Ready Made Garments Industry in Bangladesh
Subject: Textile | Topics:

Introduction

The Ready-Made Garments (RMG) industry occupies a unique position in the Bangladesh economy. It is the largest exporting industry in Bangladesh, which experienced phenomenal growth during the last 25 years. By taking advantage of an insulated market under the provision of Multi Fiber Agreement (MFA) of GATT, it attained a high profile in terms of foreign exchange earnings, exports, industrialization and contribution to GDP within a short span of time. The industry plays a key role in employment generation and in the provision of income to the poor. Nearly four million workers are directly and more than twelve million inhabitants are indirectly associated with the industry. Over the past twenty five years, the number of manufacturing units has grown from 180 to over 4000. The sector has also played a significant role in the socio-economic development of the country.

The quota came to an end at 2004 but it continued to show robust performance, competitive strength and, of no less importance, social commitment. RMG’s contribution to Bangladesh economy is well-known, well-appreciated and well-respected.

Garments industry is the largest export industry for our country and it contributes 75% of total export. The industry is associated with its strength, weakness, threat and opportunity.

In this study an attempt has been made to describe the overall scenario of Bangladesh Ready Made Garments industry . At this time of free economy everyone may be interested to know about the largest export industry and the mechanism of doing business here. The present study has been undertaken with consideration of this fact.

Origin of the study

This report has been prepared by Md. Abdul Matin, Roll no. 13, 30TH  batch : session:2011/2012 as a requirement of the internship program. The report was based upon “ The Ready – made garments industry IN Bangladesh . The  supervisor is Md. Ruhul Amin, Faculty of Business Studies, . Honorable institute supervisor duly approved the topic- “Bangladesh Ready Made Garments industry  which was decided for doing the report. The report will definitely increase the knowledge of other students to know the garments industry of Bangladesh.

 Objectives of the study

The general objective of preparing this report is to fulfill the requirement of Internship Program as well as completion the EMBA Program through gaining the practical job experience and view the application of theoretical knowledge in the real life. The report focuses on two parts. They are:

   Primary Objective

The broad project objective is to analyze the garments sector of Bangladesh and relate the knowledge with the practical experience.

  Secondary Objective

In order to reach the broad objective, some specific objectives are identified.

1. To know the different aspect of garments industry, its prospects and problems.

2. To show some statistics of RMG industry.

3. To analyze the statistical data related to RMG industry.

Methodology

Sources of data

Data regarding the completion of this report are collected from both primary and secondary sources.

  • Primary source:
  1. Direct conversation with the respective officers of the company.
  • Secondary sources: 
  1. i.                    Various data source like Bangladesh bank, Export Promotion Bureau
  2. ii.                 Internet Browsing
  3. iii.               Annual report of the company
  4. iv.                Different published material. Such as books and articles.

Analysis of data

For analyzing the collected data different statistical tools are used.

  • For showing the trend of export, contribution of export to GDP, time series analysis has been used.
  • For determining the significance of RMG export and Total export simple regression analysis has been used.
  • For measuring the significance of profit and commission simple regression analysis has been used.

Limitation

1. In many cases, up to date information was not published.

2. In some cases, access to relevant papers and documents were strictly prohibited.

3. In some other cases, access was denied to procedural matters conducted directly by the top management in the operations of foreign exchange business.

Bangladesh Ready Made Garments Industry.Bangladesh RMG INDUSTRY

 

Agriculture has been the backbone of economy and chief source of income for the people of Bangladesh, the country made of villages. Government wants to decrease poverty by getting highest productivity from agriculture and achieve self-reliance in food production. Apart from agriculture, the country is much concerned about the growth of export division. Bangladesh have accelerated and changed her exports substantially from time to time. After Bangladesh came into being, jute and tea were the most export-oriented industries. But with the continual perils of flood, failing jute fiber prices and a considerable decline in world demand, the role of the jute sector to the country’s economy has deteriorated (Spin anger, 1986). After that, focus has been shifted to the function of production sector, especially in garment industry.

 An overview of Bangladesh garments industry

The RMG industry is the only multi-billion-dollar manufacturing and export industry in Bangladesh. Whereas the industry contributed only 0.001 per cent to the country’s total export earnings in 1976, its share increased to about 75 per cent of those earnings in 2005. Bangladesh exported garments worth the equivalent of $6.9 billion in 2005, which was about 2.5 per cent of the global total value ($276 billion) of garment exports. The country’s RMG industry grew by more than 15 per cent per annum on average during the last 15 years. The foreign exchange earnings and employment generation of the RMG sector have been increasing at double-digit rates from year to year. Some important issues related to the RMG industry of Bangladesh are noted in table

Table1.  Important issues related to the Bangladesh ready-made garment industry

YearIssue
1970-1980Early period of growth
1982-1985Boom days
1985Imposition of quota restriction
1990         Knitwear sector developed significantly
1993Child labor issue and its solution
2003Withdrawal of Canadian quota restriction
2005Phase out of quota restriction                  
2006Riots and strike by garments labor
2007-2008Stable growth

Source: Compiled by the databases of the Bangladesh Garment Manufacturers and Exporters Association, and the Export Promotion Bureau, Bangladesh.

Currently, there are more than 4,000 RMG firms in Bangladesh. More than 95 per cent of those firms are locally owned with the exception of a few foreign firms located in export processing zones (Gonzales, 2002). The RMG firms are located mainly in three main cities: the capital city Dhaka, the port city Chittagong and the industrial city Narayangonj. Bangladesh RMG firms vary in size. Based on Bangladesh Garment Manufacturers and Exporters Association (BGMEA) data, Mainuddin (2000) found that in 1997 more than 75 per cent of the firms employed a maximum of 400 employees each. Garment companies in Bangladesh form formal or informal groups. The grouping helps to share manufacturing activities, to diversify risks; horizontal as well as vertical coordination can be easily found in such group activities. Ready-made garments manufactured in Bangladesh are divided mainly into two broad categories: woven and knit products. Shirts, T-shirts and trousers are the main woven products and undergarments, socks, stockings, T-shirts, sweaters and other casual and soft garments are the main knit products. Woven garment products still dominate the garment export earnings of the country. The share of knit garment products has been increasing since the early 1990s; such products currently account for more than 40 per cent of the country’s total RMG export earnings (BGMEA website). Although various types of garments are manufactured in the country, only a few categories, such as shirts, T-shirts, trousers, jackets and sweaters, constitute the major production-share (BGMEA website; and Nath, 2001). Economies of scale for large-scale production and export-quota holdings in the corresponding categories are the principal reasons for such a narrow product concentration.

Foreign buyers are concerned about the different compliance of law. So, they were bothered about the child labor issue of Bangladesh. But later on this problem is salute and now garments are restricted to employ child labor. In 2005 the quota facilities for Bangladesh was withdrawn. Everybody thought it would be a great shock for garments industry. But in reality Bangladesh has faced this challenge with great courage. The fact is that the export of garments product has increased after the withdrawn of this quota. And the last two years were really good time for garment industry. The political situation was stable under the country’s state of emergency and this boost the growth of the industry.

 Size of the garments industry of Bangladesh

The garment industry is by far the country’s most important manufacturer, earning around $5 billion annually and accounting for about two thirds of all exports. Bangladesh has about 4,000 garment factories with up to 10 million livelihoods dependent on it directly or indirectly. In 2006 it provided jobs for 2.2 million people, accounted for 10.5% of the country’s GDP, and contributed 40% of its manufacturing output. Exports have been growing at an impressive rate in recent years. In 2006/07 alone, they increased by 18.2% to reach US$9.6 billion, a record level for the fifth consecutive year. The contribution to GDP increases at 13.25% in 2007. About 80 per cent of garment workers are women. The Ready Made Garments sector has more potential than any other sector to contribute to the reduction of poverty. Despite the phenomenal success of the RMG sector the working conditions and wages of workers in the industry are cause for serious concern. Bangladesh’s current position as a leading garments exporting nation needs to be consolidated. The economy-wide reverberations of failure would be disastrous. We believe it is in everybody’s interest to sustain this industry – an industry which changed the lives of so many people, particularly women, in Bangladesh.

Bangladesh garments industry is now matured

Bangladesh garments industry has just woke up one morning and find itself a matured one. If we follow DS reports on the conditions of Bangladesh garments industries, we may as well have the same idea. Until 1/11/2007, as per some media, everything was a mess. Now a day, while teachers and lawyers can’t hold elections, garments industries owners hold elections under direct government patronage. And DS must also speak well of the team mates. Maturation of a large industry like RMG sector in Bangladesh is not an overnight phenomenon. The industry was trying to be in a matured stage from last ten years but the unrest political situation was the main obstacle. Bangladesh’s garments exports have experienced a boom from the last two years because of a stable business climate under the country’s state of emergency.  The nation’s exports of knitted and woven items rose by nearly 17 percent to a record 10.7 billion dollars in the financial year to June 2008. And now the industry is at the matured stage.

 Strength, Weakness, Opportunity & Threat of Garments sector of Bangladesh at a glance

Strength

  • Considerable Qualified/keen to learn workforce available at low labor charges.
  • Energy at low price
  • Easily accessible infrastructure like sea road, railroad, river and air communication.
  • Accessibility of fundamental infrastructure, which is about 3 decade old, mainly established by the Korean, Taiwanese and Hong Kong Chinese industrialists.
  • FDI is legally permitted.
  • Moderately open Economy, particularly in the Export Promotion Zones.
  • GSP under EBA (Everything But Arms) for Least Developed Country applicable (Duty free to EU).
  • Improved GSP advantages under Regional Cumulative.
  • Looking forward to Duty Free Excess to US, talks are on, and appear to be on hopeful track.
  • Investment assured under Foreign Private Investment (Promotion and Protection) Act, 1980 which secures all foreign investments in Bangladesh.
  • Overseas Private Investment Corporation, USA insurance and finance agendas operable
  • Bangladesh is a member of Multilateral Investment Guarantee Agency (MIGA) under which protection and safety measures are available.
  • Adjudication service of the International Centre for the Settlement of Investment Dispute (ICSID) offered.
  • Excellent Tele-communications network of E-mail, Internet, Fax, ISD, NWD & Cellular services.
  • Weakness of currency against dollar and the condition will persist to help exporters
  • Bank interest@ 7% for financing exports
  • Convenience of duty free custom bonded w/house
  • Readiness of new units to enhance systems and create infrastructure accordant with product growth and fast reactions to circumstances

Weakness

  • Lack of marketing tactics
  • Absence of easily on-hand middle management
  • A small number of manufacturing methods
  • Low acquiescence: there is an international pressure group to compel the local producers and the government to implement social acquiescence. The US GSP may be cancelled and purchasing from US & EU may decrease significantly
  • M/c advancement is necessary. The machinery required to assess add on a garment or increase competence are missing in most industries.
  • Lack of training organizations for industrial workers, supervisors and managers.
  • Autocratic approach of nearly all the investors
  • Fewer process units for textiles and garments
  • Sluggish backward or forward blending procedure
  • Incompetent ports, entry/exit complicated and loading/unloading takes much time
  • Speed money culture
  • Time-consuming custom clearance
  • Unreliable dependability regarding Delivery/QA/Product knowledge
  • Communication gap created by incomplete knowledge of English
  • Subject to natural calamities

Opportunity

  • EU is willing to establish industry in a big way as an option to china particularly for knits, including sweaters
  • Bangladesh is included in the Least Developed Countries with which US is committed to enhance export trade
  • Sweaters are very economical even with china and is the prospect for Bangladesh
  • If skilled technicians are available to instruct, prearranged garment is an option because labor and energy cost are inexpensive.
  • Foundation garments for Ladies for the FDI promise is significant because both, the technicians and highly developed machinery are essential for better competence and output
  • Japan to be observed, as conventionally they purchase handloom textiles, home furniture and garments. This section can be encouraged and expanded with continued progress in quality.

Threat

  • The exporters have to prepare themselves to harvest the advantages offered by the opportunities.

 Major market of RMG industry

The RMG industry of Bangladesh fully depends on the export. The major importer of RMG products are USA and Europe. But there is other country that has a contribution to the total RMG export. The following table contains the list of major importer of our RMG products.

                 Table-2 : Major market of RMG industry                        

                                                                                                        (Tk in million)

CountryAmount
Belgium3812.00
Canada6218.00
France13078.00
Germany27008.00
India80.00
Italy22.00
Netherlands10619.00
Sweden3058.00
Turkey2681.00
U.K.15411.00
U.S.A43368.00

                         Source: Bangladesh bank ( April to June)

 Contribution to Economy

The Ready-Made Garments (RMG) industry contributes to the Bangladesh economy in a distinctive manner. The last 20 years witnessed unparalleled growth in this sector, which is also the largest exporting industry in Bangladesh. It has attained a high profile in terms of foreign exchange earnings, exports, industrialization and contribution to GDP within a short span of time. The industry plays a significant role in terms of employment generation. Nearly two million workers are directly and more than ten million inhabitants are indirectly associated with the industry. In addition to its economic contribution, the expansion of RMG industry has caused noticeable changes by bringing more than 1.12 million women into the workforce. Hence it is quite apparent that this sector has played a massive role in the economic development of the country.

RMG’s contribution in terms of GDP is highly remarkable; it has reached 13 percent of GDP which was only about 3 percent in 1991. It also plays a pivotal role to promote the development of other key sectors of the economy like banking, insurance, shipping, hotel, tourism, road transportation, railway container services, etc.

One of the key advantages of the RMG industry is its cheap labor force, which provides a competitive edge over its competitors. The sector has created employment opportunities for about two million people of which 70 percent are women who mostly come from rural areas. Thus the industry helps in the country’s social development, women empowerment and poverty alleviation. Currently RMG earns the lion’s share of foreign exchange earnings.

 Macro contribution

  • Contribution to Export and GDP

The Bangladesh RMG industry, with its woven and knit sub-components, is a pre-dominantly export oriented sector, with 95 per cent of the woven and 90 per cent of the knit exports being directed to foreign markets. The cumulative foreign currency earnings by the sector, since 1978, when first export was registered, is estimated at 70.56 billion US dollars. Bangladesh’s RMG export earning stood at 9.21 billion US dollars in FY2007. In 2007 this sector contributed 75.64% of the total Bangladesh export of 12.78 billion dollars in the same year. RMG export in FY2007 was equivalent to 13.25% of Bangladesh’s GDP over the corresponding year. At present the local value addition by the RMG sector is estimated to be 45%. Accordingly, local value addition by the sector in 2007 was about 4.15 billion US dollars which was equivalent to 5.96% of GDP for the same year. The value addition created by the sector itself is estimated at 25% of total RMG export earnings which amounted to about 2.30 billion dollars or equivalent to 3.32% of GDP [ Appendix Table-4].

Macro Contribution of RMG Sector RMG Earnings

Amount

(billion US$)

As Percentage of GDP

Total RMG Exports

9.21

13.25%

Local Value Retention

4.15

5.96%

Direct Value-Addition by RMG Sector

2.30

3.32%

 Employment Creation and Wage Bill

RMG sector is one of the major employers in the economy. Around three million people are employed in RMG industry and about 70 per cent of which are women. As a matter of fact in the 1990s a large part of the incremental labor force in the manufacturing sector was absorbed by the RMG sector. The RMG workers received USD 315.25 million as their wage in FY 2007. This purchasing power contributed significantly to the growth of the economy through its multiplier impact in terms of consumption expenditure and savings.

 RMG industry contribution to different sector

Growth of RMG sector has spawned a whole new set of linkage industries and facilitated expansion of many service sector activities. The RMG industry not only propelled the growth of spinning, weaving, dyeing and finishing industries, production of accessories and spare parts, but also rendered large externalities by contributing to other economic activities in such areas as banking, insurance, real estate, packaging, hotels and tourism, recycling, consumer goods utility services and transportation. RMG sector has overwhelmingly high backward linkage with textile sector providing fabrics, yarn and other ancillaries. It has important backward linkage with utilities such as electricity, gas, and machinery and spare parts supplying.

  • Banking and Insurance

Growth of the RMG sector and the related activities has contributed a lot to the robust growth of the financial sector in Bangladesh. In FY 2007 the banking sector earned about 72.77 million dollars from business with the RMG sector in the form of interest and charges and L/C charges. More than one-tenth of the commercial banks’ asset portfolio belongs to the RMG and textile sector in the country. A World Bank survey revealed that almost all firms (98%) are the clients of the commercial banks for working capital and procurement of machines and equipment (57%).

The RMG sector has also contributed to the growth of the country’s insurance sector. On average, every year the premium paid by the RMG sector to the insurance companies was about 6 million dollars. All firms have their machines and plants insured and, additionally, 87% of importers of input and 15% of the RMG exporters get their imports/exports insured.

  • Shipping and Logistics

The RMG sector has contributed to the shipping business in Bangladesh and stimulated setting up of several container yards, expansion of port facilities to handle large container carrying trains, increase of cargo handling and storage facilities. RMG manufacturers also extensively use services of Clearing & Forwarding Agents for the purpose of customs clearance of inputs and finished goods. It is estimated that port usage fees earned from the RMG sector account for more than 40% of the income of the port authority. RMG sector contributed about US$130.80 million in FY2007 to earnings of the Shipping business of the country by way of port charges, C&F Agent’s commissions, freight charges, forwarding charges etc.

  • Transport Communication

The growth and development of inland transport services to a considerable extent owe to the growth of the RMG industry. Both wheel transport service and railway service are widely used by RMG sector for activities related to manufacturing and cargo movement. The concept of covered van emerged in Bangladesh for safe transportation of the RMG products in particular. In 2007 the inland transport industry received about 55.27 million dollars as revenue from the RMG sector.

  • Contribution to Government Exchequer

The RMG sector contributes to the government exchequer both directly and indirectly. In FY 2007 the sector paid 10.13 million dollars as stamp and postage, license renewal fee etc. The sector also paid USD 4.61 million to the government as direct taxes in FY 2007.

  • Professional Services

The RMG sector extensively uses professional services from CA firms, legal agencies, and business consultants. In FY 2007 total payment for professional services is estimated at 7.37 million dollars.

  • Engineering Sector

The RMG industry paid 28.55 million dollars to the engineering sector which included payments to repairing and maintenance service industry (USD 8.29 million), electrical engineering (USD 9.21 million), transport vehicle maintenance service ( USD 5.53 Million), and machine tools service (USD 5.52 Million).

  • Utility Services

Payment of Electricity bill by the RMG industry is estimated to be 29.47 million dollars in FY2002. Utility payments for gas, WASA etc. amounted to an additional 7.37 million dollars.

  • Real Estate

Demand for real estate development by the garment industry to accommodate offices and factories of over 4000 garment units has generated a lot of activities in the Construction Industry. The RMG industries paid approximately 52.50 million dollars as factory, office and garage rent in FY 2007.

  • Information and Communication Technology

The RMG sector also plays a catalytic role in the growth of the country’s ICT sector. The services consumed by the RMG industry generated revenue for the ICT sector. Payments for ICT services which include communication, hardware and software services are estimated at 19.34 million dollars in FY 2007.

  • Hotel and Tourism

A large number of overseas apparel buyers and their representatives visit Bangladesh every year for business purpose. In FY2007 the RMG industry created a business of approximately 9.21 million dollars for the country’s tourism industry.

  • Waste Recycling Industry

Approximately 0.5 million people are engaged in waste (mainly, the waste out prices of fabrics) recycling industry of the country which get their materials from the RMG industries. With these waste materials, they are making stuff toys, patterns, quilts, cushions etc.

  • Emerging Consumer Market

The 2.2 million workers in the industry have created a large demand for consumer goods. A regular source of earning increases the basic consumption needs such as improved diet, better healthcare, improvements in family utensils and housing conditions etc. The sector has created an increasing demand for consumption of low cost commodities, cosmetics items, dresses, footwear, fast food and other products. A whole industry has been created to service this growing demand and created employment opportunities for hundreds of thousands of people.

(Source of all the above used data is Appendix Table 4)

Social impacts of the RMG Sector

  • Women Empowerment

It is well recognized that women’s participation in income generation activities lends them a better status within the family and provides them with considerable freedom. A job ensures equitable access to household resources (nutrition) and larger investment on female human capital (health and education). Employment opportunities draw attention to women’s needs for public facilities such as transportation, communication, safety etc. and create a demand for policy response in these areas. It also has created a demand for education and health. As the income by the female member reduces dependency on male income it reduces their vulnerability. It also reduces the possibility of domestic violence against women. Expansion of women’s employment has contributed positively to the improvement of the savings behavior of the poor people since women tend to be better savers.

Employment in the RMG industry has provided direct access to cash income for the first time to many poor women. A survey, conducted by the BIDS in 1997 showed that for 96 percent of the female workers in the non-EPZ areas, work in the garment industry was the maiden wage employment8. The survey also showed that women were taking up such roles paying for house rents and schooling expenses for their children or brothers and sisters. Despite the fact that they have lower incomes, the female garment workers were spending the same amount as the male workers on the studies of their family members. The same survey further showed that female workers were spending their earnings on their marriage, thus taking a big burden off their families. The independent earnings also allow these women to have a greater share in household decision making. Evidently, wage work at the garment industry has empowered women and improved their status.

  • Savings

Regular earning enables a large number of the garment workers to go for some savings. Workers investments on family pension schemes etc. create savings. A BIDS survey conducted in the early 1990s found that 21 percent of both male and female workers aged 15 years and above had their own bank accounts. A higher proportion of workers (30 percent) had bank accounts in the EPZ. Findings showed that women are on average better savers than men and save about 7.6 percent of their otherwise small income.

  • Child Labor

In recent years, international debate on child labor has intensified. The elimination of child labor is also among the core labor standards in the ILO Convention. The Harkin Bill placed at the US Senate entitled “The Child Labor Deterrence Act of 1993” which called for the elimination of child labor in the export oriented manufacturing and mining industries. As a consequence many garment industries had to retrench child workers from their factories. In many countries these retrenched children ended up in more strenuous and less-remunerative jobs, or worst, turned to begging in the street. The Bangladesh RMG sector set a unique example through collective efforts which eventually led to the development of a safety-net program for the child labors. The BGMEA/ILO/ UNICEF Child Labor Project in the garment industry of Bangladesh, funded by the US Development of Labor was the first of a series of child labor programs executed by the International Program on the Elimination of Child Labor of the ILO. This project, initiated in 1995, is based on a Memorandum of Understanding (MOU) signed by the BGMEA and two international organizations, the ILO and UNICEF, with the aim of progressively phasing out child labor from more than 2,500 factories that are members of the association.

The key elements of the MOU were:

(a) A fact-finding survey to determine the extent of child labor in the garment industry;

(b) The establishment of an education program in which identified child workers should be enrolled;

(c) The establishment of a monitoring and verification system;

(d) The provision of income compensation in the farm of a monthly stipend of Tk. 300, the equivalent of (at that time) US$ 7. The costs are to be shared by on fifty-fifty basis by BGMEA, the ILO and other donors.

Many of the retrenched child workers have been placed in schools and are receiving a monthly stipend. Football manufacturing industry of Pakistan has been following the globally acclaimed BGMEA Model of Child Labor Elimination. BGMEA has so far spent over 600,000 US dollars for the project. Successfully addressing of this issue has created a very favorable image about Bangladesh abroad and has promised continued market access for the sector.

  • Population Control

Employment opportunities especially for women created positive impact on family planning and population control in the country. Independent working-women are getting more conscious about the advantage of a small family, and are exposed to modern family planning methods. Working adolescent girls tend to avoid early marriage as they have their own source of income and are self-dependent. The mean age at marriage for girls working in RMG factories tend to be higher than the national average.

 Condition of workers of RMG sector

  • According to BGMEA about 3 million people are employed in the RMG sector (around 80% are female). Growing apprehension is the already deprived garment workers may face further retrenchment which may worsen the existing poor working and living standard of the workers.
  • A “decent employment” means rising productivity and real wages by ensuring rights to work, employment, social protection, freedom of association and social dialogue in an integrated approach. The concept of decent work has significant gender implications in Bangladesh RMG sector since women constitute a vast majority of the labor force, and women and the worst victims of violations of decent work conditions.
  • Women workers are particularly deprived of their special legal rights (e. g. maternity benefits) and remain more exposed to exploitation within their particular spheres of work. The female workers tend to be underpaid and exposed to physical assault by both fellow colleagues and employers.
  • Results of a study for ILO re-confirmed us the absence of decent work in most of the RMG industries as they offer low wage, long working hours, poor health and safety protection and in most cases there is no formal contract for job security and social protection.
  • The national labor movements are continuously demanding for National Minimum Wage. The minimum wages rule for the garment sector, endorsed in 2006. The minimum wage is Tk 1650.
  • No formal appointment letter is issued to the employees’ contractually defining their terms of employment. In most cases the industries do not follow proper dismissal procedure for their workers. Since the workers do not get any formal contract, the employers can hire and fire them at any time without showing any reason.
  • The exhaustive and prolonged work schedule of RMG industries sometimes causes occupational disease among the workers, which ultimately impacts negatively on their productivity.
  • The recent collapse of a garment factory building at Savar shows how insecure and vulnerable the workers are in the RMG sector. Therefore it is now urgent to improve OSH condition at workplaces for the business interest of the RMG owner in quota free market.
  • Bangladesh does not have any national social safety net program like contributory provident fund, medical allowances, unemployment allowances etc. Small and one time retrenchment benefits are not adequate for workers and their families in situations of massive income losses. In most cases the workers do not have their own savings and are not prepared to face any adverse situation.
  • Though export-oriented apparel industry is the lifeblood of Bangladesh’s foreign exchange earning, the basic rights, welfare issues of garment workers are severely neglected.
  • The basic problem of the ordinary workers and labor movement in garments sector are low scope of operation, non-recognition of legally registered unions at the factory level, long working hours and practically no weekly holiday that left hardly anytime for workers to participate union activities, non-compliance of existing labor laws, high occupational accidents etc. On the other hand, creation of yellow trade unions by the garments owners, imposition of self-made code of conduct, apathy to active social dialogue made ordinary workers and trade unions more vulnerable.
  • Closer cooperation between employers and employees are important to ensure the sustainability of an industry. However, it was evident that there is a lack of adequate communication between employees and employers and role of such social dialogue in building a healthy working relationship at factory level are always absent. It is absolutely difficult for workers to form legally registered in house union as a systematic tool to carry on social dialogue with employers at workplace.

 Women Seeking Accountability in the Bangladeshi Garment Industry

From an employers’ perspective, they were an ideal workforce for an industry that sought to compete in the global economy on the basis of cheap labour. They could be paid much less than men with equivalent skills and be treated as a largely informal workforce to whom employers had no obligation aside from paying their wages.

Today, things are beginning to change. Female education has gone up steadily; there has been widespread dissemination of ideas about women’s rights through non-governmental organizations (NGOs), state pronouncements and the media, while microfinance has increased and diversified employment opportunities in the countryside. Women enter the industry not just because of poverty, but also for the prospect of improving their family’s standard of living, sending their children to school, saving for their dowries or supporting ageing parents. They have been able to leverage their earnings into increased decision-making power within their families and independent purchasing power in the market place. They have also become increasingly visible in collective actions in support of their rights, which have linked local and global movements.

At the global level, campaigns have drawn attention to abuses of workers’ rights in global supply chains and put pressure on international corporations to take greater responsibility for employees through corporate codes of conduct. Local employers in the Bangladesh garment industry must now demonstrate compliance with these codes to win orders from international buyers. The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) has formulated its own code of conduct for the industry, in collaboration with the major trade unions, and has set up a compliance unit that monitors labor conditions in members’ factories. It has been known to freeze licenses of members whose factories have made headlines for violations. Legal success in winning favorable verdicts for workers in the labor courts also led BGMEA to set up its own conciliation and arbitration cell, with equal representation of employers and trade unions. This is intended to provide a less expensive and time-consuming mechanism for settling disputes between employers and workers.

In 2006, the Government passed a new labor code, after 12 years of deliberation and activism. It applies to all workers, and the new sections relevant to the garment industry include written contracts and identity cards, timely payment of wages, revised minimum wage, paid maternity leave and explicit laws against sexual harassment. Despite this progress, there is still much to be done to improve women worker’s rights.

Some tragedies of RMG sector

It is heartbreaking that year after year women and men are killed while making clothes for stores in our communities,” said Ineke Zeldenrust of the Clean Clothes Campaign International Secretariat, an international network that for years has highlighted the safety risks plaguing the Bangladesh garment industry.

The spate of tragedies began on Thursday, February 23, 2006 when a fire, possibly caused by an electrical short circuit, destroyed the four-story KTS Textile Industries in Bangladesh’s port city of Chittagong. Initial reports stated that 54 were killed and at least 60 were injured, however other sources peg the death toll at several hundred in what local garment workers rights’ advocates are calling the worst tragedy in the history of the Bangladesh garment industry. Over 1,000 workers were reportedly in the factory at the time of the 7 p.m. fire. According to the workers, the exits were locked. In 2005 two electricians reportedly died at this same facility, located in the Kalurghat Industrial Area, when they were electrocuted. This facility reportedly produced for US companies Uni Hosiery, Mermaid International, ATT Enterprise, and VIDA Enterprise Corp. Meanwhile, authorities have apparently sealed off three other factories connected to this facility (Vintex Fashion, Cardinal Fashion and Arena Fashion) citing unplanned construction and inadequate safety measures as life-threatening for their more than 6,000 workers.

Just days after the KTS fire, 19 people were reported dead and 50 injured when a five-story building collapsed in Bangladesh’s capital city of Dhaka. The PhoenixBuilding in the Tejgaon industrial area collapsed following unauthorized renovations to convert the upper stories of the building that housed various offices and factories, including a garment factory, into a 500-bed private hospital. One hundred fifty construction workers and an as yet unreported number of garment workers were reportedly in the building Saturday morning when it collapsed. Rescue operations, hampered by lack of equipment, are still underway, as many are feared to be trapped under tons of concrete rubble. Hundreds of activists from workers’ rights groups marched through Dhaka on Saturday demanding compensation for the victims families and punishment for the factory owners. Police have reportedly been searching for the building’s owner Deen Mohammad, also chairman of the City Bank of Bangladesh, but have been unable to locate him. Phoenix Garments exports clothing mainly to Europe.

That same day in Chittagong, 57 workers at the Imam Group of Industries (reportedly housing the Moon Fashion Limited, Imam Fashion, Moon Textile, Leading Fashion and Bimon Inda garment factories) were injured when a transformer explodes and fearing fire, they tried to exit through a narrow exit. Four are reportedly in critical condition following the stampede.

There is a clear need for a long-term wide scale program to address health and safety in the garment/textile sectors. The failure to implement safety measures in these sectors in Bangladesh has resulted in a conditions where the death and injury of workers has become alarmingly routine: in 2000 53 workers died at Choudury Knitwear, 24 died in 2001 at Maico Sweater, nine died in 2004 at the Misco Supermarket building, and 23 died at Shan Knitting and 64 died at the Spectrum-Shahriyar factory in 2005.

Step need to be taken to minimize the risk

  • A real and effective national consensus should be the prime concern to get prepared for post MFA Bangladesh needs to prepare a time bound national action plan to minimize the potential risks. It needs to priorities its immediate actions from a number of possible solutions.
  • As most of the labor laws have become old and not time befitting, government should formulate a National Policy on Ready Made Garments to establish a development trajectory for the sector to survive, in a quota-free world.
  • The growth of RMG sector was facilitated by the supply of low cost labor and since the female workers could easily learn the sewing techniques, the management took very limited or no effort for any further development of its workers. The apprehension regarding the post-MFA also discouraged the employers to arrange further training programs for their work force. However this not only limited workers skill, but also contributed to loss of production through lose of production time, low labor productivity, re-working, quality inconsistence, materials wastage, etc.
  • Improved working conditions can help to increase productivity level. Investment in human resources, e.g. training, betterment of working conditions, maintenance of proper safety and health measures, protection from physical and psychological harassment, freedom of association and rights to collective bargaining at factory/enterprise level etc will certainly improve the productivity of the workers.
  • Rights and welfare of the employees working in the subcontracting garments factories of the multinational companies should be ensured under corporate social responsibility. The multinational companies should be enforced to make regular visit to the subcontracting factories to ensure core labor standards. Employers associations may works as the watchdog of such initiative. The role of trade unions is to monitor the implementation of CSR at both large companies and subcontractors.
  • The CCC believes that follow-up to these tragedies from local and international stakeholders must include
  1. support for adequate rescue and relief efforts and financial compensation for the injured workers and the families of the dead;
  2. full, independent and transparent investigation and follow-up for all these incidents; and
  3. Immediate structural measures to prevent future, similar incidents.
  • Industry, along with public authorities (at the local and international levels) must commit to launch an immediate initiative to take on the safety issues that plague the garment industry in Bangladesh, including a structural review of multi-story buildings and facilities inspection mechanisms, explained Zeldenrust.
  • Introduction of Labor Standard Stickers on the exported goods, the monitoring and issuance of such stickers may be made under joint supervision of the government and the trade unions. The international buyers, government, trade unions may also encourage the employers to opt for Social Accountability.
  • To protect the rights and interests of livelihood security of RMG workers, it is necessary to set up a Social Safety Net programs (contributory provident fund, gratuity, retrenchment fund) and compulsory Workers Insurance. Also an effective Special Fund (easily accessible for affected ordinary workers) can be made to deal with any adverse situation in the post-MFA environment.
  • The workers at the garment sector lives under a terrible socio-economic condition with unstable and temporary employment, poor working conditions, long working hours, forced overtime & sexual harassment.
  • The promotion o ILO’s “decent work” program would be the most comprehensive effort to protect the workers of RMG sector in a quota-free world.

Possible way to Face the Coming Challenges for RMG sector in Bangladesh:

To face the upcoming challenges in RMG sector, the country should take the following measures:

  Formulation of a national policy on RMB industry and workers for post MFA period.

  Unconditional and quick implementation of core labor standards and labor laws at workplace of all RMGs.

  Establishing a compulsory social safety net package for RMG workers.

  Exploration of new market for RMG to protect the industry and the workers and take maximum advantage of free excess to Canadian, Australian and other markers.

  Capacity building training and re-training activity for employers and workers in RMG sector to develop productivity and efficiency level.

  Develop backward linkage industries for RMG.

  Export and product diversification.

  Building alliances with likeminded neighbors and competitors within the LDCs.

  Continuous training program to sensitize the workers about their rights and interest should be undertaken in cooperation with and financial assistance from the fraternal organizational abroad.

 Prospects of the RMG Industry

Despite many difficulties faced by the RMG industry over the past years, it continued to show its robust performance and competitive strength. The resilience and bold trend in this MFA phase-out period partly reflects the imposition of ‘safeguard quotas’ by US and similar restrictions by EU administration on China up to 2008, which has been the largest supplier of textiles and apparel to USA. Other factors like price competitiveness, enhanced GSP facility, market and product diversification, cheap labor, increased backward integration, high level of investment, and government support are among the key factors that helped the country to continue the momentum in export earnings in the apparel sector. Some of these elements are reviewed below.

  • Market Diversification

Bangladeshi RMG products are mainly destined to the US and EU. Back in 1996-97, Bangladesh was the 7th and 5th largest apparel exporter to the USA and European Union respectively. The industry was successful in exploring the opportunities in markets away from EU and US. In FY06, a successful turnaround was observed in exports to third countries, which having a negative growth in FY05 rose three-fold in FY06, which helped to record 23.1 percent overall export growth in the RMG sector. It is anticipated that the trend of market diversification will continue and this will help to maintain the growth momentum of export earnings. At the same time a recent WTO review points out that Bangladesh has not been able to exploit fully the duty free access to EU that it enjoys. While this is pointed out to be due to stringent rules of origin (ROO) criteria, the relative stagnation in exports to EU requires further analysis.

Table- 3: Region-wise Share of RMG Export

Year

Export Share to USA

Export Share to European Countries

Combined Share of USA & EU (%)

Export Share of Other Countries (%)

2001-2002

42.67

55.43

98.10

1.90

2002-2003

38.02

57.12

95.14

4.86

2003-2004

28.64

65.42

94.06

5.94

2004-2005

30.64

64.24

94.88

5.12

2005-2006

33.67

49.77

83.43

16.57

Source: Export promotion Bureau

  • Product Diversification

The growth pattern of RMG exports can be categorized into two distinct phases. During the initial phase it was the woven category, which contributed the most. Second phase is the emergence of knitwear products that powered the recent double digit (year-on-year) growth starting in FY04.

                    Table-4: Growth Pattern of Woven and Knitwear Categories

Year

Woven

Knitwear

2002-03

4.28

13.34

2003-04

8.59

29.88

2004-05

1.70

31.26

2005-06

13.50

35.38

                       Source: Bangladesh Bank

In the globalize economy and ever-changing fashion world, product diversification is the key to continuous business success. Starting with a few items, the entrepreneurs of the RMG sector have also been able to diversify the product base ranging from ordinary shirts, T-shirts, trousers, shorts, pajamas, ladies and children’s wear to sophisticated high value items like quality suits, branded jeans, jackets, sweaters, embroidered wear etc. It is clear that value addition accrues mostly in the designer items, and the sooner local entrepreneurs can catch on to this trend the brighter be the RMG future.

Table-5 : Export performance of different Apparel items                        

(in million USD)

Year

Shirt

Jackets

T-Shirt

Trousers

Sweater

2001-02

871.22

412.34

546.28

636.61

517.83

2002-03

1019.88

464.51

642.62

643.66

578.38

2003-04

1116.57

364.78

1062.11

1334.85

616.31

2004-05

1053.34

430.28

1349.71

1667.72

893.12

2005-06

1056.87

408.97

1781.51

2165.25

1042.61

Source : Bangladesh Bank

  • Backward Integration

RMG industry in Bangladesh has already proved itself to be a resilient industry and can be a catalyst for further industrialization in the country. However, this vital industry still depends heavily on imported fabrics. After the liberalization of the quota regime some of the major textile suppliers Thailand, India, China, Hong Kong, Indonesia and Taiwan increased their own RMG exports.

If Bangladesh wants to enjoy increased market access created by the global open market economy it has no alternative but to produce textile items competitively at home through the establishment of backward linkage with the RMG industry. To some extent the industry has foreseen the need and has embarked on its own capacity building. The trend of back-to-back import has been declining over the years implying a rising contribution of domestic value addition (Figure 2). This is an optimistic indication that a well equipped and modern backward linkage industry may well prove cost effective and thus helping Bangladesh to meet the challenges in the post-MFA era.

  • Flow of Investment

It is plausible that domestic entrepreneurs alone may not be able to develop the textile industry by establishing modern mills with adequate capacity to meet the growing RMG demand. It is important to have significant flow of investment both in terms of finance and technology. The investment outlook in this sector is encouraging, although the uncertainties before the MFA phase-out period caused a sluggish investment scenario. In part the momentum in the post-MFA phase-out period is indicative of the efforts underway towards capacity building through backward integration. This is evident in the pace of lending to the RMG sector and in the rising import share of RMG related machinery. However further progress would be necessary to improve and sustain competitiveness on a global scale.

  • A Supportive Policy Regime

Government of Bangladesh has played an active role in designing policy support to the RMG sector that includes back-to-back L/C, bonded warehouse, cash incentives, export credit guarantee scheme, tax holiday and related facilities. At present government operates a cash compensation scheme through which domestic suppliers to export-oriented RMG units receive a cash payment equivalent to 5 percent of the net FOB value of exported garments. The FY04 budget also lowered the corporate income tax rate for the RMG industry from 30 to 10 percent for the period up to June 30, 2006. From FY05 the tax regime has been further changed, and a 0.25 percent tax at source will be deducted from the value of the export proceeds of Woven and Knitwear category. At the same time, income tax rate for textile manufacturers were reduced to 15 percent from its earlier level for the period up to June 30, 2008. The reduced tax rates and other facilities are likely to have a positive impact on the RMG sector.

  • Lead Time

‘Lead time’ is a crucial factor maintaining export competitiveness. Bangladesh happens to feature the longest lead time in the RMG world. The lead time for Bangladesh is 120 days on an average, while the corresponding period for Sri Lanka is about 19-45 days and for India it is only about 12 days. Various factors like the distance from major markets, importation of raw materials, port congestion, strikes, poor roads, etc. are some of the factors responsible for this. At present the fashion seasons are becoming short with a changing trend, it would not be possible to compete if the lead time extends beyond 30-40 days. Therefore, bringing down the ‘lead time’ to about 30-40 days is a major challenge for the country’s RMG sector. Clearly more business can be captured only if the lead time could be improved.

  • Infrastructural Impediments

The existence of sound infrastructural facilities is a prerequisite for economic development. In Bangladesh, continuing growth of the RMG sector is dependent on the development of a strong backward linkage in order to reduce the lead time. However, other factors constraining competitiveness of Bangladesh’s RMG exports included the absence of adequate physical infrastructure and utilities (e.g., transportation, telecommunication, stable power supply, efficient seaport, political tolerance, quality control and a smoothly functioning bureaucracy). According to a recent World Bank-IFC publication (2006) records that a businessman in Bangladesh needs 35 days to export and incurs USD 902 per container, whereas his counterpart in India requires 27 days and spends USD 864 per container. The comparable figures for Pakistan, Sri Lanka and Vietnam are 24 days and USD 996, 25 days and USD 797, and 35 days and USD 701, respectively.

  • Labor Productivity

The productive efficiency of labor is more important determinant for gaining comparative advantage than the physical abundance of labor. In Bangladesh, the garment workers are mostly women with little education and training. The employment of an uneven number of unskilled labors by the garment factories results in low productivity and comparatively more expensive apparels. Bangladesh labor productivity is known to be lower when compared with that of Sri Lanka, South Korea and Hong Kong SAR. Bangladesh must look for ways to improve the productivity of its labor force if it wants to compete regionally if not globally.

  • Cheap Labor Force

The strength of a firm depends on its specific comparative advantages, which its competitors do not possess. To date the local industry has flourished in spite of the challenges cited above (e.g., lead time, infrastructure, and bureaucratic red tape) on the back of cheap female labor. The wages paid to RMG workers in Bangladesh are the lowest even by the South Asian regional standard. Figure 4 illustrates the comparative average hourly wages in apparel industry of selected developed and developing countries.

  • Research and Training

The country has no dedicated research institute related to the apparel sector. RMG is highly fashion oriented and constant market research is necessary to become successful in the business. Here India has had a head start and Mumbai and Delhi are on line to become fashion centers on a global scale. At present whatever design work is done in the country, these are mostly carried out with foreign workers and experts. BGMEA has already established an institute which offers bachelor’s degree in fashion designing and BKMEA is planning on setting up a research and training institute. These and related initiatives need encouragement possibly intermediated by donor-assisted technology and knowledge transfer. A facilitating public sector role can be very relevant here.

 Recent riots and strikes by the garments worker

Garments worker raise their voice in different times to attain their rights. From analyzing different news it can be viewed that the bursting riots of 2006 has not created in a day. There is a long way behind this and a lot of reasons. In July 4, 2001 the national strike took place throughout the garment industry. The strike, planned months in advance, was called by the NGWF and six other union federations. The garment workers called the strike across the country demanding implementation of their six point charter. At least 17 garment factories were damaged in the city by elements hired by some owners, alleged the striking workers. Police arrested 13 garment workers from Mohakhali area for their alleged involvement in demanding the factories.

 Then several times the garments worker places their demand in different way. Their main demand was to increase their basic wage at Tk 3000. For achieving this demand, in 2005-2006 all hell broke loose as a riot broke out in and around the capital Dhaka city when a garments worker was shot in Savar, an industrial zone 30km away from Dhaka as police was trying to control the angry protesters.

The death sparked more violence as thousands of garments workers took to the streets in Savar, creating chaos and huge traffic deadlocks around the capital. A section of 800-1000 violent protesters with sticks lead by motorcycle processions resorted to widespread damage of vehicles, attacked about 300 garments factories, and torched many of them. Widespread lootings were also reported and finally extra security forces were deployed to prevent this from going further.

Then Government took some initiatives to sort out the problem and made some promise about the demand to the garments worker. As a result the garments sector became stable again. But the demand was not fulfilled. The worker’s demand for wage was not fulfilled. So the protest started again.

On October 5th 2006, the Bangladesh Minimum Wage Board announced the first raise to the minimum wage for garment workers since 1994. The gross minimum monthly wage was announced as Tk 1,662.50 (€20.12) including basic salary plus house rent and other allowances for entry-level workers. Previously this was Tk 930.The announcement means the basic wage without benefits is around Tk 1,100, far below the Tk 3,000 basic wage called for by Bangladeshi trade unions and supported by the Clean Clothes Campaign.

Garment workers in different parts of Bangladesh have demonstrated against this new proposal and a series of strikes was occurred. As we previously stated, whilst garment workers and their supporters had been demanding wage increases for several years it wasn’t until May 2006, following the outbreak of massive labor unrest by workers unable to tolerate the extreme exploitative conditions any longer, that any kind of action was taken by the Bangladesh government and the minimum wage board was formed. This riot came to an end under the state of emergency.

Reason behind the riot

Around 2.2 million people are employed in the garments sector and around 70% of whom is woman. From the beginning of the industry the rights of the worker is violating. The workers wage was determined as Tk 930 for a new worker in 1994. And this rate was continued till 2006. The other facilities like safety, healthy working environment, security etc. were not provided to the worker. The reason behind the riot can be listed as below.

  1. A new wage structure for the garment workers on the basis of a basic minimum wage of tk 3000 (unskilled).
  2. Ensure the health and safety of garment workers.
  3. Necessary steps for the development and expansion of the garment industry and its markets.
  4. Implementation of trade union rights in the garment sector. Trade union rights for the EPZ workers.
  5. Separate industrial zones for the garments industry. Settlements, schools and hospitals in the zones.
  6. Implementation of the Memorandum of Agreement signed between the MGMEA and the BGWUC in 1997 and 2000 (appointment letter, identity card, service book, weekly holiday, maternity leave, etc.)

 Effect of world ongoing financial crisis on Bangladesh Garments Sector

The ongoing financial crisis has not affect the Bangladesh Garments Industry at a large extent till now. But no one no what will happen. And there is a controversy about the future effect of this financial crisis on RMG sector. Some argues that it will affect the industry in a positive manner. The arguments behind this is that the western buyers are cutting their prices because of the financial crisis but China and other garment manufacturing countries can’t afford the price cut, but Bangladesh can because our labors are cheaper and they can work overtime.

But many exporters are really worried about the effect of financial crisis on this sector. The Bangladesh Knitwear Manufacturers Association (BKMEA) reported a ten per cent drop in knitted items such as T-shirts and pullovers. Buyers are now renegotiating prices and delaying orders citing the ongoing financial turmoil.

It’s true some of the top retailers are downsizing their inventories due to the crisis. But Bangladeshi exporters have to be careful. If they can make shipment timely and keep the quality intact, global financial crisis will not affect the RMG sector of Bangladesh.

RMG Sector Statistics

Ready Made Garments Sector of Bangladesh & its Statistics

  RMG export growth and percentage as the total export

Table- 6: RMG export growth and percentage as the total export  (In million US$)

             Year

Export of RMG

Total Export

% of RMG Export to Total Export

1976-77

0.012

417.00

0.02

1977-78

0.069

493.74

0.01

1978-79

0.104

618.81

0.02

1979-80

0.672

749.44

0.09

1980-81

3.36

709.85

0.47

1981-82

6.99

625.90

1.12

1982-83

10.84

686.60

1.58

1983-84

31.57

811.00

3.89

1984-85

116.20

934.43

12.44

1985-86

131.48

819.21

16.05

1986-87

298.67

1076.61

27.74

1987-88

433.92

1231.20

35.24

1988-89

471.09

1291.56

36.47

1989-90

624.16

1923.70

32.45

1990-91

866.82

1717.55

50.47

1991-92

1182.57

1993.90

59.31

1992-93

1445.02

2382.89

60.64

1993-94

1555.79

2533.90

61.40

1994-95

2228.35

3472.56

64.17

1995-96

2547.13

3882.42

65.61

1996-97

3001.25

4418.28

67.93

1997-98

3781.94

5161.20

73.28

1998-99

4019.98

5312.86

75.67

1999-00

4349.41

5752.20

75.61

2000-01

4859.83

6467.30

75.14

2001-02

4583.8

5986.09

76.57

2002-03

4900.0

6396.87

76.60

2003-04

5700.00

7600.00

76.00

2004-05

6300.00

8422.46

74.80

2005-06

7900.8

10526.2

75.06

2006-07

9211.2

12177.9

75.64

Source: Export promotion Bureau

            Total

70563.03

 

This table reveals the RMG export from the initial stage of the industry till 2007 and its contribution to total export. The RMG sector enjoys a continuous growth from the beginning of the industry but the initial level was tough. From the last ten years it is viewed that RMG export is contributing 75% of the total export. The following graph can give clear view of growth in RMG export for the last 10 years.

 Major Export product for 2006-2007

It is said earlier, contribution of garments export to total export is 75% or more. Two major types of garments products are exported. One is woven garments and another is knitwear. The 2006-2007 export scenarios are presented here by a pie chart.

From the pie chart it can be found that the mot dominating sector is the garments sector in case of export.  Woven garments contribute 38.25% and Knitwear contributes 37.39%.

Share of RMG Export in Country’s GDP

Table- 7 : Share of RMG Export in Country’s GDP                                     (US$ in Million)

                    Year

GDP at current price

RMG Export

RMG export as percentage of GDP

FY84

19636

31.57

0.16

FY85

21644

116.20

0.54

FY86

21170

131.48

0.62

FY87

23759

298.67

1.26

FY88

25604

433.92

1.69

FY89

27710

471.09

1.70

FY90

30477

624.16

2.05

FY91

30975

866.82

2.80

FY92

31335

1182.57

3.77

FY93

32031

1445.02

4.51

FY94

33853

1555.79

4.60

FY95

37940

2228.35

5.87

FY96

40726

2547.13

6.25

FY97

42319

3001.25

7.09

FY98

44034

3781.94

8.59

FY99

45713

4019.98

8.79

FY00

47125

4349.41

9.23

FY01

46934

4859.83

10.35

FY02

47374

4583.80

9.68

FY03

42975

4900.0

11.40

FY04

51227

5700.00

11.12

FY05

54516

6300.00

11.56

FY06

61136

7900.8

12.92

FY07

69482

9211.2

13.26

Source:  CPD, IRBD Database

Along with the increasing trend of export, country’s GDP is also increasing. So it can be said that RMG export has a great contribution in this regard.

Contribution of Bangladesh RMG sector to national economy, FY 2007

Table-8: Contribution of Bangladesh RMG sector to national economy, FY 2007

Sector

Contribution of the RMG Sector in Bangladesh Economy

[Million USD]

Share in Total RMG Export

Local Fabrics Inputs

1915.00

20.79

Imported Fabrics and Other Inputs

4532.83

49.20

Employment (Wage and Salary Bills)

1122.85

12.19

Management Payment

401.61

4.36

Workers Payment

721.24

7.83

Linkage

182.38

1.98

Buying House Commission

80.14

0.87

Dying & washing Industry

58.03

0.63

Process Contract

35.92

0.39

Printing & Stationery

8.29

0.09

Banking

72.77

0.79

Earnings from interest & charges

29.48

0.32

L/C charges

43.29

0.47

Insurance

11.05

0.12

Insurance on import

7.37

0.08

Fire Insurance

3.68

0.04

Professional Services

7.37

0.08

Professional Services

5.53

0.06

CA Firms [Audit]

0.92

0.01

Legal Services

0.92

0.01

Tours & travels including hotel

9.21

0.10

Engineering Sector

28.55

0.31

Repair & maintenance Service industry

8.29

0.09

Transport Vehicle Maintenance Service Industry

5.53

0.06

Electrical Engineering

9.21

0.10

Machine Tools Services Industry

5.52

0.06

Machinery Trade

61.72

0.67

Operational equipment purchase

28.55

0.31

Spare parts

11.97

0.13

Depreciation

21.20

0.23

Shipping & Port

130.80

1.42

C&F Agents

66.32

0.72

Freight charges

52.50

0.57

Forwarding charges

11.98

0.13

Transport Sector (Land and Railway)

55.27

0.60

Petrol & lubricant

5.53

0.06

Real estate

52.50

0.57

Factory rent

51.58

0.56

Office rent

0.92

0.01

Garage rent

0.00

0.00

Information and Communication Technology

19.34

0.21

Electronics and Compute Services Industry

5.53

0.06

Mobile & telephone bill

12.89

0.14

Telex, fax, internet

0.92

0.01

Other

11.97

0.13

Security & Protection

4.61

0.05

Media (Business promotion)

7.36

0.08

CPD Occasional Paper Series 50 Sector Contribution of the RMG Sector in Bangladesh Economy [Million USD] Share in Total RMG Export News and Publications

0.17

0.00

Gift & souvenir

0.14

0.00

Payment to Government

272.65

2.96

Direct Payment

16.58

0.18

Stamp & Postage

3.68

0.04

License renewal, rent, rates

6.45

0.07

Payments to EPB

1.84

0.02

Tax

4.61

0.05

Indirect Payment to the GOB

256.07

2.78

WASA bill

2.76

0.03

Electric bill

29.47

0.32

Gas

4.61

0.05

Miscellaneous

219.23

2.38

Gross Margin

720.32

7.82

Total Export

9211.20

100.00

Memo Items
Direct Value Addition by the RMG Sector

2302.80

25.0

Local Value Retention

4145.04

45.0

Source: Estimated on the basis of Analysis of Statements of Accounts of selected RMG units.

From the above Table it is focused that he RMG industry not only propelled the growth of spinning, weaving, dyeing and finishing industries, production of accessories and spare parts, but also rendered large externalities by contributing to other economic activities in such areas as banking, insurance, real estate, packaging, hotels and tourism, recycling, consumer goods utility services and transportation. RMG sector has overwhelmingly high backward linkage with textile sector providing fabrics, yarn and other ancillaries. It has important backward linkage with utilities such as electricity, gas, and machinery and spare parts supplying.

Reducing trend of Back to Back LC

Reducing trend of Back to Back LC indicates the local value addition by RMG industry. Here is the table showing the percentage of back to back LC for the last ten years.

                       Table- 9 : Percentage of Back to Back LC

Year

% of Back to Back LC

1998

47.74

1999

44.13

2000

51.74

2001

45.10

2002

43.20

2003

42.0

2004

39.0

2005

34.3

2006

30.0

2007

28.10

                              Source: Bangladesh Bank

Statistical Analysis on RMG Export

Statistical analysis on RMG sector

This chapter reveals the statistical analysis on the RMG Sector for last ten years, its growth and the significance of RMG export to total export and the significance of RMG export growth to GDP growth. For analyzing the performance of RMG industry of Bangladesh some statistical tools has been used.

Time Series Analysis

Here, the trend of RMG Export has been revealed through indirect method of time series analysis by using eleven years data. The model of Time series analysis is

Here,

 

a = Constant

b= Slope

Y= Dependent variable

t = Time

Y = a + bt

 

RMG Export Trend

Export is an influential tool for foreign exchange business. Any decrease in export can cause a huge decrease in foreign exchange income as well as profit. The trend of export business for last five years is presented here.

Table Calculation for RMG Export trend

Year (n)

Export (Y)(mill $)

Time (t)

Yt

t2

1997

3001.25

-5

-15006.30

       25

1998

3781.94

-4

-15127.80

16

1999

4019.98

-3

-12059.90

9

2000

4349.41

-2

-8698.82

4

2001

4859.83

-1

-4859.83

1

2002

4583.8

0

0

0

2003

4900.0

1

4900

1

2004

5700.00

2

11400

4

2005

6300.00

3

18900

9

2006

7900.8

4

31603.20

16

2007

9211.2

5

46056

25

n  = 11

∑Y= 58608.21

 

∑Yt  =    57106.60

t2  = 110

b = ∑Yt / ∑t2

= 57106.60 / 110

 

    = 519.15

Now,

a = Y/n

= 58608.21/11 

= 5328.02

So the equation for Export Business is

Y = 5328.02 + 519.15 t

Here, Y = RMG Export of Bangladesh

 REGRESSION ANALYSIS

In this age of globalization the demand for RMG products is increasing day by day. This increasing trend in export sector helps to build the economy of Bangladesh. For showing the significance of RMG export to total export and the significance of RMG export growth to GDP growth simple regression analysis has been done.  Software SPSS 15.0 is used to do this statistical analysis.

The outputs that are got by using SPSS 15.0 software are enclosed in the appendix and interpretations of those are presented below sequentially.

 Simple regression between RMG Export & Total Export

RMG Export is one of the major sources of Total export of Bangladesh. Simple regression analysis has been used to show the relationship between Total export and RMG export. Here, RMG export is considered as independent variable and Total export is considered as dependent variable. The model will be as follows.

i. Regression equation

From the simple regression analysis the following equation is formed by considering total export as dependent variable (denoted as Y) and RMG export (denoted as X) as independent variable. The equation is:

This equation indicates if RMG export of Bangladesh increases for US$1 million, Total Export will be increased by US$ 1.221 million.

 ii. Mean and standard deviation

The mean of Total export is US$3438.50 million, which indicates the average total export per year of Bangladesh is US$3438.50 million. And the standard deviation is US$ 3196.15 million. So, the variability of total export is US$ 3196.15million.

Mean of RMG export is US$ 2276.23 million. That means the average amount of RMG export per year is US$ 2276.23 million. And the standard deviation is US$ 2613.37 million. So, the variability of RMG export is US$ 2613.37 million.

 iii. Correlation Matrix

The correlation between Total export and RMG export is 0.999 & significance level (1- tailed) is .000. Here, the significant level is bellow .05. So, there is a significant relationship between Total export and RMG export.

 iv. Co-efficient of multiple determination & Co-efficient of multiple correlation

Here, r2 = 0.997. r2 stands for Co-efficient of multiple determination. The result indicates that RMG export explains 99.7% of the variation in the Total export. So, this variable is very influential as it can explain more than 50%. Again, r = 0.999, r stands for Co-efficient of multiple correlation. The result shows that there exits a high degree of positive relationship between Total export and RMG export.

  v. ANOVA

The result of the ANOVA table indicates that the relationship between Total export and RMG export is statistically significant. That is statistically the simple regression equation is valid as the test is significant at 0.000 levels, which is less than 0.05.

  • From the above analysis it is found out that there a significant relationship exists between Total export and RMG export.

Simple regression between RMG Export & GDP

Here, RMG export is considered as independent variable and GDP is considered as dependent variable. The model will be as follows.

i. Regression equation

From the simple regression analysis the following equation is formed by considering GDP as dependent variable (denoted as Y) and RMG export (denoted as X) as independent variable. The equation is:

Y = 24404.01 + 4.877 X

                                                                                                                                   This equation indicates if RMG export of Bangladesh increases for US$1 million, GDP will be increased by US$ 4.877 million.

 ii. Mean and standard deviation

The mean of GDP is US$38737.29 million, which indicates the average GDP per year of Bangladesh is US$ 38737.29 million. And the standard deviation is US$ 13042.27 million. So, the variability of GDP is US$ 3196.15million.

Mean of RMG export is US$ 2939.20 million. That means the average amount of RMG export per year is US$ 2939.20 million. And the standard deviation is US$ 2622.43 million. So, the variability of RMG export is US$ 2622.43 million.

 iii. Correlation Matrix

The correlation between Total export and RMG export is 0.981 & significance level (1- tailed) is .000. Here, the significant level is bellow .05. So, there is a significant relationship between GDP and RMG export.

iv. Co-efficient of multiple determination & Co-efficient of multiple correlation

Here, r2 = 0.961. r2 stands for Co-efficient of multiple determination. The result indicates that RMG export explains 96.1% of the variation in the GDP. So, this variable is very influential as it can explain more than 50%. Again, r = 0.981, r stands for Co-efficient of multiple correlation. The result shows that there exits a high degree of positive relationship between GDP and RMG export.

 v. ANOVA

The result of the ANOVA table indicates that the relationship between GDP and RMG export is statistically significant. That is statistically the simple regression equation is valid as the test is significant at 0.000 levels, which is less than 0.05.

  • From the above analysis it is found out that there a significant relationship exists between Total GDP and RMG export.

FINDINGS of Ready Made Garments Sector OF Bangladesh

Findings

After explaining different aspect of Bangladesh RMG sector different issue is pointed out. The major issue related to this industry is present here.

  • The garment industry is by far the country’s most important manufacturer, earning around $5 billion annually and accounting for about two thirds of all exports. Bangladesh has about 4,000 garment factories with up to 10 million livelihoods dependent on it directly or indirectly. In 2006 it provided jobs for 2.2 million people, accounted for 10.5% of the country’s GDP, and contributed 40% of its manufacturing output. Exports have been growing at an impressive rate in recent years. In 2006/07 alone, they increased by 18.2% to reach US$9.6 billion, a record level for the fifth consecutive year. The contribution to GDP increases at 13.25% in 2007. About 80 per cent of garment workers are women and the current minimum wage is Tk.1650.
  • The major strength for the garments sector of Bangladesh is the low labor charge, free economy, infrastructural support, improved GSP, low energy price and so on. Major weakness of this sector is lack of marketing tactics, small number of manufacturing method, low acquiescence, fewer process units for textile and garments, risky working environment etc. There are also some opportunities associated with threat that can be captured by the sector to acquire more profit.
  • The major importer of RMG products are USA and Europe. But there is other country that has a contribution to the total RMG export. The other countries are Belgium, Canada, France, Germany, Netherlands and more.
  • The RMG industry not only propelled the growth of spinning, weaving, dyeing and finishing industries, production of accessories and spare parts, but also rendered large externalities by contributing to other economic activities in such areas as banking, insurance, real estate, packaging, hotels and tourism, recycling, consumer goods utility services and transportation. RMG sector has overwhelmingly high backward linkage with textile sector providing fabrics, yarn and other ancillaries. It has important backward linkage with utilities such as electricity, gas, and machinery and spare parts supplying.
  • The basic problem of the ordinary workers and labor movement in garments sector are low scope of operation, non-recognition of legally registered unions at the factory level, long working hours and practically no weekly holiday that left hardly anytime for workers to participate union activities, non-compliance of existing labor laws, high occupational accidents etc. On the other hand, creation of yellow trade unions by the garments owners, imposition of self-made code of conduct, apathy to active social dialogue made ordinary workers and trade unions more vulnerable.
  • 80% of garments workers are women. In the early stage they could be paid much less than men with equivalent skills and be treated as a largely informal workforce to whom employers had no obligation aside from paying their wages. Today, things are beginning to change. Female education has gone up steadily; there has been widespread dissemination of ideas about women’s rights through non-governmental organizations (NGOs), state pronouncements and the media, while microfinance has increased and diversified employment opportunities in the countryside. Women enter the industry not just because of poverty, but also for the prospect of improving their family’s standard of living, sending their children to school, saving for their dowries or supporting ageing parents. They have been able to leverage their earnings into increased decision-making power within their families and independent purchasing power in the market place. They have also become increasingly visible in collective actions in support of their rights, which have linked local and global movements.
  • The working environment of garments factory is really risky.  Year after year women and men are killed while making clothes for stores in our communities.  There is a clear need for a long-term wide scale program to address health and safety in the garment/textile sectors. The failure to implement safety measures in these sectors in Bangladesh has resulted in a conditions where the death and injury of workers has become alarmingly routine: in 2000 53 workers died at Choudury Knitwear, 24 died in 2001 at Maico Sweater, nine died in 2004 at the Misco Supermarket building, and 23 died at Shan Knitting and 64 died at the Spectrum-Shahriyar factory in 2005.
  • From the time series analysis it is found that RMG export will be increased by US$ 519.15 million per year. The regression analysis reveals that there is a significant relationship between the RMG export and Total export. The GDP growth and RMG export growth is also significant at 5% significant level.
  • The quota came to an end at 2004 but it continued to show robust performance, competitive strength and, of no less importance, social commitment. RMG’s contribution to Bangladesh economy is well-known, well-appreciated and well-respected. In 2005-06 the industry faced a great instability due to the protest of the worker. After that under the state of emergency the sector enjoyed a stable growth and finally reaches at the matured stage. The ongoing financial crisis has not affect the Bangladesh Garments Industry at a large extent till now but it can be. So, Bangladeshi exporters have to be careful. If they can make shipment timely and keep the quality intact, global financial crisis will not affect the RMG sector of Bangladesh.

Letter of Credite

A Letter of Credit is a payment term generally used for international sales transactions. It is basically a mechanism, which allows importers/buyers to offer secure terms of payment to exporters/sellers in which a bank (or more than one bank) gets involved. The technical term for Letter of credit is ‘Documentary Credit’. At the very outset one must understand is that Letters of credit deal in documents, not goods. The idea in an international trade transaction is to shift the risk from the actual buyer to a bank. Thus a LC (as it is commonly referred to) is a payment undertaking given by a bank to the seller and is issued on behalf of the applicant i.e. the buyer. The Buyer is the Applicant and the Seller is the Beneficiary. The Bank that issues the LC is referred to as the Issuing Bank which is generally in the country of the Buyer. The Bank that Advises the LC to the Seller is called the Advising Bank which is generally in the country of the Seller.

The specified bank makes the payment upon the successful presentation of the required documents by the seller within the specified time frame. Note that the Bank scrutinizes the ‘documents’ and not the ‘goods’ for making payment. Thus the process works both in favor of both the buyer and the seller. The Seller gets assured that if documents are presented on time and in the way that they have been requested on the LC the payment will be made and Buyer on the other hand is assured that the bank will thoroughly examine these presented documents and ensure that they meet the terms and conditions stipulated in the LC.

Types of Letters of Credit

  • Revocable
  •  Irrevocable
  •  Unconfirmed
  •  Confirmed
  •  Transferable Credit
  •  Assignment of Proceeds
  •  Revolving
  •  Standby

 BENEFITS OF THE LETTER OF CREDIT

The letter of credit is the safest, most secure and most convenient settlement method for international transactions. There are a number of advantages both for the seller/exporter and the buyer/importer.

Benefits of sellers

• Assures the security of payment from an international bank once the terms of the letter of credit are met.
• Seller can determine when payment will be satisfied and ship the goods accordingly.
• Bank bears the responsibility of oversight.

• Seller does not have to open an account and grant payment terms to buyer. Credit risk is nearly eliminated. The risk of exchange control created with payment delays is greatly reduced.

• Provides seller easier access to financing once the letter of credit has been issued.

• Once the bank confirms the letter of credit, political and economic risk and questions regarding the buyer’s ability to pay are eliminated. The confirming bank is obliged to pay, even if the buyer goes bankrupt, provided the terms of the letter of credit are met.

Benefits to buyers

• Buyer may get better terms and prices.

• No cash is tied up in the process. Buyer does not have to pay cash up front to a foreign seller before receiving the documents of title to the goods purchased. This is particularly helpful when the buyer is unfamiliar with local suppliers and laws.

• Protects the buyer since the bank only pays when the supplier complies with the specific terms and conditions and produces the documents required by the buyer.

• The buyer can build safeguards into the letter of credit, including inspection of the goods and quality control, and set production and delivery times.

Typically the documents requested in a Letter of Credit are the following:

  • Financial Documents

Bill of exchange, Co-accepted Draft

  • Commercial Documents

Invoice, packing list

  • Shipping Documents

Transport Document, Insurance Certificate, Commercial, Official or Legal Documents

  • Official Documents

License, Embassy legalization, Origin Certificate, Inspection Cert , Phyto-sanitary Certificate

  • Transport Documents

Bill of Lading (ocean or multi-modal or Charter party), Airway bill, Lorry/truck receipt, railway receipt, CMC Other than Mate Receipt, Forwarder Cargo Receipt, Deliver Challan etc.

  • Insurance documents

Insurance policy or Certificate but not a cover note, pre shipment packing list.

The Letter of Credit Process

Participants in LC Process:

  • Buyer
  • Issuing Bank
  • Advising Bank
  • Seller (Beneficiary)

Nine (9) Steps in the Letter of Credit Process

  1. Buyer and seller agree to terms including means of transport, period of credit offered (if any), and latest date of shipment acceptable.
  1. Buyer applies to bank for issue of letter of credit. Bank will evaluate buyer’s credit standing, and may require cash cover and/or reduction of other lending limits.
  1. Issuing bank issues LC, sending it to the Advising bank by airmail or electronic means such as telex or SWIFT.
  1. Advising bank establishes authenticity of the letter of credit using signature books or test codes, then informs seller (beneficiary).
  1. Seller should now check that LC matches commercial agreement and that all its terms and conditions can be satisfied.
  1. Seller ships the goods, then assembles the documents called for in the LC (invoice, transport document, etc.).
  1. The Advising bank checks the documents against the LC. If the documents are compliant, the bank pays the seller and forwards the documents to the Issuing bank.
  1. The Issuing bank now checks the documents itself. If they are in order, it reimburses the seller’s bank immediately.
  1. The Issuing bank debits the buyer and releases the documents (including transport document), so the buyer can claim the goods from the carrier.

International Payment Methods – Recommended Terms and Conditions for Payment:

 There are several basic Export Payment Methods – Import Payment Methods for products sold abroad. As with domestic sales, a major factor that determines the method of payment is the amount of trust in the buyer’s ability and willingness to pay. For sales within our country, if the buyer has good credit, sales are usually made on open account; if not, cash in advance is required. For export sales, these same methods may be used; however, other methods are also often used in international trade. Ranked in order from most secure for the exporter to least secure, the basic methods of payment are:

  • Cash in advance
  • Documentary Letter of Credit – Payment at shipment
  • Documentary Collection – Payment at delivery
  • Open Terms – Payment after delivery
  • Other payment mechanisms, such as consignment sales

Since getting paid in full and on time is of utmost concern to exporters, risk is a major consideration. Many factors make exporting riskier than domestic sales. However, there are also several methods of reducing risks. One of the most important factors in reducing risks is to know what risks exist. For that reason, exporters are advised to consult an international banker to determine an acceptable method of payment for each specific transaction.

    1. Cash in Advance

Cash in advance before shipment may seem to be the most desirable method of all, since the shipper is relieved of collection problems and has immediate use of the money if a wire transfer is used. Payment by check, even before shipment, may result in a collection delay of four to six weeks and therefore frustrate the original intention of payment before shipment. On the other hand, advance payment creates cash flow problems and increases risks for the buyer. Thus, cash in advance lacks competitiveness; the buyer may refuse to pay until the merchandise is received.

    1. Documentary Letter of Credit

A Letter of Credit is an undertaking issued by a bank in favor of a Beneficiary (exporter), which substitutes the bank’s creditworthiness for that of the Applicant (Importer).  It is used to pay for a shipment of goods or services from one party to another.   The following are the minimum terms, conditions and information that is needed to be agreed upon between the Applicant and Beneficiary for the Applicants bank to issue the Credit to the Beneficiary.  The Terms should reflect the Purchase Agreement or Contract between the parties as to the description of goods and services, transportation method, Incoterm, shipping points, currency and the like.

SWIFT No.Description  (MT 700 Format)Terms
40AForm of Documentary CreditIrrevocable (Option: & Transferable)
50Applicant NameApplicant’s (Importers) Name, Address, Telephone, Facsimile & Email.
59BeneficiaryBeneficiary’s (Exporty  Name, Address, Telephone, Facsimile & Email.
32BCurrency / AmountUSD $ X,XXX.XX
42CDrafts AtSight (or) 1-180 Days from Bill of Lading
43PPartial ShipmentsAllowed (or) Not Allowed
43TTransshipmentsAllowed (or) Not Allowed
44ALoading / Dispatch At/FromSea Shipment: FOB (or) CFR (or) CIF “From”
44ALoading / Dispatch At/FromAir Shipment: EXW (or) CPT “From”
44BFor Transportation ToSea (or) Airport “To”
44CLatest Date of Shipmentdd mmm yy (minimum 21 days from Credit expiry date)
45AGoods DescriptionEquipment And/Or Materials per PO No. XXXXX.
46ADocuments Required:1. Bill of Exchange
2. Bill of Lading (or) Waybill
3. Commercial Invoice
4. Packing List
47AAdditional ConditionsDocuments issued in English language.
49ConfirmationConfirmed (Preferably)

  1. 3.Documentary Collection

Instructions given by a seller (exporter) to its bank that the documents attached to a draft for collection are deliverable to the drawee (buyer / importer) only against the drawee’s payment or acceptance of the draft.

Documents Required1. Bill of Exchange
2. Bill of Lading (or) Waybill
3. Commercial Invoice
4. Packing List

 4.      Open Account

A seller (exporter) ships goods along with the related documents to a buyer (importer) with no guarantee of payment.  The buyer then makes payment on its account in the manner and terms specified in the invoice.

Document Required1. Commercial Invoice

 Risk situations in LC transaction

Fraud Risks

  • The payment will be obtained for nonexistent or worthless merchandise against presentation by the beneficiary of forged or falsified documents.
  • Credit itself may be forged.

Sovereign and Regulatory Risks

  • Performance of the Documentary Credit may be prevented by government action outside the control of the parties.

Legal Risks

  • Possibility that performance of a Documentary Credit may be disturbed by legal action relating directly to the parties and their rights and obligations under the Documentary Credit

Force Major and Frustration of Contract

  • Performance of a contract – including an obligation under a Documentary Credit relationship – is prevented by external factors such as natural disasters or armed conflicts

Risks to the Applicant

  • Non-delivery of Goods
  • Short Shipment
  • Inferior Quality
  • Early /Late Shipment
  • Damaged in transit
  • Foreign exchange
  • Failure of Bank via Issuing bank / Collecting Bank

Risks to the Issuing Bank

  • Insolvency of the Applicant
  • Fraud Risk, Sovereign and Regulatory Risk and Legal Risks

Risks to the Reimbursing Bank

  • No obligation to reimburse the Claiming Bank unless it has issued a reimbursement undertaking.

Risks to the Beneficiary

  • Failure to Comply with Credit Conditions
  • Failure of, or Delays in Payment from, the Issuing Bank
  • Credit Issued by Party other than Bank

Risks to the Advising Bank

  • The Advising Bank’s only obligation – if it accepts the Issuing Bank’s instructions – is to check the apparent authenticity of the Credit and advising it to the Beneficiary

Risks to the Nominated Bank

  • Nominated Bank has made a payment to the Beneficiary against documents that comply with the terms and conditions of the Credit and is unable to obtain reimbursement from the Issuing Bank

Risks to the Confirming Bank

  • If Confirming Bank’s main risk is that, once having paid the Beneficiary, it may not be able to obtain reimbursement from the Issuing Bank because of insolvency of the Issuing Bank or refusal of the Issuing Bank to reimburse because of a dispute as to whether or not payment should have been made under the Credit

Other Risks in International Trade

  • A Credit risk from change in the credit of an opposing business.
  • An Exchange risk is a risk from a change in the foreign exchange rate.
  • A Force major risk is

           1. A risk in trade incapability caused by a change in a country’s policy, and

           2. A risk caused by a natural disaster.

  • Other risks are mainly risks caused by a difference in law, language or culture. In these cases, the cargo might be found late because of a dispute in import and export dealings.

Export

The term “export” is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to an “exporter” who is based in the country of export whereas the overseas based buyer is referred to as an “importer”. In International Trade, “exports” refers to selling goods and services produced in home country to other markets.

In economics, an export is any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade. Export goods or services are provided to foreign consumers by domestic producers.

Export of commercial quantities of goods normally requires involvement of the customs authorities in both the country of export and the country of import. The advent of small trades over the internet such as through Amazon and e-Bay have largely bypassed the involvement of Customs in many countries because of the low individual values of these trades. Nonetheless, these small exports are still subject to legal restrictions applied by the country of export. An export’s counterpart is an import.

Barriers

Strategic

Tariffs

Subsidies

Exports and free trade

Export strategy

Export strategyis to ship commodities to other places or countries for sale or exchange. In economics, an export is any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade.

Vessel at Container Terminal Altenwerder (Hamburg)

Advantages of exporting

Ownership advantages are the firm’s specific assets, international experience, and the ability to develop either low-cost or differentiated products within the contacts of its value chain. The locational advantages of a particular market are a combination of market potential and investment risk. Internationalization advantages are the benefits of retaining a core competence within the company and threading it though the value chain rather than obtain to license, outsource, or sell it. In relation to the Eclectic paradigm, companies that have low levels of ownership advantages either do not enter foreign markets. If the company and its products are equipped with ownership advantage and internalization advantage, they enter through low-risk modes such as exporting. Exporting requires significantly lower level of investment than other modes of international expansion, such as FDI. As you might expect, the lower risk of export typically results in a lower rate of return on sales than possible though other modes of international business. In other words, the usual return on export sales may not be tremendous, but neither is the risk. Exporting allows managers to exercise operation control but does not provide them the option to exercise as much marketing control. An exporter usually resides far from the end consumer and often enlists various intermediaries to manage marketing activities.

 Disadvantages of exporting

For Small-and-Medium Enterprises (SME) with less than 250 employees, selling goods and services to foreign markets seems to be more difficult than serving the domestic market. The lack of knowledge for trade regulations, cultural differences, different languages and foreign-exchange situations as well as the strain of resources and staff interact like a block for exporting. Indeed there are some SME’s which are exporting, but nearly two-third of them sells in only to one foreign market. The following assumption shows the main disadvantages:

  • Financial management effort: To minimize the risk of exchange-rate fluctuation and transactions processes of export activity the financial management needs more capacity to cope the major effort
  • Customer demand: International customers demand more services from their vendor like installation and startup of equipment, maintenance or more delivery services.
  • Communication technologies improvement: The improvement of communication technologies in recent years enable the customer to interact with more suppliers while receiving more information and cheaper communications cost at the same time like 20 years ago. This leads to more transparency. The vendor is in duty to follow the real-time demand and to submit all transaction details.
  • Management mistakes: The management might tap in some of the organizational pitfalls, like poor selection of oversea agents or distributors or chaotic global organization.

COMMON EXPORT DOCUMENTS

The Section covers to documents that are commonly used in exporting, but specific requirements vary by destination and product. It is divided in the following sections: common export-related documents, certificates of origin, other certificates for shipments of specific goods, Export licenses and Temporary shipment documents.

      1. Common Export Documents

2. Certificates of Origin

3. Other Certificates for Shipments of Specific Goods

4. Export Licenses

5. Other Export Related Documents

6. Temporary Shipments

 COMMON EXPORT DOCUMENTS

  • Airway Bill

Air freight shipments require Airway bills, which can never be made in negotiable form Airway bills are shipper-specific (i.e. USPS, Fed-Ex, UPS, DHL, etc).

  • Bill of Lading

A contract between the owner of the goods and the carrier (as with domestic shipments). For vessels, there are two types: a straight bill of lading, which is non-negotiable, and a negotiable or shipper’s order bill of lading. The latter can be bought, sold, or traded while the goods are in transit. The customer usually needs an original as proof of ownership to take possession of the goods.

  • Commercial Invoice

A bill for the goods from the seller to the buyer. These invoices are often used by governments to determine the true value of goods when assessing customs duties. Governments that use the commercial invoice to control imports will often specify its form, content, number of copies, language to be used, and other characteristics.

  • Export Packing List

Considerably more detailed and informative than a standard domestic packing list, it lists seller, buyer, shipper, invoice number, date of shipment, mode of transport, carrier, and itemizes quantity, description, the type of package, such as a box, crate, drum, or carton, the quantity of packages, total net and gross weight (in kilograms), package marks, and dimensions, if appropriate. Both commercial stationers and freight forwarders carry packing list forms. A packing list may serve as conforming document. It is not a substitute for a commercial invoice.

  • Electronic Export Information Form (Shippers Export Declaration)

The EEI is the most common of all export documents. Required for shipments above $2,500* and for shipments of any value requiring an export license. SED has to be electronically filed via AES Direct (free service from Census and Customs) online system.

CERTIFICATES OF ORGIN

  • Generic Certificate of Origin

The Certificate of Origin (CO) is required by some countries for all or only certain products. In many cases, a statement of origin printed on company letterhead will suffice.The exporter should verify whether a CO is required with the buyer and/or an experienced shipper/freight forwarder or the Trade Information center.

For textile products, an importing country may require a certificate of origin issued by the manufacturer. The number of required copies and language may vary from country to country.

  • Certificate of Origin for claiming benefits under Free Trade Agreements

Special certificates may be required for countries with which the United States has free trade agreements (FTAs). Some certificate of origin including those required by the North American Free Trade Agreement (NAFTA), and the FTA’s with Israel and Jordan, are prepared by the exporter. Others including those required by the FTA’s with Australia, CAFTA countries, Chile and Morocco, are importer’s responsibility). Click on a specific country below to learn details on how to document origin.

  Australia (CO samples)

  Bahrain (importer to check with Govt. of Bahrain on format/information)

  CAFTA (Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras CO sample)

  Chile (CO sample)

  Israel (sample Note: Green form needs to be purchased from Vendor or US-Israel Chamber of Commerce or a publishing house )

  Jordan (notarized generic certificate of origin required)

  Morocco (importer makes a claim on the basis of supporting evidence)

  NAFTA (Mexican, Canada, sample)

  Singapore (no certificate of origin is required. However, the importer is required to produce the necessary permits together with an invoice, at the time of cargo clearance.)

OTHER CERTIFICATES FOR SHIPMENTS OF SPECIFIC GOODS

  • ATA CARNET/Temporary shipment certificate

An ATA Carnet a. k. a. “Merchandise Passport” is a document that facilitates the temporary importation of products into foreign countries by eliminating tariffs and value-added taxes (VAT) or the posting of a security deposit normally required at the time of importation.

  • Certificate of Analysis

A certificate of analysis is required for seeds, grain, health foods, dietary supplements, fruits and vegetables, and pharmaceutical products.

  • Fumigation Certificate

The Fumigation Certificate provides evidence of the fumigation of exported goods (esp. agricultural products, used clothing, etc). This form assists in quarantine clearance of any goods of plant or animal origin. The seller to fumigate commodity at their expense a maximum of fifteen (15) days prior to loading.

  • Ingredients Certificate

A certificate of ingredients may be requested for food products with labels that are inadequate or incomplete. The certificate may be issued by the manufacturer and must give a description of the product, contents and percentage of each ingredient, chemical data, microbiological standards, storage instructions, shelf life, and date of manufacture. If animal fats are used, the certificate must state the type of fat used and that the product contains no pork, artificial pork flavor, or pork fat. All foodstuffs are subject to analysis by Ministry of Health laboratories to establish their fitness for use.

  • Inspection Certificate

Weight and Quality certificates should be provided in accordance with governing USDA/GIPSA regulations for loading at port and loading at source/mill site as appropriate. A certificate of origin certified by local chamber of commerce at load port and a Phytosanitary certificate issued by APHIS/USDA and Fumigation certificate are to be provided to buyer. Costs of all inspection, certificates/ documents at the load port are usually the responsibility of the seller.

  • Insurance Certificate

Used to assure the consignee that insurance will cover the loss of or damage to the cargo during transit (Sample). These can be obtained from your freight forwarder or publishing house. Note: an airway bill can serve as an insurance certificate for a shipment by air. Some countries may require certification or notification.

  • Steamship or Airline Company Certificate

A declaration attached to a bill of lading or airway bill stating that the shipper will not stop at an unscheduled port, attesting to the accuracy of the shipping route and providing other shipping information such as name of vessel/plane, nationality of vessel/plane, owner of vessel/plane, names of ports of call including port of leading and discharge.

  • Other (product-specific) certificates

Shaving brushes and articles made of raw hair must be accompanied by a recognized official certificate showing the consignment to be free from anthrax germs. Used clothing requires a disinfection certificate. Grain requires a fumigation certificate, and grain and seeds require a certificate of weight. Many countries in the Middle East require special certificates for imports of animal fodder additives, livestock, pets, and horses.

  • Weight certificate

Certificate of weight is a document issued by customs, certifying gross weight of the exported goods.

EXPORT LICENSES

Export license is a government document that authorizes the export of specific goods in specific quantities to a particular destination. This document may be required for most or all exports to some countries or for other countries only under special circumstances.

  • Destination Control Statement

Destination Control Statement (DCS) is required for exports from United States for items on the Commerce Control List that are outside of EAR99 (products for which no license is required). A DCS appears on the commercial invoice, ocean bill of lading or Airway bill to notify the carrier and all foreign parties that the item can be exported only to certain destinations.

  • ISPM 15 (Wood Packaging) Marking

The International Standards for Phytosanitary Measures Guidelines for Regulating Wood Packaging Material in International Trade (ISPM15) is one of several International Standards for Phytosanitary Measures adopted by the International Plant Protection Convention (IPPC).

 OTHER EXPORT RELATED DOCUMENTS

  • Consular Invoice
  • Canadian Customs Invoice
  • Dock Receipt and Warehouse Receipt
  • Import License
  • Pre-shipment Inspections
  • Shippers Letter of Instruction
  • ATA CARNET/Temporary shipment certificate
  • Customs Certificate of Registration

 TEMPORARY SHIPMENTS

 Figure of Commercial Invoice

1. EXPORTER

2. CONSIGNEE

3. INTERMEDIATE CONSIGNEE

 4. FORWARDING AGENT

5. COMMERCIAL INVOICE NO.

 6. CUSTOMER PURCHASE ORDER NO.

7. B/L, AWB NO.

8. COUNTRY OF ORIGIN

9. DATE OF EXPORT

10. TERMS OF PAYMENT

11. EXPORT REFERENCES

12. AIR/OCEAN PORT OF EMBARKATION

13. EXPORTING CARRIER/ROUTE

14. PACKAGES

15. QUANTITY 16. NET WEIGHT/GROSS WEIGHT

17. DESCRIPTION OF MERCHANDISE

18. UNIT PRICE/TOTAL VALUE

19. PACKAGE MARKS

20. MISC. CHARGES

21. CERTIFICATIONS

 Figure of Bill of Lading

1. SHIPPER (From)

2. POINT OF ORIGIN (At)

3. DATE OF SHIPMENT

4. TRUCK/FREIGHT

5. SHIPPER’S NUMBER

6. CARRIER

7. AGENT’S NUMBER

8. CONSIGNED TO

9. DESTINATION

10. ROUTE

11. DELIVERING CARRIER

12. VEHICLE/CAR NO.

13. NO. PACKAGES

14. DESCRIPTION OF SHIPMENT

15. WEIGHT

16. CLASS OR RATE

17. WITHOUT RECOURSE

18. PREPAID SHIPMENTS

19. PREPAYMENTS RECEIVED

20. CHARGES ADVANCED

21. C.O.D. SHIPMENT

22. SHIPMENT DECLARED VALUE

23. SHIPPER

24. SHIPPER’S AGENT

25. CARRIER’S AGENT

26. PERMANENT ADDRESS

27. CERTIFICATION

Bibliographies

  1. Bangladesh Bank Database.
  2. Bangladesh Bureau of Statistics.
  3. Bangladesh Garments Manufacturer and Export Association (BGMEA)
  4. Bhattacharya, D., Rahman, M., Raihan, A. (2002), “Contribution of the RMG Sector to the Bangladesh Economy”, CPD Occasional Paper Series 50.
  5. Export Promotion Bureau Database.
  6. Foreign exchange and dealing, By-
  7. Haider, M.A (2007), “Competitiveness of the Bangladesh Ready-made Garment Industry in Major International Markets”, Asia-Pacific Trade and Investment Review, Vol. 3, No.1.
  8. Nehal, A.,Hossain, S. (2006), “Future Prospects of Bangladesh’s Ready-Made Garments Industry and the Supportive Policy Regime”, Policy Note Series: PN 0702, Policy Analysis Uni (PAU), Bangladesh Bank.
  9. Rashid, A. (2006), “Rise of Ready Made Garments industry in Bangladesh: Entrepreneurial ingenuity or public policy”, Workshop on Governance and Development, World Bank, Dhaka.
  10. www.almuslimgroup.net
  11. www.google.com
  12. www.export.gov/static/cert_of_origin_generic.pdf
  13. www.unzco.com/basicguide/figure9.html

Ready Made Garments Industry in Bangladesh

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