The fibre and the fear

Fortunately or unfortunately, the quota system has to go very soon and an ominous sign seems to loom large on the horizon. A World Bank forecast tells us that Bangladesh might lose up to 50 per cent of its exports to the US. The IMF forecasts a fragile future for the sector as far as exports to the US are concerned. The general consensus, however, is that abolition of quota would have an adverse impact on RMG exports although the final fall out would only be observed after some years. In this column today, we shall try to focus on few factors that came out from discussions with concerned quarters about the impact of the abolition.

Brokers heart-broken!
The robust growth of the RMG sector, inter alia, resulted in the growth of a handful of brokers who stepped in between the buyers and sellers of quotas. Quotas were distributed by the EPB as per past performance and new entries. Those who failed to meet quota requirements, generally transferred the entitlements to other firms. Thus there was a demand and supply of quotas within the economy. I am told that there were about 1,000-12,000 such brokers in Dhaka and another 300-400 in Chittagong. They carried beautiful briefcases, rode in cozy cars, and rented attractive

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offices in Motijheel or Gulshan. Their main functions were to knock at the doors of both the demand and supply points. Meantime, they reaped home a margin through matchmaking. Usually and on average, they charged 10 per cent for the total transaction. For example, if the value of the product was $10/dozen, they charged $1 for the "trouble" they took to tie the two points. On an average, the margin is 10-20 cents per dozen that goes to the pockets of the broker. Some of the brokers made fortunes out of almost "nothing." Some of them established garments industry and others involved themselves in both. We therefore reckon the first victim of the abolition will be the brokers. In economics text books, quotas are treated as rent seeking business and a boon for brokers. With no quota, there should be no brokers.

Al Haj Rafiqul Islam of Chittagong, an aged RMG exporter, tells me how a broker made him go broke. A broker contacted him for 25,000 dozens of RMG products at a rate of $22-23. Mr. Islam then opened an LC and managed raw materials to land within the shortest possible time. But to his utter surprise, one fine morning, he found that his broker had sold out the same quota to others at a rate of $59! Fortunately Mr. Islam could manage some non-quota orders to sell at a much lower price to sell at a total loss of Tk.40 lakhs! But, believably, not all brokers were like that.

Winners and losers
The small firms, accounting for about one-third of the total establishments and having up to 100 machines per plant, might lose the battle. The survived mostly on the mercy of quotas, partly on performance quotas and partly on transacted quotas. They could not develop the skill to face fierce competition -- as it often happens with protected regime -- nor could they come with backward and forward linkages. I am told that majority of them are already sick due to a volley of factors. Abolition of quota would only add some salt to the injury. However, abolition of quotas could force them to merge with some well-established businesses or serve as a source of supply for the same.

That leaves us with 2,500 RMG firms of medium and large size. From discussions with concerned quarters, I got the impression that about 1,500 firms have already displayed better performance under non-quota regime and they have taken all-out measures to cope with the upcoming crisis. Mr Mohiuddin Ahmed of Azim Group of Industries took me around his beautifully decorated office and introduced me to a group of young merchandisers undergoing intensive training. "If you had visited last year, you would not have observed that. Now we feel customers will visit us and we have to develop the strategies to face the competition. But how can we compete when a buyer from Taiwan has to spend three days to connect with me through faxes and telephones? When one buyer switched over to China failing to find me on phone? From Singapore to Chittagong it takes 6 days but from Chittagong port to my plant it also takes 6 days!" lamented the executive.

A foreign-owned firm complained that large lead time would continue to impinge on the competitiveness of the local RMG sector. In a non-quota regime, buyers would place orders to whoever can fulfill the order in a timely manner. Again, EPZ plants have to place 100 per cent margin on LC that constraints the liquidity position of those firms. The government has to see that the lead time is reduced and that the LC margin is lowered.

"How can we reduce lead time?" I asked. "Well," came the heated reply, "We are forced to import raw materials from India through sea port. Compared to land routes that take 3 days to transport, sea routes take 7-10 days. Besides, transport cost is 25 per cent more. On the other hand, if I import through trucks, I can ship part by part and still continue production. But through ship, I have to import in bulk through containers and until it all arrives I have to wait. It takes 3 days in Chittagong port to clear the load. Why can the customs not be open for 24 hours? Why should import documents need 30 signatures?"

Strengths and weaknesses
The knit wear sub-sector will perhaps win over the wind. Over the years, they have developed sufficient backward linkages and prepared well for the future. The possible imposition of quota by the US on imports from China in some catego

ries could also be a consoling factor for Bangladesh. Besides, the cheap labour, experience in RMG exports and open European markets are strong points for Bangladesh. But the weakest point is untrained labour, quick migration of trained labour across firms without notice, high dependency on buyers' agents, low labour productivity, limited linkages -- all seem to emerge as weak points. Corruption at all levels also appears as bottlenecks in doing business in Bangladesh. Take an example. A Bond License takes 1-2 months with lots of ifs and buts. The government imposed fee is only Tk.3000 but you have to pay, allegedly, Tk.300,000 to get it going. You have to pay money or a definition of "machines" at customs. So, you have to pay "unofficial duty" even for the officially declared "duty-free" imports!

Boon and bane
I visited few firms and quite obviously, my observations might not be representative. But while I observed a fear among the firms about the abolition, I also noticed a sense of firmness in facing the upcoming challenges. Mr Salim Ullah Mian of JP Garments deals in mostly non-quota garments. His firm has started modernisation of management with particular emphasis on the training of workers, reducing pilferage, and building up machineries. "Under quota system you have higher price and assured market You can perhaps afford to have pilferages. But in open market where your C and M price is almost 50 per cent less, you can hardly afford to do that. Our commercial processing costs us roughly 2 per cent of the total exports. By and large, overall cost component would have to cut by half. We are doing our part, and hopefully, government will do it its part," said the director of the firm.

Sunrise and sunset
It seems that with a complete MFA phase out, the sun will set for some but others will witness a rise. These others belong to a group of entrepreneurs who know how to produce at a lower cost and become competitive. Sooner or later, hopefully, all the firms should be able to operate under a new regime of management, skill development, and cost-cutting practices. The government has a vital role to play in the while process of regeneration of RMGs. The lead time, corruption, banking rules, etc. are all in the hands of the government. We can only expect that when the world is getting open, the government will not get interventionist. The main role of the government should be to serve as a facilitator by addressing the issues of telecommunication, electricity, clearance from the port, helping firms develop skilled manpower, etc. Once these problems are solved, there is no reason why Bangladesh should not survive the onslaught.

Abdul Bayes is a Professor of Economics at Jahangirnagar University.