Apparel potential

Growth can come from unexpected sources. A recent World Bank study suggests growing labour costs in China could see a significant shift in apparel business to South and East Asian countries that could lead to growth in Sri Lanka’s garments exports to Europe by as much as 24% provided cross-price elasticity is maintained. 

China now dominates the global apparel market – accounting for 41% of the market, compared with 12% for South Asia. But as wages in China continue to rise, its apparel production is expected to shift toward other developing countries, especially in Asia. How much of China’s apparel production can South Asia capture and therefore how much employment could be created? This is important because apparel is a labour intensive industry that historically employs relatively large numbers of female workers. 

 In the World Bank’s new report, Stiches to Riches?, the organisation estimates South Asia could create at least 1.5 million jobs, of which half a million would be for women. The United States, the European Union (EU) and other developed countries buy the largest shares of globally traded apparel, and it is their retail firms that typically decide what kind of apparel consumers would want. 

The process begins with these firms presenting designs and orders (directly or indirectly) to producers in developing countries. Producers respond with production characteristics – including costs and non-cost factors (like production times, quality assurances, and, increasingly, worker conditions). On that basis, developed country buyers then decide on where to source the apparel. 

As prices rise in China, these buyers are looking for other places from which to source apparel. The responsiveness of these buyers to prices in different countries is analysed by economists with the concept of elasticity, which is defined as the percentage change in quantity demanded for a given percentage change in price.

When comparing two or more countries, economists often refer to the cross-price elasticity, which is the percentage change of imports from, say, India, for a given percentage change in the prices of another country, such as China. If a buyer is choosing between two countries (that is, if two countries were competing against one another and are therefore considered relatively close substitutes for each other in the world market), then an increase in the price in, say, China, will increase the amount imported from the competing country.

In the report, the World Bank uses detailed US and EU apparel import data to estimate how much production may shift between China and seven leading developing Asian apparel producers: four in South Asia (Bangladesh, India, Sri Lanka and Pakistan) and three in Southeast Asia (Cambodia, Indonesia and Vietnam). 

The results suggest that under current policies, South Asian countries’ exports to these markets would increase by 13-25% depending on the country. However, the Southeast Asian benchmark countries would do even better, with a 37-51% increase.

Under these calculations in Sri Lanka, employment might increase by about 14,500 people, based on current apparel employment of about 180,000 people. This is far smaller than the 1.3 million jobs estimated for India but it does show the potential for the industry, especially if the Government is successful in regaining GSP+. If the region can also ease barriers to the import of manmade fibres; facilitate market access, and) encourage foreign investment it would boost South Asia’s development potential as a whole.