70 years have passed but Pakistan’s textile industry is still in a rut. Our global market share in RMG exports is a mere 1.1% and still shows no sign of improvement. This problem however is nothing new. To understand why Pakistan’s industry is in this poor state, we need to go back to 1974, when the Multifibre Agreement (MFA) was introduced.
MFA and its Restrictions
The Multi Fibre Agreement is an extremely important piece of history that has pretty much shaped the future of Pakistan’s RMG sector.
Textile industry has always been labour intensive. It did not need a lot of input or capital either which is why this industry was perfect for a developing country. They had an abundance of unskilled labour who were willing to work at cheap rates making them an ideal workforce for the textile industry. Their budgets were constrained and their capital goods industry was not in good shape, so developing countries could afford to set up this industry and therefore constituted a major part of their GDP.
Now the US and European Union noticed that because the economy of developing countries depended mostly on textile revenues, an increase in exports would mean a massive growth for them and cause their economy to boom. This would mean more FDI, more clients and ultimately a higher market share. The US and EU did not want this to happen at the time, as they wanted to protect their domestic textile industry.
This is where the MFA comes into play. This agreement restricted textile exports of developing countries. However Pakistan was happy with this. To explain this I will give you an example:
There is a Country A that wants to import 100 garments. Country B and Country C are both restricted due to the MFA and can only export a maximum of 50 garments each. However Country A has to fulfil its demand of 100 garments so it will be forced to import from both even if Country C’s textiles were of low value¸ or had poor finishing.
The quota ensured that no country would be able to export more than the assigned amount, so clients would have to end up ordering from somewhere like Pakistan where low value textiles were manufactured, whether they liked it or not.
Post MFA Pakistan
In 1995 the MFA was replaced by the WTO agreement according to which each country would have 10 years to work on their industry to improve their textiles. This would be the phasing out period. After the MFA would end, only products that are cheap, of good quality, and provided on time, will be purchased by the global market.
Pakistan did not work on its value addition so when the MFA ended, their market share was captured by the other developing countries who had made an effort to meet the above mentioned conditions. Despite this huge drawback Pakistan did not learn from its mistakes and the textile RMG sector growth has been stagnant because no one wants to buy their low value products. Just like Country A would rather fulfill its demand from Country B who provided good products.
From the table below you can easily see the sharp increase in market share of developing countries once MFA was removed. However Pakistan only shows a 0.2% increase.
The following shows a clearer comparison of total volume exports between Pakistan, China, Bangladesh, India and Sri Lanka – all the countries who had signed MFA.
The Vicious Cycle
- Now the Question is why has Pakistan still not developed their Textile Ready Made Garment (RMG) Sector? The sector which has the highest room for value addition and profit!
Dr. Khadija Malik Bari, a professor at the Institute of Business Administration who has researched on Pakistan’s Textile Industry answered that the country is trapped in a vicious cycle. Government policies have not been able to help in value addition so far because technically they are not responsible for quality control. This job lies with the clients. The garment industry is where the clients decide what they want, how they want it, and from where.
If let’s say an importer from China wants Pakistan’s textiles. They would give product specifications like the button size, button colour, its place of import, the thread type, thread colour, fabric texture, fabric pattern etc. The manufacturer has no innovation here. He only makes a few samples based on that order, from which the client chooses and then orders in bulk.
Depending on their clientele, manufacturers in RMG occupy a specific product positioning and only produce specific types of ready made garments.
When the MFA disaster happened countries stopped or reduced their importing from Pakistan. Pakistan had continued their use of impure and short staple cotton. Their cotton has high water content which disrupts the dyeing process because of which the garment is only used for low value textiles. Short staple cotton is also low value. These are called commodity products like bed sheets, bandages, curtains and towels.
Now the world recognizes Pakistan as a seller of these items only, so they don’t bother ordering any high price items from them. They would rather go to some other country who does specialize in this. And because these order are not placed, manufacturers do not see the need to make high price items. They don’t feel the need to bring improvement here.
Thus we are caught in this cycle, or as Michael Porter calls it: Factor Disadvantage.
There is no local demand sophistication which is why low value textiles are still selling domestically. However there is greater potential and prosperity in exports which Pakistan has not been able to capitalize on because the clientele is not diversified and only order low value products.
Thus the government and individual manufacturers must work on their marketing to grab the attention of importers who would demand high value products, which would ultimately pave the path for development in Pakistan’s RMG Sector.