Mushtaq Husain Khan
[This article is extracted from a working paper of Professor Mushtaq Husain Khan of SOAS University of London to allow the readers to understand the story of Bangladesh’s RMG industry in the late 1970s and the role of Ziaur Rahman]
The growth of the ready-made garments industry in Bangladesh has often been presented as a vindication of the success of free market policies combined with the virtual absence of labour market protections in Bangladesh.
The overthrow of the Awami League in 1975 allowed a reversal of the policies of socialism. In the years that followed, both liberalization and privatization gradually followed. But in fact investment even in the simplest of technologies involves significant risks for domestic investors when these technologies are new to the economy. The machines may be relatively simple and the formal skills of the potential workers may appear to be more than appropriate. But setting up a factory that can achieve international quality standards, meet orders on time, and manage internal timekeeping and waste management to achieve global competitiveness is a different order of requirements altogether.
The time it will take a firm to achieve global competitiveness is not known, since this depends on the time the production team takes to acquire the tacit knowledge required to operate the factory competitively. Nor is it viable for foreign firms to invest and finance learning-by-doing in low-margin, low-technology sectors simply on the promise of future profits. The future profits are unlikely to be high enough in most cases to compensate for the risks. This is of course why global production does not rapidly shift to the poorest countries. But a combination of factors made this transfer of technology feasible for Bangladesh in the early 1980s.
The takeoff of the garments industry is important because it demonstrates that liberalized product and labour markets are not sufficient for achieving a globally competitive industry. The takeoff also required a set of ‘financing instruments’ that were governed by different types of agencies and located in a specific political context, which collectively ensured that the financing both allowed learning-by-doing to begin and also ensured that high levels of effort would be put in. Indeed, an important financing instrument that enabled this learning-by-doing to happen in Bangladesh was based on a violation of free market principles. This part of the ‘financing’ was created by the Multi-Fibre Arrangement (MFA) that the USA negotiated to help its own garments and textiles industry in 1973, administered by the General Agreement on Tariffs and Trade (GATT).
MFA set bilaterally negotiated quotas on established developing countries exporting textiles and clothing to protect the US garment and textile industry. As a concession to global opinion, the MFA did not put quotas on a number of least-developed countries, like Bangladesh, which did not have any garment industry at the time and were therefore no threat to the US. For Bangladesh, it was fortuitous that just at that time a potential investor class was emerging. These investors did not have the requisite tacit knowledge to be globally competitive in garments production despite the low wages in Bangladesh. The MFA created ‘quota rents’ for countries like Bangladesh and thereby helped to finance a period of learning-by-doing.
Once established garments exporters like South Korea hit their quotas, newcomers could sell their products at a slightly higher price, thereby enjoying a ‘quota rent’. The quota rent served as a partial financing instrument that temporarily reduced the cost of financing learning in the Bangladesh garments industry. And finally, the authoritarian clientelism characterizing the ruling coalition of the time enabled a good enough growth-stability trade-off for the introduction of a few critical domestic institutional innovations required for the take-off of the garments industry.
The MFA created a serious problem for established producers of garments in countries like South Korea who suddenly found themselves quantity-constrained. They had a strong incentive to relocate production to countries that did not have quotas so that at least their textile output could be marketed. But developing countries that did not already have a textile and clothing sector were relatively poor countries that lacked the tacit knowledge to set up competitive production even though their wages were much lower. Moreover, they suffered from contracting failures that affected the financing of acquisition and learning.
To attract investors from more advanced countries who wanted to relocate, developing countries had to offer something more than just their quota-free status. After all, many poor countries were quota-free, but only a handful benefited from MFA. Bangladesh was one of them and its success has to be explained in terms of specific mechanisms through which these contracting failures were addressed.
By the late 1970s, primitive accumulation had created numerous potential investors for a sector like garments where the minimum efficient scale of investment was at most in the hundreds of thousands or low millions of dollars. Technology transfer came about in Bangladesh through collaboration between a retired Bangladeshi civil servant turned entrepreneur, Nurul Quader Khan, and a South Korean multinational, Daewoo. The Bangladeshi entrepreneur set up Desh Garments in 1979, acquiring the land and machinery with its own capital and arranging government support for the requisite institutional changes required to support a potentially risky investment in a new area.
The South Korean multinational advanced the cost of training a critical number of supervisors and managers, but this advance was effectively a loan that was to be repaid in the form of a claim of a percentage share of future exports. Daewoo’s up-front investment was to host the visiting Bangladeshis at their plant in Busan and train them in modern garment manufacturing processes. Effectively, what was being transferred here was the tacit knowledge of setting up the plant, managing quality control, minimizing wastage of raw materials, managing time-keeping and all the other aspects of factory production that determine the difference between profit and loss in a competitive world where every quality of garments has an international price that is predetermined.
The role of the quota rent was to reduce the competitiveness gap that a new entrant like Bangladesh would have to immediately overcome. But the quota rent was clearly not sufficient for Desh to simply set up its factory and start production. Further investments in learning-by-doing were necessary and these were organized by the private contract between Desh and Daewoo.
However, the quota rent reduced the mountain that Desh had to climb and made it more credible that the Bangladeshi company would be able to learn enough to be able to begin paying back Daewoo’s up-front investment relatively rapidly. Moreover, the fact that a retired civil servant from Bangladesh could sit across the table from a global multinational and offer credible equity to set up a collaborative venture can only be understood if we remember the primitive accumulation that the country had just gone through. Daewoo’s calculations were straightforward. Bangladesh’s access to the US market through MFA was an attractive business proposition which would enable them to market their textile output. But they would probably not have been willing to take the risk of participating in a Bangladeshi collaboration without a number of factors that reduced the risk of failure.
The equity invested by the Bangladeshi firm came from internal financing by the investor and provided commitment that the top management at least would put in high levels of effort in raising competitiveness rapidly. This reduced the institutional requirement of enforcing contracts between outside investors and stakeholders within the firm who would be expected to put in high levels of effort in learning.
No less important was the explicit support provided by President Ziaur Rahman to the project. President Zia’s support had credibility because it was his initiative to link up Nurul Quader with Kim Woo-Choong, the chairman of Daewoo. His support assured the South Koreans that unexpected institutional problems would be dealt with or at least addressed. This political support ensured that relatively small but critical institutional innovations like the back-to-back letter of credit (which allowed Bangladeshi producers to borrow from local banks to finance their imports of raw materials using their export orders as collateral) and the bonded warehouse (which allowed complex customs duties on imported inputs to be avoided) were quickly introduced. The president had sufficient control over the (authoritarian clientelist) ruling coalition to implement discrete institutional changes like these without significant modification or cost in terms of political stability. Interestingly, the owner of Desh Garments, Nurul Quader Khan was a civil servant who had made his money in the previous Awami League regime. Zia’s objective in supporting him was clearly to develop the economy, not because he was a primary political client of his own party.
Desh was remarkably successful. Between 1981 and 1987 its export value grew at an annual average of 90 percent. The learning and transfer of technology that was unleashed by this single project was remarkable. By the end of the 1980s, of the 130 people who were first trained by Desh in Daewoo’s factories in South Korea, 115 became entrepreneurs and set up their own garment firms. This apparently did not do much damage to Desh, whose output continued to grow at close to 100 percent per annum during this period. The loss the
company suffered when it lost a manager was made up many times over by the high levels of effort that these individuals invested in the first place as a result of this implicit incentive. From virtually a zero base in 1980, by 2005 there were around 3,500 active firms in the garments sector employing upwards of 2 million people.
Primitive accumulation continued to be an important source of entrepreneurial supply. In a survey carried out in 1993, 23 percent of garment factory owners responded that they had originally been civil servants or in the army. We can assume that many others had close contacts with politics and had made their initial capital through political processes.