The time has come for Sri Lanka to look beyond apparel exports
Friday, 21 March 2014 00:00
By Subhashini Abeysingha
Apparel is the feather in the cap of Sri Lanka’s export story. It is sadly the only success story of the country’s export oriented industrialisation policy adopted in 1977. Apparel accounts for nearly 70% industrial exports from Sri Lanka. In the last decade, the sector has received much applause for successfully weathering competition from low cost developing country exporters and for transforming itself from a low value exporter to a high value exporter.
The analysis of the sector performance in the country and the world however shows that the time has come for Sri Lanka to look beyond apparel in order to revive its exports. The world market share of apparel and its share of Sri Lanka’s exports are on the decline. The sector is losing the comparative and competitive advantage it originally had in the 80s. The overall contribution to the economy and employment is declining as well.
Further, the experiences of East Asia indicate that apparel is the beginning of the industrial export story, not the end. The success of East Asia has been their ability to diversify away from labour intensive apparel into technology and skill intensive industrial and services exports.
The best performer in Sri Lanka but not the world
Apparel fares well in comparison to the rest of the export sectors in Sri Lanka. However, in the world market, the country is steadily losing its market share since 2000 (Exhibit 1). During 2000-2012 when Sri Lanka has been losing its world market share, cost competitive developing countries have seen their share increase. For example, the apparel market share of Bangladesh in the world has increased from 2% to 5%, Vietnam from 1% to 3% and China from 18% to 38% during the same period.
Sri Lankan apparel was hurt by the MFA phase out
Contrary to the popular belief, the apparel sector in Sri Lanka has been hurt by the MFA phase out and is struggling to sustain itself (MFA or the Multi Fibre Agreement governed world trade in apparel from 1974 to 2004, imposing quotas on the quantity of apparel developing countries can export to developed countries like the USA). The U.S. import statistics show a sharp decline of apparel imported from Sri Lanka since 2005, in terms of value as well as market share (Exhibit 2).
Sri Lankan apparel has strived hard to sustain itself post MFA amidst the emerging competition from low cost destinations. The ability of the country to recover the value of exports to US to match the level it was in 2006 (Exhibit 2) therefore is salutary. However, sustaining the growth momentum will be challenging.
For example, all countries experienced slowing down in the growth rates of imports into USA due to the slowdown of the US economy. However, statistics clearly show that the decline in Sri Lanka’s rate of growth was much more severe than the rest of Asia. During 2005-2011 period, apparel imports from China to USA grew by 17%, Vietnam by 14%, Bangladesh by 12% while imports from Sri Lanka declined by 3%.
Post-MFA low cost suppliers dominate the US market
During the MFA period, the buyers were restricted from sourcing all their requirements from low cost suppliers, because of the quota restrictions. As was expected post-MFA, the countries that were cost competitive emerged as the winners; China, Vietnam and Bangladesh are on the top of the list. China and Vietnam alone accounted for nearly 50% of the total imports into the United States in 2013.
This is a remarkable achievement, given that their share was a mere 20% in 2004. As a result, market concentration of countries in the import market for apparel in USA has increased over the last 10 years (Exhibit 3). At present 5 countries account for 64% of total apparel imports into USA. This development is hurting high cost exporting countries like Sri Lanka.
GSP+ to the rescue
The apparel sector had its share of luck working in its favour compared to other export sectors in the country. In the exact same year that the country completely lost its quota-guaranteed market access to the developed world, Sri Lanka received GSP plus access to the European Union (EU). The GSP plus or the Generalised System of Preferences scheme for good governance and sustainable development – which came into effect in 2005 – granted duty free access to apparel exports from Sri Lanka to the EU.
For the apparel industry, the timing could not have been more perfect. Exhibit 3 clearly shows the impact of GSP plus on Sri Lankan apparel; USA was the leading export market for Sri Lankan apparel exports until 2005, thereafter the share of USA has steadily declined and the share of EU has steadily increased.
The GSP plus window closed down in 2010. Apparel from Sri Lanka no longer has preferential access to the two leading import markets for apparel in the world: USA and the EU; the two countries alone account for over 50% of total world apparel imports.
Declining contribution to exports, GDP and employment
With the growth of apparel slowing down, the contribution of apparel to exports of the country has declined from 48% to 38% and the value added apparel contribution to GDP has declined from 3.6% to 2.6% during 2002-2012 (Exhibit 5).
The apparel sector continues to be a leading employment provider in the country. However, the number of people employed by the sector as well as the number of establishments records a significant decline over a short period (Exhibit 6). According to data available, between 2007 and 2010, the number of persons engaged in the sector dropped by 226,000.
Declining comparative and competitive advantage
The apparel sector came to be established in Sri Lanka in the 80s as a result of the quota guaranteed market access to the developed world and the comparative advantage the country had in terms of low skilled, low cost labour. With the end of the quota system Sri Lanka has to compete in the world market with other exporting countries on an equal platform. Labour, over the years, has become a scarce and a costly resource. Thus, the country has lost the initial cost and other advantages it had as an apparel exporter.
The industry strives hard to overcome the cost disadvantage by moving up the value chain. While such initiatives have undoubtedly helped the sector to stay afloat, it is losing its glamour as a leading exporter, employment provider and contributor to GDP growth.
Lessons from East Asia
Cross-country comparisons indicate that this is a natural evolution of the apparel industry when countries move up the income ladder. The experience of East Asia has been that export oriented industrialisation begins with labour intensive industries like apparel.
However, as countries moved up the income ladder, they diversified into other skill and technology intensive industrial exports. Exhibit 7 shows this transformation clearly. All countries, even India and Vietnam, have seen a steep decline in their apparel export share in manufacturing compared to Sri Lanka, which continues to be heavily dependent on apparel.
The time has come to think beyond apparel
Sri Lanka is jealously guarding the only industrial export success story of the country - that is apparel. Yet, this attitude can have a negative impact on the attempt to revive the export sector of the country. Statistics strongly suggest that it is time the country starts thinking beyond apparel when talking of exports.
What is important to remember however is that decline in the share of apparel does not mean decline in value. Vietnam for example saw its share of apparel exports as a percentage of manufacturing decline from 33% to 21% from 2003 to 2012 but the value of apparel exports increased from US$ 35 billion to US$ 141 billion during the same period.
Thus, the value of apparel exports from Sri Lanka can and should continue to increase, but the country needs to take initiatives to diversify the export product basket beyond apparel in order to boost export earnings.
(The writer is a Senior Economic Analyst, Vérite Research.)