Share of Textile and Clothing in manufacturing and total GDP

. Share of Textile and Clothing in developed and total GDP

T&C industries have a say in varying degrees to GDP directly. Some general

commentary includes: 

• Manufacturing is on average a fifth of GDP, less in low income countries and

older in middle income countries;

• The contribution of the T&C industry to manufacturing value added increases

with incomes but begins to fall at some level. The share of T&C in MVA is a

third in low-income countries but approximately a sixth in middle income countries.

• Combined, T&C contributes 7% of GDP in low income countries.

  

 Source: World Development Indicators – based on tables A7-A10 in Appendix A

The contribution of T&C is still very high in some LDCs even though it has fallen in recent times. The contribution of T&C to MVA in Bangladesh was 30% (latest year for which data available). In Madagascar, it fell from 36% in 1990 to 6% in 2006 and in Nepal from 31% in 1990 to 19% in 2006. With respect to other low-income countries, the contribution of T&C to MVA in India increased to 24.4% in 2003. In Pakistan, the participation of T&C to MVA was 92% in 2006. The T&C industry makes a liberal contribution to the economy as a whole; the data suggest that Pakistan has been able to maintain the competitiveness of its exports over 1990-2006. ElSalvador’s MVA as per cent of GDP barely increased between 1990 and 2006 nor did the contribution of T&C to MVA. Vietnam has substantially increased its exports of T&C and clothing in particular.  Although low income countries are more dependent on T&C exports, low middle income countries are the most significant group of developing country exporters. The contribution of T&C to MVA for the group as a whole averaged around 14% in 2006. In Syria the contribution of T&C to MVA  is highest at 42%. In Sri Lanka, T&C contributed 33% to MVA. In Morocco and Colombia T&C contributes approximately 20% to total MVA. The contribution of T&C to MVA is lower in the Dominican Republic, Guatemala and the Philippines. The contribution of T&C to total MVA in Colombia, Guatemala, Morocco, Sri Lanka, Syria and to a lesser extent the Dominican Republic increased between 1990 and 2006 (or nearest year). However, in other cases the contribution of T&C to total MVA decreased.  Within the high-middle income grouping, Mauritius has the highest share of T&C exports in total manufactured exports. However, the contribution of T&C to MVA is relatively low reflecting to a certain extent the Mauritian transition from T&C (a key contributor in the 1980s and 1990s) to other value added activities  102.1.3 Share of T&C in Employment Traditionally the T&C sector was responsible for significant job numbers in developed countries, but over the last decades the sector has become the first step towards manufacturing production and employment for many developing countries. While total world employment in T&C barely changed in recent decades, the distribution of employment changed substantially with the EU and US losing jobs and mainly Asia gaining (ODI et al. 2002).  Appendix A presents data on employment within industry T&C employment for selected countries across country income groupings, including average wages and the share of wages in MVA. The average result for the country income groupings are Source: UNIDO Industrial Statistics, World Development Indicators, and ILO Labour stats – average sare based on a selection of countries in each group, see Table A11 These averages reveal that textiles and clothing are responsible for the majority of formal jobs in a number of LDCs, and a third in low and middle income countries. However, the average picture overlooks country specific features. LDCs such as

Bangladesh, Cambodia, and Lesotho all have very high shares of total manufacturing employment in the T&C industry (77%, 90% and 89% respectively). In terms of value added per employee, this is highest for Bangladesh and Cambodia. However, in Bangladesh, the share of wages in MVA is twice as high as in Cambodia.  For low income countries such as Pakistan and El Salvador, T&C employs a relatively large share of the total employment in manufacturing (44.3% and 50.2% respectively) with relatively higher wages ($1,647 and $2,675 respectively).  Within the lower middle income country  group Honduras has a  very high share of employment in T&C (76%), a very high share of wages in MVA (67.5%). Sri Lanka has a relatively high dependence on the  T&C industry for employment (46.4%). Morocco has a relatively elevated share of labour employed in T&C (40%).  112.2 Dynamic aspects  Beyond the static aspects, there are several other pathways through which textiles and clothing affects economic development. T&C production may be considered as the first step up on the industrialization ladder and the wider effects depend on: 

• learning by doing and knowledge spillovers; 

• agglomeration effects; 

• local linkages;

• upgrading; and the role of value chains and FDI

This section discusses the academic pathways with some illustrated examples, while section 2.3 provides country examples.

2.2.1 Learning by Doing and Knowledge Spillovers Firms in developing countries  able to participate in global production networks and global value chains (GVC’s) of which T&C is often the first1 are typically expected to increase their skills, knowledge and technology – all considered as key factors for productivity improvement and growth (UNIDO 2004). Less technologically advanced countries can exploit their late coming and distance from the technological frontier in order to tap into new technologies. Firms in developing countries are therefore posited to ‘learn by doing’ through trade with more developed and developing countries (Young, 1991) and participation within GVC’s through international knowledge espill overs.  Without achieving and sustaining learning by doing and national knowledge spill overs, developing countries and producers may not be able to capture all benefits. As we will argue later, rising country governments have a role to play in formulating industrial policy to ensure that the potential benefits which may accrue from T&C export production are harnessed in such as way so as to result in positive learning spillovers for the wider economy. Increasing the skill level of labour should translate into higher output effects  and value added in order to maintain competitiveness at the initial stages of progress and move onto other activities. Learning effects within the economy are cumulative and can work across sectors.

 

2.2.2 Agglomeration Effects 

The climate in which low income countries can drive development from a manufacturing base created by the T&C sector is now framed by the presence of extremely large supplying countries in the global market (Brenton et al. 2007). While start-up costs are comparatively small and scale economies are not important which favours production in locations where labour costs are low, there are some important changes in the nature of the global market for clothing that may condition the role that

                                                         

1

 For  reasons such as the relatively low levels  of assets employed and low skill of labour, T&C production is often one of the first step onto the industrialization ladder and into global production networks.

12the sector can play in development relative to previous episodes of industrialization. For example, the scale of production in China has had implications for other developing countries trying to get on the T&C ladder. On the other hand, while China and India derive scale economies in terms of T&C production, it is also the case that the cost competitiveness in Southern China is being eroded by domestic pressures such as wage and land rental increases – the negative effects of agglomeration on competitiveness. This will present opportunities for other T&C exporters who are able to tap into existing niche markets. In Southern China, land and labour costs are rising within EPZs so much so that large firms are reconsidering their investment strategies and looking to other South East Asian economies where land and labour costs are lower. UNIDO (2004: 3) also suggested that even successful enterprises may find it difficult to sustain competitiveness as the wages in their countries rise and market conditions change. 

2.2.2 Local linkages

The development of local linkages with garment assembly such as business support systems may facilitate the transition into higher value added activities and horizontal diversification into other sectors, as arguably in the case of Southern China, but it also raises demand and prices of factors of production.

2

 Alternatively, the competitiveness

of the T&C value chain may be enhanced through backward vertical integration, such as through the development of the textile industry.   As an example, in Pakistan a broad policy framework ‘Textile Vision 2005’ aims to make the textile industry more competitive with additional investment downstream in order to increase the overall textile exports of the  country. Increasing the share of manmade fibre based products is also being worried. Pakistan is in the process of expanding the raw material base by encouraging the production of polyester staple fibre and other man made fibres within the country (UNCTAD 2005a). 2.2.4. Industrial Upgrading and the role of value chains and FDI  The participation in comprehensive networks and global value chains  can help industrial upgrading and improved economic performance. Gereffi (2002:21) classifies the T&C industry as a buyer-driven GVC  which contains three types  of lead firms: retailers; marketers; and branded manufacturers. Industrial upgrading in the clothing industry is primarily associated with a shift from assembly to full package production, which changes the relationship between buyer and supplier in a direction that gives far more autonomy and learning potential for industrial upgrading to the producer. This implies vertical integration, whilst also influencing GVC governance structures and the balance of power in favour of producers.  Producers can move up the T&C value chain and integrate vertically, or they  diversify moving horizontally into othersectors.3 In order to do this, producers and countries need to develop local linkages and supplier capabilities.  2 China is increasing exporting more stylish products given its level of income. See Rod rik(2006).  3 It has been observed that countries diversify until they reach a certain level of income, after which

they begin to specialize again (for an example, see Carrere et al. 2007).  13  East Asian economies such as Hong Kong, South Korea and Taiwan are good examples of industrial upgrading. They started out with low technology T&C industries and upgraded into higher value added activities and higher technology industries, making a transition from Original Equipment Manufacture (OEM) to Own Design Manufacture (ODM) to Own Brand Manufacture (OBM).4 As this process of technological and industrial upgrading  occurred, T&C production relocated and moved offshore inside the region. This stylized description of the development of the manufacturing industry within East Asia  is known as the ‘Flying Geese’ model (Akamatsu 1962). China, Viet Nam and Cambodia have more recently been able to take part in this regional process of upgrading as T&C production has been offshored and outsourced to its (mostly) coastal  regions from other East Asian Newly Industrialized Countries (NIC’s).  A major question is whether and how other countries can replicate the East Asian model of upgrading? Most authors suggest that due to the fragmentation of production, buyers increasing require suppliers to take on increasing responsibility for fabric and input sourcing, supplier managed inventory and production flexibility, for example, at the same time as they maintain control of production, export and marketing networks and in particular, branding . The implications noted by Brenton et al. (2007) for developing country T&C producers involve higher barriers to entry than in the past.  The post-quota era of T&C manufacture has  seen increased consolidation of T&C production amongst preferred suppliers. UNCTAD (2005a) notes that in most cases those countries with a geographical proximity to major buyer markets have gained.5 As buyers expect to rely more on core suppliers, they may be less footloose in their relations with suppliers. This can be good  for host country, but T&C producers are either ‘locked into’ or ‘locked out’ of T&C GVCs.  Achieving preferred supplier status may be some distance away for some developingcountry T&C producers unless they are able to competitively differentiate themselves based on other factors. This is likely to remain the case until ‘locked in’ countries are able to move up their technology trajectory and look to outsource and/or offshore their own T&C production base to ‘locked out’ countries. The previous discussion suggested that upgrading occurs via participation in value chains (without direct ownership). But it can also happen via FDI (which involves ownership of local firms). FDI can provide market access for developing country producers to developed country markets and the opportunity to upgrade and add additional value through knowledge spillovers and technological transfer, similar to being division of a global value chain.  Regarding specific FDI projects in T&C  manufacturing in developing countries, Japan was the largest outward investor in 2004, followed by the US. The mostattractive host countries included China, Eastern Europe and the US, followed by South and South East Asia.  4 See Humphrey and Schmitz (2004). 

5 It is noted that low labour costs are not enough to ensure consolidation, geography and proximity to markets in order to supply just in time delivery are key determinants.  14It is noted by UNCTAD (2005a) that between 2002-4 overall the developing EastAsia Pacific region accounted for most FDI in T&C manufacturing (38.5%), followed by Central and Eastern Europe (29.1%)  and Latin America and the Caribbean(13.1%). Africa accounted for 5.1% of total FDI projects in T&C manufacturing over the same period. In Cambodia, the textiles, clothing and leather industry was thesecond most attractive FDI destination in 2002, after wood.