garment industry

Garment industry

in South Asia

Rags or riches?

Competitiveness, productivity and job quality

in the post-MFA environment

Edited by

Gopal Joshi

South Asia Multidisciplinary Advisory Team (SAAT)

International Labour OrganizationNew Delhi

Copyright © International Labour Organization 2002

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Foreword

Garments exports from five South Asian countries (Bangladesh, India, Nepal, Pakistan andSri Lanka) have generated sizeable employment in the recent years. However, these countries arefaced with the prospects of declining employment as the quota arrangement under the MFA(Multi-Fibre Agreement) comes to an end by the year 2005. The smaller countries, which do nothave a diversified export portfolio, are expected to be particularly adversely affected in terms ofpotential loss of employment and income resulting from abolition of the quota system and increasedcompetition from other low-cost countries. The ILO is naturally concerned with the potential lossof employment and deterioration of job quality in the developing countries in South Asia.

Nepal has already experienced a downturn in its employment in the garment industry fromthe peak of approximately 100,000 workers to approximately 30,000 workers due to variousreasons, including increased competition. Bangladesh, which is considered to be performingrelatively well in garment exports among the South Asian countries and which employs 1.5million workers (90 percent female), is expected to be affected due to its large dependence on theUS and EU markets for its garment exports and also due to its general disadvantage in productivity.

As the competitive pressures from low-cost, high productivity countries increase, not onlyemployment but also job quality may get adversely affected; and the burden of such adverseconsequences may fall disproportionately on female workers. Therefore, it isessential to determine how such likely adverse consequences of abolition of quota couldbe minimized.

In this context, each country needs to assess its strengths and weaknesses and formulatea strategy to prepare the industry for the liberalized and globalized environment. In order toassist in this process, the ILO organized a sub-regional meeting from 25-26 September 2001 inKathmandu with the participation of the representatives from the Ministries of Industry, Labour,and Textiles; workers’ and employers’ organizations; and garment manufacturers’ associations.By organizing the sub-regional workshop, the ILO has sought to facilitate formulation of strategiesamong the participating countries before the quota arrangement under the MFA is abolished.

This publication, a compendium of the country papers presented during the sub-regionalworkshop and the proceedings of the meeting, was prepared and edited byMr. Gopal Joshi, Senior Enterprise Specialist, ILO New Delhi. I would also like to take thisopportunity to acknowledge the contribution of various resource persons in preparing the countrypapers and the rich inputs provided during the discussions by the representatives of thegovernments, employers’ and workers’ organizations and the garment industry.

Herman van der LaanDirector,

South Asia Multidisciplinary Advisory TeamApril 2002 ILO New Delhi

ContentsPage

1. Overview of competitiveness, productivity, andjob quality in South Asian garment industry – Gopal Joshi 1

1. Introduction 12. Illusory competitiveness 43. Productivity and job quality 94. Common strategy 11

2. Garment industry in Bangladesh – Nasreen Khundker 13

1. Introduction 132. Static vs. dynamic competitive advantages 193. Major issues and prospects in the garment industry 234. Strategies for improving competitiveness, productivity, and job quality 275. Summary 30

3. Garment industry in India – M. Vijayabaskar 39

1. Introduction 392. Characteristics of Indian garment sector 423. Features of world garment industry 484. Competitiveness of Indian garment exports 575. Labour and Indian garment exports: A case study of Tiruppur knitwear industry 626. Possible impact of removal of quota restrictions 69

4. Garment industry in Nepal – Dinesh Pant and Devendra Pradhan 83

1. Introduction 832. Globalization context of garment industry in Nepal 903. Employment and quality of jobs in garment industry in Nepal 1024. Strategies for improving competitiveness, productivity and

job quality in garment industry 115

5. Garment industry in Pakistan – Asir Manjur 137

1. Introduction 1372. Global market 1383. Apparel exports 1414. Unit price realization 1485. Apparel industry structure 1516. Quotas in textile trade 1597. Issues, concerns and suggested strategy thrust

for apparel sector development in Pakistan 167

6. Garment industry in Sri Lanka – Saman Kelegama and Roshen Epaarachchi 187

1. Introduction 1872. Major issues facing the industry 1933. How competitive is the Sri Lankan garment industry? 196

Contributing factors to low productivity 1995. Impact of globalization on garment industry 2106. Key strategies for improved productivity and competitiveness

in Sri Lanka’s garment industry 215

7. Sub-regional meeting on competitiveness, productivityand job quality in the garment industry in South Asia,Kathmandu, 25-26 September 2001 233

Proceedings and conclusions 2331. Inauguration 2332. Technical sessions 2343. Country presentations 2344. Panel discussions 2375. Conclusions 2396. Closing 242

List of tables

Page

1.1 Employment in the garment industry in South Asia 11.2 Quota exports of garments from South Asia 31.3 Labour costs in selected countries (in US $/hour) 41.4 Growth of intraregional garments trade, 1990-98 51.5 Share in world garment exports, 1998 61.6 Unit price realization of selected garment exports (in US $/piece) 81.7 Productivity and wages 9

2.1 Growth rate of RMG exports 162.2 Sectoral composition of female employment in Bangladesh, 1995-96 172.3 Participation indicators of female employment in Bangladesh, 1995-96 182.4 Inter-country comparative average hourly wage in the RMG industry 202.5 Gender discrepancy of participation and wage rates in export-oriented RMG 222.6 Cost structure and profit margin of RMG units 282.7 Trend in nominal and real wage in garments by skill category 30

3.1 Growth rate of exports of Indian apparel, 1980-2000 443.2 Machines installed by apparel export firms (nos.) 463.3 Employment within the textile and apparel industry in India 473.4 Sex-wise distribution of workforce in the organized Indian garment sector (1997/98) 483.5 World’s leading exporters of apparel, 1980-95 493.6 Cost structure of the apparel industry 513.7 Labour costs in apparel industry across regions (in US $/hour) 523.8 US imports from selected countries by MFA categories, 1996 (unit values) 583.9 Rank correlation coefficients of the RCA indices for pairs of countries (garments) 613.10 No. of workers employed in the knitwear industry in Tiruppur 633.11 Worker characteristics in finishing units, Tiruppur 643.12 Break-up of cost of production 66

4.1 Cost composition and profit margin 884.2 Import of raw materials and accessories for garment industries 934.3 Garment export as percentage of GDP 944.4 Share of South Asian countries in total garment import of U.S.A 944.5 US imports from SAARC region in 1999 954.6 Comparative cost structure and profit margin (in US dollar) 964.7 Manufacturing labour productivity indices of selected Asian countries 96

5.1 Comparative unit price realization of men’s wovenwear exports 1495.2 Comparative unit price realization of men’s knitwear exports 1495.3 Comparative unit price realization of women’s wovenwear exports 1505.4 Comparative unit price realization of women’s knitwear exports 1505.5 Comparative unit price realization of exports of T-shirts & pullovers 151

6 Number of stitching machines installed 1535.7 Extent of losses in the knitwear industry 1545.8 Competitiveness of apparel manufacturing in Pakistan 1555.9 Average monthly salaries based on skill levels in the apparel industry 1565.10 Apparel industry average hourly wages 1565.11 Pakistan’s quota utilizations in the USA 1615.12 Quota utilization in EU 162

6.1 Distribution of factories by size 1896.2 Geographical distribution of garment establishments

and numbers of employees, 1999 1906.3 Garment industry gender composition in labour force

by occupational categories, 1998 1916.4 Quota and non quota exports 1926.5 Percentage share of quota and non quota garment exports 1936.6 Growth in garment industry 1976.7 Hourly labour costs including social & fringe benefits (US $), 1996 1986.8 Selected characteristics of the wearing apparel sector in selected

South Asian countries, (annual data), 1993/4 1996.9 Garment industry labour turnover and absenteeism (percentage) 2026.10 Mode of training in garment industry (percentage), 1999 203

List of figures and exhibits

Page

Figures1.1 Rings of global sourcing 81.2 Scattergram of productivity and wages of selected countries 10

2.1 RMG exports from Bangladesh 142.2 BGMEA membership 152.3 Male and female workers in Bangladesh RMG industry (1990’s) 19

2.4 Productivity and wages in Bangladesh RMG industry 202.5 Productivity and wages in selected countries 21

4.1 Ready-made garment exports 854.2 Changes in Garment Export to U.S Market 86

4.3 Ratios of male female employment and local foreign labour 874.4 Garment export in national total exports 894.5 Interactive relationships between job quality, productivity and competitiveness 114

4.6 Cyclic linkages between productivity and competitiveness 119

5.1 Volume of world apparel imports 138

5.2 World imports of apparel – product split 1395.3 Trend of world imports of apparel 1395.4 Global imports from Asia 140

5.5 Apparel exports from South Asia 1415.6 Pakistan’s exports to world 1415.7 Split of Pakistan’s exports 1999 142

5.8 Share of knit and woven garments in Pakistan’s exports 1435.9 Trend in Pakistan’s apparel export 1445.10 Pakistan’s exports to EU 145

5.11 Split of exports to EU 1465.12 Pakistan’s exports to USA 1475.13 Split of exports to US 147

5.14 Split of textile products, 1999-2000 1525.15 Apparel market segments 1595.16 Composition of apparel trade with US 161

5.17 Global consumption of fibres 1685.18 US import of men’s knit garments from Mexico 169A5.1 US import of apparels 173

A5.2 Types of US imports 174A5.3 Split of Asian exports to US, 1999 175

Page

A5.4 EU imports of apparel 176

A5.5 Types of EU imports, 1999 177A5.6 Breakup of Asian exports to EU, 1999 177

6.1 Quantity of garment exports 1876.2 Value of garment exports (US $) 188

6.3 Sri Lanka garment exports to EU, 1999 1916.4 Total value of export of garments and value of imports

to the garment industry, 1990-1998 208

Exhibits3.1 Types of retailers and major global sourcing area 56

5.1 Buyers preference in apparel market segments 1595.2 Key features of textile quota policy in Pakistan – I 165

5.3 Key features of textile quota policy in Pakistan – II 165

6.1 Dependence of competitiveness on productivity and job quality 1996.2 Transport and hostel facilities available for garment workers 2016.3 Present garment industry training institutes and programs 2046.4 Possible impact of globalization on garment industry 210

Overview of competitiveness, productivity,and job quality inSouth Asian garment industry

Gopal Joshi*

1. Introduction

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

Table 1.1: Employment in the garment industry in South Asia

Countries No. of workers Percent Percent of female total exports

Bangladesh 1.5 million 90 76India 4.3 million 34* 13Nepal 40,000 15 38Pakistan 700,000** 10 60

Sri Lanka 277,000 87 52

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

Rapid expansion of the garment industry within the last two decades has certainlygiven a boost to job creation in the organized sector, which is otherwise less than ten percentin the South Asian countries. Such rapid job creation also has created apprehensions aboutthe possibility of similarly rapid loss of jobs once the quota system instituted under the MFA

1

* Senior Enterprise Specialist, ILO-SAAT, New Delhi.

12 GARMENT INDUSTRY IN SOUTH ASIA

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

Ø How sustainable are the jobs in the garment industry?

Ø How important is productivity in enhancing competitiveness of the industry?

Ø How does job quality in the garment industry affect its productivity andcompetitiveness?

The issue of sustainability of the jobs in the garment industry, which carry even greatersignificance considering the impending removal of quota system at the expiry of MFA(Multi Fibre Agreement) at the end of the year 2004, can be addressed only by examiningthe position and nature of the South Asian garment exports in the world trade, which is alsogreatly influenced by bilateral and multilateral arrangements.

1.1 Dependence on quota

Among several reasons, there are primarily two situations that have caused rapid expansionof garment industry in last two decades in the South Asia; such as, Bangladesh, Nepal and SriLanka, which have no resource endowment or historical tradition of garment exports. These twosituations are:

ü Relocation of manufacturing platforms in South Asia from other Asian countriesincluding larger neighbours within the region largely due to availability of quotasfor export to the US and EU markets.

ü Low wages and ease of entry and exit in these countries for operating garmentmanufacturing.

South Asian countries are preponderantly dependent on quota based exports, more soin regards to the smaller countries with no resource endowments (Table 1.2). The quotasystem was fashioned by industrialized countries under the MFA (Multi-Fibre Agreement)in 1974 as a temporary arrangement to protect their domestic garment industries from theonslaught of cheap imports from low wage countries.

As a result of the quota restrictions, the Asian countries, which had used up their quota,initially established manufacturing platforms in other Asian countries, which were not in aposition to fully utilize the available quota. Quota arrangements under MFA are due toterminate in a phased manner by the end of the year 2004. While it supposedly frees up themarket for exporting countries to export garments without quota restrictions, there is a greatdeal of apprehension that the jobs and incomes of a very large number of people in the

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garment industry would be in jeopardy when the exporting countries, particularly withresource endowment, textile and clothing tradition and efficient manufacturing base, jostlefor market share. Not only the number of jobs may come under threat but also the qualityof jobs may suffer as price competitiveness places pressure on wage costs.

Table 1.2: Quota exports of garments from South Asia

In percent

Countries Quota-basedexports

Bangladesh 95India 73Nepal 80Pakistan 90Sri Lanka 62

Sources: Implications of the phase out of MFA on exports of garments & textilesand the structural adjustments required, a study by KSA Technopak, India forMinistry of Textiles and FICCI and Country Papers prepared by Nasreen Khundkerfor Bangladesh, M. Vijayabaskar for India, Dinesh Pant and Devendra Pradhanfor Nepal, Asir Manjur for Pakistan, and Saman Kelegama and RoshenEpaarachchi for Sri Lanka for the Sub-regional Meeting on Productivity,Competitiveness and Job Quality in Garment Industry in South Asia, Kathmandu25-26 September 2001.

1.2 Job quality for productivity

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

q Can there be a strategy to prevent job losses through improvement in productivityand competitiveness?

q Should such strategy examine the possibility of gradually reducing the dependenceon quota allocations and seeking other avenues of exporting garments?

q How could improvement in job quality contribute to the enhancement inproductivity and competitiveness?

q What are other measures required in improving competitiveness?

OVERVIEW


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

2. Illusory competitivenessIt is natural that the South Asian exporters and governments remain complacent in the

belief that they are uniquely placed to export with the strength of low wages or that theyhave the various sourcing companies in the West locked into a business relationship or thatthey have natural resource endowment and clothing and textile tradition to weather thecompetitive pressures. The levels of wages in South Asia are certainly lower than in manyother garments exporting countries (Table 1.3). However, such low wages may not beenough for achieving competitive edge since wages occupy only one percent in the coststructure of the apparel industry.1

Table 1.3: Labour costs in selected countries (in US $/hour)

Countries 1991 1993

Bangladesh NA 0.16India 0.25 0.27Pakistan 0.24 0.27Sri Lanka 0.39 0.35

China 0.24 0.25Indonesia 0.18 0.28Thailand 0.59 0.71

Italy 13.5 NAUK 7.99 NAUS 6.77 NA

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

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

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

15

Asian countries are destinations of such third relocation, after the first and second waves ofrelocations in East and South East Asian countries. There is evidence of such shift insourcing taking place in other regions as well.

2.1 Growth of intraregional trade

There has been a growing trend in intraregional garments trade among the countries inNorth America, Europe and East Asia, which has begun to impact the exports from otherdeveloping countries regardless of the price advantage of the latter. Table 1.4 provides aglimpse of such growing trend in intraregional garment trade. Such growth has been largelymotivated by:

ü Proximity to the markets in developed countries, where the garments assembledfrom the material inputs from these countries can be exported.

ü Flexibility in production processes whereby the garment importing countries arenot entirely dependent on the exporting countries from design to marketing.

ü Political considerations of having stable economies with employment in theneighbouring countries.

ü Regional trading blocks; i.e., EU and NAFTA.

Table 1.4: Growth of intraregional garments trade, 1990-98

Regions Growth 1998 Trade volume(in percent) (US$ billion)

Intra-Western Europe 2 46.5Asia to W. Europe 4 18.6Asia to N. America 5 31.2Central & EEC to W. Europe 20 8.7Intra-Asia 11 19.6Mexico & Latin America to N. America 20 11.7

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

There have also been periodic changes in such intraregional trade depending on thelatest agreements reached among groups of countries on the basis of various considerations.Until recently, Caribbean countries enjoyed a surge of as much as 3.3 percent growth in1997-98 in such garment exports to the US market due to the CBERA (Caribbean BasinEconomic Recovery Act) launched by USA in 1983 and subsequently amended as CBTPA(Caribbean Basin Trade Partnership Act) in 2000.2 However, once NAFTA (North American

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

OVERVIEW


Free Trade Agreement) came in force, Mexico has been able to increase its garment exportsto the US by increasing its market share from 3.8 percent in 1992 to 12.6 percent in 1998.EU also has increasingly started assembly of the garments in central and east Europeancountries due to proximity and probably for the political reasons.

There have also been evidences of growth of intraregional trade within East and SoutheastAsia. How far the South Asian countries become a part of such intraregional trade woulddetermine their ability to bargain and compete in the garment industry. The complementarityof comparative advantages brought about by such intraregional trade may enhance thecompetitiveness of these countries.

2.2 Features of garments trade in South Asia

Although the growth of garment exports among South Asian countries has beenphenomenal in many respects, the share of their exports in the total world garments tradestill remains quite marginal (Table 1.5). The items being exported by these countries remainquite narrow and few, while other Asian countries have far more diversified and high-valueadded exports. On the other hand, China’s share of garment exports has risen to over 15percent by 1995 from 4 percent in 1980.3 It has climbed to be the top exporter from theeighth rank during the period with comparative advantage in as many as 32 categories ofexport items vis-à-vis such exporting countries as India and Indonesia.4

Table 1.5: Share in world garment exports, 1998In percentage

Countries US market EU market

Bangladesh 3.77 1.9India 3.14 3.3Nepal 0.4*Pakistan 1.8* 1.1Sri Lanka 2.56

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

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

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

4 M. Vijayabaskar, “Productivity, Competitiveness and Job Quality in Garments Industry in India,” a discussion paperprepared for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garments Industry in SouthAsia, Kathmandu 25-26 September 2001.

17

strengths and weaknesses in garment exports. Bangladesh had had the largest annual growth rateof almost 17 percent in garment exports during the nineties.5 This may be largely due to thelowest wage rate among all the countries in the region, in addition to other factors such astechnological upgradation and union free EPZ. Nepal has shed jobs in large numbers from around100,000 to below 40,000 while maintaining a growth in garment exports. It is beset with theproblems associated with a landlocked country and costs associated with it.6

All three countries, Bangladesh, Nepal and Sri Lanka have no natural resourceendowment while India and Pakistan are both amply endowed with cotton production. Yet,cotton tends to be the source of problem in both countries, whether in terms of contaminatedcotton in Pakistan or over-dependence on cotton (as much as 70%)7 as the input materialin India.

In India’s case, large percentage of cotton component in the apparel has held back anyprogress that could be made in moving up to the high-value added garments with inputs ofvarious fabrics. Furthermore, government cottage and small scale reservation policy has heldback the prospects of productivity improvement. Sri Lanka is the only country, which hasmarkedly moved up in the value chain. Pakistan, on the other hand, suffers from dependenceon very narrow items of quota based exports as a result of the government policy ofallocating quota only to existing exporters, thus depriving incentives to new entrepreneurs.

2.3 Export of commodities

There are several layers of global hierarchy in sourcing indicating the extent of thevalue garments are able to command on the basis of value addition and branding (Figure1.1). South Asian countries fall in the outer periphery beyond ring 3, where the garmentsare sold through mass merchandisers and discount chains. South Asian countries are carryingout more of a role of commodities exporters responsible for assembling low-cost discountclothing without much role as independent exporters of branded merchandise or even ascommercial subcontractors or component suppliers. As a result of the above weaknessesdescribed in Section 2.2 above, the exporters from South Asia are largely confined in buyerdriven commodity chains (BCC) rather than producer driven commodity chains (PCC).

As a result of the above confinement of exports at mass merchandising and discountchain outlets on a commodity basis, the region generally receives much less value in

5 Export Promotion Bureau, Government of Bangladesh as quoted in Nasreen Khundker, “Productivity, Competitivenessand Job Quality in Garments Industry in Bangladesh,” a discussion paper prepared for the Sub-regional Meeting onProductivity, Competitiveness and Job Quality in Garments Industry in South Asia, Kathmandu 25-26 September 2001.

6 Dinesh Pant and Devendra Pradhan, “Productivity, Competitiveness and Job Quality in Garments Industry in Nepal,”a discussion paper prepared for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in GarmentsIndustry in South Asia, Kathmandu 25-26 September 2001.

7 Handbook of Export Statistics, AEPC as quoted in M. Vijayabaskar, “Productivity, Competitiveness and Job Quality inGarments Industry in India,” a discussion paper prepared for the Sub-regional Meeting on Productivity, Competitivenessand Job Quality in Garments Industry in South Asia, Kathmandu 25-26 September 2001.

OVERVIEW


Figure 1.1: Rings of global sourcing

Source: G. Gereffi, “Capitalism, Development and global Commodity Chains,” in L. Sklair (ed.) as quoted in M. Vijayabaskar,“Productivity, Competitiveness and Job Quality in Garment Industry in India,” a discussion paper prepared for the Sub-regional Meeting on Productivity, Competitiveness and Job Quality in Garment Industry in South Asia, Kathmandu 25-26 September 2001.

terms of unit price of the garments exported (Table 1.6). Excepting for Sri Lanka, very fewgarment export items from South Asia fetch high value. Low wage rates have probably goneinto manufacturing low priced products. Bangladesh has the lowest wage rate, and it has noneof the export items securing high value. In many instances, low wages are also accompaniedby low quality and low productivity, as it would be seen later (Figure 1.2 in Section 3).

Table 1.6: Unit price realization of selected garment exports (in US $/piece)

SITC Product Bangladesh India Pakistan Sri Lanka China Thailanddescription

Men’s woven wear8414 Trousers 4.21 3.91 3.67 6.44 5.74 6.3584151 Cotton shirts 4.82 5.59 3.74 6.15 4.02 7.5184159 Shirts (other material) 4.17 6.16 2.89 5.72 5.28 4.85

Men’s knit wear84324 Trousers 3.17 2.80 3.21 3.90 2.04 3.2984371 Cotton shirts 2.97 4.53 4.06 7.44 5.49 7.4884379 Shirts (other material) 3.45 4.62 3.81 6.08 8.14 3.34

Women’s woven wear8425 Trousers, breeches 3.47 4.77 4.04 5.39 7.53 6.058426 Blouses, shirt-blouse 4.55 4.22 3.67 5.87 5.85 7.138427 Skirts 3.28 3.94 3.14 5.69 6.77 7.04

Women’s knit wear8425 Skirts 0.00 2.92 5.68 4.85 3.13 4.418426 Trousers, breeches 2.59 3.74 2.90 4.82 6.78 4.54

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

Ring 5: Discount chains and small retailers

Ring 1: Designers’ products

Ring 2: Top quality, high priced brands and labels

Ring 3: Specialty stores with brand name

Ring 4: Mass merchandising

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3. Productivity and job quality

The rising competitive pressures in the post-MFA environment may force South Asiancountries to examine their strategies in dealing with the competition. They may choose totake the ‘Low Road’ of price competitiveness based on low wages and low quality or the‘High Road’ of quality based competitiveness with emphasis on quality, branding and highervalue. Thus, the strategy of ‘Low Road’ of price competitiveness through reduction in labourcosts may take them on a downward spiral of further reducing not only wages and pricesbut also towards deterioration of overall job quality for the workers. As it is, there arenumerous instances of the workers in the garment industry, particularly female workers,having endured harsh working conditions and environment and exposure to workplace hazards.Long working hours, cramped working and living conditions away from home, absence ofbasic facilities (such as, adequate toilet facilities, meal breaks and crèche for childcare), andlack of workers’ rights have been often noted. These conditions can be expected to furtherworsen, as price competitiveness becomes primary concern of the manufacturer.

However, low wages and lower levels of benefit do not necessarily make a manufacturermore competitive in the long run. With low wages and adverse working environment, notonly productivity is expected to suffer but also retention of skilled workers becomes harder.Table 1.7 below illustrates the levels of productivity and wages among selected countries.It is essential to examine whether a different strategy of ‘high road’ should be taken wherebythe efforts are made to improve productivity and value addition and thus enhancecompetitiveness. Such strategy would lead to securing of high value in the export items thusleading to higher spiral of larger incomes and investments.

Table 1.7: Productivity and wagesin US$

Countries Wages Productivity Share of wages (%)

Bangladesh (1992) 340.9 890.1 38.3India (1994) 627.5 3,146.1 19.9Nepal — — —Pakistan (1991) 1,553.5 3,236.1 48.0

Sri Lanka (1993) 653.1 1876.1 34.8

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

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

OVERVIEW


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

If a garment manufacturer decides to adopt the strategy of improving productivitythrough high value addition and high quality, it can be pursued through a combination ofvarious measures:

Ø Investments in new technology and equipmentØ Upgradation of skills among the workersØ Improvement in production organization and processesØ Carrying out productivity campaigns and emphasis on quality improvementØ Improvement in Job QualityInvestments in new technology and upgradation of skills could certainly contribute to

improvement in productivity and competitiveness, as in the cases of Bangladesh and SriLanka. However, improvement in working environment, workers’ concerns (for instance,crèche for the children of working mothers), benefits and incentives, safety and security andother working conditions would provide motivation for the workers to utilize such skills andtechnology for enhancement in productivity. Improvement in production organization andprocess emphasizing on productivity campaigns and product quality can certainly orient theworkers towards the need for higher levels of productivity. Improvement in productionorganization and process is not, however, complete without improvement in workingenvironment. For instance, if a manufacturer strives for hygienic and dust-free environment

levels of wages. On the other hand, most low wage countries are clustered around the leftbottom of the graph.

Figure 1.2: Scattergram of productivity and wages of selected countries

w

Wages

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w

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0 5000 10000 15000 20000 25000 30000

45000

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21

through installation of sanitary and air-conditioning facilities, not only the product qualityis improved through cleaner handling of the garments but also the working environment forthe workers is improved. Similarly, reduction in excessive working hours, correct workposture, and less hazardous working environment, all contribute to better productivity.

‘High Road’ of high value addition, quality product requires the garments manufacturersplacing less reliance on exports of low-priced discount merchandise and increasing the shareof branded merchandise being produced through the use of latest technology and upgradationof the worker skills. Such strategy requires examining the human resource developmentpolicies of the manufacturers in treating the workers in two different groups - skilled mastercraftsmen and semi-skilled assembly workers. In most instances, female workers presentlypredominate in the latter group. Skill development among the workers in the semi-skilledcategory would determine the ability of the enterprises to enhancing the quality and valueof the product.

4. Common strategy

While there are numerous initiatives that can be undertaken by the individual countriesand enterprises in improving the competitiveness, the countries in South Asia would needto evolve a common strategy to deal with the onslaught of increased competition in thepost-MFA environment. There may be several areas requiring common strategy frombuilding complementarity among the countries to avoiding non-tariff barriers against thegarments exports.

As stated earlier, there is a growing trend of intraregional trade in Europe and NorthAmerica for benefiting from proximity and flexibility of the production platforms within theregions. South Asian countries could benefit from developing linkages to the intraregionaltrade, particularly in Asia. Their complementarity among themselves as well as with othercountries in Asia could enhance competitiveness. However, it would be essential thatproductivity, quality and value added in manufacturing of the garments would need to be intandem with such growth in complementary relationship. Then only, the South Asian countriescould become a part of the regional designing, branding and marketing. Such enhancementin productivity, quality and value added requires improvement in job quality and skillsupgradation.

Whether the countries in South Asia remain in the low skill, poor job quality and lowprice bracket or whether they would move up to high skill, better job quality and high valuebracket would have to be determined by themselves individually. But a common strategyamong these countries would need to be evolved through mutual discussions and agreementsin order to be a part of the regional complementarity in the garment trade. Hence, a commonstrategy for the region may be in:

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

OVERVIEW


countries. Global scale capacities as being developed elsewhere through informationflow and knowledge management on garments manufacturing and export couldalso benefit South Asian garment industries.

ü Avoiding non-tariff barriers against garment imports in developed countries byexchanging information on the compliance to these barriers relating to labourstandards, environment, human rights and democracy. Voluntary compliance tolabour standards, particularly in the areas of freedom of association, child labour,workers’ rights and health and safety, could be promoted through exchange ofbest practices.

ü For poverty alleviation through job creation, making a common case on the basisof the least developed status for access to the European and North Americanmarkets beyond the year 2004.

ü Lastly and most importantly, promoting local market within the sub-region for thegarments since the existence of such local market is an important cushion againstthe market fluctuations as well as for promoting the scale of operation requiredfor innovation and value addition.

23

Garment industry in Bangladesh*

Nasreen Khundker

1. Introduction

Bangladesh’s industrial base, which has remained stagnant over the past two decades,is very narrow, contributing to about 11.5 percent of the GDP (BBS, 2001). Within thisnarrow industrial sector, however, the ready-made garments (RMG) industry has flourishedas its most dynamic sector. Since its modest beginning in the early 1980s, the industry hascontributed to the economy appreciably in terms of employment, output, and foreign exchangeearnings. Moreover, employing as it does more than 1 million young women, the industry hasbrought about a noticeable change in society as well as in intra-household gender relations.

Apparently the two most important factors behind the success of the RMG industryin Bangladesh are:

l the availability of cheap labour; andl the GATT/WTO-controlled international textile and apparel trading system through

the operation of the Multi Fibre Arrangement (MFA).The phasing out of the MFA by the end of 2004, together with ever-increasing

globalization, will exert intense competitive pressure on Bangladesh’s RMG industry. As thefuture of the manufacturing sector and the overall economy crucially depends on theperformance of this industry, a matter of serious concern is how far, and in what manner,the RMG industry will face up to the challenge of the post-MFA trading scenario.

In this connection, there is growing apprehension as to whether the industry, in orderto remain competitive, will see both a reduction in the already very low wage levels and afurther deterioration of the already very poor working conditions.

This study aims to:l analyse the current status and future prospects of the RMG industry in Bangladesh

in terms of its growth, employment, and exports;l assess the likely impact of globalisation and liberalization (with special reference

to the phasing out of the MFA) on the RMG industry; andl investigate whether the reduction in wage rates and worsening of working

conditions in the RMG industry figure as strategies to continue to be competitivein the world apparel market.

2

* The paper was prepared under the UNDP Dhaka funded Globalization SPPD and is being published by the ILO as apart of the Globalization Report titled, Bangladesh: Economic and Social Challenges of Globalization, University PressLtd., Dhaka (2002).


The paper examines the static versus the potential dynamic competitive advantages ofBangladesh’s RMG sector, and the inter-linkages between job quality, productivity, andcompetitiveness in this industry.

1.1 Contribution of RMG to the economy

Globalization, especially the intensification of trade liberalization in the 1990s, has hada significant impact on the Bangladesh economy, opening up opportunities in the exportsector and subjecting the import-competing sectors to greater international competition.Overall, exports in the 1990s have increased by a factor of four, with imports also rising.The ratio of exports to GDP rose from around 5.5 percent in the early 1980s to around 13percent in 1997. GDP increased to nearly 5 percent on average over this period, leading toa modest rise in per capita income. Unfortunately, the growth in income has also beenaccompanied by a rise in income inequalities, the national Gini coefficient rising fromaround 0.36 in 1983/84 to around 0.43 in 1995/96. Absolute poverty, at around 47.5 percentof the population, has registered hardly any decline from 1988/89 to 1995/96, although thepercentage of the hardcore poor (those unable to meet 1,805 k. cal per person per day) hasdeclined a few percentage points, and still accounts for 25 percent of the population.1

Within the export sector, there has been a shift away from more traditional exports suchas tea and jute, to items such as RMG, fish and seafood, and leather. The change in revealedcomparative advantage (ratio of net trade flows to total trade) between 1990and 1995 is shown in Table A2.1 in Annex, while the heavy concentration of exports of RMGin total exports (around 76 percent in 1999/00) is shown in Figure 2.1 (Table A2.2 in Annex).

1 BBS, 2001.

Source: Export Promotion Bureau, Dhaka, September 1999 and Bangladesh GarmentManufacturers and Exporters Association

US

$ (in

mill

ions

)

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Figure 2.1: RMG exports from Bangladesh

8000

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083- 84- 85- 86- 87- 88- 89- 90- 91- 92- 93- 94- 95- 96- 97- 98- 99-84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00

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25

The current manufacturing growth experienced by Bangladesh is thus by and largedriven by the growth of the RMG industry. In 1992, knit and woven RMG accounted for7 percent of units, 11 percent of fixed assets, 21 percent of annual investment, 30 percentof the employment and wage bill, and 23.5 percent of gross value added and returns oncapital attributable to Bangladesh’s private manufacturing sector.2 A study of the country’smanufacturing sector’s performance in the 1980s found that the top 11 sub-sectors were, interms of growth in value-added, RMG, fertiliser, tea processing and blending, compressedliquefied gas, bidis, leather shoes, printing and publishing, bakery, fish and sea food, silkand synthetic textiles, dyeing and bleaching textiles, soft drinks, hand and edge tools, chinaand ceramic wares, and tanning and finishing.3 According to a more recent study, RMG andpharmaceuticals are the two sub-sectors which demonstrated the most robust growth inoutput between 1988/89 and 1995/96, and thus commanded the most significant weight inthe manufacturing structure.4

1.2 Growth of RMG units

Since its beginning more than two decades ago, the RMG industry has shown phenomenalgrowth, despite Bangladesh’s generally sluggish industrial base, turning the country from atraditionally jute-centred export economy to one primarily based on RMG exports. Between1983 and 1984/85 the number of garment manufacturing units increased from only 47 to487. In the 1990s, Bangladesh Garments Manufacturers and Exporters Association (BGMEA)membership experienced an annual average growth rate of 18 percentage points (see Figure2.2 below, Table A2.3 in Annex).5

2 Bhattacharya, 1996.3 Bakht, 1997.4 Bakht, op.cit.5 According to the BGMEA, the growth of the RMG industry can be sustained during the post-MFA years, given

appropriate adjustments.

Figure 2.2: BGMEA membership

90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99

3500

3000

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No.

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Source: Export Promotion Bureau, GOB.

BANGLADESH


1.3 RMG exports

The dynamic performance of the RMG industry has transformed Bangladesh from ajute exporting country into what is primarily a garment exporting economy. From about 4percent of Bangladesh’s total export earnings in 1983-84, within a time span of 15 years,the RMG industry currently accounts for about 76 percent of the country’s total exportearnings, making Bangladesh one of the 12 largest apparel exporters in the world. Morethan 95 percent of the output of the RMG units and about 90 percent of that of the knitwearunits cater to the foreign market.

The success of Bangladesh’s RMG exports is in part attributable to availability ofcheap labour; preferential treatment received from the European Union (EU) under the GSPscheme; and substantial quotas available in the USA (as against quota restrictions imposedon its principal competitors, e.g. China, India, Pakistan, Sri Lanka, and Thailand).

In the late 1970s and early 1980s, intermediate buyers began to shift sources of RMGproducts from neighbouring countries, due to the imposition of quotas, to countries likeBangladesh. Abundant cheap labour in Bangladesh ensured competitive prices, and thusacted as a primary incentive, while political turmoil in neighbouring countries (e.g. SriLanka) further induced this transfer process.

By relaxing the need for working capital and allowing duty-free access to inputs forthe RMG sector, conducive domestic economic policies such as the granting by the BangladeshBank of back-to-back letters of credit (L/C) and bonded warehouse facilities further acceleratedthe process of establishing new RMG units. Superimposed on this process has been theimpact of the North American quota system and the European Union’s preferential treatmentunder various schemes, e.g. the General System of Preferences (GSP). While in the USA andCanada, quotas imposed on apparel imports mean guaranteed access for developing countrieslike Bangladesh, the GSP provided by the EU lends crucial support in maintaining competitiveprices, and thus a competitive edge for Bangladesh’s RMG exports.

Consequently, RMG exports have boomed (see Table 2.1 below). Over the last decade(1987-1997) the compound growth rate of RMG exports was more than 25 percent. Between1992 and 1997, the annual compound growth rate of RMG exports experienced a robustgrowth of 19.4 percentage points, four times higher than GDP growth rates registered overthe same period.

Table 2.1: Growth rate of RMG exports

Last 10 years In the 1990s Last 5 yearsExports (FY 1987-FY 1997) (FY 1990-FY 1997) (FY 1992-FY 1997)

Woven-RMG 21.6% 19.5% 14.7%Knit-RMG 75.5% 45.0%

Total RMG 25.4% 24.4% 19.4%

Source: Bhattacharya and Rahman, 1999

27

Once the quota system comes to an end and trade is liberalized, however, Bangladeshis likely to face intensive competitive pressures. The most trend as shown in Figure 2.1above do show a slowing down of the growth rate of RMG exports.

1.4 Female employment in the manufacturing sector

Although female economic activity rates have been increasing compared to those oftheir male counterparts, they have remained at a very low level, reflecting the usual trendamong labour markets in developing countries. The female share in Bangladesh’s totallabour force is about 38 percent (around 19 million), of which only a little more than 7percent is involved in manufacturing activities, as shown in Table 2.2.6

Table 2.2: Sectoral composition of female employment in Bangladesh, 1995-96

Female employees as a % of total employment 38.10

Women’s share in non-agricultural labour force as a % of total female employment 22.60

Women’s share in manufacturing as a % of total female employment 7.04

Women’s share in services/commerce as a % of total female employment 14.90

Women’s share in agriculture as a % of total female employment 77.40

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

Due to extensive involvement in household and agricultural activities, the female labourforce participation rate (FLFPR) is lower in urban areas (26.1 percent) than in rural areas(40.6 percent). With regard to the age cohort in urban areas, female labour force participation(FLFP) is found to be highest in the 15 to 24 year age group (36.4 percent) compared to theoverall urban average of 26.1 percent, implying that the rate of female labour absorption inthe manufacturing sector is markedly higher among younger women (see Table 2.3).

Tables 2.2 and 2.3 present the most recent picture of women’s employment inBangladesh. Unfortunately, the various labour force surveys have frequently redefinedcategories, making it difficult to present trends in women’s employment. Nonetheless, surveydata suggest that FLFPRs in the overall national economy in general, and non-agriculturaland manufacturing activities in particular, have experienced some improvements.The improvement in urban areas is attributable to the growth of labour-intensive export-oriented manufacturing enterprises, especially in the RMG industry. In the rural areas,meanwhile, increasing female participation in economic activities is attributable to theexpansion of non-governmental organization (NGO), micro-credit schemes and other formsof organizational support.

One short-term impact of recent industrialization is thus the incremental absorption offemale labour in export-oriented manufacturing enterprises. Both wage and non-wage factors—low opportunity cost of female labour on the one hand, and docility and amenability to

6 LFS, 1995-96.

BANGLADESH


repetitive process functions on the other—account for entrepreneurs’ explicit preference, inexport-oriented enterprises, for employing young, mostly single women with some formaleducation.

Table 2.3: Participation indicators of female employment in Bangladesh, 1995-96

Age group years

Indicators 15+ 15-19 15-29 20-24 25-29

Female labour force participation rate 37.77 37.50 43.28 48.39 44.00Rural 40.63 37.74 45.45 50.98 47.54Urban 26.09 36.36 33.33 36.36 28.57

Female economic activity rate 55.65 47.59 55.73 59.14 60.04Rural 63.60 54.61 64.03 67.27 69.26

Urban 30.44 28.99 30.80 33.14 30.56

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

By increasing their bargaining power at the household level, such increased femaleparticipation in the labour market is empowering women. It is also contributing to povertyalleviation by generating extra earnings for poor households. At the same time, however, thenature of this employment is making women vulnerable to fluctuating global demand. The“footloose” nature of export-oriented manufacturing enterprises thus affords less job securityfor women.

Women’s employment in the manufacturing sector, moreover, is confined to only afew industries. According to the most recent Census of Manufacturing Industries7 , about200,000 women (15.3 percent of the total manufacturing employment) were employed in themanufacturing sector. Of these, 85 percent (about 12.9 percent of total manufacturingemployment) were employed by the weaving apparel sector (BISC 323); followed by textilesmanufacturing, including cotton synthetic and jute textiles (BSIC 321 and 323), accountingfor about 6 percent (i.e. about 1 percent of manufacturing employment); and food processing(BSIC 311 and 312), accounting for about 3.2 percent of female industrial employees. Thewoodwork, cigarette manufacturing, and pharmaceutical industries employ about 1.84 percent,1.47 percent, and 0.58 percent of female industrial employees respectively.

The RMG industry currently employs about 1.5 million people, 90 percent of whom arefemale. Between 1990/91 and 1997/98, the average annual growth rate of total employment was23 percentage points. The corresponding growth rates of female and male employment were25 and 10 percentage points respectively (Figure 2.3 below and Table A2.4 in Annex).Consequently, the share of female employment in total employment in the RMG sector hasincreased from 85 to 90 percentage points over the past seven years. In addition to this directemployment, 0.2 million people are also employed in other industries linked to the RMG sector.

7 CMI, 1991-92.

29

Employment of women in the RMG industry, furthermore, has led to significant rural-urban migration, as most women RMG workers are migrants from rural areas. This has alsoincreased women’s visibility in the public sphere, with important sociological implications.

Figure 2.3: Male and female workers in Bangladesh RMG industry (1990’s)

Male Female

1600000

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800000

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400000

200000

091-92 92-93 93-94 94-95 95-96 96-97 97-98

No.

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Years

Source: BGMEA

2. Static vs. dynamic competitive advantages

2.1 Wage levels in the RMG industry

The principal static comparative advantage that Bangladesh enjoys over potentialcompetitors is its cheap labour force. The wage level in the RMG industry is low both formales and females, compared with workers in a similar category in other sectors. Forinstance, a comparison on the basis of wage data provided by Bangladesh Bureau of Statistics8

shows that the average monthly wage of skilled RMG factory workers is 1.4 to 2 times lowerthan that of similar factory workers in the textile and other sectors. Real wage indices alsoshow the comparatively low wages in this sector (Table A2.5 in Annex). Moreover, femaleemployment in the industry is confined primarily to low-paid jobs such as helpers andoperatives.

On an international scale, the RMG wage level is one of the lowest in the world (Table2.4). Even by South Asian standards, it remains very low, with the average hourly wage inBangladesh being 42 percent, 50 percent, and 33 percent of those in India, Nepal, and SriLanka, respectively.

Low wages, however, do not necessarily imply a low per unit cost of production.Labour productivity, non-wage cost and the exchange rate are also equally significant factors.As labour productivity also remains relatively low, the per unit production cost of outputtends to be high in spite of low wages. It has been calculated that person-minutes requiredper basic product in Bangladesh’s RMG sector is 25.0, compared to 14.0 in the USA; 19.7

8 BBS, 1999.

BANGLADESH


in Hong Kong, China; 20.7 in the Republic of Korea; and 24.0 in Sri Lanka.9 Trends inlabour productivity from 1981-1992 using United Nations Industrial DevelopmentOrganization (UNIDO) data show only modest increases of around 14 percent in labourproductivity (Figure 2.4 below and Table A2.6 in Annex), along with a very modest 11.5percent increase in wages over this period. While the share of wages in value-added hasremained more or less same around 38 percent, share of value-added in output has declinedduring the period to about 25 percent from 35 percent. Labour productivity is also higherin knitting mills, compared to the apparel, spinning, weaving, and finishing industries,according to UNIDO data, while productivity growth in the spinning, weaving, and finishingmills appears to have declined in the early 1990s.

Table 2.4: Inter-country comparative average hourly wage in theRMG industry

Country Wage/hour (US$)

Germany 25.00USA 16.00Republic of Korea 5.00Mexico 2.40Poland 1.40Sri Lanka 0.45China 0.35India 0.35Nepal 0.30Bangladesh 0.15

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

Figure 2.4: Productivity and wages in Bangladesh RMG industry

Source: Islam, S., 2001.

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

w w w w w w ww

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01981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

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31

Table A2.7 in Annex shows a substantial productivity gap between Bangladesh andother countries (for the year 1992 with the latest data available). Nevertheless, the very factthat RMG exports from Bangladesh have shown sustained high rates of growth suggest thatthe country enjoys certain comparative advantages in the world apparel market.

Low labour productivity is compensated for by low wage rates; and it is arguable thatlow wages and low productivity together make Bangladesh competitive at the labour-intensive,low-value product end of the international apparel market. Thus, for products of similarquality, Bangladesh is generally cheaper than China or India by 5 to 20 percent.10

In order to assess the potential competitiveness of the RMG industry in the comingdecade, however, one needs to go beyond the static comparative advantage of cheap labourto look at potential dynamic comparative advantages related to labour productivity, linkageindustries, and the overall industrial base and business climate, as has been pointed out byseveral authors.11 In this connection, a detailed international comparison of cost structure isessential, although it is currently difficult due to the unavailability of data.

In fact, interviews with entrepreneurs indicated that considerable uncertainty prevailsregarding the competitive edge of Bangladesh’s potential competitors in the post-MFA era.Adequate information in this respect is likely to be a key factor in determining Bangladesh’sstrategy in maintaining competitiveness in the future.

2.2 Gender discrepancy in job type and wage rate

Within the RMG factories, gender discrepancy in wage levels for comparable jobs issmall, especially when accounting for factors such as age, education, and experience. In theproduction process, however, female workers are mainly concentrated in “less skilled”operations, and thus are low paid. In the RMG industry, most women work either as operators(where almost all workers are female) or as helpers (40-60 percent of the total work forcein this category are females). It is extremely rare to find women working as productionmanagers, supervisors, finishing and machine operators, or as “in-charges” who draw salariesvarying from 2-10 times that of the average operator, depending on the type of operationinvolved (Table 2.5 below).

Elsewhere,12 the author has thus argued that the female labour market in Bangladeshis largely segmented by jobs (tasks) and by type of industry, as is clear from the discussionin Section 3.1.4, above, and factors such as age, education, and marital status13 account forthe low average wages of female workers, since they are prone to “crowd in” to certainspecific jobs and occupations. Thus, discrimination in wage payments between male and

10 IFC, 1999.11 Siddiqui, 2000.12 Khundker, 1997.13 Also see Mazumdar, 1983, for a more general discussion on segmented labour markets in less developed countries.

BANGLADESH


female workers may be very limited, but discrimination in terms of education and trainingand various barriers to entry explain the low wages and low opportunity costs of femalelabour, a factor which needs to be addressed at the policy level.

Table 2.5: Gender discrepancy of participation and wage rates inexport-oriented RMG

Type of work Wage/pay per month Average female(taka) participation rate

Operators Plain and overlook 1 200-1 600 80-95% Flat lock 1 500-1 800 40-60%

Helper 500-700 40-60%

Supervisors 2 000-3 500 10-20%

Finishing in-charge 4 000-5 000 0-5%

Production manager 12 000-25 000 Extremely rare

Source: Bhattacharya and Rahman (1999).

2.3 Job quality

One feature of the RMG industry in Bangladesh has been its rapid but unplannedgrowth, responding to global opportunities, which has affected both the working environmentand job quality in this industry.

Besides low wages, women and also men are subject to long working hours beyond theeight-hour day. Few workers receive such advantages as formal contracts or appointmentletters, or maternity benefits; and there have been complaints about arrears in payments.Labour turnover is also high in this industry.

Working conditions, however, improve with the size of the factory and have alsoimproved over time, although fire hazard safety precautions are inadequate despite specialprogrammes executed by the ILO. This is mainly because factories are not functionallydesigned, and are mostly located in urban areas. Lack of unionization remains an issue,when discussing the slow progress in improvement of poor wages and working conditions.Both wages and working conditions are also said to be better in the export processing zones(EPZs), compared to the domestic tariff area (DTA), though in the former workers sufferfrom a ban on freedom of association. Some factories have initiated health schemes incollaboration with NGOs.

2.4 Impact of globalization on employment and job quality

The possible impact of globalization on employment and quality of jobs in the RMGindustry will depend on Bangladesh’s ability to withstand a more competitive global

33

environment. It is arguable that this competitiveness on the other hand will depend amongstother things on measures taken to improve productivity and job quality.

In the worst scenario, a failure to maintain competitiveness will lead to enterpriseclosures and increased sub-contracting from larger to smaller units. This will obviously leadto unemployment among mostly women workers, a possible reverse trend of rural-urbanmigration, and a reduction in the household earnings of workers. A greater degree ofsubcontracting may also adversely affect job quality, since working conditions and jobquality have been found to be inversely related to the size of RMG units.14

Deterioration in job quality is likely to have serious consequences. Entrepreneurs mustrecognize that labour is not simply a commodity; and that better working conditions aredesirable from the point of view of productivity and efficiency, as well as from that offairness and justice.

Workers’ rights include freedom of association, which is currently prohibited in the exportprocessing zones, while unionization is actively discouraged in the industry as a whole.15

Interestingly, the entrepreneurs interviewed as part of this study expressed divergentviews regarding job quality. Most were worried about the impact on costs, and some regardedlabour retrenchment and subcontracting as a way out. A few more enlightened entrepreneursbelieved attitudinal changes were needed, and that wider dissemination of information wouldhelp. Others thought that the imposition of a social clause should be delayed, givingentrepreneurs a chance to adjust to the phasing out of the MFA, as well as helping them torelocate factories outside Dhaka, where there could be more available space for canteens andother facilities, and where factories could be functionally designed to meet safety standards.

In any case, measures to increase productivity and competitiveness may involve somerationalization of the workforce and technology upgrading such as the introduction ofcomputer-aided design (CAD). It has been suggested that the latter will lead to a substitutionof male for female workers, given the higher educational and skill requirements of the newtechnologies, and the currently disadvantaged status of women in this respect. Sub-contractingmay again be more actively pursued as a cost-cutting strategy by larger and more successfulfirms. Other measures to improve productivity and competitiveness such as skill upgradingwill, on the other hand, improve job quality and earnings for workers.

3. Major issues and prospects in the garment industry

3.1 Need for market diversification

If Bangladesh were to remain competitive in the post MFA era, one inevitable strategywould be to take the necessary steps to increase labour productivity. In order to realize the

14 Mazumdar and Chowdhuri, 1991.15 Khan, 2001.

BANGLADESH


incremental gains from the expansion of the global apparel market, the country also needsto diversify its market, instead of putting all its eggs in one basket, i.e. continuing to exploitthe same niche market.

Though Bangladesh now exports garments to about 25 countries around the world, theUSA is the single largest importer of its RMG products, amounting to 43 percent of totalgarment exports. Bangladesh is the sixth-largest supplier of apparel in the US market (Rahmanand Rahman, 2001). Considering the European Union as a single market, the USA thenbecomes the second largest. Over the past few years, Bangladesh’s RMG exports to the EUhave expanded rapidly, with the EU currently importing about 52 percent of Bangladesh’stotal garment products. The inter-temporal evidence of the narrow market base of BangladeshRMG exports in the 1990s is provided by the concentration of exports to the US and EUmarket (almost 96 percent in 1998-99, see Table A2.8 in Annex).

While the export share to the USA has witnessed an annual average rate of decline of1.5 percentage points, however, the corresponding share to the EU has experienced anannual growth rate of 1.6 percentage points. Thus, the increment in the EU share has simplyreplaced the declining share in the USA market, which suggests that, instead of diversification,Bangladesh’s export market has remained concentrated over the past decade. The combinedmarket share of the USA and the EU has thus increased from 95.5 percent to 95.6 percentbetween 1991-92 and 1998-99.

Bangladesh so far has been unable to gain access to ASEAN or Indian markets, althoughit imports a huge quantity of fabrics and yarn from these countries. Similarly, although itimports about 95 percent of its total garment machinery from Japan, its market share ofapparel export to Japan is a mere 0.1 percent.16 Bangladesh’s inability to gain access to theselarge markets in turn suggests that the country has yet to establish its claims, as advocatedby the WTO, to the principles of reciprocity and market access.

The North American quota system and GSP facilities afforded by the EU havecontributed to the undiversified RMG export market in Bangladesh, in that entrepreneurshave focused on taking advantage of these special opportunities. Thus, the entire nationalclothing export business will be endangered by the year 2005, when the MFA is eliminatedand GSP schemes may cease to operate.

The country must thus make immediate and vigorous attempts to diversify itsexport markets.

3.2 Need for product diversification

As already mentioned, due to its low labour productivity Bangladesh is competitive,with low value and thus low-priced items, at the lower end of the RMG market. RMGproduction is concentrated in a relatively limited range of products such as shirts, T-shirts,

16 Rahman and Rahman, 2001.

35

trousers, and shorts. To be internationally competitive, Bangladesh needs to expand itsproduct range and should begin producing fashion-wear and higher value-added items. Productdiversification is essential to meet the challenges of the post-MFA world. Evidence suggeststhat Bangladeshi entrepreneurs are already shifting to higher-value knitwear products.

One way of understanding how entrepreneurs have responded to market opportunitiesand have diversified their products, as well as built up skills and capacity, is to look atchanges in revealed comparative advantage over time. The revealed comparative advantage(RCA) (Table A2.9 in Annex) has increased for trousers, outer garments, knittedundergarments, jerseys and headgear. The table also shows, however, that there is scope fordiversifying into a range of other products.

Policy-makers must recognize that sufficient capacity building is required for suchdiversification, which involves improving skills such as fashion design and cutting as wellas upgrading technology. Entrepreneurs can also benefit from a data bank which givescomparative RCAs for close competitors, enabling them to better understand market trendsand potential.

3.3 Establishing backward linkages

A fundamental constraint on the potential of the RMG industry is the general absenceof backward linkages. In their absence, despite abundant cheap labour, the country’s localvalue addition has so far been only 25-30 percent of gross exports.

The RMG industry is currently heavily dependent on imported raw materials.Roughly 80 percent of the woven fabrics and 50 percent of the knitted fabrics areimported17, despite some improvements in this regard since the mid-1990s, in terms ofinvestments in backward linkage industries, especially with the announcement of the TextilePolicy, 1995, and the granting of various incentives by the Government. With the phasingout of the MFA, Bangladesh may face a supply shortage of required fabrics, some stakeholdersargue, since the current suppliers will find it more profitable to use their domesticallyproduced fabrics to produce their own RMG products, which they will be able to exportcompetitively in the quota-free world apparel market. Recent trends and relaxation of theGSP to allow for cumulation within the SAARC region, however, suggest that the availabilityof fabrics may not be such a severe constraint.

Nonetheless, Bangladesh’s excessive dependence on imported raw materials hasadversely affected its competitiveness by increasing the lead time and cost of production.This is something which has to be overcome in what promises to be a highly competitivepost-MFA phase.

The lead-time from the order date to the shipment date in Bangladesh is between 120and 150 days, compared to 19-45 days in India and Sri Lanka. For some countries, the lead-

BANGLADESH

17 Rahman and Rahman, op. cit.


time is only 12 days (Textile Asia, June 1999, p-61). Unless Bangladesh manages a substantialreduction in its lead-time, domestic production of quality fabrics for export will be left ina very disadvantageous position.

Establishment of backward linkages, especially the domestic production of yarn, canreduce the cost of production. The current gap in demand and domestic production, metthrough imports, is estimated to be 480 million kg for yarn, and 2,300 million meter forfabrics.18 The country could thus save considerable foreign exchange by increasing domesticproduction of yarn and fabric. Production costs would also be reduced, since the RMGmanufacturers would not have to buy fabrics at international prices that are not necessarilycompetitive. Nor would they have to pay high interest rates for a certain period (almost threemonths), nor large transport costs, nor the bribes, commissions, and fees for middlemanservices involved in custom clearance, etc., all of which significantly increase the hiddencost of doing business.

Large-scale investments in backward linkage industries may require considerable inflowsof FDI, however, and/or a pro-active government policy in terms of providing the financefor such investments to domestic entrepreneurs. It would also require a careful assessmentof the different stages such as dyeing and spinning in which Bangladesh may have acomparative advantage. So far, only a few backward linkage industries have been established,some in the form of composite textile mills; and these are highly capital intensive. What isneeded is a policy of promoting smaller and labour-intensive units, whereby thenecessary backward linkages take place without heavy investments. Dyeing units in particularare said to have the greatest potential in terms of international competitiveness. Recentresearch19 show that spinning and weaving are also internationally competitive, using theDRC (domestic resource cost) criteria.

3.4 Improvements in productivity

It is clear from the discussion so far that one issue facing the RMG industry inBangladesh is the slow rate of increase in productivity, and the gap that exists between thiscountry and other competitors in this regard. There is also scope for capacity building indifferent types of skills and processes.

The aim should be to move the industry up to a different regime, wherein competitionis based on higher productivity, an improved working environment, and backward andforward linkages to meet the new challenges of the post-MFA era. A more concerted actionplan is needed in this regard.

Interviews with entrepreneurs, for example, have suggested that Bangladesh is at adisadvantage compared to other countries in South Asia; such as, Sri Lanka, where a moreeducated labour force, especially at the supervisory and managerial levels, increases labour

18 Rahman and Rahman, op. cit.19 Rahman and Rahman, op. cit.

37

productivity. Thus, training schemes for managers and supervisors are an important elementin increasing productivity, including the introduction of functional English courses for higher-level employees, improving their ability to read operating manuals and so on. To these ends,the Government should also increase its allocations to the education sector.

3.5 Responsiveness to consumer ethics and standards

New challenges facing the RMG industry and the export sector in general includegreater consumer awareness of quality, health, and environmental standards. These issuesmay well act as non-tariff barriers, but entrepreneurs have little option other than to meetthese requirements and codes of global transactions. Similarly, working conditions—includingsafety, health, and the earnings of workers, together with issues such as child labour—aregrowing concerns on the part of international consumers.

The industry needs to improve its image in this regard, advertising recent achievementssuch as the abolition of child labour and improvements in occupational safety. Efforts tofurther improve standards, furthermore, are likely to have longer-term payoffs.

3.6 Need for a data bank

Interviews with entrepreneurs suggested considerable uncertainty regarding the behaviourof competitors and their responses to the new global environment. A considerable gap alsoexists in knowledge about trade and investment flows. This is understandable, given thatmost entrepreneur interactions are with buyers who merely specify their product needs,provide the designs, etc. The emerging global environment, however, calls for more strategicaction with regard to major competitors.

In this respect, international organizations such as the ITC, UNIDO, and the ILO canhave special roles to play. The relevant ministries can also maintain easily accessible databanks on trade flows by country and region, including information on product line, changesin unit costs, special opportunities, new technologies, cost effectiveness of differenttechnologies, etc., especially in the backward linkage industries. The BGMEA should alsotry to disseminate such information to all types of entrepreneurs.

4. Strategies for improving competitiveness, productivity, and job quality

4.1 RMG industry at a crossroads

The discussion above underscores that the RMG industry in Bangladesh is at thecrossroads, where the phasing out of the MFA and the increased pace of liberalization willimpose new challenges. Meeting these challenges, and remaining competitive in the globalmarket, will entail the transition to a new regime, the main elements of which involvestrategic interventions aiming to:

l ensure higher productivity, skills development and better job quality;

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l diversify products and markets; andl establish backward linkage industries.The RMG industry in Bangladesh, it may be argued, arose within a fortuitous set of

circumstances. Its comparative advantage was based on factor endowments, particularly anelastic supply of cheap female labour. Government policy measures were also important infostering sustained growth in the industry.

While initial growth was largely unplanned, the industry subsequently built up itscapacity and learned from experience, even though gains in productivity have been slow.One of the important learning effects has involved the building of relationships with buyersand gaining market access.

Future action, however, calls for a concerted national action plan to address the mainissues highlighted in this paper. It also demands a recognition that the low wage-lowproductivity regime, hitherto the cornerstone of the RMG industry’s competitive advantage,will no longer present a viable strategy in the post-MFA era.

The following two sections further elaborate this conclusion with regard to changes inthe cost structure of existing firms, including wages and skills composition. Recommendationsare summarized in the final section.

4.2 Cost structure of the RMG industry

Although RMG manufacturing is a highly labour-intensive process, according to somefindings labour costs account for a modest share in the entire cost structure of RMG products.In the absence of any intertemporal data representing the entire RMG sector in Bangladesh,we present the findings of two sector studies—a survey of 72 RMG units by the World Bankunder its Industrial Sector Strategy (ISS) in 1992; and a study of 38 RMG units by theBangladesh Institute of Development Studies (BIDS) in 1995—to indicate the recent coststructure and profit margin of RMG units (Table 2.6).

Table 2.6: Cost structure and profit margin of RMG units

Indicators ISS Study (1992) BIDS Study (1995)

Value of output 100 100Costs: 87.00 76.00* Industrial cost (excluding wage)1 73.00 64.00* Non-industrial costs2 03.00 05.00* Employment cost (wage bill) 11.00 07.00Gross value-added 23.00 31.00Profit margin 13.00 24.00

Source: Bhattacharya and Rahman, op. cit., Table 10, p. 17.Notes: 1. Industrial costs include expenditures on raw materials, packing materials, fuel andelectricity, spares, and sub-contracting.2. Non-industrial costs include expenditures on overheads, i.e., costs other than direct material andlabour expenditures. These costs include advertisement and facilitation expenses, selling anddistribution costs, interest payments, and taxes.

39

Bhattacharya and Rahman (1999), based on the above studies, have pointed out that,between 1992 and 1994, the proportion of costs in the gross value of output in Bangladesh’sRMG sector decreased from 87 percent to 76 percent leading to an increase in the profitmargin from 13 percent to 24 percent. Concurrently, the share of industrial costs (excludingsalaries and wages) fell from 73 percent to 64 percent, resulting in a growth of the share ofgross value-added from 23 percent to 31 percent. During the corresponding period, withinthe gross value of output, the share of non-industrial costs rose from 3 percent to 5 percent.20

Strictly speaking, such comparisons, based as they are on two different surveys, aredifficult, since neither the number nor the entities of the RMG units are the same in bothstudies. Discrepancies in figures under the respective heads, moreover, might be the outcomesof sample selection bias and/or measurement error. The statistics do, however, give anindication that, even though RMG manufacturing is a highly labour-intensive process, labourcosts constitute a very modest part of the entire cost structure of RMG production.

Therefore, a strategy to reduce wage levels further, thus affecting workers’ quality oflife, does not necessarily imply the decline of production costs to remain competitive in theworld apparel market. In fact, production costs may increase many times over even in thepresence of cheap labour, where there is political turmoil and strikes, extortion, and wide-spread corruption including bribery, which allegedly lead to an enormous increase in thehidden costs of doing business, thus often discouraging foreign buyers from coming toBangladesh, and escalating raw material costs.

4.3 Recent trends in the wage rate

The proposition that repressing wage levels to remain competitive in the post-MFA erais not a viable strategy is further strengthened by analyzing the trend in wage rates fordifferent categories of employees in the RMG sector. As may be seen in Table 2.7, thehighest increase in the real wage rate is observed among skilled workers, which shows that,in an ever-increasingly competitive world due to globalization and liberalization, it is notreduction in wage levels, but rather improving labour productivity through appropriateincentives (i.e., attractive remuneration to match higher productivity), which would be anideal competitive strategy.

Since female employment in the RMG industry is largely concentrated in low-skilledand unskilled jobs, most female workers unfortunately would not benefit to the same extentfrom the rising trend in wage rates. It is even possible that less skilled female employeeswould be replaced by skilled male employees, thus widening the gender discrepancy indivision of labour. Women workers, therefore, need to be specifically targeted for humanskills development.

20 “The shift towards a higher share of non-industrial costs is characteristic of products of high market value, which iscorroborated by the increase in the share of value added. The decrease in wage cost’s share, however, does not signifya decrease in the wage rate in real terms” (cf. Bhattacharya and Rahman, 1999).

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

Worker Growthcategory 1980 1985 1988 1990 1993 1997 rate (%)

Trainee/Helper- Nominal 130 300 400 500 500 500 -- Real 195 300 267 337 296 242 24.10

Semi-skilled- Nominal 300 500 600 800 1 000 1 000 -- Real 423 500 420 540 591 484 14.42

Semi-skilled- Nominal 500 800 1 000 1 500 1 800 2 200 -- Real 760 800 762 1 012 1 064 1 065 40.13

Source: Bhattacharya and Rahman (1999).

5. Summary

A coordinated action plan is needed, once the quota system and preferential tradingarrangements are phased out, to address the challenges faced by the RMG industry. Themain recommendations in this regard are the following:

l diversification of markets into ASEAN and other regions outside the EuropeanUnion and North America;

l diversification of products, particularly the transition to higher value-added items;

l building of technological capacity and skills for a range of products;

l support for the establishment of backward linkage industries, but with properassessment of international competitiveness, with a focus on dyeing andfinishing units (which some studies have identified as potentially more competitive),and on smaller units which are less capital intensive and less risky asinvestments;

l continued emphasis on primary and secondary education in government educationpolicies, aiming to develop a more skilled and generally higher-quality labourforce;

l continued emphasis on education and skills development for women, specifically,aiming to close the gender gap;

l introduction of functional English courses for managerial and supervisory staffand greater attention to on-the-job training, with appropriate incentives such astax rebates;

l encouragement for relocation of factories outside main urban areas, with servicedplots being made available and adequate supervision to ensure that factories arefunctionally designed;

41

l better regulation and supervision of factories, reinforcing government regulatorycapacity in this regard to ensure compliance with the Factory Act;

l compliance with labour laws with regard to wages, weekly holidays, canteen andcrèche facilities, occupational safety including attention to fire hazards, etc.;

l setting up a data bank by the relevant ministries in collaboration with suchorganizations as the ITC, the ILO, and UNIDO to monitor trade flows by productand region, information on new technologies, etc.;

l dissemination of information by the ILO regarding linkages between job qualityand productivity and best practices in other countries, aiming to promote attitudinalchanges among entrepreneurs;

l respect for basic workers’ rights, promotion of better industrial relations andencouragement of freedom of association in the entire industry sector, includingin the EPZs.

l introduction of productivity-enhancing schemes by agencies such as the ILO,with dissemination of best practices in competing countries; and

l dissemination to international consumers of information concerning improvedworking conditions such as the MOU on the abolition of child labour, and, it isto be hoped, of on-going improvements undertaken by the BGMEA, the ILO, andthe Government.

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

SITC codes Group of products Revealed comparative advantage1

1990 1995

03 Fish, crustaceans, molluscs, preparations thereof 99.9 97.9Ox Other food and live animals chiefly for food -66.4 -91.11 Beverages and tobacco -71.6 -94.7264 Jute and other textile based fibres, n.e.s, raw/processed 100.0 100.02x Other crude materials, inedible, except fuels -15.6 -96.33 Mineral fuels, lubricants, and related materials -89.2 -94.94 Animal and vegetable oils, fats, and waxes -99.9 -99.75 Chemicals and related products, n.e.s. -87.5 -56.061 Leather, leather manuf., n.e.s., and dressed fur/skins 97.1 92.265 Textile yarn, fabrics, made-up art., related products -21.3 -66.16x Other manufactured goods class. chiefly by material -96.7 -95.37 Machinery and transport equipment -99.3 -96.6842 Outer garments, men’s of textile fabrics 99.6 99.0844 Under garments of textile fabrics -100.0 98.2845 Outer garments and other articles, knitted -100.0 98.3846 Under garments, knitted or crocheted -100.0 98.9848 Art. of apparel and clothing accessories, no textiles -87.9 41.88x Other miscellaneous manufactured articles 86.5 -55.7

1Revealed comparative advantage is measured as the ratio of net trade flows to total trade (imports plus exports).Source: ILO Task Force based on data from Statistics Canada (1998) World Trade Analyzer CD ROM.

Table A2.2: RMG exports of Bangladesh: a comparative scenario

Year Export of RMG Total export of Bangladesh RMG export as a(in US$ million) (in US$ million) % of total export

1983-84 31.57 811.00 3.891984-85 116.2 934.43 12.441985-86 131.48 819.21 16.051986-87 298.67 1 076.61 27.741987-88 433.92 1 231.2 35.241988-89 471.09 1 291.56 36.471989-90 624.16 1 923.70 32.451990-91 866.82 1 717.55 50.471991-92 1 182.57 1 993.9 59.311992-93 1 445.02 2 382.89 60.641993-94 1 555.79 2 533.9 61.41994-95 2 228.35 3 472.56 64.171995-96 2 547.13 3 882.42 65.611996-97 3 001.25 4 418.28 67.931997-98 3 781.94 5 161.2 73.281998-99 7 019.98 5 312.86 75.671999-2000 4352.39 5752.19 75.66

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

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Table A2.3: BGMEA membership fiscal year-wise

Year No. of members Growth rate (%)

1990-91 8341991-92 1 163 39.451992-93 1 537 32.161993-94 1 839 19.651994-95 2 182 18.651995-96 2 353 7.841996-97 2 503 6.371997-98 2 726 8.911998-99 2 963 8.69Average annual growth rate(%) - 17.72

Source: Export Promotion Bureau, GOB.

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

Years Male Female Female employment Totalas a % of totalemployment

1991-92 8 730 494 700 85 582 0001992-93 120 600 683 400 85 804 0001993-94 124 050 702 950 85 827 0001994-95 120 000 1 080 000 90 1 200 0001995-96 129 000 1 165 042 90 1 294 0421996-97 139 756 1 257 808 90 1 397 5641997-98 150 000 1 350 000 90 1 500 000

Source: BGMEA.

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Table A2.5: Real wage indices of industrial workers (all employees)

(Base: 1985-86 = 100)

Indices

BSIC 1986 Name of industry 1989-90 1990-91 1991-92code

311-312 Food manufacturing 133 124 143313 Beverage industries 77 61 99314 Tobacco manufacturing 71 47 48315 Animal feed manufacturing 80 78 78

321-322 Textile manufacturing 112 99 98323 Wearing apparel (except footwear) 86 87 84324 Leather and leather products 96 94 99325 Leather footwear (except rubber and plastic) 44 46 39326 Ginning, pressing and baling of fibres 104 94 91331 Wood and wood cork products 102 89 110332 Wooden furniture and fixture manufacturing 50 54 59

341 Paper and paper products 107 96 127342 Printing and publishing products 124 89 118351 Drugs and pharmaceutical products 102 117 120352 Industrial chemicals 96 81 91353 Other chemical products 96 53 60354 Petroleum refining 174 168 197355 Misc. petroleum, coal products 138 102 109356 Rubber products 79 75 81357 Plastic products N.E.C. 119 106 150

361 Pottery, china and earthenware 128 116 83362 Glass and glass products 115 55 128369 Non-metallic mineral products 111 91 118371 Iron and steel basic industries 73 90 88372 Non-ferrous metal basic industries 81 65 101

381-382 Fabricated metal products 83 84 88383 Non-electrical machinery 92 101 90384 Electrical machinery 73 66 66385 Transport equipment 86 88 88386 Scientific, measuring instruments and equipment 155 125 131387 Photographic and optical goods 85 89 108

393-394 Other manufacturing industries 89 84 78

Total: All industries 112 96 96

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

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

Year Annual wages Labour productivity Average size Share of Share of (US$) (US$) wages (%) value added (%)

1981 305.7 778.8 25 39.3 35.01982 308.5 788.7 123 39.1 31.71983 344.4 803.1 163 42.9 28.31984 329.6 810.4 234 40.7 25.41985 350.0 806.2 206 43.4 30.91986 338.3 638.0 252 53.0 27.11987 344.4 692.8 205 49.7 26.01988 299.5 869.3 244 34.5 25.81989 345.5 989.4 239 34.9 27.41990 352.2 965.1 245 36.5 28.01991 334.7 951.1 288 35.2 26.61992 340.9 890.1 315 38.3 24.7

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

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

Countries Wages Productivity Share of Average(US$) (US$) Wages (%) Size

India 626.0 627.5 1 323.6 3 146.1 19.9 74(1981) (1994) (1981) (1994) (1994)

Hong Kong, China 4 121.5 13 389.3 6 720.1 20 454.4 65.5 24(1981) (1995) (1981) (1995) (1995)

Indonesia 664.9 1 119.6 1 230.7 3 555.8 31.5 169(1981) (1996) (1981) (1996) (1996) (1996)

Korea, Republic of 2 096.9 13 024.3 5 562.4 37 195.4 35.0 22(1981) (1995) (1981) (1996) (1996) (1995)

Malaysia 1 363.4 3 895.0 2 915.3 7 182.9 54.2 20(1981) (1996) (1981) (1996) (1996) (1995)

Mexico 1 817.8 4 622.6 5 181.7 9 767.7 47.3 158(1987) (1994) (1987) (1994) (1994)

Pakistan 1 228.4 1 553.5 2 587.1 3 236.1 48.0 128(1985) (1991) (1985) (1991) (1994)

Philippines 955.1 2 328.8 1 648.4 5 696.1 40.9 96(1983) (1997) (1983) (1997) (1997) (1995)

Singapore 3 045.1 9 522.5 5 236.5 13 236.3 71.9 66(1981) (1994) (1981) (1994) (1994) (1994)

Sri Lanka 499.4 653.1 1 554.9 1 876.1 34.8 464(1990) (1993) (1990) (1993) (1993) (1993)

Thailand 1 708.3 3 646.8 3 792.0 5 420.4 67.3 438(1982) (1994) (1982) (1994) (1994) (1994)

Turkey 1 703.2 2 168.6 6 839.0 14 839.3 14.6 62.0(1981) (1994) (1981) (1994) (1994) (1994)

Italy 18 505.8 23 991.7 27 460.3 36 251.4 66.2 55(1989) (1991) (1989) (1991) (1991) (1991)

Japan 6 787.3 18 645.1 12 747.6 33 573.1 55.5 20(1985) (1993) (1985) (1993) (1993) (1993)

USA 9 024.6 16 226.2 19 580.7 42 193.3 38.5 41(1981) (1997) (1981) (1997) (1997) (1992)

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

47

Table A2.8: Trend of RMG export to the US and EU in the 1990s

Year Exports to the USA Exports to the EU Combined share of the(as a % of total export) (as a % of total export) US and EU export (%)

1991-92 49.14 46.42 95.561992-93 48.72 45.69 94.411993-94 38.08 55.43 93.511994-95 45.15 49.36 94.511995-96 39.33 55.17 94.501996-97 41.49 54.11 95.501997-981998-99 43.24 52.38 95.65

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

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

SITC Codes Years

1980 1985 1990 1996 1997

8421 (Overcoats, men’s) 1 9.0 13.0 4.1 5.18422 (Suits, men’s) 0 0.5 13.0 1.4 0.38423 (Trousers) 0 3.0 1.0 20.7 22.78429 (Outer garments) 0.6 5.4 55.2 25.2 29.48431 (Coats and jackets) 0 2.8 0 2.4 4.98432 (Suits of women) 0 0.2 0 0.9 5.58433 (Dresses, women’s) 0 0.4 0 7.4 7.98434 (Skirts, women’s) 0 4.7 0 7.7 7.08441 (Shirts, men’s) 0.2 52.2 0 55.8 52.98442 (Undergarments) 0 11.7 0 15.3 19.58451 (Jerseys, pullovers) 0 1.1 0 15.9 20.28452 (Dresses, knitted) 0 0 0 5.3 3.68459 (Outer garments, knitted) 0.2 0 0 9.7 10.98461 (Undergarments, knitted) 0 0 0 29.8 23.48465 (Corsets, etc.) 0 0 0 3.1 3.28471 (Clothing accessories) 0 0 7.4 0.5 0.88472 (Clothing accessories, knitted) 0 0.4 15.5 2.3 2.28481 (Clothing accessories ofi) 0 0 0.1 0.3 0.38482 (Clothing accessories ofp) 0 0 0 .2 0.28483 (Fur clothing) 0 0 0 0 08484 (Headgear and fittings) 0 0 .4 53.8 56.0

Source: Islam, S. (2001).

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References

Bakht, Z., 1997. “The experience of the industrial sector in Bangladesh in the 1990s”, in Growth orstagnation? Bangladesh Development Review, 1996, (University Press Ltd.).

BBS. 1997. Labour Force Survey 1995-96.———. 2001. Statistical yearbook of Bangladesh, Bangladesh Bureau of Statistics (Dhaka, Government

of Bangladesh).Bhattacharya, D.; Rahman, M. 1999. Female employment under export propelled industrialization:

Prospects for internalizing global opportunities in Bangladesh’s apparel sector (Geneva,UNRISD).

Islam, S. 2001. The textile and clothing industry of Bangladesh in a changing world economy(Dhaka, University Press Ltd.).

International Finance Corporation (IFC). 1999. Bangladesh: Textile study (Washington, DC, IFC).Khundker, N. 1977. “Gender issues in Bangladesh’s Development since the 1980s”, in Growth or

stagnation? Bangladesh Development Review, 1996. (Dhaka, University Press Ltd.).Khan, S.I. 2001. “Gender issues and the readymade garment industry of Bangladesh: The trade union

context”, in Globalisation and gender, changing patterns of women’s employment in Bangladesh,(Dhaka, University Press Ltd.).

Mazumdar, D. 1983. “The theory of segmented labour markets in LDCs”, American EconomicReview.

Mazumdar, P.P., Chowdhury 1991. The socio-economic condition of garment workers in Bangladesh.Bangladesh Institute of Development Studies. Research report. (Dhaka).

Rahman, S.; Rahman A.K.M. 2001. “Development in the backward linkage industry in the textilesector: Promises and achievements”, a paper presented at TexBangla 2001 seminar, organizedby Bangladesh Textile Mills Association in collaboration with the Centre for Policy Dialogue(Dhaka) 26 May 2001.

Siddiqui, H.G.A. 2000. “Beyond 2004: Impact of MFA phase out on the apparel industry ofBangladesh”, keynote paper presented at the BATEXPO-2000 organized by the BGMEA(Dhaka), 21-25 Nov. 2000.

49

Garment industry in India

M. Vijayabaskar

1. Introduction

The world garment industry is on the threshold of far reaching institutional changes inthe near future. Hitherto, despite being one of the most globalized industries in the world,it has also been an exemplar of how trade practices in a ‘globalizing’ world are still distortedin favour of advanced economies. Over the past three to four decades, trade restrictions,price and quantitative, have come to play a major role in conditioning patterns of thesector’s development. However, over the next few years, by 2005 to be specific, the existinginstitutional constraints on garment production and trade would be removed. The removalof institutional barriers to trade would have important implications for output markets,especially that catered to by low-income economies seeking to industrialise through promotionof the garment sector. In turn, changes in these characteristics, given the labour-intensivenature of garment production, would have a serious bearing upon the labour market, especiallyin ‘labour-surplus’ economies like India that seek to strengthen/sustain their position in theglobal output market.

The garment sector has been conventionally viewed as a major source of employmentgeneration. Of late, in addition to this dimension, following the success of the East Asianeconomies, it is also seen as a lead sector in the industrialisation process of low-incomeeconomies. Its low skill requirements and large labour absorption potential have made it animportant source of non-agrarian employment for the rural populace of these regions. Toadd, the garment sector is also seen to offer tremendous prospects for employment ofwomen, unlike other traditional manufacturing sectors. Given these factors, it is of greatimportance to understand the labour market implications of the changes in the internationaltrade regime. In this study, we address this issue in the case of the Indian garment industry.Though the study is confined to an empirical examination of the possible changes in theprospects for Indian garment manufacture and employment and challenges that confrontIndian policy makers in this regard, obviously its relevance would extend to other regionswith similar structural characteristics.

1.1 Issues being examined

The report is largely based on secondary literature and published data sources. Statisticspublished by the Apparel Export Promotion Council, by garment industry associations, andby multilateral agencies would be used for the purpose apart from studies done in this area

3


by others. To overcome the gaps in secondary literature, a few interviews were undertakenwith key informants like members of garment producers’ associations and trade unionmembers actively involved in this sector. In this report, however, a case study on Tiruppurknitwear industry is also being discussed. Following issues are examined in this report:

a. What are the key elements that condition/influence the dynamics of global divisionof labour in the garment industry?

b. What are the characteristics of the market niche that Indian garment producersoccupy in the world garment industry?

c. To what extent has this phenomenon been influenced by the quota system?d. What are the sources of competitiveness of Indian garment production? How do

they compare with garment production in competing nations?e. What would be the likely impact of a quota-free regime on the prospects of

garment exports, from India and consequently, on extent and nature of employmentgeneration in India?

f. What would be the nature of policy intervention required to sustain and/or enhancethe quality and quantity of employment in the new trade regime?

1.2 Organization of the report

This report first provides a framework outline to understand the issues underconsideration. In the next section, the major characteristics of the Indian garment industryare delineated, and its position in the world garment industry is examined. The dynamics ofthe world apparel market would obviously exert a key influence upon the mode of participationin the world market and consequent production imperatives. The characteristics of the marketsegments that Indian garment industry caters are identified. To comprehend the sources ofcompetitiveness of Indian garment industry, the production structure of the Indian garmentindustry and the factors enabling the formation of such a structure are examined. Thisexercise is attempted in a comparative frame, relating some of India’s structural andperformance characteristics with that of a few of its competing countries so as to comprehendIndia’s competitive strength better.

Possible changes are examined in input and output markets wrought by the onset of a quota-free trade regime. Here, the focus is on a few important dimensions of the Indian garment sector,and its labour market in particular. The constraints and opportunities for its development arehighlighted. Finally, the nature of institutional intervention required to sustain and upgrade thequality and quantity of employment in the garment sector are suggested.

1.3 Nature of global sourcing

Since it is important to understand the trajectory of a commodity sector embedded ina global division of labour and its implications for labour, a framework is necessary forunderstanding the dynamics of production and trade as impacted by the global division of

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labour. The ‘commodity chains’ approach as developed by Gereffi and others are the mostappropriate for the purpose.

The commodity chains perspective, initially advanced by the world systems theorists(Hopkins and Wallerstein 1986), and enriched by subsequent empirical analyses of Gereffi(1995, 1996, Gereffi and Korzeniewicz, 1994) and others (Bonacich et. al 1994, Gibbon1997, Ramamurthy 2000), facilitates understanding accumulation processes in sectors whereproduction and distribution functions are dispersed across the world.1 In a period whennation states are losing their importance in economic decision-making, it is less fruitful toanalyse the capitalist system in terms of linkages of nation states. It is obvious for instance,that integration of a national economy, especially one as large as India, with the worldmarket would lead to territorially and sectorally differentiated outcomes. It becomes importanttherefore to analyse how specific industries are organized globally and to discern themechanisms of surplus extraction at various points and of co-ordination of dispersed labourand exchange processes. A commodity chain, as defined by Hopkins and Wallerstein (1986,159), refers to “a network of labour and production processes whose end result is a finishedcommodity.” To construct a commodity chain, first, the various production processes requiredfor the final product need to be delineated. Each of these processes constitutes a node in thechain. In relation to each node the following properties may be looked into:

Ø the geographic loci of the node;Ø commodity flows to and from the node, and those operations that occur immediately

prior to and after it;Ø relations of production within the node; andØ dominant organization of production, including technology and scale of the

production unit (pp 160-163).

Gereffi views the globalization process as one organized by two distinct sets of economicactors. Manufacturing Transnational Corporations (TNCs), who source their componentsand labour intensive processes of their production from less industrialised regions, constituteone set. These sectors are mostly technology and skill intensive and offer substantial economiesof scale (automobiles, computers, aircraft, electrical machinery, etc). Profits are derivedfrom scale, volume and technological advances. These constitute producer driven commoditychains (PCCs). Gereffi distinguishes such commodity chains from buyer driven commoditychains (BCCs), which are controlled by big merchandisers, retailers, and trading companiesthat co-ordinate decentralised production networks all over the world. The third worldmanufacturers produce finished goods and not components. The buyers normally involve indesign and/or marketing, deriving profits from a mix of research, design, sales, marketingand financial services. They are less likely to own production facilities.

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


In PCCs, the transnational corporations exercise control through command over rawmaterial and component suppliers, as well as forward linkages into retailing. BCCs on theother hand, since they are design and marketing intensive, create high barriers to entry atthe brand name merchandising and retail levels where ‘firms invest considerable amount inproduct development, advertising and computerised store networks to create and sell theseitems’. Whereas core firms at the point of production control PCCs, control over BCCs isexercised at the point of consumption. The latter production organization can be best describedas one of contract (or specification contracting) manufacturing where the finished consumergoods output of local firms is distributed and marketed abroad by trading companies, brandedmerchandisers, retail chains or their agents. The distinction also helps to understand the kindof trajectories that firms need to take to move up the value chain.

Even within low-income economies, Gereffi stresses the need to differentiate the roleplayed by each region in the world economy. Focusing on export production, he outlines fivebasic international economic roles that peripheral regions may fulfil: (a) The commodityexport role (b) the commercial subcontracting role (c) the export platform role (d) thecomponent supplier role and (e) the independent exporter role. There is thus a suggestionof a possible progressive movement from extreme dependent production to one of anindependent exporter of manufactured goods. It is also clear that industrial relations andlabour market outcomes would be influenced by the kind of roles that peripheral economies/regions play in the global division of labour. The commodity chains perspective thus, offersthe possibility of understanding the production organization patterns in specific regions interms of their location in the global division of labour.

Next, a framework is needed for linking the changes in output markets with the changesin labour markets. In this regard, the works of industrial organization theorists like Sabel andPiore, and labour market theorists like Peck would be useful. They are primarily concernedwith contemporary changes in global output markets and the possible implications for labourmarkets as mediated by other institutional factors. Increasingly, it is felt that competition inglobal markets relies more on innovative capability and an ability to shift from one processor product to another without loss in efficiency. Such ‘flexibility’ in output markets may bederived through deployment of flexible technologies and/or through use of flexible labour.Flexibility in labour use may be obtained either through employment flexibility or throughdevelopment of functional flexibility among the workers, which may in turn depend onmany institutional factors. The implications for labour market changes are however, clear.

2. Characteristics of Indian garment sector

2.1 Changes in export composition

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

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1995, 5).2 Chatterji and Mohan distinguish two phases of this growth based on compositionof garments exported, their destination and demand vagaries. The first one, during the late1960s and early 1970s, was led by a tremendous surge in demand for handloom garmentsdue to fashion requirements in the US and Europe.

The second phase, according to Chatterji and Mohan (1993), begins from 1983/84 andhas been marked by a relatively more steady growth. From around Rs. 640 crores in 1983/84, it has increased to around Rs. 22,915 crores in 1999 (Exim Bank of India 1995, AEPC,various years). However, this relatively stable growth has been accompanied by changes inthe relative shares of segments within the sector (Tables A1.1 and A1.2 in Annex). Ofspecial significance has been the rise of the knitwear segment. From 16.9 percent in 1983,it has almost doubled to 33 percent by 1999. That the cotton knitwear segment has led thisgrowth is quite clear, as it alone constitutes 90 percent of this sector.

However, the share of handloom garments has fallen steadily from 6.9 percent to 0.3percent while that of mill made garments continues to be high at around 70 percent (Chatterjiand Mohan 1993, M-104). This remains so, despite a slow but steady decline in the shareof mill made garments. The decline in both these product categories has been compensatedby a steady increase in the share of knitwear products. Between 1985 and 2000, knitwearexports have grown at a compound growth rate of 9.63 percent while that of woven wearhas grown only at 4.93 percent (Panthaki 2001, 86).

With regard to the fabric base, cotton garments continue to dominate the export basket.Cotton based garments accounted for nearly 71 percent of value of garment exports fromIndia in 1999 (AEPC 2000). Synthetic and woollen garments constituted 26.2 percent and3.39 percent respectively in 1999 (ibid) as compared to 9.1 percent and 6.6 percent in 1983respectively (Chatterji and Mohan 1993, M105). In fact, the share of cotton garments inquantity terms is even higher at 81 percent, indicating a lower unit value of cotton garmentsas compared to that of synthetic and woollen wear, especially synthetic garments. Comparingthe composition of Indian exports with that of South Korea and Hong Kong, Chatterji andMohan (1993, M105) find that there is a “predominance of woven clothing”. Further, theyalso note a high concentration of items exported. The Exim Bank study (1995, 12) notes thatfive products, viz., women’s blouses, dresses, skirts, men’s shirts and knitted undergarmentsconstitute 61 percent of total Indian garment exports in 1991. Since almost all the garmentsare cotton based, they argue that Indian products compete for only 15 percent of the globalmarket for clothing. On the other hand, Ramaswami and Gereffi argue that a pattern ofspecialisation is not confined to India and find a similar product concentration in thecomposition of exports from competing economies like China and Indonesia. In fact, in allthese three economies, the top two products account for more than 50 percent of their totalgarment exports. Further, across all the product categories exported, India’s market segments

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

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“mainly fall in cotton, semi-fashion, middle price segment with main product category beingT-shirts, men’s shirts, ladies’ blouses, ladies’ dresses and skirts” (Tait 2001, 44).

2.2 Destination characteristics

The change in the composition of garments exported also partly reflects changes in thedestination of Indian exports. In the initial phases of Indian apparel exports, USSR andEastern Europe were the biggest importers. Right from the mid-1960s through the mid-1970s, they accounted for roughly over 50 percent of the market for Indian apparel exports(Chatterji and Mohan 1993, M 99). Since the late 1970s and the beginning of the 1980s,there has been a gradual shift to US and European markets along with the decline of theformer East European and USSR markets. By 1999, a major share of Indian garment exportscatered to the US and European markets, 29.54 and 33.63 percent respectively (calculatedfrom AEPC 2000).

Indian exports to these countries have been subject to quantitative restrictions. Alongwith currency depreciation, this has in fact governed the relative share of garment importsby these regions from India. While during the early 1980s, the share of the EEC market wasaround 50 percent, it declined in proportion to increase in the share of US market, only toagain increase and stabilise at 43-44 percent during the late 1980s and early 1990s (Chatterjiand Mohan 1993, M 102; Exim Bank of India 1995, 35). Since quotas given in mostcountries have been fulfilled, analysts expect that the removal of MFA restrictions wouldenhance the ability of Indian exports to penetrate these markets. Moreover, there has beena slight diversification into non-quota markets in recent years with quota markets’ sharedeclining from 82 percent in 1987 to 74 percent in 1993 (Exim Bank of India 1995, 7) andto 68 percent in 1999 (Handbook of Export Statistics, AEPC 1999). These new markets areUAE, Switzerland, Japan, Russia, Saudi Arabia and Australia. Table 3.1 gives the growthin restrained and non-restrained markets since 1980.

Table 3.1: Growth rate of exports of Indian apparel, 1980-2000

(compounded rate of growth)

Period Restrained markets Non-restrained markets

1980-84 1.25 32.81985-89 11.5 11.91989-94 7.5 22.81995-2000 4.8 7.8Entire Period 8.83 17.9

Source: Panthaki (2001, 85).

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

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2.3 Relative performance

Indian garment exports do not compare well with many other peripheral economies.The growth in India’s share has been relatively slow, having moved from 1.5 percent in the1970s to around 2.4 percent in 1992 (Exim Bank of India 1995, 7) and then to 2.6 percentby 1994 (Ramaswamy and Gereffi 1998).3 Even the latest figures for India’s exports placeit at only around 2 percent (Tiruppur Exporters Association 2000). Though the growth of itsexports has moved in tandem with world garment trade, its performance does not comparetoo well with that of other peripheral economies.

Economies like Thailand, Indonesia, Bangladesh, Mauritius, Pakistan and Sri Lanka haveachieved higher growth rates during this period as compared to that of India (Exim Bank ofIndia 1995, 8; Ramaswamy and Gereffi 1998, 124). China, for instance, has more than tripledits share from 4 percent in 1980 to 15.2 percent in 1995 (Ramaswamy and Gereffi 1998, 124).Bangladesh has increased its share to 0.9 percent from near nil exports in the early 1980s. Asa result, India’s share in ‘developing’ countries’ exports has not improved beyond the 4 percentmark achieved in 1974 (Chatterji and Mohan 1993, M 96). To add, India’s rank among‘developing and NIE’ country exporters has fallen from 5 in 1980 to 8 in 1992 (Exim Bankof India 1995, 8). This relative stagnation assumes further significance in the context of India’sadvantages in terms of cheap cotton production and availability of large pools of labour. Infact, substantial quantities of cotton fabric and yarn are exported from India to some of theseeconomies from where they are made up into garments and exported.

2.4 Government policies and production structure

The strategy of import substitution based industrialisation, with emphasis on growth ofheavy industry has exerted a strong influence on prospects of the garment industry. Sinceheavy industries are capital intensive, and given the huge labour surpluses in India, the stateassigned a few light goods industries, including the garment sector, the role of a labourabsorber. Further, since there already existed a strong traditional artisanal garment sector,it was felt that it needs protection from the more ‘efficient’, modern capital. Consequently,sectors like the garments were reserved for firms that fall under the ‘small scale’ sector.Firms with a capital investment limit of less than Rs. three crore4 are categorised as ‘small’and any firm with greater investment need to commit to export more than 75 percent of itsoutput. Since no time frame is provided for this requirement, it is said that big firms do notwill to risk entry into this sector (Chatterji and Mohan 1993, M117). Further, the small firmstoo would be unable to upgrade their technology, as this would invite a movement beyondthe capital ceiling fixed for the small-scale sector.5 As a result, the Indian garment sectoris found to consist of smaller firms as compared to other exporting peripheral nations,

3 ASSOCHAM Parliamentary Digest puts India’s share in textile exports for 1997 at 2.5 per cent (1999, 216)4 It has been revised to Rs. three crores only since 1998, and the limit was Rs. one crore during the 1990s.5 “In the case of export of cotton garments to the US in 1989, the average unit value realisation for Indian products was $

3.50 as against a figure of $ 4.61 for Hong Kong, $4.73 for Taiwan and $5.1 for Korea.” (Chatterji and Mohan 1993, M115).

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thereby placing limits on the sector’s ability to compete on the basis of productivity (M116). Moreover, given the importance of market information in this industry, traders exerta dominant influence in the export market. Out of 10,000 exporters registered with AEPC,only 250 are manufacturer exporters (M114). As a result, incentives to improve productiontechniques have not been forthcoming.

It is therefore said that Indian exports depend more on fashion changes than on anyinherent competitive strength based on quality or productivity (Chatterji and Mohan 1993).Despite these limitations, Ramaswamy and Gereffi (1998) find that India has improved itsmarket share in 9 out of its 17 main product categories (129) and further that, there has beenan increase in the unit values realised. This appears to have been possible due to theadvantages derived from such a decentralised and networked production structure, whichenable firms to compete in low-volume segments with greater fashion content as comparedto say, China or Bangladesh where the minimum efficient scale of operation is much higher.6

In fact, Kathuria and Martin (2000), quoting Khanna (1990), cite that all successful exportingfirms subcontract much less than India. While Indian firms subcontract 74 percent of theiroutput, countries do not subcontract more than 36 percent of their output in all other cases.Further, they also contend that investment of Indian firms in processing techniques is verylow when compared to other exporting countries (Table 3.2).

Thus, while government policies have constrained garment producers from competingon the basis of scale economies and improved labour productivity, they have fostered astructure, albeit accidentally, that facilitates production for a more flexible product market.However, with the removal of reservation for the small-scale sector, possibilities of entry intolarge-scale production and benefiting from the scale of economy, have been facilitated. Further,with a good domestic production base in cotton fibre and lack of import restrictions to upgradeprocess techniques, Indian garment producers may venture to compete in the mass market aswell. Nevertheless, given the strong competition in this segment and absence of a first-moveradvantage, it may still be in the ‘flexible’ market segment that Indian producers retain theiradvantage in the post-MFA regime. Simultaneously, it also opens up possibilities for the lattersegment to upgrade its quality by taking advantage of availability of new processes.

Table 3.2: Machines installed by apparel export firms (nos.)

Pre-cutting Cutting Sewing Special Processing

S. Korea 2.9 12.3 134.3 77.5 31Taiwan 2.6 7.5 185.1 49.5 12.8Hong Kong 2.3 13.2 455.4 112.7 27.9Thailand 2 12.8 460.8 72.4 21.9India 0 2.3 103.7 8.6 4.6Source: Kathuria and Martin (2000, 10).

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

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2.5 Labour employed

Given the fact that considerable section of Indian garment industry is confined to the‘unorganized’ or ‘informal’ sector, working conditions for the workers are hardly under thelegal purview. For instance, Gupta ( http://www.carleton.ca/ctpl/library/booklibrary/01-01-023-11.htm) reports that only 25 percent of the total value of garment output is accountedfor by the firms registered under the Factories Act. Hence, secondary data at the macro-leveltoo are hard to come by in this regard. Time and again, as in many other countries, weobserve that labour in the garment industry is subject to harsh working conditions and lowwages (Singh 1990; Kalpagam 1981, 1993; Alam 1994). Further, given the predominanceof ‘informal’ sector activity, legislation with regard to labour markets are less likely to beenforced as compared to other economies.

Tait (2001) provides the distribution of the workforce in the Indian garment industry asfollows (Table 3.3). Above all, the table clearly brings out the heterogeneity of the sector,and the share of the workforce employed in the export sector is still unclear. Employment inthe ready-made garments industry is around three million, which is only eight percent of thetotal workforce in this sector, seen as a segment of the apparel commodity chain. The AnnualSurvey of Industries provides data on employment, output and capital used in the factory sectorof all the manufacturing industries.

Table 3.3: Employment within the textile and apparel industry in India

No Sector Employment (in million)

1 Handicrafts 7.1 (18.64)2 Sericulture (Silk Industry) 6 (16)3 Readymade garments 3 (7.87)4 Woollen sector 1.2 (3.15)5 Handloom 12.4 (32.5)6 Decentralised powerloom 6.8 (17.85)7 Man-made fibre/filament yarn 0.06 (0.16)8 Cotton/man-made fibre/Yarn Textile/Mill Sector 1.14 (2.99)9 Jute 0.4 (1.05)

Total 38.1 (100)

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

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

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the labour market conditions in all centres of the Indian garment industry, the analysis isconfined to that existing in Tiruppur, one of the biggest centres of apparel exports andrepresentative of regions undertaking garment exports in India. Prior to that, in the next section,with a view to capture the structural dynamic of the global apparel industry and the possibleimpact of it on specific regions, some of its key characteristics are delineated.

Table 3.4: Sex-wise distribution of workforce in the organized Indian garment sector(1997/98)

Industry No. of No. of No. of Share of femaleCode factories male workers female workers workers (in %)

260 1380 24708 7612 23.5265 2983 7637 148910 95.2

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

3. Features of world garment industry

3.1 Wage cost differences and strategy of shifting location

The characteristics of garment production, as noted earlier, low sunk costs, relativeabsence of advanced technology and skills, have always induced apparel firms in the advancedcapitalist countries to shift labour intensive operations to peripheral economies. Studiessupportive of the ‘New International Division of Labour’ hypothesis, in fact, view theprocess of globalization as a movement from high wage cost regions to low wage cost ones(Frobel, Heinrichs and Kreye 1980). While in the case of garment manufacture in Europe,shifting of production to low wage regions initially took place mostly within the continent7 ,movement to other peripheral countries was largely initiated by apparel manufacturers fromthe United States of America (USA or US) (Bonacich 1994, 81). This process has its originsin the 1950s when manufacturers began to shift production to Japan to take advantage of thelower wages prevailing there. This sourcing of garments from Japan with still lower wagelevels followed the earlier movement of US garment production from the northern part ofthe country to the less unionised and lower waged southern regions (Markusen 1987, 134).8

Subsequent to the economic boom in Japan during this period accompanied by rise in wagerates, manufacturers began to shift production to Hong Kong (Jones 1971, 140). From HongKong, capital migrated to South Korea and Taiwan to benefit from the lower wages prevalentthere (Bonacich et al. 1994, 23). The process of incorporation of other East Asian economies

7 Though they too did source from East Asia, the early phase was mostly characterised by relocation of production to thenearby East European economies. Frobel et. al (1980) gives a detailed account of relocation of garment factories fromGermany to the lower-waged non-EEC countries in Europe and Asia.

8 Around this period, manufacturers also contracted out orders to producers in Latin American and Carribean countriesas well (Bonacich et al. 1994, 81).

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was also aided by the growing foreign direct investment by Japanese firms in neighbouringcountries to take advantage of the prevailing low wage rates. The period thus witnessed atrend towards movement of Japanese apparel capital to offshore locations like neighbouringSouth Korea.

The 1980s witnessed the incorporation of other Asian countries with relatively lowwage levels like China, Thailand, Indonesia, Sri Lanka, Pakistan, India and Bangladesh intothe world garment trade.9 Between 1975 and 1990, the share of ‘Third World’ in the totaloutput of global textiles has increased from 18.6 percent to 26.1 percent, and that of clothingfrom 11.7 percent to 20.4 percent (Kiely 1998, 153).10 During this period, the share ofapparel in the exports of the newly industrialising countries (NICs) in fact declined. On theother hand, garment sector has become a growth pole for economies at lower levels ofdevelopment like Bangladesh, China, Sri Lanka, Indonesia, India and Thailand (Gereffi1994, 59). Table 3.5 depicts this process better by detailing the market shares of the leadinggarment exporting countries over a 15-year period, from 1980 to 1995.

Table 3.5: World’s leading exporters of apparel, 1980-95

Countries Share in world exports

1980 1990 1995

Hong Kong 11.5 8.6 6China 4 8.9 15.2Italy 11.3 10.9 8.9Germany 7.1 7.3 4.7South Korea 7.3 7.3 3.1US 3.1 2.4 4.2France 5.7 4.3 3.6Turkey 0.3 3.1 3.9Thailand 0.7 2.6 2.9Portugal 1.6 3.2 2.3Chinese Taipei 6 3.7 2.1India 1.5 2.3 2.6Indonesia 0.2 0.5 2.1UK 4.6 2.8 2.9Netherlands 2.2 2 1.8

Source: Ramaswamy and Gereffi 1998, 124.

9 “ ...while the NICs in E.Asia and other regions were shifting into more advanced export industries, textiles and clothingbecame a key growth sector for countries at lower levels of development like Pakistan, Bangladesh and Indonesia. Atpresent, China, India, Bangladesh, Indonesia, Sri Lanka and Pakistan, with their low wage advantage have begun toestablish themselves as major players in world garment trade” (Gereffi 1994, 59).“In the most recent years apparel export industries in Thailand and Indonesia have exploded past the 3 billion dollarmark, and India, Sri Lanka and Malaysia have topped one billion dollars in apparel exports” (Christerson and Appelbaum1995, 1363).

10 According to Chatterji and Mohan (1993), the share of developing countries in garment exports has more than doubledfrom 21 percent in 1970 to 56 percent (M98).

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As the table indicates, while the market shares of more industrialised economies and thenewly industrialised regions like Hong Kong and South Korea have declined in most cases,that of peripheral economies like China, Thailand, Indonesia, Turkey and India have increased.

This process has also been aided by state promotion of this sector among the lessindustrialised economies on account of its high labour absorption potential and low technologyand skill requirements. Together, they have enabled garment manufacturing to attain thestatus of the most globalized industry. As the leading sector of globalization, the garmentindustry continues to increase its share in world trade for manufactured commodities. Worldgarment trade has in fact grown faster than trade in manufactured goods as a whole(Ramaswamy and Gereffi 1998, 124).11 Accompanying this global expansion, there havealso been changes in the organization of production with important implications for garmentproduction in peripheral economies.

3.2 Changes in mode of organization

The globalization process was paralleled by important changes in organization of theapparel commodity chain. While the initial phase of globalization was dominated bymanufacturing capital in the advanced capitalist economies, it was, from the early 1970s,replaced by retail capital (Bonacich et al. 1994, 83; Fine and Leopold 1993,107-110). Thisprocess was once again facilitated by the requirements of low investment and technology inthe industry. Earlier too, the manufacturers did not produce the entire output in-house. Theysourced a substantial portion of their output through ‘contract manufacturing’, whereby theycontracted production to small producers, many of them located overseas. The biggermanufacturers focussed on supplying designs to the producers in the low-waged regions, andensured control over quality of output sold to wholesalers and retailers in the metropolitanregions. Since traders could undertake the same process of outsourcing as well, wholesalersand retailers sought to bypass the manufacturers and began to source directly from overseasmanufacturers.

Importantly, this process transformed the mode of pricing in this industry. Whilepreviously, pricing was primarily based on cost of production, with the dominance of tradingcapital, pricing increasingly was based on what the customers could afford to pay (Bonacichet al. 1994, 83). Since they could aggressively market the output, they could peg the pricesat a much higher level as compared to the cost of production. This process has importantramifications for the modes of organising production in the sector since then, with theindustry becoming an archetype of a buyer driven commodity chain. Given their relativelyless knowledge of production, they competed primarily on the basis of design, marketing

11 Trade in apparel has grown at a rate of 10.2 percent per annum (in US dollars) while overall world trade grew only at4.9 percent during the period 1980-92. In fact, the growth rate of world garment trade since the mid-eighties has beenmuch higher at 15 percent per annum during the period 1985-92 (EXIM Bank of India 1995, 16).

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and fashion creation. The market for apparel has therefore become highly segmented anddifferentiated as a consequence, with non-price factors playing a critical role in competitivenessin many of these segments.

Over time, the industry has come to be dominated by a few powerful retailers. Atpresent, in the USA, top 10 retailers account for over two-thirds of imports into the US(http://www.sweatshopwatch.org/swatch/industry/cal/retailers.html). As a result of theirincreased bargaining strength vis a vis the supplier manufacturers, it is said that they evendemand a profit margin of nearly 50 percent, further placing pressure on the former’s profitmargins and hence the workers’ wages. Over time, with the dominance of the retailers, thedistribution of costs or surplus along the garment commodity chain is heavily tilted in favourof the retailers as the following table would reveal (Table 3.6).

The table gives the percent of final retail price as distributed among different nodes inthe value chain for a pair of jeans. As can be seen in the table, the share of wages amountsonly one percent of the sale price and the same study states that the share of wages in thefinal price for clothes is normally never higher than five percent. It also indicates thepotential for a less skewed redistribution of surplus to the lower nodes in the chain, enablingproducers to pay more wages to labour in low wage regions.

Table 3.6: Cost structure of the apparel industry

Cost components Percent

Retail Shop Profit & Other Costs(Personnel, rent, administration & advertising) 50%Brand Profit, Overhead and Promotion 25%Material Costs and Factory Profits 13%Transportation/Taxes/Import costs 11%Factory Workers’ Wages 1%

Retail Price 100

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

The sourcing of garments from distant locations was found profitable not only becauseof the low wages, but also due to improvements in transport and communication technologies.Such technological innovations enabled capital to facilitate co-ordination of production indistant locations to take advantage of lower factor costs that prevail in these areas withoutmuch increase in transaction costs. Countries with better infrastructure in these areas wouldtherefore gain over those, which lack it. Despite the criticality of these factors, lower wagerates continue to draw capital to that region (Table 3.7).

Table 3.7, in consonance with Table 3.5, reveals the growing share of the lower-wagedregions in world garment trade. Countries with lower wage costs like China, Indonesia,Thailand and India have increased their share in world trade whereas, most economies withhigher average wage costs, have witnessed a decline in their shares.

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3.3 Persistence of dominance of core economies

Though the trend depicted above does lend empirical support to importance of the ‘lowwage’ pull factor, other features of this sector do not lend credence to this view. Despite thegrowth of garment production and exports from many peripheral economies, there has notbeen much change in composition of the top exporting nations (Table A.3 in Annex).

Table 3.7: Labour costs in apparel industry across regions (in US $/hour)

Europe 1991 1993 Asia 1991 1993 S. America 1991 1993

UK 7.99 NA Hong Kong 3.39 3.85 Brazil 0.76 NAW. Germany 14.81 NA South Korea 2.75 2.71 Mexico 1.17 NAFrance 12.41 NA Taiwan 3.74 4.61 Argentina 1.81 NANetherlands 14.95 NA India 0.25 0.27 Peru 0.88 NAItaly 13.5 NA Indonesia 0.18 0.28 Uruguay 1.59 NAIreland 7.5 NA Malaysia 0.62 0.77 Venezuela 1.38 NABelgium 12.57 NA Pakistan 0.24 0.27Denmark 15.91 NA Philippines 0.46 NAGreece 4.26 NA Sri Lanka 0.39 0.35Portugal 2.65 NA Thailand 0.59 0.71Spain 7.11 NA China 0.24 0.25

Japan 7.44 10.64US 6.77 NA Singapore NA 3.06

Bangladesh NA 0.16Mauritius NA 1.04

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

Table A.3 in Annex reveals a number of interesting features. First, and the mostobvious has been the rise of China to the status of world’s leading exporter in 1995 fromits eighth rank in 1980. Further, its share of 15.2 percent is the highest held by any countryduring the entire period. A related observation is the increase in shares of peripheral economieslike India, Indonesia and Thailand. The shares of semi-peripheral economies, viz., SouthKorea, Hong Kong and Taiwan (Chinese Taipei), premier exporters in the 1970s, havedeclined. On the other hand, importantly, despite decreases in their shares, core economiescontinue to have a significant presence in the global garment exports. In 1995, seven Europeancountries continue to figure among the top 15 exporters apart from the USA. USA has notonly increased its share during this period, but has also improved its rank. Moreover, manyof these economies meet a substantial portion of their internal demand for clothing throughdomestic production. USA, for instance, still manufactures 50 percent of its requirementsdomestically in 1990 though it had shrunk from the 70 percent share it had in the domesticmarket in 1980 (Bonacich et al. 1994, 23). In fact, between 1993 and 1995, the share of lessindustrialised countries in global clothing trade declined from 65 percent to 53 percent,indicating a gain for industrialised regions (Hale and Hurley, 7). To understand this apparentparadox, we have to comprehend other forces that impact on the geography of apparel

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production and hence, on the prospects of peripheral regions industrialising through exportsof garments. Towards this, in the following sections, a few other important features of theapparel product market are highlighted.

3.4 Protectionism in the advanced economies

Despite the continued presence of core economies in the top ranks of garment exporters,their shares (other than that of USA) have declined. Further, these economies have witnesseda certain degree of import penetration, especially from the semi-peripheral economies. Toillustrate, between 1983 and 1991, the share of domestic market catered to through importshas risen from 30 to 45 percent (Taplin and Winterton 1998, 20). Further, the rise in cheapimports of apparel from the lower waged peripheral economies has coincided with a phaseof growing unemployment in the advanced economies. In the UK, employment in the apparelsector declined by over 50 percent in the period 1973 to 1993, while in Germany, employmentdeclined by 2,70,000 during the period 1970 to 1994. This has led to the view that importshave resulted in loss of employment opportunities in these economies (Hoffman 1985).12

More importantly, a strong lobby of domestic manufacturers and workers has forced coregovernments to insulate the domestic industry from such imports. Hence, trade restrictionsby the developed countries, both in terms of price and quantity, have come to impact theindustry over a considerable period.13

The MFA has been revamped thrice since its creation, with each renewal meant toincrease the coverage and intensity of the restrictions (Goto 1989, 204). While the MFAsought to impose restrictions on the quantity of different apparel that can be imported fromeach country, price restrictions were also imposed in the form of duties on other textileproducts. Discrimination was hierarchical. ‘Sensitive’ products, i.e., items with higher importpenetration, met with higher quantitative restrictions. There is a gradation in tariffs imposedas one moves from processed to the final finished garment (Goto 1989, pp. 206-207).

The quota system that has evolved under the MFA has exerted considerable influenceon the structure of production of apparel. While the main objective of the quota regime isto restrict imports into the European and US markets, it has set in motion a process of quotaimposed economies seeking to avoid the restriction by shifting production to other low wageeconomies that are yet to face quota restrictions. The rise of Bangladesh as a garmentexporter is a classic example of this phenomenon (Rhee 1990). Many other Asian economieslike China, Thailand and Indonesia too benefit from the relocation of manufacturing byfirms in NICs to these countries.

12 However, imports were not the primary reason for job losses in this sector in the core economies. In Germany, for everyjob loss due to imports, 50 were lost due to productivity gains. Further declining demand constituted job losses 20 timesof that which can be attributed to imports from the periphery (Underhill 1998, 57)

13 The impact of trade restrictions on import penetration from the less industrialised regions has been, among others,examined by Keesing and Wolf (1981).

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While this process has definitely influenced the movement to relatively low wage costcountries, it has also helped to perpetuate market hierarchies in the industry. Manufacturersin the quota-imposed countries are forced to move into more value added products whosecompetitiveness is not based on low wages but on quality and fashion. Since there arerestrictions on quantity, producers seek to increase their turnover by enhancing the valueadded to each garment. Segmentation in the apparel market, therefore, influences locationof production. This is of course not to imply that the quota system is the key determinantof market segmentation. Firms in these countries only seek to move up existing markethierarchies created on the basis of quality, fashion and price.

3.5 The fragmentation of the apparel market

Fashions have always influenced creation of demand in this industry, especially afterthe rise of retailers’ control of the commodity chain. Given their closeness and greaterunderstanding of the market than manufacturers, these traders sought to compete throughmarket innovations like new designs and fashion marketing rather than through cost reductionsby innovations in production techniques. Here again, there are differences across varioussegments. Women’s and children’s wear is subject to more fashion based design changes ascompared to men’s wear (Fine and Leopold 1993, 109). Further, socio-economic and relatedcultural changes have created a general trend in clothing towards more informal and casualwear since the 1970s. Consumption based identities have begun to play a bigger role inmarking one’s position in the social hierarchy, thereby facilitating the creation of marketniches (Underhill 1998, 77). All these factors have led to the rise of distinct segments in theapparel market.

This trend has accentuated in recent years, when it is said that the recession in advancedeconomies has led to a more skewed distribution of income, creating two distinct marketsegments (Mody and Wheeler 1987; Hoffman 1985). Others point to the rise of post-Fordistlife-styles, with consumption being an important marker of one’s identity, as responsible forthis phenomenon (Underhill 1998; Lash and Urry 1987). The causes notwithstanding, theapparel industry has been divided into two key segments with different characteristics; i) avibrant and growing upmarket fashion segment and ii) a relatively stagnant, low priced andstandardised segment.

The former market is highly volatile and is characterised by short production runs, fastchanging fashions and designs, aggressive marketing and higher mark-ups. In response tomarket instability, firms target smaller, more rapidly changing market niches, which requirequick alteration of product designs. Here, cost advantages do not matter as much as in themass-market segment. More important is the ‘quick response’ factor (QR), the ability todeliver in time and adjust production to changing designs and quantities. In other words,‘flexibility’ becomes an essential characteristic of production for this segment. Thus, thecost advantage gained in dispersing production to low wage areas tends to be offset byslowness in supply response. Production in distant locations is not suited for such markets,

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where reorders14 and fashion obsolescence are common.15 Further, the quality requirementsof the fabric meant for such up-market garment production necessitates confinement ofproduction to countries with better processing technologies. Nevertheless, garments of certainsegments that are relatively less intensely driven by fashion and requiring lesser quality maycontinue to be sourced from distant regions.

In sum, despite dispersal to low wage economies, the fragmentation of the apparelmarket into fashion-determined smaller and smaller niches has enabled the core economiesto retain their competitive edge in these segments of the apparel industry. Another importantexplanation for the simultaneous dispersal and concentration of apparel production takesinto consideration the social embeddedness of production processes and their part played inreducing transaction costs of firms in this sector.

3.6 High transaction costs for dispersion

A key factor that works against greater dispersion of garment production globally is theamount of transaction costs involved in co-ordinating a global network of decentralisedproducers and traders. The high vertical and horizontal disintegration in this industry increasesthe volume and rapidity of inter-firm transactions. The location of production will thereforebe also influenced by geographical proximity to suppliers, contractors and final markets,particularly when transactions are “small scale, irregular and involve production for quicklychanging niche markets” (Storper and Scott 1990, cited by Christerson and Appelbaum1995, 1364).

In a cluster of firms in a region, the social embeddedness of production organizationcreates extra economic ties that facilitate transactions. Community and ethnic relationshipsprovide certain regions with economic advantages in such a milieu. This is more relevantto the garment sector dominated by vertically disintegrated firms. Firms tend to cluster inregions that have a common ethnic or communal identity that enable entrepreneurs to enterinto long term contracts with less risk. Christerson and Appelbaum’s study on location ofgarment industry in East Asia provides empirical support to this argument (1995). It has alsobeen observed that it is easier for Taiwanese and Hong Kong firms as compared to theKorean firms to enter into contracts with overseas Chinese businessmen because of thesesocial networks (Bonacich et al. 1994, 138).

Given the high transaction costs involved, it may not be too feasible for buyers to shifttheir point of sourcing too often taking into consideration only the labour cost advantage.In fact, studies point to the fact that buyers increasingly prefer to negotiate with more

14 “…volume production in many branches of the clothing industry is observed by the repeated re-ordering of small branchesof successful styles …rather than by the continuos production of standard goods”, (Fine and Leopold 1993, 223).

15 ‘Reorders require a 10-14 day turnaround which is possible if the original order was placed with a local factory, butimpossible if placed with an Asian factory, since transportation time alone for East Asia to Los Angeles ranges from13 to 30 days. While the turnaround time for a Los Angeles firm is 4 to 5 weeks, for a firm in Asia it takes around12 to 16 weeks...” (Christerson and Appelbaum 1995, 1368).

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reliable but lesser number of importers rather than many importers (Egan and Moody 1992).Further, the costs of finding and entering into a long-term relationship with new supplierstoo would deter buyers from shifting points of sourcing. Given these factors, establishedsuppliers may continue to manufacture for importers even if they lose the labour costadvantage over time. This is likely to be true in the mid-price segment where productioncosts are a lesser source of competitiveness.

To sum up, though there are various forces at work in influencing the location of garmentproduction, it is still possible to envisage a hierarchy of producers, hierarchy defined by levelsof development, wage levels and quality of garments produced. Elson (1994, 194) presents sixtiers of garment producers, with each country trying to move into the tier above them. Gereffi’sdepiction of the sourcing of different products from different regions by American retailingfirms reproduced below (Exhibit 3.1 below) is also very useful to understand this hierarchy.

Exhibit 3.1: Types of retailers and major global sourcing area

Representative Type of retailer Main global Characteristics offirms sourcing area buyers orders

Fashion oriented Armani, Donna Karan, First and Expensive designers’ productscompanies Polo, Ralph Lauren, second rings requiring high levels of craftsmanship;

Boss, Gucci orders are in small lots

Department stores Bloomingdale’s, Saks Second, third Top quality, high priced goods soldfifth Avenue, & fourth rings under a variety of national brandsNeiman Marcus and private labels (i.e. store brands)

Speciality stores Macy’s, Norstorm, Second, third Medium to large sized orders, oftenbrand named J.C. Penny, The Gap, & fourth rings co-ordinated by department storecompanies The Limited, buying groups (such as May

Liz Claiborne, department store company andCalvin Klein Federated department store)

Mass merchandisers Sears Roebuck, Second, third s Good quality, medium pricedMontgomory Ward, & fourth ring goods predominantly sold underJ.C.Penny, Woolworth private labels; large orders

Discount chains Walmart, Kmart, Third, fourth Low-priced, storebrand products;Target & fifth rings giant orders

Small importers Fourth & fifth Pilot purchases and special items;rings sourcing done for retailers by small

importers who act as ‘industry scouts’in searching out new sources of supply;orders are relatively small first, buthave the potential to grow rapidly ifthe suppliers are available.

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

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

4. Competitiveness of Indian garment exports

While garment exports have registered impressive growth rates relative to the rest ofmanufactured exports from India, as we saw in an earlier section, India’s relative performancevis a vis its competing nations have not been too well. India, falls under ring 3 along witha few other Asian peripheral economies. In this section, based on existing studies and newcomputations, we seek to measure the competitiveness of India’s exports. With the withdrawalof quota and price restrictions from 2005, India, despite having unrestrained access to globalmarkets, may face tougher competition from similar countries seeking to expand their marketshares. Hence, it is imperative that measures are taken to meet the possible increase incompetition.

Competitiveness, in existing studies, has been measured primarily by a comparison ofmarket shares (Chatterji and Mohan; Exim Bank of India 1995; Ramaswamy and Gereffi1998). Alternately, as an input measure, labour costs corrected for labour productivity canbe used. However, given the high presence of production in the informal sector, data onlabour use is insufficient to use. Further, this measure is also difficult to be used as acomparative measure given the impact of exchange rates on wage costs. Given the importanceof non-price factors like quality in influencing the competitiveness of garments, unit valuerealisation may be a better indicator as a measure of competitiveness. This measure, onceagain, is problematic given the highly fragmented nature of the apparel market. Higher unitvalues may probably indicate a foothold in a different market segment rather than competitionin a similar market. Nevertheless, higher unit values indicate an ability to upgrade, whichwould be a critical factor in sustaining or improving competitiveness over time. Lastly,given the importance of many non-price factors like quick response, quality of fabric andprocessing, no single indicator can reflect the extent of competitiveness of Indian garmentexports. Consequently, in this section, we draw upon a multitude of indicators to understandthis dimension of Indian apparel exports.

At the three digit level (Table A3.4 in Annex) garment categories, non-knit women’souterwear, non-knit undergarments and knitted undergarments constitute the biggest sharesand together account for more than 70 percent of exports from India. Even within thesecategories, specific items like women’s blouses and men’s shirts dominate the export basket.When compared to the market shares of these and other product categories of Indian exportsagainst few of its competitors (Table A3.5 in Annex), India’s competitive edge is quite

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mixed. This comparison is confined to apparel exports to the USA, the single largest marketfor Indian exports.

As can be seen in Table A3.5 in Annex, China and Hong Kong, in terms of marketshares, appear to pose the strongest competition. Together, they have a higher market sharein the US than India has in thirteen out of the seventeen product categories listed in the table.In fact, China alone has a higher market share than India has in ten of the product categories.Further, in quite a few categories, other countries like Indonesia, Pakistan, Sri Lanka andBangladesh too have higher market shares than India. However, by and large, there seemsto be a specialisation among the competing countries with each holding higher market sharesin a few specific categories. On the other hand, China has penetrated significantly in mostof the product categories. This leads us to infer that a region-wise specialisation in specificniches may enable the countries to expand their shares without undermining that of othercountries. However, the market shares may also be influenced by the quota restrictions thatprevent countries from expanding their exports beyond a point. Hence, the unit values ofthese product categories exported across these countries are examined in Table 3.8.

Table 3.8 indicates that unit values of garments exported from Hong Kong are higherthan that of most other countries indicating that they compete in a different, relativelyupmarket segment as compared to the other countries. Thus, unit values may not indicatethe level of competitiveness too accurately as even at the four digit level. Garments are ahighly differentiated category, in terms of design and quality and hence, price. However, wedo obtain a measure of competitiveness when we relate India’s unit values to that of theaverage for all competing countries. It appears that India has an above average unit valuein two of the six product categories though Indonesia has a higher unit value in both thesecategories and China in all of them. Thus, China appears to offer the biggest source ofcompetition to India in the post-MFA era.

Table 3.8 US imports from selected countries by MFA categories, 1996 (unit values)

Category description Average India Bangladesh Pakistan Indonesia Hong ChinaKong

Cotton men’s knit shirts 8.35 10.35 8.92 9.65 16.00 20.83 16.42Cotton men’s non-knit shirts 4.13 4.35 3.05 2.73 4.75 5.67 4.69Cotton women’s non-knit shirts 5.57 4.42 3.86 3.74 5.63 7.71 7.85Cotton other manufacturers 0.75 0.57 0.42 0.52 0.57 1.29 1.07Cotton men’s trousers 5.19 4.16 4.21 3.76 5.59 6.70 5.99Cotton women’s trousers 4.82 4.76 3.81 2.76 5.77 6.40 6.13

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

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

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the comparative advantage of a country is influenced by a number of factors, which may bebroadly classified as price and non price factors. It is however, difficult to obtain informationon these factors across products and countries. For example, sufficient information to makeinter-country cost comparisons is not available. Thus Balassa (1965) suggested that it issufficient to provide information on Revealed Comparative Advantage. The RCA, a wellknown measure, is simply a ratio of the industry A’s export share to total merchandiseexport from that country to the export share of the world exports of A to total world exports.The RCA is thus a ratio of two shares and is expressed as:

RCA= (India’s export of product A/India’s total merchandise export)/(World export ofproduct A/World’s total merchandise exports).

It has definite advantages over use of market share as an indicator. The simple marketshare is very sensitive to the size of the country. To illustrate, China obviously will havelarger share in the world exports as compared to say, Nepal. Such a large market share neednot be related to comparative advantage per se as the larger share may be reflecting thelarger size of China. But, RCA is a standardised measure and using this measure it ispossible to find that Nepal records a comparative advantage despite its low share in theworld market. To be explicit, one cannot say anything about comparative advantage on thebasis of simple shares. But, if RCA is greater than 1, one can make a definite statement thatthe country has a comparative advantage. Similarly, if the RCA is less than 1, one can makea definite statement that the country has a comparative disadvantage.

To add, unit values are generally not used as a measure of comparative advantage.Rather, it is used as a measure of quality of the product. This measure as an indicator ofquality also is not free from flaws. It is very sensitive to the level of aggregation used. Athigher levels of aggregation, it is not an accurate measure as the units of measurement mayvary at specific product level. Thus, differences in unit value need not capture quality.Rather, it may arise as a result of the particular aggregation followed.

The use of ‘revealed comparative advantage’ offers other advantages as well. Its basicthrust is to `measure’ the patterns of comparative advantage as are revealed by the observedtrade flows. The Hecksher-Ohlin-Samuelson theory tries to explain trade flows in terms offactor intensities and factor endowments. In other theories of comparative advantage, thereare propositions about the relationship between some other determinants of trade flows andthe actual trade flows. For example, such determinants include technology gap (as intechnology gap theory), economies of scale (Dreze, 1960), and domestic demand (Linder,1961) etc. In the approach of RCA, there is an explicit recognition to the effect that theobserved pattern of comparative advantage is the result of multiplicity of factors, whichencompass all the standard theories of comparative advantage.

The main advantage of the RCA measure over simple share and unit value is clear fromthe above discussion. That is, the RCA measure is very much derived from theory, whereasthe uses of simple shares and unit values do not have any theoretical rationale. For calculation

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of the RCA, we use ‘India Trades’, an electronic database from the Centre for MonitoringIndian Economy (CMIE), as the source. This database contains detailed information onIndia’s trade as well as world trade. While information on India’s trade is sourced from theDirectorate General of Commercial Intelligence and Statistics (DGCI&S)), that on Worldtrade is sourced from the Statistics Department of the United Nations (UN).

Earlier studies like that by Chatterji and Mohan (1993) and Ramaswamy and Gereffi(1998) too use the UN data. They are however, based on SITC Rev-2, wherein SITC 84represents garments. As per an understanding with the UN, all individual countries are nowsupposed to adopt a new commodity classification system called Harmonised CommodityDescription and Coding System. In fact, decision in this regard was taken long back, butmany countries are yet to adopt the new commodity classification system. Thus, the UN inits published sources has been reporting the data on the basis of the earlier classificationsystem (SITC-Rev 2). However, the data in India Trades is based on the Harmonised System,wherein 61 and 62 represent garments16. One limitation of the world trade data in IndiaTrades is that it is available for only one year (1995). The CMIE does not give any explicitreason why the data is confined to only 1995. It is possibly due to the new commodityclassification system followed. Thus, while data for the years prior to 1995 are based on theearlier classification, that for 1995 and beyond are based on the new system.

Usually, in its published sources, the UN covers data on all major countries includingSouth Asian countries of Bangladesh, SriLanka, and Pakistan. In India Trades however,these countries are not covered. Again, the CMIE has not given reasons for not coveringthese countries. Yet again, the likely reason could be that these countries have not yet startedproviding data on the basis of the Harmonised System. All the countries, included in thedatabase are probably the ones, which actually started providing data on the basis of theHarmonised system.

To illustrate how RCA indices can be interpreted, India’s exports of clothing accountfor around 13 to 14 percent of merchandise exports and the world exports of clothing is amere 3 percent of world merchandise exports. Then RCA is equal to 14/3 = 4.66. An RCAof unity would imply ‘normal’ export performance. An RCA of more than unity is usuallytaken as an indicator of comparative advantage and an RCA of less than unity implycomparative disadvantage. The calculated values for India and two of its primary competitors,China and Indonesia are given in Table A3.7 in Annex for product categories at the 4-digitlevel. It may be seen from the table that the three countries indeed record comparativeadvantages in most products. China has a comparative advantage in 32 out of 34 productcategories. The similar figure for India is 25 while that for Indonesia is 29. Based on theabove calculations, the products can be categorised in terms of which of the three countrieshave the highest comparative advantage (Table A3.8 in Annex).

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

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Also, using the RCA, one can draw certain inferences on structural characteristics. Forexample, if R1 denotes the vector of RCAs for country 1 and R2 is the similar vector forcountry 2, then a rank correlation between the two vectors (R1 R2), indicates the similarityor dissimilarity in the patterns of RCA between the two countries. Here, we have undertakensuch an exercise with regard to India, Indonesia and China (Table 3.9).

Table 3.9: Rank correlation coefficients of the RCA indices for pairs ofcountries (garments)

Pairs of countries Rank correlation Karl Pearson correlation

India and China 0.119 -0.095India and Indonesia -0.050 -0.025China and Indonesia 0.230 0.114

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

The small values of coefficients indicate that there are no similarities in the pattern ofrevealed comparative advantage between the pairs of countries. It may, however, be notedthat the similarity in patterns of comparative advantage is relatively higher for China vs.Indonesia as compared to other pairs of countries. This exercise once again indicates thatthe line of specialisation among the three countries may enable them to compete in theglobal market without eating into the market shares of other countries.

Another indicator of competitiveness is that of labour productivity. The GlobalCompetitiveness Report 1999 gives a number of competitiveness indicators of countries interms of labour. One such indicator is the wage adjusted for productivity differences. It isfound that wage adjusted for productivity is one of the highest in India. While the rank ofIndia is extremely low at 51 out of 59 countries, that of China and Indonesia is 5 and 45respectively. In fact, wages are found to be very low for the country’s level of productivityin China. Further, China too ranks pretty favourably as compared to India in terms offlexible hiring and firing practices despite better educational levels. Though these indicatorsare only representative of the entire workforce and may not hold true for the garment sector,it is quite likely that some of the differences would favour China even within the garmentsector. In fact, though the data on wage rates would indicate that Indian wage rates are nottoo different from other peripheral economies, it is found that the cost per standard minutein India is higher than that of Indonesia, Thailand and China (Majumdar 1996).

Its performance when placed against that of other peripheral economies is poor. Evenin the leading categories, other peripheral economies have a bigger market share than India.Various reasons have been cited for the relatively poor performance of the Indian garmentsector in the world market. One, garment exports from India is largely confined to cottongarments and hence confined to only one segment of the world apparel market. Two, andmore importantly, it is said that government policies have created distortions in the industrial

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

5. Labour and Indian garment exports: a case study of Tiruppur knitwearindustry

In earlier sections, the pattern of distribution of the workforce in Indian textiles andgarments sector has been already depicted. The growing share of cotton knitwear in India’sexport basket of garments is obvious. Knitwear has gradually increased its share in totalgarment exports from 16.9 percent in 1983 to 33 percent in 1999, and manufacturing ofknitwear in and around Tiruppur accounts for the major chunk of exports under this category.In fact, its growth since the mid-1980s owes solely to the massive surge in exports of cottonknitwear. Being one of the most vibrant of the export segments, a study of labour marketchanges in the region would reflect the macro-changes consequent to export production.

Interestingly, labour in the Tiruppur knitwear industry, despite being confined largelyto the unorganized sector, has a long history of labour mobilisation through two trade unionsaffiliated to the two dominant parliamentary communist parties in India, CPM and the CPI(CITU and AITUC respectively). Discussions with respondents among exporters reveal thatTiruppur’s major competitors are China and Bangladesh. However, they claim to have anedge in the relatively low-volume, fashion-intensive category compared to these countrieson account of their dense networking and modes of labour use. This observation, as otherstudies point out, is not unique to Tiruppur and can be safely extended to other centres ofgarment production in India as well (Tait 2001, 44). In this section, we profile the importantchanges in the labour market and modes of labour use and attempt to seek inferences forlabour in a post MFA regime. However, we also draw upon other studies undertaken withregard to garment industry in other parts of India to adduce further evidence.

5.1 Growing feminisation of the workforce

Exports from Tiruppur began in the early 1980s and has been increasing rapidly sincethen. Given the high labour requirements of the industry, this growth process has beenenabled by the growing incorporation of women and children into the workforce apart fromsourcing of migrant labour from the arid agricultural hinterlands of Tamil Nadu. The followingtable depicts the feminisation of the workforce during this period (Table 3.10)

Given the predominance of ‘informal’ sector activity as the garment sector elsewherein India, the data is highly unreliable insofar as the magnitude is concerned. Only 904factories are listed for 1998 when informal sources reveal that there are over 5000 firms inTiruppur. If the latter number were fairly accurate, it would imply that only 20 percent ofthe factories are in the organized sector. Further, data for the year 1990 is very inaccurate

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and not consistent with the data for the remaining years. Another glaring underestimate isthe figures on child labour (‘boys’ and ‘girls’ category). It is clear from visits to the numerousunits that helpers in all stitching units are child workers, except in a few direct exportingfirms, which account for 15 to 20 percent of the total workforce. These limitationsnotwithstanding, the data is definitely useful to indicate broad trends in composition, durationof employment and the growth of the industry.

Table 3.10: No. of workers employed in the knitwear industry in Tiruppur

Year Tot. no Sub. Total Men Women Male FemaleBoys Girls Share of FLreturns

1998 904 721 28298 19892 8406 0 0 183 997 33

1997 843 670 12263 8804 3459 0 0 0 0 28

1990 311 289 4338 3993 311 19 15 0 0 8

1985 219 185 2235 1525 312 200 143 50 5 21

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

The important observation is the phenomenal growth in the use of female labour. Froma low of around 21 percent in 1985, the proportion of female labour in the total workforcehas increased to 33.8 percent. In absolute terms, the number is very high when we considerthe fact that the total workforce has increased from an average of 2000 workers to nearly30,000 workers in 1998. Interestingly, among child labour, girls account for over 90 percentof the workforce. Nevertheless, they seem to be present in a lesser proportion among theolder workforce. This is due to the segmentation of the workforce along gender andage lines.

5.2 Segmented labour markets

Though children have been employed in this industry before, with the movement to theexport market, the quantum of use has increased manifold. Though it is difficult to come upwith estimates of the absolute magnitude, informal sources place the workforce in this sectorto number around 200,000. Of these, nearly 20 percent are children and women workerswould account for another 30 to 40 percent of the total workforce. The labour market ishighly segmented with women and children confined to a specific set of jobs, which as weshall see in Table 3.11, are relatively less paying as compared to jobs in which menpredominate.

There is no discrimination in wage rates against women within a job type. However,as can be seen, women are employed predominantly in the lesser paying jobs. The wagerates given in Table 3.11 provide only the average rates, and actual rates are found to be

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much lower in firms located on the urban fringes. More women are employed in such firmsas they need to be closer home to attend to household work as well. Further, women workersdo not undertake jobs in ancillary firms like fabrication units as it would involve workingnight shifts, which once again undermines their access to relatively better paying jobs. Thus,the structural location of women in a patriarchal household too reinforces the segmentationprocess. In fact, it may be even argued that jobs that exclusively employ women or childrenare lesser paying precisely because women and children are employed, since their wages areseen to only supplement the family income.

Table 3.11: Worker characteristics in finishing units, Tiruppur

Processes Job Age Sex Approximatewage rate in1999

Cutting Pattern master A M >5000 per monthCutting master A M 80-100

Stitching Tailors A M,F 75-90Helpers C M,F 30Trimmers C M,F 30Folders C M,F 40Checkers A F 65Button holing & fixing A M 60Label fixing A,C M,F 60

Pressing Iron master A M 90-100& Packing

Packers A,C F 60-65

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

5.3 Casualisation of labour

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

75

the workers are forced to send more than one member of the household to work in theindustry so as to reduce the risk of inadequate income due to uncertain employment.

This casualisation of the labour force also precludes them from bargaining for socialsecurity provisions that had been fought for and obtained through trade union struggles inthe early 1980s. At present, of the 5000 odd firms in Tiruppur, there are only roughly 20to 25 firms that provide social security benefits to employees, like Employees State Insurance,Provident Fund, etc.

5.4 Work intensity and conditions of work

Under the Indian Factories Act of 1948, and the Shops and Establishment Act, workersought not work for more than 48 hours per week. However, in Tiruppur, such regular andoptimal work hours are found only in firms catering to the domestic market. The movementto the export market has rendered the need for a labour force willing to work for long hours.Given the importance of sticking to delivery schedules, workers during peak season arefound to work intensively for lengthy periods. In tailoring units, workers including childworkers, tend to work for 36 hours at a stretch, and then go home for a short break, onlyto return to work the following day. On an average during peak season, workers in finishingfirms, especially tailors, work for a minimum of 10 hours, six days a week. Working forthree or four continuous shifts are however quite common.

It is said that the turnover time, i.e., the time taken between the placement of an orderwith an exporter and the arrival of garments on the sellers’ premises, has come down overtime and this squeeze on time available to complete orders subject workers to such intensework hours. And importantly, such intense work hours alternate with bouts of unemploymentduring which workers are engaged in search for employment. A study finds that the high workintensity and the cotton dust permeating the town has led to serious ailments among workersincluding children (cited in John 1998). In fact, over 60 percent of child workers reported illhealth that included mouth ulcers, respiratory problems, stomach-ache, giddiness, etc.

Apart from such effects of long work hours, work also poses serious hazards due toinadvertent slipping of fingers or hands or dresses into the stitching machine. An incidentin point is the recent death of a child worker. While she purportedly worked in a unit thatwould fall under the Factories Act, the accident however took place in a neighbouring unitrun by the owner’s son which was not registered. This unit functioned as an extendedproduction unit of the former firm and worked on the excess orders of the parent firm passedon to this unit to overcome capacity constraints. Hence, legal redressal could not be sought(John 1998, 9).

5.5 Mode of wage payment

During the initial phase of exports, when quality requirements were low, payment ofwages moved to piece-rate system from the time-rate system extant in the segment catering

INDIA


to the domestic market. However, over time, especially from 1990, with the region’s movementto the semi-fashion segment with its attendant quality requirements, wage rates have slowlyreverted back to the time rate system in a number of firms. It was felt that under the piecerate system, workers were not paying sufficient attention to the quality of stitching and thatthe piece rate system was detrimental for production in the new segment. This warranted areversion back to the time-rate system among tailors. However, through casual employmentand recruitment through the labour contractors, entrepreneurs ensured that the work wascompleted within the prescribed time limits. A few other jobs like cutting, cone winding, etc.nevertheless continue to pay on a piece-rate basis. The combination of indirect recruitment,casual employment and use of time-rate system to ensure quality despite use of variablelabour indicates greater control of capital over labour.

5.6 Wage rates

Despite periodic wage agreements between trade unions and exporters’ association,and consequent hikes in nominal wage rates, real wage rates have continued to stagnatesince the early 1980s (Bhattacharya 2000)17. Further, given the decline in quantum ofemployment in a year, it is difficult to anticipate any improvement in the total incomeearned as well. That the wages do not constitute a ‘living wage’ is clear from the fact thatmost worker households tend to send more than one member to work in the industry(Vijayabaskar 1999). An oft-cited reason is that income from one person is not sufficient tosustain a household over the year. This is especially true in the context of uncertainand seasonal availability of employment. The knitwear complex therefore sustains a low-cost workforce by employing family labour and paying less than a ‘living wage’ to individualmembers of the household. However, such wage cost reducing strategies areundertaken despite the relatively low share of labour costs in the total cost of production(Table 3.12).

Table 3.12: Break-up of cost of production

Cost components Percentage share

Raw materials (yarn) 60-70Fabrication 2Processing 10-15Finishing 15

Source: Vijayabaskar 2000, 12

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

17 Nominal wage rates are already given in Table 3.11.

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that cost reducing strategies can be extended to other components as well, especially that of‘raw materials’ through productivity improvements in yarn and fabric processing. However,the fact that exporters basically house finishing units where labour costs constitute the bulkof total production cost may direct cost reduction to labour costs.

5.7 Declining unionisation

As stated earlier, the knitwear industry in Tiruppur has been characterised by a strongtrade union presence despite its confinement to the ‘unorganized’ sector. Throughout the1970s and early 1980s, a series of strikes that sought to wrest some rights for workers likeshorter working day, implementation of a time-rate system, social security benefits, etc werecarried out with a fair degree of success. The rise of a decentralised production system withdense layers of subcontracting is, in fact, partly in response to this labour strength (Cawthorne1993). At present, however, few firms provide these benefits to the workers.

Working hours have increased considerably as discussed earlier. Given the highfragmentation of production and casualisation of labour, workers increasingly fall outsidethe ambit of seeking legal redressal. In the course of interviews with trade union officials,everyone concurred that though they have a significant role to play, in recent years theireffectiveness has been undermined due to changes in nature of the product market and theattendant changes in production organization. Demand being seasonal and labour status‘casual’, employment is available only for six to eight months a year. On the other hand,during peak season, the need to stick to delivery schedules forces labour through long workhours. This insecure employment for which ‘local’ capital is less responsible prevents tradeunions from demanding any kind of social welfare and employment security measures fromproducers. Further, since employment is only seasonal, workers do not have an incentive toorganize themselves during peak season as they need to work long hours to compensate foroffseason unemployment. Another factor that has rendered worker mobilisation difficult isthe large scale use of internal migrant labour, especially that of temporary migrant workers.Even the wage rates fixed after negotiation by trade unions are, however, not adhered to bymost firms in Tiruppur.

The unionisation levels have declined and at present trade union membership wouldnot exceed 10,000 members among a workforce of over 200,000. As a senior trade unionofficial remarked,

“I can’t say that we are completely powerless now. We can call for strikes now andwe continue to settle capital-labour disputes at the firm level. However, it is true that thenumber of people who come to us have declined, especially with women and migrantworkers’ entry. You can’t blame them. They have work only for a maximum of eightmonths a year and they would like to work as much as they can during this period”(Official AITUC, interview by author in Tiruppur, 5/8/2001).Thus, worker mobilisation has been gradually undermined over the years through an

interplay of various factors. Though not necessarily a conscious strategy of local capital, the

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logic of global capital’s need to keep costs down under flexible market conditions hasdefinitely influenced this process. The introduction of process improvements and productinnovations has taken place during a period when labour’s bargaining strength has beenwaning. This appears to indicate that the imperatives of competition at the global level hasa definite bearing on labour relations in the region. It can be said that the former hasundermined to an extent local labour organization, thereby facilitating the formation of alabour market conducive to flexible accumulation.

These changes are very much in congruence with recent trends in characteristics of theglobal market. In an international survey of the textile and clothing industry carried out byUnderhill (1998), the most important contributor to failure was found to be inappropriateproducts for rapidly changing markets. This has serious implications for workers. The numberof buying seasons has doubled in the last few years to between six and eight as retailers areonly willing to carry limited amounts of stock in order to respond more quickly to changingtrends. Such demands for flexibility are clearly linked to labour conditions since they translateinto forced overtime and extended periods of unemployment” (Hale and Hurley, 9). Givensuch tendency towards greater flexibility in product markets and the onset of more competitionamong low-income economies, flexibility of labour markets seem to be a necessary conditionto compete. However, ‘active’ or ‘functional’ flexibility that enables workers to developmultiple skills, contribute to innovation and enjoy higher wages would be possible onlywhen producers are involved in industrial upgrading and competing through innovation.

5.8 Pressure for labour flexibility

Despite the availability of such a flexible workforce, exporters continue to stress on theneed to implement fresh labour laws so as to enable them to exercise greater control overlabour.18 Such measures are especially seen to be important in the context of a quota-freeregime and the need to compete with countries like China where labour is reported to workfor longer hours, capable of undertaking multiple tasks, etc. Further, India’s workforceappear to be less ‘flexible’ and enjoy a greater ‘bargaining strength’ as compared to someof its competing countries like China and Indonesia. Though, in the case of Tiruppur,these strengths or labour market rigidity are hardly visible, such macro-indicators alongwith lower labour productivity levels may be used to highlight the need for labour marketreforms. In fact, even in Tiruppur, producers insist on the need to restructure labourmarkets.19 Formulation of a helpful exit policy is seen as critical to sustain or improve

18 “It is, however, the labour laws which the companies seem most opposed to, the policy appearing to be ‘can hire butcannot fire’ …” (Tait 2001, 47).

19 The Tiruppur Exporters Association President has this to say, “ It is essential that the knitwear industry consolidatesits strength and remains competitive in the face of aggressive competition from China, Indonesia and Thailand wherereportedly labour works faster and do many different jobs at the same time.” (Apparel Fortnightly May 16-31, 2001,Vol. VIII. No.4, pg. 35).

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competitiveness in the world market. To be sure, changes in other realms of policy makinghave also been demanded like the need to open up the sector to large-scale production,which has been recognized as a means to improve productivity through scale economies andtechnology upgradation.20 The need for a more flexible workforce however, portends aserious threat to working conditions of the garment workers.

Given these macro-trends, the discussion on labour in the Tiruppur knitwear industrywould definitely hold good for garment production elsewhere in India, albeit with marginaldifferences. In fact, trade unions hardly have a presence in most other centres and given thefact that many of them are located in EPZs, labour laws are lax. Child labour is not presentto this extent though the share of female labour is higher. Wage rates may be marginallyhigher or lower, as also wage shares. Nevertheless, pressures of export production is boundto impact upon all firms similarly as long as the output markets they compete in are similar.

6. Possible impact of removal of quota restrictions

Studies in general point to various possibilities for low-income economies like Indiain a post-MFA era. While greater access to markets is a distinct possibility under the post-MFA environment, competition from other countries may also possibly undermine the marketshares. Given the multiplicity of factors determining outcomes of global integration, theoutcomes cannot be, however, predicted with a great degree of certainty.

Irrespective of the possible trajectories that the sector may assume, the immediateimpact of quota removal on labour is likely to be negative. Studies have pointed out thatquota restrictions do constrain Indian garment exports (Khanna 1990). It is generallyrecognized that the removal of quota restrictions would lead to an expansion of exportmarkets for Indian garment producers. On the other hand, the lower labour productivity ofIndian labour observed in an earlier section, as compared to some of its competing nationslike China, Indonesia and Bangladesh, may threaten India’s competitiveness and hence leadto a decline in exports. Since India seemingly has an edge in the semi-fashion segmentwhere economies of scope rather than scale matter, it is possible that they may continue toretain or expand their shares in such markets. However, respondents from the industry andother secondary sources do indicate an anticipated threat from China even in this segment(Manager, Export firm, interview by the author in Tiruppur, dated 5/8/2001).

Given the structure and dynamics of the world garment industry, two possible strategiescan be delineated to sustain/enhance apparel exports from India. One requires a spread tothe mass market, through improved productivity, ensuring of scale economies by movementto large-scale production, installation of productivity enhancing techniques, etc. Given thepresence of a domestic base in cotton, a movement to the large-scale sector would definitely

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

INDIA


benefit producers to compete in this segment. However, for labour, this movement is fraughtwith danger, as it would involve increases in competitiveness through productivity increasethat may not always be through introduction of new or improved technologies. Rather, itmay be due to greater extraction of labour power and a possible downward pressure on wagerates, rather than on extraction of relative surplus. Resistance on the part of labour to thistrend may be met with relocation to other, less unionised regions within or outside thecountry. As borne out by the shifting geography of world apparel production, such a strategyis soon bound to flounder against the rise of new locations that can compete on the basisof still lower wages. Hence, competition based on lowering of wage costs would be detrimentalto labour and to the industry as a whole in the long run.

To counter the strategy of footloose capital seeking out lower wage locations, it maybe required to impose codes of sourcing or producing among manufacturers and importersglobally. Such enforcement mechanisms, as has always been the case, would still be difficultto implement and ensure compliance. The continued use of child labour in Tiruppur is a casein point. Alternately, competing countries can come together and decide to co-operativelycompete rather than eat into the market shares of each country. Importantly, it is imperativethat they agree to the provision of a ‘living wage’ to its workers. Here, trade unions havean important role in ensuring that competition is based on ‘active’ rather than ‘passive’flexibility. Labour institutions, by resisting downward pressures on wage rates, may forceregions to compete through ‘high road’ strategies. We observed earlier that India has agreater comparative advantage vis-à-vis some of its main competing economies inspecific product categories. Targeting these specific niches and seeking to buildcompetitiveness in these segments and to move up the value chain may therefore be a bettercompetitive strategy.

There may be less likelihood of a downward pressure on wage rates and work conditions,when competition is based on fashion and design rather than on costs. Such competitionwarrants firms to move into upper segments of the hierarchy of the apparel market or createnew niches. The strategy involves higher marketing and selling efforts apart fromconsiderations of quality and timeliness of delivery. This would involve creation of newinstitutions by the state that would enable producers to compete ‘actively’ as opposed to‘passive’ competition based on lowering of wage costs. Improvements in process andmanufacturing techniques require installation of new machinery that warrants access toinstitutional credit, which is at present difficult to access for most firms in the apparel sectorgiven their confinement to the ‘unorganized’ sector.

In the global commodity chain, given the lack of access to high-fashion markets,producers may continue to face disadvantages. However, as borne out by the experiences ofEast Asian economies like Hong Kong, Korea and Taiwan, movement along the value chainand backward integration is feasible to an extent. A closer understanding of the experiencesof these economies may offer valuable lessons for South Asian garment exporters.Diversification of output markets into new geographical regions would be another key

81

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

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ANNEXURE 2Table A3.1: Segmentwise composition of Indian garment exports, 1983-91

(in percent value)

Year Handloom garments share Knitted garments share Millmade garmentsshare

1983 6.9 16.9 76.2

1984 4.9 17.0 78.1

1985 3.5 15.6 80.9

1986 1.9 17.6 80.5

1987 1.1 19.5 79.4

1988 0.9 21.2 77.8

1989 0.6 22.0 77.4

1990 0.3 22.5 77.2

1991 0.3 22.7 77.0

Source: Chatterjee and Mohan 1993, M-104.

Table A3.2: Segmentwise and fibrewise composition of garment exports, 1991/92 – 1999

(in percent value)

Year Knitted garments Handloom garments Mill made garments

Cotton Synthetic Wool Cotton Synthetic Wool Cotton Synthetic Wool

1991-92 22.1 0.9 0.30 0.4 — 0.00 41.3 28.9 0.2

1992-93 26.5 0.9 1.2 0.7 0.2 0.00 46.1 24.2 0.5

1993-94 26.5 1.3 1.8 0.7 0.2 0.00 47.9 20.4 1.4.

1995 23.3 1.06 1.46 0.82 0.03 0.00 44.8 25.12 2.29

1996 26.59 1.6 2.48 0.61 0.01 0.02 44.1 23.08 0.98

1997 29.14 1.23 2.52 0.25 0.01 0.01 42.01 23.67 1.33

1998 28.11 1.86 2.26 0.16 0.01 0.02 42.51 24.26 0.81

1999 30.97 2.28 2.16 0.13 0.03 0.03 39.34 23.88 1.18

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

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Table A3.3: Ranking of leading apparel exporting countries, 1980-95

Rank 1980 1990 1995

1 Hong Kong Italy China2 Italy China Italy3 South Korea Hong Kong Hong Kong4 Germany Germany Germany5 Chinese Taipei South Korea US6 France France Turkey7 UK Chinese Taipei France8 China Portugal South Korea9 US Turkey Thailand10 Netherlands UK UK11 Portugal Thailand India12 India US Portugal13 Thailand India Chinese Taipei14 Turkey Netherlands Indonesia15 Indonesia Indonesia Netherlands

Source: Calculated from Ramaswamy and Gereffi 998, 124.

Table A3.4: Itemwise composition of India’s garment exports

Item description 1991 -$ Million 1991 -Share 1994 -$ Million 1994 -Share

Clothing and accessories 2531.1 100 3711.9 100

Men’s outerwear non-knit 94.0 3.7 156.8 4.2

Women’s outerwear non-knit 1032.8 40.8 1409.2 38.0

Dresses 191.8 7.6 286.0 7.7

Skirts 85.5 3.4 193.9 5.2

Blouses 510.2 20.2 617.7 16.6

Outer garments 166.8 6.6 214.6 5.8

Undergarments non-knit 435.5 17.2 724.6 19.5

Men’s shirts 408.6 16.1 659.0 17.8

Of cotton 325.6 12.9 604.5 16.3

Of synthetic fibres 83.0 3.3 54.5 1.5

Outwear knit non-elastic 236.6 9.3 338.5 9.1

Jerseys, pullovers, etc 70.0 2.8 116.0 3.1

Outer clothing accessories 123.5 4.9 175.6 4.7

Undergarments knitted 298.2 11.8 480.3 12.9Textile clothing accessories nec 106.4 4.2 172.6 4.7

Headgear non-textile clothing 327.5 12.9 429.9 11.6

Source: Ramaswami and Gereffi (1998, 124)

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

Category description US imports India Bangla- Pakistan Sri Indo- China Hong$US million desh Lanka nesia Kongall countries

Cotton women’s non knit shirt 891.6 24.9 6.5 1.5 5.9 5.6 7.2 24.8Cotton men’s knit shirt 2919.1 6.4 1.7 10.2 3.0 2.9 5.1 4.1

Cotton men’s non knit shirt 2137.3 7.7 7.6 1.3 3.2 5.9 2.9 13.7

Cotton other manufacturers 812.5 21.7 3.2 15.4 1.2 0.5 23.9 0.9

Manmade fibre dresses 904.6 8.7 0.9 0.1 4.9 6.6 18.5 5.7

Cotton other apparel 1157.7 4.7 10.5 2.1 5.3 4.6 15.3 10.3

Cotton women’s knit shirt 1937.2 2.6 0.7 2.4 1.5 1.7 2.5 10.5

MMF women’s non-knit shirt 555.1 9.0 2.8 0.1 4.2 15.7 20.7 8.6

MMF skirts 419.7 10.9 0.6 0.1 4.5 5.3 8.3 6.6

Cotton dresses 403.4 8.4 3.9 4.1 3.2 3.5 5.4 6.4

Cotton/terry towels 264.2 11.5 3.4 17.9 1.0 0.0 14.8 0.4

MMF women’s coats 1066.9 2.6 3.1 0.7 3.3 2.9 15.9 9.6

Cotton skirts 345.0 7.9 4.1 1.9 7.7 4.0 5.6 14.5

Cotton women’s coat 354.4 6.3 4.5 0.8 7.6 2.6 21.0 14.3

Cotton sweaters 336.5 5.6 0.7 0.1 1.2 9.6 8.1 23.0

Cotton men’s trousers 2942.2 0.7 3.5 0.8 1.9 3.8 3.8 8.1

Cotton women’s trousers 2288.7 0.9 1.4 0.6 2.1 2.4 4.8 17.4

Source: Ramaswami and Gereffi (1998, 127)

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Table A3.6: Revealed comparative advantage indices for China, India and Indonesia

(Garment exports in 1995)

China India Indonesia

No SITC Code RCA SITC code RCA SITC Code RCA

1 6216 20.41868 6214 25.47747 6101 12.31565

2 6213 16.97167 6105 23.72659 6201 10.68808

3 6207 13.76015 6206 21.77933 6202 7.458491

4 6208 13.15757 6205 18.29961 6207 6.877363

5 6116 13.03601 6204 8.569124 6105 6.400447

6 6201 10.50433 6213 7.260608 6113 6.216069

7 6202 9.861238 6208 7.053777 6205 5.369276

8 6103 9.814193 6209 6.599515 6103 5.20369

9 6211 8.670356 6102 6.317059 6112 5.006139

10 6203 8.625962 6207 5.751711 6208 4.550881

11 6204 8.084695 6107 5.482587 6216 4.540025

12 6209 7.954618 6106 4.257315 6206 4.030377

13 6110 7.395208 6103 4.172825 6209 3.937918

14 6109 7.388566 6108 3.699704 6102 3.822141

15 6107 7.314404 6111 3.083288 6210 3.677161

16 6206 6.675327 6104 2.573658 6212 3.563028

17 6205 6.602632 6114 2.487196 6204 3.454933

18 6108 6.594367 6109 2.462706 6116 2.943717

19 6102 5.658824 6117 1.864298 6108 2.872122

20 6214 5.21159 6211 1.850897 6104 2.811419

21 6104 5.197849 6110 1.797846 6111 2.772384

22 6112 5.17591 6203 1.671318 6110 2.614283

23 6101 4.389822 6210 1.640403 6203 2.606099

24 6212 4.296899 6202 1.337566 6115 2.353513

25 6217 4.109059 6216 1.252611 6109 2.257602

26 6215 3.861471 6215 0.951947 6106 2.242135

27 6117 3.749343 6101 0.744278 6107 2.19887

28 6210 3.711216 6115 0.701844 6211 1.362646

29 6111 3.506931 6217 0.569176 6114 1.245352

30 6113 3.033534 6112 0.564115 6117 0.726294

31 6114 2.655998 6201 0.544429 6214 0.562155

32 6115 2.64036 6113 0.473302 6217 0.457038

33 6105 0.868824 6116 0.449461 6213 0.154843

34 6106 0.578157 6212 0.083619 6215 0.011023

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

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Table A3.7: Products with highest comparative advantages among the three countries

INDIA

Women’s or girls’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets, wind-cheaters, 6102wind-jackets) and similar articles, knitted or crocheted, other than those of heading 6101Men’s or boys’ shirts, knitted or crocheted. 6105Women’s or girls, blouses, shirts and shirt-blouses, knitted or crocheted. 6106Women’s or girls’ suits, ensembles, jackets, blazers, dresses, skirts, divided skirts, trousers, bib 6204and brace overalls, breeches and shorts (other than swimwear).Men’s or boys’ shirts 6205Women’s or girls’ blouses, shirts and shirt-blouses. 6206Shawls, scarves, mufflers, mantillas, veils and the like. 6214

INDONESIA

Men’s or boys’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets), wind-cheaters, 6101wind-jackets and similar articles, knitted or crocheted, other than those of heading No. 61.03.Garments, made up of knitted or crocheted fabrics of heading No. 59.03, 59.06 or 59.07. 6113Men’s or boys’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets), wind-cheaters,wind-jackets and similar articles, other than those of heading No. 62.03. 6201

CHINA

Men’s or boys’ suits, ensembles, jackets, blazers, trousers, bib and brace overalls, breechesand shorts (other than swimwear), knitted or crocheted. 6103Women’s or girls’ suits, ensembles, jackets, blazers, dresses, skirts, dividend skirts, trousers,bib and brace overalls, breeches and shorts (other than swimwear), knitted or crocheted. 6104Men’s or boys’ underpants, briefs, night-shirts, pyjamas, bathrobes, dressing gowns andsimilar articles, knitted or crocheted. 6107Women’s or girls’ slips, petticoats, briefs panties, night-dresses, pyjamas, negligees,bathrobes, dressing gowns and similar articles, knitted or crocheted. 6108T-shirts, singlets and other vests, knitted or crocheted. 6109Jerseys, pullovers, cardigans, waistcoats and similar articles, knitted or crocheted. 6110Babies’ garments and clothing accessories, knitted or crocheted. 6111Track suits, ski suits and swimwear, knitted or crocheted. 6112Other garments, knitted or crocheted 6114Panty hose, tights, stockings, socks and other hosiery, including stockings for varicose veinsand footwear without applied soles, knitted or crocheted. 6115Gloves, mittens and mitts, knitted or crocheted 6116Other made up clothing accessories, knitted or crocheted; knitted or crocheted parts ofgarments or of clothing accessories. 6117Women’s or girls’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets),wind-cheaters, wind-jackets and similar articles, other than those of heading No. 62.04. 6202Men’s or boys’ suits, ensembles, jackets, blazers, trousers, bib and brace overalls, breechesand shorts (other than swimwear). 6203Men’s or boys’ singlets and other vests, underpants, briefs, night-shirts, pyjamas, bathrobes,dressing gowns and similar articles. 6207Women’s or girls’ singlets and other vests, slips, petticoats, briefs, panties, night-dresses, pyjamas,negligees, bathrobes, dressing gowns and similar articles. 6208

contd.

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Babies’ garments and clothing accessories 6209Garments, made up of fabrics of heading No. 56.02, 56.03, 59.03, 59.06 or 59.07. 6210Track suits, ski suits and swimwear; other garments. 6211Brassieres, girdles, corsets, braces, suspenders, garters and similar articles and parts thereof,whether or not knitted or crocheted. 6212Handkerchiefs 6213Ties, bow ties and cravats 6215Gloves, mittens and mitts. 6216Other made up clothing accessories; parts of garments or of clothing accessories, other thanthose of heading No. 62.12. 6217

Source: Calculated from ‘India Trades’, CMIE.

Table A3.8: SITC codes for garment product categories under the harmonised system

Trade classification(SITC) description Code

Articles of apparel and clothing accessories, knitted or crocheted 61Men’s or boys’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets), 6101wind-cheaters, wind-jackets and similar articles, knitted or crocheted, other than thoseof heading No. 61.03.Women’s or girls’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets, 6102windcheaters, wind-jackets) and similar articles, knitted or crocheted, other than thoseof heading No. 61.04.Men’s or boys’ suits, ensembles, jackets, blazers, trousers, bib and brace overalls, 6103breeches and shorts (other than swimwear), knitted or crocheted.Women’s or girls’ suits, ensembles, jackets, blazers, dresses, skirts, dividend skirts, 6104trousers, bib and brace overalls, breeches and shorts (other than swimwear), knittedor crocheted.Men’s or boys’ shirts, knitted or crocheted. 6105Women’s or girls, blouses, shirts and shirt-blouses, knitted or crocheted. 6106Men’s or boys’ underpants, briefs, night-shirts, pyjamas, bathrobes, dressing gowns 6107and similar articles, knitted or crocheted.Women’s or girls’ slips, petticoats, briefs panties, night-dresses, pyjamas, negligees, 6108bathrobes, dressing gowns and similar articles, knitted or crocheted.T-shirts, singlets and other vests, knitted or crocheted. 6109Jerseys, pullovers, cardigans, waistcoats and similar articles, knitted or crocheted. 6110Babies’ garments and clothing accessories, knitted or crocheted. 6111Track suits, ski suits and swimwear, knitted or crocheted. 6112Garments, made up of knitted or crocheted fabrics of heading No. 59.03, 59.06 or 59.07. 6113Other garments, knitted or crocheted 6114Panty hose, tights, stockings, socks and other hosiery, including stockings for varicoseveins and footwear without applied soles, knitted or crocheted. 6115Gloves, mittens and mitts, knitted or crocheted 6116Other made up clothing accessories, knitted or crocheted; knitted or crocheted parts ofgarments or of clothing accessories. 6117Articles of apparel and clothing accessories, not knitted or crocheted 62

contd.

INDIA

Table A3.7: Products with highest comparative advantages among the three countries (contd.)


Men’s or boys’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets),wind-cheaters, wind-jackets and similar articles, other than those of heading No. 62.03. 6201Women’s or girls’ overcoats, car-coats, capes, cloaks, anoraks (including ski-jackets),wind-cheaters, wind-jackets and similar articles, other than those of heading No. 62.04. 6202Men’s or boys’ suits, ensembles, jackets, blazers, trousers, bib and brace overalls, breechesand shorts (other than swimwear). 6203Men’s or boys’ shirts 6205Women’s or girls’ blouses, shirts and shirt-blouses. 6206Men’s or boys’ singlets and other vests, underpants, briefs, nightshirts, pyjamas,bathrobes, dressing gowns and similar articles. 6207Women’s or girls’ singlets and other vests, slips, petticoats, briefs, panties, nightdresses,pyjamas, negligees, bathrobes, dressing gowns and similar articles. 6208Babies’ garments and clothing accessories 6209Garments, made up of fabrics of heading No. 56.02, 56.03, 59.03, 59.06 or 59.07. 6210Track suits, ski suits and swimwear; other garments. 6211Brassieres, girdles, corsets, braces, suspenders, garters and similar articles and partsthereof, whether or not knitted or crocheted. 6212Handkerchiefs 6213Shawls, scarves, mufflers, mantillas, veils and the like. 6214Ties, bow ties and cravats 6215Gloves, mittens and mitts. 6216Other made up clothing accessories; parts of garments or of clothing accessories,other than those of heading No. 62.12. 6217

Table A3.8: SITC codes for garment product categories under the harmonised system (contd.)

Trade classification(SITC) description Code

89

References

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Apparel Export Promotion Council (various years). Export Statistics for Garments and Knitwear(New Delhi: Apparel Exports Promotion Council).

Balassa, B. (1965), “Trade Liberalisation and Revealed Comparative Advantage”, The ManchesterSchool of Economic and Social Studies, (33/2: 99-124).

Bhattacharya, U. K. (1999). ‘Clouds ‘in the making’ of an Industrial District?: A Note on ‘TheKnitwear Cluster of Tiruppur’ in Bagchi A. K (ed.) in Economy and Organization: IndianInstitutions Under the Neo-Liberal Regime (New Delhi: Sage), 122-146.

Bonacich, E., L. Cheng, N. Chinchilla, N. Hamilton and P. Ong (eds.) (1994). Global Production:The Apparel Industry in the Pacific Rim, (Philadelphia, PA: Temple University Press).

Cawthorne, P. M. (1995). ‘ Of Networks and Markets: The Rise and Rise of a South Indian Town,The Example of Tiruppur’s Cotton Knitwear Industry’, in World Development, 23/1: 43-56.

Chatterjee, S. and R. Mohan (1993). ‘India’s Garment Exports’, in Economic and Political Weekly,28/35: M95-119.

Christerson, B and R. P. Appelbaum (1995). ‘Global and Local Subcontracting: Space, Ethnicity, andthe Organization of Apparel Production’, World Development, 23/8:1363-74.

Egan, M. L. and L. Mody (1992). ‘Buyer-Seller Links in Export Development’, in World Development,20/3: 321-24.

Exim Bank of India (1995), Indian Garment Exports: Implications of the MFA Phase-Out OccasionalPaper. No.34. (Delhi: India Book House).

Fine, B and E. Leopold (1993). The World of Consumption (London: Routledge).Gereffi G, (1994), ‘Capitalism, Development and Global Commodity Chains’, in L. Sklair (ed.),

211-231.Froebel F, J. Heinrichs and O. Kreye (1980), “The New International Division of Labour”, (Cambridge:

Cambrige University Press).Gereffi, G. (1995). ‘Global Production Systems and Third World Development’, in Stallings, B. (ed.),

Global Change, Regional Response: The New International Context of Development (NewYork:Cambridge University Press), 100-142.

Gereffi, G. (1996). ‘The Elusive Last Lap in the Quest for Developed-Country Status’, in MittelmanJ. H. (ed), 53-81.

Gereffi, G. and M. Korzeniewiecz (eds.) (1994). Commodity Chains and Global Capitalism (Westport,CT: Greenwood Press).

Gibbon, P. (2000). ‘Global commodity chains and economic upgrading in less developed countries’,Working Paper: No. 2, (Copenhagen.: Centre for Development Research)

Goto, J. (1989). ‘The Multifibre Arrangement and its effects on Developing Countries’ in The WorldBank Research Observer 4/2: 203-227.

Hoffman, K. (1985). ‘Clothing, Chips and Competitive Advantage: The Impact of Microelectronicson Trade and Production in the Garment Industry’, in World Development, 13/3: 371-92.

Hopkins T.K and I Wallerstein, (1986), “Commodity Chains in the World-Economy Prior to 1800,”Review, (10/1: 57-170).

John, J. (1998), Dollar City in Tiffin Box, Labour File, 4/8: 3-13.

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Jones P. H. (1971). Asian Textile Survey 1969-1970, American Textile Manufacturers Institute.Kalpagam, U (1981). ‘Labour in Small Industry: Case of Export Garments Industry in Madras’ in

Economic and Political Weekly, 16/48: 1957-68.Kalpagam, U. (1994). Labour and Gender: Survival in Urban India (New Delhi: Sage)Kathuria S, W Martin and A Bharadwaj, (2000), “Implications of MFA Abolition for South Asian

Countries”, paper presented at the NCAER- World Bank WTO 2000 South Asia Workshop,December 20-21, New Delhi.

Keesing, D. B and M. Wolf (1981). ‘Questions on International Trade in Textiles and Clothing’ inThe World Economy 4/1: 79-101.

Kiely, R. (1998). Industrialization and Development: A Comparative Analysis (London: UCL Press).Khanna, S. (1990), International Trade in Textiles: MFA Quota and a Developing Exporting Country,

(Sage: New Delhi).Lash, S. and J. Urry (1987). The End of Organized Capitalism. (London: Polity Press).Linder S.B (1961), An Essay on Trade and Transformation, (Stockholm: Almqvist & Wicksell).Majumdar, M. (1996). ‘The MFA Phase Out and the EU Clothing Sourcing: Forecasts to 2005’, in

Textile Outlook International, March, 31-61.Markusen, A. R. (1987). Profit Cycles, Oligopoly, and Regional Development (Cambridge, MA: MIT

Press).Mody, A. and D. Wheeler. (1987). ‘ Towards a Vanishing Middle: ‘Competition in the World

Garment Industry’, World Development, 15/10-11: 1269-84.Moore, L. (1997), ‘Notes on the Structure of protection for the Textile and Clothing Industries of

developed countries and Agreements of Liberalization’, paper presented on 17/10/1997, (Oxford:Queen Elizabeth House), mimeo.

Panthaki M.K, (2001), “Have Quota Restrictions increased Indian Garment Exports?, Clothesline,April, pp. 82-88.

Ramaswamy, K.V. and G. Gereffi (1998). ‘India’s Apparel Sector in the Global Economy – CatchingUp or Falling Behind? in Economic and Political Weekly, 33/3: 122-130.

Ramamurthy, P. (2000). ‘The Cotton Commodity Chain, Women, Work and Agency in India andJapan: The Case for Feminist Agro-Food Systems Research’, in World Development, 28/3: 551-78.

Rhee, Y. W. (1990). ‘The Catalyst Model of Development: Lessons from Bangladesh’s Success withGarment Exports’, in World Develpoment, 18/2: 333-46.

Singh, M. (1990). The Political Economy of the Unorganized industry: A Study of Labour Process(New Delhi: Sage).

Storper, M and A. J. Scott (1990). ‘Work Organization and Local Labour Markets in an Era ofFlexible Production’ in International Labour Review 129/5: 573-91.

Taplin, I. and J. Winterton (eds.) (1998). Rethinking Global Production (Aldershot: Ashgate).Tait N (2001), “Indian Garment Exports: Moving Towards 2005”, Clothesline, April, pp. 43-55.Underhill, G. R. D. (1998). Industrial Crises and the Open Economy: Politics, Global Trade and the

Textile Industry in the Advanced Economies (London: Macmillan).United Nations Council for Trade and Development (UNCTAD) (1994). Technological Dynamism in

Industrial Districts: An Alternative Approach to Industrialization in Developing Countries?(Geneva: United Nations).

World Economic Forum (1999), The Global Competitiveness Report, Oxford University Press.

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Web sources

Hale A and J. Hurley, “What does the phase-out of the MFA quota system mean for garmentworkers?”, http://www.poptel.org.uk/women .

Sen Gupta D.N, “Effect of Policy on Export Competitiveness: The Case of the Indian GarmentIndustry” http://www.carleton.ca/ctpl/library/booklibrary/01-01-023-11.htm.

http://www.stanford.edu/class/e297c/trade_environment/rights/haddress.html quota20http://www.sweatshopwatch.org/swatch/industry/cal/retailers.html

INDIA

93

Garment industry in Nepal

Dinesh PantDevendra Pradhan

1. Introduction

1.1 Historical background

Ready-made garment industry is relatively a new industry for Nepal. However, thetextile industry as part of cottage industry has its own traditional roots in the country.Garment industry started growing sharply only after 1983 (MOF, 1999). This growth hasbeen largely attributed to the export business spilled over from India and other neighbouringcountries. When the government of the United States imposed quota on import of ready-made garments from third world countries, Nepal became a place of easy access for theIndian exporters to meet their quota deficiencies and manufacture garments for the USmarket (BM, 1999). Before this, Nepalese industrialists had not realized the potential ofgarment industry for export.

In the beginning, all required materials including workers were supplied to Nepalesegarment industries by their Indian partners and then garments produced were shipped to theUnited States with a “Made in Nepal” label. This was a privilege for the Indian entrepreneursas they could use both quotas and non-quota facilities provided by the US to Nepal. Gradually,many other Nepalese entrepreneurs were attracted to this industry because of export potentialand started to run industries on their own. However, some of them simply registered theindustries in their names to enjoy quota premiums by offering partnership with real exporters,both Indian and Nepalese.

1.2 Present status

The garment industry sector has not maintained progressive trends that it recorded inits early years. It has shown a mixed picture, both encouraging and discouraging, in recentyears as described below.

1.2.1 Number of industries

According to Garment Association of Nepal (GAN), the number of registered industriesincreased from 58 in Fiscal Year 1982/83 to 165 in FY 1983/84 and to 757 in FY 1992/93.It has been found from a separate source that the ‘cumulative’ number of garment industriesregistered from FY 1991/92 to FY 1997/98 was 1857 (BM 1999). The industries are

4


concentrated in Kathmandu valley, with extension to other 50 districts focusing on Morang,Kaski, Parsa, Rupendehi, Chitwan and Jhapa. While production capacity was equivalent toRs. 7,070 million, the capital investment recorded was equivalent to Rs. 1822.6 million.

There are currently over 215 garment manufacturers, which hold capacity to employover 50000 workers and have total investments shooting above 6 billion (TKP, 2001). Notall the registered garment industries are currently operating. According to GAN, the numberof operating industries is 95. In terms of scale of business, 10 are large, 25 are medium and60 are small. However, the total number of industries may come further down to about 60when only those industries operating on a full-fledged basis are considered. Presently operatingindustries are those few large and medium industries which have been able to expand,modernize and develop linkages directly with the American buyers and improve quality ofproducts. They are concentrated among few entrepreneurs in Kathmandu valley and in fewother industrial towns.

1.2.2 Export performance

The total export performance has been generally in the rising trend (as shown in Fig.4.1). However, the export figure differs according to the source. As reported by the Ministryof Finance, the total export earning increased from Rs. 10 million in FY 1982/83 to Rs.470.9 million in FY 1984/85 and to Rs. 1350.3 million in FY 1990/91 (MOF, 1999).According to the Trade Promotion Center of Nepal, which has computed the export figureon the basis of actual garment items, the export figure declined from Rs. 5756.5 million in1993/94 to Rs. 5357 million in FY 1994/95 whereas it again started growing and reachedRs.11500.2 million in FY 1999/2000. It has recorded a slight decline by 4 percent bringingthe export figure to Rs 11030.7 million in FY 2000/01. It was in FY 1998/99 that thegarment industry overtook woolen carpet industry, for the first time after more than adecade, as the leading export industry of Nepal.

The average rate of annual growth in export earning is 16.6 percent in the last ten fiscalyears (1991/92-2000/01), though the growth in total volume during the same period is notencouraging (Annex 4.1). It grew from 25.3 million pieces in FY 1991/92 to 40.7 millionpieces in FY 2000/01. The average annual growth in export volume is 10.3 percent for thesame period.

The export earnings have increased by more than three times (increment by 254 percent);while the total volume has increased only by 61 percent. The high annual growth in earningsis largely attributed to increment in exchange rate of US dollar. Moreover, the present exportearnings too have been largely attributed to the export performance of a few large garmentindustries currently operating in Nepal.

1.2.3 Market segment

As regards the country-wise classification of export performance, the United States hasbeen the largest market for the Nepalese garments. Almost 87 percent of total export earning

95

and 88 percent of total export volume in FY 2000/01 have been attributed to the US market.However, export earnings and export volume for the US market were 77 percent and 72percent respectively in FY 1998/99 (Annex 4.2). The export earning from the US marketincreased from Rs. 2898 million in FY 1991/92 to Rs. 6425.6 million in FY 1998/99 andRs 9595.4 million in FY 2000/01. Likewise, the volume of export to the US market alsoincreased from 23.4 million in FY 1991/92 pieces to 27.2 million pieces in FY 1998/99 and35.8 million pieces in FY 2000/01.

Figure 4.1: Ready-made garment exports

However, as shown in Figure 4.2, the share of US market in total export from Nepalhas slightly decreased on a percentage basis, if compared with the similar share in the earlyyears of the garment industry. An estimate shows that the share of US market in total exportearnings has decreased from 93 percent in 1991/92 to 77 percent in 1998/99 whereas theshare of other countries has increased from 7 percent to 23 percent during the same period.Likewise, its share in total export volume has decreased from 92 percent in FY 1991/92 to72 percent in FY 1998/99 whereas the share of other countries has increased from 8 to 28during the same period. Nevertheless, the share of US market in total export earnings hasincreased in recent years; it reached 87 percent whereas the share of other countries hasdecreased to 13 percent in FY 2000/01. Likewise, the share of US market in export volumeincreased to 88 percent in FY 2000/01 whereas the share of other countries has decreasedto 12 percent during the same period

1.2.4 Niche market

The main export items have varied over time since 1983. However, as described above,the exports of garments from Nepal continue to concentrate in the US market as the mainmarket. There are altogether 12 quota categories covering both cotton and rayon products.

NEPAL

1982

-83

1984

-85

1985

-86

1987

-88

1990

-91

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-200

0

2000

-01

w w w w w

w

w w w ww

w

w

w

14000

12000

10000

8000

6000

4000

2000

0

Exp

ort v

alue

(Rs.

in m

illio

ns)

Fiscal Year

Source: Trade Promotion Center, Lalitpur, Nepal


Since 1992, the following categories of garment products have constantly constituted theniche US market for Nepal.

Export of cotton shirts (quota category 340) to the US market was the highest with 31,23 and 24 percents in 1996, 1997 and 1998, respectively. However, it was reduced to thethird highest export category in 2000, recording 11 percent of total US export value. Likewise,out of total export, the combined share of quota category 347/348, was 32, 37 and 44percents in these three years respectively. The category recorded highest level of export(27%) in 2000. The combined share of quota category 336/636 was 19, 20 and 12 percentsduring the same period. It reduced further to 8 percent in 2000. Nevertheless, the othersignificant export items in recent years also included terry towels and shop towels (quotacategory 363-s and 363, respectively). Likewise, the quota category 338 emerged as thesecond largest export item in 2000.

Figure 4.2: Changes in garment export to U.S market


This was reflected even in the trend of utilization of quota allocated to Nepal from theUS government. Naturally, the quota category 340 was fully utilized (i.e., 100 percent) inboth 1996 and 1999, though its utilization slightly reduced to 93 percent in 2000. Likewise,the utilization of quota category 347/348 was 76 percent, 82 percent and 95 percent in 1996,1999 and 2000, respectively. In the case of quota category 336/636, the utilization raterecorded 51 percent, 58 percent and 82 percent during the same period. On the other hand,utilization of some garment quota categories (i.e., 641 and 341) ranged from as low as 5 to47 percent in 2000 while it ranged even from 3 to 22 percents in 1996.

The concentration of garment industry in some specific categories of products has beenjustified by sample studies too. For most of sample industries, following products constitutedthe hot categories for exports to the United States (Annex 4.3):

Other countriesUSA

100

90

80

70

60

50

40

30

20

10

0

2000/01

1991/921998/99

Per

cent

97

- Cotton shirts for men and boys (Quota category 340)- Cotton trousers and shorts for boys and girls (Quota category 347/348)- Cotton /rayon dresses for ladies (Quota category 336/636)

1.2.5 Employment and its patterns and growth

Though no authentic data are available, it is estimated that the employment has comedown after mid-nineties along with decline in the number of garment industries. It is statedthat the current level of employment in the industry is around 25000 to 30000 people (BM,1999), while the previous level of employment was around 100,000 in early 1990s (Pant,1998). No data were available to analyze the employment pattern in terms of skill level.However, as shown in Figure 4.3, the ratio of male to female is 85:15 and 40 percent ofpeople employed in this sector are Indians. These ratios have now gradually changed infavour of both females and local labour in individual industries.

Figure 4.3: Ratios of male female employment and local foreign labour

Female15%

Male85%

Male female employment ratio

NEPAL

Source: Sample study

Some indicative information has been generated through sample studies of nine garmentindustries presently operating in Nepal. The percentage of females in total employment rangesfrom 85 percent to less than 1 percent (Annex 4.4). Likewise, the ratio of local and foreignemployees/workers ranges from 99:1 to 50:50. The ratio of skilled workers with non-skilledones ranges from 60:40 to 95:5. In last two years period, while the ratio of females hasdecreased in some industries (GramMom and GramEna), it has increased in other industries.Likewise, while the ratio of local labour with foreign one increased in some industries (e.g.,GramSin), it has decreased in other industries (e.g., GramEna) during the same period.

Although the total number of employment in the garment sector has come down witha sharp decline in the number of industries, the employment size has dramatically grown inthe sample industries which have been able to survive and grow. Based on sample studies,the growth in employment in individual industry, by comparing the employment in its firstyear of establishment with the present employment size, has ranged from 80 percent in(GramSin) to 620 percent in (GramMal). It is also noticeable that larger enterprises in thesample have larger percentages of skilled workers.

Foreign40%

Local60%

Local foreign employment ratio


1.2.6 Capacity utilization.

The overall capacity utilization of garment industries in Nepal cannot be estimated, asmany registered industries are not in operation. Since the production capacity of all theindustries registered during the 1992-1998 has been estimated to be equivalent to Rs. 7070million (BM 1999), the export earning recorded in 1998 indicates a situation of full capacityutilization. However, as a study shows, the capacity utilization in nine sample industries hasranged from 50 to 100 percent (Annex 4.5).

1.2.7 Cost of production

The cost of production of Nepalese garments continues to be relatively high whencompared with similar cost in India and Bangladesh. Transportation is the main cost elementfor both import of raw materials and export of products. The cost of transportation of goodsfrom Nepal to Calcutta constitutes 70-80 percent of transportation cost from Calcutta portto the US port. This has been the main cost disadvantage for Nepalese exporters comparedto those in Bangladesh and India. The cost of loan from commercial banks is relatively highwhich ranges between 14 to 16 percent whereas it ranges as low as 8 to 10 percent inBangladesh. It needs to pay about 3 percent for various service fees, excluding the recentincrement in export tax and development tax.

The cost of labour which ranges from 18 to 30 percent of total production cost (includingcost of fabrics) in sample industries is considered to be relatively high compared with similarcost in India and Bangladesh (Annex 4.6). The cost of raw materials such as fabrics andaccessories, which are imported mainly from India, is naturally higher than that in India.However, recent government policy of allowing Nepalese entrepreneurs to procure fabricsthrough letter of credits in US dollar has helped them to reduce the cost of fabrics to some extent.

The profit margin in each exported item is not as high as it is generally thought of.During the present study, the garment industrialists were asked even to illustrate the costcomposition and profit margin of a particular product on a sample basis. As shown in Table4.1 below, the profit margin per piece of cotton shirt for men can be as low as US 15 cents.However, the higher value item such as children’s wear can offer as high profit margin asUS $ 1.15.

Table 4.1: Cost composition and profit margin

Cost factors Sample item X Sample item Y(men’s cotton shirt) (children’s wear)

Fabrics US $ 2.00 US $ 1.70Others (labour, transportation, accessories, etc) US $ 1.25 US $ 1.65Total cost: US $ 3.25 US $ 3.35Unit price: US $ 3.40 US $ 4.50Profit US $ 0.15 US $ 1.15

Source: Sample study

99

Data on cost composition of garment products in India and Bangladesh could not beavailable. However, all the industrialists and experts interviewed during the present studyshared the view that the cost factors particularly those relating to fabrics, transportation andlabour are relatively low in those countries.

1.2.8 Share in national export

In the fiscal year 1998/99, garment industry recorded its export performance as thelargest export-oriented industry in terms of foreign exchange earnings. Before this, it continuedto be second largest export-oriented industry after carpet industry in the country. As shownin Figure 4.4, the garment export has correspondingly increased with increase in total nationalexports to overseas countries (MOF, 2001). The share of garment export in total nationalexports in FY 2000/01 is 43.9 percent, while it increased from 21.7 percent in FY 1992/93to 48 percent in FY 1999/2000 (details in Annex 4.7). During the last nine fiscal years, theaverage share of garment industry is around 36.8 percent. Such a growth is partly due toincrease in export earnings of garment industry itself in terms of local currency and partlydue to decline in the export of carpets from Nepal.

Figure 4.4: Garment export in national total exports

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

1.2.9 Value addition

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

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

w

n

nn n n

n

n

n

n

ww

ww

w

w

w

w

3500

30000

25000

20000

15000

10000

5000

0

Exp

ort v

alue

(Rs.

in m

illio

n)

Fiscal Year

NEPAL

Export of Garmentsn Total National Exportsw


tailor master, cutter, designer, etc). Naturally, the value addition in this industry is not ashigh as in other labour-intensive industries. According to a study undertaken in 1996 (NPEDC,1996), the average net value addition of garment industries in Nepal is 35.4 percent. Thissituation has hardly changed now. The main contributors to such value addition are salaryand wages, house rents, utilities such as electricity and water and duties and fees paid tolocal agencies. Obviously the garment industry has high potential to improve its valueaddition to the scale of 90 percent if it is able to use local fabrics and accessories and replaceforeign workers by local ones.

The present status of the garment industry as presented above becomes a basis onwhich to review its competitiveness and the impact of globalization process. Moreover, italso provides a context to review the employment situation and job quality critically in thesucceeding chapters.

2. Globalization context of garment industry in Nepal

2.1 Globalization process and its meaning in Nepal

2.1.1 Background

It has been gradually realized that the immediate impact of globalization in Nepal ison its garment industry sector through the implementation of TCA under the WTO regime.This is because the quota system will be completely dismantled and integrated with theWTO system from 2005. With the removal of quota system, restrictions for neighbouringcountries to export unlimited volume of garment product to USA and Europe will beremoved and these countries will be able to export large volume of garment products. Onthe other hand, Nepal’s garment export is feared to decline sharply because of lack of itsown unique market.

Nepal needs to make preparations seriously to meet the challenges of globalizationunder the WTO regime, but the preparations seem to have been far from being satisfactorydue to frequent political changes and continued confusions among the intellectuals andbusiness communities regarding the country’s membership of WTO. Debates on whetherNepal should be a member of WTO are going on since the establishment of WTO in 1995.However, the government has already submitted a memorandum in July 1998 for its entryinto WTO as it applied for the membership of GATT in the wake of trade and transitimpasse with India in 1989. Nepal participated in the last ministerial meeting of WTO inSeattle as an observer.

Nepal has entered into various rounds of bilateral and multilateral negotiations foraccession to WTO and is likely to get accession after the conclusion of negotiation andendorsement by WTO authorities. The WTO regime will have profound influence on Nepal’seconomy. The Uruguay agreement allows for subsidies for countries having less than $1000per capita on industrial products as long as it is less than 3 percent of domestic market.

101

There are some special provisions for landlocked and economically weak country like Nepalwhich can guarantee freedom of transit, access to permanent international market and attractforeign investment in the country, thereby helping to boost its production. On the otherhand, Nepal will also have to allow products of other countries on the basis of MostFavoured Nation treatment which means Nepalese industries will have to directly competewith industries from the neighbouring countries including India and China along with theindustries of the world. Nepal, with a very weak industrial base, will have hard time competingwith superior products of the neighbouring countries and the world at lower prices.

2.1.2 Uruguay agreement on textile and clothing and its implications for Nepal

The Textile and Clothing Agreement (TCA) is a vital component of the Uruguay roundof negotiations which concluded in 1993 and came into affect with the emergence of WTOfrom 1st of January 1995. Developing countries were long trying to remove Multi-FiberAgreement (MFA), which was in force from 1974 allowing developed countries to imposequota on exports of garments from third world countries and integrate textile and clothingsector in the mainstream WTO rule. The present TCA has aimed to phase-out bilateralquotas under the MFA within 10 years from 1995 to 2004 on a product-by-product basis.This will be achieved in three phases by progressively integrating currently restricted productswith the WTO regime and at the same time simultaneously accelerating growth of quotasof remaining restricted products to eventually allow full market access by the year 2005. Thethree stages in which the quota will be phased out are:

First Stage: 36 months (1Jan 1995 to 31 Dec 1997)

Second Stage: 48 months (1Jan 1998 to 31 Dec 2001)

Third Stage: 36 months (1Jan 2002 to 31 Dec 2004)

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

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2.2 Competitiveness and productivity of garment industry and impact of globalization

As describe in earlier chapter, the garment industry has been prospering in recent yearsas the top export-oriented industry of Nepal. But it will now have to improve its productivityand competitive edge to survive and prosper in the emerging competitive world market afterthe full-fledged implementation of the WTO system. In this context, it is necessary to reviewits present structure, performance, competitiveness, productivity and future prospects in thecontext of globalization.

2.2.1 Industrial structure and export performance

Data were collected from nine garment industries to analyze their structures andperformances (Annex 4.8). This was done with a view to observing the changes in thegarment industry sector that could be attributed to effects of globalization process in generaland phasing out of quota system in particular. Majority of these industries were establishedin the mid-eighties with few industries established in the early nineties. They have nowtransformed their technology from piece-rate system to assembly line system, though a fewindustries are still using both the piece-rate system and assembly line system dependingupon the types of product. Such a transformation in manufacturing system has been madethrough replacements of the traditional Indian machines by modern Japanese machines.Similarly, employment size in each of these industries has gone up significantly, in sharpcontrast to overall reduction of employment in the garment industry as a whole due toclosure of many small industries in recent years.

Garment entrepreneurs have made some efforts towards market diversification, but theexport of garment industries of Nepal is still largely concentrated in the US market. However,as stated in earlier chapter, the share of US market is on slight decrease with increment inshare of European and Asian markets after 1990.

All nine sample garment industries that were covered by the present study wereperforming well in terms of their export business. They have now recorded export performancethat is more than double of their first year of establishment. In some cases, the incrementranges from as high as 3 to 23 folds (Annex 4.8). This has been compatible with theincreasing trend of total garment exports from Nepal (details in Annex 4.1 and 4.2)

Nepal has been enjoying duty free imports of fabrics from India when payments aremade in dollar as India provides 20 to 30 percent subsidy on their fabric export through dutydraw back scheme when transactions are made in US dollar. Such a situation has indeedbeen favourable for Nepal, and it has contributed towards making Nepalese products slightlycompetitive. According to the WTO rule, developing countries with per capita income ofless than $1000 can subsidize their export product as long as the domestic consumption isnot greater than 3 percent. India is likely to subsidize its fabric export even after the year2005. It means cheap fabric import will continue to help Nepal to become competitive inthis respect for some time to come unless there is change in India’s subsidy policy.

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Although all the fabrics and accessories used to be imported from India in the earlyyears of industrialization in the garment sector, almost 50 percent of raw materials wereimported from third countries in recent years (Table 4.2). This is a clear evidence ofdiversification and up-scaling of sourcing of input materials. Such a recent trend in importsindicates that the Nepalese garment industries, especially the big and medium industries, areincreasingly becoming quality conscious. Some industrialists have already started preparationsto appoint their representatives abroad to ensure outsourcing of materials and export markets.This is one of the effects of globalization and this kind of outsourcing of materials is likelyto be intensified in the future to meet the challenges of WTO from the year 2005.

Table 4.2: Import of raw materials and accessories for garment industries

(I) From India (Rs. in million)

Year 1993/94 1994/95 1995/96 1996/97 1997/98

Cotton Textile 1738.9 1402.8 1569.8 1094.4 1249.5Cotton Thread 531.6 407.3 587.5 664.9 438.8Synthetic Textile NA 119.7 243.8 127.5 143.2Synthetic Thread NA 76 123 53.3 332.9Button and Fastener NA 8.5 9.6 7.2 7.8

(II) From Overseas (Rs. in million)

Year 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98

Synthetic Thread 630 748.7 402.5 470.7 372.7 304.4Cotton Textile 117 0 60.8 164.5 416.8 283.3Button 10.6 0 20 19.2 42.5 45Textile Dyes 55.3 94.9 42.4 73.9 56.5 43.1Cotton Thread 2.7 0 27.5 9.5 7.5 19.5Other Thread 327.5 0 627.5 505.1 233.8 290.8Other Textile 285.5 0 357.5 292.3 347 431.2Fastener 75 0 141 115 322 366Synthetic Textile 57.1 332.8 60 133.9 169.2 274.1

Source: BM (1999)

The major trends as presented above indicate that the first two phase-out of exportquota had hardly any adverse effect on the structure and export performance of thegarment industry sector in Nepal. One possible reason is that 35 percent of the products inthe U.S. market and 37 percent of products in European markets were not protected fromthe beginning.

The real challenge of globalization is feared to be strongly felt by the end of 2001when 51 percent of the existing quota will be dismantled while the remaining quota will alsobe increased by 27 percent. This means Nepalese garment industry, especially that part

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which largely depends on the spill-over effect from India and other neighbouring countries,will start feeling the pressure of globalization as early as two years from now.

2.2.2 Comparative review of competitiveness and productivity

Nepal’s export performance is relatively quite low in SAARC region (consisting ofseven countries). For instance, while the total exports of Bangladesh and Sri Lanka werecomparable at around US $ 3473 million and US $ 3798 respectively in 1995, Nepal’s totalexports were quite low to the tune of US $ 354 million in the same year (Joshi, 1999). Onthe other hand, the share of garment export as percentage of GDP was relatively high inNepal, indicating a small base of both the industry sector and the national economy (Table4.3). Such a situation continues to remain unchanged even in recent years.

Table 4.3: Garment export as percentage of GDP

Country Garment export in percentageof GDP

Nepal 2.00India 0.25Sri Lanka 2.60Bangladesh 1.40Pakistan 0.20

Source: BM (1999)

As shown in Table 4.4, the share of Nepal in the US garment market is the lowestamong other SAARC countries. While Nepal’s share is 0.4 percent, India’s share is thehighest with 4.6 percent followed by Bangladesh, Sri Lanka and Pakistan with 2.6 percent,2.1 percent and 1.8 percent, respectively.

Table 4.4: Share of South Asian countries in total garment import of U.S.A

Total import from Total value of 1993-97 Percent(in ‘000 dollar)

World (Total) 64477911 100.0India 2940689 4.6Bangladesh 1697340 2.6Pakistan 1149765 1.8Sri Lanka 1365718 2.1Nepal 232053 0.4


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

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of Nepal’s export was 0.0174. Likewise, Nepal’s share in total US import of garments fromSAARC region was merely 2.04 percent while it was 33.76 percent for Bangladesh (Table4.5). In fact, its share in total US import from SAARC region is in itself least, being thesixth after Maldives.

Table 4.5: US imports from SAARC region in 1999

Total imports Garment imports

Country Value (US$ in million) Percent Value (US$ in million) Percent

India 9071.50 61.67 1962.6 28.17Bangladesh 1921.80 13.06 235.2 33.76Pakistan 1742.30 11.84 1140.3 16.64Sri Lanka 1744.00 11.85 1315.6 18.89Nepal 177.60 1.21 142.2 2.04Maldives 54.90 0.37 53 0.76

Total 14712.10 100 6965.7 100

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

With the complete phasing out of the quota system for garment exports to the USAfrom the year 2005, Nepal will have to compete with many countries, particularly itsneighbouring countries such as India, Bangladesh, Pakistan and Sri Lanka. Nepal tends tobe little behind its neighbouring countries in terms of its competitiveness for garment exportbusiness. This is obvious from many points of view presented earlier in this report. Manyof the neighbouring countries are in a hurry to speed up the process of ending the MFA tointegrate it with the WTO rules. Nepal on the other hand is not in too much of a hurry tosee the quota system dismantled. This is because most of the neighbouring countries havingfavourable conditions are in a position to gain from this process while Nepal on the otherhand will have to struggle to survive.

The competitive strength of Nepal compared to its most immediate neighbours can beassessed in terms of cost structures of garment products. As illustrated by an experiencedNepalese garment entrepreneur some time ago, also shown in Table 4.6, Nepal’s cost structureis relatively higher than its immediate competing neighbouring countries. For example,when export value of a garment product such as men’s shirt is US$ 3.40, cost structure andprofit margin have shown relative competitiveness of three South Asian countries. This isa conservative estimation considering cost of fabric in cost structure to be constant for allcompeting countries which may not reflect reality of Nepal, except in the case of importfrom India by paying US dollar. This situation either leaves very small profit margin forNepalese entrepreneurs or puts pressures on them to charge price that is higher than otherexporting countries.

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Table 4.6: Comparative cost structure and profit margin (in US dollar)

Factors: Nepal Bangladesh India

Cost of fabrics 2.00 2.00 2.00Other costs (cutting/finishing, etc) 1.25 0.70 1.00Total cost 3.25 2.70 3.00Export value 3.40 3.40 3.40Profit 0.15 0.70 0.40

Obviously, Nepal is weaker than its neighbouring countries in terms of costcompetitiveness. The average cost of production of garments in Nepal has been estimatedto be about 30 percent higher than in major competing neighbouring countries. The averagevalue addition of garment industry in Nepal is only 35 percent while it is generally consideredto be about 70 percent in Bangladesh and about 95 percent in India. The cost of bank loansin Nepal is also significantly higher compared to other South Asian countries.

A study (NPEDC, 2000) shows that the labour productivity index in Nepal has relativelydecreased in the last decade, especially in manufacturing sector (details in Annex 4.9). Asestimated by some Nepalese garment entrepreneurs, labour productivity in Nepal is about 35percent lower than other neighbouring countries. As illustrated by an experienced industrialist,if the Bangladeshi garment workers can produce 3000 pieces from 100 machines, Nepalesegarment workers can hardly produce 1000 pieces from the same number of machines.

A comparative review by the Asian Productivity Organization also indicates increasingtrends in productivity indexes of some Asian countries in manufacturing sector, unlikeNepal. Details are given in Table 4.7.

Table 4.7: Manufacturing labour productivity indices of selected Asian countries

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Bangladesh 100 NA NA 48.3 NA 62.4 NA NA NA NAIndia 100 104.4 107.2 119.8 133.7 137 128.4 136.3 135 144.6Indonesia 100 106.6 115.8 106.8 113 119.8 126.1 131.2 141.1 NAPakistan 100 95.1 114.1 115.2 118.1 134.8 139.1 158.9 177.4 177.8Philippines 100 97.6 98.4 101.4 109.3 99.6 91.9 96 95.9 104.7Sri Lanka 100 NA NA NA 130 122.2 131.6 146 141.1 131.6Thailand 100 97.5 120.5 117.6 134.9 124.1 129.6 139.7 146.7 NA

Source: APO (1997)

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

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idea of dry port, though being materialized through necessary construction work, is yet tocome in operation.

Industrialists and experts tend to believe that the only advantage Nepal has currentlyover other neighbouring countries is labour cost. The average labour cost component, whichis currently about 20 percent to 30 percent of the total cost of a product, often variesdepending on the cost of fabric and other accessory materials. High quality, skilled manpoweris still not adequately available. This is compensated by the employment of foreign workerswhose salary or wage rate is much higher than those compared to similar high qualityworker in India or Bangladesh.

However, with improvements in technology and modernization of industry, someNepalese products have built an image in the international markets. In terms of quality, theNepalese products can well compete with those of Bangladesh and those of northern partsof India. Some Nepalese entrepreneurs have already established direct linkages with thereputed buyers without relying on the middlemen. For the past five or six years, there issome positive indication that Nepal has been able to develop its own unique market.

If Nepal has been performing well in garment industry sector in spite of many obstacles,it is mainly due to resourcefulness, business manoeuvring and managerial capabilities of afew Nepalese garment entrepreneurs. Nevertheless, government too has been making someliberal policy changes in favour of garment industrialists for the past five or six years andit is still in the process of making efforts to extend incentives for the promotion of garmentindustry and its export business. Most importantly, the policy makers are beginning to feelthe challenges of globalization process and understand that the garment industries will havedifficulty surviving in Nepal without substantial supports from the government. Some of theinitiations taken by the government in this regard are the construction of Inland ContainerDepots (ICD) at Biratnagar, Bhairahawa and Birgunj, which are the major sites fortransportation and transaction of goods. There are some positive indications that the ICD atBirgunj has been completed recently and this alone, if used, is expected to decreasetransportation cost by 20 percent to 30 percent. The government is also planning to establishExport Processing Zones near these depot areas. Nepal is making progress in the area oftelecommunication with the introduction of Internet and cellular phones. All these actionsin process are expected to help the garment entrepreneurs to be competitive in the future.

2.2.3 Niche market

Many believe that Nepal’s present so-called niche market is artificial and, if it exists,is very minimum. It will disappear with the emergence of fully globalized competitivemarket under the WTO regime. This is because the so-called niche market of Nepal hasexisted mainly due to quota system. Since Nepal has virtually no ancillary industries tosupport the present garment industry, everything has to be imported from India and othercountries making the cost of production higher than in other countries. Only a few Nepalese

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garment industries have exported products that are made from Nepalese fabrics withunique Nepalese designs. In most cases, buyers have determined the types of fabric to beused in the products, including specific designs and colors. Nepal still has not been able toexport non-quota items significantly enough to carve a unique place for itself in theinternational market.

The impact of globalization on the present niche product market of Nepal, as hintedin earlier chapter, is unpredictable as it will continue to largely depend on the consumers’demands and dynamics of market forces. However, the globalization process will affect notonly the niche products but will extend to the whole garment market. Nepal has only aboutthree years to strengthen its capabilities, and there is now tremendous pressure on both thegovernment and private sector to take concrete measures for developing skilled manpowerand a sound R&D base to create a real niche market that can withstand the pressures ofglobalization. The situation for Nepal will deteriorate fast with the offering of special facilityto other countries such as Sub-Saharan African countries and Caribbean countries. Garmentexporters in Nepal can not ignore Bangladesh’s attempt in particular to enjoy such a specialfacility either.

2.3 Challenges and pressures of globalization on garment industry in Nepal

Globalization means both opportunities and problems (threats) in Nepal. The benefitsof globalization to developing countries seem to be extremely limited as the developedcountries have very stringent migration laws that restrain the free movement of labourcontrary to the spirit of globalization (Dahal, 1999). Nevertheless, there are two extremeviews about the challenges of globalization to Nepalese garment industries. While one ispessimistic, the other is optimistic.

Some of the threats of globalization challenges are related to the following situationswhich need to be tackled carefully for garment industry to survive in Nepal.

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

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

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

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for the workers. Globalization in this sense is likely to give birth to problems ofunemployment and labour unrest.

n Many entrepreneurs tend to be confused about what to do, nor have they beenable to understand the concept of WTO clearly. The present pace of governmentto devise strategies and policies to face the challenges of the globalization processunder the WTO regime is very slow while the time is running out. Consideringwhat has been done in the past, one can not expect miracle to happen in the nextthree years to prepare Nepal for facing the challenges of globalization. It will bevery difficult for Nepal to improve its competitiveness in the garment industrywith the existing level of efforts and work culture.

n Decline in garment industry, which is currently the leading foreign-exchangeearning industry of Nepal with export business of over US $140 million andcapacity of employing some 50 thousand people, will have profound negativeimpact on the entire economy. To prevent this, government needs to take a leadrole to bring all the key players to devise long–term strategies for countering thelikely adverse situation from the year 2005.

n There is a possibility of deeper penetration of the Nepalese market by the Indiancapital and labour with very little gains for the mass of population and disruptionin their traditional livelihood patterns (Acharya, 1999). Nepalese economy, beinga satellite of Indian economy for more than four decades of planned development,is still isolated from global economic revolutions that created many bubbleeconomies in the SAARC and the ASEAN countries (Dahal, 1999). It is unlikelythat Nepal will get rid of the continued Indianization process that is deeply rootedin behaviours of many Nepalese people (e.g., Acharya 1999, Shrestha, 1999). Theprocess will continue to affect Nepal’s garment industry considering in particularthe fact that Indian manufacturers and workers originally induce the industry.

n If the skilled Indian workers go back home because of demands in their owncountry for producing garments for unrestricted, open world market, it is alsolikely to create a problem of deficiency in skilled manpower required for thegarment industry of Nepal.

n Being a land-locked country, Nepal cannot significantly reduce its present transportcost. The problem is further compounded by such factor as low productivity oflabour, ineffective labour laws with little concern for efficiency and absence ofbackward and forward linkages in the garment industry. If the present unfavourablesituation continues to prevail, it will be very difficult for Nepal to keep up itspresent performance after the year 2005.

n The present interest rate (around 15 percent) on bank loan in Nepal is consideredto be high in the South Asian region. Some industries have already started feelingthe pressure of repayment of bank loans. Furthermore, because of the uncertain

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future of the industry itself with the phasing out of the quota system, someindustrialists are starting to hold “wait and see” attitude refraining from investingfurther in their industries.

n As illustrated earlier, the cost of production in Nepal is much higher than inBangladesh and India. There will be pressure now to improve this situation forthe Nepalese garment industry because of the intense competition among allcountries after the year 2005.

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

n Present pace of infrastructure development, including policy designs andcommitments of the government, is very poor. If this status quo situation existswithout significant improvement after the year 2004, then it will be difficult forgarment industry to survive. In fact, Nepal does not need to wait for next threeyears to see declining situation of its garment industry if other countries startenjoying special facility for easy access to US markets from now.

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

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

n Despite the possibility that many small and medium scale garment industries willclose down, some garment industries will not only survive but also excel in theirperformance after the year 2005. With an eye on competition, some industrieshave already started not only exploring new avenues of market, but also makingnecessary arrangements for outsourcing of raw materials considering the likelydemands of the markets.

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

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of labour is expected to come down while both the supply and quality of manpowerwill also improve.

n With the removal of quota barriers, Nepal will be able to compete freely withother developing and less developed countries for having a reasonable share inthe world market. Likewise, with reduction in tariff and non-tariff barriers, thesize of the world market will increase by creating new market opportunities. It isalso likely that cheap products coming from the developing countries could displacecertain market share of the developed countries. This will lead to immense exportmarket possibilities for the garment sector of Nepal. Least developed country likeNepal can also resort to export subsidy for their export products as well as zeroduty access to other market. There will be immense possibilities of increasingexport from Nepal, provided that Nepal can negotiate for enjoying privileges ofa least developed country.

n Since only a few best and sophisticated industries can survive after 2005, their jobquality and working conditions for workers can be expected to be better thanthose in many industries operating with low quality outputs targeted for ordinarybuyers. These few best industries are producing quality products for the reputedstandard buyers such as J.C. Penny, Walmart, Target and GAP which require thatthe industries maintain certain standards of working environment for their workerswhich will lead to improvement of working condition and better facilities for theworkers.

n Large industries have increasingly realized that they can survive only by reducingtheir cost of production and improving product quality. Such a realization islikely to result in proactive initiatives of private sector, with support of thegovernment, in areas such as R&D and skilled manpower development.

n Market positions have been much better than in the past and the government alsohas started offering some important facilities in recent years. Likewise, there havebeen some gradual changes in technology by replacing the traditional inferiorIndian machines by the modern, superior Japanese and German machines. Thishas facilitated the process of transformation in production system from piece-ratesystem to assembly line system. Quality of the Nepalese products is generallyconsidered to have improved significantly. Such a transformation in productionsystem along with improvement in quality of products and export performance isan indication of improvement in productivity and willingness of the industrialiststo face the challenges of competitive globalized market.

n About 20 percent of present export are estimated to be on non-quota items.Likewise, the concentration of export business in the US market is also slowlydecreasing with expansion of European and other Asian markets. These are positiveindications that give hope for withstanding the pressures of globalization.

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n More recently Nepal has started importing raw materials from third countries inan equal footing with that of India. This will enable the Nepalese entrepreneursto enjoy both cheap and quality products after the full-fledged implementation ofWTO concepts.

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

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

n Because of similar development thrusts in South Asia and similar experiences inthe field of garment export business, the Nepalese entrepreneurs can exploresome areas of collaboration with garment exporters of other neighboring countriesand make some joint efforts for capturing a sizeable share of the world market.Such a collaboration is likely to be meaningfully utilized in minimizing cost ofproduction and transportation and promoting export market.

Productivity, as a means to generate competitive advantage, is a fundamental tool forenhancing competitiveness in the era of globalization (Bajracharya, 1999a). On the otherhand, while competitive capacity is partly determined by external factors; such as, internationalenvironment, character of international competition and competitive policy of the chiefrivals, and the competitiveness of the country (Bossak and Nagashima, 1997). Nepal, atpresent, is directly competing with its neighbouring countries in terms of both price andquality of products. Therefore, the most important challenge facing garment industry sectorin Nepal in the wake of globalization is to improve its productivity to be competitive in theopen world market.

3. Employment and quality of jobs in garment industry in Nepal

3.1 Employment situation

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

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is estimated to be some 50 thousand people while it provided direct and indirect employmentto more than one hundred thousand people a few years back. However, this sector has nowshown some improvements in other areas. While this industry started with 100 percentinvolvement of Indian entrepreneurs, more than 90 percent of garment industries are currentlyowned and operated by Nepalese entrepreneurs. Likewise, the share of employment ofNepalese labour has increased from being negligible to some 60 percent today (BM, 1999).

The total number of people employed in garment industry sector has decreased inrecent years because of decline of many small and medium garment industries. Although215 industries are currently in existence, only a few large and medium industries are actuallyperforming with tangible results. The reduction in employment size was partly due toincreasing shift in technology and manufacturing systems from piece rate system to assemblingline system by using imported sophisticated machines. Moreover, smaller industries havebeen dying out because of strong competition from both inside and outside the country.

Even though garment industry is basically women-oriented industry, majority of garmentworkers in Nepal are men. In the garment industry sector as a whole, the ratio of maleworkers dominates female workers in Nepal by 85 percent to 15 percent. Nevertheless, thelargest garment exporting industry in Nepal, with annual export to the tune of $ 13 million,has employed females constituting about 85 percent of the 2500-3000 workforce. Thisindicates that with more sophistication and development in the garment industry structurethe male dominance in the overall workforce can gradually decrease in Nepal in the future,like in other neighbouring countries.

In the beginning, the industries were dominated by Indian workers and technicians.Such a situation has not completely changed now as many industries still employ foreignworkers due to unavailability of skilled manpower in the local market. However, as indicatedearlier, the percentage of local workers in total employment in the garment industry sectoras a whole has increased from a negligible percent in early 1980s to 60 percent in 1999.

It should be noted here that employment size of the sector has in overall declined buthas grown for those few industries that have been able to survive and improve exportperformance. The industrialists claim that they have not only increased employmentopportunities but also improved quality of jobs. Employment size in each of nine selectedindustries has increased significantly compared with employment figure in its early years(Annex 4.4). It has grown by 60 percent in minimum and 620 percent in maximum. Theassumption that while dying industries reduce number of employees, those who survive canultimately provide larger number of employment opportunities and better job quality is true,as this is exactly what is happening right now in Nepal.

3.2 Review of present job quality

The quality of job in garment industries was reviewed by examining the earlierpublications for the purpose of the present research study (e.g., Adhikari, 1993; Decenzo and

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Robbins, 1997; MOLJ, 1992). The main criteria for the review were working-hours, salaryand allowances, skill development opportunities, promotion opportunities, safety at work place,job security, retirement benefits, gender distribution in employment, use of local labour andindirect employment through labour contractors. In this section, job quality in garment industrysector is reviewed by analyzing data drawn from nine sample garment industries.

3.2.1 Working-hours

All industries have eight-hours’ work day, with one day off every week as per thelabour law. While a few industries have designed workdays on a shift basis employingpeople through mutual understanding, other industries have normal work hours from 9.0clock in the morning to 5.0 clock in the afternoon. The work beyond these hours is consideredas overtime work that offers allowances.

3.2.2 Salaries / wages and allowances

In Nepal, the minimum wage determined by the government has occasionally changedover the years. As of 1997, minimum wages of different levels of manpower range from Rs.1800 to 2150 according to skill level, though market wages are considerably higher (Dahal,Karki and Upadhaya, 1999). However, it has often been argued that minimum wages shouldbe determined and enforced strictly on the basis of clear and standardized norms keeping inview the subsistence cost. The argument further goes that additional benefits to the workersshould be tied with productivity (Bajracharya, 1999b).

Only 75 percent of presently running garment industries are paying wage by followingthe minimum rates determined by the government; the average pay scale in the rest is lessthan the standard minimum wage (BM, 1999). However, all the nine industries covered bythe present study have followed the minimum wage rate periodically determined by thegovernment under the existing labour law as the main basis for fixing minimum wage fortheir workers. Some industries have now paid even more than the government rate as theirminimum wage (Annex 4.10). There is no maximum salary limit. It is different from industryto industry depending on their ability and level of competence of the persons employed. Noindustry has adopted differential salary rate for male and female workers. The minimumwage ranges from the government rate to Rs. 3000. The maximum salary ranges from Rs.9000 to Rs. 60000. However, it was found during the study that the salary received bymajority of workers and employees within an individual industry ranges from Rs. 3000 toRs. 6500.

With regard to allowances, all industries have provided overtime allowance for workingmore than eight hours on a workday. Most industries have paid 150 percent increment inbasic salary rate for over-time work. Likewise, they have provided food allowance to workers/employees for working more than three extra hours in a workday. The allowance rangesfrom Rs. 20 to 45 according to paying ability of the industry and level of workers and

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employees. Likewise, some industries were found paying incentive allowance dependingon the efficiency level of the workers. For instance, GramMom, the largest industry, offersdifferent incentive allowances for those who meet from 80 to 200 percent of worktargets. Some 30 percent of workers of this industry are reported to have enjoyed suchincentive allowance.

3.2.3 Skill development opportunities

Except few, all industries have provided skill development opportunities to their staffand workers in the form of on-the-job training. They first employ their employees as unskilledlabour and make them learn by doing and sharing know-how from their colleagues andsupervisors. Some industries have employed a few people who have been trained fromgovernment’s garment training institute. But such trained people need re-training in the realjob situation. The need for technical manpower has been fulfilled by employing cutters,masters and designers who are mostly from India and are trained elsewhere either throughformal training courses or practical experiences. Only one industry, the largest in the country,has well-organized on-the-job training in a wider scale. Most people in this industry are firstrecruited as trainees with allowance and then they are gradually shifted to their real jobsaccording to the skill level they achieve.

However, most industries do not have positive attitude in sending their staff and workers,especially female workers, for formal training courses. Two of the sample industries had badexperiences of losing money by training female workers few years back because thesetrained workers left the organization after training. Likewise, GramMom, which organizeson-the-job training on a regular basis, has been reported to have been losing hundreds offemales every year for social reasons such as marriages and other family obligations.

3.2.4 Promotion opportunities

All industries do not have formal system of evaluating performance of workers andstaff and promoting them to higher level jobs on a regular basis. Few industries haveawarded promotion to their staff such as promoting from junior master to master, tailor tomaster or supervisor. But, as noted by industrialists, promotion practices largely depend onavailability of jobs and competency of existing staff and workers to meet the requirementsof those available jobs.

One industry was found to have occasionally awarded promotion to the staff andworkers by increasing salary and wage rate when they improve their job performance. Thisis awarded even to those working on a daily wage basis.

3.2.5 Safety at work place

Though the garment industry is not hazardous by its nature, a number of provisionshave been made by many industries to ensure safety at the work place. Most industries

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reported provisions of gloves for cutters and adequate lighting system. Some industries suchas GramIna, GramPun and GramCot have developed and maintained safety system thatinclude safe drinking water, fire exits (double exits) and fire-alarms according to thestandards set by their American buyers, e.g., WalMart, J.C. Penny, etc. They were requiredto do so to satisfy the requirements occasionally specified by their buyers. In overall, thesafety system in most industries was observed to be sufficient while one industry hadminimum safety (Annex 4.11). Industries having their own factory buildings have somereasonable safety measures, while those operating in rented houses had only minimumsafety arrangements.

3.2.6 Job security

Job security has often been a matter of grievance expressed by the labour unions. Inan estimation, about 70 percent of workers were employed on contract or piece-rate basis,while 14 and 16 percent workers were employed on permanent and temporary service basisrespectively (IGWU 1996).

In most garment industries covered by the present study, only a few staff and workerswere employed on a permanent service basis. Majority staff and workers are working oneither contract or daily-wage basis. Appointment letters were issued only to the permanentones (also temporary ones in a few industries). Moreover, some industries have usedcontractors (suppliers) for employing workers in some cases, i.e., employers are not directlyresponsible for these workers.

The percentage of permanent staff in industries has ranged from almost 0 to 50percent (Annex 4.12). The employers are evidently hesitant to issue appointment letters totemporary workers as these workers become entitled to permanent service aftercompleting 240 days according to the existing labour laws and are hence entitled toenjoy job security and benefits as provisioned in the laws. For this, they oftenprefer to employ workers on a temporary basis even for years without issuingappointment letters.

Employers have been criticized for using labour contractors to exploit the workersindirectly (IGWU, 1996). They have allegedly used contractors for employing workers intheir industries simply to avoid dealing directly with workers with regard to working hours,salary and benefits. In this case, the relationship between employers, who are runningregistered industry, becomes indirect and the workers are prone to exploitation by thecontractors who do not have as legitimate existence as industry itself. There are alreadysome incidents of fleeing of contractors without making payments due to the workers. Whilesuch practice has been widely criticized by workers, labour unions and government officialsresponsible for labour administration, employers assert that it is their business compulsionin order to avoid labour problems. Nevertheless, the situation has been gradually changingwith decreasing trend of employment of contractors in industries.

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3.2.7 Retirement benefits

A few industries claimed that their provisions of provident fund, gratuity and accidentinsurance for permanent staff and workers are as per the labour laws. However, most industrieswere found to have failed to comply with provisions of labour laws for such retirementbenefits. While this has been an area of criticism of labour union and government labourofficials, employers attribute it to the vulnerable situation of the industry itself and theirfinancial inability to make long-term financial commitments to their workers.

3.2.8 Other welfare provisions

While a few industries have welfare schemes such as medical insurance, heath serviceand child-care, most industries have not done so despite the requirement to do so under thelabour laws. However, some industries claimed that they have offered music entertainmentto workers on the job.

3.2.9 Gender issues

Except in an enterprise (GramMom), each of eight sample industries has a smallnumber of female workers, ranging from almost 0 to 25 percent. Some industries were foundto employ female workers in supervisory positions too. GramMom has about 5 percent ofworking women in supervisory positions, but all others have hardly 1 percent of totalworkforce in supervisory positions. A half of the surveyed industries employed no womanin a supervisory position. However, the industries have not discriminated between male andfemale workers in determining wage rate.

Although this industry sector has potentialities to offer employment opportunities tofemale workers and reduce the gender gap in overall employment structure, there seems tobe some hesitation on the part of employers to employ females due to their high dropout rateand some other reasons. Female workers were reported to have the tendency of leaving theindustry after marriage or delivery of child or joining schools and colleges. Moreover, theNepalese society likes to avoid sending their girls to factory except under an acute economiccompulsion. As complained by the union leaders, there are some incidents of sexualexploitation and harassment of female workers by the male employees, supervisors and evenemployers in the work place.

3.2.10 Local workers in employment

While three of nine sample industries have largely employed local labour (90% andabove), remaining industries have significant number of foreign staff and workers. The shareof foreign labour in five industries ranged from 20 to 75 percent, while one industry hasemployed mostly foreign labour (details in Table 1.4.)

Different opinions prevail about the use of foreign labour in garment industries inNepal. The industrialists assert their right to employ those who are fit for their job. Even

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among available workers, industrialists prefer foreign workers because foreign workers aremore efficient and less problematic compared to local ones. Nepalese workers generallydemand for better benefits and working conditions and are often prone to quick politicizationresulting in unproductive work culture. For industrialists, there are some genuine reasons forpreferring foreign workers to local ones.

However, employment of foreign workers has often been a subject of criticism labeledby local workers, labour unions and government officials. The industrialists have allegedlyemployed foreign people even by paying salary and wage that are several times more thanthe salary and wage paid to the local ones. Industrialists dismiss such allegations by sayingthat they are eager to pay more even to local people if they can work parallel to their foreigncounterparts and also that they are not prohibited by law to employ foreign labour.

3.2.11 Benefit sharing

Except few, all industries do not have mechanism for benefit sharing. They do not havebonus payment system to workers as provisioned in the labour laws nor do they haveprovision to increase salary as per profitability and inflation situation, except when thegovernment itself fixes such a minimum wage rate. However, as noted earlier, only onesample industry reported having a pay-incentive system according to workers’ ability toachieve pre-set work targets. Moreover, most industries provide some financial incentives(equivalent to salary or wage of one to four weeks) during Dashain festival, which vary bothacross persons and industries.

Industrialists attribute their inability to have benefit-sharing mechanism due to theirlow profitability rate as well as uncooperative attitudes of local workers. However, labourunions, government officials and experts tend to hold the view that such benefit sharingmechanism is acutely lacking in the garment industry sector for maintaining the workers’motivation.

3.2.12 Labour-management relations

Overall, the present state of industrial relations in Nepal tends to be unhealthy. Thereexists tremendous gap between the workers and management – in their perception, thinkingand style of working and unless such a gap is narrowed down, there is little room forharmonious industrial relations in the country (Manandhar, 1999).

Currently, some garment industries that employ more than 200 people have labourunions at enterprise level. Moreover, there is one central level union called IndependentGarment Workers’ Union that coordinates the activities of unions that are set up at enterpriselevel and maintains close working relationships with the Garment Association of Nepal,formed by the garment industrialists. Such a central union is part of the central level tradeunion called GFONT, affiliated with the UML which is currently the main oppositionpolitical party.

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Five out of nine sample industries reported the existence of labour unions within theirrespective industry (Annex 4.13). One of them has recently turned the existing labour unioninto a joint committee represented by both labourers and management. Most of these industrieshad no history of strikes. Even the incidents of strikes in some industries were reported tobe less serious. The general scenario as seen by the industrialists is peaceful, despite thereport that the scenario is likely to deteriorate in one sample industry.

However, industrialists, union leaders and workers reveal some mixed and problematicsituations. There seem to be misunderstanding between employers and workers about theirrespective roles as they often complain about each other. Industrialists tend to criticize theworkers and union leaders for their inefficiency level, low productivity, uncooperative attitudesand politicized work behaviours. On the other hand, workers and union leaders express theirdissatisfaction over general disregard on the part of the employers towards the local workers’feelings, favouritism to Indian workers, use of contractors, non-issuance of appointmentletters, low pay and non-conformance to provisions made in the existing labour laws.

Labour-management relations continue to be a critical factor for development of garmentindustry in Nepal. The present findings are similar to those reported in an intensive studyconducted by NPEDC in 1997 for the Ministry of Commerce (NPEDC, 1997).

3.3 Overall impressions of job quality

The existing job quality in garment industry sector in Nepal has been perceived differentlyby different groups directly or indirectly concerned with development of the industry.

3.3.1 Employers’ perceptions

The industrialists hold the view that the existing job quality as stated above is morethan reasonable compared to job quality in other sectors of the Nepalese economy. Peopleemployed in the industry have been able to earn more than the minimum wage rate determinedby the government and those who are competent can earn substantial amount of money thatis more than what is offered in other employment sectors. With regards to safety and otherworking conditions, workers are less likely to find other places that are better than in thegarment industries as these work places have been built and maintained according to standardsset by foreign buyers by going beyond the Nepalese standards.

The employers are eager to increase the size of financial package for skilled andefficient people and to further modernize the work place according to their business leveland profitability. They also express their readiness to pay more to workers and improve levelof job security if the workers maintain their discipline in work places and help in developingproductive work culture. Female workers have been provided with relatively comfortableand safe work place in terms of nature and volume of work and working hours. The presentindustrial environment is perceived to be relatively peaceful by all the industrialists.

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However, industrialists strongly feel that the existing labour law has not been favourablefor improving productivity as they can not hire and fire workers at discretion to maintaindiscipline among the workers and provide different incentives depending on their efficiencylevel. They have to think twice to employ local workers instead of foreign workers. Thereis always a fear of being caught in the trap of existing labour law and threats of strikes byunions, making it difficult to take actions even against those local workers who areunproductive and undisciplined.

There is a feeling among employers in general that the present labour laws are notformulated in a balanced way. As it has been argued, labour law should specify not only theright but also duties of the workers, unions, management and owners/ shareholders. Necessaryhiring and firing, disciplinary actions and layoffs have to be made easy since the employerscan not afford to keep unproductive or undisciplined workers and lose profits on investment(Jyoti, 1992).

3.3.2 Workers’ perceptions

Workers in general are not dissatisfied with the present job quality in garment industries.They often express grievances over the discrimination between local and foreign workers asregards to financial packages and insecurity of their employment as they have not receivedappointment letters or have permanent job even after completing the period of work prescribedby the labour laws. The employers are allegedly not taking care of the workers but exploitingthem for their business interest. Workers feel that they have been largely deprived of therights and benefits as envisaged in the existing labour laws, especially the rights and benefitsrelated to issue of appointment letters, job security, provident fund, gratuity and workinghours. They also expressed their grievances over the occasional misbehaviours of employersand senior staff towards female workers and their inhumane treatment to workers in difficultsituations such as those arising from illness and family obligations.

As the union leaders observed, employers have hardly shown any concern for improvingquality of job in garment industries as their concerns have been limited to making artificialtemporary arrangements during the inspection visits by the buyers. It is also argued thatthere are adequate skilled garment workers in Nepal, but the industrialists do not like to usethem because labour law requires employers to give permanent jobs to workers once theywork continuously for 240 days.

3.3.3 Government officials’ perceptions

The government officials, especially those oncerned with labour administration, do notsee existing job quality as satisfactory one. They do not like present tendencies of garmentindustrialists to employ workers on a temporary basis, use contractors and foreign workersand provide no increase in financial benefits even after making high profits involving millionsof dollars. They emphasize the need for improving job quality in garment industry especially

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in the areas of financial package, job security and use of contractors and foreign workers.Even other government officials concerned with foreign trade and industrial promotion sharethe views similar to those of labour administration officials.

3.3.4 Experts’ perceptions

The industrial relations system in Nepal has been viewed as a blurred one. It has beena mix of informal custom and practice and a set of formal structures and rules as providedby labour legislation as there are still some aspects of labour relations that are governed bytraditional values and mutual understanding between employers and employees (Pant 1991).There are two extreme views expressed by the experts in matters relating to employment andjob quality.

One view is that the present rate of salary and wage in garment industry sector is highconsidering the high cost of production and low labour productivity. The industry can notimprove competitiveness in the international markets, when compared against Bangladesh,without reducing the cost of production including cost of labour. Workers should be paid tomatch their productivity level. The job security is considered to be a non-issue for improvingproductivity and competitiveness. On the other hand, it has been viewed that the existing jobquality is not adequate to cope with the demands for improving productivity andcompetitiveness. The existing job quality including wage level should be improved byexploring other areas of cost reduction.

It is also relevant here to review how some experts have assessed job quality situationin the context of industry sector as a whole. At present, improvement in the Quality ofWorking Life (QWL) can be a new but significant dimension in harmonization of work inNepalese shop-floor, though it is not clear how far the industrial sector has succeededtowards this direction during the last 50 years of industrial history in Nepal (Adhikari,1993). Certain ILO standards are being considered by the Government of Nepal in takingadministrative and legislative measures to update the country’s labour laws. Since thesestandard setting activities are generally believed to have been largely influenced by theexperiences of the developed societies, it has been felt in Nepal that the ILO standardsshould be flexible and realistic to the prevailing peculiarities of the national socio-economicsof the participating countries (ILO, 1998).

3.3.5 An overall impression

Job quality in the initial phase of industrialization process in the garment sector waspoor. With the development of professionalism and increase in the export market, jobquality has started improving. The existence of labour laws and establishment of labourunions have improved the situation of the workers at least by setting standards of job qualityin the form of minimum wage rate, work hour, allowances, safety, job security and retirementbenefit. With growth in garment industry since the mid-eighties, job quality has also continuedto improve, albeit, slowly and mostly in medium and large garment industries.

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For the past six or seven years, government has gradually come to regard garmentindustry as one of the country’s important industries providing not only huge foreign exchangebut also significant employment opportunities. The industry has started attracting educatedprofessional entrepreneurs who understand that treating workers fairly and providing themwith reasonable facilities will enhance their productivity. Moreover, some reputed buyers(e.g., Walmart, J.C. Penny, GAP, Target, etc) seem to be contributing a great deal inimproving job quality of workers by putting pressures to maintain their standards in thefactory. By showing humanitarian concerns and accepting to buy only from those industrieswhich meet their standards and specifications, they have in fact been more effective inbringing about improvements in job quality of garment workers than any other partiesconcerned. Nevertheless, job quality in many industries is yet to be satisfactory as it is farbelow the world standard.

Both industrialists and experts in general feel that the hire-and-fire rule should beintroduced in favour of industrialists particularly in sensitive export-oriented industries likegarment industry. This is because industrialists are now unable to discipline workers to raisetheir relatively low productivity.

Present job quality in garment industries is apparently offering different pictures todifferent groups. However, it is important to review the existing level of job quality to assessthe likely impact of globalization, especially after the present quota system is fully phasedout by forcing the garment industries to operate in a fully globalized, competitive market.The following section attempts to assess the possible impacts of globalization on the jobquality in garment industry sector in Nepal.

3.4 Possible impact of globalization on employment and quality of job

The possible impacts have been assessed mainly in two areas: employment situationand quality of job for those who are employed.

3.4.1 Employment situation

The garment industries have declined in Nepal in terms of establishments and totalemployment size. Moreover, the export business too (in terms of both value and volume) hasshown declining trend since the last year. Particularly after 2005, without considering theimpact of recent US preferential policies for some countries, it is likely that only thoseindustries will survive in this sector which can be competitive in the market. The industrialistsare likely to operate their business by reducing the cost of production. In this process, theymight reduce the size of employment through optimum utilization of existing labour andadded automation in work process. It means there is high possibility of retrenchment in thesize of present employment in the garment industry sector.

As indicated in earlier chapter, one serious concern over the impact of globalization inemployment sector in general is the fear of Indianization of national economy. The

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globalization process in Nepal might turn into a process of deeper penetration of the Nepalesemarket by the Indian capital and labour with very little gains for the mass of population.

However, some different perspective also can be presented as far as the present garmentindustry sector is concerned. It is also likely that the employment size may even increaseif the garment industry sector grows with large industrial establishments that have competitivestrengths. Naturally, small industries with traditional technology and limited market are lesslikely to be competitive enough to survive in the free, competitive world market. A growthof large-scale garment industries, each employing 4000 to 5000 people, even in smallnumber will contribute to promotion of employment opportunities in the country. But allthese situations are dependent upon how the present garment industry sector moves toimprove its productivity and competitiveness.

3.4.2 Job quality

It is expected that despite the possibility of decline in the number of industries andtheir total employment size, the quality of jobs in the industries will improve. The logic isthat only those industries that are competitive can exist in the age of globalized competitivemarket and the competitiveness often requires improvement in productivity at firm levelsthat in turn demands improvements in job quality. The entrepreneurs will be required tomodernize their industries through new investments in modern technology, development ofhuman resources and improvements in job quality that may include various schemes toretain and attract competent manpower. In such a situation, those who get employment inthe garment industry will be able to enjoy improved job quality.

The apprehension that employers will reduce cost of production including cost oflabour is less likely to be proved completely true. The cost reduction drive may limit todownsizing of manpower, but it may not result into deterioration in job quality. Almost allinterviewees, including industrialists, government officials, workers and experts also tend tohold similar view. The entrepreneurs, even if they may like to do it, are unable to reducethe wages to workers, or degrade the work place simply to minimize the cost of productionbecause these cost reduction measures will have negative impact on their productivityimprovement drive for enhancing their competitiveness. They will be forced to explore newareas for reducing the cost of production and increasing profit margin. Moreover, big buyerssuch as Walmart and J. C. Penny will continue to show their concerns for the humanitarianaspects of garment workers and this will help improve job quality even though there willbe pressure for industrialists to decrease their cost of production.

However, as some union leaders and workers argue, the concept of discretionary hire-and-fire by the employers, if applied in garment industry, may have negative impact on thejob quality of workers since it will reduce the bargaining power of workers. It is likely thatsupply of foreign workers will diminish from the year 2005, because they will then preferto work in their own country. Industrialists will then have to hire Nepalese workers and eventhink about training Nepalese workers seriously. But there is some apprehension that employers

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will further exploit the local workers because of their abundant supply from withinthe country.

On the other hand, not all union leaders and workers are worried about the possibledeterioration in job quality, instead they are concerned with the existence of industry andjob after 2005. They also seem to believe that only competitive industries can survive in theglobalized competitive markets and for this these industries will be forced to further improvetheir job quality. During studies of sample industries which happen to fall under categoryof modernized industries, workers were found to be optimistic about improvement in jobquality in the future.

3.5 Inter-linkages of job quality with productivity improvement drive for competitiveness

As the concepts of productivity and competitiveness are closely inter-linked, the qualityof job is also directly linked with the productivity improvement drive at enterprise level. Infact, the linkages among job quality, productivity and competitiveness are circular as shownin Figure 4.5. Accordingly, in garment sector of Nepal, improvement in productivity is notpossible without improvement in job quality while job quality can not be improvedwithout improvements in competitiveness. Moreover, productivity and job quality interactbilaterally too.

Figure 4.5: Interactive relationships between job quality, productivity and competitiveness

Improvement in Improvement in Improvement inJob Quality Productivity Competitiveness

Productivity improvement for competitiveness requires among others state-of-the-arttechnology, market promotion, modernization of work place, human resource developmentand motivation schemes that include opportunities for staff and workers to utilize competencyand develop careers besides enjoying competitive financial packages. Moreover, it requiresrestructuring of organization and redesign of jobs in the form of job enlargement and jobenrichment. In overall, productivity improvement drive calls for development of a workculture that is people-centered (priority for development and utilization of human resources),performance driven, goal-oriented, innovation-inclined, quality obsessed, and client-committed. The work culture that possesses these features manifest in itself the high qualityof job in the enterprise. The globalized market hence calls not only for improvement inproductivity and competitiveness but also for improvement in quality of job.

Considering the present low level of productivity and competitiveness in garmentindustry sector, emphasis will have to be strategically placed on improvements in productivity.Keeping in view the present job quality, there is also a broader scope for improvingproductivity through improvements in job quality. A few garment industrialists have already

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

4. Strategies for improving competitiveness, productivity and job quality ingarment industry

4.1 Repositioning of Nepalese garment products in the world market

Whatever the role of present quota system and the present strength of garment industryitself, there is an urgent need to improve competitiveness of garment industry of Nepal inorder to reposition the industry in the competitive, quota free world market. The process offactory modernization, product quality enhancement, image building and market promotionthrough direct relationships with buyers initiated by some large industries should be furtherimproved. There should be a consensus over the view that the Nepalese garment industrycan not afford to operate in a fashion it used to do in the past to survive and grow in theborderless competitive world market.

In order to face the challenges of globalization under quota free competitive worldmarkets, the main strategies for developing the garment industry sector in Nepal should bedirected towards bringing about improvements in three areas such as competitiveness,productivity and job quality.

4.2 Strategies for improving competitiveness

Competitiveness in the context of garment industry in Nepal should mean improvingquality and price competitiveness as these are the main means utilized (e.g., Bossak andNagasimha, 1997) by the competing countries. It should also mean producing such productsthat carry high value and are not supplied by the competitors in the world market. Animprovement in such competitiveness also requires application of manufacturing andmanagement systems that are superior to those of the competitors.

The garment industry needs to do a lot of homework to be competitive in the worldmarket by identifying both its competitive advantages and disadvantages. For this, it has toidentify its main competitors and their present strengths and weaknesses and develop its ownstrategies. Some suggestions are presented below.

4.2.1 Focus on high value products.

Most of the garment products exported are of low value, ranging from 3 to 6 US dollaron an average. The profit margin ranges from 25 cents to 1 US dollar. The profit, if any,has been made simply because the business takes place in bulk. The business is risky as itinvolves huge amount of money in transaction and many other problems associated withcarrying and forwarding. It should be highly beneficial for garment industries in Nepal toswitch from producing low value products to quality products carrying high value to compete

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with existing strengths of neighbouring competitors. The fact that the Nepalese productshave gradually built their image through quality in the international market also supportssuch a proposition.

As shown in a study, South Asian countries are still exporting products that can becategorized as low-wage and labour-intensive and exports from these countries have not yetshifted to high value added products as has been the case with some of the East and SouthEast Asian countries (Joshi, 1999). In this perspective, Nepal can improve its competitivenessby focusing on export of high value products.

4.2.2 Product diversification

The garment industries, presently focusing on such products as cotton shirts for boysand men, cotton trousers and skirts for girls and women and children wears, should alsoproduce some other new products that are in demand but are short in supply. It can be sheetsfor bed, pillow, table, sofa, cushion, etc. The growth in exports of terry towels and shoptowels from Nepal to USA in recent years shows feasibility of new non-garment products.Possibility of using new and unique materials should be explored to offer products of uniquelook in the market. Garment products made by Dhaka fabrics and pashmina products seemto have prospects as proven by recent surge of export of pashmina shawls. The uniquenessof Dhaka products having its traditional roots and growing popularity of Nepal’s pashminaproducts in European markets tend to offer opportunities to improve competitiveness in theworld market.

4.2.3 Market diversification

In recent years, Nepal has promoted export to some European and Asian markets. Thisobviously calls for efforts towards exploring new markets by reducing reliance on the USmarket. In the era of quota free globalized market, the US and other developed Europeanmarkets are likely to be encroached by neighbouring countries such as Poland, Bulgaria,Cyprus and Latin American countries as the main competitors. Through exploration of newmarkets such as European countries, Korea and Japan, Nepal can have some competitiveadvantage, especially in terms of transportation cost.

4.2.4 Development of backward-linkage industries

It is necessary to recognize the fact that the main problem of garment industry in Nepalfor improving its competitiveness is the high price due to high cost of production. Some 60percent of the total cost of production consists of imported raw materials such as fabrics andaccessories (e.g., button, threads, zipper, etc). As a result, the garment industry sector hasnot been able to increase its value addition to national economy from its present level of 35percent. All this justifies the need for establishing some industries that produce fabrics andaccessories required by garment industry sector and help the sector reduce cost of production

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and improve competitiveness. Initiatives from both the government and garment industriesare required to attract both local and foreign investments in such industries.

4.2.5 Development of dry ports

Being a land-locked country, Nepal can never have free access to sea. It is a hard factthat can not be changed except making compromises and developing alternative measuresto cope with such a limitation. Nepal has already started building dry ports in the three maincities bordered with India. One of the dry ports is also being linked with India throughconstruction of a railway line. This is expected to reduce the present transportation cost by20 to 30 percent. Hence it is suggested that the government completes these projects in timeand both the government and industrialists fully utilize these facilities.

4.2.6 Establishment of export processing zone

It is desirable that development of dry ports be accompanied by development of exportprocessing zone (EPZ). This is consistent with the proposition made in the existing IndustrialPolicy of the government. Once these dry ports are extended to be EPZs they should havefacilities enjoyed by EPZs in other countries. Garment industries should be included in EPZsto enjoy the facilities offered by them so that they can have access to comfortable bankloans, subsidized carriage and forwarding facilities, insurance services, exemptions of servicefees charged by the government offices, etc.

4.2.7 Utilization of provisions for least developed countries under WTO regime

Under the WTO regime, least developed countries are expected to be entitled to someprivileges for next five years after taking memberships. These include enjoyment of zero-tariff and provision of bilateral trading arrangements with developed nations. AlthoughNepal has not yet joined WTO, it is making preparations to obtain its membership. Beinga LDC, it should make some deliberate attempts to utilize the provisions made by the WTOfor LDCs. In South Asia, Nepal is one of the three LDCs, the other two being Bangladeshand Bhutan. It can improve its competitiveness by enjoying LDCs’ privileges compared toIndia, Pakistan and Sri Lanka for promoting its garment industries.

4.2.8 Preparedness of industrialists and government

It may be relevant here to quote Singh (1995),“In an era of increasing competition, survival will depend on inspired planning,

constant innovation and total flexibility. New product development, identification of nichemarkets and application of creative strategies will be the vital ingredients for success.Information gathering must be accepted as a major priority on a continuing basis toenable companies to respond quickly to change. Quality, cost, and delivery (QCD) willbe the important criteria for competitiveness.”

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Garment entrepreneurs can develop infrastructures for R&D centers and training institutesespecially designed for garment industry sector. They could set up market promotion andliaison offices in foreign countries to capture export market for them through establishmentof direct contacts with the buyers and exhibition of exportable products. Furthermore, theycan develop communication network among garment industrialists and buyers through internet.It is also necessary that they go for group advertisements by creating web page in theinternet and by placing advertisements in leading international magazines.

Nevertheless, government has many important roles to play. Globalization does notlimit the role of government in the name of economic liberalization. It should makeinvestments for development of infrastructure and creation of congenial business and industrialenvironment because such investments would promote national competitiveness. As notedby Lohani (1999), public investment should ultimately enable the private sector in broad-based efforts to improve productivity.

4.2.9 Forming strategic alliances

Both government and individual entrepreneurs should take necessary initiatives insearch of opportunities for manufacturing and exporting garments in collaboration withforeign partners and attract foreign investments so that Nepal can capture a sizeable worldmarket with competitive edges. The alliance can be instrumental in many areas such asreducing cost of production (e.g., minimizing transportation cost), improving product qualityand promoting market.

4.2.10 Coping with the immediate threats

It has been almost certain that the present garment industry can not survive and developin Nepal without necessary preparations for improving its competitiveness in the freeglobalized market. Its competitiveness level is also influenced by how other countries areoffered special privileges by importing countries such as duty and quota free access to USmarkets given by the US government under its AGOA for 33 African Sub Saharan countries.If other countries continue to enjoy preferential treatments from the USA, Nepal’s garmentindustry does not need to wait for 2005 for feeling the pressures of competitive market andis likely to decline without having time even for preparations for coping with the competitivesituations. It is therefore highly desirable that serious efforts are made at government levelto seek special treatments from the importing countries, especially the US, at least to buysome time to save the industry from pre-matured death and to build its competitive strengths.

4.2.11 Focusing on price competitiveness

Nepal has very low price competitiveness, estimated to have about 30 percent higherprice compared to the price charged by the main competing neighboring countries. In thiscontext, all efforts to promote the garment industry in the country should be solely directedtowards reducing such a gap in price competitiveness.

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However, the situation is less likely to improve simply by improving the pricecompetitiveness. Because of its geographical location, Nepal is likely to continue facing theproblem of competitiveness in lead time required for delivery (i.e., receiving order, procuringraw materials, manufacturing and dispatching). Hence, this issue also needs to be welladdressed in improving the national competitiveness.

4.3 Strategies for improving productivity

It has been widely emphasized that productivity drive be linked with the efforts towardsenhancing competitiveness (e.g., Bajracharya 1999a; Joshi, 1999). Since productivityimprovement is mainly concerned with the act of optimum utilization of resources, it helpsto reduce cost of production, which also means increase in cost saving and profit margin thatcan be utilized for improving the quality of products as well as reducing their price. Thehigh quality and low price often help to improve competitiveness and increase sales andprofitability that can again trigger new investments for expanding production as well asimproving productivity. Hence, the improvement in productivity leads to further improvementin productivity and competitiveness in a cyclic form (Figure 4.6).

Figure 4.6: Cyclic linkages between productivity and competitiveness

Productivity Cost New Investments ProductivitySaving/Profit

Competitiveness

It is in this context that garment industries should direct their efforts towards improvingproductivity in order to enhance their competitiveness and strengthen position in theinternational market. The garment industries can develop various strategies for improvingproductivity, which are suggested in subsequent sections.

4.3.1 Human resource management

Although it is difficult to combine physical capital and educated workers to increaseoutput per worker like in fast growing economies in East Asia, human resource managementis a critical factor in improving productivity (Joshi, 1999). It has a strategic role to addressall the issues that motivate employees and channel their physical, emotional and creativeenergies towards corporate goals (Monga, 1999a).

Many garment industries covered during the present study have employed foreigntechnicians and workers. As shown by sample studies, the percentage of such foreign workersemployed in an individual industry ranges from 10 to 75 percent. They are highly paid

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compared to local ones. Moreover, they are provided accommodations within or outsidefactories. The garment industries can save money spent on wage and salary and reduce costof production by replacing foreign technicians and workers by Nepalese ones.

Every garment industry should have a series of skill upgrading training programs ona formal and regular basis for their staff and workers, besides making provisions for plannedjob rotation and on-the-job training. Senior and experienced workers can be sent to certaintraining institutes or well organized garment industry to develop them as trainers and utilizingthem later for training large number of workers in work places. Local workers and staffshould be given preference in offering training opportunities to make best use of them.

Effective human resource management for productivity improvement should also involvethe following:

l proper placement of workers on the job;l competitive rate of salary and allowance;l providing a sense of job security;l designing and implementing reward and punishment systems;l securing commitments and winning trust of the workers through transparent

and humane treatment;l involving staff and workers in productivity improvement activities by forming

and activating quality circles and making them implement productivityimprovement techniques such as 5s;

l introducing productivity-based incentive system; andl adopting a system of gain-sharing scheme.

Various options are available to introduce productivity gain sharing and incentiveschemes. Some of these are suggested later in relevant sections.

4.3.2 Upgrading of technology

In Nepal, while the assembling line manufacturing systems are facilitated by the useof the Japanese machines (also German machines in one sample industry), piece-rate systemsare being operated through Indian machines. Although majority of garment industries visitedduring the present study were using modern technology by switching from piece-rate systemto assembly line system, most of the industries currently operating in Nepal are usingtraditional technology by following piece rate system. Both the Indian machines and piecerate manufacturing system can not meet the present needs for two reasons. First, they cannot meet quality standards to compete with others in the international market. Second,industries can not have large-scale production to enjoy economy of scale and consequentlyreduce cost of production.

It is therefore necessary for industries to make new investments in technology andmodernize manufacturing systems by considering type of markets to be served and the

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technology of present and potential competitors. Emphasis should also be placed on fullutilization of the installed capacity. Moreover, there should be an in-built periodic maintenancesystem to minimize repair and maintenance cost and avoid breakdowns affecting capabilityof industries to meet the orders in time.

4.3.3 Methods of operation

Manufacturing system adopted in an industry largely influences the methods of operation.Nevertheless, they also include all management procedures and methods, starting from planningto organizing, co-ordinating, supervising and controlling functions of the industrial enterprise.Improvements in methods of operations for productivity improvement should include:

l Simplifying the work processes (steps to be followed) in relation to procurementof raw materials, storage and transportation to the work place, manufacturing andassembling, and packing and dispatching.

l Developing detailed work manuals and job descriptions in a written form andorienting the concerned staff and workers to follow them.

l Applying performance goal or target setting systems to facilitate workers forefficient performance and relating incentives with the performance of targets.

l Making necessary arrangements to apply modern productivity management suchas benchmarking, total quality management and Japanese techniques popularlyknown as KAIZEN, 5s, JIT, with required adaptation.

l Exploring several other measures to improve methods of operation that improvequality, cost-effectiveness and delivery system, also known as QCD.

l Developing a management information system and modeling through computerapplications on targeting, scheduling and monitoring.

l Extending electronic communications to both buyers and suppliers.

A mechanism needs to be devised at the enterprise level to continuously monitor thework processes and improve them.

4.3.4 Materials management

As the garment industry uses various materials, mostly imported ones, materialmanagement constitutes an important area of consideration for productivity improvement atenterprise level. Development of backward linkages to industries such as textile, accessories(like button, threads, zipper), and packing materials may seem to be difficult for the exportoriented garment industries. There are some measures that should be adopted by garmentindustries as cited below:

l Making necessary arrangements for outsourcing of raw materials with genuineparties in foreign countries based on comparative advantages of quality, price andtransportation cost.

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l Collaborating with other local garment industries for making investment in settingsome supporting industries related to textiles and accessories.

l Developing a sound inventory system to ensure that right volume of materials isordered and stored for maintaining smooth production process.

l Integrating procurement system with the production planning system andscheduling.

Materials management can no longer be ignored for improving productivity at enterpriselevel. This has to be prioritized particularly because the present situation in which the buyersthemselves supply raw materials, directly or indirectly through middlemen, along with theirpurchase order, is less likely to continue in the age of free competitive globalized market.The garment industrialists will have to choose materials by themselves predicting the demandseven before the order is received with a view to promoting markets through advertisements.

Besides these conventional methods, various new approaches need to be pursued forimproving productivity. Such approaches include total quality management, business processreengineering, benchmarking, strategic cost management and activity-based costing andvalue chain. Productivity improvement should be concerned with design and delivery ofproducts to satisfy customer needs and desires at the cost they can afford since the productivityconcept, which focuses only on reducing input consumption, serves no purpose in the presentglobalized environment in which materials, people, ideas and capital move much morefreely between countries (Monga, 1999b). Moreover, since economic co-operation and globalintegration based on free markets and free flow of goods and services are the concepts ofthe future, co-operation between countries in harmonizing their approaches with transformationprograms is an essential factor to productivity growth (Prokopenko, 1995)

However, it is also equally important to emphasize the fact that productivity improvementdrive can not be effective without improving the quality of job at enterprise level.

4.4 Strategy for improving quality of jobs

Job quality is in fact a relative concept and it is also influenced by the well-being ofthe enterprise that is demonstrated by its levels of productivity and competitiveness. However,decisions to undertake organizational changes aiming at improving job quality often hingeon the potential gain for the enterprise as a whole (Adhikari, 1993). Some deliberate effortsneed to be made by the garment industries for improving quality of jobs as part of their drivefor improvement in productivity and competitiveness. Some suggestions are provided below.

4.4.1 Opportunities for skill development

Workers should be given opportunities to upgrade their skills through training.Considering the present trend towards assembling line of manufacturing, it is desirable that thetraining is not limited to one specific part of production process; and workers are logically andgradually shifted to different important parts of the production system. In this connection, the

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suggestion that garment producers should have a separate training institute to train their staff andworkers through benchmarking of garment industries in Nepal and abroad is worth considering.

Workers should also have opportunities to make a fuller use of their skills andcompetency. It is necessary that all of them are first employed as apprentices within certaintime limit of adhering the minimum wage concept. The skilled workers should be entitledto extra financial incentives for working as trainers. Moreover all managerial decisionsrelating to appointment, placement, job security, salary increment and promotion of theworkers should also be tied with their training performance.

4.4.2 Gain sharing

Although there have been conceptual and operational gaps with regard to productivityand its linkages with wages (Dahal, Thapa and Upadhaya, 1999), financial incentivescontinue to deserve importance for both maintaining and improving efficiency of workersin work place.

Financial packages (including minimum salary, allowances for working beyond regularhours, observing festivals such as Dashain and Tihar, health services, gratuity, etc.) shouldbe devised and offered in an equitable manner, without discriminating in terms of skill leveland sex. Moreover, the packages should be fair and adequate as per the profitability of theenterprise and the prevailing rate in the industry sector, besides making it not less than therate fixed by the labour law.

Moreover, as suggested by experts (e.g., Bajracharya, 1999b), minimum wages shouldbe strictly maintained with productivity-tied differential additional benefits. In this connection,it is essential that the staff and workers be provided incentives for meeting productiontargets and that increment in salary and allowance rate be based on the efficiency andproductivity levels as defined before hand. Emphasis should be placed on employing theworkers by applying a piece-rate system, along with a determination of the minimum levelof work that should be met for earning the basic salary. Bonus system should be compulsorilyput into practice by ensuring that the bonus is fairly distributed for those who have workedfor a period specified by the respective law.

Periodic awards for the best quality circle or best work unit or worker of the week,months or year can be introduced. The schemes such as benefit-sharing based on team work,additional payments for special knowledge and skills and production above individual orgroup norms and two-tier wage by paying new workers lower wages than senior workers fora period of time (e.g., Dahal, Thapa and Upadhaya, 1999) can result in improvements inboth job quality and staff motivation.

4.4.3 Job security

The present practice of not offering appointment letters to the workers even aftercompleting the period specified by the labour law, if any, should be avoided. All the

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employment related transactions should be made transparent to win the confidence of workersand trade unions. Those, who have worked for more than six months either as temporary orseasonal workers, should be entitled to benefits designed specifically for such work inadvance. Other practices of recruitment in consideration of the seasonal nature of businessneed to be closely examined.

4.4.4 Safety and comfort at work place

The industry, though not hazardous by its nature, needs to have some safety measuresto improve quality of jobs for its workers. They should not think of making safety provisionsin the work place merely as a part of requirements of buyers. It should be made a part ofnormal work feature of the industries. The present practice of temporary installation ofsafety measures to please the buyers and removing them after the departure of visitors, ascomplained by union leaders, should be avoided.

Minimum safety measures should exist in workplace; such as, provision of fire-exits,fire-alarms, gloves for those involved in ironing, cutting and washing parts of productionfunctions, aprons and face cover for protection, safe drinking water, comfortable temperaturesystem and clean toilet. Besides these, some measures required for the comfort of workersneed to be adopted. The main welfare schemes expected in these industries are insurance,gratuity, provident fund and child-care centers.

4.4.5 Labour-management relations based on benefit sharing

This has been one important area for improvement to enable the garment industrysector to offer high job quality and at the same time to be more productive as well ascompetitive. Both garment industry and union leaders claim that their industry is the mostorganized sector as compared to other sectors of the national economy. Though they enjoyrelatively peaceful work situations, their relationship does not look warm and healthyconsidering the type of perception they have made for each other.

While the industrialists view local workers as inefficient, undisciplined and problematic,the workers and union leaders often complain that their employers have exploited them andare biased against them in favour of foreign workers in matters of employment opportunityand pay even if they are not inferior. The workers are often apprehensive of the intentionsof their employers as the latter are openly asking government either for non application ofexisting labour laws or formulation of a new one specifically designed for their industryunder which both the trade union and its right to strike will be prohibited and the employerswill enjoy the right to hire-and-fire the workers at their will.

It is suggested that both employers and workers carry out dialogue for winning confidenceand maintaining trust of each other. They should realize that while the garment industriescan not improve productivity and competitiveness without competent workforce, workersalso may not have their rights if industries themselves do not survive and progress. There

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is also a need for change in the managerial orientation with regard to industrial relations.Management and labour should seek for more bipartite solutions than tripartite solutions(Manandhar, 1999). Likewise, both management and labour should adopt such a code ofconduct which provides agreed rules for their relationship (Pant, 1991). Many of themisunderstandings that prevail between employers and workers in present day garmentindustry sector can be resolved through social dialogue. It can compensate the need forhaving a separate labour law for the garment sector.

A feeling should be cultivated among the workers that if their industry can performbetter, they too can increase their earnings. As a matter of priority, the concept of benefitsharing should be incorporated in the framework of labour-management relations as it hasdirect bearing upon improving not only job quality but also productivity and competitiveness.

How well Nepal can withstand the challenges of globalization by being productive andcompetitive depends on how well both the government and the private sector can tackle theemerging situations, particularly in next three years, through their joint efforts to shapeNepal’s own unique position in the world market. All these efforts will also determine levelof improvement or deterioration in employment situation and job quality in garment industryof Nepal.

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Appendix 4.1

Methodology

Data collection

The study utilized both primary and secondary sources of information. Variousdocuments (published and unpublished) relevant to the theme of the study were collectedfrom various sources and reviewed during the study. Required instruments such as checklistsand interview schedules were developed to collect data and information. The instrumentsincluded:

l Interview schedule for officials of Garment Association of Nepal (GAN)

l Checklist to collect basic data/information from GAN

l Interview schedule for officials / experts of government and non-governmentorganizations

l Checklists to collect data from government and non-government organizations(e.g., Ministry of Commerce, Trade Promotion Centre, etc.)

l Interview schedule for garment industrialists

l Checklist to collect basic data/information from garment industries

l Interview schedule for workers and trade union leaders

These schedules and checklists were used simply as guidelines as there was flexibilityin using the sequence of questions and skipping certain questions as per the needs.

The following were selectively interviewed to assess the present and likely situationsin the garment industry sector in Nepal.

l garment industrialists

l officials of garment association

l government officials dealing with the issues of foreign trade, industry and labour

l union leaders and workers

l experts in the fields of labour management, industrial development and internationaltrade

Sample industries

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

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Timing

The study was undertaken first between November-December of 1999. It was revisedlater on keeping in view the changes that have taken place between then and now. In thisconnection, four of nine sample industries were studied twice in July 2001 to update dataand information about them.

List of interviewees and visited industries

Persons interviewed: Number

- Government officials (including Secretary, Special / Joint Secretariesof the Ministry of Commerce, Joint Secretary of Ministry of Industry,Director Generals of Department of Industry and Department of Labour), etc. 8

- Garment industrialists (including senior officials of Garment Association of Nepalsuch as President, ex-presidents, vice-presidents and general secretary) 13

- Workers and union leaders 9- Expert(s) 2

Industries visited:

1. Elina Garments2. Prasuna Garments3. Sirin Garments4. Logo Garments5. Prabha-belt (Tribeni) Garments6. Radiant Fun Wear Fashion (Krishna) Garments7. Cotton Comfort Garments8. Mahalaxmi Garments

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

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Annex A4.1: Export performance of garment industry in Nepal

Fiscal year Export value Growth Export volume Growth(NC in million) (Percentage) (Pieces in million) (Percentage)

1991/92 3112. 0 25.31992/93 3723.4 19.4 22.8 9.91993/94 5756.5 54.6 40.1 75.91994/95 5357.0 -6.9 33.5 -16.51995/96 5414.7 1.1 28.0 -16.41996/97 5617.5 3.7 30.0 7.11997/98 6783.0 20.7 34.9 16.31998/99 8368.2 23.3 37.7 8.01999/00 11500.2 37.4 42.5* 12.72000/01 11030.7 -4.1 40.7* -4.2

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

Annex A4.2: Country-wise export performance of garment industry in Nepal

Fiscal year Export value Export volume(in million rupees) (in million pieces)

USA Growth Others Growth USA Growth Others Growth

1991/92 2897.9 214.1 23.4 1.91992/93 3258.3 12.4 465.1 117.2 19.2 -17.9 3.6 89.51993/94 5216.4 60.1 540.1 16.1 36.0 87.5 5.0 38.91994/95 4636.6 -11.1 720.4 33.4 26.9 -25.3 6.6 32.01995/96 4671.1 0.7 743.6 3.2 22.5 -16.4 5.5 -16.71996/97 4692.7 0.5 924.8 24.4 22.3 -0.9 7.7 40.01997/98 5626.0 19.9 1157.0 25.1 24.9 11.7 10.1 31.21998/99 6425.6 14.2 1942.6 67.9 27.2 9.2 10.5 4.01999/00 10646.3 65.7 853.9 -56.0 42.5* 56.2 NA NA2000/01 9595.4 -9.9 1435.3 68.1 35.8 -15.8 4.9 NA

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

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Annex A4.3: Present niche market of sample industries

(in terms of types of products)

Sample industries Quota categories / Product types

GarmIna* 347/348, 340GarmSin* Shirts, trousers, skirtsGarmPun* Ladies shirts, trousers, dressGarmLog Ladies wearsGarmRaf All mixed categoriesGarmCot Shirts, trousers, children wearsGarmMom* 341, 338/389, 351, 342, 336, 347/348GarmPra 347, 340, 348 and 336GramMal 340, 347, 348

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

Annex A4.4: Employment: growth and present patterns

Sample Employment size Employment patterns

Starting Now Male Female Skilled Unskilled Local Foreign

GramIna* 250 600 95% 5% 60% 40% 80% 20%GramSin* 125 225 75% 25% 95% 5% 50% 50%GramPun* 125 2000 80% 20% NA NA 80% 20%GramLog 66 200 100% - NA NA NA SomeGramRaf 80 200 80% 20% 70% 30% 50% 50%GramCot 280 700 80% 20% 80% 20% 50% 50%GramMom* 1800 2500-3000 15% 85% 60% 40% 99%Below 1%GramPra 80 450 99% Bel.1% 60% 40% 99% Below 1%GramMal 125 900 87% 13% 94% 6% 25% 75%

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

Annex A4.5: Capacity utilization in industries (in terms of installed machines)

Sample industries Level of capacity utilization(Percentage)

GramEna* 70GramSin* 75GramPun* 60-70GramLog 66GramRaf 80-100GramCot 100GramMom* 70-80GramPra 100GramMal 75

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

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Annex A4.6: Indicative labour cost

Sample industries Labour cost (in percentage oftotal cost of production)

GramIna* 40**GramSin* 18GramPun* Not to be revealedGramRaf 30-35**GramCot 20-25GramMom* 25GramPra 20GramMal 20

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

Annex A4.7: Share of garment exports in total national exports

Fiscal year Export of garments Total national exports Share in national exports(Rupees in million) (Rupees in million) (in percentage)

1992/93 3390.3 15644.8 21.71993/94 5943.2 16884.5 35.21994/95 5139.3 14514.9 35.41995/96 5374.8 16198.5 33.21996/97 5955.0 17410.3 34.21997/98 7015.4 18719.1 37.51998/99 9701.9 23145.6 41.91999/00 13924.9 29004.3 48.02000/01* 9304.6 21207.7 43.9

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

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

Name Year of Technology Market Export value

of industry establishment Early years Present (1999-2000)

GramIna* 1985 Assembly U.S.A $900,000 $2.7 millionGramSin* 1989 Semi-Assembly (new machines) U.SA $790,000 $1.6 millionGramPun* 1984 Piece-rate to Assembly (90%) USA $120,000 $1.5 millionGramLog 1995 Assembly Germany $1million $2.4 millionGramRaf 1983 Piece-rate USA $400,000 $850,000GramCot 1986/87 Piece-rate to Assembly USA $700,000 $4 millionGramMom* 1994 Assembly USA $1.8 m $13 millionGramPra 1992 Piece-rate to Assembly USA $400,000 $1.1 millionGramMal 1984 Piece to Assembly USA (Canada, $200,000 $4.6 million

Spain in 1996)


Annex A4.9: Laour productivity index of Nepal

Description 1984/ 1987/ 1990/ 1992/ 1993/ 1994/ 1995/ 1996/ 1997/ 1998/ 1999/85 88 91 93 94 95 96 97 98 99 2000

Agriculture, Fisheries 100 110 128 127 137 138 144 151 153 158 167& Forestry

Mining & Quarrying 100 92 82 76 74 70 73 71 66 62 60

Manufacturing 100 79 60 62 60 53 50 46 40 37 35

Electricity Gas 100 102 111 82 76 74 77 69 59 54 54& Water

Construction 100 52 26 17 13 11 8 7 5 4 3

Trade, Restaurant 100 93 83 79 78 76 73 69 67 63 61& Hotel

Transport, 100 65 46 37 33 30 26 23 20 18 16Communication& Storage

Finance & Real Estate 100 90 90 87 86 83 83 80 79 77 75

Community & 100 95 86 84 83 80 77 73 71 70 68Social Services

Source: NPEDC (2000)

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Annex A4.10: Salary and allowances

Sample Salary range Mean salary Allowancesindustries (in Rs.) (of majority) Overtime Food Incentive for

efficiency

GramIna* 2116-14000 3000 150% Rs.30 NoGramSin* 3000-10000 6500 150% Rs.45 NAGramPun* 2116-15000 5000 Yes Yes NoGramLog 2500-9000 6500 150% (+shift) No NoGramRaf 2150-16000 4500 Yes Yes YesGramCot 1800-25000 4500 Yes Yes YesGramMom* 2400-20000 3500 150% Yes YesGramPra 1800-60000 6500 150% Yes YesGramMal 2000-16000 4500 150% Rs.20-30 No


Annex A4.11: Safety at work place

Sample industries Safety provisions Buyers’ standards

GramEna* Safe water, gloves, fire exists, etc WalMart/ J.C. PennyGramSin* Sufficient (+ recent improvements) Not specifiedGramPun* Sufficient (US standards) WalMart/ J.C. PennyGramLog Sufficient Periodic visits by buyersGramRaf Minimum Not specifiedGramCot Sufficient GAP/WalMartGramMom* Sufficient Not specifiedGramPra Sufficient WalMartGramMal Moderate Not specified


Annex A4.12: Job security level

Sample Nature of service Issuance of appointment Existence ofindustries Permanent Temporary letters contractors

GramEna* 25% 75% For both services NoGramSin* 50% 50% (+daily wage) For both services NoGramPun* 10% 90% For permanent In a few casesGramLog Few 99% No (renewable contract papers) Yes (for some jobs)GramRaf 14% 86% 85% YesGramCot 50% 50% Mostly (No foreign) Yes (for ironing job)GramMom* 75% 25% For both services In a few casesGramPra 8% 92% 8% NoGramMal 4% 96% 8% Yes (for female)


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Annex A4.13: Industrial relations situation

Sample industries Existence of Strike history Generallabour union scenario

GramEna* No (joint committee) Once (not serious) O.KGramSin* No No DeterioratingGramPun* No Once (2days closed) O.KGramLog No No O.KGramRaf Yes (two unions) No O.KGramCot Yes Once ( half a day closed) PeacefulGramMom* Yes Once (not serious) PeacefulGramPra No No PeacefulGramMal Yes No Peaceful


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Garment industry in Pakistan*

Asir Manjur

1. Introduction

The textile apparel sector lies at the apex of the textile value chain starting from cottonand synthetic fibres. Over the past decade there has been a consistent increase in the valueof global market share of high value textile apparel in comparison to the products lying atthe lower end of the value chain. This phenomenon is driven by factors like frequentmovements in the global fashion scene, niche marketing resulting in higher unit pricerealizations and enhanced usage of diverse fabrics and materials particularly in the women’sapparel segment.

The South Asian economies have established themselves as important global playersin the apparel trade. Predominantly the reasons lie in the very nature of the industry that islabour intensive. Increasing wage rates in the developed countries resulted in the relocationof the industry to developing countries. Global exports markets, the USA and EU, in orderto protect their domestic industry regulate the imports from developing countries by imposingquantitative import restrictions, these are managed under a formal agreement known as theMulti Fibre Arrangement (MFA). The Uruguay round, a major milestone in liberalization ofinternational trade paved the way for extinction of non-tariff restrictions on trade includingtextiles. The new arrangement, Agreement on Textiles and Clothing (ATC) governs theglobal textile trade regime, which aims at removal of quantitative barriers by 2005.

MFA phase-out is likely to open new vistas of opportunities for developing countriesthat have developed a strong and a diversified product base, particularly in the productsegments at the top of the textile value chain. At the same time it would adversely affectthe growth of exports from developing countries dependent on a limited product range andcompeting in the global markets on price rather than quality.

The eradication of trade barriers will start an era of increased competition and countrieshaving the advantage of low labour costs will only be able to survive through developmentof strategies aimed at enhancing the productivity of the work force, broadening ofthe product as well as market base and process improvements leading to highcost efficiencies.

5

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


2. Global market

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

Figure 5.1: Volume of world apparel imports

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

2.1 Product mix of imports

In terms of values of the global imports the share of both the knit and woven garmentsat a broader level is almost equal (Figure 5.2). At a product level the woven garments formen and women apparel categories enjoy a 50 percent share in the global imports, whichalso include a major part of the hosiery category because mostly imports are in the women’sunder garments and night wear in the form of woven garments. The knit garments segmentcomprising mainly t-shirts and knitwear have a share of 38 percent in the total worldimports. Due to unavailability of disaggregated data of knit garment in men and women’scategories, it is not possible to come up with exact market size. Over a period of five years,the knit garments have grown at a faster pace than the woven garments; the share of wovengarments has been reduced by almost 5 percent during this period.

Analysis of gender split of the apparel import market shows that the women’s garment(knit and woven) segment is the single largest product category with a share of 31 percentin the import markets. Products such as sports-wear and baby-wear have a very small shareof 3 percent each respectively in the total imports.

1995 1996 1997 1998 19990.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

138.4

147.0 156.1 159.6 160.2

in billion dollars

149

Figure 5.2: World imports of apparel – product split


The world imports of large categories like woven and knit garments have grown at anaverage annual growth rate of 1 percent and 6 percent respectively from 1995-1999. Importsof woven garments in men’s category increased from US $ 34.99 billion to US $ 36.18billion in 1995-99 representing an average annual growth rate of 0.8 percent (Figure 5.3).Whereas imports of the woven garment in women category increased at an average annualgrowth rate of 1.9 percent, the imports increased from US $ 36.42 billion in 1995 to US $39.23 billion in 1999. In the knit garments category imports for men’s wear increased fromUS $ 7.18 billion to US $ 9.12 billion during the same period, showing an average annualgrowth rate of 6.1 percent. The imports of knitted garments for women had an averageannual growth rate of 5.5 percent, resulting in an increase of volume from US $ 8.96 billionin 1995 to US $ 11.11 billion in 1999. The figures depict the growth and performance ofvarious categories comprising the global imports.

Figure 5.3: Trend of world imports of apparel


PAKISTAN

World imports of apparel 1995-1999

w

n

l

w w w w

n n n n

l

ll

l

16.014.012.010.0

8.06.04.02.00.0

1995 1996 1997 1998 1999

Baby Wear Sports Wear Hosierylw n

World imports of apparel 1995-1999

w w w w wnn n n n

ll

l

l

l

~~~~

~n n

n n n

40.035.030.025.020.015.010.05.00.0

1995 1996 1997 1998 1999

Woven Men Woven Women Knit MenKnit Women T-Shirtsl

w n

n

~

Product split of world imports 1999

Hoisery9%

Woven Men23%T-Shirts

25%

Woven Women24%Knit Men

6%Knit Women

7%Baby Wear

3%

SportsWear3%

World imports of apparel1995

Hoisery9%

Woven Men25%

Woven Women27%Knit Men

5%Knit Women

6%

Baby Wear2%

SportsWear4%

T-Shirts22%


2.2 Asian countries and global market

Asian countries dominate the apparel markets of the world. Almost 45 percent of thetotal exports in the apparel markets originate from the Asian countries which include keyplayers like China, Hong Kong, Thailand, Turkey, Bangladesh, India and Pakistan. Theirtotal share in apparel markets increased at an annual average growth rate of 5 percent overa period of five years from 1995-99 (Figure 5.4). In absolute terms, the exports from Asiahave increased from US $ 52 billion to US $ 63 billion.

Figure 5.4: Global imports from Asia

in billion dollars


China holds the lion’s share in the overall exports of the apparel from Asia; its exportsconstitute almost 40 percent of the total exports of Asian region. Other important contributorsinclude Hong Kong with a share of 14 percent, Turkey with a share of 10 percent, Thailandwith a share of 5 percent, and Indonesia and Korea with shares of 6 and 4 percent respectively.

2.3 South Asia and apparel exports

South Asian countries export apparel products worth US $ 12.5 billion and have acombined share of 20 percent in Asian exports (Figure 5.5). Within the South Asian region,Bangladesh dominates the exports by constituting almost 8 percent towards the net exportsof Asia. India follows Bangladesh with a 7 percent share, and Pakistan has a meagreshare of 2 percent in the total Asian exports. The apparel sector of Bangladesh hasexperienced tremendous growth, its exports were limited to less than US $ 2 billion in 1995and increased to almost US $ 5 billion in 1999 that translates into an overall increase of 140

South Asian China Hong Kong Turkey

Thailand Indonesia Korea Rep. Japan~w w

l

n

n ~

ww

~~~~~

nnl

~

w

n

nn

n

nn

~ ~ ~ ~w

www w

w w

nn

30

25

20

15

10

5

01995 1996 1997 1998 1999

ll l l

151

percent in exports. The growth in apparel exports from Pakistan during a similar period hasbeen stagnant.

Figure 5.5: Apparel exports from South Asia

in billion dollars


3. Apparel exports

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

Figure 5.6: Pakistan’s exports to worldin million dollars


PAKISTAN

1,400

1,200

1,000

600

400

200

-

1995 1996 1997 1998 1999

1,090

1,274 1,238 1,305 1,321

w

l

nn

n

n

n

w

w

w

w

l l l l

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

-1995 1996 1997 1998 1999

Pakistan India Bangladeshl wn


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

Figure 5.7: Split of Pakistan’s exports 1999

USA57%

EU35%

Other countries8%

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

3.1 Product mix of exports

Pakistan operates in the global apparel markets with a few product categories havinga strong bias in favour of men’s wear which constitutes 69 percent of the total exports,whereas globally the market share of the women’s wear is higher than the men’s wear.Traditionally Pakistan has tried to focus and increase its penetration in a smaller globalmarket i.e. men’s wear by ignoring a larger market. For this reason only 15 percent ofPakistan exports comprise women’s garments.

When the existing product mix of apparel exports from Pakistan is analysed, both thewoven and knit garments seem to have an equal split. In actuality the knit garments dominatethe export product mix because of the fact that almost 100 percent exports in T-shirtscategory are also that of knitted garments (Figure 5.8). Even the hosiery segment in Pakistanis also dominated by knitted garments. On the contrary, the hosiery segment in the world

153

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

Figure 5.8: Share of knit and woven garments inPakistan’s exports

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

3.1.1 Men and women’s garments

The major category of woven garments for men and women has increased at an averageannual growth rate of 4.34 percent during 1994-99. In this category, exports increased fromUS $ 486 million to US $ 576 million. The exports of the women garments in this categorywere US $ 116 million, and men’s garments were US $ 460 million in 1999. The exports ofthe men’s garments increased at an annual growth rate of 7.49 percent, whereas the women’sgarments shrunk at an average annual rate of 4.78 percent. Even though the share of the wovengarments is higher in Pakistan’s exports, the comparison with the exports split of 1995 showsthat the share of the woven garments has slightly declined from 45 percent to 43 percent(Figure 5.9). But the split of the men and women’s woven wear has completely changed.The share of women’s wear has fallen to only 9 percent which was earlier 13 percent.

The next big category is of knit garments taking a share of 41 percent, and the exportsof this category increased from US $ 333 million to US $ 537 million, representing anaverage annual growth rate of 12.71 percent. The women’s garments exports were US $ 80million and that of men’s garments were 457 million. In this category, the exports of men’sgarments increased at an average annual growth rate of 13.63 percent. When the exports of1999 are compared with 1995, it is evident that the share of knit garments in the Pakistan’s

100%

80%

60%

40%

20%

01995 1996 1997 1998 1999

333 365 366 489 537

486 645 655 605 576

Knit Woven

PAKISTAN


exports have increased from 30 percent to 41 percent over 1995-99. The reason for theexports being biased towards men’s wear is that the exporters have the benefit of massproduction and the stable profits in this category. While in the global trade the market forthe knit garments has not increased, Pakistan’s price realization in the knit garments categoryindicates upward trend.

Figure 5.9: Trend in Pakistan’s apparel export


In smaller categories, the exports of the baby wear increased at an average annualgrowth rate of 13.81 percent from US $ 16 million to US $ 27 million. The exports of othercategories like sports wear, hosiery and T-shirts have shrunk at an average an annual rateof 11.55 percent, 8.47 percent and 7.19 percent respectively. The main reason being that theexports are becoming more in favour of men’s wear. Whereas globally the export marketfor women’s wear is much larger than men’s wear and the imports of T-shirts is increasingbut in case of Pakistan the exports of T-shirts has shrunk. The Pakistani exporters are notexporting the smaller categories such as baby wear and others because market size is notlarge due to which the size of the orders in quantity terms is very small. Exporters do notlike to pursue these niche markets as these are considered as specialised garments.

3.2 Exports to EU

The European market is the major target for Pakistan’s exports of apparel products eventhough the quotas are placed in the EU market. The exports of apparel product to EU wereUS $ 462.6 million in 1999 (Figure 5.10). This represents that the share of Pakistan’s apparelexports in the European market is 0.71 percent, and this share has increased from 0.67 percent.This mainly reflects that more and more of Pakistan’s exporters are venturing into the Europeanmarket. The apparel product exports to EU have increased at an average annual growth rateof 3.27 percent from US $ 462.6 million to US $ 406.7 million during 1994-99. An analysisof the garments imports by the EU countries is provided in Annexure II.

Split of Pakistan’s apparel exports 1999 Split of Pakistan’s exports 1995

T-Shirts5%

Woven Men34%

Hosiery8%

SportsWear1%

BabyWear2%

KnitWomen

6%

Knit Men35%

WovenWomen

9%

WovenMen32%

Hosiery13%

T-Shirts8%

SportsWear2%

BabyWear2%

WovenWomen

13%

KnitWomen

5%

KnitMen25%

155

Figure 5.10: Pakistan’s exports to EU

in million dollars

500.0

400.0

300.0

200.0

100.0

-

406.7464.4

417.1 428.2462.6

1995 1996 1997 1998 1999

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

3.2.1 Product mix of exports

In the European market, 60 percent of the Pakistan’s exports are of men’s wear whereaswomen’s wear exports total up to 16 percent of the exports (Figure 5.11). The market sizeof the women’s wear is larger than the men’s wear in EU, and the exports of Pakistan arein favour of men’s wear. The reason for not increasing the share of women garments is thatthe women’s garments require sophisticated processing procedures and fine fabric due towhich the conversion cost of the garments is higher than the men’s wear.

Pakistan’s exports in the woven category are the highest with a share of 54 percent.Between 1995 and 1999, export has increased in this category from US $ 204.7 million toUS $ 245.7 million with an annual average growth rate of 4.67 percent. The men’s garmentsand women’s garment exports were US $ 194.7 million and US $ 50.99 million respectivelyin 1999. The average annual growth rate of 6.67 percent was realised in the men’s garmentsand the women’s garments shrunk at the rate of 1.58 percent from 1994 to 1999. This alsoshows that the percentage decline in the women garments is taken up by the more relianceon the men’s garment exports to EU market.

The exports of knit garments have a share of 22 percent and the exports of thiscategory increased from US $ 70 million to US $ 104 million. Representing an averageannual growth rate of 10.29 percent. The women’s garments exports were US $ 23 millionand that of men’s garments were US $ 81 million. In this category the exports of men’sgarments increased at an average annual growth rate of 12.40 percent.

The exports of Pakistan in smaller categories show a similar pattern to the exports toworld. It was in the baby wear category that there was some increase in exports while theexports of sports wear, T-shirts and hosiery have realised a negative growth rate. Thisreflects that the Pakistan’s exports are being concentrated on men’s garments and thusshrinking the share of other categories, while the trend should have been focused on addingup on new product categories in the product mix or catering the women garments marketand moving towards higher value added products.

PAKISTAN


Figure 5.11: Split of exports to EU


The comparison of Pakistan’s exports to EU during 1995-99 shows that the productmix of Pakistani exports is mostly in favour of woven garments and knit garments in theEU market. The same trend is seen in the overall exports of Pakistan in the apparel sector.The woven garments exports to EU had a share of 50 percent in 1995, and it increased to54 percent in 1999. Similarly, the share of the knit garments have increased from 17 percentto 22 percent. The share of the T-shirts, which is globally increasing has decreased inPakistan’s case.

3.3 Exports to US

American market, being the largest in the world for the apparel products, is the dominantimporting country. Pakistan exported upto 57 percent of its apparel to the USA market in1999 totaling to US $ 750.9 million. Pakistan’s apparel products take up a share of 0.92percent of the USA market. This shows that the Pakistan’s exports are highly dependent onthe USA market trends and demands. The exports of Pakistan have increased from US $ 529million to US $ 751 million reflecting that the average annual growth rate is 9.16 percentduring 1995-99 (Figure 5.12). An analysis of the garments imports by the US is providedin Annexure I.

3.3.2 Product mix of exports

In the American market, the share of the men’s wear is 76 percent and a small shareof 14 percent is of women wear (Figure 5.13). The main reason for the exports inclinedtowards men’s wear is that the volume of exports is higher for men’s wear and the benefitsof mass production are more attractive than going for higher value. In the USA market too,the size of the women’s wear is larger than the men’s wear.

Pakistan’s exports in the knit garments category are the highest for USA with a shareof 53 percent. The exports increased in this category from US $ 232.4 million to US $ 400.7

Split of exports to EU 1995 Split of exports to EU 1999

T-Shirts5%

Woven Men37%

Hosiery21%

SportsWear4%

BabyWear3%

KnitWomen

5%Knit Men

12%

WovenWomen

13%

Woven Men43%

Hosiery14%

T-Shirts4%Sports

Wear2%

BabyWear4%

KnitWomen

5%

Knit Men17%

WovenWomen

11%

157

million with an annual average growth rate of 14.59 percent. The men’s garments andwomen’s garment exports were US $ 347.9 million and US $ 52.8 million respectively in1999. The average annual growth rates for men’s garments and women’s garments were15.04 percent and 11.82 percent respectively, thus reflecting that the consumers prefer theknit garments for their softer and durable qualities.

Figure 5.12: Pakistan’s exports to USA

in million dollars

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

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

Figure 5.13: Split of exports to US

1995 1996 1997 1998 1999

Split of exports to USA 1995 Split of exports to USA 1999


PAKISTAN

800

700

600

500

400

300

200

100

0

529

648 654

721 751

Woven Men26.4%

WovenWomen11.2%

Knit Men37.6%

T-Shirts10.0%

Hosiery6.9%

SportsWear1.3%

BabyWear0.2%

KnitWomen

6.4%

Woven Men30%

Hosiery3%

T-Shirts5%

Sports Wear1%

Baby Wear1%

Knit Women7%

Knit Men46%

Woven Women7%


The share of knit and woven garments together is 90 percent in the exports of Pakistanto USA and the rest of 10 percent are shared amongst the baby wear, sports wear, T-shirtsand hosiery categories. The baby wear category increased at an average annual growth rateof 52.85 percent and its exports were US $ 6.2 million in 1999. Besides baby wear category,sports wear, hosiery and T-shirts category declined at an average annual rates of 8.56percent, 8.10 percent and 8.19 percent. this clearly shows that the Pakistan’s exports areconcentrating on two major garments exports namely men’s wear and women’s wear and allother categories are being ignored and not significantly developed.

The comparison of the share of the exports to USA during 1995-999 shows that theshare of the woven garments exports have shrunk and it has shifted towards the exports ofknit garments. This shows that the exports of Pakistan are becoming more and more vulnerableby focusing on only smaller market rather than focusing on the market which is very big.In both of these categories, the share of the men’s garment exports of Pakistan are very high;and the share of women’s wear is very small. This also shows that the Pakistan’s exportersare overlooking the fact that the market for the women’s wear is larger than market of men’swear. The reasons for focusing on men’s wear are that the quotas for women’s garments areexpensive to buy and the conversion costs are slightly higher due to complexity in women’sgarment manufacturing. Other reasons include limited domestic availability of wide rangeof fine and blended fabrics that often need to be imported. Due to these reasons, the industrycontinues to maintain a strong bias in favour of the men’s garments production.

4. Unit price realization

The unit price realization of product categories is an excellent indicator to determinethe sustainability of the export growth and to develop an understanding about thecompetitiveness in various product segments. It also gives a fair idea about the positioningof the apparel products in different tiers of the market, i.e. high-end and low-endproduct segments.

4.1 Men’s wear unit price realization

4.1.1 Woven garments

In the men’s woven wear category, the major exports by Pakistan are trousers andshirts. On the per piece basis trousers are exported at US $ 3.67, while the cotton shirts andshirts of other textile material are exported at the rate of US $ 3.74 and US $ 2.89 respectively.These prices are the lowest in comparison to all other countries under review (Table 5.1).Sri Lanka has been able to get the highest price per piece of US $ 6.44 for trousers, Thailandin cotton shirts for US $ 7.51 and India in shirts of other textile material for US $ 6.16. Thisgives a decent idea that Pakistan’s presence in the woven garment segment is limited to thelow-end market comprising discount stores.

159

Table 5.1: Comparative unit price realization of men’s wovenwear exports

$/Piece

SITC Product Pakistan Bangladesh India Sri Lanka China Thailandcode description

8414 Trousers, etc. 3.67 4.21 3.91 6.44 5.74 6.3584151 Cotton shirts 3.74 4.82 5.59 6.15 4.02 7.5184159 Shirts of other 2.89 4.17 6.16 5.72 5.28 4.85

textile material


4.1.2 Knit garments

In the men’s knit wear exports, the major categories of Pakistan exports are trousersand shirts. On the per piece basis trousers are exported at US $ 3.21, while the cotton shirtsand shirts of other textile material are exported at the rate of US $ 4.06 and US $ 3.81. Theseprices are better than prices of Bangladesh (Table 5.2). Also in the trousers category Pakistanis able to fetch higher prices than India and China reflecting that the Pakistan’s exports aremuch more competitive in the men’s knit wear. Sri Lanka has been able to get the highestprice per piece for trousers i.e., US $ 3.90, Thailand in cotton shirts for US $ 7.48 and Chinain shirts of other textile material for US $ 8.14 on per piece basis.

Table 5.2: Comparative unit price realization of men’s knitwear exports$/Piece


84324 Trousers etc. 3.21 3.17 2.80 3.90 2.04 3.2984371 Cotton shirts 4.06 2.97 4.53 7.44 5.49 7.4884379 Shirts, other 3.81 3.45 4.62 6.08 8.14 3.34

textile material


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

PAKISTAN


industry relies heavily on the buying houses that are the major providers to mass marketsand discount stores. A very limited number of buyers are able to deal with high-end labelssuch as Levi’s, Ralph Lauren and Nike, etc.

4.2 Women’s wear unit price realization

4.2.1 Woven garments

The market perception of Pakistan even in this category is that of a low quality, highvolume supplier. The price level in the skirt category is US $ 4.04 per piece, which is betterthan Bangladesh’s price of US $ 3.47 (Table 5.3). As far as trousers and blouses areconcerned Pakistan’s prices are the lowest among the Asian countries at US 3.67 and US$ 3.14 per piece. China has a very high unit price realization in skirts followed by Thailand.The basic reason is the indigenous availability of numerous fabric blends. China and itsneighbouring countries are the largest producers of man-made fibres and filaments whichgive them competitive edge over other countries particularly in the global women’sgarments market.

Table 5.3: Comparative unit price realization of women’s wovenwear exports$/Piece

SITC code Product description Pakistan Bangladesh India Sri Lanka China Thailand

8425 Skirts & divided skirts 4.04 3.47 4.77 5.39 7.53 6.058426 Trousers, breeches etc. 3.67 4.55 4.22 5.87 5.85 7.138427 Blouses, shirt-blouse, etc 3.14 3.28 3.94 5.69 6.77 7.04


4.2.2 Knit garments

In the knit wear category for women, Pakistan has been able to fetch the highest pricefor the skirts category among the Asian countries and in the trousers category the pricerealised was US $ 2.90 per piece (Table 5.4). China, Sri Lanka and Thailand are priceleaders in the knit trousers category. Although the unit price realization of Pakistan is veryhigh in the knitted skirts segment but the volumes of export in this category are very low;and it is unable to make a significant impact on the overall export performance of Pakistan.

Table 5.4: Comparative unit price realization of women’s knitwear exports$/Piece

SITC code Product description Pakistan Bangladesh India Sri Lanka China Thailand

8425 Skirts & divided skirts 5.68 0.00 2.92 4.85 3.13 4.418426 Trousers, breeches etc. 2.90 2.59 3.74 4.82 6.78 4.54


161

4.2.3 T-shirts & pullovers

T-shirts are imported in large volumes in the USA. In Pakistan’s apparel export portfolio,the t-shirts category has a pivotal position, as it is the third largest apparel product exportedfrom the country.

The unit price realization comparison among the selected Asian countries shows thatthe Pakistani exporters are not able to attain the higher price for their product. The exportersare relying on mass production and gain the profits in this manner. This clearly indicates thatPakistan’s exports are directed mainly towards the bottom tier of apparel market and theexporters mainly deal with buyers like discount chain stores, with the exception of fewexporters that deal with established brand names and labels. Again the volume of exportsis not very high, as a result, the average unit price realization of the overall apparel industryis very low.

Table 5.5: Comparative unit price realization of exports of T-shirts & pullovers$/Piece


8453 Jerseys, pullovers, etc. knit 3.45 3.06 5.36 6.19 4.57 7.068454 T-shirts, other vests knit 2.83 1.69 4.26 4.21 2.93 3.68


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

5. Apparel industry structure

The textile exports of Pakistan are US $ 5.615 million whereas the apparel exportsconstitute a total of US $ 1.658 million. This represents only 14 percent of the total textileexports. Whereas globally the trend is that the share of the exports of the apparel productsis nearly 70 percent. This reveals that the Pakistan’s exports are basically concentrated onthe low value added products like exports of cotton/textile fabric, cotton yarn/thread andother items (Figure 5.14). Apparel products being the highest value added category in thetextile exports does not have a large share.

If the secondary data sources are consulted in order to determine the size of the apparelsector in Pakistan, these sources are highly under-reported. The Census of ManufacturingIndustries (CMI 1995-96) gives the total number of registered apparel manufacturing unitsas one hundred and 30 only (130) and the number of persons engaged in these units isaround fourteen thousand (14,000). Similarly, according to the Survey of Household andManufacturing Industries (SHMI 1996-97) the number of total apparel stitching units in the

PAKISTAN


informal sector is around four thousand (3,839 precisely). The total number of personsengaged is highly underestimated at seven thousand.

Figure 5.14: Split of textile products, 1999-2000

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

High tendency of under-reporting the number of employees exists in the businesscommunity to circumvent the labour levy contributions on behalf of employees. Also thenumbers represent direct employment, whereas contract employees and piece rate employeesare not captured by the secondary data sources.

5.1 Imports of stitching machines and size of apparel sector

Imported stitching (sewing) machines are used mostly for industrial purposes, whereasdomestically manufactured machines are used for household purposes. The volume of importsof sewing machines in Pakistan gives a fair idea of the total size of the apparel sector.

Table 5.6 reveals that the total number of sewing machines in the country is around400,000. Considering the fact that stitching units either of knit garments or woven garmentsrequire other human resource as well such as helpers, cutters and trimmers, etc the totalemployment in the sector is more than 700,000 individuals. Out of this workforce, the totalnumber of skilled workers is probably half the size of total employment.

5.2 Knit and woven apparel segment

At a broader level, the industry can further be classified in two broad categories i.e.the knit garments segment and the woven garments segment. The knitting industry in Pakistanhas traditionally focussed on integrated units. An estimated number of 700 vertically integratedunits constitute the knitwear sector of Pakistan. These units perform in-house knitting,dyeing and processing and stitching of garments. An estimated number of 15,000 knittingmachines are installed in this segment, mostly these units cater to the export marketswith limited presence in the domestic markets; almost 80 percent of the productionis exported.

Apparel,14%

Others, 68%Cotton Fabric,

9%

Cotton Yarn,9%

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Table 5.6: Number of stitching machines installed

Year Machines installed

1991 - 1992 62,4001992 - 1993 61,5991993 - 1994 44,9481994 - 1995 28,4021995 - 1996 18,5131996 - 1997 25,4081997 - 1998 47,4351998 - 1999 37,7091999 - 2000 20,377Total 346,791

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

In the woven garments segments although the number of manufacturing units is muchhigh but these are dedicated stitching units which only convert fabric into garments. Thesegment is dominated by SMEs which operate with small number of stitching machinesranging from 30 to 40 machines per unit. A large number of the woven garments stitchingunits also cater to the demands of the domestic apparel market.

5.3 Gender split in employment

The apparel manufacturing industry in Pakistan is the single largest industrialemployment provider in the country. The male workers who comprise almost 90 percent ofthe total labour force dominate the employment in the sector.

The industry prefers to hire male workers as stitchers whereas, female workers are onlyhired as helpers in the trimming and packing sections. Key factors given by the industryincludes the following:

q Labour laws in the country impose restriction on women employment after 7 P.M.Due to the cyclic nature of the apparel industry and depending upon orders obtainedby a specific unit, it becomes difficult for female workers to work extra time.

q The entrepreneurs also avoid hiring female workers because of the maternitybenefits that are to be provided to a female employee. The maternity benefitsinclude paid leave for fixed period of time.

q The apparel industry heavily relies on ‘Ustaad-Shagird’ tradition (apprenticeshipon the job training). Mostly the stitching masters are male, and they tend to havea gender bias against training of women workers.

Although generally the women workers are considered to be more productive by theapparel industry as compared to male workers, male workers are given a preferential treatmentby the apparel sector on the basis of the above mentioned factors.

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5.4 Production efficiency and losses

An important factor that undermines the productivity of the apparel sector in Pakistanis the high production losses (Table 5.7). These losses are to the extent of 30 to 40 percentin the knitwear sector. An important element is the lack of specialization and presence ofintegrated units within the knitwear sector. These losses are significantly reduced in thewoven garments segment due to specialization in production processes.

Table 5.7: Extent of losses in the knitwear industry

Cut to Shipment Rejection 2-3 %Knitting losses 2 %Dyeing & Finishing Losses 4-7 %Cutting & Stitching Losses 15-18%

Source: Textile Vision 2005, SMEDA

The level of wastage at various stages in knitwear industry by no standards can becompared to international benchmarks that consider any process to be commercially unviableif the extent of losses is more than 4 percent.

5.5 Skill development in apparel sector

There are a very limited number of training institutes that provide stitching training inthe country. The output of these institutes is not sufficient to meet the requirements of theapparel sector. The apparel industry develops its human resource through ‘Ustaad-Shagird’system. The stitching masters induct young apprentices and impart stitching training. Dueto this particular aspect, the modern production techniques and process improvements rarelyhappen within the system.

This aspect also limits the capability of the apparel sector to bring about improvementsin the existing product lines and develop new products. The industry in Pakistan is highlyproduction oriented and lacks innovation in both the processes and product.

5.6 Competitiveness of apparel manufacturing in Pakistan

Even with increasing labour costs and the costs of other inputs, Pakistan is still highlycompetitive in apparel manufacturing. The total cost of garments is below the average unitprice realization of different competitors.

Table 5.8 represents the cost structures of the apparel sector in the threeselected product categories. The highest cost content, almost 80 percent, in any garmentis that of the inputs including fabric, trimming and accessories. The labour cost pergarment is within the range of 7 percent to 11 percent, depending upon the type of garmentproduced.

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5.7 Wages and salaries in the apparel industry in Pakistan

The labour force in the apparel industry in Pakistan can be classified into three categories,the first category is that of supervisors supervising a particular department such as stitchingand cutting, the second category is that of skilled workers performing a specific function inapparel manufacturing such as stitching and finally there are a number of helpers andworkers performing basic recurring functions in each department constituting the semi-skilled and unskilled workers.

Interestingly majority of the female workforce is only employed to perform semi-skilled operations. It is for this reason that there is high presence of women in the clipping,and packaging sections meaning thereby that the female workers are the lowest paid in theapparel sector (Table 5.9).

Table 5.8: Competitiveness of apparel manufacturing in Pakistan

Cost of goods /garment (Rs) Denim % of PK polo % of Woven pants % ofJeans total cost t-shirt total cost cotton total

cost

Fabric (RS) 132.61 70.92 % 72.12 65.64 % 141.40 71.67 %

Pocket Lining fabric (RS) 6.50 3.48 % 0.00 0.00 % 6.50 3.29 %

Accessories (Rs) 21.15 11.31 % 11.76 10.70 % 18.70 9.48 %

Packing cost/garment (Rs) 5.00 2.67 % 5.00 4.55 % 5.00 2.53 %

Electricity charges per garment (Rs) 1.81 0.97 % 1.66 1.51 % 1.91 0.97 %

Maintenance Costs (Rs) 0.30 0.16 % 0.47 0.43 % 0.65 0.33 %

Labour (Rs) 14.00 7.49 % 12.00 10.92 % 16.00 8.11 %

Total CGS Rs 181.37 103.01 190.16

Total CGS $ 2.83 1.61 2.97Financial Charges 2.80 1.50 % 2.16 1.97 % 2.50 1.27 %

Admin/Overheads 2.82 1.51 % 4.70 4.28 % 4.64 2.35 %

Cost/garment including Admin &Financial Charges 186.99 109.87 197.30

Total Cost including admin &Financial Charges $ 2.92 1.72 3.08

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

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

PAKISTAN


Table 5.9: Average monthly salaries based on skill levels in the apparel industry

in Pakistan Rs/month

Structure of labour force Wages Pak US $/ monthRupees/month ($ to PKR @ 63)

Supervisory Level (Cutting, Stitchingand Finishing Supervisor) 8,000 127Skilled Worker (Stitching MachineOperator, Clipping incharge, etc) 5,000 to 6,000 79 to 95Semi-Skilled and Unskilled Workers(clippers, stain removers, packers and helpers) 2,000 to 3,000 32 to 48

Source: SMEDA Textile Sector Research

5.8 Comparative wages and productivity

Despite consistent inflationary pressures, Pakistan is still highly competitive in labourcosts as compared to developed countries. The average hourly wage in the apparel industryis within the range of US $ 0.22 to 0.30 (Table 5.10). This makes it competitive with thedeveloped countries even if the productivity of the labour force is only 50 percent to thatof the USA. In developing countries like India and Bangladesh, the average wages are evenlower than that of Pakistan. The competition with these economies is only possible byenhancing productivity and curtailing process wastage.

Table 5.10: Apparel industry average hourly wages

Countries US $ / hour

USA 8.00Dominican Republic 1.15Malaysia 1.15Mexico 0.85Thailand 0.65Indonesia 0.15India 0.20Bangladesh 0.18Pakistan 0.22

Source: Kart Salmon Associates

5.9 Working conditions in the apparel industry

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

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their rights. However at the same time, labour welfare schemes providing social cover andother benefits are only implemented in the formal sector.

5.10 How would globalization affect quality of employment?

With the process of globalization, a new regime of standards will be put in place bythe developed countries to source goods from developing countries. Although some of thestandards such as ISO 9,000 and 14,000 deal with product quality and process improvementand documentation and have a direct effect on the productivity of the workforce, certainother standards strictly deal with working conditions of the labour force. Case in point is theSA-8,000 (Social Accountability) standard, which the European market can impose on thesuppliers. These standards have been formulated to take into account the social dimensionthereby meaning that the welfare of workers is the responsibility of the entrepreneur.

With the swift movement towards implementation of similar standards, the quality ofemployment in apparel industry is likely to improve. An interesting feature is that compliancewith these standards is not limited to a certain manufacturing facility, whereas the standardsare imposed on production of a product across numerous stages. If such standards areimplemented properly, this would definitely lead to improvement in job quality in theapparel sector particularly where small process vendors perform specific processes and theirworkforce neither enjoys the benefits of social security nor is provided with the right kindof environment. The MFA phase-out in 2005 is likely to trigger competition among thedeveloping countries to retain the market shares and thus are likely to be forced to complywith international standards as mentioned above.

5.11 Impediments in diversification

Despite the fact that the production process of stitching is fairly flexible to switchbetween different product categories. The major constraint is the quota policy that favoursthe production of a specific product category without having any negative implications onthe cost structures. The cost structure of garments given above does include quota costs. Ifan enterprise wishes to enter in a new product category, it has to buy quota from the openmarket. Consequently, the cost incurred only to acquire quotas would inflate the cost of onegarment by almost US$ 2.5, thus leaving the enterprise un-competitive in the internationalmarkets. Without any provision of quota allocation for potential investors and new entrants,the quota policy serves as a major deterrent towards widening of the apparel industry’sproduct base.

5.12 Availability of inputs

The fabric and other accessories constitute almost 80 percent to 85 percent of the totalgarment cost. The knitting industry due to its structure is capable of meeting its fabric

PAKISTAN


requirements indigenously. The woven garments segment due to its dependency on domesticweaving industry has a limited capability to produce a wider product range. The productionof weaving industry in Pakistan is concentrated in coarse fabric (low density cotton fabrics)which makes it feasible for the apparel sector to produce cotton based trousers and bottoms.Due to this the availability of fine fabrics used for producing tops (woven shirts) is verylimited. This forces the domestic garments segment to increase its existing share in men’swear thus neglecting a large global product segment of women wear.

The Government, in order to facilitate the apparel manufacturing, has created a systemfor temporary imports of inputs. These include the ‘No Duty No Drawback schemes (NDND),’but due to procedural requirements the small sized apparel manufacturers are unable toimport fabric through these schemes. However, the large ones import fabric from numeroussources to meet the requirements of buyers of woven garments.

5.13 Marketing of products

Marketing in the apparel segment is driven by three main elements. Firstly, it is thecapability of an enterprise to produce a particular product; secondly, it is the buyer thatrequires the product; and thirdly, it is the capability of the manufacture/exporter to meet theorders and deliver on time. Unfortunately, due to quota restrictions, the first considerationeven for buyers is the availability of a specific product quota with the supplier; as only thiscan ensure timely delivery of the product. This attribute of the industry has constrained theability of the apparel manufacturers to market their products and even diversify.

The apparel industry of Pakistan has positioned itself as a mass producer of garments,particularly in the knitted garments segment. Due to which majority of the industry exportsto the low end markets whereas high-end markets are rarely targeted by the industry. Thisalso results in low unit price realization in the international markets.

5.14 Global apparel market segmentation

The pyramid in Figure 5.15 shows the structure of the apparel market. The tip of thepyramid, although very small in size, is a high price segment primarily dominated by theapparel designers such as Georgio Armani and Versace, etc. These products can be classifiedas high value-added products. The base of the pyramid depicts the low-end discount storessuch as K-mart and Walmart, etc, where the need of the international buyers is quantity withlimited consideration given to quality of the product. These buyers in the apparel marketsegment can be classified as commodity buyers. The movement from top to bottom of thepyramid results in increased volumes and decrease in unit price realization.

Exhibit 5.1 below represents buyers’ preference in different apparel market segments.The low-end buyers, as represented by the base of the pyramid, give top priority to pricewhile negotiating with the suppliers and apparel manufacturers. The second most importantfactors considered by this segment is delivery according to commitment, whereas the element

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

Figure 5.15: Apparel market segments

▲

▲Exhibit 5.1: Buyers preference in apparel market segments

Commodity products High value added products

Price QualityDelivery FlexibilityQuality DeliveryFlexibility Price

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

6. Quotas in textile trade

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

PAKISTAN

Haute Couture

Designer Shops

Department Stores

Mass Market

Discount Low-endChain Stores


completion of the final round of WTO in 1994, the quota restrictions on textiles were foundto be in conflict with the basic principles of WTO which stressed upon removal of any non-tariff barriers. As a consequence a new regime called the Agreement on Textiles and Clothing(ATC) replaced MFA. The key objective of the ATC is to phase out the quota restrictionsover a period of ten years. The MFA will cease to exist after December 31, 2004. Theprocess in which the developed countries are phasing out quotas according to theircommitments with WTO is very interesting to evaluate, as the current level of liberalizationis not in accordance with the committed volumes as well as categories of products whichneed to be integrated in the non-quota trade regime. This raises serious concerns about thefuture of ATC. An issue that still needs to be dealt with is the complete implementation ofATC in 2005.

6.1 Quota for textiles and apparel in Pakistan

The USA and the EU comprise vital textile markets particularly for the apparel products.More than 90 percent of the Pakistan’s exports of garments are directed towards these tworegions of the world. Trade in both these markets is governed by quantitative restrictions.Every year Pakistan is allowed to export a fixed number of garments based on the quotaallocated by the countries/region. In this particular section, the performance of the domesticapparel industry will be evaluated on the basis of its utilizations of quota in variousgarments categories. This will be helpful in developing an understanding about the level ofpreparedness that the country has so far achieved in order to meet the challenges of the postMFA scenario.

6.1.1 Quota utilizations of Pakistan in the US

The USA is Pakistan’s largest export market for textile apparel. Almost 50 percent ofthe apparel trade is directed towards the USA. The overall average quota utilization ofPakistan in the American market is slightly above 75 percent (Table 5.11). This is not a veryencouraging figure as other competitors like China and India have overall average quotautilizations of more than 90 percent in the American market. The main reason is limitedproduct base of Pakistan textile apparel.

One thing is evident from the quota utilization figures of Pakistan in various apparelcategories. Pakistan’s presence in the American market is dominated by the male garmentsegment and that too heavily dependent upon the cotton knit segment. High quota utilizationsin knitted product categories speak volumes of the inclination of the domestic apparelindustry towards men and knit garments.

The female garment segment in the USA driven by the quickly changing fashionscenarios makes it difficult for the apparel sector of Pakistan to cope with the changingtrends. Limited use of man-made fibres in the spinning and weaving sector also hampers thedomestic availability of fashion fabrics to meet the requirements of this dynamic market.

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Another important linkage within the whole textile value chain is the processing and finishingindustry for the woven fabric. This is a highly capital intensive sector which is at the initialstages of development and does not facilitate the downstream industry with the availabilityof different fabric textures and finishes, which are critical to the development of a solidwoven apparel segment.

Table 5.11: Pakistan’s quota utilizations in the USA(in percent)

HTS codes* Product 1997 1998 1999

331/631 Gloves and Mittens 77.5 81.9 67.8334/634 Men and Boy Coats 88.1 58.2 78.0335/635 Women and Girl Coats 67.7 56.4 38.3336/636 Dresses 61.7 73.1 51.6338 Men and Boy Knit Shirts 93.5 77.1 88.0339 Women and Girl Knit Shirts and Blouses 77.4 72.9 83.9340/640 Men and Boy Shirts (not knitted) 90.0 61.0 69.8341/641 Women and Girl Shirts and Blouses (not knitted) 27.3 77.9 24.6342/642 Skirts 18.4 55.7 38.0347/348 Men and Boy Trousers, Breaches and Shorts 81.9 73.2 92.7351/651 Nightwear and Pyjamas 85.1 84.3 74.9352/652 Underwear 69.2 76.4 52.0359/659 Other Cotton Apparel 89.5 74.2 84.7638/639 Men and Boy Knit Shirts 36.0 19.9 75.4647/648 Women and Girl Trousers, Breaches and Shorts 73.8 69.8 65.7

Source: US Department of Customs

6.1.2 Export product mix and apparel quotas in the USA

Despite a highly regulated apparel sector imports in the USA, a significantly highproportion of products is free from the quota regime. These products are referred to as non-quota items. There are a total of 78 MFA categories (quota categories) that constitute the

USA apparel import composition and Pakistan (value)

Figure 5.16: Composition of apparel trade with US

Composition of Pakistan’s apparel exports to the USA

PAKISTAN


Imports underquota, 83%

Imports inunrestricted

categories, 3%

Untappedcategories by

Pakistan, 14%

Exports inunrestricted

categories, 1%

Exports underquota, 99%


apparel segment out of which the exports of Pakistan to the US are restricted in 30 categories.The value of exports in this segment was US$ 714 million out of which US$ 708 millioncame from the quota-restricted categories and only US$ 6 million came from the unrestrictedcategories. The division of the apparel market of US according to the previously mentionedthree-segment criterion is shown in Figure 5.16.

Due to the concentration and dependence of Pakistan’s apparel sector on quota products,99 percent of Pakistan’s exports to the USA comprise quota products. This particularphenomenon leaves a high proportion of American market untapped by the Pakistani apparelmanufacturers and exporter. The categories in which Pakistan has been completely unableto penetrate comprise almost 15 percent of the total USA apparel market (in US $ terms itis around 7 billion).

An important reason which restricts diversification of apparel exporters is the quotapolicy of Pakistan that favours concentration in few categories thus limiting the entrepreneur’scapability to have a broader product line, the issues of quota policy in Pakistan will bediscussed later.

6.1.3 Quota utilizations of Pakistan in the European Union (EU)

The EU constitutes an important market for Pakistan’s textile products, the total textileexports of Pakistan including yarn, fabric and textile made-ups and apparel are to the tuneof US $ 1.5 billion (Table 5.12). Imports in textile apparel are also restricted by quantitativerestrictions by the EU countries. The mechanism of limiting imports by quota is that EUannounces specific quota limits for the coming calendar year. This quantitative limit isadjusted in each year in accordance with the flexibility provisions contained in the ATC. TheEU has an integrated system of licenses (SIGL), which is linked with computerised networkconnecting the European Commission with the departments in various countries that issueimport licenses. When the licenses issued reach the designated quota, European Commissionorders the issuing departments to cease the issue of licenses.

Table 5.12: Quota utilization in EU

(in percent)

SIGL Description Pakistan

1997 1998 1999

4 Shirts, T-shirts 91.0 91.0 90.85 Jerseys, pullovers, waistcoats 91.3 89.5 92.16 Woven trousers, shorts of wool, cotton 90.9 90.4 88.97 Women’s blouses, shirts 66.4 69.4 25.58 Men’s shirts of wool, cotton, MMF 55.2 46.9 31.318 Briefs, nightshirts, pyjamas &similar 40.1 39.8 40.726 Women’s dresses of wool, MMF 37.0 19.3 16.0


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6.1.4 Apparel quota utilization of Pakistan in EU

The categorisation of products within the EU to allocate quotas is fairly simple ascompared to that of the USA. A large majority of products are lumped for simplificationpurposes. If the quota utitilisations of Pakistan are observed closely it becomes evident thatPakistan’s utilization is very high in cotton based knit and woven garments segments. Inproduct categories like t-shirts, pullovers and jerseys and woven trousers and shorts theutilization is to the extent of 90 percent and in certain cases exceeds 90 percent.

Due to focus of the industry on cotton textile products the utilizations in man-madefibre and blended fabric based apparel is very limited. This can also be viewed in the tablewhere the quota utilizations in products such shirts of MMF and blended fabric for men isas low as 30 percent. It is for the same reason that Pakistan’s utilization in other productslike lingerie and undergarments is also very low.

Similarly for women apparel categories, the utilizations of quota are very low. A majorreason is the high dependence of the industry on the silver fiber. Due to limited usage ofthe man-made fiber in the upstream industry the production of blended fabrics is verylimited which makes it convenient for the apparel industry to compete in internationalmarkets with a limited range of apparel products, primarily based on cotton.

In both the USA and EU markets the quota utilizations reveal that the Pakistan apparelsector is highly dependent upon firstly on cotton products and secondly on male garments.Another attribute relates to the presence in the knit garments segment and a weak wovengarment segment. In the woven garments Paksitan’s exports are predominantly in low countfabrics (twills) where as fine count high density and blended fabrics are used in a very smallproportion. This significantly restricts the capability to develop a niche in high value garmentsegments such as women tops and blouses, undergarments (bras and pantyhose) and nightwear.

The quota markets (EU and USA) are of vital importance to the apparel sector ofPakistan for the very reason that more than 90 percent of apparel exports are targetedtowards these markets. This makes Pakistan highly vulnerable in the post MFA trade scenario.The emerging exporters particularly countries like Mexico and other South American stateswill offer stiff competition in products like knit garments where they are developing strongindustrial presence.

6.2 Quota policy of Pakistan

A large number of products ranging from cotton yarn to ready-made garments areunder quota restraint. Pakistan has bilateral textile trade agreements with USA, EU andCanada regarding its exports of textiles. The USA has imposed quotas on 39 items (Cottonand MMF). In EU, there are 15 categories of cotton and MMF products, which fall underquota restraints, whereas a large number of categories falling under apparel group are stilloutside quota restraint. The Canadian market has 10 textile categories under quantitativerestrictions.

PAKISTAN


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

6.2.1 Salient features of existing quota policy

l The basic criteria for allocation of quotas is on the basis of performance i.e. theperformance holders receive allocation of quotas equal to the actual quantityexported by them under each category during the preceding year to a specificquota country. It makes the quota allocation 100 percent on the past performance.

l Unit price realization is not accorded any consideration in quota allocations.l The growth quotas and the residual quotas available to the Government under

bilateral arrangements with the quota countries are auctioned in the market toearn revenue for the Government.

l Quotas can also be transferred from one firm to another by selling them.l There are no provisions for allocation in the existing quota policy for the potential

investors and new entrants in the apparel business.

6.3 Previous quota policies of the Government

The Government of Pakistan has tried repeatedly varied strategies to implement aquota policy that ensures sustainability in textile sector growth but to no avail. This isreflected in the review of the past quota policies.

6.3.1 Inconsistency in quota policies

During the past decade the Government has revised the quota policy a number of times.An interesting feature of these policies is that no quota policy was able to complete itstenure. This phenomenon of radical changes in quota policies overlaps with the changes inthe Government itself. The new Government used to scrap previous Government’s policybecause of corruption and nepotism.

6.3.2 Lack of long term strategy

The sudden revision in quota policies both at the macro level as well as the micro levelraises apprehensions amongst the stakeholders about the future of prevalent quota regimesand the exporters face a difficult time in planning and devising future strategies.

6.3.3 Competitiveness of firms

The changes in quota policy play havoc with the cost structures of the exporting firms.In case quota is allocated on past performance the entrepreneurs are provided an incentiveto accumulate stocks in terms of greater exports, making them eligible for greater quota

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

Attributes 1992-93 1994 1995 1996 1997-98 1999-2000

Defined Time Jan.92-Dec.96 1994-Dec.96 1995-Dec.96 Jan.96-Dec.96 Jan.97-Dec.99 For the year 1999Period & Year 2000

separately.Newcomer No provision -10% of growth -10% of growth -10% of growth All discretionary No Provision

quota for new units quota for new units quota for new units quotas abolished-25% of growth -25% of growth -25% of growth including new unitsquota for rural quota for rural quota for rural and rural areas.areas and areas and areas andtransferable transferable transferable

Allocation Basis Performance Only on Quantity Only on Quantity Only on Quantity 1st Year: 75%Q:25%VHolders: based based based 2nd Year:65%Q:35%V50% Q:50% V 3rd Year onward:

50%Q:50%V Based on Quantity

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

Exhibit 5.3: Key features of textile quota policy in Pakistan – II

Attributes 1992-93 1994 1995 1996 1997-98 1999-2000

Defined TimePeriod Jan.92-Dec.96 1994-Dec.96 1995-Dec.96 Jan.96-Dec.96 Jan.97-Dec.99 For the year 1999 &

Year 2000 separately.Residual Quota Through auction Through auction Through auction Through auction Growth and residual Growth and residual

and non-transferable and transferable and non-transferable quota both through quota both throughauction and non- auction and non-transferable transferable

Quota Transfer Transferable -For performance -For performance -performance and -performance and -performance andholders transferable holders open market open market open market transfer-non performance transferable transferable transferable ableholders, not -auction quota -auction quota -auction quotatransferable non-transferable non-transferable non-transferable

-New passbookholders have to ship

90% of quota allocated.Source: Quota Supervisory Council of Pakistan

PA

KIS

TA

N


allocation in the coming years. In case of a sudden switch in quota policy from pastperformance to value additions, exporters having invested heavily in quota suffer humongousmonetary losses. The inconsistency in policy ultimately results in erratic export performanceof the apparel sector, leading to negative effect on the overall exports of the country.

6.3.4 Quality vs. quantity

As mentioned earlier that the existing quota allocation is entirely on the basis of pastperformance. The greater the volumes of exports, the greater are the chances of increasingexports in the future. The particular aspect of the quota policy encourages to invest heavilyin quotas and undermines the diversification capability of the industry.

An example in this regard makes it easier to understand. Category 338 in the USA isfor knitted shirts. Pakistan has a very high quota allocation in this category due to thestrength of local cotton. The exporters of knit garment try to focus on this particular productwhile exporting and tend to build high volumes in order to get additional quota in future.It is for this reason that occasionally the cost per dozen of quota in this particular categoryrises to Rs 2200 (US $ 2.5/piece), if the quota is purchased from open market.

For a firm not having past performance it becomes difficult to export in 338 category.This specific feature of the quota policy makes it convenient for firms to concentrate onsimply one apparel product category, resulting in an overall narrow product line in internationalexport markets.

The benefits of having a mix of value and volume in quota allocation are much higherthan simply having the quota allocation on past performance. It not only enables the exportersto maintain their export performance in existing product categories but also provides anincentive for further value addition. The feature of value addition also enables the exportingfirms to diversify their product lines as well as markets, as they no longer enjoy the benefitof allocation primarily based on mass production.

6.4 Importance of quota policies in post-MFA scenario

Quota policy in any country can serve the purpose of an effective tool to prepare theapparel sector so as to make it globally competitive in the post MFA scenario. A welldesigned policy can determine the future direction of the apparel sector exports by balancingdifferent variables, i.e. through encouragement of value addition and diversification, otherwiseit is likely to play a catalytic role in the deterioration of future export earnings by focussingonly on limited products. In Pakistan the existing quota policy not only discouragesdiversification but also hampers the entry of new exporters through imposition of high entrybarriers in terms of large investments required in quota procurement.

6.4.1 Quota policy, employment and skill levels

It has been established that the sole dependency of quota allocation on only performance(quantity) restricts the industry’s capability to diversify and innovate. This in turn hampers

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skill development within the apparel sector in general. Workers at all levels are equippedwith certain set of skills that make them experts in handling a few products efficiently,whereas a switch to other product categories directly reduces productivity.

This phenomenon is particularly true for the women’s garments segment in whichPakistan’s quota utilizations are extremely low. A large majority of garments in this segmentare produced through diverse fabrics, including blends and other synthetic materials. In orderto handle the production of synthetic and blended fabrics, a greater degree of skill and precisionis needed. The skills to handle women’s garment line can be acquired, but given the existingsituation where the industry as a whole is dedicated to the production of men’s garmentsand at the same time dependent upon on-the-job skill development, it would become verydifficult to reposition itself as a quality supplier of women’s garments by simultaneouslydeveloping human resource capable of handling this diverse and dynamic product range.

The limited product portfolio that appears to be the result of quota policy of theGovernment can have a two pronged effect on the apparel sector in Pakistan. Firstly, theentrepreneurs will have to respond quickly by diversification to sustain the existing level ofexports in the international markets; and secondly, they will be confronted with the problemof finding human resource with the right set of skills to meet their needs. This can also havenegative bearing on the cost structures of the apparel sector.

7 Issues, concerns and suggested strategy thrust for apparel sectordevelopment in Pakistan

7.1 Limited market exposure

The foremost problem confronted by the apparel sector of Pakistan is the limitedmarket exposure of the products. The exports are only targeted towards two major marketsi.e the USA and EU. Both of these markets comprise quota countries where imports arerestricted by quantity. In non-quota markets Pakistan is merely present, these include largemarkets like Japan, middle-eastern countries and Australia. The market mix of Pakistan’sapparel products gives the impression that mostly the manufacturing base has been establisheddue to quota restriction where a fixed basket of goods to be imported by the developedcountries were allocated to Pakistan. High dependence on quota countries can offer stiffercompetition to Pakistan’s apparel sector after 2004. The solution lies in market diversification,a broader market exposure can only ensure sustainable development even beyond 2004.

7.2 Limited product base

Besides the disadvantage of having a limited market mix the apparel industry of Pakistanalso faces another problem of a limited product base. Unfortunately due to quota policy, theindustry has positioned itself as a mass producer of garments in a few product categories.

PAKISTAN


Predominantly, the industry has developed itself into a hub of men’s wear, whereas themarket for women’s wear offer greater opportunities due to the size of the global market.An important reason cited by the industry in this regard was that the range of men’sgarments offers high degree of flexibility in mass production and leads to greater commercialviability. Although this limited product base of the apparel sector negatively affects thegrowth in the post MFA scenario where the international buyers would have a greater choicein sourcing, an exporter with a diversified and balanced product portfolio will be in a betterposition to catering to a wider apparel market.

7.3 High dependence on cotton

The apparel industry in Pakistan relies heavily on cotton based garments. Being anindigenous input cotton provides greater competitive advantage to the domestic industry. Atthe same time, the industry has to realign and reposition according to the internationaldemand patterns. When the international trends in consumption of manmade fibres areobserved, they clearly indicate that the global consumption as well as production of manmadefibers and filaments is greater than that of cotton, the international production of which isstagnant at the same level for the past ten years (Figure 5.17). This can also be observed inthe figure. On the contrary the mill consumption of manmade fibres is very limited inPakistan, the spinning and weaving segments of the textile value chain have also contributedto this end by not realising the importance of realignment in accordance with the globalpatterns. Due to lack of availability of inputs the apparel industry has not been able todevelop its capacities in switching or at least balancing the ratio of cotton and manmadefibres in the product mix. This particular feature also impedes the industry’s access in thewomen’s garment segment, where the market is highly dynamic and demands a variety offabric textures and blends.

Figure 5.17: Global consumption of fibres

in million bales

Source: Textile Vision 2005, SMEDA.

w~

n n n n n n n nn n

n n nn n

n~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

~ ~

w w w w w w ww w

w w w w ww

140

120

100

80

60

40

20

084 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

Cotton MMF Polyestern~ w

179

7.4 Regional trade blocs

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

Figure 5.18: US import of men’s knit garments from Mexico


These emerging exporters, besides having the geographical advantage, also have thecompetitive advantage of low labour wages. The South Asian coutries are not the only oneshaving this cost advantage in this labour intensive sector. Such economies have all theingredients to provide tough competition to countries like Pakistan. Pakistan on the otherhand does not enjoy the advantage of being a member of any trade bloc. The South AsianAssociation for Regional Cooperation (SAARC), of which Pakistan is a member, has nocomparison with big economic blocs as mentioned above. The intra regional trade betweenSAARC countries is only 3% of the total trade.

7.5 Preferential treatments

A few regional blocs also offer preferential treatments to their trading partners basedon the economic conditions of a particular country. The European Union provides such anincentive for textile products to Bangladesh under its Generalised System of Preferences

PAKISTAN

1995 1996 1997 1998 199975 153 239 296 400US $ million

w

w

w

w

w

500

400

300

200

100

0


(GSP). Under GSP Bangladeshi products enjoy an average 12 percent duty exemption in EUcountries. This particular incentive has turned Bangladesh into a massive converter of fabricsinto garments. All of this has happened without any investments in the up-stream industrieslike spinning, weaving and knitting. The exporters are free to import fabrics from any partof the world and then export after adding value.

In Pakistan, the import of woven fabrics is firstly not permitted and is also protectedby tariff. For exports purposes, there exist a number of temporary import schemes whichallow duty free imports of fabrics and other inputs. All this is complicated through a widearray of compliance requirements. Due to limited access to inputs, the industry relies ondomestically produced fabrics and is unable to diversify.

7.6 Upstream industry and linkages

The upstream industry in case of woven garments is heavily dependent on the weavingand spinning sector. The major portion of fabric, almost 65 percent, is still produced onpower looms in Pakistan. The use of this obsolete technology only permits the sector toweave low-density fabrics of coarse cotton yarn. These machines are not equipped tomanufacture high-density fabrics of finer yarn counts. If the production of spinning industryis evaluated, almost fifty percent of the total yarn produced in the country falls in the coarsecount categories. Similarly, the spinning industry’s production of blended yarns is also notin line with the global production trends. The polyester-cotton (PC) and polyester-viscose(PV) yarns comprise only twenty-five percent of the total yarn production.

On the other hand, the knitting industry, although not dependent on other sub-sectorsdue to large presence of integrated units but due to huge investments in specific quotacategories, has been unable to diversify its product base.

Such factors prevalent in the upstream industry do not provide the apparel sector withthe requisite inputs necessary to meet the diverse needs of a global apparel markets. Ifsimilar conditions and trends continue to prevail in the country then it would become verydifficult for the small apparel sector of Pakistan to compete in the value added productsinternationally.

7.7 Reactive vs. proactive selling

The apparel exporters in Pakistan do not pursue any proactive marketing techniques,with the exception of few progressive exporters. Mostly the exporters produce according tobuyers’ specification. It is very rare that exporters develop and design garments in-house andthen try to market them. This specific feature has resulted in the lopsided development ofthe apparel sector, which is restricted to a limited number of products.

Participation of exporters in international trade events and fairs is also not veryencouraging. Although a large majority of exporters have developed their websites but donot consider it to be a very reliable source of marketing. Most believe that their long-term

181

relationship with the buyers will ensure their success even after the year 2004. This situationis alarming for the apparel industry of Pakistan, as lifting of quota barriers will make itconvenient for the buyers to source from any part of the world that offers a better bargain.

7.8 New product development

Reliance on the foreign buyers in production of garments has not allowed the industryto develop itself as an innovative sector of the economy. There are very rare cases inPakistan apparel sector where an exclusive designing facility exists. Due to lack of demandof such skills in the industry, the human resource development in this critical area has alsonot taken place. With the liberalization of quantitative restrictions, the requirement for thisskill is likely to enhance. However, currently the industry is not geared up to meet therequirements of international markets based on indigenous designing and product development.

7.9 Mobility of inputs

A strong apparel manufacturing base guarantees the development of a solid up-streamtextile industry. In order to make the apparel manufacturing the engine of exports growth,a liberal import regime needs to put in place. This would ensure the availability of inputssuch as diverse range of fabrics required by the woven garments sector and accessoriesincluding zippers, buttons, etc. The current facilitating mechanisms including temporaryimport schemes have failed to achieve the results of growth in the apparel segment. Theapparel industry in Pakistan mainly comprises small and medium sized units, which due tocapacity constraints are unable to utilise these facilitating mechanisms. These facilitatingmechanisms need to be revised and simplified, wherever possible, to bring about an increasein their usage.

7.10 Technical barriers to trade and apparel industry

The complete implementation of the Agreement on Textiles and Clothing (ATC) willresult in strict enforcement of quality standards by importing countries particularly thedeveloped countries. These include standards like ISO 9002, SA 8000 (social accountability),Eco labels and environment standards (ISO 1400), etc. These standards are not likely toaffect the existing direct exporters/manufacturers. Underlying factors include theimplementation of Standards of Engagement (SOEs) imposed by foreign buyers. Most of theintegrated knit garment manufacturers in Pakistan are already ISO certified and also complywith SOEs of buyers. The integration within the knitwear sector will keep it protected fromthe technical barriers to trade due to their inherent compliance capacity.

In the woven garment segment, the specialised garment manufacturing dominates theindustry structure. Sub-contracting and out-sourcing is a key feature within this segment.The sub-contractors in the woven garment segment (manufacturers of labels, small washingunits, embroidery units, etc.), due to lack of capacity to implement standards, will accentuate

PAKISTAN


the problems faced by the woven garment exporters. Most of the standards require that thegarment should be produced through a homogenous and standardised process, meaningthereby that the entrepreneur has to ensure the implementation of SOEs at all the stages ofproduction, even if the production of a particular process is sub-contracted. Ensuringimplementation of SOEs and other standards at the stage of process vendors and sub-contractors seems to be a far-fetched idea at this stage.

This factor of ensuring compliance through all the production stages will also negativelyaffect the overall growth in the apparel industry. The phasing out of MFA will start anotherera of non-tariff barriers for the developing countries leading to high compliance costs thusundermining the competitive advantage of the industry. Currently the Government of Pakistanthrough the Ministry of Science and Technology (MOST) provides a fixed subsidy to firmswhich acquire ISO 9000 certification. In order to even maintain the existing level of exportsthe Government would have to broaden the sphere of this particular incentive by bringingin other quality systems.

7.11 Quota policy and diversification

Quota policy of Pakistan has been discussed at length in the quota section of the report.The existing quota policy does not provide any incentive for diversification. However, it canbe used effectively to achieve the desired level of both market and product diversification.The ideal strategy in this regard would be to allocate a certain portion of quotas to new andpotential investors in categories where the quota utilization of Pakistan is low. Similarly, anincentive can also be provided to exporters in non-quota countries through allocation ofquotas in selected product categories. Such measures would lower the barriers to entry inthe apparel export markets and would also be helpful in enhancing the exports to non-quotacountries, where the current level of exports is minimal.

7.12 Effect on employment in the post-MFA scenario

The analysis of the exporting firms of Pakistan clearly indicates that the developmentof the apparel industry, particularly the knitwear sector was triggered by high quota allocationto Pakistan. Even in the woven garments segment, Pakistan relies on the quota markets. Thephasing out of quotas in the year 2004 will make the environment highly competitive forthe domestic apparel industry. Such a stiff competition will play a catalytic role in stagnatingthe exports growth if timely requisite measures such as market and product diversificationare not adopted. A narrow product base can also lead to significant decline in overall exportslevel, both in terms of value and volume, which would in turn negatively affect theemployment within the apparel sector. Estimation of exact labour force reduction is beyondthe scope of the paper but if the industry maintains its existing product portfolio, it wouldnegatively affect the employment in the sector.

183

ANNEXURE I

Composition and nature of US market

1. The US market

The American market is the second largest import market for apparel products. Thecurrent size of the American market is around US $ 51 billion. The USA has a 32 percentshare of the global imports of apparel products. Due to high consumption patterns in theAmerican markets, the imports of apparel products have increased at an annual average rateof 10 percent during the period of five years from 1995 through 1999 (Figure A 5.1).

Figure A5.1: US import of apparels

In billion dollars



The market composition of imports in apparel products is almost the same as that ofthe world. The woven garment segment both for men and women has a total share of 46percent in the overall apparel imports (Figure A 5.2). The knit garments including t-shirtsand knitwear constitute another 39 percent of the imports. A major chunk of imports in thehosiery category constitutes woven under-garments and nightwear with high presence ofwomen’s garments. On the basis of this the share of woven garments in the total imports canbe safely estimated to be more than 50 percent.

As mentioned earlier, the trends in the American market are similar to the globalmarket. A closer look at the USA’s import shows that the share of the women’s garment ismore than the men’s garment. The women’s garment represents 30 percent of the totalimports of USA, while the men’s garments have a share of 28 percent. It becomes virtuallyimpossible to comment on the share of men and women’s garments in the t-shirts categoryas these are only reported as knit shirts.

1995 1996 1997 1998 1999

PAKISTAN

60

50

40

30

20

10

0

35 37

43

49 51


The imports of the woven garments have increased from US $ 19 billion to US $ 30billion in 1995-99 and showing an average growth rate of 6.7 percent. In the woven garmentscategory, imports for the women’s garments stand at US $ 12.5 billion with share of 24percent; and for men’s garments it is US $ 11.5 billion having a share of 22 percent in 1999.The contributing factor in increasing the share of this category is the women’s wear whichincreased at an average annual growth rate of 7 percent, whereas the men’s wear showedan annual growth rate of 6.3 percent during 1995-99.

Figure A5.2: Types of US imports

USA’s imports breakup 1995 USA’s imports breakup 1999

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

The knit garments segment including T-shirts and men and women’s knitwear in absoluteterms contribute almost US $ 20 billion. The high growth segment in the knit garments isthe T-shirts category which has increased at an annual average growth rate of 17 percentfrom 1995 through 1999. Currently, it holds 27 percent share in the total imports with totalimports of US$ 13 billion. The other product segments including baby-wear and sports-wearshow a consistent growth trend by maintaining their overall shares. In value terms, thesemarkets constitute US$ 3 billion in the total apparel imports.

1.2 Asian countries and US market

Asian countries are exporting apparel products worth US $ 21 billion to the USAmarket and with a share of almost 41 percent of USA’s apparel imports. The women’sgarments, having a share of 37 percent, dominates the exports from the Asian countries(Figure A 5.3). The share of men’s garments that currently stands at 25 percent is fairlysmall as compared to the women’s garments exports by Asian countries.

The woven garments including tops and bottoms of all types of woven fabrics dominatethe American market with a share of 52 percent in the overall imports followed by the T-shirts category, which has acquired a share of 25 percent in the total exports of the Asiancountries. These exporting countries have consistently maintained pace with the growth inapparel demand of the woven and knit garments in the USA. The exports of Asian countries

T-Shirts20%

Woven Men25%

Hosiery8%

SportsWear4%

BabyWear3%

KnitWomen

7%

Knit Men7%

WovenWomen

26%

T-Shirts27%

Woven Men22%

Hosiery9%

SportsWear3%

BabyWear3%

KnitWomen

6%Knit Men

6%

WovenWomen

24%

185

of the woven garments increased from US $ 9.6 billion to US $ 11 billion through 1995-99. In this category, the share of the women’s wear is almost 60 percent. Although thedifference between the volume of imports in the woven women’s wear and men’s wear isnot very high, but the high share of women’s wear in overall imports is the result of highunit value of the women’s garment in the American market. This phenomenon is not onlylimited to American market alone but generally the average unit price realization of women’swear is significantly high as compared to the men’s wear.

As is the case with world apparel markets, China has the largest share of 25 percentof the overall Asian countries’ exports to the USA, which gives them a share of almost 10percent in the American market. Among the selected Asian countries, Hong Kong is thesecond largest exporter to the USA with a total exports of over US$ 4 billion. Pakistanenjoys a 4 percent share in the Asian exports to the USA, but the size of exports is half thesize of Bangladesh’s exports. Bangladesh has consistently strengthened its position in theAmerican market by developing a strong woven garments manufacturing base. The importanceof South Asian countries in the American market is quite obvious as they constitute almost10 percent of the total apparel exports in the USA.

Figure A5.3: Split of Asian exports to US, 1999


PAKISTAN

T-Shirts25%

Woven Men20%

Hosiery7%

SportsWear3%

BabyWear3%

KnitWomen

5%Knit Men

5%

WovenWomen

32%

Turkey4% China

25%

Others19%

Thailand7%

Sri Lanka6%

Pakistan4%

India8%

Hong Kong20%

Bangladesh7%


ANNEXURE II

Composition and nature of EU market

1. The European Union market

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

Figure A5.4: EU imports of apparelIn billion dollars



The imports of EU have a prominent bias towards the woven garments, the estimatedshare of which is around 55 percent (Figure A 5.5). Although the woven men and women’sgarments combined together constitute 47 percent of EU’s imports; but due to the fact that thehosiery segment comprises mainly of women garments including under-garments and nightwear,etc. manufactured from woven fabric, the estimated share of woven garments is high.

In the woven garment category, the women’s wear imports were US $ 16 billion; andthe imports of the men’s wear were US $ 15 billion. The women’s wear showed an averageannual growth rate of 0.5 percent, whereas the imports of men’s wear declined at annualaverage rate of 0.6 percent during 1995-99. This basically reflects that the market for thewomen’s wear is very well developed in EU as compared to men’s wear. In the T-shirtscategory, the imports have increased from US $ 13 billion to US $ 16 billion with an average

1995 1996 1997 1998 1999

70.0

50

40

60.0

20

10

50.0

60.7

64.1

66.167.1

65.6

187

annual growth rate of 6 percent. The T-shirts category, which can be considered as a sub-category of knit garments, showed the highest level of growth in the EU market. The levelof imports of other knit garment segment representing both the men and women’s garmentsis to the tune of US $ 7 billion with a share of 11 percent in the EU apparel imports.

The smaller categories include baby wear, sports wear and hosiery. Among these threecategories, hosiery has the highest share of 10 percent; and in value terms the imports of hosieryincreased from US $ 6 billion to US $ 7 billion registering an average annual growth rate of1.1 percent. The baby wear category showed an average annual growth rate of 5 percent, and itincreased from US $ 1.4 billion to US $ 1.8 billion. The imports in the sports wear categoryhave declined at an annual average rate of 1 percent from US $ 2.6 billion to US $ 2.5 billion.

Figure A5.5: Types of EU imports, 1999

EU’s imports breakup 1995 EU’s imports breakup 1999


1.2 Asian exports to EU market

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

Figure A5.6: Breakup of Asian exports to EU, 1999


PAKISTAN

T-Shirts21% Woven Men

27%

Hosiery10%

SportsWear4%

BabyWear2% Knit

Women6%

Knit Men4%

WovenWomen

26%

T-Shirts25%

Woven Men23%

Hosiery10%

SportsWear4%

BabyWear3%

Knit Women6%

Knit Men5%

WovenWomen

24%

T-Shirts26%

Woven Men20%

Hosiery11%

SportsWear5%

Baby Wear4%

Knit Women7%

Knit Men5%

WovenWomen

22%

Turkey21%

China21%

Others17%

Sri Lanka3% Pakistan

2%India7%

Hong Kong17%

Bangladesh8%

Thailand4%


from US $ 19 billion to US $ 22 billion. The women’s garments, having a share of 29percent, dominate the exports of the Asian countries followed by men’s garment with ashare of 25 percent. The combined share of these two is 54 percent.

The analysis of the product mix of Asian exports to EU reveals that the trends inexports are very balanced and compatible to the import trends in the EU market. The wovengarments are the biggest category with a share of 42 percent and the second largest categoryis T-shirts with a share of 26 percent in the EU’s imports. The imports of the wovengarments increased from US $ 9.15 billion to US $ 9.18 billion through 1995-99. In thewoven category the share of the women’s wear and men’s wear is US $ 4.81 billion and US$ 4.37 billion respectively. The overall share of women’s wear is high as compared tomen’s wear.

In the T-shirts category Asian exports increased from US $ 3.9 billion to US $ 6.0billion in the same period representing an average annual growth rate of 11 percent. The knitgarment category involves exports of US $ 2.65 billion and the share is 12 percent. Theimports of the knit garments increased at an average annual growth rate of 6.6 percent. Inthe knit garment category the imports of women wear are around US $ 1.62 billion and inthe men’s wear it is US $ 1.03 billion. The share of knit garments is obtained by adding theexports of both t-shirts and the knitwear, which combined together, constitutes almost 41percent of the total EU apparel exports.

Key players in the EU apparel market includes China with a share of 21 percent in thetotal Asian exports to the EU. China also has the benefit of having a very well balanced anddiverse product portfolio that enables it to maintain its share in the EU market. Whereas itsSouth Asian rival including Pakistan and India try to retain their market share through afixed number of products mainly the knitted garments. Similarly, Bangladesh relies on thestrength of woven garment industry to maintain and even increase its penetration in the EUmarket. Another advantage that Bangladesh enjoys in the EU is the preferential treatment.Bangladesh is allowed to export duty products to EU as a part of the Generalized Systemof Preferences (GSP), which allows its products to be on an average 12 percent competitivethan its other South Asian rivals.

189

ANNEXURE III - World apparel trade

World imports in the apparel categories (in million US $)

SITC Product description 1995 1996 1997 1998 1999 Averageannualgrowth

MEN’S WEARWoven 34,992.2 36,347.2 36,706.5 37,091.2 36,183.6 0.84%

84111 Overcoats etc. wool, hair 375.2 374.4 418.9 443.9 423.7 3.08%84112 Overcoats etc. oth. textls 1,203.8 1,235.8 1,230.2 1,115.5 1,057.8 -3.18%84119 Oth. mens outerwear etc. 4,631.1 5,049.6 5,230.8 4,863.4 4,357.3 -1.51%84122 Suits, textile materials 532.5 584.2 454.3 625.5 563.5 1.43%84123 Ensembles 337.1 302.1 229.3 298.9 251.6 -7.05%8413 Jackets and blazers 3,132.0 3,190.7 3,178.9 3,018.0 2,747.7 -3.22%8414 Trousers, breeches, etc. 13,209.2 14,633.5 15,339.3 16,013.3 16,505.3 5.73%84151 Cotton shirts 7,280.8 7,049.6 6,788.1 7,070.5 6,557.5 -2.58%84159 Shirts, oth. textile matrl 2,412.7 2,044.7 1,912.5 2,036.7 2,176.9 -2.54%84587 Men’s, boy’s apparel nes 1,877.9 1,882.7 1,924.3 1605.3 1,542.3 -4.80%

Knit 7,182.2 8,251.2 9,713.2 9,585.2 9,115.2 6.14%

84121 Suits of wool, fine hair 1,485.3 1,730.4 1,857.5 1,963.8 1,989.7 7.58%8431 Overcoats, outerwear etc. 361.6 370.7 530.1 497.6 617.7 14.33%84321 Suits, mens boys, knit 55.9 61.8 104.3 69.0 58.0 0.93%84322 Ensembles, mens boys knit 151.5 168.0 238.9 160.4 174.0 3.52%84323 Jackets, blazers, m&b knit 132.5 155.2 241.4 173.1 176.9 7.49%84324 Trousers, breeches etc. 958.3 1,167.3 1,539.1 1,403.4 1,496.4 11.79%84371 Cotton shirts, mens boys 3,114.2 3,556.5 3,949.9 4,060.0 3,488.0 2.87%84379 Shirt, oth. textile matrl 868.7 969.2 1,150.7 1,162.6 1,017.5 4.03%84389 Other mens underwear knit 54.3 72.1 101.3 95.2 97.6 15.81%

Total 42,174.5 44,598.4 46,419.8 46,676.3 45,299.4 1.80%

WOMEN’S WEARWoven 36,419.6 38,389.0 38,589.0 39,549.6 39,230.8 1.88%

84211 Overcoats, cloaks etc. 2,561.9 2,818.5 2,831.6 2,511.8 2,512.1 -0.49%84221 Suits 1,536.2 1,578.9 1,385.4 1,419.0 1,239.6 -5.22%84222 Ensembles 1,017.3 925.1 720.8 817.7 731.9 -7.90%8423 Jackets 4,225.5 4,563.4 4,595.9 4,641.9 3,921.3 -1.85%8424 Dresses 4,232.4 4,473.4 4,017.6 4,121.1 3,935.9 -1.80%8425 Skirts & divided skirts 3,741.2 3,639.5 3,227.9 3475.4 3,587.1 -1.05%8426 Trousers, breeches etc. 8,621.4 10,180.4 11,669.4 12,940.0 13,957.5 12.80%8427 Blouses, shirt-blouse, etc 7,790.8 7,449.6 7,444.3 7,349.0 7,002.2 -2.63%84589 Women, girls apparel nes 2,692.9 2,760.2 2,696.2 2,273.7 2,343.1 -3.42%

Knit 8,964.1 9,497.7 11,310.1 11,267.8 11,114.4 5.52%

8441 Overcoats, oth. coats etc. 362.3 417.5 667.9 677.5 756.1 20.19%84421 Suits, womens girls. knit 115.7 122.1 183.8 100.9 84.6 -7.53%84422 Ensembls, women girls, knt 427.8 405.6 344.2 351.7 335.8 -5.88%84423 Jackets, women girls, knit 372.5 421.5 497.6 445.7 444.3 4.51%84424 Dresses, women girls, knit 1,214.8 1,170.0 1,282.0 1,288.6 1,319.6 2.09%84425 Skirts, divided skirts 650.2 598.0 595.4 624.8 747.0 3.53%844265 Trousers, women girl, knit 2,775.8 2,935.9 3,412.3 3,387.8 3,171.8 3.39%8447 Blouses, shirt-blouse, etc 2,557.7 2,913.4 3,664.3 3,836.1 3,704.2 9.70%84489 Other underwear etc. knit 487.3 513.7 662.6 554.8 551.0 3.12%

Total 45,383.8 47,886.7 49,899.1 50,817.5 50,345.2 2.63%

PAKISTAN



BABIES WEARWoven

84511 Babies’ cloths not knitted 1,117.1 1,150.0 1,133.3 1,252.7 1,174.8 1.27%

Knit

84512 Babies’ clothes knitted 2,071.1 2,296.0 2,554.3 2,911.1 3,057.2 10.23%

Total 3,188.2 3,446.0 3,687.5 4,163.8 4,232.0 7.34%

SPORTS WEARWoven 3,401.5 3,464.7 3,654.3 3,349.8 3,116.4 -2.16%

84219 Other womens outerwear 2,630.3 2,757.4 2,895.4 2,727.9 2,515.9 -1.11%84561 Male swimwear not knitted 277.3 256.7 312.3 265.9 266.8 -0.97%84563 Fem. swimwear not knitted 83.8 87.5 85.3 95.1 109.1 6.82%84581 Ski suits, not knitted 410.0 363.2 361.2 261.0 224.6 -13.96%

Knit 1,861.2 2,128.4 2,250.4 2,211.8 2,098.3 3.04%

84562 Male swimwear knitted 123.1 134.3 122.8 134.1 146.5 4.46%84564 Fem. swimwear knitted 770.7 919.7 908.4 1,037.8 1,126.1 9.94%84591 Track suits, knitted 954.4 1,056.9 1,201.1 1,017.3 811.1 -3.99%84592 Ski suits, knitted 13.0 17.4 18.1 22.7 14.5 2.78%

Total 5,262.7 5,593.1 5,904.7 5,561.6 5,214.7 -0.23%

T-SHIRTS & PULLOVERS

Knit

8453 Jerseys, pullovers, etc. knit 21,432.9 22, 818.8 25,428.7 26,726.5 28,637.5 7.51%8454 T-shirts, othr. vests knit 8,840.5 9,881.8 10,087.3 11,533.7 12,765.6 9.62%

Total 30,273.4 32,700.6 35,516.1 38,260.1 41,403.1 8.14%

Hosiery84161 Underpants and briefs 306.4 325.1 361.1 385.0 464.5 10.96%84162 Nightshirts and pyjamas 316.3 331.9 361.8 373.0 329.9 1.06%84169 Other male underwear etc. 328.2 301.7 327.7 285.3 258.1 -5.82%84281 Slips and petticoats 102.9 94.4 101.2 108.4 96.1 -1.69%84282 Nightdresses, pyjamas 809.0 819.8 843.3 891.3 849.2 1.22%84289 Other underwear etc. 993.4 933.0 1,180.8 1,050.3 875.0 -3.12%84381 Underpants, briefs, mens 1,003.4 1,066.6 1,564.9 1,393.6 1,285.2 6.38%84481 Slips and petticoats 126.1 98.1 267.5 94.3 140.7 2.77%84483 Nightdresses & pyjamas 1,171.6 1,323.6 1,618.3 1,458.9 1,276.9 2.17%84551 Brassieres 2,606.2 2,731.6 3,083.3 3,229.0 3,359.8 6.56%84552 Girdle, corset, braces, etc. 559.3 533.0 553.3 574.9 546.8 -0.56%84621 Panty hose, tights, knittd 1,401.9 1,716.9 1,861.1 1,767.7 1,615.8 3.61%84622 Women’s hosiery, knitted 316.4 239.5 251.7 258.3 262.5 -4.57%84629 Other hosiery, knitted 2,079.5 2,235.9 2,303.3 2,291.9 2,365.5 3.27%

Total 12,120.6 12,751.1 14,679.2 14,162.1 13,725.9 3.16%

Grand Total 138,403.1 146,976.0 156,106.4 159,641.4 160,220.4 3.73%


191

ANNEXURE IV - US apparel imports

US imports in the apparel categories (in million US $)


MEN’S WEARWoven 8998.3 8,997.0 10,357.4 11,255.4 11,476.0 6.27%

84111 Overcoats etc. wool, hair 53.6 55.8 72.0 72.9 60.9 3.25%84112 Overcoats etc. oth. textls 99.5 83.6 100.6 90.4 73.9 -7.14%84119 Oth. mens outerwear etc. 1,403.1 1,493.1 1,863.0 1,748.5 1,359.1 -0.79%84122 Suits, textile materials 58.5 70.0 68.7 68.8 80.5 8.30%84123 Ensembles 11.0 9.8 7.3 6.6 8.0 -7.78%8413 Jackets and blazers 392.4 411.2 489.7 513.3 501.7 6.34%8414 Trousers, breeches, etc. 3,589.8 3,840.5 4,656.9 5,398.8 6,004.1 13.72%84151 Cotton shirts 2,480.0 2,241.6 2,349.6 2,599.6 2,482.1 0.02%84159 Shirts, oth. textile matrl 662.4 550.0 523.8 564.5 705.9 1.60%84587 Men’s, boy’s apparel nes 247.9 241.2 226.0 192.0 199.7 -5.26%

Knit 2,327.0 2,643.4 3,071.2 3,424.1 3,288.8 9.03%

84121 Suits of wool, fine hair 419.3 460.5 511.8 589.4 589.5 8.89%8431 Overcoats, outerwear etc. 68.3 79.1 107.6 120.8 149.3 21.57%84321 Suits, mens boys, knit 1.8 1.9 3.1 3.5 2.7 9.68%84322 Ensembles, mens boys knit 0.7 0.9 0.6 0.4 0.1 -38.41%84323 Jackets, blazers, m&b knit 3.0 3.9 4.5 7.1 8.8 30.75%84324 Trousers, breeches etc. 238.4 301.6 353.0 405.1 536.9 22.51%84371 Cotton shirts, mens boys 1,362.9 1,542.1 1,789.6 1,933.8 1,650.7 4.91%84379 Shirt, oth. textile matrl 222.4 238.0 273.7 323.7 314.1 9.02%84389 Other mens underwear knit 10.2 15.5 27.2 40.3 36.8 37.78%

Total 11,325.3 11,640.4 13,428.6 14,679.5 14,764.8 6.85%


84211 Overcoats, cloaks etc. 225.7 237.2 307.7 296.1 262.2 3.81%84221 Suits 330.0 356.8 343.4 376.6 322.3 -0.59%84222 Ensembles 33.6 34.2 26.0 40.7 41.9 5.67%8423 Jackets 943.8 1,078.9 1,136.7 1,128.8 778.8 -4.69%8424 Dresses 1,250.8 1,328.4 1,352.6 1,368.9 1,441.7 3.61%8425 Skirts & divided skirts 886.6 964.2 870.6 979.4 1,047.7 4.26%8426 Trousers, breeches etc. 2,873.7 3,209.5 4,247.8 4,989.7 5,451.1 17.36%8427 Blouses, shirt-blouse, etc 2,078.6 2,008.3 2,219.7 2,331.5 2,405.1 3.71%84589 Women, girls apparel nes 888.6 897.1 810.1 724.0 762.9 -3.74%

Knit 2,356.6 2,384.3 2,826.5 3,135.6 3,228.1 8.18%

8441 Overcoats, oth. coats etc. 90.7 110.3 154.8 179.8 208.3 23.09%84421 Suits, womens girls. knit 5.7 4.6 4.3 4.4 7.4 6.49%84422 Ensembls, women girls, knt 5.6 2.2 3.3 5.0 5.1 -2.37%84423 Jackets, women girls, knit 27.7 36.9 46.4 39.3 45.2 13.03%84424 Dresses, women girls, knit 280.7 329.2 366.4 398.7 451.9 12.64%84425 Skirts, divided skirts 114.4 91.2 102.7 137.2 216.2 17.26%844265 Trousers, women girl, knit 909.3 853.1 987.4 1,052.0 998.3 2.36%8447 Blouses, shirt-blouse, etc 810.3 827.7 992.4 1,095.5 1,062.3 7.00%84489 Other underwear etc. knit 112.3 129.1 168.9 223.7 233.6 20.10%

Total 11,868.0 12,498.7 14,141.1 15,371.4 15,741.6 7.32%

PAKISTAN



BABIES WEARWoven

84511 Babies’ cloths not knitted 309.8 297.6 329.3 387.5 372.9 4.74%

Knit

84512 Babies’ clothes knitted 689.4 742.9 903.7 1,108.7 1,110.7 12.66%

Total 999.3 1,040.6 1,233.1 1,496.2 1,483.6 10.38%

SPORTS WEARWoven 1,053.8 1,029.8 1,207.3 1,118.8 976.4 -1.89%

84219 Other womens outerwear 859.8 854.3 1,030.9 946.4 794.9 -1.94%84561 Male swimwear not knitted 162.5 147.0 147.8 146.5 150.9 -1.84%84563 Fem. swimwear not knitted 4.2 4.7 6.3 6.1 12.9 32.26%84581 Ski suits, not knitted 27.2 23.8 22.4 19.9 17.7 -10.23%

Knit 200.1 223.5 278.5 329.1 369.0 16.53%

84562 Male swimwear knitted 3.1 2.2 3.7 4.8 4.9 12.03%84564 Fem. swimwear knitted 157.7 184.2 231.5 269.7 328.5 20.13%84591 Track suits, knitted 39.0 36.9 42.9 54.2 35.2 -2.54%84592 Ski suits, knitted 0.3 0.2 0.5 0.4 0.4 10.50%

Total 1253.8 1253.2 1485.8 1448.0 1345.3 1.78%


Knit

8453 Jerseys, pullovers, etc. knit 5,704.6 5,932.7 7,408.1 8,695.0 9,883.1 14.73%8454 T-shirts, othr. vests knit 1,321.6 1,711.2 2,242.5 2,820.9 3,312.5 25.83%

Total 7,026.2 7,643.9 9,650.6 11,515.9 13,195.6 17.07%

Hosiery84161 Underpants and briefs 149.1 174.7 191.6 213.7 282.1 17.29%84162 Nightshirts and pyjamas 82.6 70.4 74.0 87.6 87.5 1.44%84169 Other male underwear etc. 80.4 82.5 95.8 115.8 123.7 11.37%84281 Slips and petticoats 24.1 24.4 25.4 19.4 31.8 7.11%84282 Nightdresses, pyjamas 359.1 378.2 370.7 409.2 400.2 2.75%84289 Other underwear etc. 298.4 302.9 332.6 318.0 321.6 1.89%84381 Underpants, briefs, mens 263.8 339.7 449.6 501.8 605.8 23.10%84481 Slips and petticoats 16.3 16.3 24.6 30.0 31.3 17.79%84483 Nightdresses & pyjamas 347.4 372.4 414.7 481.9 537.0 11.51%84551 Brassieres 874.1 804.3 896.4 1,041.6 1,295.3 10.33%84552 Girdle, corset, braces, etc. 78.4 82.1 96.7 101.1 112.9 9.55%84621 Panty hose, tights, knittd 213.8 230.0 292.9 318.0 349.2 13.04%84622 Women’s hosiery, knitted 11.8 11.1 14.7 12.0 23.4 18.63%84629 Other hosiery, knitted 148.4 175.5 272.2 375.6 501.1 35.56%

Total 2,947.7 3,064.5 3,551.9 4,025.6 4,702.9 12.39%

Grand Total 35,420.3 37,141.4 43,491.0 48,536.6 51,233.9 9.67%

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

193

ANNEXURE V - EU apparel imports

European Union imports in the apparel categories (in million US $)


MEN’S WEARWoven 15,675.0 16,076.5 15,655.3 15,935.9 15,311.4 -0.59%

84111 Overcoats etc. wool, hair 148.3 158.0 171.6 184.3 196.6 7.29%84112 Overcoats etc. oth. textls 662.1 669.0 735.3 690.6 652.8 -0.35%84119 Oth. mens outerwear etc. 1,877.7 1,880.1 1,987.5 2,008.8 1,842.0 -0.48%84122 Suits, textile materials 221.7 252.4 244.4 317.0 361.1 12.96%84123 Ensembles 155.4 129.9 130.5 128.8 138.6 -2.82%8413 Jackets and blazers 1,679.9 1,625.0 1,574.0 1,612.6 1,442.4 -3.74%8414 Trousers, breeches, etc. 6,025.1 6,709.5 6,430.0 6,673.4 6,608.2 2.34%84151 Cotton shirts 3,113.7 3,034.4 2,728.5 2,750.8 2,482.4 -5.51%84159 Shirts, oth. textile matrl 925.9 766.0 702.7 775.8 800.5 -3.57%84587 Men’s, boy’s apparel nes 865.1 852.3 950.8 794.0 786.9 -2.34%

Knit 2,487.2 2,831.4 3,601.9 3,298.5 3,089.2 5.57%

84121 Suits of wool, fine hair 619.5 718.5 687.4 744.8 763.8 5.38%8431 Overcoats, outerwear etc. 105.9 114.4 241.2 186.9 208.0 18.39%84321 Suits, mens boys, knit 22.6 25.7 76.3 26.0 28.3 5.81%84322 Ensembles, mens boys knit 74.1 75.0 163.1 77.3 90.3 5.05%84323 Jackets, blazers, m&b knit 54.2 60.4 154.3 73.4 73.9 8.08%84324 Trousers, breeches etc. 372.7 448.7 658.3 469.3 463.8 5.62%84371 Cotton shirts, mens boys 891.1 996.7 1,070.7 1,230.0 1,071.6 4.72%84379 Shirt, oth. textile matrl 313.3 350.4 491.8 452.6 343.0 2.29%84389 Other mens underwear knit 33.8 41.6 58.8 38.1 46.4 8.24%

Total 18,162.3 18,907.9 19,257.2 19,234.4 18,400.6 0.33%


84211 Overcoats, cloaks etc. 1,243.0 1,289.3 1,381.7 1,357.9 1,345.1 1.99%84221 Suits 544.2 597.1 511.5 560.8 493.2 -2.43%84222 Ensembles 548.0 479.6 427.1 443.5 426.1 -6.10%8423 Jackets 1,971.7 2,002.5 2,058.9 2,303.1 2,067.5 1.19%8424 Dresses 1,771.1 1,869.7 1,517.1 1,612.7 1,481.7 -4.36%8425 Skirts & divided skirts 1,811.4 1,634.5 1,417.4 1,559.1 1,513.2 -4.40%8426 Trousers, breeches etc. 3,293.2 3,965.4 4,205.8 4,672.9 5,138.6 11.77%8427 Blouses, shirt-blouse, etc 3,503.1 3,254.8 3,140.4 3,083.8 2,718.1 -6.15%84589 Women, girls apparel nes 962.9 985.0 1,084.7 837.9 751.4 -6.01%

Knit 3,713.3 3,923.7 4,995.9 4,478.8 4,187.3 3.05%

8441 Overcoats, oth. coats etc. 117.3 132.7 322.1 258.2 304.5 26.93%84421 Suits, womens girls. knit 53.9 57.8 134.2 50.7 41.1 -6.53%84422 Ensembls, women girls, knt 252.0 238.6 208.7 210.0 194.3 -6.29%84423 Jackets, women girls, knit 189.8 214.8 272.8 223.5 220.0 3.76%84424 Dresses, women girls, knit 580.0 481.5 520.1 496.5 507.9 -3.26%84425 Skirts, divided skirts 348.1 323.8 315.5 299.6 299.3 -3.70%844265 Trousers, women girl, knit 1,208.5 1,377.5 1,701.1 1,658.7 1,504.3 5.63%8447 Blouses, shirt-blouse, etc 705.6 840.1 1,146.7 1,068.1 920.2 6.86%84489 Other underwear etc. knit 258.2 256.9 374.6 213.6 195.6 -6.70%

Total 19,361.9 20,001.5 20,740.6 20,910.5 20,122.1 0.97%

PAKISTAN



BABIES WEARWoven


Knit

84512 Babies’ clothes knitted 915.7 1,018.6 1,056.0 1,143.2 1,220.1 7.44%

Total 1,439.3 1,576.7 1,592.7 1,685.4 1,761.0 5.17%

SPORTS WEARWoven 1,496.4 1,527.1 1,706.9 1,,582.8 1,385.2 -1.91%

84219 Other womens outerwear 1,214.7 1,247.4 1,346.1 1,315.7 1,141.3 -1.55%84561 Male swimwear not knitted 43.8 46.6 88.6 51.4 53.7 5.22%84563 Fem. swimwear not knitted 51.1 51.0 47.8 54.2 62.9 5.33%84581 Ski suits, not knitted 186.8 182.0 224.0 161.5 127.3 -9.13%

Knit 1,092.8 1,280.9 1,345.1 1,251.8 1,111.3 0.42%

84562 Male swimwear knitted 79.4 87.9 77.8 87.0 95.3 4.66%84564 Fem. swimwear knitted 410.5 484.0 397.7 462.3 469.4 3.41%84591 Track suits, knitted 594.7 696.3 856.6 683.6 536.4 -2.55%84592 Ski suits, knitted 8.2 12.8 13.0 18.7 10.3 5.67%

Total 2,589.2 2,808.0 3,052.0 2,834.6 2,496.5 -0.91%


Knit

8453 Jerseys, pullovers, etc. knit 8,326.6 9,180.5 9,969.9 9,941.2 10,230.5 5.28%8454 T-shirts, othr. vests knit 4,518.9 5,053.8 4,816.1 5,776.0 5,979.7 7.25%

Total 12,845.5 14,234.3 14,785.7 15,717.1 16,210.2 5.99%

Hosiery84161 Underpants and briefs 94.4 94.2 86.0 102.4 97.7 0.88%84162 Nightshirts and pyjamas 119.8 132.4 123.9 123.7 120.3 0.11%84169 Other male underwear etc. 93.4 94.6 109.2 102.4 88.8 -1.26%84281 Slips and petticoats 30.2 30.6 27.4 36.0 32.8 2.11%84282 Nightdresses, pyjamas 318.6 334.9 327.8 315.8 328.9 0.80%84289 Other underwear etc. 340.6 320.7 304.0 326.4 323.4 -1.29%84381 Underpants, briefs, mens 669.1 676.8 739.7 753.8 748.6 2.85%84481 Slips and petticoats 89.6 72.3 125.0 37.2 33.3 -21.94%84483 Nightdresses & pyjamas 685.3 709.3 743.1 684.6 699.7 0.52%84551 Brassieres 1,265.7 1,385.4 1,368.2 1,640.0 1,599.6 6.03%84552 Girdle, corset, braces, etc. 285.1 298.6 327.0 280.5 279.7 -0.48%84621 Panty hose, tights, knittd 889.4 938.8 858.3 790.7 718.1 -5.21%84622 Women’s hosiery, knitted 117.9 125.4 135.8 156.0 154.4 6.96%84629 Other hosiery, knitted 1,345.2 1,395.9 1,359.9 1,357.0 1,391.3 0.85%

Total 6,344.3 6,610.0 6,635.1 6,706.7 6,616.6 1.06%

Grand Total 60,742.5 64,138.5 66,063.4 67,088.6 65,607.0 1.94%


195

ANNEXURE VI - Pakistan apparel exports

Pakistan exports in the apparel categories (in million US $)


MEN’S WEARWoven 344.31 444.69 519.17 467.39 459.64 7.49%

84112 Overcoats etc. oth. textls 0.01 0.09 - 0.07 0.39 183.94%84119 Oth. mens outerwear etc. 0.97 1.24 1.00 0.93 3.45 37.34%84122 Suits, textile materials 27.54 29.92 2.25 22.10 49.54 15.81%84123 Ensembles 33.18 41.73 38.83 21.84 2.41 -48.08%8413 Jackets and blazers 23.27 31.56 37.35 25.84 26.45 3.26%8414 Trousers, breeches, etc. 123.36 159.20 199.31 216.32 232.39 17.16%84151 Cotton shirts 116.42 158.51 179.73 130.08 104.02 -2.78%84159 Shirts, oth. textile matrl 5.39 6.51 6.75 6.16 3.43 -10.70%84587 Men’s, boy’s apparel nes 14.19 15.95 53.95 44.06 37.57 27.56%

Knit 274.05 303.63 314.00 420.54 456.88 13.63%

84121 Suits of wool, fine hair 0.01 - 0.03 0.01 0.14 92.39%8431 Overcoats, outerwear etc. 0.09 0.39 0.89 0.44 0.21 22.58%84321 Suits, mens boys, knit 10.35 10.85 12.04 29.27 19.68 17.44%84322 Ensembles, mens boys knit 0.02 0.08 0.01 0.08 0.17 63.14%84323 Jackets, blazers, m&b knit 2.77 2.57 4.44 3.78 6.92 25.68%84324 Trousers, breeches etc. 6.65 10.62 9.95 12.15 16.66 25.82%84371 Cotton shirts, mens boys 248.32 271.97 277.18 367.56 405.45 13.04%84379 Shirt, oth. textile matrl 5.55 6.89 9.32 7.03 6.95 5.78%84389 Other mens underwear knit 0.29 0.27 0.12 0.23 0.71 25.33%

Total 618.36 748.32 833.17 887.93 916.52 10.34%

WOMEN’S WEAR

Woven 141.70 200.38 135.86 138.03 116.47 -4.78%

84211 Overcoats, cloaks etc. 2.63 2.41 1.02 3.32 1.20 -17.87%84221 Suits 27.46 58.32 15.44 28.82 29.79 2.05%84222 Ensembles 0.20 0.02 0.00 0.15 0.51 26.40%8423 Jackets 2.29 4.50 3.52 2.88 3.17 8.42%8424 Dresses 36.80 32.14 37.66 16.18 7.48 -32.85%8425 Skirts & divided skirts 4.54 6.25 2.83 3.31 6.47 9.27%8426 Trousers, breeches etc. 15.66 22.26 29.65 38.78 32.19 19.74%8427 Blouses, shirt-blouse, etc 21.20 26.96 18.95 22.33 18.20 -3.75%84589 Women, girls apparel nes 30.92 47.53 26.77 22.27 17.47 -13.30%

Knit 5 8.78 61.38 51.62 68.22 80.18 8.07%

8441 Overcoats, oth. coats etc. 0.14 0.11 0.85 0.34 0.12 -4.29%84421 Suits, womens girls. knit 14.95 16.79 13.41 20.86 18.64 5.66%84422 Ensembls, women girls, knt 0.37 0.14 0.06 0.22 0.39 1.65%84423 Jackets, women girls, knit 0.69 0.57 1.03 1.39 2.37 36.15%84424 Dresses, women girls, knit 3.64 5.17 3.58 4.76 7.72 20.64%84425 Skirts, divided skirts 0.34 0.27 0.08 0.37 0.79 23.02%844265 Trousers, women girl, knit 2.50 5.25 3.94 4.50 4.84 17.88%8447 Blouses, shirt-blouse, etc 35.25 31.90 28.18 35.36 44.11 5.76%84489 Other underwear etc. knit 0.88 1.19 0.50 0.42 1.22 8.37%

Total 200.48 261.76 187.48 206.25 196.65 -0.48%

PAKISTAN



BABIES WEARWoven


Knit

84512 Babies’ clothes knitted 2.67 2.96 3.23 3.90 10.11 39.40%

Total 16.39 18.53 19.59 25.42 27.49 13.81%

SPORTS WEARWoven 0.05 0.03 0.41 0.37 0.25 50.61%

84219 Other womens outerwear 0.05 0.02 0.22 0.06 0.02 -16.80%84561 Male swimwear not knitted 0.00 0.01 0.18 0.14 0.02 32.00%84563 Fem. swimwear not knitted 0.00 0.00 0.00 0.17 0.20 21.08%

Knit 2 4.63 26.07 22.13 24.93 14.86 -11.87%

84562 Male swimwear knitted 0.13 0.00 0.00 0.01 0.04 -27.69%84591 Track suits, knitted 23.92 26.03 22.02 24.73 14.77 -11.36%84592 Ski suits, knitted 0.58 0.04 0.11 0.19 0.06 -43.38%

Total 24.68 26.10 22.54 25.30 15.11 -11.55%


Knit

8453 Jerseys, pullovers, etc. knit 3.62 6.32 5.68 7.59 11.91 34.70%8454 T-shirts, othr. vests knit 82.18 81.74 49.71 49.34 51.76 -10.91%

Total 85.80 88.06 55.39 56.93 63.67 -7.19%

Hosiery84161 Underpants and briefs 0.27 0.11 0.43 0.50 0.41 11.05%84162 Nightshirts and pyjamas 0.13 0.42 0.61 0.72 0.76 54.37%84169 Other male underwear etc. 44.58 38.04 42.57 36.30 45.86 0.71%84281 Slips and petticoats 0.24 0.07 0.16 0.03 0.11 -18.65%84282 Nightdresses, pyjamas 0.48 0.26 0.67 2.53 2.66 53.18%84289 Other underwear etc. 1.39 0.90 0.63 2.99 4.36 33.20%84381 Underpants, briefs, mens 1.19 0.22 0.23 0.94 1.28 2.01%84481 Slips and petticoats 0.00 0.02 0.03 0.17 0.18 126.80%84483 Nightdresses & pyjamas 12.26 12.52 10.63 11.71 9.34 -6.58%84551 Brassieres 1.33 1.11 0.73 1.17 0.34 -29.04%84621 Panty hose, tights, knittd 0.23 0.06 0.11 0.00 0.06 -28.39%84622 Women’s hosiery, knitted 15.84 19.19 20.93 23.23 24.46 11.47%84629 Other hosiery, knitted 66.34 58.05 41.83 23.23 11.48 -35.51%

Total 144.28 130.96 119.54 103.53 101.27 -8.47%

Grand Total 1,089.99 1,273.72 1,237.71 1,305.36 1,320.71 4.92%


197

Garment industry in Sri Lanka

Saman Kelegama and Roshen Epaarachchi*

1. Introduction

1.1 The state of the Sri Lankan garment industry

The Sri Lankan Garment industry experienced phenomenal growth after the late 1970sand continues to be the strongest manufacturing sub-sector in terms of its contribution to theGDP, exports, foreign exchange earnings, and employment generation. The contribution ofthe garment sector to GDP has risen from 3.88 percent in 1985 to 6.64 percent in 1997. In1998, for instance, the garment industry accounted for 52 percent of total exports and 44percent of industrial output (Annex A6.1 and 6.2). In 1978, the industrial sector accountedonly for 15 percent of export earnings; and by 1998, it had increased to 75 percent. Thegarment sector alone recorded more than 50 percent of the total export earnings in 1998 (formore details, see Annex A6.3 to 6.5).

Figure 6.1. Quantity of garment exports(Mn Pcs)

Source: SLAEA, various issues.

Garment exports have demonstrated a significant increasing trend over the last 18 years(Figures 6.1 and 6.2). While export quantities have declined on average between 1996 and1999 by almost 26 percent, the value of production (in US $) has increased during the same

6

* Institute of Policy Studies of Sri Lanka

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

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period by almost 33 percent. This indicates a shift in the production and export of standardgarments to higher value garments. In the first quarter of 1999, however, Sri Lanka’sgarment industry recorded a drop in its foreign exchange earnings due to the adverse impactof the East Asian financial crisis (see Figure 6.1).

Sri Lanka can be considered to have a comparative advantage in the manufacture ofgarments. While this comparative advantage is significantly higher than in other industries,it is comparable to the rubber and tea/coffee/spice export oriented industries, as indicated bythe Revealed Comparative Advantage (RCA) figures in Annex A6.6.1

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

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

Figure 6.2. Value of garment exports (US $)


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

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from a number of East-Asian producers whose country-quota allocations were exhausted.2

Given the fact that Sri Lanka is a labour-surplus economy, foreign investments in a labour-intensive industry such as garments proved to be extremely fruitful.

In 1977, there were 5 garment factories in operation and earning US$ 10 million fortheir exports and by 2000, export earnings were recorded at around US$ 2,710 million bya total of 891 factories. Of these factories, approximately 80 percent are categorized as smalland medium scale enterprises employing up to 500 employees (Table 6.1). The garmentsector provided direct employment to approximately 280,000 employees in 1999. Whilelocal industrialists own about 85 percent of garment factories, 25 garment manufacturersproduce 52 percent of total garment exports (SLAEA, various issues). Out of the 891factories, 417 have received Board of Investment special status (commonly known as “BOIstatus” where the enterprise is entitled to duty free importation of inputs, off-shore borrowingfacilities, ‘one-stop shop’ facilities, etc. – see BOI, 1995). The rest do not enjoy theseprivileges but account for over 55, 000 employees in the garment sector (SLAEA, 2000a).

Table 6.1: Distribution of factories by size

Category Number of employees No. of factories Percentage

Small 0-100 282 32Medium 101-500 445 50Large 501-1000 131 14Extra Large Over 1000 33 4Total 891 100

Source: TVEC (1999).

In 1992, the 200 Garment Factory Programme (GFP) was initiated with the dualobjective of fuelling growth in the industry and solving the problem of rural unemployment.Under this programme, investors were offered quotas liberally (more quotas were offered ifthe factory was located in a so-called remote area) as well as a number of concessionsincluding tax holidays, duty-free importation, and access to off-shore finances (BOI status).One condition of the 200 GFP was the employment of at least 500 workers in each factory.By the end of 1996, 154 garment factories had begun commercial operations in rural areasproviding 76,821 employment opportunities.

In an increasingly competitive environment, the size of the enterprise is becoming farless important; and garment operations are more recently being considered in terms of thosethat are “strong” and “weak”. The relative strength of an enterprise can be gauged by itscapacity to remain competitive.3

2 The main garment producing countries tend to exhaust their quota allocations early, and international buyers then placetheir orders with other garment producing countries.

3 “Strong” manufacturers are those who can absorb the external shocks and become competitive suppliers of garments tothe world market. Those manufacturers who cannot do so are considered “weak’, and the categorization does not dependon the size of enterprise.

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

Table 6.2: Geographical distribution of garment establishments and numbers of employees, 1999

Province Establishment Employment

Number Percentage Number Percentage

Western 638 72 181329 65Southern 51 6 19488 7Central 54 6 17056 6Eastern 8 1 3512 1North Western 60 7 22398 8North Central 21 2 10426 5Uva 20 2 6559 2Sabargamuwa 36 4 15419 6Northern 3 - 634 -

Total 891 100 276821 100


By the end of 1998, 14.3 percent of the 6 million people in the country’s total workinglabour-force were employed in the manufacturing sector. Out of the total manufacturingsector labour-force, approximately 32 percent were engaged in the garment industry. Table6.3 shows the gender composition in labour force by occupational categories in the garmentindustry. Female dominance – about 87 percent — is one of the most conspicuouscharacteristics of the garment industry. Females hold 53 percent of the management categoriesand 72 percent of front line management occupations such as supervisors, while males aredominant in the upper management occupations. The share of females in occupations ofmachine operators and others is over 90 percent. There is equal participation of both sexesin pattern making, quality controlling, merchandising, designing and quality assurance.

1.2 Sri Lanka’s major export markets

During the past two decades, Sri Lanka has enjoyed a relatively assured export marketfor garments through bilateral agreements with the USA, the EU, Canada, Norway, Sweden,and Finland. Sri Lanka’s largest market is the USA, with 60 percent of Sri Lanka’s garmentsbeing exported to this destination, followed by 30 percent of exports to the EU. The buyersof Sri Lanka’s garments within the EU are shown in Figure 6.3. Other importers of SriLanka’s garments include Canada, Australia, Japan, South Korea and Switzerland.

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

Grade Occupational category Total Male (%) Female(%)

Management Grade Senior Managers 2,120 84 16Middle Level Managers 3,229 62 38Front Line Managers 6,739 28 72

Technical Grade Quality Assurance Managers 454 52 48Cutting Managers 391 90 10Quality Controllers 2,950 28 72Pattern Makers 645 50 50Merchandisers 824 50 50Work Study Officers 581 64 36Designers 128 50 50

Operative Grade Mechanics 3,041 99 1Operators 124,444 6 94Helpers 69,255 9 91Checkers 21,572 7 93Line Leaders 3,207 11 89Cutters 2,585 68 32Ironers 6,919 30 70Others 7,905 30 70

Grand Total 257,026 13 87


Figure 6.3: Sri Lanka garment exports to EU, 1999


Two new market opportunities have emerged during the last two years. First, the Indo-Sri Lanka Bilateral Free Trade Agreement (that came into operation in March 2000) permits8 million pieces of garments at 50 percent duty concession to the Indian market. It is howevercharacterized by a plethora of problems, and thus Sri Lanka has not been able to reap thebenefits of the offer (Kelegama, 2001). Second, the Trade and Development Act (TDA) of2000 provides duty free entry to USA for garment exports from Caribbean and sub-SaharanAfrican countries (SLAEA, 2000b). The rules of origin are quite liberal during the first fouryears for most Sub-Saharan African countries. This has provided an opportunity for SriLankan garment industrialists to relocate in Sub-Saharan Africa and target the US market.

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Germany17%

Italy3%

Others5%

United Kingdom55%

Belgium7%

France6% Netherlands

7%


1.3 Quota and non-quota exports

More than 90 percent of Sri Lanka’s garment exports are ready-made garments (RMGs),which are primarily concentrated in casual wear for women and men. Most garmentmanufacturers are geared to produce standard, low value added garments for the majormarkets under export quotas. In the context of the USA, Sri Lanka is subject to quotas under30 categories, covering over 50 clothing items, including specific categories such as knittedshirts and blouses, trousers, underwear, overalls, terry and other pile towels, etc. The non-quota garment exports attempted are primarily higher value added garments, which cater toniche markets and designer labels such as Victoria’s Secrets, Triumph International, BritishHome Stores, Marks & Spencer, C & A., etc.

Exports to the EU are predominantly non-quota (Table 6.4). The government of SriLanka signed an agreement with the EU in December 2000 to lift the quantitative restrictionsof Sri Lanka’s garment exports to the EU from March 2001. The agreement lifts all textilequotas with Sri Lanka in exchange for tariff reductions by Sri Lanka and binding of all itstariffs for the textile and clothing sector with ATC. Sri Lanka bounded its rates of duty forthe entire textile and clothing sector at zero percent for raw materials, 5 percent for fibresand yarns, 10 percent for fabrics and 17.6 percent for clothing products. The EU willsuspend the application of four quantitative restrictions currently maintained on imports oftextiles and clothing products from Sri Lanka. These quotas relate to trousers (category 6),cotton blouses (category 7), cotton shirt (category 8), and anoraks (category 21). Under theagreement, all EU countries will no longer apply quotas on these garment products fromSri Lanka.

Table 6.4: Quota and non quota exports4

Year USA EU CANADA

Total quota Total non Total quota Total non Total quota Total nonquota quota quota

1994 83.62 16.36 14.99 85.01 87.14 12.851995 77.60 22.39 15.87 84.13 89.14 10.851996 68.40 31.60 n.a. n.a. n.a. n.a.1997 68.80 31.20 0.08 99.92 75.10 24.901998 63.70 36.30 24.67 75.33 87.70 12.301999 61.20 38.80 22.54 77.46 101.87 -1.872000 62.03 37.96 16.93 83.07 98.77 1.23

Source: SLAEA, Various issues.

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

4 As a percentage of MFA.

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exports to the USA have doubled during the last five years. The Textile Quota Board (TQB)is a statutory body under the Ministry of Industrial Development, responsible for thedisbursement of export quotas. Generally, quotas are distributed to manufacturers dependingon their size, capacity and past performances.5

Table 6.5: Percentage share of quota and non quota garment exports(million pieces)

Year National garment exports

Quota Non quota

1994 49.6 50.41995 46.8 53.21996 62.0 38.01997 61.7 38.3


Sri Lanka and other South Asian garment producing countries export mainly a fewcategories of items to the main markets, the USA and the EU. The composition of SriLanka’s category-wise garment exports is shown in Annex A6.7. Women’s outerwear andmen’s outerwear exports accounted for approximately 45 percent and 15 percent, respectively,of the total garment exports. Some of these garments have low market value and demandand are categorized as standard garments.

An item-wise composition of garment exports of South Asian economies, including SriLanka, also indicates a high concentration of a few items across all countries (Annex A6.8).South Asian countries largely compete with one another in the garment sector, particularlybecause they supply similar products to the same markets in the USA and the EU. More than90 percent of total garment exports of South Asian economies find their way to these twomajor markets.

2. Major issues facing the industry

2.1 The phasing out of the Multi-Fibre Agreement

The Multi-Fibre Agreement (MFA) came into existence in 1974, whereby a mechanismof quantitative restrictions was used to manage world trade in textiles and garments.Restrictions in the form of quotas were placed on the importation of apparel into industrializedcountries as a form of protection for their domestic industries. Under the MFA, the developedcountries negotiated bilateral agreements with individual trading partners in order to restrictthe quantity of exports of specific product categories. The MFA, with around 100 bilateralrestraint agreements, is estimated to cover almost 80 percent of the world textile andgarment trade.

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

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The MFA is responsible for severely restricting potential trade in the garment sectorand, in particular, reducing the volume of exports of some developing countries. New andmore competitive producers may also have been discouraged as traditional suppliers wereprotected to a certain extent under the quota system and assured markets, even in the eventof a loss of competitiveness. The most efficient producers have been adversely affected dueto export tightening. However, some developing countries like Sri Lanka and Bangladeshbenefited from the MFA by having assured markets in a competitive environment during theearly years of production in the 1980s (Athukorala, 1995). The quota system has helped toattract foreign investors to set up manufacturing operations in these countries. In addition,buyers whose quota allocations were exhausted in other countries turned to manufacturersin these countries to supply the remainder of their markets.

The new Agreement on Textiles and Clothing (ATC) has been integrated into thenormal GATT rules, and quantitative restrictions are to be phased out within a ten-yearperiod, from January 1995 to January 2005. Any quotas that were in place in December1994 under the old MFA were carried over into the new agreement. Importing nationsagreed to liberalize 16 percent of their textile imports on 1st January 1995; 17 percent in1998; 18 percent in 2002; and the remaining 49 percent at the end of the transition period,on 1st January 2005. The annual quotas are not to be lower than trade in a specified twelve-month period, and they must be enlarged by not less than 6 percent every year.

While the agreement focuses largely on the phasing-out of MFA restrictions, the ACTrecognizes that some members would maintain non-MFA restrictions not justified under aGATT provision. These would be brought in line with GATT within one of the agreementsor phased-out progressively by 2005. The agreement also contains a specific transitionalsafeguard mechanism, which could be applied to products not yet integrated into GATT.Action under the safeguard mechanism could be taken against individual exporting countriesif it can be demonstrated by the importing country that overall imports of a product wereentering the country in such quantities from a particular country that they threaten thedomestic industry. Action under the safeguard mechanism could be taken either by mutualagreement, following consultations, or unilaterally. A safeguard restraint could remain inplace for up to three years without extension or until the product is integrated intothe GATT.

The agreement specifies that all members abide by GATT rules and regulations so asto improve market access, ensure the application of policies relating to fair and equitabletrading practices, and avoid discrimination against imports in the area of textiles andclothing. The agreement also has provisions for special treatment for countries, which havebeen subject to MFAs, for new entrants, small suppliers and least developed countries. Asdiscussed in Section 5, due to various loopholes of the agreement, the operation modalityhas been twisted by developed countries in their favour (Weerakoon and Wijayasiri, 2000and ESCAP, 2000).

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The presence of the quota system has virtually guaranteed markets for many Sri Lankanmanufacturers, especially those manufacturing standard garments and competing on price.This guaranteed period would be over in 2005 with the dismantling of the quota regime,which will compel the industry to compete for its market share in an intensely competitiveglobal market. There are a large number of garment manufacturers who depend predominantlyon quota-based business. With the phasing out of the MFA, these manufacturers will haveto thoroughly assess the structure and functioning of their operations, in order to remaincompetitive in a quota free world.

2.2 Globalization

The term ‘globalization’ can be broadly defined as the integration of markets and isvisible in the garment industry where production is spread over national boundaries. As aresult of globalization, pressures and changes amongst buyers and in consumer countries canhave fast and significant bearings on manufacturers in producer nations (Ramaswamy andGereffi, 1998). This is visible already in the Sri Lankan garment industry where the internethas transformed the garment business to a ‘buyers’ market’ and where buyers have stressedon the need to adhere to international standards for labour and factory conditions, to upgradetechnology, and for faster response times and improved service.

There is a strong consensus on new emerging issues in the international tradingenvironment that can impinge on the marketability of most products. Environmental andlabour issues are likely to affect the industry in the future with producers and consumersbecoming more aware of the conditions prevailing internationally and locally. Internationalbuyers are now placing on their suppliers increasing importance on the worker welfare tothe extent that they send their inspection groups to investigate and report on the workingconditions of the factory workers prior to placing orders. In the context of the changingglobal environment, garment producers, therefore, have to be informed of changing consumerpreferences in order to meet necessary environmental, labour, health and safety standards.

There are other concerns that are influencing the pattern of trade in the global economy.The global trading environment has shown the emergence of strong trade blocs during therecent past. The most noteworthy for the Sri Lankan garment industry has been the emergenceof the North American Free Trade Agreement (NAFTA) involving the USA, Canada andMexico. As a result of NAFTA, Mexico has become the dominant supplier of apparel to theUS market at the expense of supplier countries although there has not been a direct adverseimpact on Sri Lankan garment exports to USA (Kelegama, 1997). As stated, the Trade andDevelopment Act of the 2000 has granted the Caribbean Basin and the Sub-Saharan Africancountries zero duty preferential treatment; and consequently, they will emerge as key suppliersof apparel to the US by cutting into Asia’s market shares in the USA. In addition, tax reliefhas been granted in the Caribbean and El Salvador. Increased access for East Europeancountries into the EU and the long-term impact of Turkey’s entry into the Customs

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

3. How competitive is the Sri Lankan garment industry?

In the recent past, the global garment industry has been subject to significant changesin terms of changes in consumer demands, changes in technology, and fierce competition.These changes have also filtered down to the Sri Lankan garment industry, and there is nowconsiderable pressure on the industry to reach higher standards of production and service.

As the garment industry is a relatively low skilled and labour-intensive operation, overtime there has been a shifting of production from countries such as Hong Kong, SouthKorea, and Taiwan to low-wage countries; such as Bangladesh, India and Sri Lanka. As thisprocess of shifting (or shifting comparative advantage) has continued, Sri Lanka has graduallylost its low labour cost comparative advantage.

As the majority of Sri Lankan manufacturers currently produce standard garmentswhere competition is primarily based on price, Sri Lanka faces stiff competition from otherdeveloping countries of South and South East Asia where production cost is low (India,Bangladesh, Pakistan, Indonesia, Cambodia, Laos and Vietnam). China has also emerged asa dominant force in the global apparel industry with its massive supply capability and lowcosts of production. These countries have a lower ranking in terms of cost of production incomparison to Sri Lanka. Given this situation, there is a need for Sri Lanka to move to thetop end of the market as a reputable and dependable supplier of quality apparel in Asia. Inthe higher value-clothing segment, countries such as Malaysia, Korea, Singapore, HongKong, and Japan are serious competitors.

In Bangladesh, the share of total export earnings from garments increased from 12percent in 1985 to over 73 percent in 1998. India is less dependent on garments for herexport earnings. The Indian garment industry is based on a system of decentralized production;and relative to Sri Lanka, exports have been niche-based, focusing on low volume and highvariety of outputs, within the broad area of fashion clothing and especially ladies outwear(Kathuria, et al., 1998 and 1999). Garment exports constitute only 12 percent of India’smerchandise exports. India’s share of world exports of garments increased from 1.5 percentin 1980 to 2.6 percent by 1994. The share of garment export earnings accounted for 60percent of Pakistan’s economy.

While Sri Lanka’s global market share, has been recorded at 1.5 percent, more recentestimates indicate that there has been a marginal increase and stands at 2 percent of theglobal garment market. During the period 1995 to 2000, Sri Lanka maintained a 19 percentexport earning growth in the garment industry (Table 6.6). If there is a lifting of the US tariffbarriers for Sri Lanka’s apparels then there would be an increase of exports by around 50percent.6 As mentioned earlier, although over 90 percent of Sri Lanka’s garment exports are

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

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destined for the USA and the EU, Sri Lanka does not rank amongst the top exporting nationsto the EU (Annex 6.9). Sri Lanka ranked 20th and 15th place among suppliers of apparelproducts to the EU and the USA market, respectively, in 1998. The positive feature is thatthe Sri Lankan garment manufacturers, in general, have built up a good rapport andsound reputation the world over. It is a great advantage when compared to her competingneighbours.

Table 6.6: Growth in garment industry

(export earnings as percentage)

Country 1980-1985 1985-1990 1990-1995

Sri Lanka 20.9 18.7 19.6Bangladesh 14.2 21.6 20.3Nepal 42.6 19.3 7.8Pakistan 4.5 26.1 12.2India -0.3 21.6 13.3

Total Export 6.1 14.8 11.2

Source: World Bank (1997).

Buyers now have a range of sources from which to choose; and countries such asMexico (supplying to the USA) and Turkey (supplying to the EU) have the added advantagesof being in close proximity to their major markets, lower transport cost and shorter turnaroundtimes. Moreover, Mexico and Turkey possess competitively priced labour, good qualityproducts and quota free access to their major markets.

One factor contributing to this reduced level of price-competitiveness is the increasingcost of labour in Sri Lanka compared to other garment producing nations. Labour costs havebeen steadily increasing and currently constitute between 15 - 30 percent of the total productioncosts in the average Sri Lankan garment manufacturing firm (Table 6.8). 7 Table 6.7 highlightshourly wage rates of a number of garment manufacturing nations and indicates that SriLanka’s competitors currently have relatively lower wage cost structures.8 For thosecompetitors who have higher wage cost structures (and higher global market shares), theirstrengths lie particularly in their high levels of productivity.

Available studies show that total factor productivity (TFP) in the garment industry hasimproved after 1977 liberalization policies (Kelegama, et. al., 1999 and Athukorala andRajapathirana, 2000). “Among the industries which exhibited impressive and consistentimprovements in productivity, textiles and clothing tops the list” (Athukorala and

7 UNIDO ( 2000) has found out that the average labour cost is around 20 per cent of the cost of production in the garmentindustry. Apart from this, in the Greater Colombo area, costs for land and buildings ( rent payment) amount to 17 percent, the cost for interest payments of small and medium enterprises amount to 3 per cent.

8 Sri Lankan wage rates are currently at least 30 per cent higher than rates in Vietnam and Cambodia.

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Rajapathirana, 2000: 165). However, the Kelegama et. al. (1999) study shows the TFPG forthe textiles, clothing, and leather products sector (ISIC No. 32) declining from 6 percent in1981-87 to 1.2 percent during 1987-93. The study also shows that when textiles (ISIC No.321) and clothing (ISIC No. 322) are removed from the entire sector (ISIC No. 32), theTFPG improves from 2.0 during 1981-87 to 5.1 percent during 1987-93. Clearly, there hasbeen a decline in factor productivity in the textiles and clothing sector in the latter periodof 1987-93. Whether this decline happens in the textiles sector or the clothing sector isdifficult to judge from the study. Data on unit labour cost in the textiles and clothing sectorshow that it has increased over the two periods of comparison. Moreover, there has been adecline in labour productivity growth (measured both in terms of real output per employeeand real value added per employee) for the textiles and clothing sector for the two periodsof comparison. The finding of the study is that there has been a general decline in thecompetitiveness of the textiles and the clothing sector.

Table 6.7: Hourly labour costs including social & fringebenefits (US $), 1996

Country (US$)

Japan 16.29Taiwan 5.10Hong Kong 4.51S. Korea 4.18Malaysia 2.52Mexico 1.08Thailand 1.06Philippines 0.62Sri Lanka 0.41Indonesia 0.34Vietnam 0.32Bangladesh 0.31China 0.28Pakistan 0.26

Source:Fonseka and Fonseka (1998).

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

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

Country Value added Wages Percentage in output

per employee per employee Costs of input Costs of labour Operating(1000 dollars) (1000 dollars) materials etc surplus

India 3.4 0.6 68.8 5.3 25.9Nepal 1.6 0.5 59.7 11.4 28.9Sri Lanka 1.9 0.7 55.4 15.5 29.1

Source: UNIDO (1998).

4. Contributing factors to low productivity

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

Exhibit 6.1: Dependence of competitiveness on productivity and job quality

Low Level of International Competitiveness

Low Productivity

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

4.1 Poor working conditions

One of the most important factors affecting the productivity of labour is poor workingconditions. In many of the factories, especially those belonging to the small and mediumcategory, hazardous factory layout with cramped workspace for the workers are not conducive

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

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➝➝


to improving output. Some factories also lack basic facilities such as canteens, toilets, etc.,and in many cases, regular breaks for using these facilities are not provided. Within thefactory itself, a common problem for many of the female workers has been harassment, andin particular, sexual harassment.10 The Sri Lanka Apparel Exporters Association, since oflate, has come up with a new code of business conduct in factories to address this problem,but monitoring mechanisms appear to be weak; and the coverage does not exceed 50 percentof factories.

While working hours have been specified by labour regulations, there are numerousinstances where workers are required to work longer hours to achieve production targets. Forthe additional hours of input, most often the workers are not entitled to extra payment. Insome garment factories, workers are required to work on continuous shifts. For workersrequired to work night shifts, though some factories provide transport, most do not. Moreover,some of the surrounding roads are not adequately lit at night; and female workers in somecases encounter harassment and other unsafe situations. For workers travelling long distances,infrastructure weaknesses such as poor and unpunctual public transportation services contributeto a certain degree of stress even prior to starting of the work. The resulting worker stresshas significant adverse effects on productivity.

In many cases, factory workers are from rural areas and are compelled to findaccommodation in the vicinity of the factory (Exhibit 6.2). The available accommodation forthe workers are generally of poor condition due to increasing congestion around the urbangarment factories and Free Trade Zone areas. The lodging facilities are commonly smallrooms with limited additional facilities and inadequate sanitation (for details, see Wellawatte,1999). Furthermore, the rent can constitute a significant proportion of the workers’ salaries.

In 1999, the Government constructed a new hostel complex for female workers in theKatunayake Free Trade Zone to address some of these problems. It was far from adequateto address the problems of all the workers in the industry. In fact, since mid-2000 there hasbeen 12,000–18,000 vacancies in the garment factories, particularly in the ones located inthe Free trade Zone. The solution to the problem lies partly with the industrialists. While themajority of manufacturers maintain that the costs of providing accommodation for theirworkers are too high for them to stay in business, the stronger enterprises have demonstratedthat improving workers’ living conditions have long run dividends by in terms of improvedproductivity.

Enhanced working conditions are inexorably linked to improved productivity, and thefailure to acknowledge this has contributed to low productivity and has eroded Sri Lanka’scompetitive advantage. In an increasingly competitive international environment, foreignbuyers now place greater pressure on manufacturers to upgrade their factories and workerstandards in order to satisfy buyer requirements. Of course, there are significant capital costs

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

211

and future maintenance costs involved in this process, and manufacturers are under increasingpressure to conform. It could be considered as a “blessing in disguise”.

Exhibit 6.2: Transport and hostel facilities available for garment workers

Facilities provided Large scale producers Middle grade producers Small scale operators

Transport

Hostel

Source: Based on interviews conducted for the study.

When stress increases over an optimal level, work performance deteriorates, unfavourablereactions develop, which if not controlled will gradually result in psychological stress. Thedirect consequences are that the person’s productivity gets diminished with feelings of lowachievement, and increased absenteeism. Other factors, which contribute to such situation,are poor interpersonal relationships at the work place, autocratic management style, lack ofvariety in work, low use of skills, poor pay, and low value given to work in the society,especially for the female garment labour.

4.2 Poor incentive structures

Another serious constraint to enhancing productivity is the poorly structured incentiveand pay systems that employers have set up. In most factories, allowances are not linked toproductivity; and in the cases where productivity payments are made, they are in fact onlyflat-rate allowances rather than incentive systems.11 The Sri Lanka Apparel Exporters’Association has suggested that wage increases should be linked to increase in productivity,but the Wages Board for the Garments Manufacturing Trade has still not agreed to this

Some factories providetransport for the night-shiftonly. Others do not providetransport at all. Around 5 %are normally late for work.No extra payment for targetcompleted. Work till late tocomplete the given targets.

No hostel provided. Around80% of workers come fromprivate boarding places. Poornutritional condition has ledto lethargy or other physicaldisorders. 20% of workerstravel from distances of 20to 40 Km radiuses and spendan average of two hourstravelling.

Transport provided but latecomers for work are notpermitted entry. Extra pay-ments made for achievingtargets. Absenteeism around1% or less.

Some factories provide hostelfacilities and the governmenthas constructed hostels forthe EPZ workers. 99% of theworkers are in hostels orlodges. High congestion andvarious social harassment.

No transport provided.95% of the workersnormally live in thevicinity. Highabsenteeism due to extraengagements. No extrapayments.

No hostel facilitiesprovided. Around 95%come from their ownresidences. Low salariesinadequate to meetminimum nutritionalstandards. Workingcapacity is far below theaverage.

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

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suggestion. However, stronger enterprises, such as MAS Holdings, have conducted “timeand motion studies” and implemented well-structured incentive schemes for workers, whichhave significantly improved productivity levels.12 Gain sharing schemes have not beenimplemented in any of the garment factories.

4.3 Labour turnover and absenteeism

Shortage of skilled labour available to the industry is another factor adversely affectingproductivity.13 Consequently, it is more difficult to use the existing labour in the mostefficient manner; and as the supply of labour is less than the demand, low productivityresults. The garment sector has recorded average labour turnover rates of around 55 percentper annum, with the highest rate of 60 percent being recorded for factories in the WesternProvince (Table 6.9).

Absenteeism is another serious problem contributing to low productivity. The averagerate of monthly absenteeism amongst labour in the garment industry is approximately 7.4percent (Garment Gazette, June 1999). However, the ‘stronger’ enterprises, which devotesignificant resources to improving labour productivity, manage to maintain their monthlylabour absenteeism rates at around 1- 2 percent.14

Garment manufacturers who spent 30 percent or more of their turnover on humanresources development (HRD) and workers’ welfare, have maintained very low labourturnover, and absenteeism around 1 percent or less. Some garment manufacturers haveinvested on social development programmes such as construction of schools and maintenanceof daycare centres for workers’ children in the village where the factory is located. Theyhave also provided transport facilities for the factory workers and made attempts to integratethe garment factory to be a part of village life.

Table 6.9: Garment industry labour turnover and absenteeism (percentage)

Province Monthly labour turnover (%) Absenteeism (monthly %)

Western 5.9 8.5Southern 3.1 5.3Central 3.4 7.5Eastern 7.2 8.1North Western 5.2 6.5North Central 2.5 3.4Uva 1.2 6.4Sabaragamuwa 3.3 4.4Northern 8.0 12.0All-island Average 4.9 7.4Note: North includes only Vavuniya.Source: TVEC, 1999.

12 Each machine is connected to a computer which indicates the productivity per hour / per employee, and each employeeis thus aware of his or her efficiency.

13 Designers, Cutters, Technicians, etc., are in short supply.14 Based on a survey done and interviews with industrialists.

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There are a number of reasons attributed to the high rates of labour turnover andabsenteeism. A poor working environment and worker-stress are among the main reasons.Workers’ facilities greatly vary among the garment factories, with only a few of the ‘stronger’enterprises having satisfactory working conditions. Differences in allowances and facilitiesamong factories have resulted in the continual movement of labour to enterprises whereworking conditions are better.

A poor social image of factory workers is another factor contributing to high labourturnover. Due to the bad reputation the industry has gained for harassment of womenworkers and the poor working conditions, the factory worker has a social stigma.15 Thesefactors too have led to high labour turnover, which in turn has impeded the productivity oflabour and affected Sri Lanka’s international competitiveness.

4.4 Inadequate training

Inadequate training of managers and workers alike is an important factor constrainingproductivity and competitiveness. There is little emphasis placed on the importance oftraining and its role in improving productivity by factory owners/ managers. Often, managersdo not view training as an investment and are unwilling to incur expenditure on it. Whilemost workers are trained during recruitment, this initial training is not sufficient to ensureconsistently high levels of labour productivity and product quality.

Table 6.10: Mode of training in garment industry (percentage), 1999

Method of training

Occupational category In house training/ Public sector Local private sector ForeignIndustry training Training institute Training institute training

Senior Management 55 25 11 9Middle Management 50 36 8 6Front Line Management 47 47 6 -Mechanics 74 21 5 -Operators 93 5 2 -Helpers 95 3 2 -Checkers 91 6 3 -Line Leaders 84 13 3 -Cutters 87 10 3 -Ironers 100 - - -Other 94 - 6 -


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

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

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sector institutions (Table 6.10). Over 90 percent of the operative grades are trained in-house.Some ‘strong’ garment factories have their own training units, which have separate traininginstructors and trainers who are paid an allowance during the training period. However, inmost ‘weak’ garment factories, focus is more on minimizing the training costs. Industry-based training is favoured for its hands-on approach and the ability to cultivate industrialculture directly at the site. Training conducted by other institutions tend to be in shortcourses and with less practical exposure in the course content.

Currently, there are only a few institutions, predominantly run by the government,conducting training programmes for the garment industry (Exhibit 6.3). The government-established Clothing Industry Training Institution (CITI) is one of the main organizations,which the garment industry relies heavily upon for its training requirements. As the capacityof the CITI is not sufficient to cater to industry training requirements, there have beenconcerns raised within the industry as to the institution’s ability to provide high qualitytraining courses.16 A course at the CITI can cost between US $ 55 -110 per worker, andmanufacturers claim that the standards have not met their expectations in many cases.

Exhibit 6.3: Present garment industry training institutes and programs

Organization Training programme

Department of Textile Production Organization and Management of the Garment Industryand Clothing Technology,University of MoratuwaTextile Training and Service Textile Technology for the Garment IndustryCentre Fabric Inspection for Textile & Garment

Knitting Machine MechanicsMarketing Management for Textile & GarmentQuality Aspects of Fabrics

Clothing Industry Training Training Personnel in the IndustryInstitution Advanced Pattern Cutting, Grading

Garment DesignGarment Technology and ManagementQuality Control for the Sewing IndustrySewing Machine Maintenance

Phoenix College of Clothing Clothing Technology and ManagementTechnology Pattern Technology and Grading

Clothing Production TechnologyVocational Training Authority Training of Sewing Machine Operator by 65 Training Centres ofSri Lanka throughout the CountryNational Apprentice and Sewing Machine Operator Training ProgrammeIndustrial Training AuthorityNational Youth Services Council Sewing Machine Operator Training Programme

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

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

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There are no recognized graduate level advance courses on fashion designing, patternmaking, fabric painting, etc. in the recognized universities in Sri Lanka. While the governmentLabour Department has designed and conducted training programmes to educate employeesin the garment industry, both within the Export Processing Zones (EPZs) and outside, thesehave been ad hoc measures which have not been developed under a broader framework. Tofill this lacuna, the ADB is considering giving a grant to the Government of Sri Lanka toestablish a Clothing Fashion and Design Centre.

The Government has set up a special unit to undertake skill development programmescalled the Skills Development Fund for the industrial sector. Financial grants will be givento private enterprises to establish training units to increase their productivity. The garmentsector has hardly been able to utilize the funds from this unit up to this date.

4.5 Strained employer-employee relations

The poor relationship between employers and their employees in the garment industryis another constraint to improving productivity. Strained relationships are reflected in thedemands made by management upon workers in cases where unrealistic targets are set andthe workers are pressured to perform beyond their capacity. This can be attributed toabsenteeism, the lack of adequate training amongst middle and upper level managers as wellas to a lack of professionalism in the industry. Some employers tend to believe that the factthat they create employment should absolve them from any obligations. Consequently, lawsensuring statutory rights of the workers are evaded in a significant scale. For example,according to the available data, only 35 percent of the registered employers comply with theprovision of the Employment Provident Fund Act (Gunatilake and Kelegama, 1996).

Some managers see no role for trade unions in bringing about productivity increases,believing that they are an obstacle to the process. Most labour laws are evaded in most FreeTrade Zone factories using the “culture of attempting to contain any problem within itsboundaries” (Amerasinghe, 1999: 170). Trade Union formation is discouraged.17

The most common form of worker participation in management in the garment industrywithin the Free Trade Zones is in the form of Joint Consultative Councils or Employees’Councils which are, in principle, established to encourage the mutual cooperation of theemployer and employees, to promote employee welfare and to settle disputes.18 The Councilis purely a consultative body and its decisions are not binding on the management. They areineffective in influencing the management in regard to worker issues, and this has severelystrained the relationship between employers and employees.

17 In fact the first trade union in the free trade zone was formed in January 2001.18 The Joint Consultative Workers’ Council consists of seven office bearers, four members nominated by the employer and

three members appointed by election.

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4.6 Restrictive/stringent labour regulations

The consensus amongst the majority of garment manufacturers is that the currentlabour regulations governing employment are too restrictive and adversely affect Sri Lanka’sinternational competitiveness. The Government of Sri Lanka advocated specific legislationapplicable to the garment manufacturing industry in September 1963, covering particularemployment terms and conditions specific to the garment trade. Similarly, the Wages Boardfor the Garments Manufacturing Trade was set up in October of the same year. Regulationswere based on legislation such as the Trade Unions Ordinance No. 14 of 1935, the WagesBoard Ordinance No. 27 of 1941, the Factories Ordinance No. 45 of 1942 and the IndustrialDisputes Act No. 43 of 1950, amongst others. While some of these regulations have beensubject to minor revisions, others have remained as they were, thus making them animpediment for modern day factory operations.

Under the Termination of Employment of Workmen Act (TEWA), employers mustfollow a stringent process to dismiss workers, which industrialists are strongly opposed to,and prefer a more structured, but flexible system (Gunatilake and Kelegama, 1996). Inaddition, the Factories Ordinance No. 45 stipulates that workers can only be employed for100 overtime hours per year, which has proved to be impractical in the manufacturingprocess and has thus limited Sri Lanka’s overall productivity compared to competingmanufacturing nations. Factories in the Free Trade Zone follow it in the breach. Manyemployees are willing to work through the additional time-period in specified shifts forappropriate remuneration.

As international buyers of garments also strictly assert that local labour regulationsmust be adhered to, as a pre-condition for purchasing the goods, this places the manufacturerin an inflexible situation. A minority of ‘strong’ manufacturers has been able to circumventthis international pressure by developing a close understanding with their buyers; however,for the majority of manufacturers, buyers cannot accept the stringency of the local labourregulations. The Sri Lanka Apparel Exporters’ Association has appealed to the governmentto amend this Act to suit the modern day needs of the garment industry (SLAEA, 2000a).

The employer is legally bound to consider the outcomes of collective bargaining witha recognized trade union (more than 40 percent worker representation). Many industrialistsare opposed to this legislation on fears of the workforce becoming politicized by large,external, politically motivated trade unions. However, the minority of ‘stronger’ manufacturersmaintain that positive and solid employer - employee relations within an organization shouldresult in minimal conflicts and disputes, regardless of such amendments.

4.7 Low investment in technology

The garment manufacturing industry has become a hi-tech industry worldwide. For theSri Lankan garment industry to develop a competitive edge, it has to shift to higher value

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added products. In order to achieve the quality standards required to penetrate higher valuemarkets, it is necessary for manufacturers to invest in advanced technology. Without suchinvestment, garment manufacturing will be limited to the area of standard garments wherethey are currently shielded by the quota system. Once this protective umbrella is lifted, SriLankan manufacturers will have to face intense competition from rival countries, which canproduce standard garments at lower costs.

Large international competitors in the higher value added segment of the global garmentmarket are technology-driven and this has given a “wake–up call” to Sri Lankan manufacturersto upgrade their technology in order to remain competitive. The manufacturers are generallyunwilling to acknowledge the importance of investment in technology due to the massivecapital costs they would have to incur and the resulting increases in overhead costs. Theyignore the fact that initial high costs can be outweighed in the long run by gains in productivity,quality and subsequently higher margins. This unwillingness and inability is seriouslyconstraining the growth and competitiveness of garment manufacture in Sri Lanka.

One reason for the slow switching to new technology is that the garment industry waspromoted by the state as an employment generator. The 200 GFP virtually rubber-stampedthis view and under the programme the ratio of workers: machines was 2.5:1 which is quitehigh. In fact, the 200 GFP has ballooned the Sri Lankan overall average of workers:machineto 1.8:1 compared to, for example, Hong Kong, which has the ratio of 1.2:1. There are casesin Sri Lanka where, for example, a stitching of a pocket is done by 10 workers whereas itcould be done by one person with a suitable machine. Most garment factories continue withJuki sewing machines with an average age of five years. Some medium size factories haveinvested in new cutting machines and high speed sewing machines during the last 6 years. Infact, only 5-10 factories have invested in CAD/CAM machinery during the last three years.

The Government has imposed a cess of Rs. 1 per piece of garment to develop aconsolidated fund with a view to upgrade technology in the industry. The accumulated fundshave been utilized for budgetary management instead of upgrading technology in the industry.The Sri Lanka Apparel Exporters Association has suggested to the Government that atechnology upgrading fund should be put into operation to address the current needs. Thematter remains pending. There is a tendency among ‘weak’ garment manufacturers to spendon personal luxury of the owners, such as purchasing a BMW car, and also to wait till thelast moment in 2005 to do the necessary switching to high technology. The ‘stronger’enterprises maintain that emphasis should be placed on long-term and progressive financialmanagement in order to absorb, and benefit from, the costs of investment.

4.8 Slow turn-around time

Despite the fact that the Sri Lankan garment industry has achieved phenomenal growthover the last two decades, the development of backward linkages has been poor. The industryis heavily dependent on imported inputs, such as fabric and accessories, and over 90 percent

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of fabric requirements are imported. On average, over 65 percent of material inputs areimported and this comprises almost 70 percent of manufacturing costs (Kelegama and Foley,1999). As shown in Figure 6.4, the import costs to the garment industry have been increasingagainst garment exports over the past decade.

Figure 6.4: Total value of export of garments and value of imports to thegarment industry, 1990-1998

Import Exportw n

n

w

w

w

w

w

w w

ww

n

n

n

n

n

n

n

n

2500

2000

1500

1000

500

01990 1991 1992 1993 1994 1995 1996 1997 1998

Source: Sri Lanka Customs.

Other garment manufacturing countries such as Hong Kong, South Korea and Taiwan,which have their own domestic sources of required inputs, in addition to high productivity,have a significant comparative advantage in production. Most inputs needed for the SriLankan garment industry – fabric and accessories, like buttons and zippers are importedfrom other countries. Buyers normally have their own suppliers. They often directmanufacturers to purchase garment inputs from these sources. The cost of raw materials,which the industry depends on the sources outside the country, has been increasingsteadily in real terms. The manufacturers must thus explore other avenues to maintaincompetitiveness.

In addition, importation of raw materials results in longer lead time, which has becomeanother serious threat to the international competitiveness of the industry. Lead time of SriLanka’s garment exporters also is longer than that of some of her competitors. Accordingto Sri Lanka’s industrial sources, the lead time, after an order is placed is 80 to 120 days,while in other garment producing countries, it is less than 60 days (Kelegama and Foley,1999). It would be vital therefore, to reduce lead time to 30 – 60 days from 80 –120 daysto compete effectively in a world of free trade.

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Sri Lanka made concerted efforts to promote backward linkages, particularly fabricindustries, in the early 1990s. But attempts failed since the conditions required for highcapital intensive industries were not prevalent in the country. Kelegama and Foley (1999)argued that state-led ‘forced’ promotion of backward linkages could be counter-productiveand in fact could kill the garment industry. They argued that formation of backward linkagesin a developing economy like Sri Lanka is time dependent and will emerge in the long runwith industrial deepening. Since the late 1990s the government has given less emphasis onpromoting backward linkages. On the recommendation of the Sri Lanka Apparel ExportersAssociation, the Government is attempting to reduce the turnaround time by streamlining thedocumentation requirements and procedures and by computerizing customs office byintroducing an electronic data flow system.

The new trend in the industry is ‘Just-In-Time’ production, whereby the buyer minimizesthe fashion risk by placing the orders closer to the season and in smaller quantities thustransferring the financial risk to the manufacturer, which demands a more different and moreefficient linkage between the fabric suppliers, contractors, manufacturers and retailers. In otherwords, the orders have become smaller, lead times have become shorter, and buyers demandnot a simple product but an ‘on-line service’. It is a quick response technique. To face thissituation, the ‘stronger’ factories have introduced ‘supply management’ techniques andeffectively networked with the required players of the production process. Moreover, theypractice designing process through internet or on-line services and get the approval from thebuyers. Very little has been done by the ‘weaker’ factories to face this new challenge.

4.9 Low garment factory standardization

Under the current international competitive pressures, the standardization of garmentfactories has become essential to conform to the required standards of major internationalbuyers. Although the Sri Lanka Apparel Exporters Association has ensured that the basicminimum standards in regard to fire safety, etc. are maintained, there are a number ofshortcomings in most of the factories at present. For example, basic facilities such as toilets,ventilation, and working space are not up to international standards in most factories.

In the post-MFA era, ISO 9000 Certificate may become an important factor for mostbuyers. Moreover, factory inspection has already started before securing orders by majorinternational buyers. Many factories, which are currently operating, do not comply withfactory standards and will lose potential market share as a result. While some consider suchstandards to be non-tariff barriers, others take it as an opportunity to improve productivityin the production process.

The lack of standardization of factories has impeded the potential to achieve technicaleconomies of scale by designing production lines. It is difficult for the industry to enjoyfinancial economies of scale such as obtaining better discounts on orders of raw materials,or enhanced prices for their finished products without adhering to international standards.

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4.10 Lack of professionalism in the industry

At the initial development stage of the garment industry, more than 90 percent of theSri Lankan entrepreneurs managed their enterprises as family businesses. Most of the factoryactivities, purchasing and higher level management were conducted by themselves andamongst many enterprises it continues to be the case even today. There is an evident lackof professionalism in the industry as most entrepreneurs are unwilling to invest in humanresources to manage the various functions of their business professionally. Besides, financialdiscipline and planning have not been systematic and efficient either.

5. Impact of globalization on garment industry

Given that there are a number of obstacles to overcome and that the industry is facedwith the pressures of globalization and the phasing-out of the quota system, the next questionthat is commonly asked is “How will the garment industry be affected by the phasing outof the MFA and globalization?.” While it is difficult to predict with certainty the futureimpact of the phasing-out of the MFA and the advent of globalization on labour in thegarment industry, Exhibit 6.4 highlights some of the likely impacts and outcomes.

Exhibit 6.4: Possible impact of globalization on garment industry

Possible impacts Response for/against

Is the Garment Industry likely to ‘shrink’? Yes, the ‘weaker’/non-competitive enterprises may goout of production.

Is unemployment likely to result? Although there may be some unemployment in theshort-term, labour is likely to be absorbed into theremaining ‘strong’ and expanding enterprises in themedium and long term.

Are working conditions/job quality likely While there is no clear evidence to indicate whetherdeteriorate? working conditions will/will not deteriorate in the

short-term, it is likely that, in the long-term, labourconditions will improve due to increasing globalpressure from buyers for adherence to internationallabour standards and the need to comply with WTOregulations.

Are wages likely to be reduced? No, because the national labour regulations stipulateminimum wages.

Will there be a link between improved job Yes, labour productivity in the industry can bequality and improved productivity? increased by improving job quality.

Source: Based on interviews conducted for the study.

5.1 Is the garment industry likely to ‘shrink’?

While there are diverse opinions amongst industrialists and others associated with thegarment industry, there is a general fear that the industry will suffer significantly once

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quotas under the MFA are phased out. Some surveys reveal that 50 percent of the industrywould be forced to close down, because, more than 60 percent of the garment exports stilldepend on quota-based items, and on an average 80 percent of the small and middle levelfactories do not operate according to the demand in the exports market. Some of the reasonsfor the fears expressed are described below.

The majority of enterprises in the Sri Lankan garment industry are “weak” in terms oflow labour productivity, poor working conditions and factory standards, demonstrating alack of professionalism and financial discipline and poor work ethic, as discussed in precedingsections. In addition, lack of investment in technology and low levels of value addition aswell as weak relationships with buyers are also factors that make small and medium enterprisesvulnerable to a quota free environment.

Quota utilization is restricted to the hot categories; consequently, annual quota utilizationrate is around 60 percent . This indicates that Sri Lanka has still not gone into the productionof variety of items for which a quota is available. In other words, it is also an indication ofthe supply potential. Buyers can now access unlimited supplies from anywhere in the world.As long as Sri Lanka concentrates mainly on the manufacture of standard garments (whichare dependent on price), buyers are at liberty to purchase cheaper items from countries; suchas, China, India and Bangladesh. Unless the supply potential is improved by diversifying theproduct range, it is going to be difficult to survive in a quota free environment for small andmedium scale industries.

Furthermore, as buyers are now extremely particular about factors other than the productitself (i.e., labour conditions, factory conditions, environmental concerns, etc.), it is likelythat buyers may not give preference to Sri Lankan manufacturers if Sri Lanka does not meetthese requirements.

Most garment manufactures have still not shifted from an export marketing mode toan international marketing mode. Fonseka and Fonseka (1998) have shown that climbing inthe export ladder has been slow with very few brand names. Due to the geographic distancefrom Sri Lanka’s major markets which are US, EU and Canada, it has become necessary toestablish promotional outlets in these markets in order to maintain convenient accessibilityand fast transactions with buyers. So far very little has been done by the Sri Lanka ApparelExporters Association with the Sri Lanka Foreign Ministry to establish such outlets via theSri Lankan Diplomatic Missions. Besides, the formation of lobby groups that are favourableto Sri Lanka in the foreign markets has been slow to emerge. The entire marketing strategyfor the garment sector needs a radical transformation.

Sri Lanka has not felt the impact of the phasing out of the MFA yet. Developedcountries have not strictly adhered to the mechanism of phasing out the MFA. For instance,by 1 January 1998, compared to the target of 33 percent of product integration, USA andEU had integrated only 1 percent and 7 percent, respectively (ESCAP, 2000: 71). Moreover,developed countries have exploited a loophole of the MFA, where ATC does not provide

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any obligation on countries to limit their integration to particular products subject torestrictions. It has been estimated that the products to be relaxed by 2002 constitute onlyabout 4 percent of all restricted products currently exported by Sri Lanka to USA. Theremaining 96 percent of the restricted products are expected to be under restraint until theend of 2004 (Weerakoon and Wijayasiri, 2000). Thus a sense of complacency has crept infor last minute adjustment. This can have severe adverse consequences. However, the freightrate increases resulting from the terrorist attack at Colombo airport in mid-2001 and theterrorist attack in New York in September 2001 have triggered a business re-engineeringexercise in most Sri Lankan garment factories thus taking off some of the complacency thathad crept in earlier.

5.2 Is unemployment likely to result?

In an effort to answer this question two scenarios need to be considered — the shortterm and medium-long term.

In the short term, there is likely to be some unemployment. Why?l The survival of each garment manufacturing operation is based solely on the

ability to attract and maintain orders from buyers. As the quota system is phased-out, if buyers turn to other countries (for some of the reasons highlighted earlier),the ‘weaker’ Sri Lankan manufacturers (of standard garments) may face toughcompetition to obtain orders. If they cannot maintain orders over a period of time,their factories will become unprofitable and they will be forced to wind upoperations. The likely impact is that such businesses will have to claim redundancyand retrench workers, which is legally acknowledged by local labour regulationsas the employers’ right in such situations. Compensation may also have to be paidto workers, which is also covered by local labour regulations under specifiedconditions.

However, in the medium-long term, some labour will be absorbed into the remainingstrong and expanding enterprises. Why?

l In the medium-long term, ‘stronger’ enterprises will have the opportunity to expandfurther as quota barriers are lifted, and given the high quality of their product, thehigh level of value addition and good relationships with buyers, they can obtainlarger volumes of unrestricted orders from these buyers.19 To be able to increasetheir capacity to cater to the increased demand, these enterprises will have toexpand their factories and production as well as employ existing skilled labour.Since most large factories are automated, their labour absorption capacity will below especially of unskilled labour.

19 This argument is generally prevalent among authorities, and the Director General of the BOI himself supported this viewin an interview (see Business Today, Vol. 3, No. 10, February, 1999).

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l As there is currently a high rate of labour vacancies in the garment factories, theexpansion of these enterprises in the post-quota era will allow for some of theexcess unskilled labour to be absorbed.20 Moreover, Sri Lankan industrialists nowfunctioning in countries like Bangladesh, Madagascar, etc., are planning to expandtheir units in Sri Lanka once the quotas in those countries are exhausted. Theseunits too will absorb some labour.

5.3 Are working conditions and job quality likely to deteriorate?

Once again this question can be viewed from a short term and a medium-long termperspective.

In the short term:l During the short-term or transition period after the quotas are phased-out, there is

a strong possibility that working conditions could deteriorate. As the volume oforders start declining (in standard garments especially), manufacturers will not beable to maintain the same facilities for their employees. Most manufacturers arelikely to try to minimize costs by reducing workers’ allowances, facilities andother costs (as salaries are protected by labour regulations). However, this is likelyto prevail only temporarily as they will be forced to wind up their factories if theyare unable to obtain and maintain orders from buyers.

However in the long term, working conditions are likely to improve. Why?l One of the main reasons working conditions will improve is the increasing global

pressure. Most of the end users of garments are in Western countries. They arebecoming concerned on issues such as labour and environment standards indeveloping countries where garments are manufactured. These consumers placeincreasing demands on international sellers of clothing to purchase frommanufacturers in developing countries who adhere to internationally acceptablelabour and other standards. Moreover, buyers are also concerned about legallybinding international conventions. Consequently, buyers are now starting to insistthat local manufacturers adhere strictly to local labour regulations as well asaccepted factory standards and working conditions. In addition, they are beginningto implement tough inspection procedures and, in most cases, are willing to travelto production sites regularly to ensure that these standards are being maintained.

l Workers themselves are now demanding better working conditions in theirworkplaces and will continue to do so in the future as well. For example, inJanuary 2001, the first Trade Union in the Free Trade Zone came intooperation. Employers are also legally bound to take employee rights and requestsinto consideration.

20 There are averages of 15 to 20 vacancies in 80 per cent of the garment factories with a greater number of vacanciesin the sewing machine operator grades.

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5.4 Are wages likely to be reduced?

Wages are not likely to be reduced. The national labour regulations, specifically theWages Board Ordinance No. 27 of 1941, strictly stipulate minimum wages, which cannotbe reduced. These regulations are strictly enforced throughout the country and are based oninternational conventions. Wages are likely to continue to increase as they have been doingin the recent past. The stipulated minimum wage rate is around Rs. 3000 per month perworker (US $ 33). In addition, there are also other allowances, which vary from factory tofactory, location to location and according to labour performance.

5.5 Will there be a link between improved job quality and improved productivity?

Labour productivity in the industry can be increased by improving job quality. How?l Enhanced job quality and working conditions have undeniably been linked to

improved labour productivity, as explained earlier. The failure to recognize thisfact has been one of the significant weaknesses of Sri Lanka’s garment industryand has undoubtedly played a role in the erosion of Sri Lanka’s competitiveadvantage.

l Increases in global pressure will definitely result in a need to improve labourproductivity which will, in turn, motivate manufacturers to improve the job qualityof their workers through better investment in human resource development, wellstructured incentives and allowances, and improved dialogue with workers.

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6. Key strategies for improved productivity and competitiveness inSri Lanka’s garment industry

Strategy Implementation

Productivity Labour productivity is the key factor determining the levels of internationalcompetitiveness of Sri Lanka’s garment industry. Factor productivity hasbeen traditionally low, except for the cost of labour, which is nowincreasing. Proper factory designs, improved working conditions,improved incentive pay structures must be developed in order to improveproductivity and to secure a competitive advantage in this industry.

Fabric Base Industry A strong fabric-manufacturing base (for accessories and trims) is requiredto support the garment export sector and to reduce costs of imported rawmaterials. The lack of such base is a serious impediment to the futuredevelopment of the garment industry. Infrastructural support may berequired to facilitate the development of such a capital intensive industry.

Information Technology A future challenge for garment manufacturers is to now adopt the internet-driven approach to speedy delivery and more efficient service in theexport of garments. Many of the leading buyers and retailers in the USand Europe now operate e-commerce sites. As a garment manufacturingcountry competing globally, Sri Lanka will have to access this route alsoto remain competitive and to ensure faster reaction times, shorter leadtimes and more flexible manufacturing.

Human Resource Development Human resource development is considered one of the most importantstrategies for improving labour productivity in this labour-intensiveindustry. More attention is required to improve the skills of the workforceand their standards of work. Labour training programmes need to beimproved to maintain high labour productivity and quality levels in theindustry. While there are several institutions conducting similar trainingprogrammes, the quality and duration of the programmes need to berevised. Private sector involvement in training should be increased in thefuture as well. In addition, there is room for significant improvement ofthe skills of middle and lower management.

Investment in Technology The industry must address the need to invest in technology in order toimprove productivity and competitiveness. The acquisition of newtechnology also requires the efficient implementation of technologicalknow-how, transfer of product technology, quality control and marketingof the finished products. Therefore, prior planning and sound financialdiscipline are vital in prioritizing and planning for future investments intechnology.

Product Differentiation Product differentiation is an important strategy in maintaining anddeveloping orders in an internationally competitive environment. Whilemost Sri Lankan garment manufacturers are producing standard garments,which are low value added products, it is essential to move into the highervalue added niche clothing markets. It is also essential for manufacturersto specialize in a few higher value clothing categories to reap highermargins, given the inability to be price competitive in standard garments.

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contd.


Product Integration Garment manufacturers now need to provide accessory products alongwith garment items, which increase the level of value addition. Buyersexpect a wider spectrum of ancillary services related to the business, andit is important to market clothing and accessories as one complete packagein order to establish a competitive advantage.

Code of Business Conduct The recognition and adoption of an internationally accepted code ofbusiness conduct is important to maintain high levels of factory andworking conditions, to improve productivity and to remain competitive.Manufacturers can now obtain a ‘Certificate of Conformity’ locally toguarantee that certain conditions are met. Such industry-wide conformityto standards helps to build international confidence in the Sri Lankangarment industry and improves the ability to compete in the global marketwith high levels of business ethics, integrity, social accountability, quality,value and service.

Improving factory standardsand working conditions Factories, which are not standardized, have been impeded from achieving

technical economies of scale through poor production line design. Atpresent, it is difficult for the industry to enjoy financial economies ofscale such as obtaining better discounts on orders of raw materials andbetter prices for their finished products. In addition, there is a lack ofknowledge or reluctance on the part of the manufacturers to acknowledgethe fact that satisfactory working conditions lead to higher yield and isa major contributing factor. Improved working conditions are a criticalfactor in enhancing the productivity of this industry.

Moving to higher value

products The domestic value-addition of this industry is extremely low due tohigh dependency on imported raw materials. The Sri Lankan exporterswill have to target middle and upper level markets and will have tomove from “export marketing mode” to “international marketing mode”.

Improving Product Quality Placing increased emphasis on quality is important, as Sri Lanka needsto develop a non-price based comparative advantage in garments. Asbuyers and customers in Western markets are now more quality conscious,Sri Lanka can cater to this demand by concentrating more on this area.

Improving backward linkages In order to reduce lead-time due to the reliance on imported raw materials,the development of backward linkages is essential. Quick delivery periodand quick response times are taken as given in a highly competitivetrade environment, and heavy reliance on imported raw materials canseriously affect the industry in meeting these demands.

Building Export Alliances The small and medium scale garment enterprises can form exportalliances, as their production is not unique and is mainly low valueadded, standard garments. As these manufacturers are hampered by alack of funds for promoting their products and attracting buyers, amutually beneficial system can be developed to reduce the time and costburden.

Strategy Implementation

Key strategies for improved productivity and competitiveness in Sri Lanka’s garment industry (contd.)

227

Annex of TablesTable A6.1: Composition of exports (percentage)

1978 1980 1985 1990 1995 1998 1999 2000

Agriculture 88.2 61.8 52.5 37.7 21.8 22.9 20.5 18.2Tea 48.5 35.1 33.2 25.9 12.6 16.4 13.4 12.6Rubber 15.3 14.7 7.1 4.0 2.9 0.9 0.7 0.5Coconut 12.9 7.0 8.5 3.6 2.7 2.0 2.8 2.2Other Agriculture 5.5 5.1 3.8 4.2 3.5 3.6 3.6 2.8

Industrial 14.7 33.8 39.5 54.2 75.4 74.9 77.0 77.6Garment 3.6 10.4 22.0 32.8 48.7 52.0 52.6 54.0

Gems 4.0 3.8 1.6 3.9 2.0 1.2 1.3 1.7Other 2.4 0.6 5.6 4.3 0.8 0.9 1.0 2.5

Source: Estimated from data available from the CBSLAR (various issues).

Table A6.2: Share of industrial output (as percentage of total)

ISIC category 1978 1980 1985 1990 1995 1999 2000

31 Food, beverage and leather 29.5 21.3 27.1 25.3 23.8 23.8 22.832 Textile, wearing apparel, etc. 11.4 10.5 24.6 32.2 43.1 44.9 46.633 Wood and wood products 1.4 1.6 1.8 0.8 0.8 0.7 0.734 Paper and paper products 4.2 2.6 3.1 2.2 2.0 1.5 1.435 Chemical, petroleum, etc. 37.0 51.4 33.9 24.4 16.6 15.7 16.136 Non metallic mineral products 6.7 6.3 4.8 8.7 7.2 6.7 6.137 Basic metal products 2.5 2.6 0.3 1.2 0.7 0.8 0.738 Fabricated metal products, etc. 6.7 3.4 4.1 4.8 3.4 3.6 3.439 Other manufactured products 0.6 0.3 0.3 0.3 2.3 2.3 2.1

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Estimated from data available from the CBSLAR (various issues).

Table A6.3 (a): Rate of growth of export earnings (US$ terms) , 1990-1999

1990 1991 1992 1993 1994 1995 1996 1997 1998

Agriculture Export 17.9 -11.0 -5.7 8.2 7.3 18.1 16.1 10.4 2.3Industrial Export 31.2 19.4 42.5 19.1 14.3 19.6 5.0 14.3 3.2Textile & Garment 28.4 28.0 51.0 16.2 10.0 19.4 2.9 19.6 8.2Manufacturing 27.4 22.7 46.3 18.4 14.9 20.2 4.3 15.0 4.1

Source: CBSLAR, Various Issues

SRI LANKA


Table A6.3 (b) : Textile and clothing exports(as a percentage of total and industrial exports)

Year Total export Industrial exports Textile and Percentage share Percentage shareUS$ Mn US$ Mn clothing exports of total export of industrial export

US$ Mn

1990 1904 1032 631 33 611991 1933 1192 762 39 641992 2337 1680 1114 48 661993 2784 2047 1323 47 651994 3174 2372 1457 46 611995 3613 2721 1657 46 611996 3993 2936 1752 44 601997 4639 3436 2172 47 631998 4735 3544 2316 50 651999 4609 3550 2430 53 682000 5522 4283 2710 49 63

Source: Annual Report Central Bank of Sri Lanka, Various Issues.

Table A6.4: Global market share of Sri Lankan garments(as a percentage of total export earnings)

Destination 1980 1987 1996 1997 1998 1999 2000

USA 54.60 64.60 58.68 61.62 64.19 60.5 61.97EEC 24.10 22.90 35.53 33.75 31.47 34.9 32.87Japan 0.50 0.30 0.78 0.53 0.40 0.40 0.43Canada n.a n.a. 2.21 1.76 1.66 1.40 1.66Switzerland n.a n.a. 0.36 0.37 0.21 0.20 0.18S. Korea n.a n.a. 0.52 0.11 0.02 n.a 0.07Norway n.a n.a 0.27 0.26 0.24 n.a 0.17Australia n.a. n.a 0.40 0.50 0.43 0.40 0.43Middle East 3.80 1.00 n.a n.a n.a. n.a n.aOther 17.0 11.2 1.25 1.69 1.39 2.20 2.22

Source: CBSLAR, Various Issues and SLAEA, Various Issues.

229

Table A6.5: Garment exports: quantity and value

Year Quantity Total value Total value Per unit value(Million pieces) (US$ mn.) (US$ mn.) (Rs )

1980 51.51 101.4 1826 351981 58.64 147.0 3021 511982 65.98 161.1 3435 521983 84.09 185.1 4627 551984 150.66 291.9 7535 501985 156.16 263.0 7899 511986 171.31 276.8 9629 561987 198.89 286.3 12387 621988 185.02 411.2 13581 731989 185.17 420.8 16831 911990 212.44 619.6 24933 1171991 241.84 742.8 31627 1311992 315.77 1069.0 49176 1561993 362.59 1258.1 62349 1721994 413.56 1379.5 68945 1671995 447.63 1569.3 84806 1891996 471.50 1654.3 93814 1981997 312.47 2052.5 121083 3871998 319.12 2203.6 142332 4461999 350.47 2205.0 155214 4432000 468.30 2710.6 20635.9 440

Note: Data from 1997 on ward was taken from the Journal of Sri Lanka Apparel Exporters Association.Source: Ministry of Industrial Development (Textile Division), Textile Statistics of Sri Lanka, various issues.

Table A6.6: Revealed comparative advantage for Sri Lankan manufacturing industries,1994

Items Revealed comparative advantage

Coffee, tea, cocoa, spices 18.66Clothing 14.78Rubber, crude, synthetic 10.26Non metal mineral manufs. 4.07Travel goods, handbags 3.92Tobacco and manufs. 3.27Rubber manufactures, nes 2.39Animal oils & fats 1.93Crude animal, vegetable mat 1.85Textile fibres 1.47Fish & preparations 1.46Footwear 1.36Fruit & Vegetables 1.27Textile yarn, fabric etc. 1.14Manufactures not classified 1.07

Source: Abe (1996).

SRI LANKA


Table A6.7: Top 15 exports from Sri Lanka, 1999

Rank HS Items Value Percentagecode US$ million share of total

garments export

1 6204 Women’s or girls’ suits, ensembles, jackets, dresses, skirts,divided skirts, trousers etc 469 21.3

2 6203 Men’s or Boys’ suits, jackets, blazers, trousers, shorts etc. 282 12.83 6206 Women’s or girls’ blouses, shirts and shirt blouses 212 9.64 6205 Men’s or boys’ shirts 151 6.85 6105 Men’s or boys’ shirts, knitted or crocheted 128 5.86 6109 T-shirts, singlets and other vests, knitted or crocheted 118 5.47 6110 Jerseys, pullovers, cardigans, waistcoats. 112 5.08 6208 Women’s or girls’ singlets and other vests, slips, petticoats,

panties, nightdresses etc. 108 4.99 6212 Brassieres, girdles, corsets, braces, suspenders, and garters. 86 3.910 6108 Women’s or girls’ slips, petticoats, briefs, panties,

nightdresses etc. 64 3.011 6116 Gloves, mittens and mitts, knitted or crocheted 64 2.912 6111 Babies’ garments, clothing accessories, knitted or crocheted. 59 2.713 6211 Track suits, ski suits, and swimwear 57 2.614 6106 Women’s or girls’ blouses, shirt and shirt blouses, knitted

or crocheted. 50 2.315 6104 Women’s or girls’ suits, ensembles, jackets, dresses, skirts,

bib and brace. 49 2.2


Table A6.8: South Asian market share in 16 categories of MFA imports of the US, 1996

Items Total US imports Sri Lanka India Bangladesh PakistanUS$ million

335 Cotton women’s coats 354.4 7.6 6.3 4.5 0.8336 Cotton dresses 403.4 3.2 8.4 3.9 4.1338 Cotton men’s knit shirts 2919.1 3.0 6.4 1.7 10.2339 Cotton Women’s knit shirts 1937.2 1.5 2.6 0.7 2.4340 Cotton men’s non knit shirts 2137.3 3.2 7.7 7.6 1.3341 Cotton Women’s non knit shirts 891.6 5.9 24.9 6.5 1.5342 Cotton skirts 345.0 7.7 7.9 4.1 1.9345 Cotton sweaters 336.5 1.2 5.6 0.7 0.1347 Cotton men’s trousers 2942.2 1.9 0.7 3.5 0.8348 Cotton women’s trousers 2288.7 2.1 0.9 1.4 0.6359 Cotton other apparel 1157.7 5.3 4.7 10.5 2.1363 Cotton /terry towels 264.2 1.0 11.5 3.4 17.9369 Cotton other manufactures 812.5 1.2 21.7 3.2 15.4635 MMF women’s coats 1066.9 3.3 2.6 3.1 0.7641 MMF Women’s non knit shirts 555.1 4.2 9.0 2.8 0.1642 MMF skirts 419.7 4.5 10.9 0.6 0.1

Source: Ramaswamy and Gereffi, 1998.

231

Table A6.9: Leading apparel exporters to the USA and EU

Top apparel exporters to USA21, 2000 Top apparel exporters to EU, 1996Country (%) Country (%)

1 Mexico 14.68 EU 44.52 China 7.85 China 7.73 Hong Kong 7.82 Turkey 6.14 Dominican Rep. 4.24 Hong Kong 5.65 Honduras 4.12 India 3.36 S. Korea 3.95 Tunisia 3.37 Bangladesh 3.69 Morocco 2.98 Taiwan 3.60 Poland 2.89 Indonesia 3.58 Romania 2.010 Philippines 3.30 Bangladesh 1.911 Thailand 3.18 Indonesia 1.812 India 3.12 Hungary 1.413 Canada 3.04 USA 1.114 El Salvador 2.79 Pakistan 1.115 Guatemala 2.60 Thailand 1.116 Sri Lanka 2.56


Table A6.10: Total value of imports to the garment industry

Year Value of import (US$ Mn) Value of export (US$ Mn)

1990 426 619.61991 612 742.81992 795 1069.01993 922 1258.11994 1,110 1379.51995 1,237 1569.31996 1,220 1654.31997 1,442 1975.61998 1,395 2099.9

Source: People’s Bank (1999).

21 Apparel Imports to USA by value US$ mn.

SRI LANKA


APPENDIX 1Garment industry project contact list

Organization Contact name Date

1. Textile Quota Board Mr Jayamaha (Consultant), February, 2000Ministry of Industries Chairman Textile Quota Board

2. Ministry of Industrial Mr. W.C. Deerasekera (Additional Secretary) January, 2000Development

3. Postgraduate Institute Dr. Tilak Fonseke January, 2000of Management (Head Research Division)

Post Graduate Institute of Management

Mr. Mahesh Amalean (Chairman) March , 2000

4. Sri Lanka Apparel Exporters Ms Sunetha Kannangara (Secretary) January, 2000

Association Mr. Mahinda Madihahewa, January, 2000Commissioner –General

5. Ministry of Labour Mr. Gunapala January, 2000Dept. of Labour Deputy Commissioner, Labour –

Workers’ Education

Mr. Sarath Ranaweera, February, 2000Deputy Commissioner (Labour Standards)

6. Ministry of Vocational Mr. Erly Fernando March, 2000Training and Rural Industries Programme Coordinator -

Skill Development Fund

7. Federation of Chambers Mr Lioyd Yapa January, 2000of Commerce Director General

8. UNIDO –Textile Quota Board Prof. Lakdas Fernando February, 2000Garment Meeting

9. Forbes Textiles Mr. Gihan Nanayakkara February, 2000Managing Director

10. Dial Textiles Industries Mr. Neil Umagiliya March, 2000Managing Director

11. Falcon Apparels (Pvt) Ltd Mr Mansoor Akbarally March, 2000

12. Hirdaramani (Industries) Ltd Mr Janak Hirdaramani March, 2000Director

13. Exotic Collection Pvt Ltd Mr Gihan Nanayakkara February, 2000Director

14. Kings Apparel Mr. Dissanayake (Chairman) February, 2000

Mr. Gunasekera (Managing Director)

15. Chirathu Garment Industries Mr. Gunawardene February, 2000Chairman

233

16. TriStar Apparel Exporters Mr. Shanta Kumara March, 2000Pvt Ltd. Executive Director

17. MAS Holding (Pvt) Ltd Mr. Mahesh Amalean March, 2000Chairman

18. “Kantha Handa” Ms Siva Ranaweera March, 2000NGO Work related tofemale labour issues

19. “Mitura Sevena” Ms Mashida Ibrahim March, 2000NGO-Labour DisputeHandling in FTZ-K atunayake

Author’s discussions with Industrialists, Bureaucrats, NGOs

Organization Contact name Date

SRI LANKA


APPENDIX 2Questionnaire- Sri Lanka garment industry

Garment Factory Name No

1. Company Registration under Board of Investment (BOI) Yes/No

2. Location,

Industrial Zone

Out

3. Number of Employees ……………………..

4. Business under Quota or Non quota (Percentage)

Quota Nil 0-10 11-20 21-30 31-40 41-50 51-60 61-70 71-80 81-90 91-100

5. Category-wise Business

Percentage

Standard Garments

Non Standard Garments

Non Apparel

Other

6. Has company developed brand name? Yes/No

7. If not, What are the brand names used?

1………………………….

2…………………………

3…………………………

8. Working Condition- Factory Condition

Yes No

A/C

Meal Provided

Breakfast

Lunch

Transport Provided

Hostel Facility Provided

Medical Facility Provided

Recreation Facility provided (Gymnasium)

235

9. Workers’ Absenteeism and Labour turnover (Percentage)

Monthly Absenteeism (%) 1-2% 3-4% 5-6% 7-8% 9-10% >10%

Labour turnover/month (%) 1-2% 3-4% 5-6% 7-8% 9-10% >10%

10. Number of current vacancies and grades

Operator Designer Cutters Ironies Other

No. Vacancies

11 Is there workers’ insurance scheme? Yes/No

12. During the last five Years (1995 to 2000), the number of incidents of

Number of Incidences

Strikes

Lockouts

Work to Rule

Go Slow

Boycott

Picketing

13.Export Destinations

Country Percentage

1

2

3

4

5

14. Number of Machines Used

CAT/CAM Sewing machines Computers

15. Availability of Internet facility Yes/No

16. Production specification

Embroidery Designing Printing

17. Access to the raw materials

PercentageLocally purchased

Imported

SRI LANKA


18 Has the factory recognized

Labour Unions

Workers Councils

19 Cost of Production

As a percentage of total cost

Labour

Raw material/Fabric

Other

20 Productivity Measurements

Number of pieces per hour

Number of pieces per labour

Number of pieces per machine per hour

21. Value Addition of production (Percentage)

Nil <20 21-30 31-40 41-50 51-60 61-70 71-80 81-90 >90

22. No of employees training per annum

Mode of Training Number of Persons per Annum

Foreign

Local

In house

23. Expenditure on Human Resource Development (as a percentage of total expenditure)

<10 11-20 21-30 31-40 41-50 >50

24. Expenditure on Training (as a percentage of total expenditure)

<2% 2-4% 4.1-6% 6.1-8% >8%

25. Capacity of Employee Cadre

Number of workersSkilled

Semi Skilled

Training

26. Job CategoryNumber of workers

Operator grade

Technical grade

Management grade

237

27. Marketing Strategy / Advertising Mechanism

Yes NoInternational Magazine

Buying House

Personal channel

28. Rank these problems in descending order, (Most crucial problem =1)

1 Poor Infrastructure

2 Politicization of Labour

3 Lack of Capital

4 No good Training Institutes

5 Lack of Skilled Labour

6 sluggish manner of public sector supportive services

29. What adjustments have you suggested for the operation after elimination of MFA quota. Check ifappropriate

1. Foreign Incumbent

2. Developing Brand Name

3. Downsizing

4. Productivity Improvements

5. Expanding markets

6. Changing production

7. Product Diversification

8. Factory modernization

9. None30. Remarks.

SRI LANKA

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APPENDIX 3Profile of garment industries studied

Company No of No of Annual capacity Product Range In house Remarksemployees Machines facility

1. Forbes Textiles (Pvt) LTD. 275 113 T-shirts, Shirts, Jackets, Embroidery 80 % non-quotaNon- garment items Printing transaction,

Smocking compliance ISOstandard,During the last fiveyears no labourdisputes, Main markets-Canada, UK.

2. Falcon Apparel (Pvt) LTD. 250 150 16,500 Doz BA Shirts, T-shirts, Uniform Embroidery 95% non quota

3. Kings Apparels (PVT) LTD. 200 110 360,000 Pcs Hospital/Hotel Factory Non- fashion Not standard garmentsUniform garment / No labour disputes

Uniform etc

4. Janatha Garment 726 421 Embroidery Manufacturers Ltd. Washing

5. Facination Exports 425 200 50,000 Doz Jackets, pants, Shorts, No inhouse 90 per cent quota (Private) Ltd. facilities, hire UK and USA are

those if main marketsnecessary

6. Dial Textile Industries. 3200 No Exact Quantity Design Apparel Conditions provided forand non-apparel workers all inclusive

7. Exotic Collection (Pvt) Ltd. 255 160 Ladies’ Nightwear, Embroidery Most garments itemsPrime Collection (Pvt) Ltd. Lingerie Printing are non-quota items.Prime Vision (Pvt) Ltd.

8.Colmons Garment Industries 1260 500 2.3 million pcs Embroidery(PVT) Ltd

9. Chirathu Industries 191 109 280,000 pcs Ladies’ Blouses, Embroidery -No labour disputes Overcoats during the last five

years

contd.

239

-Over 60% non-quota10.Mas Holdings 2400 No exact quantity Brassieres, Panties Design / 35% non quota,Bodyline Factory Ladies’ Nightwear fashion wear No labour disputes,Shadowline Factory Baby clothes, undergarments Cat/Cam machine use,Slimline Factory Sportswear Main markets-USA,

UK, Holland, Germany.

11 TriStar Apparel Exporters 750 325 1.2 Million Pcs Children’s wear, Cutting to About 70 per centPvt, Ltd. (Ratmalana Factory) Ladies’ wear, finishing of quota and 30 per centTriStra Group has 26 factories shirts and all items garment items non-quota.and 6 factories located in (Subsidiary Main market - UKColombo. factories have inspection done by

all the facilities) foreign experts forEmbroidery, quality control.printing, All the facilitiesSmocking, etc. are available

for workers

Note 1: Selection based on the size of the factory according to their work cadre; location of the factory in the city and outskirts of the city, or in theFree Trade Zone, and the apparel and non apparel producers.Note 2: Labour disputes during the last five years were considered (1995-2000). Approximately, 95 per cent of the factories or more had notexperienced labour disputes during this period.Note 3: The minimum wages are decided by the Wages Board Ordinance, but in absolute terms, all the factories are paying more than the wagesstipulated by the Wages Board. because, there is a movement of labour from lower to higher salary segments.Source: Field surveys and interviews with industrialists

Company No of No of Annual capacity Product Range In house Remarksemployees Machines facility

Profile of garment industries studied (contd.)

SR

I LA

NK

A


References

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Fonseka, A.T. & D.Fonseka (1998), Garment Industry of Sri Lanka: Challenges and Responses, SriLanka Journal of Management, Vol. 3, Nos. 3&4, July, December 1998. Pp.250-291.

Gunatilaka, R. and S.Kelegama (1996), Study on the Impact of Labour Legislation on Labour Demandin Sri Lanka, Department of National Planning, Ministry of Finance and Planning, Colombo.

Kathuria, S. and A. Bhardwaj (1998), Export Quotas and Policy Constraints in the Indian Textile andGarment Industries, Policy Research Working Paper 2021, World Bank, New Delhi.

Kathuria, S, W. Martin and A. Bhardwaj (1999), “Implications of MFA Abolition for South AsianCountries”, Paper presented at the NCAER-World Bank WTO 2000 South Asia Workshop,December 20-21, New Delhi.

Kelegama, S. (2001), ‘Indo-Lanka FTA: Progress of Sri Lankan Exports in Year 2000’, Sri LankaExporter, Vol. 34, June –August.

Kelegama, S., P. Samararatne, and M. Knight-John (1999), Productivity and Labour Cost inManufacturing Industries: Sri Lanka, SAAT, ILO, New Delhi.

Kelegama, S. and Fritz Foley (1999), ‘Impediments to Promoting Backward Linkages from theGarment Industry in Sri Lanka’, World Development, Volume 27, No. 8.

Kelegama, S. (1997), ‘Risks to the Sri Lankan Garment Industry from NAFTA’ Development PolicyReview, Vol. 15, No. 3.

People’s Bank- Economic Review (1999), Apparel Industry, Economic Review, June – July 1999,Colombo.

Presidential Committee and the BOI (1999), “Safety and Welfare of Export Processing Zone WomenWorkers”, Special Committee recommendations, Presidential Secretariat, Colombo.

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Ramaswamy, K.V. and G. Gereffi, (1998), “ India’s Apparel Sector in the Global Economy: CatchingUp or Falling Behind”, Economic and Political Weekly, January 17, 1998.

SLAEA (2000a), Comprehensive Industry Document, Sri Lanka Apparel Exporters Association.SLAEA (2000b), Sri Lanka Garments, Vol. 02, No. 77, Sri Lanka Apparel Exporters Association,

Colombo.SLAEA (various issues), Sri Lanka Garments, Vol. 01,02, 03/99, No. 74/75, Sri Lanka Apparel

Exporters Association, Colombo.SLCGE (1999), “Garment Gazette” Issues No. 6, June, Sri Lanka Chamber of Garment Exporters,

Colombo.Sri Lanka Customs (various years), Data Sheets/Tapes, Colombo.Sri Lanka Labour Gazette (1996), “The Wages Board Ordinance: The Garment Manufacturing Trade”,

Ministry of Labour, Colombo.TVEC (1999), Sector Profile – Garment Industry, Industry Sector Profile Series, Issue No. 1, November

1999, Tertiary and Vocational Education Commission, Labour Market Information Unit,Colombo.

UNIDO (1998), International Yearbook of Industrial Statistics, United Nations Industrial DevelopmentOrganization, Edward Elgau Publishing Ltd, Cheltenham, UK.

UNIDO (2000), Master Plan Study on Industrialization and Investment Promotion in Sri Lanka –Apparel Industry (Phase 11), Integrated Industrial Development Support Programme, May.

Wellawatte, J. (1999), ‘The Workers in the Ready-Made Garment Industrial Sector: A New Way ofLife’, Economic Review, Vol. 25, Nos. 3 & 4(June/July), People’s Bank. Colombo.

Weerakoon, D. and J. Wijayasiri (2000), ‘WTO and the Textile and Garment Sector: Implications forSri Lanka’, South Asia Economic Journal, Vol. 1, No. 2.

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Sub-regional meeting on competitiveness, productivityand job quality in the garment industry in South Asia,Kathmandu, 25-26 September 2001

Proceedings and conclusions

A two-day Sub-regional Meeting on Competitiveness, Productivity and Job Quality inGarment Industry in South Asia was organized by the ILO (International Labour Organization)in Kathmandu during 25-26 September 2001. A copy each of the programme and the list ofparticipants is attached at the end of these proceedings. Thirty-one participants from fiveSouth Asian countries - Bangladesh, India, Pakistan, Sri Lanka and Nepal - representingvarious government agencies (such as Ministries of Labour, Industries, Textile and Commerce),workers and employers’ organizations, garment manufacturers and exporters’ associations,and resource persons participated in the meeting. The purpose of the meeting was to discussthe issues being faced by the garment industries due to impending removal of the quotasystem upon termination of the MFA (Multi Fibre Agreement) by the end of the year 2004.It was expected that the cross-country experiences of the participating countries would helpdevise ways to minimize the adverse impact on job quality and to further improve productivityand competitiveness.

1. Inauguration

The workshop was opened by Mr. Palten Gurung, Minister for Labour and TransportManagement, who stated that development of a strategy to improve productivity and jobquality in the garments industry has become urgent since increasing globalization has alreadystarted to place pressures on the quantity and quality of employment. The Minister furtherstated that the Ministry of Labour and Transport Management in Nepal realizes the importanceof social dialogue for enhancing productivity. The Labour Act and the Trade Union Actare being amended in Nepal to further increase tripartite coordination. He urged theparticipating countries to develop a strategy for alternative options to compete in the globalmarket since the garment industry in general has been so far dependent on quota forits growth.

Earlier welcoming the participants, Ms. Leyla Tegmo-Reddy, Director, ILO Kathmandupointed out that the ILO has been naturally extremely concerned about potential job lossesin large numbers and the deterioration of the working environment as a result of competitivepressures resulting from phasing out of MFA. Speaking on behalf of the SAARC SecretaryGeneral (South Asian Association for Regional Cooperation), Mr. Amit Dasgupta, SAARC

7


Secretariat Director for Economic Trade and Transport, stated that there is a need for greaterdegree of coordination among apparel industries in South Asia. He suggested that SAARCSecretariat could play a role in facilitating the process of setting up a mechanism for greatercooperation and complementarity among the garment industries across the sub-region.Employers and workers’ representatives spoke about the importance of improving efficiencyand job quality in the industry, for which social dialogue would play an important role.

Mr. Suraj Vaidya representing the FNCCI and EC (employers) in Nepal and Mr.Jitendra Lal Karna of DEFONT (workers) also spoke during the occasion. Mr. Vaidyapointed out that there is a need for modernization of technology and management systemand the whole working attitude. He stated that all three social partners – the government,entrepreneurs and the workers have a stake in the survival of the garment industry, and thereis a need for all these partners to work together.

2. Technical sessions

Two technical presentations were made by Mr. Gopal Joshi, Senior Enterprise SpecialistSAAT New Delhi. Providing an overview of the garment industry in South Asia on the firstday, Mr. Joshi pointed out that there has been a phenomenal rise over the last few years ingarments exports and employment in the industry, with large percentages of female workers(as much as 90% for Bangladesh and Sri Lanka) joining the manufacturing jobs. These jobsare, however, increasingly in jeopardy as the garment industry has grown on the basis of theavailability of the quota from developed countries, which is going to be removed at the endof the year 2004 upon termination of MFA. He further stated that as the competitive pressuresincrease, the garments industry in South Asia can take the ‘low road’ of price competitivenesswith low wages and bad working environment or ‘high road’ of high value addition andbetter job quality.

During the second presentation on international perspective, Mr. Joshi pointed out thatthere is a trend of increasing regional trade to benefit from proximity and flexibility andfrom integration and complementarity across the countries and continents at the level ofenterprises so as to enhance their competitive position in the world market. The industriesoperating in the fringes of value chain, offering heavily discounted commodity, are boundto come under heavy pressures as globalization takes effect. Therefore, it is imperative thatboth the countries and industries need to increase their cooperation and complementarity toincrease their competitiveness.

3. Country presentations

Country presentations describing the state of employment, job quality andcompetitiveness in the respective garment industry in five South Asian countries werepresented by the respective resource persons.

245

3.1 Bangladesh

Presenting the country paper on Bangladesh, Dr. Nasreen Khundkar pointed out thatthe growth of garment industry in Bangladesh is the direct result of the MFA and other tradeagreements. It has had free market access to EU markets and the US which also gaveBangladesh sizeable quota thus turning it into one of the important suppliers to both Americanand European markets. The economic importance of the garment industry for Bangladesh issignified by the fast rise in its share from 4 percent of the total exports in 1983 to 76 percentin 1999-2000. The industry employs 1.5 million workers, 90 percent of whom are femaleworkers.

Once quota is removed, Bangladesh is expected to suffer from its lack of textileindustries and poorly developed infrastructure. Although Bangladesh seems to enjoy the lowwage cost advantage, it also suffers from low productivity and poor job quality.

Dr. Khundkar predicted that the initial impact of the phasing out of the MFA wouldbe highly disruptive. Thousands of jobs will be at stake, particularly for women workers,and working conditions are expected to further deteriorate. The strategy for furtherimproving competitiveness of Bangladesh garment industry should include: (a) marketdiversification; (b) product diversification to include high value fashion wear; (c) backwardlinkages to reduce the high dependence on imported inputs; (d) productivityimprovement through improved job quality; and (e) responsiveness to consumer ethics andlabour standards.

3.2 India

Presenting the country report on India, Dr. M. Vijayabaskar stated that in the initialphases of Indian apparel exports, USSR and Eastern Europe were the largest markets, butby 1999 a major share of Indian garments exports was destined to the US and Europeanmarkets. Indian exports to these counties have been subject to quantitative restrictions. Sincequota given to India in most developed countries have been fulfilled, analysts expect thatthe removal of the MFA restrictions would enhance the ability of Indian exports to penetratethese markets. Exports to non-quota countries have recently grown at a much higherrate than that for quota countries, indicating a degree of competitiveness of Indianapparel. However, 51 percent of the garment exported continues to be governed by quotarestrictions.

The presentation outlined the possible elements of the strategy to be followed in thepost-MFA environment for enhancing competitiveness as: (a) promotion of mass marketingfor achieving the scale of economy; (b) enforcement of international labour standards;(c) moving up the value chain by targeting the specific niches; and (d) creation of acompetitive environment in the domestic market through promotion of fashion designfacilities.

PROCEEDINGS AND CONCLUSIONS


3.3 Nepal

Dr. Dinesh Pant presented the country study of Nepal. He pointed out that the employmentin the garments industry has come down to 25-30,000 workers from 100,000 in early ninetiesalong with decline in the number of garment industries. Remaining jobs are expected to befurther threatened as the quota system is abolished since the garment industry in Nepal hasgrown as a spillover from the neighbouring country. The competitiveness of the garmentindustry in Nepal is particularly constrained due to transportation costs and low productivity.

Workers in the industry state the lack of contract and other rights and benefits normallyavailable to the manufacturing workers. They seem to feel that the situation is furtheraggravated due to existence of the foreign workers in the industry. On the other hand,employers are likely to seek to reduce the wage costs as the competitive pressures build upafter the removal of the quota at the end of 2004.

The country report recommended formulation of a national strategy with: (a) focus onhigh value products; (b) product and market diversification; (c) development of backwardlinkage industries; (d) completion of dry port projects; (e) utilization of WTO provisions forleast developed countries; (f) improvement in human resource management for enhancingproductivity; and (g) upgradation of technology and processes.

3.4 Pakistan

On behalf of Mr. Asir Manjur, SMEDA (Small and Medium Enterprise DevelopmentAuthority), Mr. Nabeel Goheer stated that with more than 700,000 workers, the garmentindustry is the single largest industrial employment provider in Pakistan. The labour forcein the industry is dominated by male workers (90 percent) as labour laws in the country haveregulatory restrictions on women’s employment, like working hours, maternity benefits, etc.

Phasing out of the MFA is likely to open new opportunity in the product segments atthe top-end of the textile value chain. At the same time, it would adversely affect the growthof exports from developing countries; such as Pakistan, which are dependent on a limitedproduct range and are competing in the global market on the basis of the price advantagerather than quality.

In Pakistan, the existing quota policy not only discourages diversification but alsohampers the entry of new exporters through imposition of high entry barriers in the shapeof huge investments in quota procurement. In the areas of labour costs and the costs of otherinputs, Pakistan is still competitive in apparel manufacturing. The total cost of garments isbelow the average unit price realization of different competitors.

The country report recommended a strategy that would include: (a) human resourcedevelopment; (b) diversification of export destinations; (c) tapping the regional market; (d)seeking preferential treatment from developed countries as a regional bloc; (e) innovativeproduct development through promotion of design facilities; and (f) instituting liberal importregime for importation of the inputs and equipment

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3.5 Sri Lanka

Presenting the country report on the Sri Lankan garment industry, Dr. Saman Kelegamafrom IPS stated that the industry has experienced phenomenal growth after the late 1970sand has continued to be the strongest manufacturing sub-sector in terms of its contributionto total exports, foreign exchange revenue, GDP and employment. The quota system hasvirtually guaranteed markets for many Sri Lankan manufacturers, especially thosemanufacturing standard garments and are competing on price. This guaranteed period wouldbe over in 2005 with the dismantling of the quota regime, which will compel the industryto compete for its market share in an intensely competitive global market.

Posing the question with regard to the likely impact of the phasing out of the MFA onlabour in the Sri Lankan Garment Industry, Dr. Kelegama provided the following scenariosbased on the responses received from the industry:

ü The weaker garment industries are likely to shrink.ü There may be some unemployment in the short term, which is likely to be absorbed

into the remaining enterprises in the long run.ü Labour conditions will improve due to buyers’ increasing labour standard

requirements.ü Wages are not likely to be reduced.ü Improvement in job quality would definitely have a positive impact on productivity.

The presenter suggested formulation of a national strategy for the garment industrywith the resolve to: (a) improve productivity; (b) undertake human resources development;(c) develop product quality; (d) increase investment in technology; (e) develop codesof business conduct; (f) implement the standards on working conditions; and (g) developexport alliances.

4. Panel discussions

Panel discussions were held at the end of country presentations, during which thepanelists representing the government, employers and workers made comments on the countrypapers presented and further raised the issues for discussion. Mr. Atul Chaturvedi, JointSecretary Ministry of Textiles, Government of India, chaired the first panel discussion onthe presentations on Bangladesh, India and Nepal. Mr. Mohammad Abu Taher, Joint Secretary,Ministry of Labour and Employment, Bangladesh, chaired the second panel discussion onthe presentations on Pakistan and Sri Lanka.

During the discussions, Government representative from Bangladesh pointed out thatthe country has been exporting under the GSP (General System of Preferences), which is notexactly the quota system. However, this arrangement is also subject to the discretion of thedeveloped countries. The employers’ representative from Nepal pointed out the need for thestrategic alliance among the garment manufacturers and exporters throughout the sub-region.



The employers’ representative from India stated that there should also be networking of thefirms within the country as a strategy to deal with the removal of the quota system.

The need for labour market flexibility was raised during the discussion for the firmsto be able to compete in the globalized market. However, it was pointed out by the workers’representatives that the flexibility should be based on the employability of the workers, whohave opportunity to upgrade their skills and choose employment opportunities in the labourmarket. The employers’ representative from Sri Lanka pointed out the need for intensifiedtraining of the workers with the establishment of training schools catering solely to textileand garments. The employers’ representative from India pointed out the need for formalizingthe training being given by various training organizations.

Lack of clarity in the labour laws in South Asia was pointed out by the employers’representatives. Workers’ representative from Sri Lanka pointed out the need for labour lawreform. He also urged inclusion of labour standards in the social charter of SAARC (SouthAsian Association for Regional Cooperation).

Regarding job quality and productivity in the garment industry, workers’ representativesfrom participating countries pointed out the need for gain-sharing schemes, which wouldprovide incentives for improvement in productivity. The workers’ representatives emphasizedthat incentive for the workers would help in the improvement in job quality and productivityof the workers. It was pointed out by the representative from India that female dominatedindustry has had traditionally lower wages. The government representative from Sri Lankahowever pointed out that the wages for both male and female are the same, but the femaleworkers endure other forms of difficulty, i.e., harassments, hardship in travel to and fromwork, dual responsibility of family and work, etc.

Regarding the temporary workers, the workers’ representatives noted that as the garmentindustry depends more on external factors; such as, seasonal demand and tight deliveryschedule, sub-contracting resulting in hiring of temporary workers is quite prevalent. Theworkers’ representative from Pakistan pointed out that since no registration of contractworkers takes place and since many of them are migrant workers, they are deprived fromthe regular benefits available to other workers. The employers’ representative from SriLanka stated that the buyers from importing countries do not allow casual labour in theindustry. However, the workers’ representative disputed by stating that though trade unionshave fought for permanent employment and welfare provisions, there was no legal bindingfor the household units to provide any permanent provision to the workers. It was generallyagreed that the lack of social security system has been a major disadvantage for the temporaryworkers. It was, therefore, agreed that a tripartite discussion needs to be organized forworking out the safety net for temporary workers.

The chairmen of the panel discussions provided their concluding remarks at the end ofeach of the panel discussions. Small and micro enterprises may have difficulty in survivingthe full force of globalization as the quota system is removed. There needs to be greatercooperation among the countries in the sub-region for promoting complementarity among

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the respective industries and in attaining vertical integration among different levels ofenterprises within the industry.

Until now, the basic foundation of this industry has been low wages accompanied bylow productivity and low value added. One of the suggestions floated during the discussionwas that South Asian garment manufacturers need to move up in the value addition chainbecause they have so far remained as suppliers of the garments at the lower end of the chain.

5. Conclusions

The participants were then divided in three groups for discussion on the issues raisedduring the meeting and for providing recommendations for consideration by the governmentsand social partners. The representatives from the governments and social partners presentedthe conclusions of the group discussions.

5.1 Employers

The employers’ representatives summarized the conclusions reached during the groupdiscussion by pointing out the challenges faced and strengths inherent in the garment industriesin the sub-region. The challenges were mainly concerned with weak infrastructure, risingcompetition, unemployment, weak implementation of labour standards and low productquality. The industries also have inherent strengths of domestic demand potential, large poolof labour and local fabric in some of the countries. While trying to mitigate the weaknesses,the industries need to utilize the inherent strengths to the extent possible. It has beenconcluded that each of the three parties - employers, workers and governments - has rolesto play in formulating a strategy to deal with the post-MFA environment of competitiveenvironment in garments trade.

The employers in the participating countries were urged to:

w adopt and implement the labour standards and monitor the compliance among theSAARC countries;

w explore new market for diversification of the export destinations;

w regularly liaison with the government, ILO, SAARC secretariat and other relatedagencies in establishing improved working methods;

w further upgrade the manufacturing facilities and re-strategize and right size thestructure for meeting the new challenges;

w reactivate the SAARC- Japan Fund for establishment of social infrastructure, suchas hostel/ residential facilities for workers employed predominantly in EPZ;

w establish a SAARC backed capital market funded by World Bank/IMF/ADB forfinancing business activities, upgradation of technology and infrastructure, andproviding grants and soft lending for compliance of international standards;



w take initiatives for establishing among the SAARC countries a comprehensivedata bank for sharing of information regarding new technologies, markets, bestpractices and trade/investment opportunities;

w take steps for improving product quality and value addition through enhancementof job quality; and

w improve industrial relations through regular social dialogue and improve theresponsiveness of the industry to labour standards and trade ethics.

The employers recognized the important role of the workers’ organizations in thesocial dialogue, particularly from the standpoint of fostering the work culture and attitudefor improvement in the product quality and value addition. It was believed that harmoniousindustrial relations environment across the industry would contribute to furthering the jobquality and productivity. The employers recommended that the governments need to:

w take appropriate macro economic measures for creating enabling and conduciveenvironment;

w take steps to considerably improve the infrastructure and logistic support requiredfor the industry to be able to improve its competitiveness, particularly in itsresponse and delivery capabilities;

w reduce procedural requirements, eliminate bottlenecks and restrictive hurdles inimporting required inputs, operating the plants and exporting the finished products;and

w collectively strive for establishing a common system of currency and bankingservice network within the SAARC region.

5.2 Workers

The workers’ representatives summarized the conclusions reached during the groupdiscussions and presented the role to be played by the workers’ organizations in readyingthe garments industry in facing the post-MFA environment of globalization. The workers’group pointed out the common challenges of job security, job quality improvement, andcompliance to labour standards and trade union rights as the competitive pressures build upon the garments industry with the removal of the quota system. In such an environment, theworkers’ group recommended to the ILO constituents in South Asia in developing a commonstrategy of:

w skills development;

w raising awareness towards the effect of globalization, specifically abolition ofquota;

w including ILO’s labour standards into the SAARC social character; and

w forming a coalition of SAARC trade unions.

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The workers’ group further recommended improving productivity and job quality by:

w enhancing mutual understanding and trust among the employers, workers andgovernments;

w agreeing not to compromise on job security, job quality and social security; and

w acknowledging the trade unions as important partners in improving productivityand competitiveness in the industry.

In order for implementing the above recommendations, the workers’ group suggestedto:

w constitute a tripartite forum at the national and regional levels; and

w educate the workers for cooperation among the tripartite constituencies.

5.3 Government

The government representative summarized the group discussion relating to the rolesof the governments in facing the situation arising out of the removal of quota on thegarments industry. The following recommendations were made by the meeting to thegovernments of the South Asian countries.

w Government needs to assume the role of a facilitator rather than acting as anarbiter.

w Government’s activities need to be service oriented.w Liberalization of rules and regulations should be carried out to simplify the

procedures.w In the conflict between the employers and the workers, the role of the government

needs to be like a referee.w In imparting education and skills training to the working population, government

needs to play an active role.w Information technology (IT) needs to be promoted in creating a database and

making available market information to the industry.w Uniform quality control has to be maintained through total quality management

(TQM), which needs to be taken up as a long-term campaign.w Political commitment should be displayed in carrying out required reform in the

policy and regulatory environment, so as to make it conducive for the furthergrowth of the garments industry.

w Social recognition should be provided to the exporters and the manufacturers byway of treating them as commercially important persons and providing awards,trophy, etc.

w Logistic and infrastructure support needs to be improved for enhancing theefficiency of the industry.



6. Closing

The workshop was concluded with a closing statement by Ms. Moti Shova Shrestha,Joint Secretary, Ministry of Labour and Transport Management. Reiterating that the garmentindustry is one of the most important industrial sectors of the sub region in providingemployment as well as generating exports earnings, she pointed out the problems relatingto low productivity, poor quality of product, cumbersome and lengthy export procedures andlack of adequate fiscal and financial measures.

Impending removal of the quota system after the end of Multi-Fibre Agreement in2004 is bound to pose a serious challenge to sustain the employment in garments industryin South Asia. To cope with the problems associated with this sector, a series of policy andadministrative reforms are needed. Improvement in productivity should be undertaken notonly through innovation and technology upgrading, enhancement of product and servicequality and expansion of market opportunities but also through deliberate efforts in enhancingjob quality and conditions of work.

The countries in the sub-region should adopt a strategy involving high level ofcompetitiveness, high value product, product diversification, product design and diversification,backward linkages, reduction in production led-time and intra-regional corporation amongthe SAARC countries as.

Attention should be directed in implementing the International Labour Standards. Thestandards on fundamental human rights and trade union rights must be implemented withoutregard to short-term gains that could be had by ignoring them. Implementation of thestandards is expected to enhance constructive labour-management relations promoting socialdialogue to resolve conflicts.

Ms. Shrestha emphasized that the difficulties arising out of the removal of the quotasystem may be a blessing in disguise since the industry may emerge with new strength andvigour to compete in the liberalized trade environment. It is expected that the discussion andconclusions of the meeting will provide the impetus towards strengthening of the resolvefor improving the productivity and competitiveness in the industry through improvement injob quality.

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APPENDIX I

Sub-regional meeting on competitiveness,productivity and job quality

in garment industry in South AsiaKathmandu, 25-26 September 2001

PROGRAMME

Tuesday, 25 September 2001

0830-0915 hrs. RegistrationClosed Door Meeting of Workers and Employers

0915-1015 hrs. OpeningWelcome Remarks by Director ILO Kathmandu(Ms. Leyla Tegmo-Reddy)

Address by SAARC Secretary General (Mr. Nihal Rodrigo)delivered by

Mr. Amit Das Gupta

Address by Employers’ Representative(Mr. Suraj Vaidya, VP FNCCI)

Address by Workers’ Representative(Mr. Jitendra Lall Karna, DECONT)

Inaugural address by the Chief Guest(Mr. Palten Gurung, Minister for Labourand Transport Management)

1015-1030 Tea Break

1030-1130 Technical Presentations I(Mr. Gopal Joshi, Senior Enterprise Speciaist, ILO-SAAT)

Managing Social Issues - Challenges and Opportunities

Overview of garments industry in South Asia

Discussion

1130-1300 Country Presentations I (to be continued after lunch)Bangladesh(Dr. Nasreen Khundker)

India(Dr. M. Vijayabasker)



1300-1400 Lunch

1400-1530 Country Presentations I (continued)Nepal(Dr. Dinesh Pant)

Panel Discussion

1530-1700 Group Discussion I

Wednesday, 26 September 2001

0900-1100 Technical Presentations III(Mr. Gopal Joshi, Senior Enterprise Specialist, ILO-SAAT)

International Perspective of garments industry

Productivity and job quality

Discussion

1100-1300 Country Presentations IIPakistan

(Mr. Nabeel Goheer on behalf of Mr. Asir Manjur, SMEDA)

Sri Lanka

(Dr. Saman Kalegama and Mr. Mr. Roshen Epaarachchi, IPS)

Panel Discussion

1300-1400 Lunch

1400-1600 Group Discussion II

1600-1700 ClosingConclusions by government, workers and employers

Closing Remarks by Joint Secretary (Ms. Moti Shova Shrestha)

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APPENDIX II

List of participantsBangladesh

1. Mr. Pradip Kumar KunduAdditional Secretary (cc)Social Sector Development (SSD)

Bangladesh Garment Manufacturer andExporters Association (BGMEA)Dhaka

2 Mr. Shahadat Hossain Chowdhury

ChairmanStanding Committee on Labour ArbitrationBangladesh Garment Manufacturer and

Exporters Association (BGMEA)Dhaka

3. Mr. Nasiruddin AhmedDeputy Secretary,

Ministry of Commerce, Dhaka

4. Mr. Mohammad Abu TaherJoint SecretaryMinistry of Labour and Employment

Government of the People’s Republic ofBangladesh,Dhaka

5. Mr. Louis A. CostaPresidentPresident BFTUC Dhaka city committee

General Secretary, BAKSOP and adviserFederation of Garment WorkersCare of: Bangladesh Free Trade UnionCongress (BFTUC),Dhaka

India

6. Mr. Atul ChaturvediJoint Secretary (Exports)

Ministry of Textiles, Government of IndiaNew Delhi

7. Mr. Anil P. Anand

(Council of Indian Employers)Joint Managing DirectorM/s Harjas Apparel Pvt. Ltd.

A-84, Okhla Industrial Area,Phase II, New Delhi - 110 020

8. Ms. Vinita KumarDirector

Ministry of Labour,Government of India, New Delhi

9. Mr. Ranjit SinghSenior Vice PresidentAll India Garments Manufacturers’Association, New Delhi

Nepal

10. Ms. Moti Shova Shrestha

Joint SecretaryMinistry of Labour & TransportManagement

11. Mr. Himal ThapaSection Officer

Ministry of Industry,Commerce & Supplies

12. Mr. Narayan BajajTreasurer

Garment Association of Nepal

13. Mr. Shishir Kumar JhaExecutive MemberNepal Trade Union Congress (NTUC)

14. Mr. Suraj Vaidya

Vice President, FNCCI

15. Mr. Megh Nath NeupaneExecutive Director, FNCCI



Pakistan

16. Mr. Muhammad Bashir Shakir

Joint SecretaryAll Pakistan Federation of Trade Unions(APFTU)Bakhtiar Labour Hall,

28, Nisbet Road, Lahore

17. Mr. Majyd AzizPresident, MHG Group of CompaniesEmployers’ Federation of Pakistan

D/49, SITE, Karachi 75700

18. Mr. Mukhtar SimonDeputy Social Security AdviserMinistry of Labour, Manpower andOverseas Pakistanis

Government of Pakistan, Islamabad

Sri Lanka

19. Mr. H. Wijeratne

Deputy CommissionerMinistry of Labour

20. Mr. Roy JayasingheAdditional Secretary

Ministry of Trade and IndustrialDevelopment

21. Mr. S. AmarasekaraGeneral ManagerPolytex Garments Ltd.

22. Mr. R.L.P. Peiris

Deputy Director GeneralEmployers’ Federation of Ceylon (EFC)

23. Mr. Anton MarcusGeneral Secretary

Free Trade Zone Workers Union (FTZWU)

Resource Persons

24. Dr. Nasreen KhundkerDhaka, Bangladesh

25. Mr. M. VijayabaskarBangalore, India

26. Dr. Dinesh Pant

Nepal Administrative Staff CollegeLalitpur, Nepal

27. Mr. Nabeel GoheerSmall and Medium Enterprise

Development Authority (SMEDA)Government of Pakistan43-T, Gulberg II, Lahore 54660

28. Dr. Saman Kalegama

Director, Institute of Policy StudiesColombo, Sri Lanka

29. Mr. Roshen EpaarachchiResearch OfficerInstitute of Policy Studies

Colombo,Sri Lanka

Observers

30. Mr. Jitendra Lal KarnaGeneral Secretary

Garment Workers’ Union(DECONT)Nepal

31. Mr. Hari Dutta JoshiGeneral Federation of Nepalese TradeUnions

(GEFONT)Nepal

garment industry

Documents