How long can the RMG industry sustain on low wages?

The RMG sector in the country has been in the eye of the storm in recent weeks as workers' protest over raising the minimum wage took a violent turn, leading to the death of two workers and scores injured. 

The authorities have since agreed to raise the minimum wage for garment workers by 56.25%, the first such raise since 2018, from Tk8,000 to Tk12,500 ($114), with an annual 5% increment.

Nonetheless, not all protesting workers have accepted the raise, and continue to demand the minimum wage be set between Tk20,000 to Tk25,000. As of writing this article, one other worker died during protests on Wednesday while 10 others were injured. 

On the flipside, the owners argue they can ill afford to meet the demands of workers, especially since the industry faces a variety of adverse issues, including power and gas deficits, fluctuations in exchange rates and dollar crisis, which have in turn raised manufacturing costs and disrupted clothing production. 

Besides, a decline in demand from the United States and the European Union has also precipitated a crisis in the key export sector. 

Add to this, the country faces stiff competition from countries like Vietnam; while several emerging African countries offering even lower wages are trying to challenge our dominance in the global market. 

All this comes in the backdrop of Bangladesh's LDC graduation in 2026. 

LightCastle Partners, a national management consulting firm, in partnership with Policy Exchange Bangladesh, published a working paper titled "Threads of Progress: A Comprehensive Landscape Study of the Apparel Industry and the Future for Women Workers" on November 4, 2023. 

It argued in the paper that the RMG industry will undergo significant transformation in the trade benefit regime by 2029 as the GSP moratorium ends coinciding with Bangladesh's graduation. 

All this paints an ominous picture of the future of the RMG industry - one of the most important drivers of our economic growth in the last three decades. As inflation soars and GDP grows, it is natural that workers will demand increased wages to sustain their livelihood. 

The industry, however, has been built on a model of gaining competitive advantage by forcefully keeping wages down - Bangladesh's RMG wages are the lowest in the region and among competitor countries. 

But as recent protests - alongside the changed global outlook - attests to, how long this model will continue to be viable is a question that is very much up in the air. 

The economic theory dictating low RMG wages

RMG manufacturers in Bangladesh operate in a very cutthroat capitalist model. They wield asymmetric market power in hiring decisions, and it turns the industry into a monopsonistic labour market. 

From the perspective of theoretical economics, a moderate increase in the minimum wage that is greater than the market clearing wage, but less than the marginal revenue product of labour (MRP), results in an increase in employment and wages. That is, if RMG manufacturers were to increase minimum wage, which is still lower than the incremental sales revenue from an extra low-wage worker, then the effects are positive. But if minimum wage exceeds MRP, then employment and income effects are negative — a lose-lose scenario. 

So the first order of business for factory owners is to find the marginal revenue productivity of entry level (low-wage) workers in RMG. While there might be scope for raising the minimum wage, it is critical from their perspective to ensure that minimum wage is not set above the marginal revenue product of labour of low-wage workers. That is the clear economic policy adopted by RMG manufacturers. 

So, as they see it, keeping the wages as low as humanly possible is the key. The industry is already beset with numerous issues which are pulling down the profit margin, they point out, and therefore, a significant wage increase is not possible. 

The ground reality for RMG workers

A Sanem (South Asian Network on Economic Modeling) report published on January 1, 2023, found that the RMG workers earn less than half of what is required to cover their fundamental necessities, including food, housing and healthcare. 

According to the report, on average, a worker earned Tk9,984 per month in the April-June quarter of 2022, while their living wage – the required money to afford a decent standard of living – ranged from Tk19,200 to Tk26,000, depending on the areas they live. It means there is a gap of 51%-60% between the actual income and the minimum need. 

And inflation has skyrocketed ever since, from 8.57% in January to 9.63% in September, 2023. So the situation has worsened for the workers. 

The Centre for Policy Dialogue (CPD) proposed a 55% hike in the RMG workers' basic pay under the minimum wage board on October 8, 2023. Considering the rising living costs, the think-tank recommended setting Tk17,568 as the minimum wage for the country's RMG workers. And they also found out that it can be implemented if garment owners could get an additional seven cents on average per unit RMG product. 

The monthly real wage for Bangladesh RMG workers remains the lowest in South Asia and among the competitors at $72.42 per month (till November 7, 2023), primarily due to significant currency devaluation amid economic challenges. 

And to cover up the gap, workers increasingly rely on overtime and excess hours to make their ends meet.  And all of this is allowed to go on to justify one statement - that cheap labour is our comparative advantage. If RMG workers are paid more, then our exports will decrease. 

How long can this model sustain?

What always eludes the RMG debate is how productive the industry is. The RMG sector gets a lion's share in every government policy. They got the bulk of Covid-19 stimulus package. They get tax cuts every year. And the powerful Bangladesh Garment Manufacturers and Exporters Association or BGMEA always lobby for more benefits and more incentives. 

But are the incentives improving the RMG competitiveness, or just maintaining the status quo? 

The industry which gets such disproportionate government backing should not have only one unique selling point (USP) - low wage workers - to remain competitive in the global market. 

We asked economist Dr Akhtar Mahmood, former Lead Private Sector Specialist at World Bank Group, whether such a low wage model is sustainable in the long run. 

"Before we get into the issue of sustainability, we need to address our first problem regarding the industry," Akhtar Mahmood said, "and that is the lack of consistent, updated data that can be used in research." 

RMG is our biggest export earning industry, and yet, there is not much information and data for economists or policy experts to work with. Unless there is data, research or critical indicators monitoring is hard. And it is especially true for the RMG sector. 

One of the rather interesting insights is the question of exchange rate and depreciation of taka. 

In the past year, the taka has seen a depreciation of 25.58% against the US dollar. As a result, garment exporters are now receiving Tk107.5 per dollar, a significant increase from the previous rate of Tk86.45. 

Meaning, for one dollar profit, the manufacturers are getting 21 taka more. And the same depreciation of taka has increased inflation, which is making the lives of workers unbearable. If the workers bear the cons of depreciation, why will they not receive the pros of it as well? 

They lead a meagre existence, subsisting on minimal food, residing in cramped and unsanitary accommodations, and grappling with illnesses and malnutrition. The wages they receive fall far short of what is required for their families to access basic necessities for a healthy life. 

You can not run an industry with half-fed, half-satisfied workers, Dr Mahmood pointed out.

"Yes, low wage structure helps to sustain our industry now. But do we want that? The workers are in pain, and it is affecting their productivity. We will not be able to sustain the structure in the next ten years. We do not want such low wage structure exactly because it will not sustain in the future," he said. 

His words reflected what Olivier de Schutter, the UN Special Rapporteur on extreme poverty and human rights, said in an interview with BBC Bangla, "I do not think that the development of a country can be premised on keeping workers in poverty." 

Mahmood is also not of the opinion that new African countries with lower wages can become a bigger threat. 

"Normally we do not realise how hard it is to penetrate in an already-established market. Take Ethiopia, they tried doing it with not much success. African countries do not have the high productivity required to penetrate the global RMG market. We have been in the game for forty years, our whole ecosystem knows everything about the RMG industry there is to know. So, low productive competitors are not the main problem here. The problem is automation."

In his words, in the next ten years, we will lose our competitive edge of low wage workers due to automation. Currently, less than 15% of all operations in the RMG sector are mechanised. We are still not adapting fast enough to the rapid development in automation. 

"What we really need is not low wage workers to compete in the global market, but highly productive, skilled workers that can give us the edge over our competitors," he said. "Productivity is the key." 

Our productivity, however, is far behind that of our rivals. Asian Productivity Organization (APO) Database (2018) showed that the hourly productivity of Bangladesh is valued at $3.4 while with the largest exporter China's productivity was recorded at $11.1. 

Vietnam's productivity is $4.7. The highest labour productivity was calculated in Sri Lanka at $15.9, followed by Indonesia at $12.3. Our neighbour India has a productivity of $7.5. 

With the exception of Cambodia, Bangladesh continues to trail behind its seven Asian counterparts in terms of apparel labour productivity per hour, despite being the second-largest garment exporter. 

When asked about whether the RMG manufacturers would want to invest more in order to increase workers' productivity, Dr Mahmood replied, "they do not have the incentive to increase productivity, honestly. The lobbyists love to talk about duty reliefs, subsidies and tax cuts. The owners would very much want to keep the status quo. We need the government to make them increase productivity and invest more into getting new technology and labour training. Only the government can do that. And for that, we need more data, more research." 

The efficiency of most garment factories could be much higher than the average 40%-45% in Bangladesh, compared to global benchmarks of 75%-85%, with necessary interventions. 

For this, extensive research and sufficient investment are required. For years, the government has given the RMG manufacturers a de facto carte blanche to run their business. This might be a good time to reevaluate that freedom. 

We need performance oriented government policies where there will be certain benchmarks for the manufacturers to fulfil, and that have to be enforced strictly; just the way South Korea made their industries globally competitive in the 1950s and 1960s. 

Unless the government pushes the manufacturers to transition to a more sophisticated, developed, highly-productive industry, the RMG sector will not be able to sustain its current low-wage model for long.