The Garments Gateway: The Power of Garment Exports for Economic Development

Garment exports have proven an effective tool for developing countries to sow the seeds of industrialisation

In 1974, advanced countries began restricting clothing and textile imports through the Multi Fibre Agreement (MFA). The United States and the EU were worried that cheap imports from developing countries could damage their domestic garment industries. There were exceptions, however, mainly for countries whose garment sectors were so underdeveloped they were not considered a threat. One such country was Bangladesh. 

Most people working in the development sector will be familiar with what happened next. Despite being written off by advanced countries, the value of garments exports in Bangladesh exploded in the decades that followed. By the early 2000s, the country was exporting more than $4 billion worth of apparel and clothing accessories every year. Today, with $45 billion of export value, Bangladesh is the second biggest garment exporter in the world, behind only China.  

What’s more, the garment export sector has been an engine of growth for the wider Bangladeshi economy. When the MFA was signed, the country’s GDP was just $12.5 billion. Now it is more than $416 billion. Other countries have also used garment exports to drive economic development: firstly, the East Asian tigers, then Vietnam, Cambodia and – more recently – Kenya, Ethiopia and Lesotho have followed suit.  

While Kenya and Ethiopia’s growth has been from a very low base – and their export values remain far lower than that of Bangladesh and other countries in Asia – the growth rate has been rapid. From less than $6.5 million in 2001, Kenya topped more than $250 million of garment exports by 2008. Growth has slowed down somewhat since then, reaching $340 million in 2019, but Kenya’s experience shows that rapid expansion in a relatively short time is possible. Ethiopia proves this too. Garments exports there were still below $3 million in 2009, but they had reached almost $160 million by 2019.  

Why has the garments export sector shown itself to be such an effective first step on the industrialisation pathway? A big part of the answer is the low start-up costs and technical knowledge required for entry. For countries with low technical capacity, building and exporting products like cars is out of reach. Stitching together t-shirts is much more achievable.  

The garments value chain is also broad. Countries can start at the bottom with mass production of simple items of clothing, before slowly moving up the value chain, building capacity and productivity, while remaining internationally competitive. Though the bottom of the value chain is characterised by low productivity, the prize further up is significant, opening the door to advanced manufacturing and high value-added services, such as marketing and finance. Garment firms, for example, in Taiwan, South Korea, Hong Kong and Singapore in the 1970s onwards managed to move from basic garment assembly to running sophisticated and complex production, trade and financial networks for western clients (for more details, see here and here). 

The sector, particularly in early stages, is also very labour intensive. For developing countries with an abundance of labour, this is a key advantage. It also disproportionately employs women. The share of women in paid work in Bangladesh at independence in 1971 was 4%. It is now 35% largely due to the garment industry.  

So how can other countries follow this industrialisation path and what lessons can be learned from those who have gone before? The first lesson – and perhaps the most important – is that the sector won’t grow by itself. Policymakers in successful countries have worked hard to nurture garment export companies. For example, Ethiopia gave garment firms favourable access to finance, 10-15 years of income tax exemption, duty free import of capital goods and long-term loans from the Development Bank of Ethiopia. It also protected its infant industry with a 35% tariff on apparel imports. Crucially, however, this support has not been unconditional. The Ethiopian government requires firms in the textile and apparel sector to submit export plans and show commitment to increasing exports every year, or face losing support.  

Successful countries, it should be said, have also enjoyed a fair bit of luck. But their governments acted decisively to capitalise on the opportunities they were presented with. For example, when Bangladesh was excluded from the MFA, established export countries such as South Korea sought to circumvent their quotas by re-routing garment exports through Bangladesh.  

The Bangladeshi government agreed, but with significant conditions predicated on South Korean firms building the capacity of local garments businesses. Bangladesh successfully capitalised on its initial advantage to develop internationally competitive domestic garment exporters. Similarly, Lesotho leveraged the need of Taiwanese firms to circumvent quotas to upgrade their capacity.  

Kenya, too, benefited from the African Growth and Opportunity Act (AGOA), which provides eligible countries with duty free access to the US market. In the 10 years after AGOA was signed in 2000, garment exports in Kenya grew by a factor of 30.  

While Kenya certainly benefited from AGOA, it made the most of the opportunity. It was the first country to fulfil the additional requirements for apparel exports under AGOA and was thus an attractive prospect for foreign manufacturers. It was another six months before the next country (Lesotho) was able to fulfil the requirements and another year after that before the third country (Senegal) could begin exporting apparel under the scheme.  

There are other factors that have driven garment export growth in the past, including high level political involvement, strong labour market fundamentals and the use of effective industrial parks. Yet if countries fail to take advantage of the opportunities presented by the international market, there is little chance of strong growth. AGOA remains a largely missed opportunity in this respect. The value of garments exports among AGOA-eligible countries has grown by less than 40% in the last 20 years, from $1.7 billion in 2001 to $2.4 billion in 2020, a twentieth of the level in Bangladesh alone.  

Another opportunity is presenting itself. With companies looking to diversify their supply chains away from China – the world’s largest garments exporter – in the wake of Covid-19 and geo-political tensions, developing countries in other parts of the world can take advantage. Ethiopia’s instability is also an opportunity for other AGOA-eligible countries to fill the gap.  

Of course, the garment sector is not perfect. As has been well publicised, the working conditions in garments factories can be very poor – sometimes even deadly. And in some countries, wages for workers are still too low, even decades after strong industry growth. For many countries, the potential to move up through the garments value chain to the high value-added activities mentioned above remains unrealised. The success seen in the East Asian tigers has proven hard to replicate – a familiar development refrain.  

Bangladesh has had some success moving up the value chain from “cut, make, trim” (CMT) at the bottom to “original equipment manufacturing” (OEM) further up. Yet worker conditions in many Bangladeshi garment factories remain notoriously grim. There are scant few recent examples of countries quickly going beyond CMT and OEM to the upper garment echelons of marketing and finance.  

Of course, this is not to say that Bangladesh shouldn’t have bothered. Its economy is undoubtedly in a much better position thanks to the growth of the garment sector. But the point is that the sector requires long-term policymaking. Initial government support through industrial policies may be enough to get the garments export sector going. But it won’t be enough to move it up the value chain. Further targeted support will be required. If governments want to use the garments gateway to deliver broad-based prosperity for their people, they need to stay the course. 

Note: deeper explorations of why some countries’ progress up the garments value chain has stalled will be the topic of future blog posts.