Fitch Solutions believe Bangladesh’s reliance on its large ready-made garment sector for growth can both be a boon and a bane for the Bangladeshi economy over the long term. The Bangladesh garment sector will likely be among the top beneficiaries of the ongoing structural shift in low-end manufacturing out of China. However, the country’s strong reliance and constant focus on growing its ready-made garments sector could inhibit its wage growth and the country’s move up the value chain, and this could hinder Bangladesh’s goal to become a developed country by 2041.
Bangladesh’s strong reliance on ready-made garments (RMG) exports (11% of GDP) for growth could be a double-edged sword for the economy over the long run. On the one hand, Bangladesh to be one of the main beneficiaries of the ongoing structural shift in low value-added manufacturing out of China due to rising wages which will likely be accelerated by the US’s tariffs on Chinese exports. On the other, Fitch caution that a focus on expanding the garment manufacturing sector in Bangladesh could inhibit its move up the value chain, and pose a significant hindrance to its goal of becoming a developed country by 2041.
Fitch Solution expects the Bangladesh RMG sector to be one of the top beneficiaries of the ongoing structural shift in garment manufacturing operations out of China. Indeed, Bangladesh’s RMGexports (80% of total exports) has witnessed strong double-digit growth. While having the second-largest RMG market share in the world, Bangladesh is a far second at 7.6% of the total market share as compared to the 32.0% China possesses.
Rising wages due to difficulty in attracting sufficiently skilled labor in China’s textile industry as a result of competition from the burgeoning Chinese services sector will continue to perpetuate the shift in textile manufacturing to significantly lower-cost countries such as Bangladesh. While no official data is covering the wages of textile workers, news sources indicate that monthly wages in China’s textile industry is about USD1000 (CNY7000), versus USD70 (BDT6000) in Bangladesh. In our view, the significantly lower production costs would still make it viable for garment manufacturers to shift their operations to Bangladesh and adopt a more labour intensive model in the South Asian nation, as compared to a more capital intensive one in China. While the US tariffs on Chinese exports do not yet cover finished clothing and footwear, there is still the risk of these products coming into the US’s crosshairs, particularly should tensions between the two global powers re-escalate. This informs our belief that the ongoing US-China tensions will serve to accelerate the structural shift in textile manufacturing to Bangladesh, amongst other countries such as Vietnam and Cambodia with low production costs. The shift will also be supported by Bangladesh’s ongoing provision of a 4% cash incentive for RMG exports to countries other than its main exports destinations and a 1% incentive for its main exports destinations.
The continued shift in textile manufacturing to Bangladesh due to lower wages and abundant labour will facilitate a strong expansion of Bangladesh’s RMG sector over the coming decade and bode well for its global RMG export market share. However, we see some potential problems to the expansion of the RMG sector being the path of least resistance for the country.
Firstly, the ready availability of RMG jobs (and other low-skilled jobs such as construction) as compared to sectors that require more sophisticated skills could discourage the pursuit of higher education and skills. This is simply because it would not be practical to attain a high level of education only to be overqualified for the jobs available. In addition, there is also the opportunity cost of the income that could be earned in the years spent studying for secondary or tertiary education qualification. Indeed, based on the latest 2017 unemployment data, the unemployment rate rises exponentially in tandem with education attainment, which indicates a shortage of high skilled jobs in the economy. We caution that a lack of incentive to pursue higher education could inhibit Bangladesh’s move towards higher-value manufacturing and services.
Secondly, the continued pursuit of abundant low paying RMG jobs could see Bangladeshi workers trapped in a vicious cycle of low incomes and poverty. Based on news sources, the BDT8000 (USD70) monthly salary for a RMG worker in Bangladesh is only half the amount of BDT15000 (USD177) workers consider to be sufficient to live on and to feed their families. The low wages in the industry reinforce our view that individuals could be forced to seek out low-skilled employment early in their lives so that they and their families can survive.
Thirdly, Bangladesh’s bid to defend its market share in the face of stiff competition from other countries could be suppressing wages. Bangladesh is competing with other low cost countries in the region such as India, Vietnam, and Cambodia for what was once China’s RMG export share. Given the low-skilled nature of RMG work, Bangladesh can likely only compete on cost, which forces wages to remain low.
Fourthly, from a demand perspective, the low availability of sufficiently skilled labor as a result of poor incentives to pursue higher education would be a major deterrent to higher value-added foreign direct investment, on top of the already dismal business environment of the country. To be sure, Bangladesh ranks a dismal 176 out of 190 countries on the World Bank’s 2019 Ease of Doing Business Index, with its position dragged lower by poor contract enforcement and property registration. The continued inflow of mainly low value-added foreign direct investment would only serve to perpetuate the cycle of low incomes and poverty in the country as low-value manufacturing work generally do not pay a high wage.
Lastly, the government is aware of some of these problems and is actively trying to introduce measures to improve the quality of education and job opportunities for the people, according to the budget documents. However, due to a strong influx of individuals entering the workforce every year, the rate of job creation has likely failed to keep pace, as evidenced by the youth unemployment rate rising to 12.8% in 2017 from 9.9% in 2013. This has prompted the government to bolster overseas employment opportunities for Bangladeshi nationals overseas such as in Malaysia and South Korea through a strengthening of diplomatic ties. While this would alleviate wage concerns, we believe that individuals who are better qualified would choose to remain employed overseas, where salaries and the demands of the job better fit their capabilities, resulting in a continued brain drain of Bangladeshi talent over the coming years. As such, this could be another factor inhibiting the country’s move up the value chain and also the government’s goal of achieving developed country status by 2041.