More than a year has passed since the Rana Plaza building collapsed in Dhaka, killing more than 1,100 Ready Made Garment (RMG) workers. Compliance with labour, health and safety standards in the Bangladeshi garment industry has since been under serious scrutiny internationally. The European Union, the United States, the global brands and the government of Bangladesh laid out detailed plans to improve compliance and avoid such accidents in the future. What is the current status of reforms? What has been the post-Rana Plaza export performance? What are the prospects?
RMG exports from Bangladesh post-Rana Plaza demonstrated strong growth. Notwithstanding the image crisis and prolonged nationwide economic disruption due to political turmoil in the first half of fiscal year (FY)14, RMG exports stood at an all-time high of US$24.5 billion, with a growth rate of 13.8 per cent. Both knitwear and woven garments had robust growth of 15 per cent and 12.7 per cent respectively. The European Union (EU) and the United States (US) remain the primary destinations for garments, accounting respectively for 60.2 per cent and 21 per cent share of the total garment exports. The share of garment exports to markets other than the European Union, the United States, and Canada grew from 13.8 per cent in FY13 to 14.7 per cent in FY14.
Garment exports growth in FY14 was volume driven. Knitwear export volume increased 19.1 per cent, reflecting a 14.7 per cent volume growth in exports to EU. Export volume growth to the United States was a sluggish 2.8 per cent (Table 1).Bangladesh's market share in the US remained virtually stagnant at 5.8 per cent in FY14, compared to 5.7 per cent in FY13, while the market share of competitors like Vietnam grew to 10.6 per cent in FY14, compared to 9.5 per cent in FY13. Early signs for the current fiscal year are not encouraging. Garment exports to the US declined by 7.8 per cent in the first quarter of FY15 relative to the same period last year.
Bangladesh still has an edge over other competitors. It is considered the leading apparel sourcing alternative to China. Despite the ongoing debate on worker safety issues, buyers plan to increase their sourcing share from Bangladesh through 2020. Bangladesh still enjoys the critical advantage of low wages due to labour abundance. Despite a 77 per cent wage increase last year, Bangladesh still has the lowest wage rate among its competitors, except for Myanmar (Table2).
Though some buyers are considering Myanmar as an option for sourcing apparel in the future, it is at an early stage of development, requiring a lot of investment. Several other industries are also interested in locating there, which might lead to Myanmar focusing on industries other than apparel. At the same time, Vietnam's wage rate is set to increase by US$14-18 per month in 2015, and labour unrest in Cambodia could raise the minimum wage there to US$160 per month, reinforcing Bangladesh's low wage advantage.
Bangladesh has also demonstrated the capacity to handle large volumes of orders on time. With India not favoured by the western retailers as a replacement for Bangladesh because of cumbersome regulations and the uncertain political situation with Pakistan, Bangladesh remains the best possible alternative to China for the buyers at present.
This cannot be taken for granted. Bangladesh's popularity as a top destination for apparel sourcing in the next five years dropped after Rana Plaza incident. Increased attention to compliance has led buyers to reconsider their supplier base in Bangladesh and search for new alternatives. These might result in fewer orders placed in Bangladesh in the medium to long term. Top brands have already stopped placing orders in factories with shared buildings, which constitute 30 per cent of total factories, while some have slashed previously placed orders. Around 450 factories had to close their operations, mainly due to lack of export orders and compliance.
With increasing apparel sourcing costs due to compliance issues, and consumers unlikely to be willing to pay higher prices, companies are looking to reduce costs by sourcing from untapped low cost suppliers in Southeast Asia and Sub-Saharan Africa. Europe's H&M recently placed a small order in Ethiopia to check their capacity, and PVH Corp of the United States, which was already sourcing from Lesotho and Kenya, is making a 20-year commitment to Africa with a long-term plan of developing vertical operations and socially responsible factories. Moreover, if India's attempt to get into a free trade agreement with the European Union (EU) materialises, they may emerge as a serious competitor in the garment market.
That said, Bangladesh may be able to survive these challenges. To date, there has been significant progress in improving labour safety and working conditions through the joint efforts of the government, buyers and factory owners. The government fulfilled many of the commitments made under the EU Sustainability Compact and US Action Plan. Buyers are paying more attention to ensure safety compliance and improve supply chain transparency.
The Accord, consisting of over 180 global brands (mostly European), and the Alliance, an initiative of 27 North American retailers, have inspected a total of 1,681 factories, out of which 28 have been shut down, 16 partially closed, and19 allowed to continue operation after taking remedial actions (Table 3). The Accord brands and factory owners have agreed to more than 250 corrective action plans; factories that are participating fully in inspection and remediation are rewarded with long-term sourcing commitments from these brands. At the same time, 50 per cent of the factories inspected by the Alliance are in remediation process: the Alliance trained 1.1 million workers on basic fire safety, and it provided compensation to 1000 workers displaced due to factory closures. The inspection reports are being published gradually in the respective authority's websites to ensure transparency. Retailers like Target Australia, Kmart, and Woolworths have disclosed the identity of the suppliers in Bangladesh in order to maintain transparency in sourcing.
Despite this progress, more needs to be done to cross the finish line, both to restore Bangladesh's access to the Generalised System of Preferences (GSP) in the US and to maintain favoured access to the EU market. In particular, Bangladesh needs to make further improvements in the areas delineated below:
REGULATORY CAPACITY FOR THE ENFORCEMENT OF LABOR RIGHTS: Progress in implementing amendments made in the Labor Law is slow, and the monitoring mechanism weak. The new Export Processing Zone (EPZ) law also needs to be enforced. Measures such as the preparation of necessary rules and regulations need to be completed and appropriate monitoring mechanisms need to be put in place to ensure proper enforcement. The recruitment of factory inspectors needs to be accelerated: only 88 inspectors were recruited as of August 2014, against the target of recruiting 200 inspectors by December 2013, and currently there are only 135 inspectors while recruitment of another 195 has been cleared by the Public Service Commission recently, against 575 positions, indicating an urgent need to increase capacity, as agreed in the EU Sustainability Compact and the US Action Plan.
The publicly accessible database of garment manufacturers launched by the Department for Inspection of Factories and Establishments should also be more transparent by including more detailed information on the factories, results of inspection conducted and follow-up measures taken. Safety inspections of the factory buildings outside the purview of the buyers must be completed and reports should be made publicly available.
COORDINATION ON FACTORY INSPECTION BETWEEN BUYERS: Lack of coordination among the global brands is leading to inspection fatigue for some manufacturers and creating confusion. For example, among the 250 factories that Wal-Mart blacklisted for issues of safety compliance, some are producing for other reputable North American and European brands who deem them to be compliant. There are about 300 factories subject to review by both the Accord and the Alliance.
Recently, the Accord declined to accept the Alliance auditors' inspections of these common factories and gave only qualified consideration to inspection reports by firms working for the Alliance. This resulted in a duplication of efforts, additional burdens for factory owners and questions about the integrity of the overall inspection process. Furthermore, there is a growing concern about the financing of the remedial works: in some cases buyers are allegedly not keeping their promises.
COOPERATION AMONG GARMENT MANUFACTURERS: The implementation of the new minimum wage scale was slower than expected, as 40 per cent of factories did not implement the new rate at the agreed time of December 2013, according to a Bangladesh Garments Manufacturers & Exporters Association (BGMEA) survey. There have been sporadic incidences of labour unrest for unpaid wages due to factory closures, though most of the issues were eventually resolved. There are also reports of increased denial of trade union registration and anti-trade union discrimination.
Moreover, the BGMEA is yet to develop the worker database that it committed to developing. The association and its members should be more proactive in maintaining the credibility of their commitments to transform garment manufacturing into a socially compliant industry.
(The writers are respectively Lead Economist and Research Analyst, The World Bank, Dhaka.)