Success stories: Poverty, the enabler

When Bangladesh emerged as an independent nation, it was essentially a poor agrarian economy that could hardly feed itself adequately. Since then agriculture has undergone remarkable transformation and cereal production has increased by three and half times. In the early years seeds were sown for three other activities that have now matured with worldwide reach and renown. These are: microcredit, export of labour power and export-oriented readymade garments (RMG) industry.
Microcredit has contributed greatly in empowering poor rural women by creating livelihood opportunities for them with very small loans. The experiment has proven so attractive that it is now being replicated in a large number of countries of the world including the USA. The success of microcredit has brought great fame for the country: both the pioneer of the concept and the pioneer institution have been honoured with Nobel Peace Prize.
Bangladesh took tentative steps to export its surplus labour power, mainly to Mid-East countries in the second half of 1970s. Only 6087 workers went overseas for work on a temporary basis in 1976 and total remittances amounted to only $23.7 million. Since then millions of workers left our shores, not only for the Mid-East but also several other countries such as Malaysia and Korea, and sent home billions of dollars. Remittances from expatriate workers became the largest net foreign exchange earning source of the country bringing in more than US$14 billion last year. It is believed that 6-7 million workers are now employed overseas. No sector of the economy other than agriculture employs nearly as many people.
Toward the end of the 1970s another important event took place in our national economy. A foreign firm had set up an RMG industry for exporting apparels from Bangladesh. This sparked off a veritable revolution in the industrial sector with thousands of RMG industries sprouting up. Export of RMG products multiplied by leaps and bounds. Last year it fetched $24.5 billion in export revenue, which was more than four-fifths of the total export revenue of the country.
It is interesting to note that the origin and success of all three activities lay in the abject poverty of the ordinary people. Microcredit was custom designed for the poorest of poor of the country, i.e. the poor women in rural areas. It couldn't have taken off if the clientele were more prosperous. The poverty of the ordinary people obliged them to accept work that earned very low returns or wages. The Mid-East jobs that attracted millions of people from Bangladesh were mostly low-wage employment. Indeed, Bangladeshi workers are among the lowest paid overseas workers in the Mid-East. The lack of more rewarding employment opportunities at home forced these migrant workers to accept such low paid and sometimes hazardous jobs.
The RMG industry also flourished on the back of very low paid poor workers, mostly women. A very large pool of young women, desperate for income earning opportunities to escape from the hopelessness of their situation at home, provided the workforce needed to run the juggernaut of the RMG industry at minimal wages. This allowed the RMG entrepreneurs to earn large profits, much of which they ploughed back to the RMG and associated industries. Consequently the industry grew rapidly to become the second largest apparel export industry of the world behind China within three and half decades.
In a labour abundant poor economy, such as Bangladesh, the wage rate tends to be low. Any industry or activity that uses a great deal of labour relative to other factors of production will have a comparative advantage over a similar industry in another country where labour is scarce; its unit cost of production will be lower
than the unit cost in the other country. The RMG industry of Bangladesh utilises this comparative advantage intensively. It employs a large workforce of mostly female workers, reportedly numbering to 4.0 million. These workers are paid a very low wage. The table below shows the minimum wage rates of some countries that are competitors of Bangladesh RMG industry in the world market. Even with a very large increase in the minimum wage rate in recent months, the RMG minimum wage rate is still the lowest minimum wage among the countries reported in the table. Nepal and Cambodia had much higher wage rates despite the fact that both are poorer than Bangladesh on a per capita income basis.

The principal reason for the low wage is the excess supply of RMG workers relative to demand. There are many more unskilled workers willing to accept the RMG jobs at the current low wage rate than what the industry wants to employ. Thus the entrepreneurs have no incentives to raise the minimum wage rate. Worker agitation, if sufficiently strong, could perhaps raise the wage rate, but this will be achieved at the expense of lower employment. Economic planners will be well-aware of this distributional problem associated with non-market outcomes. The real solution lies in the quick expansion of employment opportunities in all sectors and investment in human capital.
The low wage cuts both ways: it is instrumental in imparting a comparative advantage to the domestic RMG industry, it is also responsible for the low productivity of the workers. The poor young women that work in the industry are ill-educated and have few marketable skills. With the pittance they earn they can hardly provide a balanced diet for themselves. Consequently most of them suffer from malnutrition. These in turn imply that their productivity is low. The industry that has profited so enormously from the labour of these workers has not taken significant measures to raise their productivity. Indeed, the jobs for highly skilled labour that these poor workers have created have been given to foreign workers, many of whom are reportedly working in the country illegally.
Individual entrepreneurs are unwilling to invest in their workers for fear that they will be poached by other entrepreneurs who have not invested anything. This property rights related problem could be solved by collective efforts of either BGMEA or the government. Unfortunately none has taken significant measures to address the problem. The educational and training institutes of the country have also failed to make provisions for training a skilled workforce so that labour productivity could be enhanced.
In the absence of adequate individual or collective efforts to increase productivity, RMG wage may be expected to be determined by the overall trends in the labour market. A propitious thing to have occurred is a rapid increase in the agricultural real wage during the last few years after several decades of stagnation suggesting an exhaustion of surplus labour (mainly male labour) in the economy. We may, therefore, expect a steady increase in the wage rates of labour throughout the economy. However, since RMG workers are mostly female, their wage will be influenced by the rate at which labour participation rate of the female population increases as well as their reservation wage. If the behaviour of the new entrants is similar to the existing workforce, it is likely that female wage will rise at a slower rate until the surplus female labour is also exhausted. There may be a widening of the male-female wage disparity in the medium term.
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The writer is Professor and Chairman of Department of Economics, Dhaka University. He can be reached at: [email protected]