Can Bangladesh Textile Exports Survive?

The ongoing global economic crisis is having a devastating impact on all export dependent economies, whether
manufacturing or primary product exporting. The collapse in demand in major industrial countries in North
America and the European Union has led to a sharp fall in export demand from the emerging and developing
countries and a collapse in primary commodity and manufactured product prices.
Even high performing countries like China and India have recorded sharp slowdowns or decline in export in
recent months, following double-digit expansion over a prolonged period. Other high performing economies
like those of Malaysia, Thailand, Philippines, and Indonesia are also suffering badly because of the ongoing
crisis. Along with most exports, textile (including garment) exports from these countries are also declining
sharply due to the economic meltdown in North America and Europe.
In contrast, export of textile products from Bangladesh surprisingly remains quite buoyant. Knitwear and woven
garments exports have increased by 41.8 percent and 36.2 percent, respectively, during July-December 2008
over the corresponding period last year. Although the high growth rate is partly attributable to the low base of
last year during this period, and with the growth rate likely to come down somewhat in the coming months,
most garment and knitwear exporters are bullish about the near-term outlook and are talking about shortage of
skilled manpower in the sector.
Naturally, one would like to ask why Bangladesh experience is so different from others. The most common
explanation is the “Wal-Mart effect” — named after the world’s largest retailer based in the United States, which
caters mostly to ordinary Americans. The argument is based on the hypothesis that since Bangladesh primarily
exports low-end textile products — the kind of products marketed by Wal-Mart and whose sales have been least
affected by the crisis — and income declining in industrial countries, consumers would be buying more low-end
Bangladeshi made textile products.
Prof. Taslim, CEO of Bangladesh Foreign Trade Institute, questions this widely believed hypothesis and rightly
points out that: “Our export sector is in deep trouble if it is spewing out mostly inferior goods since the demand
for these products will certainly decline when income rises. We do not yet know of any product whose demand
increases with both an increase and a decrease in income.” I certainly agree with this view since the robust
growth of textile exports in recent years (presumably normal times) could not be explained by the hypothesis
that Bangladeshi products are inferior.
Another argument put forward by the IMF resident representative in Bangladesh, Mr. Jonathan Dunn, during his
presentation on the IMF’s Asian Economic Outlook, also throws cold water on the Wal-Mart effect as the basis
for explaining the growth in textile exports from Bangladesh. He points to the fact that most households in the
US and Europe have closets full of clothes which may last several years even if they do not buy new clothes.
The closets I saw at my own and my friends’ houses during the last three decades of living in North America
certainly testify in favour of Mr. Dunn’s argument that households used to a certain quality/brands of clothes
would not be shifting to inferior products in the short term, while their overflowing closets could easily meet
their needs for several more years.
It is also not conceivable that Bangladeshi manufacturers and workers have suddenly become much more
productive than those of China, India, and Indonesia, and will take market share away from these strong
competitors. All these countries have larger and better market access, modern production facilities, and better
infrastructure than Bangladesh. Why is the Bangladesh textiles sector doing so much better than most others in
this difficult time, and will it come out of the global crisis on a positive note?
The answer to this puzzle appears to lie in the series of newspaper reports in recent months pointing to the
opening of representative offices of major global corporations for buying textiles products directly from
Bangladesh. Decisions regarding sourcing of supplies by major global multinational corporations (MNCs) are
strategic in nature and based on medium- and long-term considerations. MNCs are aware of their excessive
dependence on major emerging economies, and the cost pressures and exchange rate appreciations experienced
by these economies in recent years. MNCs also recognise that, as the fastest growing economies like China and
India are getting richer, they are becoming non-competitive in many low value-added products including
textiles. Many MNCs have already concluded that they would need to find alternative or diversified sources for
procuring their supplies.
Although this strategic shift started several years back, the process is gaining momentum with cost pressures
intensifying in China, India, and other emerging East Asian economies. The apparel sectors in Vietnam and
Bangladesh gained remarkably in the post-MFA period, contrary to the doomsday scenarios painted by market
analysts and economists at that time, due to this strategic shift by MNCs. The impact of this trend is markedly
visible in the most recent data on export of textile products to the US market. (Figure 1)
The momentum is gaining strength. The shifts are based on the overall lower cost structure and its outlook,
while taking into account the ability of the new sourcing countries to meet the quality and punctuality of
deliveries. Bangladesh and Vietnam both meet these considerations and are the apparent beneficiaries of the
shift in sourcing. The momentum is gaining strength as both Vietnam and Bangladesh have crossed a critical
mass in the area of textiles exports and have got the attention of all major MNCs engaged in textiles products.
With unit labour cost at $0.25 per (Table 1), despite deficiencies in labour productivity, Bangladeshi
manufacturers are likely to remain highly competitive for years to come.
How far can the trade diversion toward Bangladesh carry us through? If we can fulfill buyers’ expectations in
terms of quality and punctuality, the sky is the limit. Although textiles account for 75 percent of Bangladesh
exports, they account for less than 2 percent of the global market for textiles. At present, the global textiles
market is about $600 billion a year, of which China accounts for 29 percent (Table 2). If Bangladesh can divert
only 2 percentage points of global textile production out of China, we can more than double our exports to $25
billion per year. This shift alone may more than offset any temporary slowdown in demand arising from the
global slowdown.
How is the Bangladesh textiles sector going to perform during the current economic turmoil? Certainly, the
effect of lower demand in industrial countries is affecting Bangladesh negatively. After all, Bangladesh textiles
are normal products. However, because of the large shift in demand toward Bangladesh from other larger
producers, textile exports from Bangladesh may still grow at a respectable pace throughout the crisis. It is more
like a situation that we characterise in economic literature as “a positive substitution effect outweighing the
negative income effect” emanating from the global downturn. Forward looking indicators for the overall activity
level in the textiles sector in Bangladesh indeed point to a continued bullish trend. Letters of credit (LCs) settled
for imported major textiles-related industrial inputs increased by high double-digit rates during the JulyDecember 2008 period over the corresponding period in the preceding year (Figure 2). The industrial inputs
imported under these settled LCs will be used by the textile related firms in the coming months, and the LCs are
generally backed by firm orders from foreign buyers.
How will the Bangladesh textiles sector perform in the post-turmoil period as the industrial countries recover?
Certainly, if we believe in the Wal-Mart effect, the Bangladesh textiles sector and the economy will be doomed
in the post-recovery phase. If the hypothesis presented above holds, the pace of substitution toward Bangladesh
will increase further, and we should expect a more robust performance of the textile sector in the coming years.
With continued political stability and necessary infrastructure support (electricity, transport and port facilities),
and if the current open trade regime for importation of textile inputs is maintained, the sector will be ready for a
much faster export growth once the global economy moves to an expansionary phase.
Ahsan H. Mansur is Executive Director, Policy Research Institute.

Dr. Ahsan H. Mansur

Dr. Ahsan H. Mansur

Dr. Mansur started his career as a Lecturer, Department of Economics, Dhaka University in 1976. He left for Canada for higher studies in economics in the same year. As a graduate student and research assistant, he was also offering regular economics courses at the undergraduate level at the University of ...

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