Introduction
The purpose of this paper is to examine the way in which the end of the quota system and introduction of a free-trade system for the garment industry in Bangladesh has impacted on poverty in Bangladesh. The research topic is International Trade and Development. This paper will begin by presenting the objectives of the study as well as a brief introduction into the garment industry in Bangladesh. This will be followed by literature review on the ideas that have been presented on the impact of free-trade on the garment industry in Bangladesh as well as its impact on the wages of the employees in the garment industry.
Proposed Question
The proposed question is to establish whether the introduction of free-trade policies for the garment industry in Bangladesh has led to a reduction in poverty for garment workers.
Research Question and Objectives
The research question to be tackled in this research is as to whether introduction of free-trade policies to the garment industry in Bangladesh has led to a reduction in poverty for the workers. The objectives of this study will therefore include the following:
- Providing an understanding of the free-trade policy for the garment industry in Bangladesh.
- Examine the various viewpoints about the benefits and downsides of the abolishment of the quota system
- Determining the actual impact that the free-trade policies in the garment industry have had on the overall level of poverty in the country.
Background of the study
The Garment industry in Bangladesh has been a great source of economic growth in the export market since it began in the 1970s. It initially accounted for less than 1% of total revenue from exports but come the year 2005 it accounted for close to 80% of the total revenue from exports. It is also is the lead sector in terms of employment generating. The sector directly employs more than 1.8 million people and therefore plays a major role in employment and providing income to the poor workers although the contribution of the industry to the GDP ranges at about 11% which is relatively low.
Foreign Direct Investment (FDI) in Bangladesh is mainly concentrated around the Export Processing Zones (EPZs). FDI total in the year 1999 was $81.8 million and has been on a downward trend ever since. It is estimated that almost 95% of the garment factories in Bangladesh are owned by local companies and families. The garment industry currently generates around $7 billion per year in revenue for the country and its citizens (Haider, 2007).
Bangladesh is among the countries with the lowest wages as compared to the rest of the world. Surprisingly though, their productivity also is among the lowest. This means that they do not derive any competitive advantage over other countries from low cost production. Besides this, the employment opportunities created in this sector is a major step in poverty eradication and women empowerment.
Bangladesh export of garments to the EU has gained a lot of benefits from the Generalized System of Preferences arrangements which allow duty free access. These arrangements have seen Bangladesh double production of knit and woven fabrics that are of export quality since 1998. It has also increased its value added and reduced its lead times thereby becoming more competitive price wise. Likewise, the generous quota allocation scheme by the United States also opened channels for huge benefits in the garment industry and country’s exports in general. It is estimated that 98% of the country’s exports are shipped to the EU and the US.
As a Least Developed Country (LDC), Bangladesh cannot be criticized for lack of domestic inputs considering it has the most advanced textile and clothing industry and exporters in the world. In this there was heavy reliance on importation of raw materials including countries like Hong Kong, Taiwan, Japan and Republic of Korea. China is also among the countries that imports mass volumes in raw materials and textiles despite having a large local textile industry.
Most of the FDI that is made to Bangladesh EPZs goes to the garment industry especially the Ready Made Garment (RMG) sector that contributes about 11% of total exports from Bangladesh. Most of the foreign investors were from the Republic of Korea and Hong Kong and they formed the backbone of the RMG sector in Bangladesh. They exploited the export quotas in Bangladesh for restricted markets which comprised of EU, US, Canada and Norway. They also used the abundance of cheap and available labor in Bangladesh for development of the RMG sector. Government intervention has reduced the role of FDIs with time as a result of imposition of restrictions with a view of preserving the valuable quotas for domestic producers. This has had the results of low wages, upgrading and slow diversification of exports and greater access in the quota role to retain competitiveness.
It is unfortunate that high street retailers like TopMan, Primark, Asda (George), H&M and Nike have their garments produced in Bangladesh while the workers are grossly underpaid, overworked and subjected to very poor working conditions. The workers are paid a fraction of what the retailers earn from selling one piece of garment in the shops. An article in the Guardian states that, “Some of Britain’s best known high street brands are selling cheap chic clothes at the expense of workers in Bangladesh who are paid 5p an hour despite pledges to protect basic labor rights.” Ramesh, R (2006) and another also states that clothes are made in Bangladesh for as less as 5p an hour.
The quota system was put in place in the year 1985 and it placed limits on the number of garments a country could export to other nations. The idea behind the quotas was prevention of a single nation being able to overrun the garment market around the world with cheaper items that would result in garment makers in other countries being forced out of business. In the past decade however, the quota system has slowly been lifted in many countries. In the year 2005, the quota system was completely abandoned and free-trade rules put in place which meant that countries could now export as many garments as they could sell on the world market, Haider, M.Z (2007).
Rahman (2004) states that, ‘In a country where few new industries have emerged over the recent past years, the garment sector provides a major opportunity for employment. The changing marketplace could not only affect the economy but social relations as well. Millions of women and girls, whose destinies are entwined with the fortunes of the country’s garment sector, may be affected by the quota changes.’
Recent research shows that the quota system has been completely abandoned and free-trade policy has been embraced. This has affected millions in terms of unemployment in Bangladesh and it also faces stiff competition from China and India who are more cost effective suppliers in the garment industry. With the quota system gone, these countries have now taken a significant share of the industry from small countries like Bangladesh.
On the contrary, abolishment of the quota system seems like a great thing for a country with an economy that generates 80% of total revenues from the garment industry. The fear among many in Bangladesh is that abolishment of the quotas will expose the country and its garment industry as not being able to compete in a competitive manner on the world market. There is also concern that it will have a negative impact on the poverty level of Bangladesh because of closing down of factories as a result of increased competition from other countries (Asia Monitor 2004: 6).
Literature Review
Effect on industry
One of the fears that exist regarding the effect of free-trade on the garment industry is competition from more cost effective producers like China. The major concern is that the Chinese garment industry is capable of producing larger volumes of products for large retailers at a cheaper price than is possible for the Bangladeshi industry. Introduction of the free-trade market principles means that companies do not have to base their purchasing decisions on quota levels but instead, if companies in a single country are able to produce the total level of goods that are desired at the lowest prices possible, then they get the contracts from large retailers. The reverse means that they are ignored by retailers. McClear, S (2005).
Recent data however suggests that some of the initial fears of garment companies in Bangladesh may have been unfounded. Statistical findings indicate that the revenue generated from the export of garments in the year 2007 totaled $9.3 billion while revenue from the same exports in 2008 rose to $10.7 billion (Bangladesh’s Garment Industry 2008). This shows an increase in total revenues of $1.4 billion in just one year under the free-trade system hence it may therefore be helping the country and the millions of workers in the industry.
However, with those increasing numbers in revenue, there are calls for the government of Bangladesh and its business sector to embrace diversity and seek opportunities outside the garment industry. The point of concern lies on the fact that while current revenues may be on the rise, having an economy based on a single sector will most likely present problems in future. Any large-scale downturn in garment sales would result in devastation for Bangladesh and its people (USA to sign Free Trade Agreement with Bangladesh 2005).
Poverty and Working Conditions
Even though the recent statistics show an increase in total revenue generated by the garment industry in Bangladesh, it does not necessarily mean that there will be a reduction in poverty levels of the garment workers or even better working conditions. Many of the country’s garment workers are women in Bangladesh. According to Delahanty (1998), women may work in unsafe conditions that earn wages that can barely allow for the support of an entire family.
Furthermore, an increase in total revenue does not mean that it reflects in all factories in the country or benefit in the same way as some may be experiencing loses while some are growing. Free-trade policies not only mean that countries are now competing against each other but also individual companies and industries within the same country. This results to the smaller companies being swallowed up or being forced to shut down or lay off workers as they cannot compete with large companies. The result is millions of people, especially women, being unable to find jobs in the garment industry to support their families Buerk, R (2005).
There is also the issue of the actual wages that are paid to employees that work in the garment industry in Bangladesh. As most of the companies are bent on becoming more competitive in their pricing of finished garments, they have reduced the wages paid to workers as well as the amount per finished product that is paid to other workers that perform more specialized work on the products before shipping to buyers around the world market. The result is that while more work is available to go around, each of the workers in the industry is actually making less money than under the export-quota system Tahmina, Q. A (2006).
Furthermore, increased revenues does not always equate to improved conditions for workers. This is supported by the fact that some factories have been accused of cheating workers out of wages by failure to keep accurate and fair records of time worked thereby denying the workers the rightful share of money earned.
This is an even larger problem when it comes to overtime as workers in some factories may work for more than 100 hours of overtime but only receive compensation for a fraction of that. While all this occurs, the workers are penalized for being late or absent from work. The end result is that families are not able to improve their economic situations because they do not receive any additional pay or other benefits for work performed Tahmina, Q.A (2006).
The normal working day for garment workers in the country can range from 13 to 17 hours (Tahmina 2006; Delahanty 1998). It is also not uncommon for children to be working as part-time employees in garment factories so as to make additional money for their families. For many years, child labor was common in garment industries until 1995 when the Bangladesh Garment Exports’ Association agreed to end child labor in garment factories. There is however an estimated 6 million child workers employed in the industry (Bangladesh: Working Conditions 2008).
Numerous studies have been conducted on the incidence of poverty and they have used data provided by the Household Income and Expenditure surveys (HIES) that were conducted by the Bangladesh Bureau of statistics especially in the period between 1970 and 1980. World Bank (1998), states that in the year 1983/84, 58.50% of the population in Bangladesh fell under the poor category as compared to 40% in 2005. The pre-reform period is 1983-1992 and 1992-2005 is the post-reform period. This is also depicted in table 1. It also states that the rate of poverty reduction is higher in the post-reform period as compared to the pre-reform period.
It is on a final note necessary to understand the definition of child labour as stated in the agreement implemented by the Bangladesh Garment Exports’ Association. The agreement defines child labour as children under the age of 14 (Nielsen, 2005). What this means is that anyone over the age of 14 in Bangladesh can work part-time or full-time in the garment factories.
What the literature review demonstrates is that there is a battle that exists among the garment workers in Bangladesh. While the end of the export-quota system has led to increases in overall revenues for the industry, garment workers have not necessarily received additional pay for their efforts. On the contrary, workers have seen their wages stagnate or even lowered due to the closing down of smaller factories and the desire to reduce production costs. All of this seems to suggest that the poverty level of the workers has not reduced in line with the increase in business in the garment industry in Bangladesh.
Table 1: Trends in Poverty and Income Distribution in Rural and Urban Areas, 1991/92 to 2005
Methodology
Research Design
The research is designed as an analysis of primary and secondary data regarding economic conditions in Bangladesh. The purpose of the study is to determine whether changes in the garment industry stemming from the end of the export-quota system have had an impact on poverty levels of the garment industry workers in the country. Secondary data is widely available for use from a variety of respected international sources and is therefore possible to provide insight into the poverty situation of workers in the country.
The design is to examine the relationship between revenues for the garment industry, total export revenues, poverty levels and per capita income in the country over a period for the last five to ten years. Examining data over the past several years allows for a time-series analysis to occur to determine if any significant changes occurred with the achievement of free-trade policies. The data that are examined in the years when the export-quota system will also help to establish a baseline to understand the poverty conditions and per capita income in the country under the rules that had been in place for nearly two decades. Then, the data from the years since 2005 will allow for the use of statistical methods to determine if significant increases or decreases have occurred in the level of poverty and per capita income levels.
Data Collection
Primary data was taken in form of interviews. Interviews were conducted on business people as well as garment industry workers in Bangladesh regarding their perceptions. The interviews were conducted via phone and E-mail. Interviews done by other people on the same issue are also regarded as primary data.
The data collection process for this research will consist of retrieving data on various income indicators such as export figures before and after abolishment of the quota system for Bangladesh over the past five to ten years. Relevance to the research will determine the sources that will be used for secondary sources. The data will be gathered from the databases of international organizations in order to ensure that it is as accurate and reliable as possible.
The assumption is that such organizations as the International Monetary Fund or the World Bank provide highly accurate data for the economic indicators that needed for this analysis. In addition, it is assumed that these types of international organizations will have these economic variables available for download for the time period that is desired for the research. As for the primary data which will be collected through interviews with representatives of the garment industry.
Ethical issues
One of the benefits of conducting a study that largely involves economic data is that human subjects do not have to be surveyed or agree to participate in the research. This means that there are no ethical issues to be examined and considered in relation to the collection of data or the protection of personal information. However, with this being said, there is still an ethical issue that should not be overlooked. The issue is how the data are to be interpreted.
While the literature seems to indicate that the workers’ poverty levels have not changed or have become worse with the introduction of free-trade in the garment industry, the data may indicate a very different outcome. Regardless of the personal stories from interviews and working conditions that are faced by garment workers in the country, this research is to determine if significant changes in poverty have occurred because of the end of the export-quota system. Feelings and concerns about working conditions in the country’s garment industry cannot influence the results of any statistical tests, especially if those statistical tests indicate that poverty has indeed been reduced in relation to free-trade in the garment industry in Bangladesh.
Potential Problems
Based on the use of secondary data, the problem that may occur is the inability to collect accurate data regarding the revenues in the garment industry in Bangladesh, as well as other economic indicators, for the past several years. It may be necessary to consult several sources in order to find all of the data that are necessary to complete the investigation. However, because of the availability of information with the use of the Internet and other databases, this should be a problem that is relatively easy to overcome. The other problem that might arise is different sources of data providing different economic figures for the variables that will be analyzed.
If this should occur, then additional research will be conducted as a means of determining what several sources of data indicate are the correct figures and which information may be incorrect. Again, with the availability of information from a variety of sources, ensuring that reliable economic statistics are used for the research should not present a major problem or hinder being able to complete this analysis with anything less than accurate and reliable information and results.
Findings
Quota System Removal
The quota system is one that was of great benefit to the Bangladesh Garment industry over the last three decades. The quota limits protected the domestic companies in the industry from unfair competition from countries that were more competitive in terms of economies of scale. The system allowed Bangladesh to enjoy a relatively secure market access in major importing countries such as US, the EU and Canada (Rahman 2004).
The abolishment of the quotas meant that the countries that were unable to meet the requirements of the quota would not benefit while those that were using the system before it was phased out stood the chance to increase their exports. Bangladesh therefore had a very good chance of increasing output after the restrictions had been scrapped off. Table 2 shows the steps that were involved in the removal of the quota system.
This also spells increased competition on developing countries because they will not have the protection they enjoyed under quota constraints. This presents a new challenge as most of these countries have not faced such intense competition before therefore it is much more difficult to remain in the market let alone enter the world market as the export quantities are minimal.
Removal of quotas after the year 2004 in the export performance provided evidence of competitiveness. The export products from Bangladesh were not spared as they decreased by 46% in the US market and 41% in the EU market which was a bit surprising considering it had access to both quota free and duty free policies in the EU market.
Table 2: Steps taken in removal of quotas.
Free-Trade
Free trade refers to the right for countries to trade freely with other countries internationally in the same manner that they trade nationally. This requires abolishment of all barriers to trade such as tariffs and quotas.
Argument for free-trade
The argument for free-trade can be categorized into two namely social and economic impacts. One of its economic advantages is that it encourages specialization as companies, regions or countries can focus on what they can produce efficiently. It also sharpens the competition as well as presenting the consumer with increased choices and better product as there is pressure on the producers to improve on products and services so as to be competitive. Finally, free trade put pressure on the pricing strategies used by the producers giving rise to competitive prices and there is also the transfer of technology and business globally.
The free trade sympathizers believe that the benefits derived from the specialization that ensues internationally has the potential of uplifting the poor in the long run. However, in the short run, there is need to put in place policies that aid redistribution as the poor do not have the capacity to quickly adjust with the changing market.
In the social perspective, free-trade is an advocate for peace. This is because countries that are closely involved in trade activities in the event of conflicts resolve to deal the matter diplomatically so as to protect their business ties. The economic theory of competitive advantage shows that free trade results in efficient allocation of scarce resources, lower prices and higher output all of which result to increased employment for the citizens. This theory is however based in the long run where the assumption is that there is full mobility of factors of production.
Argument against free trade
This is an argument that is embraced by the protectionists who believe that for protection of the local market trade barriers are important. They believe that it threatens employment as it exposes developing countries to low wages so as to offer competitive rates and be competitive with developed countries which have more cost efficient methods of production. Another argument that exists against free trade is that developed countries and multi-nationals are in a better position to exploit the trade relations with developing countries therefore the trade is not fair.
Bangladesh Textile Industry Market
The US Market
Bangladesh readymade garment exports faced very many quota restrictions in the US market as compared to its competitors. An estimated 30 categories of products from Bangladesh had been slapped with restrictions however compared with 90 categories of products from China, it was pretty low. At a product level, competitors of Bangladesh garment industry were expected to face intensive competition in the US market following the full abolishment of quotas. In the 1990s, there was a sharp increase in garment exports followed by a decline in 2002 and 2003 and then a gradual increase after 2004 as evident in table 1.
The EU Market
Bangladesh did not have any quotas for the EU market. That meant that when with abolishment of quotas their exports could increase while those to the EU remained stagnant or increased. The export earnings from the EU increased from 1.2 billion Euros in 1996 to 3.7 billion in 2005. Table 3 shows a gradual increase in exports to the EU through to 2004 after which there was a decrease reaching a low of 49.77% in 2006-2007.
Table 3: Region wise share of Readymade Exports.
Governance
According to Mahmud 2001 and Ahmed 2003, the economic reforms in Bangladesh have not been matched with corresponding progress in building of institutions of political and economic governance. The prevailing political culture and stability determines the degree of resistance to change. The governance related problems in Bangladesh include corruption in procurement procedures, tax evasion, and high rate of default on bank loans, unreliable justice system as well as poor law and order enforcement.
Such a governance structure as that in Bangladesh encourages corruption as the administrators have large discretionary powers to exercise but with very little or no accountability which fuels misappropriation since they do not face consequences for their actions.
Impact of Trade Liberalization on Poverty
The impact of free trade on poverty can be analyzed in two dimensions which are the long run and short run. In the short run, there is an increase in poverty as the poor are not well set to adjust with the changes in the marketplace. It is only possible to have positive results with policies in place that regulate the allocation of resources as the rich are the major beneficiaries as they are able to adapt to the changes. This is because trade liberalization leads to a fall in wages as the companies strive to be more competitive and therefore lower the labor income which faces a lot of competition as Bangladesh s highly populated.
In the long run however, there is a poverty reducing effect that is evident across all borders in the economy. tariff removal stimulates the export market and therefore attract labor from other low productive sectors as compared to the garment industry which in turn leads to an increase in nominal income which translates all over the sectors in a bid to retain their labor and not lose it to the more better paying sectors of the industry.
Analysis
Analysis of the questions
The type of questions recommended for the interviews were unstructured and open ended questions. These questions were designed to get as much information from the interviewees as possible. The questions forwarded were as follows:
- What changes did they expect before removal of quotas?
- What is the effect of the removal of quotas on poverty level?
- What have they done to adapt with the regime change?
- What does the future hold for them?
It was however very difficult to get a hold of garment workers to interview as most of the companies have shifts running as late as 8pm and the management was reluctant to allow the workers to be interviewed. Extracts from previous studies therefore proved useful and relevance was determined through how recent the studies were conducted.
Responses from professions in the Textile industry
According to Mr. Bhatia, most of the retailers and buyers prefer locating their businesses in Bangladesh because of the low labor wages. But everyone is worried about what will happen after the year 2008, with China back in the market with no quota restrictions. With the quota away, the Europe business has definitely increased while for the US sector the business is growing due the quotas in China. In 2006, there were riots in the EPZ factories due the wages and lots of factories were closed. Also the social Compliance play an important role, where many factories are moving towards the social compliance in BD at this point of time and they are shifting from Dhaka city to the outskirts of the capital.
Analysis of the Responses
What changes did they expect before removal of quotas?
Most of the respondents of this question claimed that they were not apprehensive of quota removal and they did not expect any devastating changes. They justified these claims with the fact that they had loyal buyers, were in constant communication with them and knew the merits of their products. They were however unaware that China was slowly entrenching into their established segments more competitively.
What is the effect of the removal of quotas on poverty level?
In response to this question, the respondents were optimistic that removal of quotas would have poverty reducing effects. This was due to the expected increase in exports of readymade garments, increased demand from existing and established buyers, market growth and increased prices which they believed would transfer to better wages and working conditions.
What have they done to adapt with the regime change?
They undertook various policies which included lobbying the government to reduce inadequacies in infrastructure, conducting fairs and exhibitions to market Bangladesh Garments training the labor market to increase efficiency and thereby competitiveness and finally laying down the code of conduct for the work environment of the workers and placing a ban on child labor in the garment industry.
What does the future hold for them?
The respondents were highly optimistic in future that the poverty levels in the country would be greatly reduced. This is in line with an increase in wages, better working and living conditions as well as better redistribution of resources across the poor and the rich.
The Research Question
The research question is whether the introduction of free-trade has led to the reduction in poverty level of the garment workers. The study reveals that the workers in Bangladesh garment industry are subjected to very poor working and living conditions. There is also no law on the national minimum wage requirement in the country which leads to oppression of workers through overworking and meager payments. Most of the factories do not therefore follow the labor laws and International Labor Organization conventions even after liberalization.
It is also revealed that workers are forced to work for 14 to 16 hours a day which is one of the reasons for being unable to contact the garment workers for an interview. This is contradicting the labor law which allows for a maximum of 10 hours a day. Finally, neglecting workers in terms of social amenities is observed. They are not offered transport facilities, accommodation, maternity, medical aid and day care centers for their children.
Conclusion
Most of the literature review on the effect of free-trade policies on poverty levels of Bangladesh workers pointed out that it would have devastating effects. The textile industry in Bangladesh is rapidly developing but it is disadvantaged to lack competitive advantage over its competitors like China and India. This is despite having low labor costs which so as to maintain competitiveness is likely to remain so for a long time.
There are some recommendations that can be made for the Bangladesh Garment industry. First is the issue of corruption. This is one of the factors that prevent achievement of rapid poverty reduction and higher economic growth. This can be achieved by empowerment of the Anti-corruption commission. There is also need for skilled and trained workers so as to increase productivity and maintain competitiveness without having to further oppress the workers in the industry through low wages while it already faces labor agitation from trade unions and the international community demanding higher wages.
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