Hanging by a threadNepal’s garment industry can be revived if the garment processing zone is operated proficiently.
Once upon a time, the export of readymade garments was a roaring business in Nepal. Emerging as a spillover business in the late 1980s, it grew exponentially during the 1990s and peaked in the early 2000s before going into freefall from 2005 with the end of the quota system in international trade in textiles and clothing. The end of the quota system brought free trade in this previously restricted global commerce. Free trade relieved competent countries like China and India, which had been restrained by quotas, while it hurt countries like Nepal which used to enjoy the ‘quota rent’ provided by the under-utilisation of the quotas allocated to them by the importing countries.
It is commonly perceived that stringent competition resulting from the liberalised trading system ruined one of Nepal’s major export businesses. But it was free trade that boosted countries such as Bangladesh and Cambodia, which had also started from scratch, to great heights. Quota-free trade has established Bangladesh as one of the world’s largest exporters of garments, second only to the giant supplier China. Today, garment shipments from Bangladesh are worth $30 billion a year, and are delivered to almost all major international brands. In contrast, Nepal experienced a sharp drop in its export value from a high of Rs13 billion during the industry’s heyday in 2002 to less than Rs5 billion today, a contraction of more than 60 percent.
These two contrasting scenarios have raised many questions as to why the clothing trade turned from rags to riches in Bangladesh, and riches to rags in Nepal. Evidently, it was policy intervention that caused this. Bangladesh had the right policies at the right time that helped the industry to become firmly established. But Nepal distinguished itself with inconsistent policies that sent the industry haywire.
One key example is the concept of garment processing zone (GPZ) which was devised in the early 2000s following a series of studies on the impact of the phase-out of quotas on Nepal. The idea was recommended as being indispensable to create a ‘critical production mass’ without which it would be virtually impossible to tackle competitive pricing and delivery sensitivity, the two most important factors which cannot be avoided for the industry’s survival in quota-free trade.
Also acclaimed by the private sector, this policy response did not materialise for almost two decades until the construction of a GPZ in Birgunj in 2019. But it was too little, too late as Nepali entrepreneurs had lost their global business connections and production base due to the intense competition in the quota-less trade.
Although the concept of GPZ is similar to the common special economic zone with regard to tariffs, taxes and other government support, it has special bearing with regard to clustering of factories. It would help not only to consolidate output, but also permit the joint establishment of facilities such as dyeing and washing which would otherwise be too costly to set up for an individual garment manufacturer.
Supplementing these operations, it would attract ancillary industries like manufacturing of zippers, buttons and packaging materials within the industrial cluster. While these activities enable efficient management of sourcing and supply systems, they would also provide services of fabric experts, production staff and fashion designers, and banking and logistics services at one location. Clustering of industries would, thus, offer the advantage of economies with the benefit of cooperative purchasing and control over the entire production and supply chain.
There are other unseen advantages of such processing zones in addition to efficiency in output and supply. Reducing transaction costs and lead time, which is vital for a landlocked country like Nepal, is another potential advantage. Considering this logic, the zone was proposed to be built close to the dry port in Birgunj, the only rail link for the country’s access to the seaport in Kolkata. This was done with the aim of reducing the cost of transportation and shipping of imported inputs and export of finished goods.
Proximity to the transit point would reduce land transit times considerably through reduced handling and less cumbersome procedures, and also minimise the dependence on the services of transport agencies in India. More importantly, it would optimise transportation time and container space for consignments from Nepal at the port in Kolkata. From these perspectives, proximity to the transport and transit points are crucial to enhance delivery efficiency without which the survival of the delivery-sensitive clothing trade is virtually impossible. In the long run, the GPZ would attract foreign investors, not only in the labour-intensive garment industry, but also in the capital-intensive textile industry, moving up the value chain.
But the irony is that the garment processing zone could not come into operation even two decades after it was visualised while, during the same time, Bangladesh accomplished remarkable progress through industrial clustering using special economic zones. Stalling the project in Nepal only led to the loss of its exports to the United States, the world’s largest clothing market. By this time, investors had lost their enthusiasm and confidence in the clothing trade, as can be seen by their lack of interest in renting space inside the zone.
Nepal missed a great opportunity to adapt to the changed global trading environment due to lack of correct and timely policy intervention. The private sector was unduly preoccupied in lobbying for preferential access to the American market while the government was unnecessarily consumed with doubts over the industry’s relevance after the quota system. Yet, the business that was lost due to lack of determination can be regained if there are collective efforts to run the project objectively. The success of the GPZ in Birgunj can help the industry spread from Biratnagar in the east to Bhairahawa in the west in the future. Promoting this labour-intensive sector will help the country to absorb the massive numbers of semi-skilled labourers who are looking for jobs in the Gulf and the emerging economies in East Asia.
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