IMPACT OF GLOBAL RECESSION ON

READY MADE GARMENTS INDUSTRY OF BANGLADESH

IMPACT OF GLOBAL RECESSION ON

READY MADE GARMENTS INDUSTRY OF BANGLADESH

Prepared for:

Dr. Muhammad Ziaulhaq Mamun

Course Instructor

Research Method (K301)

Prepared by:

Nabeel Khan (ZR-29)

Farwah Tasnim (ZR-40)

Rasheeq Rayhan (ZR-45)

Sayan Muhammad Rafi (ZR-48)

Rafat Shamim (ZR-51)

Ishmam Rahman Abedin (ZR-53)

Bushra Barkat (ZR-54)

Institute of Business Administration

University of Dhaka

June 30, 2012

30 June 2012

Dr. Muhammad Ziaulhaq Mamun
Professor
Institute Of Business Administration
University Of Dhaka

Dear Sir,

Here we present the report “Impact of Global Recession on Ready Made Garments Industry of Bangladesh”. In this report we tried to analyze the current RMG industry scenario and the various factors associated with it which have been influenced by the global financial crisis. We believe our report will facilitate strategic planning for both the decision makers in the market and identify possible counter measures and new possibilities.

We hope the report meets your expectations. We will be glad to answer any query about the report.

Sincerely yours,

Nabeel Khan (ZR-29)
Farwah Tasnim (ZR-40)
Rasheeq Rayhan (ZR-45)
Sayan Muhammad Rafi (ZR-48)
Rafat Shamim (ZR-51)
Ishmam Rahman Abedin (ZR-53)
Bushra Barkat (ZR-54)

Table of Contents

EXECUTIVE SUMMARY: i

1.0 INTrODUCTION 1

Background: 1

Issues: 2

Objectives: 6

Hypotheses: 6

Rationale 7

Scopes: 7

Limitations: 7

2.0 Literature Review: 8

3.0 Methodology: 11

Data Collection 11

Sampling 12

Validity 13

Reliability 13

Questionnaire Development 14

4.0 Findings 18

5.0 SWOT ANALYSIS OF BANGLADESHI RMG SECTOR 25

Strengths 25

Weaknesses 27

OPPORTUNITIES 28

THREATS 29

6.0 Analysis of the impact of global recession on the RMG sector of Bangladesh 30

7.0 RECOMMENDATIONS: 31

Diminution of the interest rate: 31

SUBSIDY: 33

RESEARCH AND DEVELOPMENT: 34

INTERNATIONAL LOBBYING: 35

LABOR UNREST: 36

INFRASTRUCTURE: 38

UTILITY SUPPLY: 39

INVESTMENT ENVIRONMENT: 39

EXPORT-IMPORT POLICY: 39

EXPLORING NEW MARKETS: 40

ANALYSIS OF SOLVENCY AND AUDIT REPORT OF THE BUYERS: 41

CENTRAL COMMITTEE FOR ECONOMIC OBSERVATION: 41

8.0 CONCLUSION: 42

Bibliography I

APPENDICES: II

QUESTIOnNAIRE: II

EXECUTIVE SUMMARY:

The readymade garments industry (RMG) of Bangladesh began its journey in the late 1970’s as a negligible, non-traditional sector with a narrow export base. It started expanding slowly and grew rapidly since the 1990’s. The biggest contribution of the RMG sector has been to the export market of Bangladesh. RMG contributed to 78.15% of exports in 2010-11 and plays a key role in the employment of a huge amount of people from the low income group. Around 3.6 million workers are engaged directly to this sector, out of which around 80% are women (BGMEA 2009). Moreover, this industry contributed to 13.5% of GDP. The main focus of this sector has been on exports and the leading customers are the European Union (EU) countries and USA. However, the Bangladesh RMG industry was affected by the global recession following the events of September 11, 2001. Several small underperforming RMG firms were closed down. While the total RMG export in 2000-01 was $4859 million, it fell to $4583 million in 2001-02. Nevertheless, the industry did stabilize the next year by recording exports worth $4912 million. During this period Bangladesh had to face another huge barrier when the MFA era ended in December 31, 2004. Under the MFA quota system, Bangladesh enjoyed the benefits of operating in a market where its competitors where restricted by quota. But when it was lifted in 2005, experts predicted that the Bangladesh RMG sector would fail under immense competition from India and China. It was almost expected that many factories would be closed down and the industry would get a huge shock.

Even though the growth of RMG exports has been impressive over the last decade, in 2009-10 it grew by only 1.2% compared to 2008-09. While this rate of growth is not as good as the ones achieved in previous years, Bangladesh still holds a strong footing in the international RMG market with the EU and US as the strongholds.

The main problems or downturns due to recession are loss of jobs, a decline in real income, a slowdown in industrial production and manufacturing, a slump in consumer spending, and increase in crime rate. The full impact of a recession on employment may not be felt for several quarters. Research in Britain shows that low-skilled, low-educated workers and the young are most vulnerable to unemployment in a downturn. After recessions in Britain in the 1980s and 1990s, it took five years for unemployment to fall back to its original levels. Many companies often expect employment discrimination claims to rise during a recession. In Bangladesh, the effect was not widespread, with workers of smaller factories getting sacked as they ran out of business, whereas larger companies were able to deal with the blow, which resulted in fewer layoffs for their employees. Productivity tends to fall in the early stages of a recession, and then rises again as weaker firms face closure. The variation in profitability between firms rises sharply. Recessions have also provided opportunities for anti-competitive merges, with a negative impact on the wider economy. As sales revenues and profits decline, the manufacturer will cut back on hiring new employees, or freeze hiring entirely. In an effort to cut costs and improve the bottom line, the manufacturer may stop buying new equipment, curtail research and development and stop new product rollouts (a factor in the growth of revenue and market share). Expenditures for marketing and advertising may also be reduced. These cost-cutting efforts will impact other businesses, both big and small, which provide the goods and services used by the big manufacturer. Productivity in Bangladesh has increased, albeit at a declining rate, compared to the rest of the exporting countries. In the wake of such bankruptcies or dissolutions, the entrepreneurial spirit, which inspired someone to go into such a business, may take a hit, discouraging, at least for a while, any risky business ventures. Too many bankruptcies may also discourage banks, venture capitalists and other lenders from making loans for startups until the economy turns around. The social effects of recession are immense. The living standards of people dependent on wages and salaries are more affected by recessions than those who rely on fixed incomes or welfare benefits. The loss of a job is known to have a negative impact on the stability of families, and individuals' health and well-being. Recessions come and go and some are more severe and last longer than others. But history shows that recessions invariably end, and when they do, an economic recovery follows.

1.0 INTrODUCTION

Background:

The readymade garments industry (RMG) of Bangladesh began its journey in the late 1970’s as a negligible, non-traditional sector with a narrow export base. It started expanding slowly and grew rapidly since the 1990’s. With the help of government policies and a variety of incentives entrepreneurs invested heavily in this sector. In 1985-86 there were 594 factories which have grown to 5150 in 2010-11.

The biggest contribution of the RMG sector has been to the export market of Bangladesh. RMG contributed to 78.15% of exports in 2010-11 and plays a key role in the employment of a huge amount of people from the low income group. Around 3.6 million workers are engaged directly to this sector, out of which around 80% are women (BGMEA 2009). Moreover, this industry contributed to 13.5% of GDP. The main focus of this sector has been on exports and the leading customers are the European Union (EU) countries and USA. They accounted for 58.72% and 25.82% of total RMG exports in 2010-11.

However, the Bangladesh RMG industry was affected by the global recession following the events of September 11, 2001. Several small underperforming RMG firms were closed down. While the total RMG export in 2000-01 was $4859 million, it fell to $4583 million in 2001-02. Nevertheless, the industry did stabilize the next year by recording exports worth $4912 million. Since 2001-02, RMG exports have grown three-folds to $17914 million in 2010-11. If we go back a few more years, in 1995-96 RMG exports were $2547 million which means that total sales has grown 7 times in just one and a half decade.

During this period Bangladesh had to face another huge barrier when the MFA era ended in December 31, 2004. Under the MFA quota system, Bangladesh enjoyed the benefits of operating in a market where its competitors where restricted by quota. But when it was lifted in 2005, experts predicted that the Bangladesh RMG sector would fail under immense competition from India and China. It was almost expected that many factories would be closed down and the industry would get a huge shock. But beating all odds, RMG exports still grew from $6417 million in 2004-05 to $7900 million in 2005-06 and has continued to grow.

As we saw earlier, the biggest market of the Bangladesh RMG sector is the EU. In 2006, 49.13% of the total RMG export was to the EU, while 33.1% was to the US. By 2008 export to the EU had grown to 58.4% of the total export while the share of sales to the US had fallen to 29.91%. However, the value of exports to the US grew by almost 5% in 2007, even though the volume did not grow as much as that of the EU. This was probably due to the fact that the US was feeling the effects of the recession which led to a decrease in the number of orders.

Even though the growth of RMG exports has been impressive over the last decade, in 2009-10 it grew by only 1.2% compared to 2008-09. While this rate of growth is not as good as the ones achieved in previous years, Bangladesh still holds a strong footing in the international RMG market with the EU and US as the strongholds.

The second quarter of the 2007-08 financial year brought the biggest effects of the global recession on the US and EU. This meant that it would automatically affect the Bangladesh RMG sector. Such trying times call for stronger competitiveness from Bangladesh and fight off its much bigger competitors like India and China to keep the industry from falling apart and affecting millions of lives In the process.

Issues:

Some economists have jokingly defined a recession like this: “If your neighbor gets laid off, it's a recession. If you get laid off, it's a depression.” The main problems or downturns due to recession are loss of jobs, a decline in real income, a slowdown in industrial production and manufacturing, a slump in consumer spending, and increase in crime rate.

The full impact of a recession on employment may not be felt for several quarters. Research in Britain shows that low-skilled, low-educated workers and the young are most vulnerable to unemployment in a downturn. After recessions in Britain in the 1980s and 1990s, it took five years for unemployment to fall back to its original levels. Many companies often expect employment discrimination claims to rise during a recession. In Bangladesh, the effect was not widespread, with workers of smaller factories getting sacked as they ran out of business, whereas larger companies were able to deal with the blow, which resulted in fewer layoffs for their employees.

Productivity tends to fall in the early stages of a recession, and then rises again as weaker firms face closure. The variation in profitability between firms rises sharply. Recessions have also provided opportunities for anti-competitive merges, with a negative impact on the wider economy: the suspension of competition policy in the United States in the 1930s may have extended the Great Depression. For example, let's take an unnamed Fortune 1000 manufacturer as a typical big business suffering the effects of a recession. What happens to this firm will likely happen to other big businesses as the recession runs its course. As sales revenues and profits decline, the manufacturer will cut back on hiring new employees, or freeze hiring entirely. In an effort to cut costs and improve the bottom line, the manufacturer may stop buying new equipment, curtail research and development and stop new product rollouts (a factor in the growth of revenue and market share). Expenditures for marketing and advertising may also be reduced. These cost-cutting efforts will impact other businesses, both big and small, which provide the goods and services used by the big manufacturer. Productivity in Bangladesh has increased, albeit at a declining rate, compared to the rest of the exporting countries.

The business may cut employees, and more work will have to be done by fewer people. Productivity per employee may increase, but morale may suffer as hours become longer, work becomes harder, wage increases are stopped and fear of further layoffs persists. As the recession increases in severity and length, management and labor may meet and agree to mutual concessions, both to save the company and to save jobs. The concessions may include wage reductions and reduced benefits. If the company is a manufacturer, it may be forced to close plants and discontinue poorly performing brands. Automobile manufacturers, for example, have done this in previous recessions.

As declining revenues show up on its quarterly earnings report, the manufacturer's stock price may decline. Dividends may also slump, or disappear entirely. Shareholders may become upset. They and the board of directors (B of D) may call for a new CEO and/or an entirely new senior management team. The manufacturer's advertising agency may be dumped and a new agency hired. The internal advertising and marketing departments may also face a personnel shakeup. When the manufacturer's stock falls and the dividends decline or stop, institutional investors who hold that stock may sell and reinvest the proceeds into better-performing stocks. This will further depress the company's stock price. The sell-off and business decline will also impact employer contributions to profit-sharing plans if the company has such programs in place.

Secondary aspects of the goods and services produced by the recession-impacted manufacturer may also suffer. In an attempt to further cut costs to improve its bottom line, the company may compromise the quality, and thus the desirability, of its products. This may manifest itself in a variety of ways and is a common reaction of many big businesses in a steep recession.

As firms impacted by the recession spend less money on advertising and marketing, big advertising agencies, which bill millions of dollars per year, will feel the squeeze. In turn, the decline in advertising expenditures will whittle away at the bottom lines of giant media companies in every division be it print, broadcast or online. As the effects of a recession ripple through the economy, consumer confidence declines, perpetuating the recession as consumer spending drops.

Also impacted by the recession is the account receivable (AR). The customers of the company that owe it money may pay slowly, late, partially or not at all. Then, with reduced revenues, the affected company will pay its own bills more slowly, late, or in smaller increments than the original credit agreement required. Late or delinquent payments will reduce the valuation of the corporation's debt, bonds and ability to obtain financing. The company's ability to service its debt (pay interest on the money it has borrowed) may also be impaired, eventuating in defaults on bonds and other debt, further damaging the firm's credit rating and preventing further borrowing.

Debt will have to be restructured and/or refinanced, meaning new terms will have to be agreed upon by creditors. If the company's debts cannot be serviced and cannot be repaid as agreed upon in the lending contract, then bankruptcy may ensue. The company will then be protected from its creditors as it undergoes reorganization, or it may go out of business completely.

The impacts of a recession on small businesses are also significant. Without major cash reserves and large capital assets as collateral, however, and with more difficulty securing additional financing in trying economic times, smaller businesses may have a harder time surviving a recession. Bankruptcies among smaller businesses may therefore occur at a higher rate than among larger firms. The bankruptcy or dissolution of a small business that serves a community - a franchised convenience store, for example - can create hardships not only for the small business owners, but also for residents of the neighborhood.

In the wake of such bankruptcies or dissolutions, the entrepreneurial spirit, which inspired someone to go into such a business, may take a hit, discouraging, at least for a while, any risky business ventures. Too many bankruptcies may also discourage banks, venture capitalists and other lenders from making loans for startups until the economy turns around.

The social effects of recession are immense. The living standards of people dependent on wages and salaries are more affected by recessions than those who rely on fixed incomes or welfare benefits. The loss of a job is known to have a negative impact on the stability of families, and individuals' health and well-being.

Recessions come and go and some are more severe and last longer than others. But history shows that recessions invariably end, and when they do, an economic recovery follows.

Objectives:

The broad objective of this research is to examine the impact of the global recession on the RMG sector of Bangladesh.

This study will specifically look into the following points as well:

• Effect on total sales of knitwear and woven products to USA and the EU

• Effect on the profit of firms

• Effect on employment level of the RMG sector

• Effect of the change in dollar value.

• Effect of change in the mode of payment from LC to direct contract

• Effect on the diversification of products

• Effect on preference of knitwear over woven products

• Effect on the price of raw materials imported

• Effect on the cost of production

Hypotheses:

• During the period of recession, the export of knitwear and woven products from Bangladesh to major markets such as US, EU and Middle Eastern region increased due to the end of quotas in China.

• Increase in cost of raw materials brought about a decline in profits.

• Drastic layoff did not occur in large firms.

• The value of US dollar against BDT remained relatively stable between a certain range.

• Shift of mode of payment from LC to contractual basic will bring about adverse effects on the exporters profitability.

• The garment products are not diversified- exporters concentrating on producing low-end cheap textiles.

• The exports of knitwear have increased substantially.

• Raw material prices have increased.

• Cost of production has increased.

Rationale

One of the main things that this proposal needs to address is the reason behind conducting this research. The basic reasons for this research are mainly personal and social benefits. On a personal level, as business students, the conductors of this research will be greatly benefitted. Basic research conduction helps develop several skills like public speaking, writing skills, computer skills, running projects on a deadline, working with a team, evaluating past published papers and reports, dealing with and analyzing statistics, etc. The research conductors also gain a vast amount of knowledge on the subject of research. All these skills are essential for whatever job we end up doing later in life. For research conductors like us, this topic is of special interest ‘Impact of Global Recession on Readymade Garments (RMG) Sector Of Bangladesh’. As business is our main field of interest, it would help us greatly to have an insight of how recession affects business. The RMG sector has been chosen because that is the sector that earns most foreign currency for the country and so it seemed wiser to see the impacts of a global recession on this sector. We read up some literature and found interesting facts. Some facts go with the usual trend predicted by economists and some do not. We would like to conduct this research to check the current research findings and to answer any new questions that may come up during conducting the research. As for benefitting the society, we believe this report will help businessmen understand and predict trends in the future, especially those in the RMG sector. Finally, if this report does contribute even a little in helping the society as expected, knowing this will be tremendously rewarding to the novice research conductors.

Scopes:

Our research is on the impacts of global recession in the RMG sector of Bangladesh. In our research we intend to gather information from both primary and secondary sources. Since the research is descriptive we will gather data from journals, government periodicals and essays. For primary information interviews of the associated will be considered. In this research mainly factories in Dhaka or near the Dhaka region will be considered. Besides that data will be collected from BGMEA. The main goal of this research is to analyze and gauge the impact the recession left on the RMG sector of Bangladesh. We further want to assess the social and other economical impact of the recession on the RMG sector. As the resources in our hands are inadequate we would like to conduct the research in a shorter time and in areas within our reach.

Limitations:

There are few constraints and restraints that are faced by every researcher. In our case the data deficiency is a drawback since all organizations are not always willing to reveal their sales and profit values. Another drawback is the absence of experts in this field. To get accurate data all the organizations has to be brought into consideration. But that will take a lot of resources and also time. Most of our considered factories are within Dhaka or near Dhaka. This may cause some inaccuracy in the ultimate result.

2.0 Literature Review:

Since the early 1980s, the RMG industry has emerged as an important player in the economy of the country and has gradually replaced the jute industry. It is the only multi-billion dollar manufacturing and export industry in Bangladesh. While the industry contributed only 0.001 per cent to the country’s total export earnings in 1976, its share increased to about 76 per cent of those earnings in the fiscal year 2007-08.

(Khandaker 2010)

Since the mid-1990s, US imports of textiles and garments from Bangladesh have more than tripled, rising from $1.1 billion in 1996 to $3.5 billion in 2008.Exports to the EU doubled from 1999 -2004, with a decline in growth rate after the ATC, while it was even negative in 2005 and 2007.After recovering in 2008, the export reached a new high of €5 billion. (Berik et al, 2009).

The global recession followed by the 9/11 event had a distinct impact on the Bangladesh RMG industry, leading to closure of several small RMG firms. Exports decreased 7% during that period. In 2002, the industry stabilized and exports increased by 13% in 2003. However, the international market share did not show a comparable increase.By 2004, Bangladesh had captured 1.07%, up from 0.46%, of the world-wide garments export market. In 2005, despite the negative predictions, Bangladesh experienced growth in RMG export. In 2006, exports continued to grow steadily. The 3rd quarter of 2007 experienced deterioration in growth as the month of September was recorded as the worst in the entire history of Bangladesh RMG industry.According to a 2008 study, it is said that the global economic crisis would not affect Bangladesh RMG sector much as it exports mainly basic products. The Bangladesh RMG industry experienced an impressive 44.46% growth in the 3rd quarter of 2008 compared to the corresponding period of 2007 amounting to nearly $4353 million despite the financial meltdown in the developed countries. (Mamun 2010)

The volume of trade slowed down by 5.3% between July-December 2008 against an increase of 3.4% during the same period in 2007. A further decrease of 7.1% was observed in January 2009 in comparison to January 2008. Export orders of RMG fell by 5% in January and 17.6% in February 2009.

Data from the United States International Trade Commission (USITC) and EUROSTAT indicated that Bangladesh’s major export destinations were badly hurt by the global financial crisis. From July to December 2008, the US import of knitwear and woven garments from Bangladesh increased by 25.9 % and 12.5 % respectively, compared to the same period in 2007. While imports of knitwear increased by 6.7 % in the EU, imports of woven garments from Bangladesh decreased by 2 % during July-December 2008, compared to the same period a year ago. This occurred as a result of the end of quotas on China from January 1, 2008 which increased competition in the EU market easing the pressure on prices. (Sanogo 2009)

In other words, the so-called “Wal-Mart Effect” or the resilience of Bangladesh RMG to the global recession was coming to an end (Sanogo, 2009). The safeguard on China was withdrawn from January 1, 2009 in the US market. This is likely to increase competition on low-end textile products in the US market, putting further downward pressures on garment prices and hence margins.

Bangladesh’s RMG exports destined for the US market fell by almost one-third in value terms between January and October 2009, compared with the same period in 2008 (Velde et al, 2010).However, in 2008/09 around 58.5% of total RMG exports from Bangladesh were intended for the EU. In the EU market RMG exports (in value terms) from Bangladesh continued to grow and were up 12% in July 2009 compared to July 2008. While many countries lost their market share, Bangladesh captured an additional 1% of the market. In general, in both markets, year-on-year seasonal variation is high, so it was difficult to distinguish a clear declining trend at the time. However, in the EU market, reductions in the export volumes and changes in market share among producers were less apparent. Out of 4939 RMG factories, 270 were listed as ‘sick’ prior to the global recession, whereas 100 garment factories were at risk because of the adverse impact of global recession. It was estimated that at least 25,000-30,000 thousand RMG workers lost their jobs in the last eight months of 2009.

Exports of ready-made garments (RMG) represent 80% share of total exports. Almost half of the exports go to the Europe, while 25% goes to the United States.

In the first three months of 2010, when both the volume and value of world exports have dipped compared to the same period last year, Bangladesh has got back to last gains with 11.34% increase in volumes and rise of 8.33% in value.

USA’s imports valued US $ 75554 Million with an increase of 2.95% in 2007, as compared to the previous year. In the same period, imports from Bangladesh recorded an increase of around 6%.In 2009, US apparel imports from around the world declined by 11.8%, and imports from Bangladesh witnessed a decline of 0.42%. During 2008, Garment import volume from Bangladesh to UK increased by 3.6%. (Aziz 2011)

Prior to the MFA, there were studies which predicted that 0.35-0.4 million workers will potentially lose their job, around 1280 production units will be closed and approximately 40%-50% production will be reduced in cutting and making prices in the MFA post era.

However, rather than having negative impacts on Bangladesh, the post-MFA period showed a lot of promise. Despite removing privileged quota system, the number of RMG industries rose up over the periods.

According to the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), the average growth rate for RMG exports from 2004-2005 to 2008-2009 was about 16%, while during this period the total export growth rate was about 15%. There were just four industries in 1983 in RMG sector whereas the number has increased at around 5,000 in 2009. About 1000 factories were established after 2004. More than 1 million workers entered into this sector.

From the pre phase out completion year (2004) to the first post MFA year(2005) , Bangladesh experienced a growth in exports of only 2.6% compared to 44.4% for China, 32.2% for India, 10.6% for Cambodia and 7.3% for Indonesia. According to the Commerce Wing report of Bangladesh Embassy in Washington DC, Bangladesh exported $409 million worth of RMG products in August 2010 compared to $289 million exactly a year ago, marking a spectacular 41.5 per cent growth, as per data released by US International Trade Commission (USITC) (Sultana et al, 2011)

The global downturn has reduced the export demand for Bangladeshi goods but still the total export earnings increased by 10.3% in 2008-09. Exports have grown by 16% the previous year. The former increased by 16.2% while the latter by 14.5% in 2008-09. In the USA market the knitwear suffered more than the woven goods as for knitwear USA imposes duty but on the other countries Bangladesh can carry out with almost no tax. So even during the EU recession the knitwear did not suffer much but on the other hand the woven wear faced a little difficulty due to huge cost incurred during production.(Taslim et al, 2010)

3.0 Methodology:

Data Collection

The study will make use of both primary and secondary sources of information. As an initial input, we prepared a detailed structure of the relevant areas in which export-oriented RMG sector of Bangladesh was contributing.

Primary

The primary data was obtained from face to face interviews with the persons involved in the RMG business. People involved in the RMG business sector were interviewed to collect data about the impact of recession on the Bangladeshi RMG sector.

Secondary

The secondary data was compiled from relevant websites, journals, research papers, books, write-ups and reports concerning the RMG sector of Bangladesh.

Sampling

This research will use sampling to draw inferences about the overall impact of recession on the RMG sector of Bangladesh. To save time and cost and be ensure accuracy sampling will be used. Plus, it is impossible to conduct a survey in this situation.

To make the report more convenient and easy to understand the non-probability convenient and judgmental sampling method will be chosen. Since it is extremely difficult to find out all the data of the export oriented garments we will be choosing few big garments to carry out our research. The idea behind this is that if recession had any effect in the RMG sector the big garments would be affected more. The garments we surveyed were mostly USA and EU based exporters, as recession had mainly impacted in these countries. We have also interviewed people from the RMG industry whom we tend to know or can get easy access. This is a kind of convenient sampling as getting appointments of unknown garments owners are extremely difficult. The data collected is qualitative in nature.

Sample Size

In this case we will be using the proportional method of finding sample size.

n = (z2pq)/d2 where,

n= Sample Size

z= Reliability (depends on level of significance)

d= Precision

p= proportion (0.5 for maximum variance)

q= 1 – p

Taking 7.5% significance level, z value equals 1.78. The precision level is taken to be 8% and p=0.5 whereas q=0.5.

Therefore, n = (1.782*0.5*0.5)/0.082 which equals to about 124.

Due to budget constraint and time constraint, 124 people could not be interviewed. As per our budget and time, only 14 respondents were interviewed. Of these 14 respondents 5 represented large RMG firms and the rest represented small and medium RMG enterprises. These gave us a somewhat proper reasoning of the real scenario as we interviewed people involved in big, small and medium RMG firms.

Validity

To see whether the measures in this research actually measures what it is supposed to measure we will check face validity. Face validity implies that the items chosen to measure a variable are logically related to it. The problem in here is that it is highly subjectively determined so there is no way to guarantee a 100% valid measure.

Reliability

For checking the reliability we tried the Cronbach’s Alpha test. Part 1 took 7 variables and gave an alpha of 0.425 and part 2 gave us an alpha of 0.655.

Questionnaire Development

Since we did not go for a direct survey and went for interviews instead, we kept with us a checklist from which we would ask questions. The questionnaire/checklist is attached at the end of the report. To develop this a co-ordination schema was developed which dealt with all the possible and relevant variables. Unfortunately even though there is a value column in the co-ordination schema, we were not able to get the figures of sales level increase/decrease from particular companies. Other generalized tables are used in context to the overall RMG sector of Bangladesh.

Co-ordination Schema

|Parameters |Complex Variables |Simple Variables |Value |
|Effect on total sales of |Sales of Knitwear |Sales of Knitwear to USA |- |
|knitwear and woven products to | |Sales of Knitwear to EU | |
|USA and the EU | | |- |
| | |Sales of Woven garments to USA | |
| | |Sales of Woven garments to EU | |
| |Sales of Woven garments | |- |
| | | | |
| | | |- |
|Effect on the cost of raw |Cost of imported raw |Types of raw materials imported |- |
|materials imported |materials |Prices of raw materials imported | |
| | |Volume of imported raw materials in the final product|- |
| | |Value of imported raw materials in monetary terms in | |
| | |the final product |- |
| | | | |
| | | | |
| | | |- |

|Effect on cost of production |Cost of production |Labor Cost |- |
|Effect on profit of firms |Profit of Firms |Sales Price |- |
| | |Sales Volume |- |
|Effect on employment level in |Employment level |Occurrences of layoffs |Yes/No |
|RMG sector | |Number of layoffs | |
| | | |- |
|Effect on change in contribution|Contribution of the RMG |Total value of RMG output |- |
|of the RMG sector to the GDP |sector to GDP |Change in percentage contribution | |
|during the recession period | | |Yes/No |

|Effect of the change in dollar |Change in dollar value |Percentage change in export value |- |
|value. | |Percentage change in dollar value in the same period | |
| | |Effect on profit due change in exchange rate |- |
| | | | |
| | | |Yes/No |
|Effect on the diversification of|Diversification of |Types of products manufactured |Yes/No |
|products |products |Volume of products | |
| | |Market competitiveness |- |
| | |Potential target markets |- |
| | | | |
| | | |Yes/No |
|Effect on preference of Knitwear|Preference of Knitwear |Market share of knitwear products |- |
|over Woven products |over Woven products | | |
| | |Efficiency in Knitwear industry |Yes/No |

|Measure to encounter |Need to lower interest rate| | |
|recession- Interest rate | | | |
|Encounter recession- Subsidy |Need for subsidy |Subsidy for Woven Sector | |
| | |Subsidy for Knitwear sector | |
|Encounter recession – R&D |Need for R&D | | |
|Encounter recession- Utility |•Need for Electricity |•Improve electricity supply | |
| |•Need for gas |•Improve gas supply | |
|Encounter recession- |Need for friendly |• tax benefits | |
|Investment Environment |investment environment | | |
| | | | |
|Encounter recession- Export |•Improve export policy | | |
|Import policy |•Friendly import policy | | |
|Encounter recession- Port | |• Improve time to get products from mother vessel to | |
|facility | |land | |
| |• Find new markets | | |
| |• Safety to avoid | | |
|Encounter recession- New |dependence on US and EU | | |
|market | | | |
|Encounter recession- |• Improve roads | | |
|transportation | | | |

4.0 Findings

Sales to USA

Here the null hypothesis is that volume of sales to USA has decreased.

The alternative hypothesis is that volume of sales to USA has not decreased.

From our respondents, 9 have answered that sales volume has decreased, 4 have mentioned that their sales volume has increased, while 1 answered that it was indifferent.

Hence, since more than 50% have answered in favor of the null hypothesis, we do not reject it.

This is because due to recession, people’s purchasing power has decreased. Demand for clothes has decreased. Hence import volume for the buyer and our export volume have decreased.

Sales to EU

Here the null hypothesis is that volume of sales to EU has decreased.

The alternative hypothesis is that volume of sales to EU has not decreased.

From our respondents, 10 have answered that sales volume has decreased, 3 have mentioned that their sales volume has increased, while 1 answered that it was indifferent.

Hence, since more than 50% have answered in favor of the null hypothesis, we do not reject it.

This is because due to recession, people’s purchasing power has decreased. Demand for clothes has decreased. Hence import volume for the buyer and our export volume have decreased.

Change in price of raw materials

Here the null hypothesis is that price of raw materials have increased.

The alternative hypothesis is that price of raw materials have not increased.

From our respondents, 2 have answered that price has decreased, 3 have mentioned that price has increased, while 9 answered that price was not affected by recession.

Hence, since more than 50% have answered against the null hypothesis, we reject it.

Change in labor cost

Here the null hypothesis is that labor costs have increased.

The alternative hypothesis is that labor costs have not increased.

From our respondents, 3 have answered that cost has decreased, while 11have implied that labor cost was not affected by recession.

Hence, since more than 50% have answered against the null hypothesis, we reject it.

Small companies laid off some laborers, hence labor supply increased a little. This brought down costs, but not very significantly for large or medium companies.

Labor layoff rate

Here the null hypothesis is that labor layoff has increased.

The alternative hypothesis is that labor layoff has not increased.

From our respondents, 3 have answered that layoff had increased; while 11have implied that there were not layoffs due to recession.

Hence, since more than 50% have answered against the null hypothesis, we reject it.

Small companies laid off some laborers, since they faced greater increases in costs due to recession compared to large or medium companies.

Effect on sales price

Here, the null hypothesis is that sales price has decreased.

The alternative hypothesis is that sales price has not decreased.

From our respondents, 7 have answered that sales price has decreased, 6 have implied that sales price has increased, while 1 said it did not change.

Hence, since 50% have answered in favor of the null hypothesis, we do not reject it.

Due to recession, the demand for clothing decreased. Hence, price faced an automatic decline.

Effect on profit due to change in dollar value

Here, the null hypothesis is that profit has increased.

The alternative hypothesis is that profit has not increased.

From our respondents, 12 have answered that profit has increased, while 2 have implied that profit has decreased.

Hence, since more than 50% have answered in favor of the null hypothesis, we do not reject it.

Over the years, the value of dollar against the taka has been rising. As a result it has increased the amount of profit. For some, however, the increase in import costs due to increase in price of dollar has overshadowed the profit increase.

Diversification

Here, the null hypothesis is that companies have diversified.

The alternative hypothesis is that companies have not diversified.

From our respondents, 2 have answered they have diversified, while 11 have implied that they did not diversify.

Hence, since more than 50% have answered against the null hypothesis, we reject it.

It is quite difficult for firms operating in a large scale to diversify, more so in times of recession. Small firms, in an attempt to try and cope with recession, attempted diversification, but have failed.

Change in quality demanded by buyers

Here, the null hypothesis is that quality demanded has changed.

The alternative hypothesis is that quality demanded has not changed.

From our respondents, 5 have answered that quality demanded has changed, while 6 have mentioned that quality demanded has not changed.

Hence, since more than 50% have answered against the null hypothesis, we reject it.

This is because, although recession has affected buyers spending, they do not choose to compromise on the ground s of quality.

Change in preference for Knitwear over Woven products

Here, the null hypothesis is that preference for knitwear has increased.

The alternative hypothesis is that preference for knitwear has not increased

From our respondents, 9 have answered that preference for knitwear has increased, 3 have stated that preference for knitwear has decreased, while 1 indicated it has not changed.

Hence, since more than 50% have answered in favor of the null hypothesis, we do not reject it.

This is because; vertical integration has been achieved for knitwear production. As a result lead time- time between receiving an order and delivering it- has decreased, beyond that of woven goods. This has resulted in quicker delivery, hence more demand.

Effect on cash cycle due to shift of payment mode from LC to contract

Here, our null hypothesis is that shift in payment mode has affected the cash cycle.
The alternative hypothesis is that shift in payment mode has not affected the cash cycle.

From our respondents, we can see that 4 have denoted that it has no effect, while 8 have mentioned that it did affect the cash cycle.

Hence, since more than 50 % of the respondents have responded in favor of it, we do not reject the null hypothesis.

This has been seen as a negative change, in case of an LC, the seller had guarantee of payment, and it took a shorter time for the seller to receive payment. Now, these advantages were lost.

Effect on purchase of raw materials due to shift of payment mode from LC to contract

Here, our null hypothesis is that shift in payment mode has affected the purchase of raw materials.

The alternative hypothesis is that shift in payment mode has not affected the purchase of raw materials.

From our respondents, we can see that 5 have denoted that it has no effect, while 9 have mentioned that it did affect the purchase of raw materials.

Hence, since more than 50% of the respondents have responded in favor of it, we do not reject the null hypotheses.

This is because, since in case of contract, the payment takes longer to reach the seller, to continue production, s/he needs to borrow from the banks to continue production. As a result, cost of production increases.

Dependency on bank loans due to shift of payment mode from LC to contract

Here, our null hypothesis is that shift in payment mode has increased the dependency on bank loans.

The alternative hypothesis is that shift in payment mode has not increased the dependency on bank loans.

From our respondents, we can see that 4 have denoted that dependency on loans have decreased, while 6 have denoted that dependency on loans have increased, while 2 have answered that it remains unaffected.

Hence, since 50% of the respondents have responded in favor of it, we do not reject the null hypothesis.

The respondents have stated that due to this change, payment is delayed, and the money takes much longer to reach the seller from the buyer. As a result, they have to apply for loans to maintain operations

5.0 SWOT ANALYSIS OF BANGLADESHI RMG SECTOR

Even though the Bangladeshi Ready Made Garment sector, which is the major source of the country’s export, has achieved a lot it still has to face the challenges that the ever changing global market environment will present. The new environment not only opens up a vast market with unlimited potentials, it also represents threats like fierce competition from other textile giants. Therefore to continuously develop its growth potential and to set quality standards, this sector needs constant improvement measurements. Even though RMG owners are continuously adopting several measures to overcome the industry’s problems, many sectors are left unattended. These have significant impact on the RMG sector and thus needs special attention. The research conducted a SWOT analysis to find out the strength, weakness, opportunity and threats of the RMG industry of Bangladesh.

Strengths

One of the strengths behind the success of RMG of Bangladesh is the availability of low cost labor compared to other competing countries in the region. The labor rates in textile industry show that the average hourly wage rates for Bangladesh, India, Pakistan and Sri Lanka were respectively US$ 0.23, $0.56, $0.49 and $0.39 (Bhattacharya 1999). There is also an adequate supply of labor force of both sexes.

Being in the manufacturing of RMG for such a long time, Bangladesh now possess a large pool of skilled & semiskilled manpower. Given the fairly long learning curve in this industry, extensive experience in dealing with the issues of this industry such as dealing with foreign buyers, etc. have become a valuable asset for the industry people. These days, Bangladesh is actually exporting experienced manpower for RMG sector to different countries.

Most firms agreed that clothing itself being a basic need, the demand always stays no matter what the situation. The fashion industry is something with which people connect and they connect their personality with what they wear. Therefore even if somebody has less money in hand, they would always want to buy that T-shirt anyway. These necessities of fashion apparels have helped the country move even in the recessionary period. Some experts think that now people will consume less luxury products and switch to buying basic RMG products. But the actual advantage that Bangladesh has that it strategically exports basic clothing materials as well as fashion apparels, like school dress. No matter what the economic situation is, people will send their children to schools and they will demand school uniforms which in turn helps the RMG firms to stay in business.

The RMG firms own superior quality machineries and technology. Plus, the buyers give a quality expectation and inspect the quality level at every stage. In this way the end product has buyer’s approval. Combining such quality with the cheap and skilled labour available, Bangladesh produces excellent quality apparel at a very competitive price. Many firms these days are opening up factories which produce green clothing, i.e. the factory is totally environmentally friendly. Such clothing has high demand and are bought by the foreign buyers at a higher price. This is one competitive strength that the Bangladeshi RMG sector posses. Bangladesh has a reputation for being highly reliable which encourages buyers to choose Bangladesh as the buying point.

Another competitive advantage that the RMG sector has is the low value of the Bangladeshi currency Taka. One dollar equals about 82 BDT compared to the Indian currency ($1= 57 INR) and the Chinese currency ($1=6 CNY). This difference in exchange rate makes the local products very cheap abroad and the payment in dollars helps the industry gain much more.

The Bangladeshi government provides strong support program to the exporting RMG firms. For example, firms enjoy very low rate of duty on imported capital machinery, duty free imported raw material, etc. Government has extended some major incentives and facilities for the local and foreign investors to help increase investment in the country for all industrial sectors including textiles and clothing.

Weaknesses

Poor infrastructure, political instability, disruptive trade unionism, inefficiency in port management, and excessive dependence on RMG sub-sector are the major weaknesses of the industry.

The industry is heavily dependent on others for outsourcing of raw materials such as clothing and accessories. Firms import maximum raw materials such as cotton which is the major component of the finished products from competing countries like China, India, etc. This high dependency on imported raw materials and inadequate backward linkage, lead time happens to be as long as nearly 3 months.

Port management problem is one of the greatest weaknesses of the RMG industry. The Chittagong Port is the most important entry and exit point for trade and commerce of the country. Corruption, inefficiency and mismanagement have made Chittagong Port a weakness of this sector. This port is extremely pressurized and if the country were to take up extra orders and expand the industry, it surely needs another port to handle the load. A World Bank (1999) study estimated that handling charges for a 20-foot container were $640 in Chittagong compared with $220 in Colombo and $360 in Bangkok. The study added, inefficiency at Chittagong port could be costing the economy as much as $600 million annually. Besides this, loading and unloading at the port takes much time at the port. These inefficiencies seriously hamper the competitiveness of Bangladeshi garment in the world market.

Labor unrest is yet another problem that the RMG sector of Bangladesh frequently faces. Usually this happens because the labor demands more wages. These bring about problems. In fact, in 2008, labor unrest occurred 72 times in the span of 6 months only.

Bangladesh faces a constant energy crisis. There is constant load shedding and this has an adverse impact on the output of the RMG industry this power crises in the country are forcing the RMG manufacturers to keep their factories idle for quite a few hours regularly. This reduces production level and increases the production cost. It is estimated by the BGMEA that the industry loses around Tk 3902 million losing revenue and exports and incurring the cost of generating power through own generators during load-shedding.

OPPORTUNITIES

The apparel sector of Bangladesh mainly exports low-cost products to the international market. But it is possible to move into high value added products through diversification. This is not impossible given the existing long time experience, good relationship with buyers, worldwide reputation, and presence in quality-conscious United States and European Union. With the help of further increase of productivity and quality and design support, Bangladesh can definitely tap into new opportunities. As mentioned before, it has already entered the field of green technology. Bangladesh has a scope to target new market.
.

Currently Bangladesh is getting a preferential duty free access to EU under the Generalized System of Preferences (GSP) meant for the Least Developed Countries (LDCs). This gives the country an upper hand over non LDC competing countries. Bangladesh is also enjoying preferential quota policy in the States and getting duty free access to India. Such access has opened up a lot of prospects for the industry.

Other competing countries like China, India are forced to increase their minimum wage for the workers due to the increase in living standards. Even though Bangladesh has also increased minimum wage, the difference in exchange rate and other factors still put Bangladesh in a better position.

Yet another opportunity is the trust earned from the buyers over the years. The RMG firms are meeting the buyers’ standards and earning buyer satisfaction. This trust and satisfaction ensures repetitive orders from buyers and new agreements from prospective markets who are often switching their orders from other competitors.

THREATS

The political and labor unrests in the country present a threat to the industry. Frequent labor unrest and factory shutdowns hamper production and increases lead time. Frequent hartals (strikes) and political unrest hampers the production and communication of the sector. The level of product diversification is still low and thus value addition is not standing at a satisfactory level. Product diversification has recently started with a view to gradually increasing product portfolio and value addition. Plus in the RMG sector, value-addition is about 30% only because a RMG unit has to import at least 70% of the total value of the product. The low value added represents that the backward linkage industries such as fabrics and accessories, which directly feed into the garment sector, have not satisfactorily developed. The competing countries like India, Pakistan, Thailand, Malaysia and other countries have their textiles mills that can produce quality fabrics for the respective apparel industries. Due to recession the prices of these raw materials are on the rise and are a threat to the low cost products that Bangladesh produces. Other countries such as China who has relatively high labor productivity and applies more capital intensive modern technology and has less lead-time because of getting locally available raw material like fabric etc, are of huge threats to the Bangladeshi RMG sector. These countries also have better energy supply, transportation and communication system.

Another threat is interest rates. Banks charge very high rates for investment loans. This discourages small and medium entrepreneurs who might have wanted to set up their own RMG firms.

Longer lead time

Given factors like geographical location, imported raw materials, port problems, etc. Bangladesh has considerably longer lead-time compared to other countries. This is depicted in the following table.

Table : Comparison of lead time (days) of RMG exporting countries
|Country |Lead Time |Country |Lead Time |Country |Lead Time |
|Mexico |15-20 |Cambodia |60-90 |Bangladesh |90-135 |
|Italy |15-20 |India |60-90 | | |
|Vietnam |60-90 |China |60-90 | | |

Source:BGMEA

6.0 Analysis of the impact of global recession on the RMG sector of Bangladesh

In this report we tried to analyze the effect of recession on the buyer’s countries in purchasing our exports. Since USA and EU are our major importers we mainly focused our study on these two regions.

To analyze the short term effect of recession we would take the statistics from the USA markets. Data of three different markets were taken.

1. NASDAQ Closing price

2. Oil price

3. Inflation

These three variables are taken because all three of these markets will be affected due to recession. If there is a recession the stock market generally remains very unstable. The investors don’t invest as much as they would have done in a normal scenario. So we can say that it reacts negatively to recession. The same scenario is with oil price. During the recession period the price of oil falls as the demand for it also falls. As many large industries are shut down oil usage goes down. So it also reacts negatively to the recession. During recession inflation level also rises as the cost of production rises. So the demand for our exports decreases. So exports fall and hence we can say that inflation and export has a strong relationship.

The r of these three independent variables were very high (0.919) showing that they are strongly correlated

|Coefficientsa |
|Model |Unstandardized Coefficients |Standardized |t |Sig. |
| | |Coefficients | | |
| |

From the above model we can see that the independent variables have a significant contribution in the model. The two variable Inflation (-0.507) and Oil price(0.769) have the maximum impact on our RMG sector. The NASDAQ closing price also has quite a significant effect. So we can conclude that global recession is having an effect on our RMG exports and hence if recession continues the exports are going to go down further.

7.0 RECOMMENDATIONS:

Diminution of the interest rate:

Severe liquidity or cash crisis is going on in the banking sector. Banks have become beleaguered to get rid of this liquidity crisis. As an immediate solution to crises, banks are increasing their interest rates on deposits. Some are maintaining their daily expenditures after borrowing from the call money market (for inter-bank transaction) at a high rate. In addition, some of the banks are borrowing from Bangladesh Bank through repos (Repurchase Agreements) after pledging the liquid assets like treasury bills and bonds. Their deposit management cost is increasing as they are collecting deposits at a high rate. Some of them are increasing their lending rate to cope up with this additional cost. As the interest rate on bank financing is rising, the cost of investment of the entrepreneurs is also increasing. As a result cost of production is rising. On January 4, the central bank withdrew the 13 percent interest rate limit on bank loans, prompting the private banks to increase their lending rates. According to BB data, 18 out of 30 private banks charged 16 percent to 18 percent for industrial loans and working capital in January. A senior BB official said until 2007-08, there had been no cap on deposit rates or loans since the country introduced a liberalized policy in the banking system in 1992.The immediate past caretaker government imposed a cap on lending rates due to the global economic crisis. When the central bank withdrew the cap in January, it said it would monitor the situation so that rates do not go up abnormally. But as it is evident they failed miserably. On the other hand our main competitor china is maintaining a benchmark lending rate of 6.31% to initiate growth in the economy. Our competitor India maintains a lending rate of 6.25%-11.75% depending on the bank. A comparison is shown of the interest rates in thE following chart:[pic]Source: www.worldbank.com

The primary benefit of low interest rates is its simulative effect on economic activity. By reducing interest rates, the government can help spur business spending which also helps the economy's long-term performance. For any business owner the low interest rate will reduce operational cost and increase profit margin. The cases are not different for our readymade garment owners. In many countries direct suggestion is considered from the business community. So that the government can help the industry to cope up with their challenges. But the scenario is totally different in our country. Our business community is still struggling with this high interest rate. With the worldwide downturn in the economy survival has become very difficult. When the rest of the world economies are taking counter measures to fight the downturn our monetary policy does not show any sign to reduce the interest rate and facilitate the RMG sector. But a low interest rate will give the investors incentive to invest and diversify. The government can introduce new loan package for the RMG industry at a lower rate as it constitute 75% of the total export of our country. So a cutback in the lending rate can help to restore the damage or loss done by the recession.

SUBSIDY:

The RMG sector of Bangladesh is the major exporter(75% of total export). This sector like all other industries of the country is suffering from various problems. But no special package of financial help is allocated for this industry. We have selected the following fields where government t can subsidize. They are mentioned below:

Raw materials and machinery import:

Import duty at the rate of 2.5 percent ad valorem is payable on capital machinery and spares imported for initial installation or for BMR/BMRE of existing industries. The value of spare parts should not, however, exceed 10 percent of the value of the machinery. Export-oriented industries and industries located in the under-developed areas may enjoy a further concession. The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) have demanded of the government to reduce the import duty on machinery and spare parts and to extend the bonding facility period. the small and medium sized garment businesses are facing more difficulties as they operate in rented premises, and thus need to pay extra nine percent VAT (Value Added Tax) on rented premises. If the tax imposition on the rented space is withdrawn by the government, it would help the readymade garment (RMG) industry to better contribute to the country’s economy.

duty drawback rate:

Historically the word drawback has denoted a situation in which a duty or tax that has been lawfully collected is refunded or remitted, wholly or partially, because of a particular use made of the commodity on which the duty or tax was collected. All of our competitor countries face a high duty drawback rate but Bangladesh is lagging behind. The chart below will depict the situation: [pic]

ENERGY SUBSIDY:

The industrial consumption rate of electricity varies from Tk.5.15 to Tk. 8.87 per kW depending on the size of the industries, load capacity and peak/off peak hour consumption. This price is quite high and difficult to afford for many small businessmen. Government can provide some discount packages for this industry for proper and timely delivery of the products. Many companies also generate electricity with generator to cut losses. Government can provide subsidized fuel to them.

RESEARCH AND DEVELOPMENT:

Bangladesh RMG sector severely lacks product diversification and a research and development. Most of the factories we visited whether it is a large or small garment has no original product. All of the products are designed by the foreign buyers and the local designers just implement the design. Keeping the situation in mind BGMEA opened a fashion institute in 2003. But it still has to show the intended result. Our exporters are so focused on some specific products like shirts and jeans that they are ignoring a huge market like household materials, sports apparels and so on. No company can develop the designs due to lack of an expert research and development team. The large companies have a R&D department but at a very small scale. But the small companies do not give much importance to their R&D department. With a fully functional R&D department the companies can not only fight recession but they can venture to new products and prospects. Bangladesh needs to strengthen its capabilities to tap this growing market as technology-intensive products are the future. A small portion of revenue of the Indian textile industry is derived by innovative or technology intensive products. The R&D should aim at increasing the country's share of advance technology-based products and high value-added items in global market. A national readymade garments research council can be set up which can act for undertaking and providing direction to overall development. Development of eco-friendly and sustainable linkages is key to competitiveness. Also, the competitive edge for RMG industry will come from adoption of new and advance materials with functional properties (like anti-microbial fabrics for patients dress) in the RMG sector. The importance of the R&D cannot be should not be undermined. Because a creative and innovative industry will survive if put through tough situations. So if this industry faces situations like the last recession it can combat it with equal might.

INTERNATIONAL LOBBYING:

Bangladesh's competitive edge as an exporter of textiles cannot be fueled solely by domestic policy changes. The United States, which imports at least $3 billion worth of Bangladeshi textiles annually, has an opportunity to bolster the country's garment industry and reduce sweatshop conditions for the sector's 3 million, who are mostly women.

The New Partnership for Trade Development Act, a bill introduced by Congressman James McDermott (D-WA) in November, 2009, would do just that by including Bangladesh and Cambodia among the countries that receive duty-free access to the US market. Unlike Mexico and other countries engaged in regional trade agreements with the United States, Bangladesh and other developing Asian countries are paying high tariffs on their exports. And it's taking a toll on both the garment industry and its workers. In promoting his legislation, Congressman McDermott has pointed out that less developed economies need to find ways to increase trade and "one set of poor people is not more or less worthy of help than another." I wholeheartedly agree. But the efforts were not successful and Bangladesh still suffers from the high tariff in the US market.

In 2008, Bangladesh exported $3.7 billion in goods to the United States, of which only 0.5% were duty free. Furthermore, Bangladesh had to pay more than 15% in tariffs for the remaining $3.7 billion worth of goods, ranking it the highest among all tariff-paying trade partners to the US.

The tariffs the United States collected that same year on Bangladeshi imports were equivalent to imposing a $3.98 tax on every person in Bangladesh, a country with a per-capita annual income of $621. In 2007, while Bangladesh paid $522 million in tariff charges to the United States, it received only $49 million in development assistance.

Though this scenario may seem bleak and many factory owners and they are not interested in any more lobbying but if put through proper channels and in the right time the lobbying can bring this sector lot of profit and prospects.

LABOR UNREST:

Frequent labor unrest in clothing manufacturing sector; strikes by labors & their unions; has become common in Bangladesh. Most obvious reason for the unrest is wages & increments up to a level, which could help them to live a minimal life. In fact with the high inflation in food and energy price, it is getting difficult for the workers to live with the present low monthly wage. Most of the owners of the clothing factories can realize the reality, but they are unable to increase the wages as demanded by the labor unions. They are not making a high enough profit to meet their demands.

if the Wage Board announces minimum wage more than present limit, then present clothing industry might get one big shock, which could lead the clothing industry of our country in the verge of destruction.

There could be few possible outcomes, following implementation of the announcement. The first one is the premium organizations of the sector; namely BGMEA and BKMEA; can ask the government for monetary stimulus package to full fill higher wages. Other most likely consequent is permanent stoppage of the clothing factories. Apart from this, wage increment might lead to market inflation, especially in food.

Therefore, we should go thorough diagnostic consideration to find out hidden problems, and possible solutions to save our billion dollar clothing industry. Bangladesh enjoys the lowest wages in clothing sector in the world, but cost of living has been increasing gradually; most likely at significantly higher rate in the world. Thus; demand of increasing monthly wages is obvious, creating labor unrest. The second factor is wages discrimination; e.g. top-level employees draw more than 100 times monthly salaries than low-level employees, plus other company’s benefits in the hierarchy. This in turn develops non-motivation among the fellow workers. Other reasons for the labors’ non-satisfaction may be other mismanagement of the industry, resulting in frequent unrest of workers; like fire security, fraction salary payment, zero payments for over time, no festival bonus, and lay off of factories without prior announcement. Some experts of the sector believe; internal political environment, national or international politics; like creating labor unions; industry waste or Jhoot trading issues etc, are also contributing in unrest.

Labor unrest is the final explosion created by uncountable mistakes, misbehavior, mismanagement, and over exploitation of labors by authority. I like to summarize my writing in the following table:

|Reasons for Labor Unrest |Proposed Solutions |
|Low wages |Control food and power abnormal inflation; readjust wages |
|Higher wages discrimination/gap in organizational hierarchy |Restructure factory hierarchy organogram; provide incentive to |
| |deserving employees but keeping salary indiscriminate level |
|Lack of compliance (no weekly day off, no festival bonus, |Ensure social and environmental compliances in the |
|compulsory over-time, but fraction payment or no payment) |clothing-manufacturing sector. |
| | |
|Death of any garment labors in the factory premises, could be by |Train labors techniques how to save themselves; construct |
|fire-smoke, electrified and labor pain for pregnant women |production plant accordingly; keep contractual agreement with |
| |nearest doctors in the locality, in case of unable to ensure 24 |
| |hours doctor. |
|Local influential (could be mastans) trading of garment |Needs to formulate garment police to tackle such occurrences |
|wastes/jhoot, sometimes create unwanted unrest in the clothing |(like Railway Police to guard Bangladesh Railway) |
|manufacturing areas. | |
|Some believe international politics willing creates labor unrest,|In such cases, government and media could play vital role. They |
|thus intentionally spread the news of labor unrest in the |should go depth in the matter, and thus broadcast real pictures |
|industry to take unprivileged advantages. |(hidden cases) |
| | |

INFRASTRUCTURE:

For all the stakeholders the infrastructure is the single largest issue hampering the growth of the RMG sector. Buyers today are forced to select product to export due to congested road, limited inland transport alternatives and the lack of a deep sea harbor. These factors just add to the inefficiency. With an aim to moving more fashionable and shorter lead time items in Bangladesh improved infrastructure has no other alternative. The transport issue needs to be addressed immediately as the system may collapse with the growth of this industry.

The export transportation largely depends on the Dhaka-Chittagong highway and Chittagong harbor. The following issues are the identified major barriers in the process:

• The highway is often congested as capacity planning falls behind demand, increasing transport time up to 20 hours from Dhaka to Chittagong.

• Lead time for sea fright has increased about ten days due to the absence of a deep sea harbor.

• Productivity in the Chittagong port suffers hugely due to some efficiency like manual handling, limited crane supply, strikes by the employees and mismanagement.

• Dhaka-Chittagong railway connection offers very limited capacity, about 120 containers daily. But at present the demand is almost ten times of that.

At the moment business community is making adjustments and managing the situation by building close relationship with the transport companies, making drivers more accountable, by using tracking system to achieve full transparency.

The government needs to implement the projects like extension of the Dhaka-Chittagong highway to four lanes, improvement in railway sectors and extension of the port areas to avoid a collapse of the transportation network. Our RMG sector is on the verge of massive growth. If we cannot keep up with the demands the orders will shift to another competing country. So it is very important to solve the infrastructure problem as soon as possible.

UTILITY SUPPLY:

Bangladesh is suffering from severe utility shortage. The power and gas crisis has gone to the peak. Gas connections are limited now. So for any new business it is a very unfavorable environment. The factories generate their own power through generators but make the production cost too high. They can use gas either as its supply is very poor. The government has chalked out some plans to solve this power crisis in the next two or three years but with the recent failure of the diesel based power plants the plan seems a little bit farfetched. To meet with the increasing demand and to survive the RMG sector need immediate solution. Government can shift to coal or gas based power plants to minimize the cost of subsidy.

INVESTMENT ENVIRONMENT:

Bangladesh is in more robust shape than most, to handle the financial crisis aftermath, though it will nevertheless see some export and remittance effects. With turmoil abroad, it becomes even more important to focus on investment and development at home, improving the domestic investment climate so as to enable rapid private sector growth to exert its stabilizing effect. We at the World Bank are monitoring the evolving situation as well as the effect on the developing countries very closely, and stand ready to assist Bangladesh when needed. Improving investment climate is core to accelerating the economic growth – to aid diversification into areas of comparative advantage and to finance infrastructure – and higher productivity. Substantial improvements in the investment climate is achieved by improving trade policies, enhancing the legal and regulatory environment for the private sector, developing an effective competition policy, establishing policies friendly to foreign direct investment, and deepening financial sector reforms. Addressing labor skills with due regard to education and social issues is critical to improving productivity. Improvements in the policy environment for energy development are central to this effort, by strengthening the institutional framework, addressing distorted pricing, and encouraging accountable and transparent processes for investment decisions. Equitable growth and empowerment of the poor further call for strengthening of high-growth rural and peri-urban areas with natural potential, via services and infrastructure provision to such promising growth poles.

Investment environment has evolved in time, across locations, and in international comparisons, and outlines policy options for further progress. But to have a competitive edge it is very important to develop the environment further.

EXPORT-IMPORT POLICY:

Bangladesh government has provided with a fair policy providing with lots of facilities. But In order to promote export, scopes should be there to pay prices both under LC and contractual agreements. The subsidy on the cost of the local raw material purchase should be increased. Though Bangladesh enjoys a good export environment the import of raw materials and machinery is still not favored by the government. With the closing of cotton export from India our country may face higher price as 30% of the cotton is imported from India. So our government should promote local production. Our major export markets are EU and USA. But to diversify and cut the risk new destinations should be included in our list. Government should increase incentive these exporters.

EXPLORING NEW MARKETS:

The majority of our export depends on EU and USA. Fifty per cent of the country's total RMG products are exported to the European Union (EU) and US is the largest market for Bangladeshi apparel. So instead of depending on these two buyers Bangladesh should focus on other countries to reduce the risk. So that in case of an economic downturn our whole industry does not crumble under pressure. Already eleven new countries have been identified and export has already started. The new destinations are South Africa, Brazil, Australia, Japan, Chile, China, India, South Korea, Mexico, Russia and Turkey. n the last fiscal year, 75 per cent growth was noticed in the new 11 countries. Bangladesh exported apparel worth $ 1.38 billion to the new markets and of the total, $ 800 million was earned in the last six months of the current fiscal compared to $ 562 million in the corresponding period of last fiscal, Bangladesh Garment Manufacturers and Exporters Association (BGMEA) research cell shows. Among the new countries, Japan is the biggest apparel importer. In the last seven months of the current fiscal, Japan has imported RMG worth $ 191 million from Bangladesh. The country imported apparel worth $ 93 million in the corresponding period of last year. In the last seven months of the current fiscal, Australia has imported $ 121 million worth of Bangladeshi apparels while it imported $ 66 million worth of RMG products in the corresponding period of last year.

During the same period Brazil has imported RMG worth $ 73 million while the import volume of the country was $44 million in the corresponding period of last year, according to BGMEA. Japan has recently decided to appropriate 'China plus Policy' in importing RMG which has become a great opportunity for Bangladesh to occupy Japanese market.

Japan, India, China and Brazil are lucrative markets for Bangladeshi apparels, so exporters are trying to catch the new markets. If we want to explore new markets for export of Bangladeshi apparels we need fast development of infrastructure, uninterrupted gas and electricity supply.

ANALYSIS OF SOLVENCY AND AUDIT REPORT OF THE BUYERS:

Most of the small industries suffered most as they were dependent entirely on one or two foreign buyers. So when those companies closed their business the RMG factories had to close their operations too. But this situation could be avoided if the exporters had some knowledge about the financial health of their buyers. To measure the financial stability we use certain tools. For example solvency ratio and audit report. Acceptable solvency ratios will vary from industry to industry, but as a general rule of thumb, a solvency ratio of greater than 20% is considered financially healthy. Generally speaking, the lower a company's solvency ratio, the greater the probability that the company will default on its debt obligations.

Another tool for the financial condition measurement is audit report. Recorded in the annual report, the auditor's report tests to see that a corporation's financial statements comply with GAAP. This is sometimes referred to as the clean opinion.

If this measure is taken and it is made compulsory by the government many factories will be able to cut back their losses and refrain themselves from risky investments.

CENTRAL COMMITTEE FOR ECONOMIC OBSERVATION:

Most of the foreign investors could somehow predict partial effect of the recession on their business. But in our country there was no official or private body of researchers who could warn the business sector about the impending doom. As our GDP hugely depends on the export any downturn in the world economy will affect our industries. So a government body or collaboration between the government and private sector can be done. This body may consist experts from the government and the industry. They can explore new factors and fields with potentials. This body can explore new markets and predict any depression in the world economy.

8.0 CONCLUSION:

Bangladesh, one of the representative LDCs, has also been following the same route for the last 25 years. Once derided as a “bottomless basket-case” by Henry Kissinger, the country stumbled across an economic opportunity in the late 1970s. New rules had come to govern the international trade in textiles and apparel, allowing low-cost suppliers to gain a foothold in American and European markets. Assisted by foreign partners, and largely unaided by the government, entrepreneurs held the opportunity and exploited it to the fullest. The history of the Readymade Garments Sector in Bangladesh is a fairly recent one. Nonetheless it is a rich and varied tale. The recent struggle to realize Workers' Rights adds an important episode to the story.

The RMG industry of Bangladesh has expanded dramatically over the last three decades. Traditionally, the jute industry dominated the industrial sector of the country until the 1970s. Since the early 1980s, the RMG industry has emerged as an important player in the economy of the country and has gradually replaced the jute industry. Although Bangladesh is not developed in industry, it has been enriched in Garment industries in the recent past years. In the field of Industrialization garment industry is a promising step. The sector now dominates the modern economy in export earnings, secondary impact and employment generated. It has given the opportunity of employment to millions of unemployed, especially innumerable uneducated women of the country. It is making significant contribution in the field of our export income. Bangladesh exports 35 types of garment products to about 31 countries around the world. The RMG sector is a 100% export-oriented industry. That Bangladesh today is considered an economic competitor in terms of international garment manufacturing by other countries of the region and beyond is the country since gaining independence in 1971. it appears much of the socio-economic development in the first decade of the twenty-first century for Bangladesh and its approximately 1.5 million women workers depends on the continuing success of the RMG industry.

Over a period of 25 years, the garments export sector has grown into a $6 billion industry that employs over a million people. In the process, it has boosted the overall economic growth of the country and raised the viability of other export-oriented sectors. The ready-made garments (RMG) sector has a venerable history of about 25 years. This period cannot simply be termed as "long" as this would be the understatement of the decade. This history is one of success, endeavor, and the continuous struggle of the class of entrepreneurs who remained focused on achievement and challenges. RMG contributes 76% of total exports in Bangladesh. Major products of apparels include knit and woven shirts, blouses, trousers, skirts, shorts, jackets, sweaters, sports wears and many more casual and fashion items. The sector currently employs approximately 1.5 million workers, mostly females from underprivileged social classes. The raging controversy over wage hike in the readymade garments (RMG) sector continues. This is happening at a time when the industrial structure in China, the world's largest exporter of apparel products and one of the major competitors of Bangladesh, is undergoing rapid transformations. While the China shift could benefit Bangladesh's RMG in the medium to long run, the industry faces some short-term challenges largely owing to economic problems in the advanced economies. While the emerging markets returned to the high growth path following the great recession of 2008-09, the advanced countries' economic outlook remains gloomy. The hope of economic recovery is overshadowed by continuous job losses in the United States (US) and the sovereign debt problem on the both shores of the Atlantic. Further, most countries in Europe are announcing a series of austerity measures that could slash their demand for imported goods and services significantly. Both Europe and the US remain Bangladesh's major exports markets.

Amidst the global financial crisis Bangladesh's apparel exports have not had much impact largely owing to the massive fiscal stimulus packages in the advanced world. However, the recent austerity measures and a less than rosy outlook of advanced economies could affect Bangladesh's apparel sector adversely. This indeed limits the RMG owners in Bangladesh revising labor cost upward, particularly at the scale the workers have been demanding.

However, there is also a silver lining as far as the industry's prospects are concerned. China is increasingly focusing on the development of high-end manufacturing and services, given the structural needs of its economy. Beijing has also decided to allow a gradual appreciation of its currency in the wake of relentless pressure from the US and Europe. China's undervalued exchange-rate policy is believed to be a cause of strain in the global economy. Increasing product and market concentration, weak domestic linkage of export-oriented industries and shallow domestic market of goods that are exported make Bangladesh’s export sector especially vulnerable to external shocks. Recent global initiatives such as USTDA 2000 and special preferential treatment accorded by EU and USA to Pakistan are in all likelihood having adverse impact on Bangladesh’s exports and accentuating the negative consequences of the ongoing recession. The recently introduced initiative of EU’s everything but arms initiative providing LDCs zero-quota zero-tariff access to EU market is not expected to benefit Bangladesh much either – a recent study conducted by the Commonwealth Secretariat showed that from a static perspective, Bangladesh’s gain is expected to be very negligible, about $8.0 million. Bangladesh, however, stands to gain substantively if such a treatment was accorded globally in which case the gains for Bangladesh are estimated to be $1200 million annually. However, as is known, the recently held fourth WTO Ministerial Meeting in Doha failed to come up with such an initiative.

The main objective of this research paper is to analyse the effect of recession on the readymade garments sector of Bangladesh. From the above analysis we came up with the inference that sales volume and price was affected by the economic turmoil. It seems that the small companies were affected more as they were dependent for on few fixed customers. The percentage contribution of the RMG sector on the total export peaked and reached 79.33% during 2008-09. But during the year 2009-10 the contribution percentage reduced to 77.12%. (Data Source Export Promotion Bureau Compiled by BGMEA). As recession has an economic impact on the end customer. So our products will see a dip in the demand. But Bangladesh had an upper hand due to the cheap labor cost and production of low end products. On the other hand it is also true that we have very less product diversification in creativity in product development. So if the world fashion trend shifts our RMG industry may find itself in a trap.

Our major markets are EU and USA. So it is suggested that the industry search for new market.

Our RMG sector has a lot of prospects and but the main impediments are the infrastructure deficiency and utility shortage. With the proper guidance and support this sector can grow and thrive.

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APPENDICES:

QUESTIOnNAIRE:

IMPACT OF GLOBAL RECESSION ON

READY MADE GARMENTS INDUSTRY OF BANGLADESH

CHECKLIST FOR INTERVIEW

Name of Respondent

Designation

Company

(Take a Visiting Card)

1. Where do you export your products to?

-- USA

--EU

-- Indifferent (specify)

2. How have the sales been affected in the following sectors?

* Sales in knitwear(US)-Increased/decreased/Indifferent

* Sales in knitwear(EU)- Increased/decreased/Indifferent

* Sales in woven wear(US)- Increased/decreased/Indifferent

* Sales in woven wear(EU)- Increased/decreased/Indifferent

3. What are the types of raw material imported?

Ans .

4. Have the prices of the raw materials changed?

Ans: Increased/Decreased/Indifferent

5. How dependent are you on imported raw materials? What is the impact of the changes in price due recession, if any?

Ans.

6. How have the labor costs been affected?

Ans. Increased/decreased/Indifferent

7. What is the effect on the profit by the following factors?

* Sales price-increased/decreased/Indifferent

• Sales Order volume- increased/decreased/Indifferent

* Any change in Cost of production

8. Has there been any occurrences of layoffs? (Time period)

Ans: Yes /No /Indifferent

9. If yes, what is the number of employees laid off?

Ans:

10. Is there any change in the profit due to the change in exchange rate of US$? (Period)

Ans. Yes /No / Indifferent

11. Was there any product diversification during this period?

Ans. Yes/No/Indifferent

12. If yes, what are the products that were produced to diversify?

Ans.

13. Has the market competitiveness changed?

Ans. Yes/No/Indifferent

Effort towards Maintaining Quality

Need for Product diversification

Need for Innovative marketing strategies

14. Which sector is more efficiently functioning in Bangladesh?

Ans. Knitwear/ Woven wear

15. Has there been any change in preference for Knitwear over Woven products?

Ans: Yes / No

16) Has there been a change in payment mode (from LC to direct contract)

Ans. Yes / No

17) If yes, what are the problems that have been created?

• What should be the Measures to Encounter Recession

6.1 Interest rate on loans

6.2 Subsidy

6.3 R&D

6.4 International Lobbying

6.5 Labor unrest

6.6 Utility supply

6.7 Investment environment

6.8 Export import policy

6.9 Port facilities

6.10 Exploring new markets