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The rag trade: savior or sinner?

The rag trade: savior or sinner?

SHOULD Cambodia try to develop the garment industry as the backbone of its economy,

or does the industry milk the country's resources without spreading the economic


Garment executives argue that garments mean jobs.

They point out that the industry employs nearly 70,000 people directly and indirectly

through spin-off industries; and this figure is likely to grow over the next few


Garment exports comprised 30 per cent of the country's total exports in 1995 ($26.4m,

compared to only $3.8m, or two per cent of exports in 1994), and officials expect

that figure to grow to 50 per cent in five years.

For the first six months of 1996, exports totaled $32.7 million, and the next six

months may bring in another $34 million, or 40 per cent of total exports, according

to Minister of Commerce Cham Prasidh.

Thirty-two garment factories are currently in operation, up from 20 in 1995, while

another 28 more have received licenses but have not yet committed their investments.

According to industry executives, the primary reason garment companies invest in

Cambodia is the promise of Most Favored Nation (MFN) status with the United States.

MFN will grant normal trading status with the US, meaning the end of prohibitive

garment duties that range from 55 to 100 per cent.

Van Sou Ieng, Chairman of Cambodia's Garment Manufacturers Association claims that

when MFN is granted, garment companies will invest an additional $50-70 million in

the country, up from roughly $32 million currently.

MFN not only promises lower tariffs on exports to the United States, but, more importantly,

membership in the Multi-Fiber Arrangement, which specifies the per-country amount

of garment exports to the US. With MFN, Cambodia will be eligible to negotiate its

status in the Multi-Fiber Arrangement.

This explains why companies from Singapore, Malaysia, Taiwan, and Thailand are setting

up garment companies in Cambodia. Most of these countries have reached their quota

restrictions, and exporting garments to the United States under Cambodia's quota

offers them a way to increase their exports even further.

Potential revenues are high. In 1995, for example, China exported $4.8 billion of

garments and textiles to the US; Taiwan $2.8 billion; Thailand $1.6 billion; and

Bangladesh $1.1 billion.

While disagreeing on the level of profits, garment executives agree that they are

healthy. "Cambodia is not a gold mine," said Roger Tan, Managing Director

of Thai-Pore Garment Manufacturing Co. The industry-wide profits are 10-12 per cent

a year, according to Sou Ieng.

Sok Hong, Chairman of Kong Hong Garment Co., however, said that profits at his factory

are "guaranteed at 20-25 per cent." Profits have the potential to reach

50 per cent after a couple of years, if business is "done well" - that

is, if buyers are in place and Cambodia has MFN. "If business is not done well,"

he said, "we could be killed."

Nevertheless, garment executives argue that the industry should be given preferential

treatment to offset the challenges of conducting business in Cambodia.

For example, exorbitant shipping costs shave 20 per cent off their gross profits,

according to Sou Ieng. "Administrative costs" are 25-30% of total costs

in Cambodia, compared to 7-12% for other Asian countries. Pre-shipment inspections

are also a "tremendous burden," according to Sou Ieng, because they result

in lengthy delays. Some factories may even close due to these delays.

In addition, the profits of some garment companies have fallen off in recent months

due to Rule of Origin problems with the European Union. The EU allows Cambodia to

import a certain amount of garments duty free, provided that their raw materials

originate in that country. Since Cambodia's industry currently imports all of its

materials, it is in violation of the Rule of Origin.

Until the EU agrees that Cambodia deserves to be an exception - called a "derogation"

- importers will have to pay higher duties. Cham Prasidh was optimistic that the

derogation will be soon granted.

Of all the managers' complaints about conducting business in Cambodia, their criticism

of poor labor productivity was the most strident, though they did state that labor

costs were among the lowest in the region. Workers are paid piece-rate, that is by

the number of pieces they produce, and work according to a quota.

"The quota [of a Cambodian worker] is 50 per cent less of the quota of a garment

worker in China, yet they still only meet 10-20 per cent of this quota," said

Sou Ieng.

Chinese workers make $120 a month and Vietnamese workers $55-60 a month, while Cambodian

workers make lower salaries because they are less productive, he said.

He argued that by working eight hours plus one hour overtime a day, five and a half

days a week, the Cambodian worker averages $50-55 in monthly wages; he said that

some even earn more than $100 a month.

These figures contradict a recent NGO study of garment factory wages. According to

this study, workers must work a minimum of ten hours a day, seven days a week to

earn an average of $30-35 a month.

Furthermore, this study found that the piece-rate is declining, meaning that workers

must work longer hours to earn the same wage each month. If the latter figure is

true, labor costs would indeed be among the lowest in the region, comparable to $30-35

a month in India and Bangladesh.

"[Cambodian workers] want money without working," said Sou Ieng. "It

wouldn't matter if we paid them 5-10 per cent more, they still wouldn't work hard.

We are not squeezing the workers. We only want to deliver quality goods according

to a time schedule set by the buyer."

Sizable investment incentives go a long way to offset labor's low productivity. Cambodia

offers some of the most liberal investment incentives in Southeast Asia: an eight-year

tax holiday, five-year loss-carried forward, and the tax-free import of raw materials

and equipment.

While noting that the investment incentives for the garment industry are the same

as for other industries, Cham Prasidh said: "The garment industry is very mobile.

Without tax incentives they may not come." However, he suggested that taxes

may increase by 2006. "This may affect the garment industry, but they will recoup,"

he said.

The footloose nature of the industry, which invests an average of only $1 million

per factory in equipment and materials that are easily removed as costs rise, makes

the tax issue a particularly sensitive one.

A May 1996 World Bank report faults Cambodia's investment incentives for weakening

the country's tax base. Although it doesn't specify the garment industry, the report

recommends that tax holidays be lowered to "three years or less." The World

Bank explains: "The tax incentives offered by the Investment Law are too generous

by international standards and would result in a substantial potential loss of tax

revenues... [The] experience of other countries shows that tax incentives rank low

on the list of determinants of investment flows. Moreover, tax policy affecting multinational

corporations in the majority of countries allows for some credit for taxes paid abroad,

so that tax holidays in Cambodia might only serve to shift tax revenue to foreign


However, garment executives believe that reducing the investment incentives would

hurt the industry and the economy. "Companies will spend their time trying to

avoid paying taxes," said one executive. "They won't be productive. [Cambodia]

should tax consumption products, not for-export goods."

Sou Ieng offered a slightly different reason. "If factories don't come [because

of less liberal incentives], Cambodia won't increase their taxes. The government

should tax the activities of spin-off industries."

While the garment industry is a matter of sewing sleeves, buttoning, ironing, and

folding, once the initial investment is made, there is little incentive to reinvest


For long-term growth, Cambodia must develop the capital-intensive textile industry,

which manufacturers the materials used by the garment industry.

"We want to tie [the garment industry] down," explained Prasidh, "perhaps

by linking them to the textile industry and cotton-growing industry." A weaving

mill, for example, costs $10 million, compared to a minimum investment of $500,000

for a garment factory, and cannot be easily shifted to a second country.


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