Focus on the Cambodian garment and footwear sector and its labour standards
Based upon the latest ILO International Labour Organisation Bulletin on Cambodia’s garment and footwear sector, TextileFuture presents you a focus on these sectors with the latest available data and other findings. Since this country is in the limelight for textile production, we find it worthwhile to let you have this insight
The basics facts and figures of the two sectors
Cambodia’s garment and footwear sector has continued to perform solidly in 2014 and the first quarter of 2015. Exports continued to grow along with employment and workers’ average wages, a new ILO International Labour Organisation analysis finds
Cambodia’s garment and footwear sector has continued to perform solidly, with exports growing by 10.6 per cent over 2014. Exports grew by 9.3 per cent in 2014, and expanded by 10.6 per cent in the first quarter of 2015 (compared to the first quarter of 2014).
The number of factories operating and the number of workers employed in the industry have also increased, according to the International Labour Organisation’s (ILO) new Bulletin on Cambodia’s garment and footwear sector . The sector now employs some 600,000 workers, whose wages have risen significantly over the past two years. This figure pertains to the export sector only and does not include factories working as sub-contractors.
What’s more, the growth of the industry compares favourably against predictions that the new monthly minimum wage levels of USD100 (effective 1 February 2014) and USD128 (as of 1 January 2015) would lead to a contraction of export volumes with direct implications on employment levels.
The current minimum wage of USD 128 is still lower than that of some competitors in the region such as China (USD 297), the Philippines (USD 269) and Thailand (USD 237), but above the level in Sri Lanka (USD 66), Bangladesh (USD 71) and Pakistan (USD 99 to USD 119).
Meanwhile, the number of factories operating in the sector has reached a record number of 640 in March 2015, compared to 528 factories in late 2013.
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The content of the ILO Bulletin
This is good news for Cambodia’s garment and footwear industry, but also for the workers in these sectors. The new ILO Bulletin reviews the performance and progress of Cambodia’s garment and footwear sector using up-to-date official data, with a focus on exports, wages, employment, factory openings and closures and newly approved foreign direct investment.
The ILO Bulletin reviews the performance and progress of Cambodia’s garment and footwear sector, with a focus on exports, wages, employment, factory openings and closures and new foreign direct investment. The garment and footwear sector is Cambodia’s largest manufacturing industry and the country’s largest foreign exchange earner. The Bulletin documents the evolution of the sector – supported by the most up-to-date official data, mainly from the Ministry of Commerce, the Ministry of Labour and Vocational Training, the Cambodia Investment Board, the National Institute of Statistics and the National Bank of Cambodia.
The development of Cambodian garment and footwear exports
The garment and textiles industry has thrived for about two decades now. Growth skyrocketed when the normalised trade relationship went into effect with the United States and the European Union in 1996 and 1997. From humble beginnings with exports worth USD 27 million in 1995, the sector grew 200-fold and by 2014 provided more than half a million jobs for young Cambodians (86 percent of whom are young women).
The industry continued to perform well in 2014, with the highest export revenues in the country’s history. Total exports of garment and footwear grew by 9.3 % to USD 5.8 billion, up from USD 5.3 billion the year before.
The footwear sector was particularly dynamic, recording a growth of exports of 23.9 % to $438 million, while exports of the garment sector grew by a still substantial 8.3 % to USD 5.4 billion. The combined garment and footwear sector’s export growth in 2014 is a slight slowdown from the 11.8 % growth recorded in 2013. The growth of the industry compares favourably against predictions that the new minimum wage level of USD 100 (effective February 1, 2014) and USD 128 (as of January 1, 2015) would lead to a collapse of export volumes. The growth figures are even more impressive when the size of the industry is taken into account: when an industry becomes larger and more mature, it is increasingly difficult to maintain the rapid proportionate growth rates it recorded at its inception.
Data for the first quarter of 2015 indicate a solid start to the year. Exports of the combined garment and footwear sector totalled USD 1.5 billion in the first three months of 2015, up by 10.6 % compared to the same period in 2014 (garment exports increased by 7.9 % and footwear exports rose by 48.2 %.
The continued growth of garment and footwear exports is driven mainly by strong demand from European buyers. In 2014, exports of garments and footwear to the European Union rose by more than 27 %, while exports to the United States declined by 6 %. As a result, the European Union became the single biggest destination for Cambodia’s garment and footwear exports and now accounts for 42 % of the total export volume. This puts it ahead of the United States, traditionally the main market, with a share of 34 percent. The remaining 24 % of Cambodian garment and footwear exports in 2014 was shipped to the rest of the world, mainly Canada and Japan.
The garment and footwear sector remains a key industry for Cambodia. Its exports in 2014 accounted for nearly 79 % of the country’s total merchandise exports (down from 90 % in 2008). The garment and footwear sector also spends a large proportion of export earnings on intermediary, inputs (such as fabric). According to the National Bank of Cambodia, retained imports of the garment sector amounted to USD 2597 million in 20144 (compared to garment and footwear exports worth USD 5817 million in the same year.
Export diversification is sought for
The country has begun to diversify its exports, with milled rice, paddy rice, rubber, fish, wood and wooden products accounting for much of the remainder. Cambodia’s Industrial Development Policy 2015—2025 aims to broaden the industrial base further by diversifying and increasing exports of manufactured products other than garments. The policy’s goal is to reduce the export share of clothing and footwear to 50 per cent of total merchandise exports by 2025. In this context, the policy emphasises the need to improve and modernize the country’s industrial structure. This would lessen the country’s exposure to shocks, such as the slump in garment and footwear exports in 2009-10, when demand in Cambodia’s main export markets fell due to the global economic and financial crisis. The decline of exports drove Cambodia’s economic growth down to just 0.1 percent in 2009.
New investments
According to the Cambodian Investment Board (CIB), 78 new garment and footwear investment projects were approved in 2014. These projects were largely funded by investors from mainland China and Hong Kong (China), with a small proportion from Taiwan and other economies. Most were in the form of sole ownership (85 per cent), and only about 15 per cent in the form of joint ventures. The new garment and footwear projects approved in 2014 accounted for USD 452 million of fixed assets (a slight decline compared to 2013). Investments in the garment and footwear sector represented 28 % of the total newly approved investment in fixed asset value in 2014.
During the first quarter of 2015, a further 19 new garment and footwear projects were approved. The total value of the new projects was USD 72 million, just half as much as in the same period of the previous year – but more than twice as much as in the final quarter of 2014. Figures often fluctuate from one quarter to another, so annual figures are more informative about investment trends.
The factory’s situation
While the data on newly approved projects show that foreign investors continue to channel funds into new garment and footwear factories in Cambodia, the opening of new factories needs to be seen alongside closures. In a market economy where factories compete against each other, this is a normal process: one can expect that the least profitable companies will go out of business, as more efficient competitors and new entrants win market share.
According to figures from the Ministry of Commerce, the number of effectively operating garment and footwear factories grew from 528 at the end of 2013 to 626 factories at the end of 2014. This is a net growth of 98 factories. It reflects the closure of 11 factories and the opening of some 109 factories (either re-opened under new ownership or in the form of new projects).
The positive trend continued in the first quarter of 2015, with factory openings again exceeding the number of factory closures by 14 (all of them garment factories). This brought the number of effectively operating garment and footwear factories to 640 at the end of the first quarter of 2015, the highest number on record at the Ministry of Commerce. The vast majority were garment factories (572), with the remainder being footwear factories (68).
The employment situation in the two sectors
According to the Cambodia Labour Force Survey 2012 (CLFS 2012), the garment sector accounted for some 8.5 % of all employment in the country. Employment in the sector has since grown further, with an average of roughly 60,000 new jobs added per year since 2012. According to figures recorded by the Ministry of Commerce, employment in the garment and footwear industries grew throughout 2014. Each quarter exceeded the previous, growing from 539,000 workers (Q1 2014) to 561,400 (Q2 2014), 576,200 (Q3 2014), and finally to 581,200 (Q4 2014). On average, some 564,500 workers were employed in the garment and footwear sector in 2014, compared to 497,200 workers in 2013 (an increase of 67,300 net new jobs). Some 85 per cent of the additional jobs were created in the garment sector, with the remaining 15 per cent generated by footwear sector.
Employment in the garment and footwear sector continued to grow in the first quarter of 2015. The Ministry of Commerce counted some 580,900 workers in January, a number that further increased to 604,100 in February and a new record high of 605,100 in March 2015. On average, 596,700 people were employed by the sector in the first quarter of 2015, an increase of 57,600 compared to the same period in 2014.
Wages and prices
The growing garment industry over the past decade led hundreds of thousands of young Cambodians to migrate to the city seeking paid employment. The recent development of other industries, along with workers’ migration to seek job opportunities outside Cambodia, caused the industry to report labour shortages. Some factories offered extra financial incentives to some workers to attract labour, while base wages of entry-level workers have often remained aligned with the statutory minimum wage. Cambodia’s minimum wage for the garment and footwear industry was first introduced in 1997, when it was set at USD 40 per month. The rate has since increased to USD 128 per month, effective from January 1, 2015. The minimum wage is guaranteed for every full time worker in the garment and footwear industry; part-time workers need to be paid in proportion to their working time. In addition to the minimum wage, there are also other allowances to which workers are entitled, including USD 10 attendance bonus, USD 7 transportation allowance and seniority allowances of up to USD 11 (from the 11th year of tenure onwards).
The data suggest that minimum wages have had an impact on average wages. As shown in the graph (Figure 4) below, average wages stagnated from mid-2000 to mid-2006, a period where the nominal minimum wage remained unchanged at USD 45 per month. According to calculations based on data from the Ministry of Commerce, the average monthly wage of garment workers during this time was only USD 66.
With the subsequent minimum wage increases, the average wage started to rise. When the minimum wage was increased in late 2006 to USD 50, the average monthly wage earned by the garment workers rose to USD 73 (December 2006) and then rose to USD 146 in December 2014, when the minimum wage stood at USD 100.
However, the increase in nominal wages overstates the real gains experienced by workers, after taking inflation into account. To adjust for this effect, figure 5 presents both the nominal and the real average wage. The real wage factors in the country’s consumer price inflation rate, and hence presents the trend in workers’ purchasing power. The base year used is December 2010.
The most important aspect of figure 5 is the trend over time and not the level of the wage expressed in constant US dollars, which would change if a different base year was used.
The main finding is that workers’ purchasing power declined between 2003 and 2009. The real average monthly earning of garment workers fell from USD 111 in 2003 to USD 88 by 2009 (in constant December 2010 prices). This was driven by two factors. Firstly, there was slow growth and in some years stagnation in nominal wages due to a lack of minimum wage adjustments. Secondly, inflation was relatively high at an average of 7.1 % per annum over the 2003 to 2009 period. As a result, workers could buy less with the wages they received.
Cambodian workers benefited from lower consumer price inflation in recent years, which averaged 3.8 % per annum from 2010 to 2014. Combined with strong growth in nominal wages, this led to a recovery of the past losses in purchasing power and some gains. The real average monthly wage of garment workers rose from USD 93 in 2010 to USD 126 in 2014 (in the same constant December 2010 prices). This corresponds to an average growth of 8 % per year (over the 2010-2014 period) after adjusting for inflation.
Data from the Ministry of Commerce for the first quarter of 2015 show that garment workers have seen further gains from the new minimum wage of USD 128 that came into effect on 1 January 2015. Average nominal wages of garment workers (which include overtime and bonuses) rose from USD 139 in the first quarter of 2014 to $165 in Q1 2015 – an increase of about 18.9 per cent. The latest figures for March 2015 indicate an average wage of USD 171, including overtime and bonuses. However, while skilled office workers and line supervisors can expect to make more than this, other workers will receive less than the average.
When the effect of inflation is taken into account by converting these figures into December 2010 prices, real average wages of garment workers grew from USD 123 in Q1 2014 to USD 144 in Q1 2015 (a growth of 17.7 % in real terms). Adjusted for purchasing power, the latest data for March 2015 indicate a real average wage of USD 149 in December 2010 prices.
Labour Advisory Committee process
Under an agreement reached by the government, union and employer representatives in June 2014, the Labour Advisory Committee (LAC) will review the minimum wage annually.
The process is scheduled to commence in the third quarter of each year, with a new Prakas (ministerial order) coming into effect on January 1 the following year. The Ministry of Labour and Vocational Training (MoLVT) serves as the Secretariat of the LAC and is facilitating and coordinating the process, which involves tripartite dialogue, comprising of representatives from unions, employers and the government itself. The ILO continues to provide technical support to the LAC Secretariat in its discussion about the minimum wage for the garment and footwear sector.
The review of the minimum wage is based on Article 107 of Cambodia’s Labour Law that gives the Labour Advisory Committee the power to make recommendation on the minimum wage level to the Ministry in charge of Labour. The law stipulates that the “[minimum] wage is adjusted from time to time in accordance with the evolution of economic conditions and the cost of living”. The law also states that the adjustment should consider, to the extent possible, social criteria such as the needs of workers and their families and the evolution of cost of living (or inflation), and at the same time, also pay attention to economic factors. Consultations held in early 2014 highlighted the need to investigate the impact of the minimum wage on enterprises, on the competitiveness of Cambodia, and on the labour market and employment.
The available data presented in this bulletin show that strong employment growth continued throughout 2014 and into 2015 (see figure 6). However, Cambodia’s minimum wage started from an exceptionally low base before the series of increases in the past five years. The current level of USD 128 is still significantly lower than that of competitors such as China, the Philippines and Thailand (all of which have higher aggregate labour productivity than Cambodia). By contrast, Cambodia’s minimum wage is now above the level in Sri Lanka (USD 66), Bangladesh (USD 71) and Pakistan (USD 99 to USD 119).
Conclusions
The garment and footwear sector has continued to perform solidly in 2014 and the first quarter of 2015. Exports continued to grow along with employment and workers’ average wages. There has been a net increase in the number of factories in operation. The sector’s exports to the European Union continue to grow as a share of total exports. The increased minimum wage of USD 128, effective since January 2015, has coincided with continued solid employment growth.
It is hoped that these data and this analysis will contribute to a more informed discussion about the current state and future prospects of Cambodia’s garment and shoe industry, including the discussions on wage levels and minimum wage fixing.
The role of ILO
ILO does not take, or recommend, a specific minimum wage level for Cambodia. Instead, it is responding to a request to provide technical advice and assistance to the government and social partners on the basis of sound analytical work anchored to national data.
As social conflict in the past has shown, the minimum wage is a topic of critical importance in Cambodia.
ILO welcomes the fact that the government, unions, and employers all committed in June 2014 to a minimum wage review process that is evidence-based and takes into account a range of social and economic factors. In this context, the ILO hopes that the Bulletin will become a vital resource helping key actors in the world of work to have an informed discussion and constructive negotiation on minimum wages and other social and economic issues in the garment and footwear industry.
Workers and their unions are understandably concerned to ensure that wages are adequate to meet the needs of workers and their families. On the other hand, it is also vital that the impact of the minimum wage on enterprises, productivity, competitiveness and employment is taken into account.
ILO intends to release new issues of the Bulletin on a roughly quarterly schedule. It has been published within the framework of the ‘Labour standards in global supply chains’ programme financed by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), Germany’s leading provider of international cooperation. The programme was initiated as part of a renewed partnership between the German Federal Ministry for Economic Cooperation and Development (BMZ) and ILO.