ANALYSIS

Inflation and the garments worker

by | Zahin Hasan

Bangladesh’s garment industry is constrained by competition from Chinese manufacturers, and the changes in global demand for trousers, jackets, shirts and sweaters.

The garments industry is by far Bangladesh’s largest exporter, employing roughly two million people, and accounting for 80 percent of the economy’s foreign-exchange earnings. For years, these workers have accepted a precarious existence, working long hours for less than USD 1 a day. Over the last year, however, rapid inflation in food prices has made their wages unlivable.

Beginning on 23 May, rioting workers in and around Dhaka torched several garment factories and vandalised many more. The press responded to the rioting by flaying factory owners, both local and foreign, for exploiting their workers. The owners in turn pleaded with the government to restore law and order. After deploying security personnel to protect factories from vandalism, on 31 May the government established an official commission to review minimum wages in the garment industry. The move was subsequently endorsed by representatives of both workers and factory owners in a memorandum of understanding signed 12 June.

\ Violent protests may have waned, but the fact is that the garment industry is in crisis. In an industry that is healthy, most companies make a margin high enough to pay their workers a wage that is mutually acceptable to both the workers and employers. The recent riots show that the Bangladeshi garment industry is far from healthy.

The root of the problem is inflation, which has ultimately been fuelled by high international oil prices. During fiscal year 2005 (July 2004 to June 2005), Bangladesh imported crude petroleum and POL (petroleum, oil and lubricants) worth USD 1.6 billion, a price increase of 57 percent over FY2004. Final data is not yet available for FY2006, which ended in
June, but a further increase in the oil import bill is almost certain.

In 2005, the higher cost of oil imports put pressure on foreign-exchange reserves and forced Dhaka to allow the Taka to depreciate dramatically. This immediately made imported foods more expensive. Large volumes of subsidised diesel were smuggled to India, creating a fuel shortage in border districts, and forcing the government to increase retail fuel prices. That hike subsequently increased the costs of irrigation (the pumps run mostly on diesel) and transportation (from field to market). As a result, food prices have risen significantly over the last year. Garment factory workers typically spend their entire income on food and rent, and inflation has made their situation desperate.

Worryingly, more inflation is expected. The new budget proposed by the finance minister in early June combines an unrealistically high revenue target with a high level of expenditure, and is a formula for large fiscal deficits. In the short-term, deficits fuel economic growth; with a general election just around the corner, such growth-oriented fiscal policy is hardly surprising. In the long term, however, fiscal deficits will cause even more inflation and more misery for workers.

Losing to China

The big question is whether the garment industry can afford to pay higher wages. Before jumping to any conclusions about this, we should examine the industry’s performance statistics (see table 1). These figures show a clear trend: the value of exported shirts and jackets has fallen over the last five years, even though the other categories have been growing. A business whose sales are stagnant or falling is seldom profitable. From this table, we can infer that most of the factories that have been unable to raise workers’ wages are probably those producing shirts and jackets. They are proving unable to compete globally – meaning, they are unable to compete with Chinese manufacturers.

The trends in the average unit values of exported garments (see table 2) are very disturbing. Unit value of garment exports (ie, the average export price of each garment shipped) has gone down almost across the board. This applies to woven garments (shirts, trousers and jackets) as well as knitwear (T-shirts and sweaters).

Combining the information in the two tables gives us a clear picture of what has been happening in the industry. Over the last five years, knitwear factories have had to cut their export prices to compete globally. They have accomplished this by integrating backwards: most of them now knit fabric as well as sewing it into garments. By doing this, they are successfully competing globally, and their export volumes – in value as well as quantity – are increasing.

Woven-garments factories have also had to cut their export prices, but in the case of shirts and jackets, they are still largely dependent on imports of fabric from China. This gives them two huge disadvantages over Chinese factories. First, fabrics take a month to reach Bangladeshi factories from China (by sea), whereas Chinese factories get the same materials within a few days. This means the Chinese factories can ship finished garments earlier and can command a higher price. Buyers accept that earlier delivery merits a higher price. Second, when defective fabric is received, Bangladeshi factories must simply write it off as a loss; it has already been imported and paid for by letter of credit. Chinese factories, on the other hand, would simply send defective fabric back to the textile mill and get it replaced for free.

Labour in China is more expensive than in Bangladesh, but the advantages of quicker fabric delivery and lower losses on defective fabric more than offset the disadvantage of higher labour costs. That is why buyers of shirts and jackets are getting better deals in China – and why exports of woven garments from Bangladesh are falling.

The implications are ominous for certain segments. Three months from now, when, as expected, the government wage commission recommends higher minimum wages, most knitwear and trouser exporters will probably be able to raise wages; their business appears to be fundamentally sound – or at least that is what is implied by their growing export volumes. On the other hand, shirt and jacket exporters have seen their business shrink for the last five years, and are probably in no position to increase wages. There is a high probability that raising minimum wages will force many woven-garments factories out of business.

Order of the day
Though Bangladeshi shirt and jacket exporters are unable to compete with China at present, they do have two possible survival strategies. The first would be to re-equip (and re-train) themselves as trouser factories. This is technically feasible, though it could not be accomplished overnight. However, it would mean starting from scratch, selling a new product to new customers. It would also mean abandoning the shirt and jacket customers overseas with whom they have built up trust over the years.

The second (and probably more realistic) strategy is for the garment manufacturers to open sales offices in Europe and the United States. Buyers have a feeling of comfort in dealing with suppliers whom they can contact anytime, without having to worry about varying public holidays, weekends and time zones. Garment exporters who maintain sales offices abroad command a higher price based on buyer comfort.

Maintaining even a two-person foreign sales office would require an annual budget of about USD 200,000. This is only affordable for a garment company that exports over USD 20 million every year. As such, the order of the day must be consolidation: small shirt and jacket companies must merge to combine the volumes of their factories and work together to have representation overseas. If they do not, they will probably be forced to close their businesses. At that
point, no amount of protesting will save the thousands of jobs that will be lost.