The Garment Industry in Low-Income Countries

An Entry Point of Industrialization

T. Fukunishi, T. Yamagata, T. Fukunishi, T. Yamagata

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN:
  9781137383174
• eBook ISBN:
  9781137383181
• Topic: Economía
• Subtopic: Negocios en general

This book explores the means through which the garment industry contributes to industrialization, poverty reduction, empowerment of undereducated workers, in particular female laborers, and shared growth in contemporary low-income countries.

1

Introduction: The Dynamism of the Garment Industry in Low-income Countries

Takahiro Fukunishi and Tatsufumi Yamagata

1.1 Motivation and aim

Historically, many countries began their process of industrialization through focusing on labor-intensive industries, typically the textile industry. This industry was at the forefront of industries leading the Industrial Revolution in the United Kingdom from the mid-eighteenth to the mid-nineteenth centuries (Clark 2007; Mokyr 1990). Japan is another nation that exploited the labor-intensive nature of the textile industry to promote industrialization and the absorption of the country’s abundant labor (Ito 1992; Lockwood 1954). The Industrial Revolution and subsequent technical progress turned the textile industry’s upstream processes into capital-intensive activities. Thus, spinning, weaving, and dyeing processes became increasingly machine-dependent and capital intensive, whereas downstream processes, particularly sewing, have remained labor intensive even up to the present day.

Some East Asian economies around mainland China, namely Hong Kong, South Korea, and Taiwan, followed the Japanese-style industrialization pattern led by the textile industry featuring downstream processes during the post-World War II period (Amsden 1989; Ranis 1979; Wade 1990; Suehiro 1982). In the 1970s and 1980s, industrialization led by the export of labor-intensive commodities was taken over by some Southeast Asian countries such as Indonesia, Malaysia, the Philippines, and Thailand (Amjad 1981; Pang 1988; Suehiro 1982). In the 1990s, mainland China also joined neighboring countries to grow its economy by exporting labor-intensive manufactured products. This gradual development of a number of countries was called the “flying geese” pattern of industrial development (Akamatsu 1962; Watanabe and Kajiwara 1983; Yamazawa 1990). These East Asia countries achieved economic growth with relatively equal income distribution and poverty reduction (Oshima 1987; World Bank 1993). Labor-intensive industrialization contributed at least in part to this “shared growth” by offering employment opportunities to workers lacking higher education.¹ Fukunishi et al. (2006) and Yamagata (2009) stated that this same mechanism of industrialization combined with poverty reduction worked in Bangladesh and Cambodia, countries where the garment industry dominates the manufacturing industry in terms of exports and employment.

This book explores the means through which the garment industry contributes to industrialization, globalization, poverty reduction, the empowerment of undereducated workers, in particular female laborers, and shared growth in contemporary low-income countries. More specifically, we first demonstrate how dynamism in the industry successfully leads to growth for considerable periods, including trade liberalization without degradation of workers’ wages and working conditions. We provide evidence against the argument that the garment industry is a static and non-innovative activity, or even a “dead-end sector of industrialization.”

One such “dead-end” argument states that specialization in a labor-intensive industry offers a narrow scope of innovation and is destined to participate in a “race to the bottom” through cost-cutting competition, resulting in wage reductions and deterioration in workers’ welfare (Tonelson 2002; UNIDO 2002). According to this argument, a country should avoid committing to a labor-intensive industry even if the static comparative advantage of labor-abundant and low-wage countries lies in that sector. In fact, the theory of international trade featuring increasing return technology in capital-intensive industries concludes that a country specializing in a labor-intensive industry misses the opportunity to gain a dynamic comparative advantage because the labor-intensive industry is arguably less innovative (Grossman and Helpman 1991, 1995).

However, recent studies have found little evidence of a “race to the bottom” despite considerable liberalization in the apparel markets. While liberalization has lowered prices of apparel products, real wages did not fall but rose in many exporting countries including Bangladesh, Cambodia, Pakistan, and Vietnam (Lopez-Acevedo and Robertson 2012; Asuyama et al. 2011). The growth of exports coincided with a reduction of output price and a rise of input prices, which, contrary to the implications of the Stolper–Samuelson theorem, strongly imply that garment industries have made process and/or product innovations; that is, they have enhanced productivity and upgraded product quality. If it is a case of growing low-income garment exporters, the industry can provide employment opportunities to unskilled and female workers without degrading working conditions in the liberalized market.

Furthermore, the garment industry is often a door for further and deeper industrialization in a country. As stated at the outset of this chapter, the textile industry was a beginning, not an end, of industrialization. Successful garment-exporting countries have extended their range of export commodities from garments and primary goods to electrical machinery, transport equipment, and so on. Even current low-income countries specializing in the garment industry, such as, for example, Bangladesh and Cambodia, exhibit signs of deeper and broader industrialization.² Though direct evidence is yet to be collected and accumulated, innovations in the garment industry are likely to facilitate further industrialization.

Nevertheless, the industrial performance of export-oriented garment industries is diverse and success is not shared by all developing countries. Many countries in sub-Saharan Africa and some in Asia have not experienced or did not maintain any growth in exports. Even among successful industries, dynamism during trade liberalization differed from country to country, reflecting variations in factor endowment, markets, policies, and business environments. For instance, some industries made process innovation while others engaged in product innovation. Through in-depth investigation of individual industries and cross-country comparisons, we demonstrate diversity across countries and explore the factors that yield such diversity in garment industries. Our argument incorporates an examination of factors leading to the stagnated performance in African countries.

Seven developing countries – Bangladesh, Cambodia, Kenya, Madagascar, Myanmar, Pakistan, and Vietnam – were selected as case studies in this book to discuss the above issues. All seven countries have been at low-income levels, although Pakistan and Vietnam just graduated from the low-income group as defined by the World Bank. Moreover, they have all experienced rapid growth in garment exports to developed countries, at least for a period of a few years. Of our case study countries, Vietnam, Cambodia, Bangladesh, Pakistan, and Madagascar have sustained steady growth in exports over a considerable length of time. Although the industry’s size varies between countries, in each case, it has a substantial share in commodity exports and provides significant employment opportunities (Table 1.1). In contrast, growth in Myanmar and Kenya was frustrated after a short period of rapid growth, and Madagascar experienced a drastic reduction after political turmoil erupted in 2009. Incorporating this performance diversity of the seven countries, we intend to capture a broader range of the implications of the garment industry’s development on industrial dynamism in low-income countries.

1.2 Overview of the garment industry

Before proceeding to the case studies and cross-country comparative study, this section offers basic knowledge regarding the technical specifications of textiles and apparel and the status quo of both the industry and market.

1.2.1 Production structure of the garment

The garment, which is also called wearing apparel and clothing, is a main final product of the textile industry. Though the industry does have other final products, such as bed sheets, curtains, and tablecloths, their amounts in terms of both consumption and production, are far smaller than the garment, in terms of both quantity and value.

Table 1.1 Overview of the garment industry in the seven countries (2011)

Note: Export values are based on import value reported by US, EU and Japan. Share of apparels in total exports is based on export value to all destinations reported by the seven countries.

Source: (export value, share) UN Comtrade, (GNI per capita, population) World Development Indicators, (employment) BGMEA, Ministry of Commerce Cambodia, EPZ authority Kenya, Ministry of Trade and Industry Madagascar, Kudo (2010) for Myanmar.

Broadly, the textile industry includes the entire production processes for final products from fibers. The typical series of processes begins with the introduction of fibers from either natural or artificial sources. The fiber is spun into thread or yarn, and then the thread/yarn is woven or knit into fabrics. Finally, fabrics are cut and sewn into garments and/or other final products, and it is a process that garment industry mainly handles.³ These exceptions are sweaters and socks, which skip the process of weaving or knitting into fabrics and are knitted directly from yarn into the final products. In the narrow sense, the textile industry contains only spinning, weaving, and knitting, namely the processes that make thread/yarn and fabrics from fibers.

A series of production processes that produces a final product from material is called a “value chain” (Gereffi et al. 2001) because value added is created through each process and distributed as factor income to owners of the factors of production used in the process and as profits to owners of the firm. A sequence of these processes is interpreted as a chain flowing from upstream to downstream. Given that transportation and communication costs declined drastically, the location in which each production process is undertaken need not be in the same country. In other words, production process locations are “fragmented” and are allocated to a country that has minimized its production costs (including those for transportation and communication) (Deardorff 2001). In the textile industry, factor intensity differs substantially between spinning/weaving and sewing processes with higher labor intensity in the latter. Consequently, the garment industry tends to locate in a country with low wages, while the narrowly defined textile industry, consisting of spinning and weaving, is likely to be concentrated in a few countries to realize economies of scale. In addition to factor prices, preferential treatment in tariffs, such as the Generalized System of Preferences (GSP), affects location of processes. Currently, allocating each production process to countries is an important strategy for multinational enterprises.

Occasionally, exporting countries implement a further division of labor. Many garment firms undertake subcontracts of other firms, called a cut-make-trim (CMT) or cut-make-pack (CMP) service. Under this arrangement, a firm provides all of the work of assembly works from cutting fabrics to packaging products using materials supplied by a buyer. While CMT is a common practice in the garment industry as an order-sharing arrangement to allow firm to deal with orders in excess of their capacity, some firms actually specialize in CMT services. CMT services require much smaller amounts of start-up capital than full-process operations requiring the procurement of materials, which is called FOB, because it does not require cash holdings to purchase materials. CMT services are provided both across and within borders. For CMT service providers that work only within borders, the management of international transportation and marketing in export markets is waived. This feature allows for the entry of small, young firms with little financial capacity and marketing skills.

1.2.2 Development of the garment industry in low-income countries

Growing presence of low-income exporters

After World War II, garment exports from developing countries increased gradually. The first-comers were the East Asian countries that flourished in the 1970s and 1980s, followed by Southeast Asian and Latin American countries in the 1980s and by China in the 1990s and afterwards. In the late 1990s, exports from low-income countries increased steadily, and they became top exporters in the 2000s. Table 1.2 shows the top 15 exporters to the US market and highlights low-income countries as of 2000.⁴ Clearly, the number of low-income countries among the top 15 exporters increased gradually, and six low-income countries were ranked in 2008. Although the share of low-income countries was less than 1 per cent in 1970, it increased rapidly during the 1990s and 2000s and finally hit 27.0 per cent in 2008 (Figure 1.1). In the EU market, the share of imports f...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Tables
• List of Figures
• Preface and Acknowledgements
• Notes on the Contributors
• 1 Introduction: The Dynamism of the Garment Industry in Low-income Countries: Takahiro Fukunishi and Tatsufumi Yamagata
• 2 Cambodia: Growth with Better Working Conditions: Yoko Asuyama and Seiha Neou
• 3 Bangladesh: Market Force Supersedes Control: Mohammad Yunus and Tatsufumi Yamagata
• 4 Vietnam: Upgrading from the Export to the Domestic Market: Kenta Goto
• 5 Pakistan: Challenges for Women’s Labor Force Participation: Momoe Makino
• 6 Myanmar: Promised Growth with Restored Market Access?: Toshihiro Kudo
• 7 Madagascar: Unyielding Growth amid the Political Turmoil: Takahiro Fukunishi and Herinjatovo Aimé Ramiarison
• 8 Kenya: Stagnation in the Liberalized Markets: Takahiro Fukunishi
• 9 Cross-Country Comparison of Firm Performance: Bangladesh, Cambodia, and Madagascar: Takahiro Fukunishi
• Index