Bailing out the garment industry

After spending the last six months telling us that the GSP+ concession would be renewed, the government seems to have thrown in the towel, barely three weeks after submitting the application for renewal. Perhaps bailouts are in fashion or perhaps the case was doomed from the start but either way the industry seems set to receive US$150m.

The question is: is there an alternative? In the case of the financial crisis plaguing the rest of the world I would say no, in Sri Lanka's case, yes.

To start, lets just examine the nature of this industry. Prior to WWII the garment industry existed as an industry proper only in Europe and America, everywhere else it was a cottage industry of local tailors and seamstresses.

After WWII factories were set up in cheap locations overseas, starting with East Asia, Japan, South Korea, Taiwan, later Southeast Asia, Hong Kong, Singapore and so forth. Garments are an excellent way for a low-income country to grow because it uses a lot of cheap labour. As the country develops, wages rise and the industry moves elsewhere. A misguided attempt to protect Western manufacturers in the 1970's - the Multi Fibre Agreement (MFA) resulted in the industry spreading to areas that had never seen any kind of industrialisation, like in Africa. The MFA allocated quotas on a geographic basis so manufacturers sought out any location that had a quota.

Therefore the garment industry is unlikely to stay anywhere unchanged, it evolves and moves when costs rise. Take the example of Hong Kong, once a cheap manufacturing location now transformed into a fashion centre, design centre, buying centre with limited high end manufacture.

If Sri Lanka's industry is to survive they need to look at Hong Kong and plan. Unfortunately, in order to evolve to that stage requires certain things that Hong KOng, as a crown colony enjoyed: stability, the rule of law and good governance. For the moment at least, these are things beyond the bounds of possibility so any hard headed industrialist needs to look to other means of survival.

Coming back to the question in hand, is there anything else that the Government can do, short of pouring taxpayers money into the industry? To answer this question, lets look at the fundamental problem facing the industry: high costs (compared to location in Vietnam, China and elsewhere). What can the Government do to help?

Well, for start, how about controlling inflation? If inflation is under control, then costs are automatically under control, right? at least workers will not have to demand exorbitant wages, just to live.

How about controlling power costs? The CEB is notoriously inefficient, power piracy is rampant and the bill winds up mainly in the hands of industry.

The same is true of fuel costs. At the current price of oil the Government is set to make windfall profits at the CPC, a hidden tax in other words. Now I have no objection to fuel taxes, many countries use them and they have their place but why not make it transparent by returning to the pricing formula and adding a transparent tax on that? The moment the tax becomes visible the government will be under pressure to keep the tax to the minimum : which is also good, rather than taking the money through the back door which means less accountability and probably higher cost. How about reforming the CPC as well? Waste, inefficiency and everything else is added on to the fuel bill that you and I pay.

How about improving productivity through better infrastructure? Clogged roads, inefficient ports, onerous bureaucracy at the customs and everywhere else - all these add to costs and make life a lot harder for struggling businessmen.

Unfortunately all of the above is only possible by treading the path that is hard and narrow, in the log run it is the only way out, but headline grabbing bailouts are an easy temporary fix. A fellow called James Manor wrote a book on SWRD Bnadaranaike called the "The Expedient Utopian" - something that typifies much of the post independence rule.