Sri Lanka: The Fruits of Globalization

Sri Lanka: The Fruits of Globalization

“We create institutions and policies on the basis of the way we make assumptions about us and others. We accept the fact that we will always have poor people around us. So we have had poor people around us. If we had believed that poverty is unacceptable to us, and that it should not belong to a civilized society, we would have created appropriate institutions and policies to create a poverty-free world.”
Muhammad Yunus, economist and banker, founder of Grameen Bank based on micro-credit, Winner of Nobel Peace Prize in 2006

 

Is the earth now flat?

The Made in Sri Lanka label is tucked away in millions of pieces of garments in the supermarkets in USA and UK and many other developed countries but the tiny letters are hardly noticed by consumers who are only conscious of the Western brand names they seek, not Third World manufacturers. I went to that country in 2002 and 2004 as the leader of UNIDO teams that assisted the small and medium enterprises in the garment/textile export sector and we were impressed. By 2004 exports of these products exceeded US$3.2 billion and directly employed about 300,000 workers. Surely this was proof of the glorious fruits of globalization, confirming Thomas L. Friedman’s best-seller, The Earth is Flat.

Since the prices for tea, rubber and coconut exports were unstable or declining, the highest inflow of foreign exchange had come previously from the almost one million low-paid Sri Lankan workers labouring in the Middle East. With garment exporters now employing about 350,000 low-paid workers, 98% of whom are young unmarried girls who are supporting their poor families, about a million and a half poor people were being assisted. The global economy was surely helping this Third World country out of poverty!

The garment export industry is unique in the business history of Sri Lanka.  Over the last hundred and fifty years, the tea export industry was the only Sri Lankan export industry that made a significant mark in the global markets. This export industry was created a hundred and fifty years ago by British nationals during colonial rule. It did not help the local population at the time. Since village landholdings were without the legal land titles of the British Government, the government in the mid-19th century annexed village lands in the highlands to enable British investors and adventurers to first create coffee plantations and then tea plantations. The land was first sold to them at a shilling an acre. Hundreds of thousands of indentured labourers were imported from South India to work in these as semi-slaves. The local population rebelled against these acts in 1848 and was suppressed with ruthless terror by the British military, using additional troops from India. But tea eventually became the foundation of the national economy because of the profits it generated.

The next substantial export achievement was the garment export industry that developed two and half decades ago, from about 1980 onwards. Though pioneered by investors from East Asia looking for countries with unutilized garment export quotas under the restrictive US-EU Multi-Fibre Agreement (additionally supported by the Free Trade Zone situated north of Colombo), it was the Sri Lankans who developed it by copying the foreign investors. It is also noteworthy that the bulk of the business was contributed by SMEs, the first major SME success story in Sri Lanka. The last JICA[1] study (Y 2000) identified 891 garment export enterprises of which only 20 were categorized as large (SME categorization has varied from report to report, based on the criteria used[2]). The SMEs accounted for 51% of the exports by value.

Brief history of garment industry

The history of the modern garment manufacturing industry is a landmark in modern economic history. Up to about 1970, most developing countries were dependent on the export of commodities, agricultural and mineral, for their economic survival. The industrialized countries of the West processed these and sold the finished products around the world. Internal markets in poor countries are poor and progress and prosperity depends on selling to the rich countries. Since World War 2 commodity prices kept declining because of over-production in developing countries and market pressure from buyers in developed countries that altered the terms of trade against Third World producers.

But from around 1980, manufactured products became the main export from developing countries and garments and textiles were the leading export products of the new front-runners in the developing world. The Asian industrialization even in highly advanced places like South Korea, Taiwan and Hong Kong began initially with these two products before they graduated to more high technology industries. These are comparatively low technology industries with a high labour content: ideal for poor countries with capable people desperate for work at low wages.

Sri Lanka did not seriously develop industry till about 1979 when a government committed to an open market economy took power and removed the restrictive burdens imposed on business by the earlier pseudo-socialist governments. International aid agencies, particularly the World Bank, kept advocating and financing the extension of peasant agriculture. The theory of comparative advantage proclaimed by the World Bank and international aid agencies pre-supposed at that time that developing countries were best suited for agriculture and other commodity productions while industrial production would be in the traditional Western industrialized countries. The idea that a developing country could compete in manufacturing with the industrialized countries of Western Europe and North America was considered ridiculous.

Today, that concept has been rendered invalid. Most of the world’ industrial production is located in developing countries, mainly in East and South Asia. China is the biggest and most efficient industrial producer in the world with sustained annual GDP growth rates of around 10%. But in the 1970s, when Deng Xiaopeng opened the country to private sector production and China was developing faster than any country in previous history, The Economist, the highly regarded UK economic journal, was writing articles predicting that this growth was unsustainable and would be short lived because China was not opening its financial markets to Western financial institutions and speculators.

Trade restrictions on the poor

The increasing exports of textiles and garments after 1970, to which footwear was added a little later, caused alarm in developed countries when their own labour intensive manufacturing centres had to close down due to increasing competition. The political leaders of the industrialized countries, who are forever preaching the virtues of open markets to the poor nations when their corporations are the dominant producers, then introduced the most stringent restrictive trade rules on these imports from developing countries. On the one hand, they had no intention of blocking the import of cheap goods which brought windfall profits for the large marketing corporations and supermarket chains. On the other hand, they had to placate the workers in their own countries who were losing employment due to cheap imports.

The result was the Multi Fibre Agreement (MFA) imposed by the European Union and the USA, a vastly complex system that established restrictive import quotas for most types of manufactures of popular textiles and garments for each exporting country and each type of garment/textile product, supplemented by different import tariff levels for each product category. It lasted from 1974 to 2004. Huge bureaucracies monitored the trade in both importing and exporting countries and infractions resulted in penalties for the manufacturing country. As an added sanction, no Western aid would be provided for these industries in developing countries.

The MFA fuelled expansion of garment industry

The draconian MFA regulations, either by intent or by unforeseen circumstance, helped to expand the manufacturing base into less developed countries. The pioneers of this industrialization, South Korea, Taiwan, Hong Kong and Singapore, were soon more affluent and were moving into higher value technology industries that paid higher wages. The quota restrictions compelled the textile and garment manufacturers in these countries to seek cheaper locations with unused quotas for continuation of their exports. And so garment manufacturing for export arrived in Sri Lanka around 1979 when the economy was liberalized and a Free Trade Zone offered incentives for foreign investors.

Very soon Sri Lankans working for foreign garment companies were setting up their own manufacturing units with the advantage of their experience in the industry. Men and women who worked as supervisors in foreign-owned factories went out to start their own small garment factories which soon grew in size. Some Sri Lankan business families with international business experience and access to capital developed direct links with US and European supermarket chain suppliers and moved into high value products that were not on quota.  A singular feature was that many staid old corporations that could trace their honourable history to the British colonial era almost invariably failed when they entered this business.

The large numbers of small and medium enterprises were manufacturing the high volume mass market garments: shirts, pants, skirts, blouses, etc. These enterprises competed for quotas allocated to the country and distributed by a government quota control office on criteria agreed with the industrialists. They were also fighting for the attention of buyers’ representatives from Western chain store suppliers who were the source of their production orders.

Rationale for international aid

The reason for UNIDO assistance was that in Year 2005 the notorious Multi-Fibre Agreement (MFA) would end, hurting the small producers in countries like Sri Lanka and opening most of the market to the world’s most efficient producer, China. China’s economic dominance is feared, though its cheap labour and productions are in high demand. Up to that time, development aid to garment and footwear industries in developing countries was denied on the grounds that these industries hurt similar industries in the West. The aid that was now provided would increase competition between producer countries to vie for a piece of the Western markets at reduced prices. Additionally, the import duties in the USA, the favoured destination for 60% of Sri Lankan garment exports, stood at between 18 and 30% during the time of our visits. In the EU market, Sri Lanka had duty concessions under the GSP scheme for qualified developing countries[3]. Even now, when the MFA has been disbanded, separate quota restrictions are imposed on China which tends to help exports from other countries.

The UNIDO consulting services to the garment enterprises had key objectives and these were all technology oriented: invest in improved production technology and systems, make workers more efficient by making them work harder, get raw materials tested by European approved laboratories to ensure over 100% safety to customers, reduce export prices so that Sri Lanka world be more price-competitive than Bangladesh, Vietnam, Cambodia and Laos (where similar aid projects were at work). Setting up these testing laboratories with European-funded aid was the major part of the UNIDO aid project and separate from what our team was doing within enterprises. These extremely stringent testing and certification requirements for fabric, colours and accessories are part of the sophisticated non-tariff barriers set up by the European Union (EU). All these laboratories must pay annual fees to EU verification agencies and pass annual performance tests. Enterprises must pay fees for these services to obtain certification for each shipment.

Our principal task as consultants was to assist in developing more efficient production. The production of large volumes of garments at high speed and minimum cost in assembly lines is a complex process. It bears no comparison to the work of your local seamstress. First the drawings of the garment are studied by Master Tailors and the garment is broken down into all its different component pieces. A shirt, for example, could have 40 different pieces involving more than 40 different operations: collar, button holes, cuffs, sleeves, etc. The addition of each of these to the final product must be sequenced for the most efficient result. The supervisors then decide on how much time is required at each work station (comprising a girl with a sewing machine) so that the work with each piece adds up in movement from one work station to the next till the shirt is finished at the last station.

The next stage is a trial run on the assembly line that is set up. The assembly line consists of modern electric sewing machines with bench seats for each worker. Moving belts at sewing machine level and overhead conveyors move continuously at a fixed pace, carrying the different pieces of material and stitched pieces. The cut pieces first arrive in small bundles from the Cutting Room where computerized cutters are set to cut each piece to an exact size. Each girl dexterously picks up the pieces intended for her and puts the stitched pieces in the moving lines after finishing her task. As the line moves the garment is in the process of being assembled. The finished garments move to those who iron and fold them, others that pack them and finally put into export boxes. Each garment is checked before ironing by Quality Controllers and any small defect in assembly requires that the item be discarded.

During the trial run, supervisors check the speed of work of each girl at each machine as the line only moves at the pace of the slowest performer. The assembly line must move without slowing at any point. If there is a delay at one point, the task must be divided into two to allow for an increase in the pace of work. If work is moving faster than the others at one point, the work load at the point is increased. If work is delayed because one girl cannot work at the speed intended, she is removed and will lose her job to a more capable girl.

Once the trials have eliminated any weakness in the assembly, the actual production begins. The volumes to be produced run into tens or hundreds of thousands and target dates are irreversible. Once the assembly lines start moving no worker can stop, either to go to the toilet or have a drink of water. They work like their machines till the lunch break of half an hour and then again till closing time. Then another set of workers will continue with the next shift. Working the factory for one shift a day is not economical. The minimum is two shifts and sometimes even three shifts.

 

The main technical contribution of the UN aid project, much appreciated by the factory owners, was to increase the pace of work still further. While supervisors on the assembly lines monitored the output of each worker using a stop watch, our technical experts introduced a small hand-held computer that could check the pace of work quickly and more accurately. Thereby, girls who were slower could either be retrained or sent away. The other component of the project, handled by specialists from quality certification agencies from Europe, was to get local firms to qualify for ISO 14001 certification. ISO bodies for certification and monitoring were being established in the country. For the information of those not in manufacturing business, the International Standards Organisation (ISO) is an international body that certifies consistency in quality production within a factory. The process of obtaining certification involves training personnel and defining the production processes to be followed. These are reviewed annually by certified inspectors and, naturally, there are fees to be paid by the company. The certifying bodies are also inspected and annually tested by inspection bodies from the EU and these services also have to be paid for. It is understood that the various ISO certifications will help a company to gain acceptance by Western buyers.

 

The First World sets the rules of the market

Exports of garment/textile products to Europe are, like other developing country export products, subjected to stringent certification of quality requirements, even though most of the components come from more industrially advanced places like Singapore, Hong Kong, Korea and Japan. The certification requires that, for example, the materials be free from one hundred thousandth part of some chemical used in manufacturing it. Regularly, the certification requirements are revised upwards, making it clear that the objective is to make life a little more difficult for the producers who must spend more time and money obtaining these certification clearances. They must work harder to stay in place.

The USA, on the other hand, bases its controls, aside from quotas, on high import duties and numerous patent rights. US corporations have patented numerous processes and products, some of which have been in use by others

for many years. They are generally sure that Third World corporations cannot afford the expensive litigation in US tribunals to challenge them[4]. Import duties for manufactured products from developing countries are on average much higher than duties for products from other developed countries.

Competition and free markets are wonderful things: by making for more efficient production it improves the economy of the world and brings more prosperity to people! If improved competition is the objective of the aid agencies, the World Bank, the World Trade Organisation and the UN trade and industry related agencies should have demanded that the iniquitous MFA be completely removed and import duties lowered. Instead, by giving the same form of technical assistance to Sri Lanka, Bangladesh, Vietnam, Laos and Cambodia the international aid agencies ensure that they reduce their producer prices to compete with each other. But the key factor is that consumers in the Western supermarkets are only partial beneficiaries from this, though marketers are still able to sell cheaper than if these were produced in their own countries. A name brand men’s shirt that is sold in the USA for $35-40 would be purchased from the producer in Sri Lanka for $2-3.

The key players in this market for the majority of producers are the representatives of the Western buying houses who supply the supermarket chains on annual supply contracts. These buyers’ representatives are stationed in Singapore, Hong Kong, Delhi or Colombo. It was interesting to see how they controlled the small and medium enterprise producers. When the main office in the Western country obtained an order for the supply of, for example, a brand of shirts, the buyers would send the specifications to several local pre-selected producers in the entire South and South Asian region. Then they would bargain over prices. If all producers in one country kept to a minimum price, they would threaten to take the business to another country. In this way, they successfully reduced producer prices over the years and the producer countries, who were now heavily dependent on these exports, supported these price reductions by devaluing their own currencies (in short, impoverishing their own people gradually to support export revenues).

The buyers’ representatives gave the designs, the delivery dates and tested quality standards to ensure the highest quality at every stage. Newcomers to the industry gained entry by working as sub-contractors to the bigger local producers who were in turn contract manufacturers for the foreign buyers. The buyers’ representatives also made extra money by designating the suppliers of textiles and accessories to producers and earned commissions on these sales.

Sri Lanka, unlike many other developing countries, has functioning labour laws to protect workers, the result of continuous agitation by Marxist labour unions since the early 1930s. After protracted strikes and conflicts with the police and strike-breaking employers, they obtained legally enforced minimum wages for each industry, an eight-hour work day, minimum holiday allocations, and some form of retirement benefit called an Employees’ Provident Fund. Also, unlike in most other developing counties, it is not often that labour law enforcement officials can be bribed to circumvent the laws as trade unions are vigilant and the courts are generally independent. But foreign investors shun countries with strong trade unions and the Sri Lanka Free Trade Zone was built with the bonus of trade union-free cheap labour.

The Western media and NGOs often portray stories of worker exploitation in Third World countries. In a travesty of justice, the very people who demand the lowest prices for Third World  products and force down their wages and benefits, then loudly proclaim to the world their concern for the poor in developing countries. We saw some of the labour inspectors from Western countries at work. They would arrive unannounced at a factory and demand to speak to the employees in private. The factory owners and workers are intimidated. Fortunately, Sri Lanka has strict labour laws that are enforced and it is not possible to find underage girls working in factories. The minimum age is 16 years. By ILO standards, girls under 18 cannot work overtime. But when a production batch is being finished for urgent shipment and a few hours of overtime are required, the line workers cannot be moved out and sometimes a girl between 16-18 years would be found working. This then becomes serious business for the inspectors. The other areas of concern are the number of toilets per hundred workers and the size of the lunch canteen. One question they do not care to ask is whether a worker can live on US dollars 1-2 a day because that could be improved only if the Western buyers are willing to accept a somewhat better price for the products.

The issue of direct marketing was considered by me in my added role as Marketing Specialist, a role that was considered of minor importance for the aid project organizers. The small and medium producers were represented in a Garment Manufacturers’ Association which, if it was effective, could have pooled the resources of its members to come up with huge volumes that would have justified the acquisition of a buying house in New York. This would have cut out the middlemen and enabled somewhat better prices for the producers. The Sri Lanka Export Development Board seemed interested in the idea at first but was lukewarm in its support. I addressed the garment association and they liked the idea. But at the meeting at the Export Development Board to discuss the proposal, one large exporter got up and opposed the idea as being a dangerous step that might antagonize the existing buyers. The small producers were intimidated and were silent, the Export Development Board was ambivalent, and no decision was possible. And the old system prevails.

Social impact of the garment industry

So how do workers benefit from this industry? The Wages Board minimum wage for a garment worker was Rs.3,000 per month at the time of our visits[5] and most small and medium enterprises paid the minimum wage. At the dollar exchange rate that was prevailing at the time, this makes for a basic salary of US $31.25 per month. Since workers had to often work overtime, their salaries would range from Rs.4,500-6,000 or around US $50-65 per month. So it could be claimed that Sri Lanka was on its way to achieving one of the targets of the UN Millennium Goals by bringing people out of dire poverty to live on a minimum earning of over a US dollar a day.

There were a few large enterprises that had direct links with the supermarket buying companies and were focused on high-value garments like business suits and exclusive underwear. They got better prices and in turn offered workers much better conditions. The lead company in this area paid its workers a base salary of $125 equivalent per month and offered very good working conditions and many extra facilities. Even the smaller companies had a good work environment, without which productivity levels could not be obtained. The work place had to be air-conditioned, well lighted and very clean to prevent work errors that would be costly.

While a highly skilled garment worker in a Sri Lankan factory earns between one or two dollars a day, the unskilled worker in a Western supermarket store selling these products would receive a minimum wage of $7-12 per hour. Neither are Sri Lankan factory owners dollar millionaires like big Western business people, though they are certainly affluent by local standards. There is no way that employee salaries can be increased and production kept viable unless producer prices are increased by the Western buyers: they must be reduced in real terms by devaluation and inflation to maintain the industry.

Garment making in its most efficient form, as in Sri Lanka, is really a form of egregious exploitation of workers. Perhaps only young Asian women, who are attuned to generations of hard work and poverty, are capable of sustaining such industries. Despite duty free status by the USA to sub-Saharan African countries under AGOA[6], no African country can compete with Asian producers. With the removal of the MFA in 2005, the Sub-Saharan garment industry has virtually disappeared, except in Mauritius, which is quite different to its African neighbours.

Not everyone can be a garment worker. Girls who are recruited go through an intensive training period of about two or three weeks. At the end of this, the slower workers are weeded out and sent away. But even the efficient workers cannot sustain the pace for very long. Most workers are burnt out in about five years and leave the factory with their savings, usually to get married in their village. A garment worker with some savings is a desirable bride in a poor village.

The government has provided fiscal incentives for investors who locate their factories in rural areas and the bonus of higher quota allocations. Large factories employing over 5,000 workers are found in rural areas far from Colombo. Girls working in the Katunayake (Colombo) Free Trade Zone must rent lodgings, usually a cheap room shared by 5 or 6 girls. They pool resources to prepare their meals to avoid the cost of eating out. They have no leisure time activities except for an occasional film. But in their rural own setting, girls can travel from home by bus and get their meals from home which gives them more savings.

By creating an industry geared to large scale industrial production for export, Sri Lanka has taken the first step towards industrial development. But it seems currently incapable of going further by using this experience to move into higher value industries on a substantial scale, as Korea, Taiwan, Hong Kong, Singapore and Malaysia did, and as Vietnam is now doing. The country is still thinking of garment manufacturing as the primary road to future industrial prosperity. The problem is that the SME garment sector consists of family businesses. Unlike the few larger enterprises, they are unwilling to hire qualified managers. A typical business will have the father as the Managing Director, the mother as the Sales or Production Director and sons and daughters as the accountants and the other key managers. These small companies do not have the competence to move beyond a certain level and are vulnerable to changes in the international markets. It is not a recipe for sustained national development.

During our work we visited numerous factories, employing from around 150 to 5,000 workers. Most of the factories were in the suburbs of Colombo or neighbouring townships: Angulana, Kadawatha, Polgasowita, Nugegoda, Koralawella, Ratmalana, Hendala, Homagama, Boralesgamuwa, Moratuwa. Motoring to these places took long hours through narrow crowded streets. Small shops and eateries lined the streets while pavements, if they existed, were taken up by street hawkers. The factory in the village of Thorakolayaya, off the small town of Middeniya, was different. It is situated in the very South of the country, about 150 miles from Colombo. We journeyed on small roads through lush green paddy fields interspersed with giant tropical plants and sleepy villages. We passed a village fair where in a large open area women squatted beside piles of fruits, vegetables, baskets and clay pots. And then we arrived at this large modern factory: gleaming with clean tiled floors, modern lighting and fully air-conditioned. We could have been in any modern factory in Europe[7]. It employed over 5,000 workers who, at the end of the shifts, crowded into local buses to get to their homes in the surrounding villages.

It was hard to imagine that these garments made by small, under-nourished, ill-paid village girls from Sri Lanka would be shortly in the supermarkets in London, New York or Chicago where affluent Western customers would be shopping. They would be wearing these clothes and travelling in luxury vehicles to modern offices or homes without a thought for those who made these items.

If a factory employing 5,000 workers was created in the EU or North America, a village would be transformed into a bustling town with modern shopping malls, games arcades, McDonalds’ diners, Starbucks coffee shops, etc. But this was still a poor over-crowded village where people were grateful for two meals a day and most people still ploughed tiny rice fields with bullock-driven ploughs for survival. Those who were lucky to enter universities through the free public school system had left the village for the cities.

Annually, there are visits by Western organizations that are concerned about worker exploitation and human rights to these garment factories. Periodically, some newspaper would run an article by an NGO in the USA or the EU that a particular brand of shoes or garments is manufactured in some developing country by exploiting the workers. This is bad public relations for the brand owners and good news for the NGOs who could gain more funding for their work in developing countries. The NGOs and politicians in the West that criticise these enterprises and take the high moral ground have no solution to the mass unemployment and increased poverty that would result by closing these factories.

Kenneth Abeywickrama

(This article is based on the author’s personal experiences as an aid consultant to the SME garment industry in Sri Lanka in 2002 and 2004.)

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[1] Japan International Cooperation Agency, an aid implementing agency since 1974

[2] The industry is labour intensive. A small enterprise employed 50-250 people, a medium-sized enterprise employed 250-1,000 people

[3] The GSP refers to the Generalized Scheme of Preferences under which developing countries that qualify under different criteria, adopted by the importing country, receive preferential duty rates. The EU GSP for Sri Lanka was withdrawn in 2010 on allegations of human rights violations during the government’s successful conclusion of its armed conflict with the LTTE terrorists.

[4] In 2008 the manufacturers of Eveready batteries charged that Chinese exporters of mercury batteries were infringing on their patent and had their products banned from the US. However, several Chinese corporations banded together to challenge the ruling that was already made, as the exports were worth around $9.0 billion, and after spending several millions of dollars were able to prove that their manufacture of these batteries predated the date of the patent. The extremely rigid international patent rights regime was created by the Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement as a part of the Uruguay Round of international trade agreements in April 1994 and later adopted by the WTO. It discriminates against developing countries that have no system or capability of patent protection.

[5] This minimum wage was in Y 2004. It has since been doubled by the government.

[6] The African Growth and Opportunity Act created by the USA in 2000. So far, African countries under the scheme have not shown signs of any greater development as a result of this.

[7] The most modern garment factories are owned by the MAS Holdings. After visiting these, our technical experts stated that they had never seen such advanced garment factories in Europe.