In our last Newsletter TextileFuture has offered a portrait of Mostafiz Uddin, a visionary entrepreneur of Bangladesh. Today we add some practical Tips for manufacturing in Bangladesh, based upon the research of the Hong Kong Trade Development Council, for which we are very greatful. In addition, we publish excerpts of the IMF International Monetary Fund of a recent mission to Bangladesh with the latest economic developments, facts and figures for the country’s further development.
Bangladesh’s population of 161 million is the eighth biggest in the world. Its large pool of low-cost labour makes it attractive as a production base for labour-intensive industries, like garments and textiles. Since the 1980s, the country has been a popular location for sourcing ready-made garments (RMGs) for global brands such as H&M, GAP and Adidas. At present, Bangladesh is home to more than 4,600 garment factories, most of which are concentrated in the country’s two largest cities – the capital Dhaka and the port city Chattogram. The RMG sector is responsible for about 80% of Bangladesh’s total exports, making the country the world’s second largest exporter of RMG products after China.
Along with the low cost of its labour, Bangladesh possesses several other attributes which make it a sensible choice for Hong Kong manufacturers looking to diversify their production base. Firstly, because it is one of the least-developed countries (LDCs), exports from Bangladesh enjoy duty-free access under the Generalised System of Preferences (GSP) schemes offered by many developed markets, including the EU, Japan and Canada. Secondly, having been under British colonial rule until 1947, Bangladesh has a legal system based on common law. Thirdly, it allows free movement of capital (or full repatriation of profit) and 100% foreign ownership of companies, which provides assurance for foreign investors. Having said that, there are underlying issues regarding labour, logistics and locations which manufacturers should not overlook.
Low-Cost Labour with High Turnover and Skill Shortage
Labour costs are rising in many economies across Asia, and Bangladesh is no exception. The minimum wage is set on an industry-by-industry basis, with different grade structures in each industry. For example, the RMG sector has a seven-grade wage structure in which the minimum wage of the lowest grade (entry-level workers) was lifted to Tk 8,000 (USD 95) in December 2018 – a 51 % increase on the level the last time it was adjusted in 2013. Despite this substantial rise in the minimum wage, the country’s average wage level remains competitive in the region. The average monthly salary for manufacturing workers in Bangladesh is USD 109, far lower than that in Myanmar (USD 162) and Cambodia (USD 201), according to the Japan External Trade Organisation.
Despite having a large labour force of more than 68 million and relatively low wages, Bangladesh suffers from a skills shortage which restricts the productivity of its workforce. Although the overall education level has improved significantly in recent years, about 40% of the current workforce has received either no education or only primary level education. To boost the productivity of their workforce, it is essential for manufacturers to invest in training programmes for both newly hired and existing workers. Such a move not only increases workers’ ability to adopt new production techniques, it can also help to retain experienced workers amid the high turnover rate among garment factories in Bangladesh. As well as wage levels and training opportunities, other factors which could significantly improve labour turnover rates include improving the regularity and punctuality of wage payments and making workplaces safer.
Underdeveloped Infrastructure leads to Higher Logistics Costs
Bangladesh is located at the estuary of the Ganges Delta with floodplains occupying 80% of the land area. Given the low-lying topography and underdeveloped infrastructure, Bangladesh is susceptible to flooding which results in delays to imports and exports. With insufficient drainage facilities, some parts of the country are prone to flooding and waterlogging during the monsoon season (July to October), which can disrupt logistics and production activities. When selecting a production site in the country, manufacturers should avoid areas with inland rivers or those near the sea, which are the most vulnerable to flooding.
Chattogram Port is the largest seaport in Bangladesh, handling about 90% of the country’s total trade. Despite continuous enhancement over the past few years, the port is still affected by congestion as the volume of cargo it handles has risen rapidly. In 2018, the port’s throughput reached a record high of 2.9 million TEUs, up from 2.7 million TEUs in 2017 and far in excess of its designed annual capacity of 1.7 million TEUs. It takes about 15 days for a shipment of raw materials to reach Chattogram from mainland China, and another seven days to get it through customs, according to a Hong Kong manufacturer in Bangladesh.
Inefficient border clearance is another main challenge faced by manufacturers and exporters. The lengthy process of inspection, licensing and paying for the relevant charges often leads to delays and higher costs being associated with shipping and border compliance.
Export Processing Zones
To boost industrialisation and facilitate foreign investment, the Bangladeshi government has established eight export-processing zones (EPZs) since 1983. Because they have better infrastructure and business support services, many foreign manufacturers prefer to locate their businesses in EPZs. EPZs also provide one-stop administration services, including customs clearance and the issue of import and export permits, which can be handled at the EPZ without having to deal separately with several different government agencies. Since they were launched, the EPZs have attracted about 500 enterprises, including many from South Korea, mainland China, Japan, Hong Kong and Taiwan. EPZs not only host many garment and textile product manufacturers, they are also home to companies producing footwear and leather goods, electronics, metal and plastic products. Together, they are responsible for about 20 % of the country’s total exports.
Since the eight EPZs were established at different times, they are currently at differing stages of development. The first two EPZs, Chattogram and Dhaka, are the two largest and have better-developed public facilities. As of 2018, the two were home to about 280 companies, accounting for more than 60 % of the total investment in EPZs and almost 80 % of their total exports. In a bid to decentralise industrial development, the government gives companies located in Uttara, Ishwardi and Mongla (the less developed EPZs furthest away from Chattogram and Dhaka) a longer tax holiday. Although land rent and wage levels are lower in these less developed EPZs, investors should bear in mind the lack of skilled or experienced workers, as well as the extra lead time required for transporting goods to and from the Chattogram port.
To reduce reliance on RMG exports and promote industrial diversification, the Bangladeshi government has approved more than 80 special economic zones (SEZs) across the country since 2015. The SEZs offer more generous incentives than the EPZs, to try to attract both export-oriented manufacturers and companies targeting the local market. With its abundant low-cost labour and rich agricultural resources, Bangladesh is well positioned to become a production base for labour-intensive industries other than RMG, such as leather goods and food processing.
Looking ahead, the future of industrial diversification in Bangladesh will largely depend on the pace of infrastructure development. This is not currently keeping up with the industrial demand for accessible land and utilities. The Bangladeshi government has been receiving development assistance and loans from Japan, India, China and multinational institutions. To provide more reliable and flexible source of funding, the government is setting up its first sovereign wealth fund, which is aimed at providing further support for infrastructure projects. However, it is likely to take years before any significant progress is made. Until then, in the short to medium term, foreign manufacturers will need to adapt to the country’s challenging operational environment.
 Previously called Chittagong. The English name of Chittagong was officially changed to Chattogram on September 10, 2018.
 Following developments highlighted in UN reports about human rights violations in Myanmar, a monitoring mission from the EU visited the country in October 2018. The findings of this mission will feed into the analysis on whether to remove trade preferences via a temporary EBA withdrawal procedure. The EU is now analysing the information gathered during the mission, before considering its next steps. For details, see “Myanmar: EU mission assesses human rights and labour rights situation”
In January 2019, the US Senate introduced the Cambodia Trade Act of 2019, which would require the US government to review preferential trade privileges given to Cambodia under the GSP. For details, see “Cambodia Trade Act of 2019“
 The pay scale of garment workers consists of 7 grades, based on the type of work and seniority.
 Salary excluding benefits for a regular general worker with 3 years of work experience, not including contract-based and probationary workers, as of October 2018. Based on the results of JETRO’s 2018 Survey on Business Conditions of Japanese Companies in Asia and Oceania.
 Hossain, G., & Mahmood, M. (2018). Employee Turnover in the Garment Industry in Bangladesh: An Organization-level Perspective. South Asian Journal of Human Resources Management, 5(2), 129–149.
Selected items from the IMF Report on Bangladesh 2019
EXPORT DIVERSIFICATION IN BANGLADESH1
Rapid growth in the Ready-Made Garment (RMG) sector in Bangladesh has significantly strengthened growth and stability of the economy. However, exports have become increasingly concentrated in the RMG sector. Though the country has recorded important welfare gains as this concentration occurred, a broader and more complex export base would help start integration into global supply chains, increase potential growth, and improve the sustainability of growth.
- The State of Diversification in Bangladesh vis-à-vis Neighbours
1. This paper uses concepts of diversity and complexity to assess export diversification of Bangladesh. These concepts are defined as follows; Diversity is measured as an IMF index of the concentration of goods that an economy produces (IMF 2014).2
Complexity relies on two concepts: ubiquity and diversity (Hausmann et al., 2014). 3 A product is ubiquitous if many economies have a revealed comparative advantage4 in producing it. An economy is diverse if it has a revealed comparative advantage in the production of many products.5 The complexity of an economy is negatively related to the ubiquity of the products, and positively related to diversity.
2. As Bangladesh has made important strides in improving GDP per capita, the economy has become more concentrated and less complex compared to peers. After the RMG sector started to grow, the country shifted from an agrarian to a more manufacturing based economy. This led to higher diversity and complexity until the 1980s. However, this trend has reversed and the economy’s complexity and diversity have been declining since the 1990s. In contrast, ASEAN economies have consistently seen an increase in the diversity of the products they produce and an increase in the complexity of their economies, coupled with higher GDP per capita growth.
3. Significant success in the RMG industry has led to a less diverse and complex structure of the economy.6 RMG and other products where Bangladesh has a revealed comparative advantage have become less complex over time. This has occurred since more economies have a comparative advantage in these products and they become more ubiquitous. The higher share of RMG sector in exports, which is currently more than 80 percent, also implies that Bangladesh has a revealed comparative advantage in few products, making it less diverse.
4. Bangladesh has had limited integration into global supply chains to date compared with neighbouring economies (Figure 1). Over time, Bangladesh’s top export partners have changed little as the primary export sector has remained RMG. Vietnam is an example in Asia that is more integrated into global value chains. Vietnam’s diversified away from exporting fish in the 1980s and moved to garments and footware in the 2000s. By 2016 the export share of more complex products such as machinery and telecomunication equipment had increased markedly along with the share of exports to China, indicating increased integration into global value chains. Bangladesh does not yet have comparative advantage in the production of intermediate goods used in the prodution of more complex final goods. Diversifying into these more complex intermediate goods would be a good step in increasing the complexity of exports and would help integrate Bangladesh into global supply chains and help the external sector become more robust to shifts in global demand.
6 IMF, 2019 includes a broader discussion of diversification in South Asia.
B. Looking Forward
5. Bangladesh stands to gain from its large and growing manufacturing base. Empirical evidence suggests that increased growth in manufacturing is associated with increases in the complexity of the economy (Table 1). However, the garment sector has few linkages to other more complex manufacturing industries (Figure 2). Though it might take some time that automation significantly impacts the RMG sector in Bangladesh, factories are working to increase productivity which will eventually free resources for other uses and necessitate expansion into different sectors. Implementing policies that would allow the private sector to enter new industries will be important.
This includes (i) improving the business environment to ease the entry of new firms and
(ii) investment in human capital to prepare the labour force.
6. Further improvments to the business environment would facilitate diversification. Over the past year, reforms spearheaded by the Bangladesh Investment Development Authority have, to some extent, improved the business environment. Under the One Stop Service virtual platform, procedures such as company registration, online payment of registration fees, obtention of a tax identification number, and online VAT registration have all been merged into a single process. The time required to obtain a construction permit, electricity, and the average time to complete administrative requirements for export and import permissions have all been cut. Some progress has also been made regarding the protection of minority investors. Significant reform priorities are still in the pipeline that should enhance the effectiveness of the judicial system. In addition, a monitoring system should be in place to ensure that commercial disputes are settled within 500 calendar days.
7. Developing complex industries will also require investment in human capital. Data suggest significant scope for improving the employment of youth and especially females (Figure 3). The unemployment rate for youth in Bangladesh was 12.8 percent in 2017, around three times that for the total population. 26 percent of youth were not employed, or being educated, or trained in 2018. This is especially prounounced for females, 44 percent in 2018 compared with around 9 percent for males. Female unemployment, 6.8 percent in 2017, is twice male unemployment. Female labor force participation has increased only moderately between 2006 and 2017 and remains among the lowest in peer countries. New sectors will not develop without a labor force that can support production. Bangladesh has the people to fill the jobs, and they will need targetted training and education for the sectors that are going to develop. Ultimately, enhanced human capital and a more diverse export sector will lead to higher welfare.
Hausmann, Ricardo, César A. Hidalgo, Sebastián Bustos, Michele Coscia, Sarah Chung, Juan Jimenez, Alexander Simoes, and Muhammed A. Yıldırım, 2014. “The Atlas of Economic Complexity: Mapping Paths to Prosperity,” MIT Press Books.
International Monetary Fund, 2014. “Sustaining Long-Run Growth and Macroeconomic Stability in Low-Income Countries—The Role of Structural Transformation and Diversification.” IMF Policy Paper.
2019, “Is South Asia Ready for Take Off? A Sustainable and Inclusive Growth Agenda” Background Paper in Regional Economic Outlook: Asia Pacific.
35. Diversification into more complex products will be necessary to increase potential growth. The set of products for which Bangladesh has a revealed comparative advantage have relatively low complexity. Production of more complex exports could increase Bangladesh’s integration into global value chains and make exports more robust to changes in global demand patterns. This could be facilitated by reforms to improve the business climate and boost human capital, as these would help enhance productivity in more complex sectors. Import tariffs which protect domestic markets and make intermediate inputs more expensive also distort incentives to diversify (see Selected Issues).
36. Improving the business environment continues to be important to facilitate investment outside the RMG industry despite some progress over the past year. Under the One Stop Service virtual platform, procedures such as company registration, online payment of registration fees, obtention of a tax identification number, and online VAT registration have all been merged into a single process. Reform priorities are still in the pipeline to enhance the judicial system. By December 2019, a monitoring system should ensure that commercial disputes are settled within 500 calendar days, and commercial courts are to be created at district levels.
The TextileFuture Newsletter of last week
Mostafiz Uddin – the Portrait of the denim and textile expert, promoter and entrepreneur of Bangladesh https://textile-future.com/?p=28958
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