The scale of the need is sobering. With limited indigenous resources, governments and aid agencies will need to look for leverage where they can find it. One important source of leverage is export supply chains. I illustrate both the promise and the challenge of this with another example from Bangladesh, this time from a government programme supporting wage payments to workers in the ready-made garment sector. In addition to their being a source of leverage for income support, a focus on export supply chains is also important for addressing a second concern: foreign currency earnings. Export earnings have fallen sharply in many countries as tourism has dried up and remittances have fallen. Yet, many lower-income countries import a substantial share of the food included in basic diets, including grains, which require access to foreign currency.
On 25 March, the Bangladeshi government announced a programme of support for export industries, which in Bangladesh means primarily the readymade garment sector. The programme supports wage payments to workers, and nicely illustrates the use of leverage. It was announced as a 60 billion Bangladesh taka (roughly $600 million) support programme for workers who make up around 6% of the labour force (Bangladesh LFS, Bangladesh Bureau of Statistics (2017)). It was designed so that there was no immediate budgetary impact to the government. Under the programme, banks make direct wage payments through electronic transfers to garment sector workers employed by participating factories. The payments are grounded in salary data from the preCOVID period, provided by the (large and formal) factories. Payments to workers accrue as loans to the factories, with liquidity provided to the banking system by the central bank.
The loans-for-wages scheme provided liquidity to solvent factories, who take on additional debt in exchange. Factories needed the liquidity in large part because foreign buyers cancelled existing orders. Some buyers agreed to pay for production in process, others agreed to accept production in process while demanding substantial discounts, and still other buyers refused to accept or pay anything even for work in progress.[1] Because factories pay for fabric in advance, and fabric accounts for around three-quarters of the cost of production, the cancellation of orders left many factories in a precarious position.
With these liquidity issues in mind, the programme gave factories a six-month grace period, with full repayment over the 18 months thereafter. The hope is that both the ability to operate factories and the demand for goods will have returned to normal by late 2020 though, of course, that is uncertain. Thus, the cost of the programme to the government is unclear in the long run, as that depends on how widespread defaults on the loans are.
Even as the retail sectors in Europe and the US begin to re-open, it is unclear what the new normal will be. Aside from short-term issues of excess inventories, several large buyers - Debenhams in the UK; JCrew, Neiman Marcus and JC Penny in the US, for example - have declared bankruptcy, and will close at least some of their outlets. For Bangladeshi manufacturers, payments of existing orders and flow of future orders are both in doubt. Meanwhile, other brands look even more enviously at the Zara model of producing nearer to market and maintaining lower levels of inventories. COVID-19 is likely to accelerate the movement to all-Zara, but that transition is likely to be slow in any case. Moreover, even with its focus on local production, Zara parent Inditex is among the ten largest buyers in Bangladesh. So, a movement in the Zara direction does not imply an end to production of less rapidly changing styles in locations further from market.
The manufacturers’ view of the future is important because an alternative to paying wages during the production hiatus is laying off workers. Bangladeshi labour law requires employers to pay around half of wages for a period of 45 days after laying off a worker. Factories with buying partners who have proven less reliable are likely to rely more heavily on layoffs.
[1] Workers Rights Consortium (2020) provides information on buyers who agreed to pay for work in progress and those that did not.
