Topic: CONTRIBUTION OF THE RMG SECTOR TO THE BANGLADESH ECONOMY

Title: How RMG is covering the body of Bangladesh

Instructor name & designation: Biva Arani Mallik Senior Lecturer Department of Economics

Submitted by: Shafkat Ahmed Chowdhury Id. 2009-2-10-205 Sec: 3 Shamim Ehsan Id. 2009-2-10-241 Sec: 3 Avijit Mondal Id. 2009-2-10-203 Sec: 5

Date of submission: 18th April 2010

CONTRIBUTION OF THE RMG SECTOR TO THE BANGLADESH ECONOMY

Introduction
From the beginning of Bangladesh, most observers of the newly appeared country took a pessimistic view about the developmental prospect of it. Many thought that the country would remain under poverty line permanently. Though it was almost true but it has come a long way from there. Bangladesh has improved itself gradually by pulling itself in global trade by high export rate. Thus, Bangladesh can now rightfully claim that it has graduated from a largely aid receiving nation to a trading nation among which Ready Made Garments (RMG) sector place a crucial contribution. The Ready Made Garments (RMG) industry is the most important sector driving the economy as a whole. During the last fiscal year, the total export value of RMG was $9.2 billion. In context of Bangladeshs total export, contribution of RMG is approximately 78%. Over the years, this sector has had around 20% growth rate. Since 1970s, RMG has started providing huge contribution on economy. Therefore I have focused in this paper on how and what much RMG contributes on our economy.

Growth Overview
The export-oriented readymade garments (RMG) sector in Bangladesh started its journey in late 1970s as a small non-traditional sector of export. Bangladesh exported RMG worth only $ 69 thousand when Reaz Garments exported its first consignment to USA in 1978. By 2009, within a distance of about three decades exports have gone up to $12.35 billion. Over the last decade, the sector recorded an extraordinary growth rate of 20 percent per year, which is impressive by any standard. In fact, this was an exceptionally high growth rate for an emerging industry anywhere in the world. This industry has maintained such high growths that it also enjoyed a healthy expansion. In 1983, there were less than 50 factories from where in 2009 it expanded to 4,825,

and 3.5 million (approximately) people are directly involved in RMG sector. This industry has seen such an expansion From this graph it can be realized that RMG is on progress

80 60 40 20 0

% of RMG's to National Export

% of RMG's to National Export

75.66 76.06 75.83 65.61 59.31 35.24

Contribution on Different Sectors

How and what amount of economy is contributed by RMG sector could be viewed by GDP and other related factor. GDP is the measurement of the economy. It counts the value and earning of all final products that has produced inside the country. GDP has some component like consumption, investment, government expanding, export, import, taxation and a lot. Any kind of financial changes get counted by it. All together these sectors create the whole economy. Thus, RMG contribution on all these sector has been shown bellow. Contribution on GDP Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time. It is not as simple as this definition. GDP includes all the form of spending on domestically produced goods and services. One of the major

19 83 19 84 87 19 88 91 19 92 95 19 96 99 20 00 05 20 06 07 -0 8

components of the GDP is export among which RMG sector contributes 80%. The Bangladesh RMG industry 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. Day by day foreign currency earning is increasing. Bangladeshs RMG export earning stood at 4.58 billion US dollars in FY2002 where its contribution on GDP was 9.5%. Bellow, RMG contribution has shown as per US$ and GDP percentage. Macro Contribution of RMG Sector
RMG Earnings Total RMG Exports Local Value Retention Direct Value-Addition by RMG Sector Amount (billion US$) 4.5 2.1 1.2 As Percentage of GDP 9.5 4.4 2.4

Backward and Forward Linkages 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. As shown in Table, the 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 sectors. It has forward linkage with transport, communication, banking and insurance and trade services. Besides, there is a considerable subcontracting linkage within the sector. The buying house also plays important role towards bringing the manufacturers and buyers of the finished goods closer. As the inputoutput table shows, the RMG value-added ratio to output stood at 19% in 1993-94. Since then the RMG sector has undergone important changes, with substantial movements in terms of enhanced value addition. Direct value addition by the RMG was estimated to be about 25%. Though the country had some base in cotton textile industry even before the emergence of export-oriented RMG sector, its linkage with global market was insignificant. Realizing the

importance of the backward linkage industry in terms of supplying export quality yarn and fabric to satisfy the need of the growing RMG sector, the Bangladesh government took an early initiative to declare the textile sector as a thrust sector. Since the textile policy was put in place in 1995, the sector registered remarkable growth. In response to the incentive provided by the government and a ready market provided by the RMG industry, private sector came forward to invest in backward linkage industries. Backward linkages and other related activities marked remarkable progress in the last decade, particularly since mid-1990s.
TABLE : INPUT-OUTPUT RATIO WITH DIFFERENT SECTORS (1993-94) Inputs supplying Sectoral Input-output Ratio Yarn 0.59 RMG 0.004 Other Textiles 0.01 Printing and Publishing 0.002 Chemicals 0.0004 Petroleum and its Products 0.002 Machinery 0.0046 Transport Equipment 0.0006 Miscellaneous Industries 0.005 Electricity 0.0044 Gas 0.000173 Trade Service 0.029 Transport Service 0.016 Public Administration 0.00081 Banking and Insurance 0.00164 . . .. . Total Intermediate Input 0.81 Total Output 1.00 Value Added to Output 0.19

Banking Growths of the RMG sector and the related activities have contributed a lot to the strong growth of the financial sector in Bangladesh. In 2002 the banking sector earned about 37 million dollars from business with the RMG sector in the form of interest and charges and L/C charges. In Bangladesh, more than one-tenth asset portfolio of the commercial bank belongs to the RMG and textile sector. Every year textiles and garments industry take a huge amount of loan from the commercial banks. In 2001, RMG sector received 46.14% of the total export financing portfolio of the banks. The export financing business of the commercial banks is largely dependent on

this. A World Bank survey revealed that almost all firms (98%) are the clients of the commercial banks for working capital and collection of machines and equipment (57%). Insurance The RMG sector has also contributed to the growth of the countrys insurance sector. This is a risky industry and every year in our country, accident in the factory or shipment is getting common. There for, usually all factories and workers remain insured by the owner and 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. Transport Communication The growth and development of internal transport services to a considerable extent owe to the growth of the RMG industry. All of our RMG industries are situated nearby or inside the capital but for the raw materials and exporting shipments, some transportation is needed. There for 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 2002 the inland transport industry received about 27.3 million dollars as revenue from the RMG sector. National Board of Revenue (NBR) The RMG sector contributes to the governments NBR both directly and indirectly. As RMG oriented exports are increasing, NBR is getting revenue for investment, buying raw materials, buying packages, transportation, dock charge etc. In 2002 the sector paid 6.3 million dollars as stamp and postage, license renewal fee etc. Payments made for visa form, license form, GSP form and other forms to the Export Promotion Bureau amounted to 58.85 million dollars in 2001. The sector also paid $2.4 million to the government as direct taxes in the year 2002.

Shipping and Logistics

The RMG sector has contributed to the shipping business in Bangladesh. Maximum of the consignments exported through the ship and for that also huge logistic supports like free shipyard, quick transportation and shipment, one stop services are needed. Thus RMG sector also 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 $65 million in 2002 to earnings of the Shipping business of the country by way of port charges, C&F Agents commissions, freight charges, forwarding charges etc. Rising Consumer Market Growth in the RMG sector not only contributed on economy directly, but also contributed indirectly. It has increased the need for the skilled human resources and have given a huge job opportunity for the people. This earning people increase the spending for their unfulfilled need contribute on economy. The 1.6 million workers in the industry have created a large demand for consumer goods. RMG also pay comparably more as they consider their worker as resources. 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. Hotel and Tourism About 1000-1500 overseas apparel buyers and their representatives visit Bangladesh every year for business purpose. These people spend huge for good living and visiting. In 2002 the RMG industry created a business of approximately 4.42 million dollars for the countrys tourism industry. With that our country also has branded by RMG like Cambodia has branded for coffee and Brazil has branded for football. By being good in RMG sector Bangladesh is getting good reputation and familiarity from all over the country. This familiarity and reputation is attracting tourists from everywhere towards our country. This increasing amount of tourism also contributes on our economy.

Conclusion
Though almost three decades has passed, still there are several potential problems in RMG sector those are forbidding the progress of this sector as well as our country. Some main highlighted problems to be considered are:

EU and China: For the strategic partnership between China, EU is going to withdraw its quota system for China which means that China will grow to become a bigger competitor in the trade system. In terms of Bangladesh, this may create as a threat as the RMG sector will face tougher competition from China. Investment: In light of the socio-economic and political aspects, the investment scenario in Bangladesh is uncertain. Social Compliance: Some hampering factor like the power supply, labor conditions, pollution, bureaucracy and standards of the factories are obstacles for the growth of the RMG sector. For any kind of real improvement or advancement, financial support is required along with commitment from government and other bodies.

Recommendation
The minimum wage issue need to be solved
Recruitment policy need to be changed, which has been politicized so far. Real effort need to make for branding Bangladesh in international market.

Need more investor in this sector. The backward linkage is very important for RMG, it should be maintained. RMG sector might face tougher competition from China, need to conceder. Proper planning, government policies, effective entrepreneurship is required for facing he challenge in the world market.

Government through its lobbyist needs to acquire duty free market in USA.

References:
o

Mankiw. N. Gregory, PRINCIPLES OF MACROEC ONOMICS (Latest Edition), The Dryden Press.

o Mr. Kabir Ahmed Choudhury, Joint Director, Labor Department.

o o o o o http://bangladesheconomy.wordpress.com/2010/01/31/rmg-looks-to-goodtime/ http://www.bangladesh-bank.org/research/policynote/pn0702.pdf http://www.oppapers.com/essays/Rmg-Analysis-Bangladesh/153673 http://en.wikipedia.org/wiki/Bangladeshi_RMG_Sector http://www.undp.org.bd/library/policypapers/Policy%20dialogue%2020.pdf