What next for Bangladesh?

The collapse of the eight-storey Rana Plaza in the Savar district of Dhaka on April 24 that killed 1,127 people was clearly a terrible human disaster. It has led to recriminations, soul-searching about the standards in Bangladesh’s $20 billion readymade garment industry (RMG) and government action. But, not least, it has also turned the focus on the country’s other potential export sectors as a way to move up the value chain.

Bangladesh is the world’s second-largest exporter of RMG (after China), and accounts for 80% of its exports. The industry employs 3.5 million workers — 80% of whom are women — in 5,400 factories.

It has been an engine for growth and driven millions of people out of poverty.

“But, it has been evident for most policymakers that it will be difficult for us to move on to the next phase of Bangladesh’s economic progress without developing new industries,” Ifty Islam, managing partner at AT Capital told delegates at FinanceAsia’s Bangladesh Investment Summit, Europe, in London on June 11.

Remittances from overseas workers earn the country around $16 billion, making the manpower sector its second foreign exchange earner. However, the next largest export sectors, footwear and leather goods, and frozen foods and aquaculture, are barely worth $500 million.

Bangladesh has demographics on its side. Population growth is now 1.5% a year, but the working age population is growing faster, at 2.5% to 2.8%. “Quicker growth in working-age population presents an opportunity for more rapid development but also careful management of labour issues — wages, compliance with safety standards and skill development,” said Islam.

He identifies shipbuilding as one of the key promising sectors to nurture. It benefits from low labour costs and the availability of locally produced materials. Bangladesh, as a new entrant to the industry, exported ships worth $46.23 million in 2011-12, compared with only $9.34 million two years earlier.

The country’s information and communications technologies (ICT) sector has also made “impressive progress in recent years led by the telecoms sector which has seen rapid mobile penetration growth”, said Islam. Trained ICT staff at globally competitive prices has led several foreign firms setting up operations in Bangladesh, such as Samsung which established a research and development centre employing 250 people.

Aquaculture is another potential growth area. After China and India, Bangladesh is the third largest country in the world in terms of inland fisheries, covering 4.6 million hectares, according to the Department of Fisheries.

During the past 20 years the country has seen significant changes in fish production. In 2010-11 the total fish production was about 3.1 million tonnes compared with 1.89 million tones a decade ago. Fresh water prawn (scampi/golda) and brackish saline water shrimp known as (black tiger/ bagda) are the two most major export-oriented species that are cultured heavily in both fresh open water and coastal areas.

Marine fisheries is also an important segment of the fisheries sector, which holds around 17% of total fish production in Bangladesh. But, local fishing firms engaged in deep sea trawling have yet to develop sufficient capacity and technology, preventing them from catching high-priced fish, such as yellow fin tuna and black marlin, below 200 metres. Technological support may improve the local trawling industry by increasing both the quantity and quality of the catches.

Islam is optimistic about the growth potential of these industries, but it is hard to see Bangladesh weaning itself off its dependence on the RMG sector soon, especially as its comparative advantage — low wages — is strengthening.

In April 2012, McKinsey forecast that Bangladesh’s RMG industry could reach earnings of $30 billion by 2015 and $50 billion by 2021. “While China is starting to lose its attractiveness in this realm, the sourcing caravan is moving on to the next hot spot,” it said. “With Bangladesh having developed a strong position amongst European and US buyers, many companies are already eager to evaluate the future potential.” (Bangladesh’s Ready Made Garments Landscape: The Challenge of Growth”).

Indeed, Bangladesh’s next development stage might well be centred on the RMG sector, as businesses abandon the “T-shirt phase” and concentrated on higher quality clothes that demand a more skilled workforce.

Islam cited the economist Adam Davidson who recently pointed out that nearly every rich country has gone through a T-shirt phase — an economic period in which there are a significant number of poor farmers who, rather than toil on unproductive land, accept harsh work conditions and low wages in textile and apparel factories.

When the T-shirt phase ends, a “race to the top” usually begins. Factories often shift to finer clothes, like dress shirts, which require skilled workers. This phase often involves the growth of unions and rising wages.

Meanwhile, there are signs that the government is keen to avoid a repetition of the Rana Plaza tragedy and also grant factory workers some basic rights. Among several measures, the cabinet has now approved the final draft of Bangladesh Labor (Amendment) Act 2013 to ensure freedom of association and the right to collective bargaining, improve occupational safety and health, and provide group insurance for factories with more than 100 workers.

McKinsey’s forecasts seem to assume Bangladesh will remain a country of badly paid and poorly-regulated sweatshops, while its competitors develop and get richer. But a more empowered labour force might make that assumption redundant. Instead, factory owners might be forced to jettison the T-shirt phase earlier and move up the value chain.