The Rise of Small Asian Economies in the Apparel Industry

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Summary of The Rise of Small Asian Economies in the Apparel Industry

163 C H A P T E R 6 The Rise of Small Asian Economies in the Apparel Industry Yevgeniya Savchenko Introduction This chapter analyzes two Asian countries, Cambodia and Sri Lanka. The export-oriented apparel sector is the key manufacturing industry in both countries. In Cambodia, apparel exports accounted for 70 percent of total manufacturing exports, and the sector employed around 325,000 work- ers in 2008, which represented almost 30 percent of total industrial employment. In Sri Lanka, the apparel sector contributed 40 percent of total exports and employed 270,000 workers, or 13 percent of industrial employment in 2008.1 Female workers dominate apparel sector employ- ment in both countries—83 percent of apparel employment in Cambodia and 73 percent in Sri Lanka.2 The MFA (Multi-fibre Arrangement) phaseout was a major concern for both countries because of the expected competition from cheaper Chinese products.3 However, despite an initial slowdown in apparel export growth in 2005, Cambodian apparel exports The author of this chapter is grateful for comments provided by Gladys Lopez-Acevedo, Raymond Robertson, Ana Luisa Gouvea Abras, and Cornelia Staritz. The empirical analysis was conducted by Elisa Gamberoni, Ana Luisa Gouvea Abras, Hong Tan, and Yevgeniya Savchenko. The first section on apparel sector structure is based on country background papers of Cornelia Staritz and Stacey Frederick (2011a, 2011b). 164 Sewing Success? grew on average at almost 14 percent annually between 2005 and 2008, and Sri Lanka experienced more moderate but still healthy 6 percent annual growth. One key difference between these countries is that Cambodian and Sri Lankan apparel industries had different strategies to facilitate the MFA phaseout and achieved different outcomes. The Sri Lankan apparel sector upgraded to full-service provider, moved to higher-value products, and consolidated the industry at the expense of small firms. The Cambodian apparel industry increased employment and expanded the number of firms after the MFA phaseout by remaining a supplier of less sophisti- cated cheap products and by being attractive to buyers through a good labor compliance record due to the Better Factories Cambodia program. Poverty has considerably declined in Cambodia and Sri Lanka over the past 15 years (World Bank 2006, 2007), which some studies have linked to the development of the garment sector. Yamagata (2006), using a 2003 survey of export-oriented manufacturing firms in Cambodia, shows that employment in the apparel industry had a substantial impact on poverty reduction in Cambodia. The wage of an entry garment worker in Cambodia was higher than the amount of income needed for two people to live above the overall poverty line in Phnom Penh. Education entry barriers are not high for the garment sector, making it possible for people with little education to work in the industry. The proportion of apparel workers living on less than 1 dollar (purchasing power parity, PPP) a day in Cambodia and Sri Lanka is lower than in other low-skilled sectors.4 One-quarter of Cambodian apparel workers were living on less than 1 PPP dollar a day in 2007, compared to 55 percent of agricultural and 48 percent of service workers. In Sri Lanka, only 11 percent of apparel workers lived on less than 1 PPP dollar a day in 2008, compared to 21 percent of agricultural and 17 percent of service workers. The empirical analysis shows that the apparel wage premium dropped immediately following the MFA phaseout in both countries. However, in the following years, the industry wage premium improved, although it never regained pre-MFA phaseout levels. The male-female wage gap was declining before the MFA phaseout, but it widened after the phaseout in both countries. The share of females in apparel industries of both coun- tries was not affected by the MFA phaseout, suggesting that labor shed- ding in Sri Lanka and employment increases in Cambodia were proportional for men and women. Apparel sector working conditions deteriorated in Cambodia following the MFA phaseout. In Sri Lanka, the results were mixed, depending on the measurement. The Rise of Small Asian Economies in the Apparel Industry 165 The rest of the chapter is structured as follows. Section one describes the apparel industry structure in Cambodia and Sri Lanka, section two presents findings on employment changes in apparel, section three describes the within-industry changes, section four analyzes the apparel sector wages, section five describes changes in working conditions, and section six concludes.5 Apparel Sector Structure in Cambodia and Sri Lanka This section presents the apparel sector structure in Cambodia and Sri Lanka.6 First, it describes the historical development of the sector and the factors that determined the sector characteristics, such as foreign direct investment (FDI) and the preferential market access. Then, we document the apparel export dynamics in both countries before and after the MFA, describe end market and export product orientation, and describe back- ward linkages (input sources). The section concludes with a description of the domestic policies that were designed to prepare the apparel sectors of both countries for the MFA phaseout. Development of the Sector Cambodian and Sri Lankan apparel industries thrived under the MFA, driven by both foreign investments and government efforts to develop the sector. Due to decades of political and civil unrest, Cambodia was a late- comer to the apparel industry. Although Cambodia was manufacturing apparel during the French colonial era, the modern industry was estab- lished only in the mid-1990s by investors from Hong Kong SAR, China; Malaysia; Singapore; and Taiwan, China. Foreign investors were attracted by unused quota under the MFA and preferential market access, as well as by the relatively low labor costs stemming from Cambodia’s large labor surplus. Sri Lanka, on the other hand, has a longer tradition in the apparel sector. Before 1977, the Sri Lankan apparel sector was very small, with a few locally owned firms producing low-end apparel for the domestic mar- ket using inputs from the local state-controlled textile industry (Kelegama and Wijayasiri 2004; Kelegama 2009; Staritz and Frederick 2011b). In 1977, Sri Lanka was the first South Asian country to liberalize its econ- omy. Moreover, the government was very supportive of the apparel sector, in particular through the Board of Investors (BOI),7 and created a favorable investment environment for not only foreign but also domestic investors. Trade liberalization, together with unused MFA quotas, immedi- ately attracted foreign investors from East Asia—Hong Kong SAR, China, 166 Sewing Success? in particular—who relocated their production to Sri Lanka. Also, European manufacturers saw a window of opportunity to reduce labor costs by mov- ing to Sri Lanka. Government support programs also encouraged the development of local apparel firms. FDI played a major role in establishing and developing the apparel industry in both countries, but subsequently the patterns diverged. In Sri Lanka, FDI in apparel came either through foreign ownership or joint ventures, which have been common among the largest local apparel manufacturers. According to BOI data, FDI accounted for about 50 per- cent of total investment (cumulative) in the apparel sector—either wholly owned or jointly owned in the early 2000s (USITC 2004). Joint ventures brought crucial technology, know-how, and skills to Sri Lanka. However, the industry soon became dominated by local firms. In 1999, around 80–85 percent of factories were locally owned (Kelegama and Wijayasiri 2004). Today, FDI plays a more limited role in the apparel sector, but it has recently increased in the textile sector. By contrast, the apparel sector in Cambodia is dominated by FDI. About 93 percent of factories are foreign owned, led by Taiwan, China (25 percent); Hong Kong SAR, China (19 percent); China (18 percent); and other Asian economies (Natsuda, Goto, and Thoburn 2009). Cambodians own only 7 percent of apparel firms, and these are mostly smaller firms (accounting for around 3 percent of sectoral employment) that generally work on a subcontracting basis for larger foreign-owned firms. The vast majority of owners as well as managers are foreigners, and locals are predominant only at low-skilled jobs. According to a survey of 164 apparel factories in 2005,8 30 percent of top managers were from mainland China; 21 percent from Taiwan, China; 15 percent from Hong Kong SAR, China; and only 8 percent from Cambodia (Yamagata 2006). The Garment Manufacturers’ Association in Cambodia (GMAC) esti- mates that 80 percent of middle managers are also foreigners. Preferential market access to the United States and the European Union (EU) was central to the development of the apparel sector in both countries. When the sector started in Cambodia, it faced no quota restric- tions to the United States and the EU because it was not part of the MFA system. In 1996, Cambodia, as a nonmember of the World Trade Organization (WTO), was granted most favored nation (MFN) status for the U.S. and the EU market. The major industry takeoff was spurred by the U.S.-Cambodian Bilateral Trade Agreement of 1999, under which favorable quota execution was linked to compliance with labor regula- tions. The two governments agreed that if the Cambodian government The Rise of Small Asian Economies in the Apparel Industry 167 was able to secure compliance by apparel factories with the country’s labor laws and internationally agreed-upon labor standards, quotas would be increased on an annual basis. Decisions for quota increases were based on a monitoring program—the Garment Sector Working Conditions Improvement Project—conducted by the International Labour Organization (ILO). In 2000 and 2001, a 9 percent increase of all quota categories was established. In 2001, the trade agreement was extended for three additional years, from 2002 to 2004. Across-the-board quota increases of 9 percent, 12 percent, and 14 percent were awarded for those years (Polaski 2009). Although Cambodia has preferential access to the EU market, it is not as well utilized as access to the U.S. market because the double transformation rules of origin (ROO)9 cannot be fulfilled by all apparel exports. Thus, the utilization rate is very low, at around 10 percent (UNCTAD 2003). Cambodia also enjoys duty-free market access to Australia, Canada, Japan, New Zealand, and Norway. At the regional level, Cambodia is a member of the Association of South East Asian Nations (ASEAN). Preferential access to the EU market under Generalized System of Preferences (GSP) schemes contributed to steady growth of Sri Lanka’s apparel industry and its increased presence in the European market. In March 2001, the EU granted Sri Lanka quota-free market access, but it still faced duties. In February 2004, the EU granted Sri Lanka a 20 percent duty concession for its compliance with international labor standards, in addition to an earlier 20 percent duty concession granted under the GSP General Agreement.10 In July 2005, Sri Lanka qualified as the first South Asian country for the GSP+ scheme for vulnerable countries, permitting duty-free entry to the EU market. This development contributed to the strong growth of exports to the EU and made the EU the largest export destination of Sri Lankan apparel products. Despite participation in mul- tiple regional agreements, such as the South Asian Association for Regional Cooperation (SAARC) and the Indo–Sri Lanka Bilateral Free Trade Agreement (ILBFTA),11 the potential for regional apparel trade and investment in Sri Lanka is still not fully realized. Export Dynamics Apparel exports grew remarkably in Cambodia and Sri Lanka during the MFA era. After the Cambodian apparel industry took off in the mid- 1990s, exports quadrupled within a decade, growing from $578.0 million in 1998 to $2.4 billion in 2004 (figure 6.1). According to GMAC, apparel accounted for only 3 percent of total exports in the early 1990s, 168 Sewing Success? but by 2003, it constituted 76.4 percent. Between 2000 and 2004, apparel exports grew at an annual average rate of 20.5 percent. The share of Cambodia in global apparel exports increased from 0.3 percent in 1998 to 1.0 percent in 2004. Sri Lanka, already a seasoned apparel exporter in the mid-1990s, experienced healthy but more moderate growth than Cambodia, with exports rising from $1.7 billion in 1995 to $3.0 billion in 2004 (figure 6.1). However, in the late 1990s, export growth decelerated, and exports even declined in 2001 and 2002.12 The share of Sri Lanka in global apparel exports increased from 1.1 per- cent in 1995 to 1.3 percent in 2001, but then decreased to 1.2 percent in 2004. Despite pessimistic expectations for apparel sectors post-MFA, both countries continued increasing apparel exports, though growth slowed somewhat. Sri Lankan exports were expected to decrease by half and that 40 percent of firms would close in 2005 (Kelegama and Epaarachchi 2002). However, although exports were weak in the first half of 2005, apparel exports grew by 3.7 percent over the entire year. From 2004 to 2008, apparel exports as a share of total exports remained above 40 per- cent, and the share of Sri Lanka in global apparel exports remained quite stable at around 1.1–1.2 percent. Apparel exports grew 6 percent annu- ally on average, and value increased by almost $1 billion over 2005–08. In Cambodia immediately after the MFA removal, total apparel exports increased to $2.7 billion in 2005 and to $4.0 billion in 2008, a rise of Figure 6.1 Apparel Exports to the World, Volume and Annual Growth Source: United Nations Commodity Trade Statistics Database (UN Comtrade). Note: Growth rate reflects change from previous year. 115 95 75 55 35 15 1998 growth rate (%) 2001 2004 2005 2006 2008 total value ($, million) 0 500 1,000 2,000 2,500 3,000 3,500 4,000 4,500 1,500 2007 –5 Sri Lanka value Cambodia value Cambodia growth Sri Lanka growth The Rise of Small Asian Economies in the Apparel Industry 169 almost 14 percent annually. Cambodia’s share of global apparel exports remained stable at 1.0 percent between 2004 and 2005, and it increased to 1.1 percent in 2006 and 1.2 percent in 2007. One of the contributors to continued growth post-MFA was the reimposition of quotas13 on cer- tain categories of apparel imports from China to the United States and the EU between 2005 and 2008, which limited the impact of the MFA phaseout. End Markets End markets of both countries are highly concentrated in the United States and the EU, with 87–90 percent of total Cambodian and Sri Lankan apparel exports going to those two destinations. The type of preferential agreements that Cambodia and Sri Lanka signed with the United States and the EU can explain the pattern of export concentra- tion. The United States used to be the largest market for Sri Lankan apparel exports, but the composition has changed considerably since the MFA phaseout. The current largest export market—the EU-15— increased its share from 33.5 percent in 2004 to 48.8 percent in 2008, while the United States decreased its share from 55.3 percent to 41.2 percent.14 The rest of the world increased its share from 5.2 percent in 2000 to 10.0 percent in 2008. The importance of the EU market increased because the EU granted Sri Lanka GSP+ status in 2005. Additional reasons for the shift to EU markets was that EU buyers gener- ally demand more services and involvement in the sourcing and design process, are more prepared to pay higher prices for good quality, and are generally more relationship driven in their sourcing policies (Gibbon 2003, 2008). The high concentration of Cambodian apparel exports in the U.S. end market is due to the preferential quotas that Cambodia had with the United States as a result of the U.S.-Cambodian Bilateral Trade Agreement. In 2008, 86.3 percent of apparel exports went to the United States and the EU-15, with 61.9 percent of all exports going to the United States and 24.4 percent to the EU-15. The only other important end market is Canada, which had a 6.1 percent share in 2008. Although the United States still dominates Cambodia’s apparel exports, its share decreased from 70.4 percent in 2000 to 62.0 percent in 2008, while the EU-15 share increased from 22.4 percent to 24.4 percent in the same time period. Canada’s share also increased, from 0.9 percent in 2000 to 6.1 percent in 2008. The increase in apparel exports to Canada since 2003 is related to the extension of Canada’s GSP scheme 170 Sewing Success? to cover textiles and apparel in January 2003. In addition to preferential quotas, the interests of the parent foreign companies that control the Cambodian apparel sector explain the high concentration of Cambodian apparel exports in the U.S. market. Those parent companies, typically based in Hong Kong SAR, China; the Republic of Korea; and Taiwan, China, are largely concentrated in the U.S. market and have well- established relationships with U.S. buyers. Moreover, in contrast to Sri Lanka, the Cambodian apparel sector is tailored to a different demand sector. Orders from U.S. mass market retailers are large, and price is the most important criteria; quality and lead time are also central but not as important. In general, EU orders are smaller, demand more variation, and have different standards with regard to quality, fashion content, and lead times. Export Products Export products in both Cambodia and Sri Lanka are characterized by high concentration in a few items, though of different value-added prod- ucts: the Sri Lankan apparel industry focuses on higher value-added products, whereas the Cambodian industry focuses on lower value-added items. After the MFA phaseout, the Sri Lankan apparel industry took over a lingerie products niche and gradually shifted away from woven to knit apparel production. Exports of lingerie products, including under- wear, bras, and swimwear, have almost doubled since the end of the MFA, accounting for nearly a quarter of total EU-15 and U.S. exports in 2008. Sri Lanka’s apparel exports are concentrated in relatively few prod- ucts, namely underwear, trousers, and sweaters. The top five product categories accounted for 40 percent of total EU-15 apparel exports and for 47 percent in the U.S. market in 2008. Product concentration has increased since 2000. However, Sri Lanka’s product concentration is lower than in most Asian competitor countries. Moreover, knit products grew in importance compared with woven products as a share of Sri Lankan apparel exports. In 1995, woven exports accounted for 72 per- cent of total apparel exports, but the share declined to 61 percent in 2004. By 2008, knit and woven accounted for an equal share of total apparel exports. Cambodia, on the other hand, concentrates on exporting lower value-added products, both woven and knit. The top five product categories accounted for 52.5 percent of the U.S. and 66.3 percent of the EU-15 apparel exports in 2008. The most important products in both markets are trousers, sweatshirts, and T-shirts. In the EU market, sweaters The Rise of Small Asian Economies in the Apparel Industry 171 are particularly important, accounting for 53.3 percent of total exports in 2003, and different types of sweaters represent the top two apparel export products. This fact is related to the double transformation ROO required for preferential market access to the EU, which can be fulfilled for sweaters. From 1995 to 2004, knit and woven exports accounted for similar values. Woven exports, however, have stagnated since 2004, whereas knit exports have continued to increase. Nearly three-quarters of Cambodia’s apparel exports were knit products in 2008. Backward Linkages Both Cambodian and Sri Lankan apparel industries have very weak domestic backward linkages and import most of the inputs for the apparel production. Despite government efforts to support a local textile sector, the Sri Lankan apparel sector still relies heavily on tex- tile input imports. On average, over 65 percent of material input (excluding labor) used in the industry is imported (Kelegama 2009). In the early 2000s, an estimated 80–90 percent of fabric and 70–90 percent of accessories were imported (Kelegama and Wijayasiri 2004). In 2005, the ratio of imported yarn and fabric to apparel exports was 60 percent, and yarn and fabric imports accounted for a fourth of overall imports to Sri Lanka (Tewari 2008). There have been major changes in expanding the local supply base. Local accessory sourcing has increased importantly—40–50 percent of knit fabric is produced locally—but all woven fabric is still imported. The top textile import- ers to Sri Lanka are China (30.6 percent); the EU-15 (11.7 percent); Hong Kong SAR, China (14.2 percent); India (17.4 percent); and Pakistan (7.6 percent). In Cambodia, over 90 percent of textile inputs are imported. Moreover, most of the accessory, packaging, and presentation materials are imported. Cambodia’s fabric imports in 2008 accounted for an estimated 25 per- cent of the country’s total merchandise imports (Natsuda, Goto, and Thoburn 2009). The major textile import sources in 2008 were China (41.5 percent); Hong Kong SAR, China (29.4 percent); Korea (8.6 per- cent); Malaysia (5.7 percent); and Thailand (5.5 percent). The high dependency of Cambodian backward linkages on imports can be explained by foreign ownership and concentration of the industry in cut- make-trim (CMT) production, which gives apparel firms located in Cambodia limited decision power with regard to input sourcing, as these decisions are made at the headquarters. 172 Sewing Success? Proactive Policies The Sri Lankan apparel sector actively prepared for the MFA phaseout by restructuring and functionally upgrading the industry, and the government played an important role in this process. The Cambodian government was less proactive than the Sri Lankan government, with most of the policies oriented toward attracting FDI rather than upgrading the apparel industry. Moreover, Sri Lankan government was very efficient in implementing policies, whereas in Cambodia, the implementation is still lagging.15 Sri Lankan post-MFA policies. In 2002, Sri Lanka’s main apparel indus- try players and the government developed the Five-Year Strategy to face the MFA phaseout and the associated heightened competition in the global apparel sector. An important aspect of this strategy was the Joint Apparel Association Forum (JAAF) established by the government and the five industry associations,16 which consolidated different associations under one roof and enabled an industrywide response to challenges posed by the MFA phaseout (Wijayasiri and Dissanayake 2008). The key focus areas of the Five-Year Strategy included backward inte- gration, human resource and technology advancement, trade, small and medium enterprises (SMEs), finance, logistics and infrastructure, and marketing and image building (JAAF 2002; Kelegama 2005b, 2009). The strategy had five main objectives: • Increase the industry turnover from its 2001 level of $2.3 billion to $4.5 billion by 2007, which required a growth rate of 12.0 percent between 2003 and 2007 (lower than the growth rate of 18.5 percent between 1989 and 2000). • Transform the industry from a contract manufacturer to a provider of fully integrated services, including input sourcing, product develop- ment, and design, as buyers demand more functions from suppliers. • Focus on high value-added apparel instead of low-cost apparel and penetrate premium market segments. • Establish an international reputation as a superior manufacturer in four product areas: sportswear, casual wear, children’s wear, and intimate apparel. • Consolidate and strengthen the industry. The strategy proposed initiatives at three levels to reach these objectives (Fonseka 2004). At the macro level, initiatives included reducing the costs of utilities, instituting labor reforms, developing Electronic Data Interchange (EDI) facilities at the port and at customs, developing infrastructure, and The Rise of Small Asian Economies in the Apparel Industry 173 building strong lobbies in Sri Lanka’s main markets, such as Belgium, India, the United Kingdom, and the United States. At the industry level, the government encouraged branding and promotion, research and devel- opment, market intelligence, greater market diversification, backward linkages technological upgrading, building design, and product develop- ment skills, as well as enhanced productivity and reduced lead times. Finally, at the firm level, efforts were directed at reducing manufacturing costs, upgrading technology and human resources, and forming strong strategic alliances. To shift the industry from a contract manufacturer to a fully integrated services supplier,17 the Five-Year Strategy identified the following key steps: encourage backward integration, improve human resource capital and technology, change labor laws and regulation, promote Sri Lanka’s image as a supplier with high labor standards, cater to the needs of SMEs, strengthen bilateral and multilateral links with key countries, lobby the government for improved infrastructure, and mobilize funds to implement change. Human resource development was seen as particularly important in the post-MFA environment (Kelegama 2009). The government wanted to increase worker productivity in the apparel sector through strengthen- ing marketing capabilities, creating design capabilities, improving pro- ductivity within firms, developing technical competence, enhancing skills, and encouraging a cohesive focus for apparel and textile education. As a result, multiple initiatives in the area of skill training have been implemented, which built on existing training facilities (Kelegama 2009).18 See box 6.1. As part of the Five-Year Strategy, two initiatives have been undertaken to improve working conditions and the international and local image of the apparel industry—an international image-building campaign “Garments without Guilt” in 2006 and a local image-building campaign Abhimani (“pride”) in 2008. Cambodian post-MFA policies. The government of Cambodia sup- ported the development of the apparel sector, but proactive policies were mainly oriented only at attracting FDI. The government approved the establishment of 100 percent foreign-owned firms in Cambodia in 1994, improved the business environment, and provided favorable poli- cies for foreign investors, including duty-free imports for export sectors, the provision of tax holidays and financial incentives, the introduction of laws to establish export processing zones (EPZs), and one-stop services to simplify investment procedures (Natsuda, Goto, and Thoburn 2009). Besides FDI-oriented policies, state capacity for proactive policies to 174 Sewing Success? Box 6.1 Initiatives to Improve Human Capital in the Sri Lankan Apparel Industry • To strengthen the marketing competencies, the JAAF, in collaboration with the Chartered Institute of Marketing, initiated an industry-specific professional marketing qualification (Wijayasiri and Dissanayake 2008). • To strengthen design capabilities, the JAAF (with the support of the Sri Lankan government) initiated a Fashion Design and Development program, a four-year degree course conducted at the Department of Textile & Clothing Technology at the University of Moratuwa in collaboration with the London College of Fashion. • To increase firm productivity, the JAAF (with the support of the Sri Lankan government) initiated the Productivity Improvement Program in 2004.a The objective is to promote “leaner” and more effective organizations, which would result in higher productivity, lower costs, better quality, and on-time delivery (Wijayasiri and Dissanayake 2008). • To strengthen technical capacity, the JAAF entered into an agreement with the North Carolina State University (NCSU) College of Textiles in 2004 to deliver an NCSU-affiliated diploma in collaboration with the Clothing Industry Training Institute and the Textile Training & Service Centre. The Sri Lanka Institute of Textile and Apparel also organizes the following: ° The Apparel Industry Suppliers Exhibition, a biannual exhibition for machinery suppliers to show new technology to support technology transfer in Sri Lanka ° The Fabric and Accessory Sourcing Exhibition, a fabric and accessories sup- plier exhibition showcasing new technology developments in fabric and textiles around the world and improving the awareness of the local textiles manufacturers about global trends ° A magazine (Apparel Update) ° A conference (Apparel South Asia) • Several programs have been established in the context of the MFA phaseout, supported by donors. For instance, USAID created four model training centers within the 31 vocational training centers, which provide training for the textile and apparel sectors (out of a total of 189 vocational training centers). Source: Staritz and Frederick 2011b. Note: JAAF = Joint Apparel Association Forum; MFA = Multi-fibre Arrangement; USAID = United States Agency for International Development. a. Prior to this program, the International Labour Organization (ILO) launched the Factory Improvement Program (FIP) in 2002 with funding from the U.S. Department of Labor and the Swiss Secretariat for Eco- nomic Affairs. FIP is a training program that aims to help factories increase competitiveness, improve working conditions, and strengthen communication and collaboration between managers and workers. The Employers’ Federation of Ceylon, together with the ILO, has implemented the program with JAAF as a collaborating partner (Wijayasiri and Dissanayake 2008). The Rise of Small Asian Economies in the Apparel Industry 175 support local involvement and links in the apparel sector and upgrading of the apparel sector has been rather weak, in particular compared to com petitor countries such as Bangladesh, China, Sri Lanka, and Vietnam. The major achievement in proactive policies was Better Factories Cambodia, which grew out of a trade agreement between Cambodia and the United States. Under the agreement, the United States allowed Cambodia better access to the U.S. markets in exchange for improved working conditions in the garment sector. This project has put in place institutional structures that facilitate collaboration between the govern- ment, industry associations, firms, and trade unions. Better Factories Cambodia is managed by the ILO and supported by the government, the GMAC, and unions. The project works closely with other stakehold- ers, including international buyers. It monitors and reports on working conditions in Cambodian garment factories according to national and international standards and helps factories to improve working condi- tions and productivity. To facilitate the post-MFA transition, the government prepared the Cambodian Garment Industry Development Strategy in 2005; however, implementation is lagging. The main goal of the strategy is “to create an environment in which the Cambodian garment industry can develop and sustain export competitiveness and diversify its offer in niche markets, to retain greater value within the country, and to empower employees by fairly distributing the benefits” (Staritz and Frederick 2011a). The objec- tives of the strategy include the following: • Strengthening the institutional and information base of the apparel sec- tor by bringing together key stakeholders • Improving access to major markets and forming close public-private partnerships • Reducing transaction costs • Shortening lead times and increasing value added by building links to a domestic textile industry and encouraging local investment throughout the supply chain • Improving and expanding marketing efforts to a larger number of coun- tries and buyers • Improving productivity by establishing a skills development program • Addressing general infrastructure issues within the country that add to product costs, such as the high cost of electricity and port charges The strategy was accompanied by a work plan and management framework involving various stakeholders, including the National Export 176 Sewing Success? Council of Cambodia, the GMAC, labor unions, and the ILO. Despite its ambitious goals, this strategy has not been implemented so far. Although the apparel industry is the engine of growth in Cambodia, investments in systematic skill training have been limited. Existing train- ing centers are largely focused on teaching women to sew and reducing injury and downtime rather than driving productivity improvements and upgrading to broader functions and higher value-adding activities (Rasiah 2009). The only two broader formal training institutes are the Cambodia Garment Training Center (CGTC) and the Cambodia Skills Development Center (CASDEC).19 Employment This section presents the employment characteristics in the apparel industry in Cambodia and Sri Lanka and contrasts the trends in employ- ment in both countries before and after the MFA. Labor populations employed in the apparel sectors of Cambodia and Sri Lanka share a num- ber of characteristics. First, the share of population employed in the tex- tiles and apparel industry was relatively small and remained stable after the end of the MFA: 5 percent in Cambodia and 6 percent in Sri Lanka (table 6.1). Second, the apparel sector is female dominated. The share of employment in apparel is 83 and 73 percent of women in Cambodia Table 6.1 Labor Force Characteristics, Cambodia and Sri Lanka Cambodia Sri Lanka 2004 2007 2008 2009 2002 2006 2008 Employment and education Females in labor force (%) 50 49 48 50 32 31 34 Years of education 5.51 6.07 6.05 5.98 8.44 8.56 8.81 Female years of education in T&G 6.12 6.26 5.80 6.39 10.03 10.01 10.18 Male years of education in T&G 7.55 8.62 7.22 7.28 10.20 10.33 10.46 Average years of education in T&G 6.39 6.67 6.10 6.55 10.08 10.11 10.26 Employment share of the industry Agriculture (%) 58 49 43 53 20 12 18 T&G (%) 4 5 6 5 6 6 6 Source: Authors’ calculations. Note: T&G = textiles and garments. The Rise of Small Asian Economies in the Apparel Industry 177 (2009) and Sri Lanka (2008), respectively. In both countries, this share was much higher than the proportion of females in the total labor force: 50 percent in Cambodia and 34 percent in Sri Lanka. Moreover, the share of females in apparel remained relatively stable in both countries after MFA removal. Third, the labor force working in apparel was more edu- cated than the country average. In Cambodia, an average person had 6.0 years of education, while an apparel sector employee had 6.5 years of education. Although this sector has slightly more education than the country average, the skill of the workforce in the apparel sector is of major concern at both the worker and managerial levels (box 6.2). In Sri Lanka, where the population is more educated on average than in Cambodia, an average person had 8.8 years of education compared to 10.3 years for an apparel sector worker. Education of the apparel work- force increased after the end of the MFA in both countries. But this change most likely reflected an overall increase in education rather than one specific to the apparel industry, since the national education levels went up as well. Within the apparel sector there was a gender gap in Box 6.2 Shortage of Skill in the Cambodian Apparel Sector A critical reason for the relatively low labor productivity in Cambodia’s apparel sec- tor is the lack of skills of workers and managers. Skilled sewing operators are in high demand, but the lack is more severe at the supervisory, management and techni- cal, and design and fashion skill levels. The vast majority of top and middle manag- ers as well as technically skilled workers and supervisors are foreigners. Around 5,000 Chinese apparel technicians and supervisors are dispatched to apparel fac- tories in Cambodia through Chinese human resource agencies (Natsuda, Goto, and Thoburn 2009). These foreign workers have brought experience, which was critical for the rapid establishment of the apparel sector in Cambodia; however, they may now pose a challenge to upgrading and productivity improvements because of their limited training and skills in production processes or industrial engineering, outdated and unsuitable management practices, and communica- tion barriers with regard to language and culture (Nathan Associates 2007). Another problem is that the transmission of knowledge to local workers is slowed by language difficulties; little learning probably takes place. Source: Staritz and Frederick 2011a.