanmar are manufacturing wages seem to be among not able to pay as much as the Thai facto- the lowest in the world. Therefore, work- ries. Coinciding with the laying off of workers are demanding that the industry in- ers (both skilled and unskilled) from facto- crease their real incomes. In other words, ries shut down after 2003 by US sanctions, there is a chronic problem for both the the growth of the Thai garment industry industry, which is threatened by price com- caused labour mobility to the Thai border petitiveness in the international market, area. A lack of skilled labour makes it diffi- and its labour force, which has been cult for factories to finish production on time. alarmed by high domestic inflation. As a Learning by doing or training usually takes result, workers shift from one place to two to three months before a worker be- another. Even within the industry, work- comes skilled. Labour contracts are not bind- ers are moving around to where they can ing in Myanmar, which restricts control over get higher wages. labour mobility.

Conclusion

Myanmar’s garment industry had been in are trying to meet the growing demand. a position of rapid growth and had proved How can Myanmar’s garment industry its potential and capability even in infancy, survive in this competitive market? It is but the success of the garment sector did recommended to both government and not last long. While other developing the private sector to take urgent meas- countries are concentrating on the US ures to: initiate training centres to main- market, Myanmar should seek a way into tain skilled labour; from the government emerging non-US markets. If non-US side to invest in infrastructure (especially markets can compensate for the loss electricity supply and telecommunica- caused by sanctions, Myanmar’s garment tions); speed up document processing and manufacturing will survive. Since the skip unnecessary processes; implement a Cold War ended, the world economy has policy for easy access to loans, especially been entering into an uncharted area of for local firms; create wage standardisa- infinite competition. Now, quotas are no tion to avoid workers job-hopping; sup- longer applicable, so developing countries port financing and find a way to import become more and more competitive and bulk raw materials.

112 The Garment Industry in the Lao PDR The Garment Industry in the Lao PDR

Syviengxay Oraboune*

Introduction

The garment industry is an important eco- do not provide design, product develop- nomic sector in the Lao PDR. It attracts ment, marketing, sourcing, financing foreign direct investment (FDI); the ma- me:or procurement functions or services. jority of garment factories are either Although the garment industry can create wholly foreign owned or joint ventures. many jobs for local people, especially Since the announcement of an open mar- women who mostly come from rural ar- ket policy in 1986, the issuing of FDI eas, most of them are unskilled jobs, policy in 1988 and the enactment of the which pay only a small wage. In compari- FDI Promotion Law in 1994, FDI inflow son to other developing countries, the in- has increased dramatically, and the gar- vestment policies of the country are in- ment sector is one of the major areas of sufficiently attractive. investment. It has significantly contributed to job creation and income generation for Most garment factories are located in ur- local people. It has also been identified as ban areas, especially in Vientiane, but most an important source of technology trans- of the workers are women from rural ar- fer and skill development of the Lao la- eas who have to migrate to city areas to bour force. Since 1995, the garment sec- work, which creates many problems for tor has been among the top three indus- those women, including their living con- tries in value of exports, making it an ditions in dormitories, working conditions important source of national income. and rules, health and various social impacts. The garment industry in the Lao PDR contributes significant income to rural women This paper aims to analyse the current situ- workers who migrate to Vientiane and ation of the garment industry in the Lao other urban areas seeking work. This in- PDR in order to discuss how significantly come helps those women’s families to over- the garment sector contributes to the socio- come poverty by financing their consump- economic development of the country, es- tion and their production. pecially through export development. As well, the paper describes some critical is- However, most garment manufacturers in sues and bottlenecks for this sector, includ- the Lao PDR are basically subcontractors ing other negative social impacts. Finally, who can offer only cut-make-trim (CMT) the paper provides some recommendations with no backward linkages to fabrics and to ensure that the development of garment accessories. Most of their exports rely on industry exports contributes fully to pov- the general system of preferences (GSP), erty reduction, stable income for the peo- which is a main factor for FDI inflow into ple and sustainable development of the this sector. Most garment manufacturers country as a whole.

* Deputy Chief, Policy Analysis division, National Economic Research Institute, Committee for Planning and Investment, Lao PDR. 113 Dialogue + Cooperation 2/2006

1. Significance of the Garment Industry for National Economy

Since the emergence of the garment in- ment exports contributes greatly to the dustry in the Lao PDR in the mid-1990s, total exports of the country. The attrac- it has offered thousand of jobs to local tion of GSP market access and low la- people and created income opportunities, bour costs has induced FDI inflow into especially for women. The value of gar- this sector.

1.1. The Garment Industry and Employment and Poverty At present there are only 57 garment facto- of garment workers are between 16 years ries in the Lao PDR, which employ approxi- and 30 years old (Table 2), and most of mately 22,000 to 23,000 workers (see Table them earn from 300,000 kip up to 1). The number of workers increased gradu- 1,000,000 kip (about US$30-100) per ally from 1998 to 2004. But due to two fac- month. According to a survey, most of them tories closing in early 2005, the number of send 100,000-700,000 kip to their home workers in the sector dropped to 22,401 as towns (parents) in rural areas (Table 3). of January 2005. However, two more FDI garment factories opened later in 2005. Most garment workers are women from rural areas. Usually they are unskilled and This growing industry has contributed sig- are trained on the job directly after admis- nificant stable income opportunities to lo- sion to the factory. Therefore, they benefit cal people, especially young women.1 Ac- not only from income opportunities but also cording to a survey in 2004, the majority from skill development provided by the employers. As well, there is sometimes train- TtnemraGnisrekroW.1elbaT tnemraGnisrekroW.1elbaT tnemraGnisrekroW.1elba ing for local workers provided by interna- IyrtsudnI yrtsudnI yrtsudn YraeY ae raeY rae NrNeebmuN ebmu rebmuN rebmu CegnahC gnah egnahC egnah TsegA'srekroWtnemraG.2elbaT segA'srekroWtnemraG.2elbaT segA'srekroWtnemraG.2elba ()%( )%( )% AeArgAgegA eg NrN%ebmuN ebmu rebmuN rebmu %%% 10899 02,71

10999 1500,8 6.4 <1861 8.0

20000 1600,9 5.5 1802-6 336.33

20100 2600,0 2.5 2552-1 379.03

22200 2164,1 3.7 2003-6 355.62 26300 2148,3 1.11 >6103 3.5 20400 2300,6 0.9 U35nwonkn 6.2 21*500 2404,2 8.31-

5002yraunaJ* T3lato 101 01 ecremmoCforebmahClanoitaNoaL:secruoS tnemraGoaLehtfonoitaicossA,yrtsudnIdna ,srekrowtnemrag311htiwweivretnI:ecruoS .yrtsudnI .4002

1. A Study on Improving Farmer Family Income of NERI/UNDP, 2005, surveyed four villages from which young villagers migrated into urban areas including Vientiane, Savannakhet and Pakse; most were females who mostly found jobs in the garment industry. 1) Thong Lum village, Louangprabang: 18 young people migrated to work in Vientiane, of whom 11 were females working in the garment industry and seven males working in construction; 2) Phongvan village, Louangprabang: nine young people migrated to Vientiane, of whom four were females working in the garment industry and five males working in construction; 3) Dindam village, Xiengkhouang province: eight young people migrated to Vientiane, seven of them females working in garment factories and one male working in construction; 4) Houysan village, Savannakhet province: 20 young people migrated to urban areas including Vientiane, Savannakhet and Pakse, 15 of them females working in garment factories, as house- maids or in shops. 114 The Garment Industry in the Lao PDR tional donors such as SIDA, JICA, UNIDO, ILO and the International Trade Centre on product costing, line supervi- TtnemraGybsecnattimeR.3elbaT tnemraGybsecnattimeR.3elbaT tnemraGybsecnattimeR.3elba sion, marketing and sourcing. WsrekroW srekroW srekro A)Ar(tnuom pik(tnuomA pik(tnuom )pik(tnuomA )pik )pik(tnuom NrN%ebmuN ebmu rebmuN rebmu %%% Although garment industry wages are not 18000,003-000,00 484.24 very high, garment workers can remit earn-

3900,005-000,00 118.61 ings to their families. Given that the national poverty line in rural areas is 82,000 50000,007-000,00 158.8 kip a month, their earnings are enough not O00reht only for their own consumption, but can U6nwonkn 368.13 often also feed their whole family. There- T3lato 101 01 fore, the garment sector should be consid- ,srekrowtnemrag311htiwweivretnI:ecruoS ered as important for poverty alleviation in .4002 the country.

1.2. The Garment Industry and Exports

Out of 57 garment manufacturers, there are ference may derive from the informal ex- 55 export-oriented and two domestic-ori- port of Lao textiles in the form of gifts to ented factories. They have a production ca- relatives in foreign countries (Syviengxay pacity of 3.64 million dozens of apparel per Oraboune 2005). Almost 92 per cent of Laos’ annum. Garment exports make up an aver- apparel exports are shipped to the European age of about 30 per cent of Laos’ total com- Union. The remainder goes to the United modity exports. Apparel exports jumped by States (3 per cent), Canada (3 per cent), nearly 80 per cent in the first half of 2005, Norway (1.23 per cent), Japan (0.72 per as compared to the same period of the pre- cent) and Australia (0.13 per cent). vious year, due to more orders for knitted products (Xaybandith Raspone 2005). In 2004, Laos’ garments exports were made up of approximately 44 per cent knits and There are differences between the apparel 56 per cent woven products. Five product trade statistics compiled by the Ministry of types2 make up 76 per cent of Laos’ ap- Commerce (MoC) and by the importing parel exports. Furthermore, garment ex- countries. The total of apparel exports for ports are significant in total export value 2003 was about US$87 million as reported although the industry’s employed workforce by the MoC, versus US$133 million based is only about 2 per cent of the total, while on import statistics reported by major im- garment exports accounts for about 30 per porting countries. One reason for this dif- cent of total export value.

1.3. The Garment Industry and FDI Among 13 leading sectors that receive FDI, US$3.1 million, or 0.61% of total FDI. At garments (including textiles) ranks ninth, present, out of 57 garment factories, 26 are with 91 projects and total investment value FDI (46 per cent), 11 are joint ventures (19 of about US$88 million (1988-2002—see per cent), and 20 are local enterprises (35 Table 4). In 2004, the total value of FDI in per cent). FDI and joint ventures account garment manufacturing accounted for for about two-thirds of all garment factories

2. HS codes 6109, 6110, 6203, 6204 and 6205—respectively T-shirts, singlets and other vests, knitted or crocheted; jerseys, pullovers, cardigans, etc, knitted or crocheted; men’s suits, jackets, trousers etc. and shorts; women’s suits, jackets, dresses skirts etc. & shorts; and men’s shirts. 115 Dialogue + Cooperation 2/2006

TtceriDngieroF.4elbaT tceriDngieroF.4elbaT tceriDngieroF.4elba in the Lao PDR and have about fourth-fifths IrotceSybtnemtsevnI rotceSybtnemtsevnI rotceSybtnemtsevn of garment production capacity. SrS-otceS otce rotceS rotce P-orP or -orP -or C)$SU(tsoC )$SU(tsoC )$SU(tso jstcej stcej stce FDI and joint venture garment factories employ more than two-thirds of all garment E70rewoPcirtcel 00,000,285,4 workers and most garment machinery. &moceleT There are also 39 small factories that sup- 177 40,724,836 tropsnarT port the bigger export-oriented factories &sletoH 522 97,372,036 (mainly domestic) as subcontractors. msiruoT

&yrtsudnI 1789 03,648,885 Table 5 shows that 37 large FDI and joint stfarcidnaH venture factories employed more than W7yrtsudnIdoo 3236,511,661 17,000 workers in 2005, about 79 per cent of all garment workers. Domestic garment M3liO&gnini 3467,299,731 manufacturers can create about 2,000 more A4ssenisubirg 9476,551,031 jobs through small subcontractor factories S1secivre 198 16,322,101 with a production capacity of about 9.5

elitxeT &s million pieces per year. The FDI and joint 901 07,886,78 stnemraG venture garment factories do not employ &gniknaB any small factories as subcontractors, but 102 00,008,38 ecnarusnI they own more than 11,000 machines with T2edar 133 19,185,27 a total production capacity of more than C8noitcurtsno 3664,267,36 34 million pieces per year, or about 79 per cent of the total production capacity of the C4o ycnatlusn 4270,095,8 garment industry in the country. T7lato 962 89,754,192,7 hcraM72ot8891rebmeceD7doireproF Therefore, with competitively low labour .2002 dnagninnalProfeettimmoC:ecruoS costs and GSP market access as an LDC, .3002,)IPC(tnemtsevnI the garment industry of Laos can attract some

T5002,erutcurtSyrtsudnIgnihtolCsoaL.5elbaT 5002,erutcurtSyrtsudnIgnihtolCsoaL.5elbaT 5002,erutcurtSyrtsudnIgnihtolCsoaL.5elba FIFeDFDIDF ID JeJdrutneVtnioJ rutneVtnio erutneVtnioJ erutneVtnio LdLlenwo-oaL enwo-oa denwo-oaL denwo-oa TlatoT ato latoT lato forebmuN 216 10275 seirotcaf

egatnecreP 496 153001

yticapaC 20809,512,5 9607,370, 9497,314, 04,307,34 )raey/seceip(

C yticapa 22623,101, 7341,65 7084,48 59,146,3 )raey/snezod(

egatnecreP 518 212001

E3seeyolpm 1018,1 5124, 4436, 68,12

P4egatnecre 55212001

M1senihca 8592, 3921, 3590, 15,41

P7egatnecre 52212001

llamsforebmuN 003993 seirotcaf

E0seeyolpm 01769, 769,1

.)5002(enopsaRhtidnabyaX:ecruoS 116 The Garment Industry in the Lao PDR

FDI into the country. However, most gar- TstropxEdnaIDFfoerahS.6elbaT stropxEdnaIDFfoerahS.6elbaT stropxEdnaIDFfoerahS.6elba ment factories, including foreign-owned and isrotceS3poTni srotceS3poTni srotceS3poTn more than 90 per cent of domestic, are lo- SrSsotceS otce rotceS rotce PsPftcejorP tcejor stcejorP stcejor %fo% ofo% fo %fo% fo% fo cated in Vientiane and a lesser number in i.tsevni .tsevni .tsevn estropxe stropxe stropx Savannakhet province. Therefore, special E7yticirtcel 618.2 4.12 economic zones like Savan-Seno have been considered a significant mechanism to at- G1stnemra 90162. .03 tract FDI into rural areas and spread the ,rebmiT 387 242. .22 industry into other provinces, ensuring that erutinruf rural people can benefit from garment FDI .3002,IPC:ecruoS supporting rural and regional development.

FDI in the garment sector accounted for than 30 per cent of total export value be- less then 2 per cent of total FDI between tween 1995 and 2002. It ranked higher even 1988 and 2002, but this export-oriented than the electricity and wood sectors, which garment investment accounted for more received more FDI inflow (Table 6).

2. Problems and Constraints of the Lao Garment Industry

The garment industry plays a significant role oped to its full potential. The main prob- in the economic development of the coun- lems derive from factors including produc- try. However, because of various constraints tive structure, labour issues, the business and problems, the industry has not devel- environment and social impacts.

2.1. Productive Structure

Since most Lao garment factories are lo- There is minimal or no incoming inspec- cated in urban areas, the textile and ap- tion conducted on materials (Xaybandith parel industry has minimal backward link- Raspone 2005). Sampling is usually done by ages, and the structure is mainly that of the headquarters or customers. Cutting is garment manufacturing with minimal sup- plagued by low efficiency, inaccuracies and port in processing, such as embroidery, low productivity. Sewing skills need to be printing and wet garment processing. improved, because there are reports of numerous reworkings required at each stage There are no materials suppliers in the Lao of inspection. Factories usually iron and PDR, and thus almost all materials, from check size specifications simultaneously or fabrics to trims, are imported. Most Lao one after the other. Although there are a garment manufacturers are subcontractors few companies providing packaging materi- or subsidiaries of bigger established manu- als, there is still a need to import them. Great facturers located outside the Lao PDR, so attention is given to in-line quality control, there is little need for them to seek materi- with inspection of 80 per cent of items and als suppliers; most procurement is usually end of line inspection, with 100 per cent. done by their headquarters or customers. This means that Laos mainly receives only Testing and inspection are not yet regarded wages from the garment industry. There- as important since most garment manufac- fore, although garments are a leading ex- turers are not involved in the procurement port sector, imports by the garment sector of materials. Because the majority of ma- are also high. terials and fabrics are imported, problems 117 Dialogue + Cooperation 2/2006

encountered centre mainly on delays and Customs. There seems to be a shortage of multiple checkpoints imposed by Laos storage space in factories.

2.2. Labour Issues

Garment factories do not face many prob- tivity (Xaybandith Raspone 2005). lems in recruiting production workers, but it is almost impossible to find locals who Some garment factories have several mem- have experience and relevant training as bers of their production management who merchandising and management staff in the are from countries such as China, Pakistan, textile and clothing sector. There are mostly the Philippines, Thailand and Vietnam. The unskilled workers, on whose training most Laos government does not place any restric- employers have to spend more. Most gar- tions on employment of foreigners. ment workers are poorly educated, about 54 per cent having completed only primary Eighty per cent of the production workers school and 45 per cent having completed are from rural areas, and most of them find secondary school. Only about 3 per cent it difficult to adapt to the structured and have a college or university degree. A small disciplined factory life after their free and percentage are either illiterate or have not easy life in rural areas. Companies must be completed any formal schooling. ready to orient them to factory work. Lao workers in general are diligent and not con- The minimum wage in the Laos textile and frontational. Nevertheless, according to gar- clothing (T&C) industry is only US$0.125 ment employers in Vientiane, one of their per hour (US$1 per eight-hour day), among problems is a shortage of labour during the the lowest in the region. By a 1994 law, rice cultivation season because many work- T&C work is limited to 48 hours per week ers who are from rural areas, especially mi- and a maximum of 30 hours’ overtime per grants from other provinces, go back home month. However, this figure is often ex- to help their families with cultivation. This ceeded. According to the Association of the seems to be a central difficulty facing most Lao Garment Industry (ALGI), including garment factories in the Lao PDR.3 overtime, workers are able to earn approximately US$40 per month. Although the Lao No training institutes cater specifically for PDR has one of the lowest wage rates per the textile and apparel industry. The courses hour, this does not translate into the lowest taught in the formal education system do operational cost because of lower produc- not prepare graduates for the industry.

2.3. Overall Business Environment

Because FDI is the source of most invest- However, these incentives are not attrac- ment in the garment industry, the invest- tive enough to FDI, because businesses ment policy must be attractive. A 2005 re- require more competitiveness, including vision of the law on FDI provided a number adequate infrastructure at a competitive of incentives to foreign investors, includ- cost. This is a reason that most garment ing exemption from import tax on raw factories are located in city areas. materials, relaxation of some other taxes concerning business performance, the pro- Most of the export garment manufacturers motion of special economic zones etc. rely on their customers to provide designs,

3. Interview in 10 garment factories in Vientiane, 2003. 118 The Garment Industry in the Lao PDR product specifications and materials. There PDR. According to the ALGI, most gar- are few efforts at marketing, advertising ment exports are routed through Bangkok; and/or branding at national, industry or it costs approximately US$800 to move a corporate level. Market information on fash- 40-foot (12.2 m) container from Thai bor- ion design and business is not easily avail- der to Bangkok port, which seems prohibi- able. Sample making and product develop- tive (ibid.). Therefore, the cost of trans- ment are an issue because most factories portation remains an obstacle to the export do not have a direct relationship with or of Lao garment products even though there access to the materials market. As subsidi- are now adequate export procedures. The aries of more established factories, there is lack of warehouses, facilities for loading very little need for them to market their goods and good roads must also be taken products, but rather to market their pro- into account. Most of the factories are lo- duction capacity and capability, which are cated in Vientiane because support facili- considered below that of competitors. Re- ties for business are better than in other lations between Lao garment manufactur- areas of the country. ers and their customers are usually those of a contract manufacturer with little input Finance is also a constraint on the garment on design, product development or mate- industry, because most Lao garment manu- rials sourcing (Xaybandith Raspone 2005). facturers, subcontractors and exporters do not receive any financial support from the Because most garment manufacturing is for government (ibid.). There are only bank export, transportation costs are a critical services provided by commercial banks such issues for a landlocked country like the Lao as letters of credit, short-term loans etc.

2.4. Other Social Impacts

Because most garment factories are in ur- homes seeking jobs in urban areas. This ban areas, mainly Vientiane and migration benefits the urban economy by Savannakhet province, while the majority supplying a workforce, but it also requires of garment workers are women from rural many social services and a social security areas, they have to leave their home towns system. and migrate to urban areas where the factories are located. A shortage of labour According to a survey, women’s migration seems to be common in many rural areas makes them vulnerable to social problems because many young people leave their including rape, unwanted pregnancy, HIV/

TenaitneiVnistnargiMnemoWybdecaFsmelborPlaicoS.7elbaT enaitneiVnistnargiMnemoWybdecaFsmelborPlaicoS.7elbaT enaitneiVnistnargiMnemoWybdecaFsmelborPlaicoS.7elba GtnemraG tnemraG tnemra SsecivreS secivreS secivre PmelborP melborP melbor srotces rotces rotce ()%( )%( )% srotces rotces rotce ()%( )%( )% otkcabmehtekatt'nodtubtuomehtekatsdneirfyoB 407.0 .0 yrotimrod

L4ycnangerpdetnawnu,ytinigrivfosso 25.0 .82

S7tnemssarahlauxe 11.6 .75

O2reht 23.2 .41

T4stnamrofnilato 512

.2002enapahtnohKhnaviriS:ecruoS 119 Dialogue + Cooperation 2/2006

AIDS and other sexual diseases etc. problems that migrant women workers in (Sirivanh Khonthapane 2002). Table 7 lists Vientiane report facing

3. SWOT Analysis of Garment Industry in Lao PDR

Based on previous research, the current try can be drawn in an attempt to support strengths, weaknesses, opportunities and the export sector’s development (Xaybandith threats (SWOT) of the Lao garment indus- Raspone 2005).

3.1. Strengths

The Lao PDR has potential for developing cluding AFTA, AISP-GSP etc.; the garment industry. Basically, this derives ■ political stability; from low production costs and relevant ■ low labour costs; policies, such as regional development, that ■ relatively low electricity cost (US$0.06/ ensure stability. Some strengths of the gar- kwhr) and water cost (US$0.015/m3); ment sector are shared with other sectors: ■ diligent workers with good attitude; ■ membership of the Association of South ■ no labour problems; good relationship East Asian Nations (ASEAN), bringing between management and workforce; benefits from various programmes in- ■ no restrictions on expatriates.

3.2. Weaknesses

However, as in other sectors, there are con- ■ a lack of formalised knowledge transfer straints and weaknesses for the industry: from expatriates; ■ a lack of highly skilled sewers and of ■ inadequate education system, courses training providers; not aligned with industry needs; ■ inadequate banking services; ■ absence of sourcing information and ■ a lack of domestic raw materials; skills; ■ a lack of technical and management ■ absence of dissemination of global mar- personnel; ket information; ■ high transit costs to seaport because ■ a lack of independent capacity build- Laos is landlocked; ing, and ALGI’s low lobbying capacity; ■ low literacy rate (despite primary edu- ■ minimal direct relationship with retail- cation); ers from the quad countries (Canada, ■ low productivity; EU, Japan, USA); ■ low marketing and branding skills; ■ inadequate knowledge about competi- ■ a lack of training institutions to pro- tors; vide T&C technical knowledge; ■ over-reliance of subcontractors or sub- ■ average labour turnover of 3-5 per cent sidiaries on parent companies in Thai- per year; land or Hong Kong.

3.3. Opportunities

The following can be considered as oppor- ■ getting new management and technical tunities for the garment industry to staff; strengthen its exports and development: ■ product diversification; ■ developing skills across the board through ■ new job creation; the development of T&C industry; ■ NTR (normal trade relations) status for 120 The Garment Industry in the Lao PDR

market access to the USA; ASEAN and neighbouring countries; ■ T&C industry creating jobs and wealth; ■ drawing in foreign investors through a ■ shipping products to major world mar- more attractive investment environ- kets; ment; ■ GSP benefits for exports to Canada, ■ encouraging foreign investors to trans- Australia, Japan, South Korea and EU; fer knowledge and skills via formalised ■ exploiting traditional silk and natural training agreements; dyes for higher fashion products; ■ encouraging investors to build infra- ■ technology and knowledge transfer from structure through dialogue on expansion the more developed T&C industry in plans and special economic zones.

3.4. Threats

However, taking the country’s demography nam that have a massive labour market; into account, many challenges exist for the ■ approval from various government agen- development of the garment industry and cies for imports of equipment and spare the country as a whole. The following is- parts requiring too much time; sues might be considered as threats: ■ inadequate banking services; ■ the country’s small population, which ■ bureaucratic, slow and passive public makes it hard to compete with neigh- service related to T&C; bouring countries like China and Viet- ■ many highly skilled competitors.

4. Sustaining Long-Term Growth and Structural Change

Through the Association of the Lao Gar- though those companies are not members ment Industry, the Lao Chamber of Com- of ALGI but of the handicraft association, merce and Industry and the MoC, most their operations are mass production rather current exporters receive fairly good assist- than handicraft. ance in exporting their finished garment products. In general they don’t have many On the other hand, the current exporters problems in identifying market opportuni- need to comply with the volume and qual- ties, but a major problem is to improve ity demands of the buyers while operating the sourcing capability and to find alter- with insufficient and unskilled workers. nate ways to import fabrics from neighbouring countries, which at present they There are many companies, members of have to be imported from more distant ALGI (especially small and medium facto- countries (China, Korea, Thailand). ries), that have potential to become exporters in the near future. The most important The improvement of domestic production thing to develop their export potential is to to supply fabrics might be considered im- raise the quality and skill of their workers to portant, but since Laos does not have the meet regional or international standards. In infrastructure for this, it still has to import other words, they will need to prepare to most of the raw material and accessories. move from CMT to free on board (FOB) Only cotton fabrics are supplied domesti- or direct dealing provider (DDP) status, cally, in small amounts and of a quality in- which will gradually improve the capacity of adequate to meet international require- the garment industry of the country and en- ments. There are few cotton companies sure sustainable development in this sector. able to export their products into the only market that exists at present, Japan. Al- The objective in the garment sector is to 121 Dialogue + Cooperation 2/2006

raise capacity for future exports. The coun- A software-based methodological tool called try target is to increase export growth to 5- FiT, developed by the International Trade 10 per cent a year by 2010. This will re- Centre, could also be an excellent instru- quire movement away from the low value- ment for benchmarking. It could help the added woven garment sector towards higher manufacturers to have good data and in- value-added knit, cut and sew garments and formation on their own businesses as well knitwear garments. The US market is also as those of competitors. opening, and more opportunities are ahead. Employment in the industry will then in- In consultation with the manufacturers, we crease as foreseen in national socio-eco- have identified a need for a bulletin, either nomic planning. in hard or soft format, circulating among all the member of the ALGI in order to update To achieve the above goals, the following T&C news in the region and in the global considerations need to be addressed. market. The ALGI should also consider having its own data and statistics unit and/or a Develop a comprehensive value chain in the web site to provide information about its garment industryyy... Under supervision of the member and activities of the association. Lao National Chamber of Commerce and Industry and with support from the MoC, Improve the system of financial support. the ALGI plays a strong role in efforts to Loans for garment factories are available develop the garment industry. Currently the through various financial institutions. Lao textile and apparel industry basically However, the critical issue is how to en- resides only in the apparel-manufacturing sure that funds are used effectively in or- segment. Therefore, in order to further de- der to be assured of repayment. A current velop the garment sector, it will be neces- constraint is that most loans focus on pro- sary to cluster the industry into a compre- duction and operations without consider- hensive structure with full linkage to back- ing the development side. Hence loans are ward sectors (Xaybandith Raspone 2005). commonly not profitable for the lender because of the short period. Subsequently, Improve information systems. One of the exporters still have difficulties accessing most important factors for the garment sec- loans from public and commercial banks, tor is market information, especially on which have high interest rates and high export markets and market access, which collateral requirements. This situation should be easily available. It could be pro- leads to low capacity of exporters to ex- vided by and through ALGI, the Lao Trade pand their businesses. Promotion Centre, Department of Foreign Trade (MoC) and foreign assistance Hence, establishment or improvement of projects. Establishment or improvement of loan management assistance for garment fac- the information systems of those institu- tories should be considered in order to en- tions is essential for improving trade infor- sure effective trade finance support. One mation for this sector. possibility is to request support under the Trade Integration Mechanism introduced by Enhanced access to information technolo- the IMF to assist member countries in meet- gies can contribute to strengthening the ing balance of payments shortfalls that might competitiveness of the garment sector by result from multilateral trade liberalisation. improving information and communication and optimising production processes where Improve the education and training system timing and up-to-date information are im- to improve skills of garment workers. As portant determinants of competitiveness. mentioned , the country is in need of skilled 122 The Garment Industry in the Lao PDR garment workers. Thus there is a need to Improve quality standards in the garment educate and train potential workers in sub- sector to support the traceability of gar- jects related to the industry such as product ment prprment oducts of the countryyy... At present, costing, line supervision, sourcing, merchan- most quality assurance issues for the gar- dising, production processes, marketing, ment industry in the Lao PDR are dealt quality control and financial planning. with by foreign neighbours’ organisations such as certification of production and Therefore there is a need for a garment train- quality SA-8000, ISO-9002 etc. ing centre managed by the ALGI with the help of international donors and inviting There is a need to upgrade garment manu- foreign experts to help in developing the facturers in Laos to obtain the above-men- competency of this sector. Assistance in the tioned certifications and with them better form of trade-related technical assistance and access to international markets, and there- capacity building provided by the OECD fore to encourage local enterprises to take and the WTO could also be an option. the first steps toward quality assurance. Conclusion

The garment industry is important in the region, development of human capabilities, Lao PDR, one of the major export indus- especially in production, regional coopera- tries of the country and the creator of thou- tion at ASEAN level, centralised sourcing, sands of job opportunities, especially for missions, market expansion and diversifi- rural women. However, in comparison with cation, supplies source expansion and evalu- neighbouring countries, the industry has ation and seeking funds from donor organi- many constraints and weaknesses, as iden- sations to fund these projects. tified above, which restrict the development of the sector and the country as a whole. Also to support the further development of Therefore, in order to improve the com- the garment industry, especially through petitiveness of this sector, various issues exports, the government might need to need to be addressed at all levels. make changes regarding trade policy, trade facilitation, capacity building and other Measures at enterprise level might include relevant issues. benchmarking, meeting social requirements, training and recruitment, utilising Provision of a social security system for e-business, developing sourcing and logis- women garment workers is also needed in tics capabilities, offering design and prod- order to solve the social problems they face. uct development services and product and Having a social security system and ad- market diversification. equate provision of training as well as other social knowledge in the garment sector will Measures at the industry level might include ensure a sound environment for women industry benchmarking, learning from the workers and improve productivity.

Bibliography

_____ 2005., Study on Improving Farmer Family Income in Lao PDR. Macroeconomics of Poverty Reduction Project. NERI/UNDP, Agrofood Consulting Co. ASEAN Federation of Textile Exporters (AFTEX), www.aftex.org. 123 Dialogue + Cooperation 2/2006

Association of Lao Garment Industry. 2005. Garment Factory Directory. IMF. 12 Jan 2005. Lao People’s Democratic Republic: Selected Issues and Statistical Appendix. Imran Arshad. 2004. Economic Theory, Transition & Alternatives: Applications to Lao PDR. National Economic Research Institute, Committee for Planning and Investment. International Trade Centre. November 2005. Export Potential Assessment in Lao PDR. Ministry of Commerce. 2005. Trade Statistics. National Statistics Centre, CPI. 2005. Third National Human Development Report. Draft. Office of Industries and Office of Economics. 26 Jan 2004. Textiles and Apparel: Assessment of the Competitiveness of Certain Foreign Suppliers to the U.S. Market. US Interna- tional Trade Commission Sirivanh Khonthapane. 2002. Women’s Migration into Vientiane Municipality. NERI. Strategy Designer Team. 2005. National Export Strategy. Final draft. Lao Trade Promotion Centre, Ministry of Commerce. Syviengxay Oraboune. 2005. National Export Strategy, Silk Handicraft Sector Strategy. Fi- nal draft. LTPC, MOC. UNIDO. 2002. The Textile and Garment Industry in Lao PDR. World Bank Vientiane Office. November 2004. Lao PDR Economic Monitor. WTO. 2004. Background Statistical Information with Respect to Trade in Textiles and Cloth- ing. Xaybandith Raspone. 2005. National Export Strategy, Garment Sector Strategy. Final draft. Lao Trade Promotion Centre, Ministry of Commerce.

124 Sustaining Development through Garment Exports: The Case of Cambodia

Sustaining Development through Garment Exports: The Case of Cambodia

Kum Kim and Seng Sovirak* The garment industry has contributed enor- US$2.2 billion in 2004 and accounted for mously to the development of Cambodia 85 of total exports in 2004 (Hing Thoraxy, through job creation, income generation 2003; Rajah Rasiah, 2006). and foreign exchange earnings. Thanks to special privileges enjoyed by the least de- The objective of this paper is to examine veloped countries (LDCs) with per capita the sustainability and the development of income less than US$1000, the Cambodian Cambodia’s garment industry in the post- garment manufacturing expanded further MFA era. Part 1 will examine the signifi- in 2005. A combination of preferential ac- cance of the garment industry for the na- cess to major markets, especially in the US tional economy. Part 2 will examine the and EU, and caps on the growth of im- problems faced by garment firms in Cam- ports from China ensured the continuation bodia. Part 3 will focus on the labour mar- of the industry in LDCs such as Cambo- ket. Part 4 looks at garment industry per- dia, Lesotho and Kenya (Rajah Rasiah, formance and technological capacity build- 2006). Cambodia’s garment exports ining. Part 5 focuses on sustaining long-term creased from US$25 million in 1995 to growth. Part 6 presents conclusions.

1. Significance of the Garment Industry for the National Economy

Cambodia’s garment industry began to grow TehtnitnemyolpmE.1elbaT ehtnitnemyolpmE.1elbaT ehtnitnemyolpmE.1elba when Cambodia was granted most favoured GyrtsudnItnemraG yrtsudnItnemraG yrtsudnItnemra nation status by the United States and signed YrYtaeY ae raeY rae EtnemyolpmE nemyolpm tnemyolpmE tnemyolpm Nfo.oN fo.oN fo.o a framework of cooperation agreement with ()000'( )000'( )000' FseirotcaF seirotcaF seirotca the EU that allowed access to its markets 18599 102 under the Generalised System of Prefer- 14699 242 ences (GSP). Over the past decade, Cam- 12799 876 bodia’s garment industry has been the main source of economic growth and employ- 19899 7921 ment generation. Garment industry employ- 16999 9251 ment has risen from 18,000 in 1995 to 21000 106 91 230,000 in 2003 (Table 1). This represents 27100 158 81 3 per cent of total employment in Cambo- 28200 270 81 dia and 36 per cent of manufacturing em- 24300 273 91 1 ployment. Most of the workers are young 25400 264 02 women who migrated from poor rural ar- edarT,ecremmoCfoyrtsiniM:ecruoS eas to the capital Phnom Penh, where most iwagraBramOmorfdetcartxe,tnemtrapeD garment manufacturing is located. .)5002(

* The authors, Cambodians, are master’s degree students in regional integration at the Asia-Europe Institute, University of Malaya. 1. Based on data from the Cambodian National Institute of Statistics labour force survey. 125 Dialogue + Cooperation 2/2006

TsT)eirogetaCsuoiraVnistnemraGfoerahS.2elbaT eirogetaCsuoiraVnistnemraGfoerahS.2elba seirogetaCsuoiraVnistnemraGfoerahS.2elbaT seirogetaCsuoiraVnistnemraGfoerahS.2elba %(

1314991 99 3991 399 1415991 99 4991 499 1516991 99 5991 599 1617991 99 6991 699 1718991 99 7991 799 1819991 99 8991 899 1910991 99 9991 999 2021002 00 0002 000 2122002 00 1002 100 2223002 00 2002 200 2324002 00 3002 300 24002 00 4002 400

PDG 1240. 161. 154. 241. 387. 499. 518. 912. 123.1 153.2 112.3 5.41

AVM 1580.2 176.2 199.5 222.1 361.2 373.9 457.4 523.7 682.4 656.6 662.8 5.17

X 151. 06. 26. 17.1 26.4 37.8 45.7 57.5 59.6 5863.3 .46

M 023. 08. 02. 38. 83. 1214.7 27.1 27.3 24.4 23.6 .62

.stropmiPSG=M.stropxePSG=X.deddaeulavgnirutcafunam=AVM .aidobmaC,ecremmoCfoyrtsiniM:ecruoS

While garments already accounted for 12.1 279,545 workers were directly employed per cent of manufacturing value added in by the garment industry in 2005. This dra- 1993, the share rose remarkably to 32.1 matic growth was facilitated by GSP privi- per cent in 1997, 57.5 per cent in 2000 leges, including the market openings in the and a massive 71.6 per cent in 2004 (Table EU and the United States. 2). Rapid expansion also raised the garment contribution to GDP from 1 per cent in Nearly all garment production is for export. 1993 to 3.7 per cent in 1997, 9.2 per cent Export-oriented garment manufacturing in 2000 and 14.5 per cent in 2004. The emerged in Cambodia after the restoration Ministry of Commerce reported that of peace and resumption of normal politi-

TrTytnuoCyb,gnirutcafunaMtnemraGnitnemtsevnIdevorppA.3elbaT tnuoCyb,gnirutcafunaMtnemraGnitnemtsevnIdevorppA.3elba rtnuoCyb,gnirutcafunaMtnemraGnitnemtsevnIdevorppA.3elbaT rtnuoCyb,gnirutcafunaMtnemraGnitnemtsevnIdevorppA.3elba )m$SU( 2021002 00 0002 000 2122002 00 1002 100 2223002 00 2002 200 2324002 00 3002 300 242*002 00 4002 400 2*2l5002 500 *5002 *500 TlatoT ato latoT lato

C0aidobma 102. 287. 362. 108. 301. 548. 9.71

C0anih 006. 105. 302. 508. 107.9 208.2 6.35

T0nawia 809. 320. 303. 100. 404. 222. 8.22

H0K 450. 007. 100. 000. 000. 050. 7.5

U0K 309. 105. 009. 000. 105. 000. 8.7

U0AS 055. 407. 000. 080. 200. 132. 5.8

M0aisyala 000. 000. 150. 206. 407. 150. 3.9

S0eropagni 108. 000. 00.0 105. 105. 200. 8.6

J0napa 002. 000. 000. 000. 000. 000. 2.0

S0aeroK. 202. 100. 059. 109. 300. 659. 9.51

F0ecnar 100. 000. 000. 000. 000. 000. 0.1

P0pilih senip 003. 100. 000. 000. 000. 000. 3.1

C0adana 000. 000. 000. 050. 007. 050. 7.0

T0lato 206.4 102.6 166.5 137.4 407.0 499.1 7.351

.rebotcO13litnU* .aidobmaC,yrtsudnIfoyrtsiniM:ecruoS 126 Sustaining Development through Garment Exports: The Case of Cambodia cal and economic relation with the global dia’s garment share of total export rose from community in the mid-1990s.2 Investors 66.2 per cent in 1999 to 83.8 per cent in from Hong Kong, China, South Korea and 2003. Despite the fear of tough global com- other countries were attracted to invest in petition due to the removal of the Multi- Cambodia by its low production costs and Fibre Agreement (MFA) after 1 January its access to garment quotas. China had 2005, garment exports remained strong, risen from being fairly insignificant in 2000 reaching US$2.2 billion in 2004 (Rajah, to become the largest investor in garment 2006) and rising by another 11 per cent in manufacturing by 2005 (Table 3). Whereas 2005 (Spande, 2006). Cambodia’s garment Hong Kong had almost seven times the in- exports represented 0.74 per cent of the vestment of China in 2000, China ac- world total by value (MoC and ADB, 2004). counted for 54.4 per cent of new approved investment in the first 10 months of 2005. In 2003, exports to the US exceeded US$1 In cumulative terms, China accounted for billion for the first time, of which 63 per 34.9 per cent (over 59 per cent if Hong cent were items under quota. However, the Kong is included) of overall garment invest- US market share of total garment exports ment in 2000-2005. Taiwan had 14.9 per from Cambodia has fallen steadily from a cent, South Korea 10.4 per cent and Ma- peak of 81 per cent in 1998 to below 70 laysia 6.1 per cent. per cent in 2003 (MoC and ADB, 2004). This was due largely to preferential access In 2003, garments worth a total value of to the EU under GSP. Exports to the EU US$1,607 million were exported; the US topped US$407.4 million in 2003, and fol- took 70 per cent and EU markets 25 per lowing the extension of Canada’s GSP cent (EIC, 2004). Despite the quota im- scheme to cover textiles and apparel in Janu- posed by the US on some categories of prod- ary 2003, exports to other markets that year ucts in 1999, Table 4 shows that Cambo- jumped to more than US$75 million.

T)3002-5991(stropxEtnemraGs'aidobmaC.4elbaT 3002-5991(stropxEtnemraGs'aidobmaC.4elba )3002-5991(stropxEtnemraGs'aidobmaC.4elbaT )3002-5991(stropxEtnemraGs'aidobmaC.4elba m$SU( 1516991 99 5991 599 1617991 99 6991 699 1718991 99 7991 799 1819991 99 8991 899 1910991 99 9991 999 2021002 00 0002 000 2122002 00 1002 100 2223002 00 2002 200 23002 00 3002 300

USUSUS 065. 19. 18.90 21.19 53.61 76.15 85.82 94.35 .121,1

EUEUEU 287.5 74.4 11.21 67.3 18.63 21.02 37.90 34.55 .704

OrehtO rehtO reht 096. 38. 45. 43. 73. 19.4 11.7 27.8 .87

TlatoT latoT lato 238.6 81.0 24.72 31.95 64.06 96.68 12.551, 11.733, .706,1

%%fo% fo 313. 19.2 27.8 52.1 60.2 74.7 83.1 88.1 .38 tlatot latot lato

.4002,BDAdnaCoMmorfdetcartxe,ecremmoCfoyrtsiniM:ecruoS

2. In the period from 1980, after the Khmer Rouge regime, to 1991, Cambodia went through civil war. Most foreign investors took a wait-and-see attitude due to the political and security uncertainty. Since 1991, Cambodia has increased relations with the international community. A general election organised by UN in 1993 coupled with the intention of the government to integrate into the region, especially ASEAN, provided investors with greater confidence. 127 Dialogue + Cooperation 2/2006

2. Current Problems Facing Garment Firms

Corruption. According to reports of the TTTrade unions. There are issues regarding Foreign Investment Advisory Service trade unions in Cambodia due to their sta- (FIAS), ADB and Economic Institute of tus—some are and some are not independ- Cambodia (EIC), corruption is a challenge ent from the ruling party. Because some of facing Cambodia’s garment industry at the them have different political affiliations, this end of the quota system. Corruption re- often leads to conflicts with their objectives sults in large additional payments by manu- (World Bank, 2005). facturers, accounting for up to 7 per cent Other problems include differences in the of the value of sales (MoC and ADB, interpretation of the labour law resulting 2004; EIC, 2004; FIAS, 2004). The prob- in serous conflicts. In large part the busi- lem of unofficial payments is serious ness sector ascribes this problem to vague- enough to reduce competitiveness. Two ness in the phrasing of articles in the la- particular examples stand out in the gar- bour law.4 Issues of particular concern in- ment sector: unofficial payments neces- clude overtime and night shift payments, sary to obtain export documents; and un- provision of health services and the exist- official additional costs incurred in trans- ence of several trade unions within the same porting a container from a factory by road factory, resulting in confusion and conflict- to Sihanoukville port, through the port and ing objectives (EIC, 2004). onto a ship. One report stated that during transportation of a container from factory Despite this, the unions have developed a to ship, unofficial costs amounted to 37.3 workable system of coming to agreement per cent of the total cost (MoC and ADB, on workplace issues. In the garment indus- 2004). However, according to an official try, they have developed a common pro- from the Ministry of Commerce, corrup- posal for a framework collective bargain- tion has been reduced significantly over ing agreement that promises no strikes in the last year. Since 2004, the government exchange for the employers’ accepting bind- has been trying hard to reduce unofficial ing arbitration of labour disputes. payments.3 Structural problems. A structural problem Bureaucracy and complex import-export ranked very high by companies is lead procedures. In addition to unofficial pay- times. This concern is especially serious for ments relating to import and export proce- knitwear and circular knit, cut and sew dures, the ADB confirmed that the bureauc- companies. Garment lead times from Cam- racy associated with importing raw mate- bodia are longer than those of other major rials and exporting finished products often competitors, as shown in Table 5. The is- resulted in a huge waste of time and unac- sue relates largely to the almost complete ceptable delays. The amount of time that absence of backward linkages. Cambodia senior managers need to spend on govern- and the garment industry must not ignore ment-related matters represented a serous the changes to supply chains that are tak- misallocation of resources. ing place around the world, partly as a re-

3. The statement from the Ministry of Commerce official was made in the conference on “ Sustaining Development through Garment Exports: Cambodia and the Least Developed Economies”, held on 5-8 June 2006 in Phnom Penh. 4. According to the ADB (2004), the industry raised the phrase, ‘Freedom of work for non-strikers shall be protected against all forms of coercion or threat’, and the need for the government to provide substance to this guarantee and indicate how it can be implemented. 128 Sustaining Development through Garment Exports: The Case of Cambodia

HHHigh cost of utilities. The input costs are TsT)emiTdaeLtnemraG.5elbaT emiTdaeLtnemraG.5elba semiTdaeLtnemraG.5elbaT semiTdaeLtnemraG.5elba syad( high in garment manufacturing and other CyCnrtnuoC rtnuo yrtnuoC yrtnuo WnevoW evo nevoW nevo CralucriC ralucriC ralucri manufacturing industries. This is due in part gstnemrag stnemrag stnemra ktink tink tin to the high price of petroleum in the coun- gstnemrag stnemrag stnemra try. The main issue here, especially for the more machinery-dependent manufacturing CaidobmaC aidobmaC aidobma 90021-0 21-09 processes, is the cost of power. The cost of BhsedalgnaB hsedalgnaB hsedalgna 90021-0 8-06 electricity in Cambodia is US$0.15 per kW hour, 2.5 times that of the international CanihC anihC anih 4006-0 6-05 average of US$0.06. The cost of electricity IaidnI aidnI aidn 5007-0 7-06 is very high compared to other countries in the region (EIC, 2004). IaisenodnI aisenodnI aisenodn 6009-0 7-06 HHHuman rruman esouresouresources.ces.ces. Years of war and isola- MaisyalaM aisyalaM aisyala 6009-0 6-05 tion have left Cambodia with poor human TdnaliahT dnaliahT dnaliah 6009-0 6-05 resources and infrastructure. Garment firms in Cambodia find it difficult to acquire VmanteiV manteiV mantei 6009-0 7-06 skilled labour and managers in the country. Most skilled workers and managerial .4002,BDAdnaCoM:ecruoS staff are hired abroad, mainly from China, Hong Kong and Taiwan (USAID, 2005). sult of the changing trade environment. As Moreover, most garment workers have only other countries have done, Cambodia primary school education. This low level should encourage investments in upstream of education is also a constraint on skill parts of the textile supply chains in order upgrading. According to the ILO (2004), to provide shorter lead times, improve com- only 8 per cent of garment workers have petitiveness, increase the number of direct high school education, 31 per cent have and indirect jobs in the textile/garment in- lower secondary school education, while the dustry and raise the domestic value added other 61 per cent have primary school edu- content of exports. cation.

3. The Labour Market

Foreign companies have virtually unre- the government. The Ministry of Labour stricted access to Cambodia’s labour force. and Vocational Training has the right to set However, certain restrictions exist on em- minimum wages for each sector of the ployment of foreigners. For example, em- economy based on recommendations from ployment regulations require that the pro- the Labour Advisory Committee. portion of foreign experts to local workers shall be no higher than 1:10, i.e., employ- The Ministry of Labour, at that time called ment of one foreign expert shall be accom- the Ministry of Social Affairs, Labour, Vo- panied by employment of at least 10 local cational Training and Youth, formally exer- workers (Law on Investment, 1994). Inves- cised this authority for the first time in July tors are permitted to bring in foreign na- 2000, when it approved a US$45/month tionals who are qualified managers, tech- minimum wage for post-probation work- nical personnel or skilled workers. ers in the garment and footwear sector. Workers who are in the probation period Wages are set by market forces, except for of one to three months receive a minimum civil servants, for whom wages are set by monthly wage of US$40. Also, the garment 129 Dialogue + Cooperation 2/2006

and footwear sector is obligated to provide ■ annual leave of 18 days. the following benefits to workers: ■ an incentive of at least US$5 per month The labour standards of the Cambodian for full attendance; garment industry have been compliant with ■ a food allowance of 1,000 riels or one international standards as well as with Cam- free meal for each worker who volun- bodian labour law (FIAS, 2005). The 1999 teers for overtime when requested by bilateral trade agreement with the US, which the employer; is linked to working conditions, provided ■ a seniority payment of US$2-5 per Cambodia with an increased quota when month; quotas were still in effect.

4. Industry Performance and Emphasis on Technological Capacity Building

Personnel and Training

Although the garment industry is the en- to train in private centres before being gine for economic growth, investment in employed in factories. skill development is not commensurate with its significance to the economy. Also, the government has imposed virtu- Technical training in garment firms is ally no requirements for skill develop- lacking at all personnel levels from sen- ment on garment firms (Rajah, 2006). ior managers down (USAID, 2004). The government should consider impos- There was only a little training for sewing a small tax—e.g. a 1 per cent levy on ing machine mechanics by trainers from profit which firms could reclaim through China. Training needs to be strengthened approved expenses on training, and an- in order to ensure productivity and com- other 1 per cent profit levy to be used by petitiveness. Surprisingly, firms do not local government to support training in- use training centres to train their work- stitutions, as is common in Vietnam and ers.5 Workers have to finance themselves Malaysia.

Technological Levels

The technology employed in garment firms but this type of technology is not wide- is at the lowest level in sewing and inspec- spread. tion. Machines have few attachments that could aid workers to operate more effec- The low level of technology is also due to tively, in either volume or quality terms. garment brand names increasingly concen- Due to the fact that labour costs are very trating on simply building and sustaining competitive, management considers it their brands, while outsourcing other ac- cheaper to employ people than to invest tivities (Rajah, 2006). Firms in Cambo- in machines or equipment (MoC and dia are extremely slow in adapting tech- ADB, 2004). A few garment firms in Cam- nology compared to Indonesia, Thailand, bodia work with CAD systems and laying the Philippines and China. and cutting machines to minimise waste,

5. Interviews by the authors with 15 garment firms during the period of 15-22 February 2003. The research was funded by JETRO to identify human development issues in the private sector. 130 Sustaining Development through Garment Exports: The Case of Cambodia

Productivity

Because of the low level of work skills, the new recruits in accuracy and speed, as well lack of training of staff and the small in- as the quality standards expected of them, vestment in technology, of course the pro- and encourage them to be successful. The ductivity of garment firms is low. The gar- level of innovation of employees was found ment industry generally accepts manual lay- to be much higher in these smaller units than ing and cutting and basic sewing machines; in the large companies. the factories prefer to employ more people rather than improve technology. Worker Low worker productivity is considered to productivity is extremely low compared to be one of the more easily solved problems. competitors (EIC, 2004). Labour productivity could be increased by 10 to 29 per cent through improved skills, However, the highest productivity levels were better human resource practices and bet- found in the smaller Cambodian-owned ter work ethics and organisation (MoC and companies6 where management teams train ADB, 2004).

Institutions for Skills and Technological Development

There are very small numbers of training (private and state) are seriously short of centres for garment workers in Cambodia. professionalism. Private universities have These are insufficiently capitalised to sup- grown remarkably since 1996, but there is port cutting edge training and too small to no regulation to ensure standards. train many workers. Also, there are no research and development institutions in the The Garment Manufacturers Association government or the private sector to sup- of Cambodia (GMAC), however, plays a port technological development of the in- very important role in garment worker dustry. The lack of training and R&D is a training. GMAC is by far the most effec- huge constraint on skill upgrading and tech- tive business association in Cambodia and nological advancement. was actively involved in negotiations for the US-Cambodia bilateral trade agreement, Polytechnics and other technical schools raising policy issues with the government, focus their programmes on training elec- co-chairing the export processing and trade tricians, boilermakers and welders. There facilitation working group, developing are no programmes focused on training policy approaches, sharing potential solu- garment workers or technological upgrad- tions to problems of logistics and sharing ing. Moreover, universities in Cambodia information on market conditions.

5. Implications for Long-Term Growth

The importance of the long-term growth poverty alleviation, the MoC and ADB of the garment sector to the national (2004) reported that garment workers re- economy is immense. Garment export mit at least half of their salaries to their were nearly 15 per cent of GDP in 2004 rural families, which contributes largely (Table 2). Although there is not yet a study to improving living standards and fami- of the impact of the garment sector on lies’ education.

6. According to a report by USAID in 2004, Cambodian-owned firms represent only 5 per cent of the garment industry. 131 Dialogue + Cooperation 2/2006

It is clear that a decline in jobs and in- try, the government needs to coordinate and comes, and therefore also in remittances, support institutions for skill upgrading and would translate directly into lower incomes technological advancement and eliminate for women and poor households. It is likely obstacles that affect business operation, that the social impacts of increasing job- such as unofficial payments and excessive lessness would be great as large numbers of red tape. In addition, the government needs young women were thrown into an employ- to ensure political stability, basic infrastruc- ment market that has few opportunities for ture (transport, telecommunications, health, them. Because these young women do not schooling, power, water, security and cus- possess skills for alternative employment toms) to make business operations easier and can not easily go back to their villages, and more effective. The government should some NGOs working with garment em- also provide high tech public goods, as ex- ployees fear that large number of women plained earlier, such as training, higher and would be pushed into unsuitable or exploita- technical education, R&D labs and an in- tive employment (Oxfam, 2002). tellectual property rights framework to strengthen and stimulate upgrading in To sustain long-term growth of the indus- firms.

6. Conclusion

The garment industry has grown remark- ductivity, and to raise firms’ technology level. ably in a short period of time. It has become the main force for national economic The quota bonus that was provided by the development by creating 245,000 jobs and United States due to the strong compliance generating the majority of Cambodia’s for- of the industry with labour standards was eign currency earnings. It has been an im- not a tool for long-term sustainability of the portant tool for poverty alleviation. industry because of the end of the quota system. Cambodia has no major unique cost The end of the MFA has put Cambodia’s position, and although labour compliance is garment industry in a difficult situation by a positive feature, the industry will continue increasing competition in the international to depend on preferential market access for market and removing the quota advantage. the foreseeable future. In such a situation, The sustainability of the garment industry institutional and systemic developments are after the end of the MFA depends largely on important for their impact on firm-level tech- the response of the government to corrup- nology. As well, the garment firms will have tion and bureaucracy, and on investment in to change from cost-based competition to education, training and high tech public product-based competition to ensure com- goods to upgrade workers’ skills and pro- petitiveness in the international market.

References

Bargawi, Omar. 2005. Cambodia’s Garment industry—Origins and Prospects. London: Over- seas Development Institute. Economic Institute of Cambodia. 2004. The Cambodian garment industry 2005 and beyond: A quantitative analysis of the critical challenges. Phnom Penh: Economic Insti- tute of Cambodia. 132 Sustaining Development through Garment Exports: The Case of Cambodia

Foreign Investment Advisory Service. 2005. ‘Labor standard monitoring, garment sector: Current status, desired end state, and recommendations’. Washington, DC: FIAS. Foreign Investment Advisory Service. 2004. ‘Cambodian garment sector: Buyers survey results’. Washington, DC: FIAS. Hing Thoraxy. 2003. Cambodia’s Investment Potential. Phnom Penh: Japan International Cooperation Agency. ILO, 2004. Better Factories Cambodia, at: http://www.betterfactories.org/content/documents/Facts%20and%20Figures.pdf. Ministry of Commerce and ADB. 2004. Cambodia’s Garment Industry: Meeting the Chal- lenges of the Post Quota Environment. Phnom Penh: Ministry of Commerce. Oxfam, Womyn’s Agenda for Change. 2002. A Social Study of Women Workers in the Cam- bodian Garment Industry. Phnom Penh: WAC. Rajah Rasiah. 2006. Sustaining Development through Garment Exports: Cambodia and Least Developed Economies. United Nation Conference on Trade and Development (forth- coming). Royal Government of Cambodia. 2006. National Strategic Development Plan 2006-2010: For growth, employment, equity, and efficiency to reach Cambodian development goals. Phnom Penh: Council of Ministers. Royal Government of Cambodia. 2002. National poverty reduction strategy 2003-2005. Phnom Penh: Council for Social Development. Spande, Jennifer. 2006. ‘Garment Sector in the End of the Multi-Fiber Agreement’. Phnom Penh: US embassy. Spinanger, D. and S. Verma. 2003. ‘The coming death of the ATC and China’s WTO accession: will push come to shove for Indian T&C exports?’, in Alan Winters and Pradeep S. Mehta (eds.) 2003. Bridging the Differences—Analysis of Five Issues of the WTO Agenda. Jaipur: Consumer Unity and Trust Society. Royal Government of Cambodia. 1996. Socio-Economic Development Plan 1996-2000. Phnom Penh: Council of Ministers. USAID. 2005. Measuring Competitiveness and Labor Productivity in Cambodia’s Garment Industry. Phnom Penh: USAID. World Bank. 2004. Cambodia Seizing the Global Opportunity: Investment Climate Assess- ment and Reform Strategy for Cambodia. World Bank. World Bank. 2005. Cambodia Corporate Social Responsibility in the Apparel Sector and Po- tential Implications for other Industrial Sectors. Phnom Penh: Foreign Investment Advisory Service.

133 The Role of the Textile and Garment Industry in Vietnam’s Economy

The Role of the Textile and Garment Industry in Vietnam’s Economy

Le Van Dao* Vietnam’s textile and garment industry now market, accounting for 55 per cent of total employs more than 1 million workers (more garment exports. However, following sharp than 20 per cent of the total industrial increases in exports in 2002 and 2003 as a workforce). It produces 12 per cent of the result of the Vietnam-US bilateral trade value of the processing industry and about agreement signed in October 2001, the 17 per cent of the country’s exports, com- growth rate decreased to 25.4 per cent in ing right after the petroleum industry. 2004 and 6.7 per cent in 2005 because the US imposed quotas on Vietnam while re- In the past 10 years, the industry has removing them for other countries. corded remarkable growth. In 2005, the industry’s production capacity was dou- Vietnam’s garment exports performed bled and export value up 244 per cent com- well in the EU market in 2005. The high pared to 2001. Vietnam’s textile and gar- export growth rate in 2004 was due to ment products are considered good and con- the admission of 10 new EU members sistent in quality, reasonable in price and in May 2004. In the first quarter of 2005, reliable in delivery time. the growth rate was sharply decreased by the impact of quota removal for all The textile and garment sector is the sec- WTO member countries. Nevertheless, ond largest export earner for the country, the rate increased at the end of 2005, after oil and gas, with nearly US$4.4 bil- thanks to the WTO status that EU gave lion in exports in 2004 and US$4.83 bil- Vietnam from 1 January 2005 and the lion in 2005, an increase of 9.5 per cent. safeguards imposed on China. In the first The three biggest importers from Vietnam quarter of 2006, exports increased 75.7 are the US, EU and Japan, which account per cent compared to first quarter 2005. for 55, 20 and 13 per cent respectively of the total garment export value. Vietnam’s Garment exports to the Japanese market export performance for the last six years in have grown impressively in 2004 and 2005 these markets is presented in Table 1. as a result of stronger Japanese demand, the general foreign trade growth between Table 1 shows that Vietnam’s garment ex- Japan and Vietnam and Vietnamese gar- ports are highly concentrated on the US ment manufacturers’ better understandings

T(T)50-0002,stropxEtnemraGs'manteiV.1elbaT 50-0002,stropxEtnemraGs'manteiV.1elba (50-0002,stropxEtnemraGs'manteiV.1elbaT (50-0002,stropxEtnemraGs'manteiV.1elba %htworg,noillim$SU MtM0ekraM ekra tekraM tekra 2021002 00 0002 000 2122002 00 1002 100 2223002 00 2002 200 2324002 00 3002 300 2425002 00 4002 400 25002 00 5002 500

U0S 5541935 1479, 2074, 46,2

E9U 690 509 507 538 756 78

J0napa 682 518 542 511 553 06

O4sreht 641 70.03 771 588 601 86

A2stropxell 1298, 1269, 2457, 3656, 4083, ,4 08

* General Secretary, Vietnam Textile and Apparel Association (Vitas). 135 Dialogue + Cooperation 2/2006

of the Japanese market. Vietnam’s proxim- ucts are the two most important competi- ity to Japan and the high quality of its prod- tive advantages of the country. Concentration in the Industry

According to 2004 figures by the Vietnam ese firms for various products include: Textile and Apparel Association, 1951 tex- ■ Materials processing: Seven cotton- tile and garment firms were operating in processing companies have a capacity Vietnam, categorised into three groups: of 60,000 tons of cotton balls, equiva- state ownership 307 firms ( 15.7 per cent), lent to 20,000 tons of cotton fibre per private ownership1172 firms ( 60.0 per year. Two polyester factories capable of cent), FDI 472 firms (24.3 per cent). producing 150,000 tons a year are under construction. About 100 spinning Under the plan, in the period to 2007, all firms, with a total of 2,200,000 spin- textile and garment factories are to be pri- dles and 15,000 rotors, have a capacity vatised or equitised. of 300,000 tons of staple fibre yarn per year (Ne 30 on average). By type of production, the sector can be ■ Weaving: Three hundred and five firms divided into five groups: materials and and thousands of household manufactur- spinning, 96 firms; textiles and finishing, ing facilities have more than 16,750 fab- 388 ; garments, 1446 ; accessories and oth- ric and towel manufacturing machines. ers, 35 ; trading and service, 265 . Production capacity is about 680 million square metres of fabric (warp 60) Most of the companies are located in and and 38,000 tons of towelling a year. around Ho Chi Minh City: in the city 1090 ■ Knitting: Eighty-six firms and thousands firms (56 per cent of the total) and in the of household facilities produce about surrounding provinces 293 firms (15 per 300,000 tons per year. cent). In Hanoi and the nearby provinces ■ Non-woven fabrics: Five firms produce are located 363 firms ( 18.5 per cent) and cotton padding and two companies pro- in other provinces 205 firms (10.5 per cent). ducing geotextile fabrics with an annual capacity of 5,000 tons. A study covering 434 textile and garment ■ Garments: Some 1471 garment firms firms found that 75 per cent were small with 771,450 sewing machines and and medium firms—with capital of less more than 1 million workers have a than US$350,000 and employing fewer than capacity of 2.15 billion shirts or equiva- 500 workers. The capacities of Vietnam- lent standardised items.

Problems Faced by Garment Firms

In comparison with competitors in the re- tricity, internet, telephones and trans- gion, Vietnam’s textile and garment indus- portation) and imported inputs. This try enjoys some advantages. However, it makes Vietnam less competitive than also suffers from many disadvantages. China, India and Pakistan in low-end Some of the most common are: garments. ■ High production cost: In spite of low ■ Long lead times: Long distances between wages, Vietnam’s production cost is Vietnam and its main markets such as relatively high compared to China, In- the US and EU, importation of inputs dia and Pakistan due to low labour pro- and complicated customs procedures are ductivity, high infrastructure costs (elec- the main reasons for long lead times. As 136 The Role of the Textile and Garment Industry in Vietnam’s Economy

international buyers have increasingly sign skills were not paid due attention. required garment suppliers to deliver in ■ Inadequate supporting industries: Do- less time, this problem has affected the mestic textile and accessories industries competitiveness of the country. do not meet the requirements of gar- ■ Lack of capacity to provide full-pack- ment manufacturers in terms of quan- age services: Since the Agreement on tity and quality. Vietnam’s garment sec- Textiles and Clothing ended on 1 Janu- tor imports 75-80 per cent of its mate- ary 2005, international buyers have in- rials, thus increasing production costs, creasingly preferred to eliminate buy- lead times and risks. Design and training agents and source garments directly ing are also under-developed. from manufacturers that can provide full-package services. Very few of Viet- The textile and garment industry is threat- nam’s garment enterprises have this abil- ened by the ever fiercer competition from ity because they lack the design, mate- powerful exporters such as China, India and rial sourcing and logistics arrangements. Pakistan. Furthermore, the zero tariff poli- ■ Inadequate human resources develop- cies for tsunami-affected countries includ- ment:ment:ment: Vietnam’s garment sector has a ing Sri Lanka, Thailand and Indonesia have shortage of highly skilled workers such increased competitive pressures on Viet- as technicians, marketing staff, middle nam. However, the quotas on Chinese gar- managers and designers. For a long ment exports to the US and EU remain time, most of Vietnam’s garment manu- until the end of 2008, creating opportuni- facturers have focused on CMT; there- ties for countries including Vietnam to fore, marketing, management and de- improve their competitiveness.

Drivers of Garment Manufacturing in Vietnam

Vietnam has been progressively integrated iff under the ASEAN Free Trade Area. On into the international economy and has been 21 December 2001, a bilateral trade agree- a member of the Association of South East ment between Vietnam and the US came Asian Nations (ASEAN ) since 1995 and of into effect. Since then, the industry has sig- Asia Pacific Economic Cooperation since nificantly boosted its exports to the US, from 1998; it is now actively concluding the steps US$47 million in 2001 nearly US$2,640 to join the WTO, hopefully by the end of million in 2005. With the expected WTO 2006. At present, Vietnam has to reduce membership and thus the removal of quotas tariff on a number of lines in accordance to the US market, the textile and garment with the common effective preferential tar- industry of Vietnam can develop further.

Mechanisms and Policies Affecting the Industry

The end of the Agreement on Textiles and the EU for Vietnam from 1 January 2005 Clothing, reming quotas for all producers opens a new opportunity for Vietnam’s gar- except Vietnam and some other non-WTO ment sector to significantly increase export countries, creates an even fiercer compe- value. As well, EU and US quotas imposed tition, giving many advantages to big ex- on garment imports from China in early porters. This puts the Vietnamese garment 2005 are an opportunity for other countries, industry into a very difficult situation be- including Vietnam, to increase their exports. cause of quota imposed by the US. It is likely that its strong determination and However, the removal of garment quotas to active negotiating efforts will result in Vi- 137 Dialogue + Cooperation 2/2006

etnam becoming a WTO member by the of the ASEAN Free Trade Agreement gives end of 2006. That accession means the re- Vietnam a number of opportunities: (i) moval of all quotas that are currently im- Indonesia and Thailand can become sources posed on Vietnamese garment exports to for fabrics; (ii) there is a possibility of es- the US. This will help Vietnam to gain a tablishing factories in other ASEAN coun- bigger share of the US market, because the tries; (iii) ASEAN, as a trade bloc, could quota has been one of the biggest barriers negotiate with Japan, EU and the US to to increasing exports to this market. give ASEAN favoured tariffs on garments and/or to accept cumulative rules of origin ASEAN (AFTA): The duty-free arrangement for garments and textile products.

Other Driving Forces

As a great employment generator and an sector. Vietnam has been making progress important foreign currency earner largely in improving its business environment, contributing to social stability and to the harmonising and standardising its legal sys- state budget, the industry has received im- tem and policy mechanisms to meet inter- portant support from the government, no- national requirements, especially those re- tably the development strategy and a lating to investment, trade and tariffs. For number of investment promotion initiatives example, investment licence procedures and export promotion activities that serve have been simplified to shorten the appli- as a guideline and backbone for the har- cation time for investors. The transporta- monised development of the industry. tion system, electricity, water supply and telecommunications have been improved, Low labour costs are one of the most im- especially in Hanoi and Ho Chi Minh City. portant advantages of Vietnam’s garment The service industry is booming. sector and have been decisive in enabling Vietnam’s garment exports to increase Vietnam’s domestic market, with more than quickly in recent years. Vietnam’s wage rate 85 million inhabitants, represents a high in the garment sector is one of the lowest consumption demand. In 2004, the local in the world, approximately two-thirds that sale of garments in Vietnam was estimated of India and about half of China’s. at US$1.15 billion, and it is expected to increase to US$2.8 billion by 2010 and Vietnamese workers are considered skilful US$4.7 billion by 2015. This domestic at sewing and able to learn new skills quickly. market can also make a great contribution This has enabled garment manufacturers to to the development of Vietnam’s garment recruit and train workers in a short period firms. of time and at low cost. Moreover, skilful and quick-learning workers have earned Vi- The above favourable circumstances are a etnam’s garment sector an image as a good driving force for the future development of and reliable quality garment supplier. Vietnam’s textile and garment industry. Al- though there remain a number of weak- Stable economic and political conditions nesses as analysed in the preceding section, and an improved legal and business envi- the industry is working hard to overcome ronment in recent years have given Viet- them and improve its overall competitive- nam a positive image in the world. This ness. This can be clearly seen in the efforts plays an important role in the decisions of to set up Textile and Garment Material and foreign investors in the textile and garment Accessories Centres in Hanoi and Ho Chi 138 The Role of the Textile and Garment Industry in Vietnam’s Economy

Minh City to increase the supplies of local that have never violated customs law) have materials to garment manufacturers, thus been implemented, and selective customs lowering production costs and decreasing checking is expected to come into effect lead times. Customs initiatives such as e- with a new customs law in early 2006. This customs clearance and the priority customs will shorten the time required for both clearance card (giving priority to enterprises importing materials and exporting garments. Labour Markets

According to 2004 statistics, the textile and invested firms in Vietnam. Productivity garment industry of Vietnam employs about in the garment sector is much better. How- 1.1 million workers on industrial scale as- ever, although there is no big difference sembly lines and about 1 million in house- in productivity among garment compa- hold factories and workshops, excluding nies, the sector’s productivity is still lower those working in cotton and mulberry fields. than that in China and Malaysia. Account- ing for the largest proportion in CMT The sex breakdown of this workforce is 68.2 garment production costs (60–65 per per cent female and 31.8 per cent male in cent), sewing labour costs in Vietnam are textiles and 78.9 per cent female and 21.1 rather low, and this is a big advantage. per cent male in garments. Training and age statistics are provided in tables 2 and 3. Recently, there have arisen a number of problems in worker-employer relations, In the spinning sector, due to differences especially in foreign-invested companies, in machinery, technological level and man- due to a lack of communication and inter- agement between firms, there is a big dif- pretation of Vietnamese labour laws and ference in productivity. On average, one improper welfare conditions. At present, worker in Vietnam manage 90 spindles, the goverment, labour unions and the In- just 80 per cent of a the task of a worker ternational Labour Organization are carry- in China or India. In the weaving sector, ing out joint programmes to improve the the same problem exists. The productiv- situation. As for social accountability, about ity of Vietnamese-owned weaving facto- 70 per cent of garment and textile firms ries is just 50 per cent of that in foreign- are examined and certified by credible institutions to meet standard safety require- T)%(gniniarTrekroW.2elbaT )%(gniniarTrekroW.2elbaT )%(gniniarTrekroW.2elba ments, sanitary standards and a good working environment. However, not many firms TeTtlitxeT litxe elitxeT elitxe GtnemraG nemra tnemraG tnemra have been certified with ISO 9000, 14000, SA 8000, Eco label, WRAP etc. /retsaM 0180. 0.0 etaudargtsop T)%(segA'srekroW.3elbaT )%(segA'srekroW.3elbaT )%(segA'srekroW.3elba &ytisrevinU 7040. 0.4 egelloc TeTtlitxeT litxe elitxeT elitxe GtnemraG nemra tnemraG tnemra

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G1srekrowlarene 610.6 4.28 05> 320. .1 139 Dialogue + Cooperation 2/2006

Future Vision and Strategic Planning

The vision is that in the next five years, nam to move from CMT to FOB. Very Vietnam will shift its garment export focus few of the country’s garment enterprises from CMT to FOB, and from low-end possess this skill adequately, and no train- markets to middle (and to some extent ing in it is available in Vietnam. Sourcing high-end) markets. The industry will be- specialists need to understand all kind of come more efficient in material sourcing, fabrics, including their characteristics, uses through both increased domestic textile and providers, and know how to negotiate. production and more efficient import Sourcing experts must also know how to sourcing methods, and will be more verti- build partnerships with material providers cally integrated, with upstreaming capac- to get the best prices and services. ity. Its competence and productivity will be increased through a better research, SSStrtrtrengthen design capacity... Design capac- training and development support infra- ity is another important precondition for a structure, especially in a seaport to enable garment manufacturer to move from CMT direct shipment to target markets. How- to FOB. The design capacities of Vietnam’s ever, the removal of quotas has brought garment enterprises are considered weak, tougher competition in garment exports, with only a few exceptions. The reasons especially from China and India. The Viet- could include: namese industry’s target for 2010 is dou- bling its exports to a value of US$9-10 bil- ■ The majority of Vietnamese garment lion and employing 3.5- 4 million workers. manufacturers have focused on CMT, which requires relatively little design To achieve that vision and target, a number capacity. Therefore, designers lack the of strategic moves should be implemented. motivation to improve and the abilities Attract FDI into the textile and garment required to track fashion trends. In gen- sectorsectorsector... The goverment (Ministry of Trade, eral, manufacturers’ designers are inca- Ministry of Industry), Vietnam Textile and pable of designing their own garment Apparel Association (Vitas) and Vietnam styles for export. Textile and Garment Corporation (Vinatex, ■ The domestic market is always the back- state-owned group ) should coordinate their ground against which a fashion indus- efforts. A number of FDI promotion meth- try develops. A high domestic demand ods can be employed, such as annual con- for fashion would lead to a developed ferences on FDI in the sector, cooperation fashion industry. Vietnam’s domestic programmes with other countries’ textile garment market does not demand so- and garment associations and promotion phisticated fashionable garment, while missions to investor countries. garment enterprises have long focussed on exports and neglected the domestic Shift production facilities and attract fdi market. to rural areas. Future textile and garment ■ The fact that CMT does not require high production facilities, both domestic and design capacity leads to weak coopera- foreign-invested, should be encouraged by tion between fashion institutes, fashion investment incentives to locate in rural ar- designers and garment enterprises. eas. Despite the weak designing capacity of Develop material sourcing skills. Material Vietnamese garment enterprises, several sourcing is the first requirement for Viet- independent designers have shown good 140 The Role of the Textile and Garment Industry in Vietnam’s Economy design skills. Their fashion shows have been Footwear Association and the Vietnam Tex- highly praised both in the country and tile and Garment Corporation have initi- abroad. ated two material sourcing centres in the form of joint stock companies in Ho Chi IIImprmprmprooovvve prpre oductivityoductivityoductivity... A shortage of quali- Minh City and Hanoi for the garment, tex- fied middle management, inappropriate tile, leather and footwear sectors. production and management processes and high labour turnover are the main reasons Establish a training centre.e.e. To supply quali- for the low labour productivity of Vietnam’s fied managers, merchandisers, designers garment sector. The same people working and technicians for the industry, it is es- for foreign-owned garment enterprises with sential to set up a training centre with co- similar sewing machines can achieve 20 per ordination and support from international cent higher productivity. Both production institutions. It is expected that services from and management should be restructured. this centre would improve the ability of However, in the long term, investment in Vietnam’s textile and garment industry to technology modernisation and IT should overcome its weaknesses, which are also be implemented to yield higher productiv- faced by industries in other countries. Vitas ity. hopes to receive cooperation and support from concerned governments and interna- Promote SME development. Approxi- tional organisations. mately 75 per cent of Vietnam’s textile and garment companies are small and medium SSStrtrtrengthen VVVitasitasitas’ capacities.capacities.’ As a repre- enterprises. Despite their disadvantages of sentative of the manufacturers in the in- scale, these SMEs have great potential to dustry, Vitas plays an important role in develop thanks to their flexibility in man- advocating and implementing policy and agement, structure and production. They collecting and providing information for can potentially be players in niche markets. enterprises. Its capacities to provide serv- For example, SMEs can be effective in ices to its members must be strengthened. manufacturing accessories for garment pro- This can be done in part through coopera- duction like trims, zippers and buttons, or tion programmes with other countries’ as- can be exporters of silk and embroidery. sociations: exchange of staff training, fo- rums, technical training etc. Establish material sourcing centres. Mate- rial sourcing centres are urgently needed Improve customs clearance and port ca- by Vietnam’s garment manufacturers since pacitypacitypacity... With increasing demand from cus- sourcing materials locally enables enter- tomers for shorter delivery time, Vietnam’s prises to reduce production costs (fewer complicated customs procedures should be costs of shipment of materials and customs simplified to clear goods faster. Port infra- procedures), shorten lead times (negotia- structure should also be improved to in- tion, quality certification, shipment, cus- crease speed. toms) and reduce risks associated with shipment delays. Establish an information centre. One of the most effective ways to increase the sector’s Establishing such centres would need joint exports is to enable each enterprise to make efforts from both private and state sectors. its own decision to improve its perform- The state sector would play a supporting ance. To do this, enterprises need sufficient role and the private sector initiate and man- information on market trends, tastes, image the centres. So far, the Vietnam Textile port and export situations etc. to make wise and Apparel Association, the Leather and decisions. However, it is difficult as well as 141 Dialogue + Cooperation 2/2006

inefficient and ineffective for each enter- Improve trade fair participation and pro- prise to collect and analyse information mote direct client contact and public re- separately. A system to collect, analyse and lations. Participation in fashion trade fairs disseminate information for the whole sec- is a traditional marketing tool for ap- tor is the best solution. Such a system, in proaching international buyers. It should the form of an information centre, is also be done selectively and can be combined needed to help policy makers to devise with other activities like visiting buyers’ timely and suitable policies. Vietnam’s tex- stores and meeting with buyers to track tile and garment sector has not established fashion trends and buyer preferences and such a system, and it is recommended to to build relationships. Vitas should sum- establish one soon. The information cen- marise and disseminate the results and tre should have the following functions: experiences from the fashion trade fairs in which Vitas and Vietnamese garment ■ collect and analyse information on the enterprises have participated. From these export situation of Vietnam every reports, garment enterprises would be able month, including total export value, to learn which trade fairs are suitable for export value in each market and com- them and how best to prepare for the fairs position of exports (CMT and FOB); they want to participate in. ■ determine characteristics, growth rates, buyer preferences and potential oppor- Other trade promotion approaches should tunities for exports in each market; be explored, such as establishing trade agen- ■ describe fashion trends in each season, cies, organising shows and sending trade including colours, styles and materials; missions to target markets. ■ report on government policies related to garments and textile, including in- Promote and strengthen cooperation vestment incentives, export incentives with ASEAN countries. Vietnam’s textile and quota allocations; and garment sector should promote co- ■ be a contact point for international buy- operation in supplying fabrics and acces- ers who want to source garments from sories to Vietnam, in manufacturing un- Vietnam. der outwards processing arrangements, by investing in Vietnam for local supply and Promote e-commerce. E-commerce is a by delivering technical expert service to powerful tool to bring together sellers and counter the weaknesses of Vietnam’s tex- buyers separated by geographic distance. tile and garment industry and by fully These are several trade portals through making use of relevant strengths of the which Vietnamese garment enterprises can textile and garment industries in ASEAN get access and participate in trading. These countries. portals are normally crowded with sellers, especially from China and India, leading SSSpeed up accession to the WWWTTTO.O.O. Vietnam’s to quite low offer prices. Vietnam’s garment accession to WTO will solve the quota enterprises are recommended to join in problem for garment exports to the US, these portals because they could not only which is the industry’s biggest export mar- get orders but also become accustomed to ket, and provide access to the international e-commerce, which is increasingly impor- market without discrimination. tant in the world’s trading.

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