Policy Note 83083 October 2013 POVERTY MONITORING AND ANALYSIS The Apparel Industry in Cambodia: Employment, Wages and Implications for Poverty Significance Cambodia has achieved impressive growth in GDP over the past two decades, sustained despite the world financial crisis, and has significantly reduced poverty. World Bank policy studies have found that countries that experience growth in labor-intensive sectors are more likely to reduce poverty. Labor intensive sectors not only provide employment, but also often hire workers from the lower end of the wage distribution scale. This note shows that this has been the case in the apparel industry in Cambodia, where, after the end of the Multi-Fibre Agreement in 2004, exports market share has increased as well as total employment, although wage premiums have decreased and upgrading has been limited. Improvements in working conditions did not increase the incidence of plant closure, and provided a clear benefit to employees. Nevertheless, gains can only be sustained if accompanied by productivity increases, allowing for better conditions, including wage premiums and other benefits. policy changes on apparel production – both Background between and within countries – across the One of the first steps in many countries’ develop- developing world. One of the most significant ment path is the movement from agriculture to recent policy changes affecting apparel was manufacturing. Apparel is often one of the first labor- the end of the Multi-Fibre Arrangement (MFA) in intensive manufacturing industries to develop, 2004. The book Sewing Success (Lopez-Acevedo and provides entry to formal employment for the and Robertson 2012) examines employment, unskilled and the poor. Importantly, apparel wages, and poverty following the end of the MFA workers are predominantly young, less-educated for nine developing countries: Honduras, Mexico, women, whose employment results in a wage Morocco, Bangladesh, India, Sri Lanka, Pakistan, premium that directly contributes to poverty Vietnam, and Cambodia. The Chapter on Cambodia reduction. includes an analysis of Cambodia’s unique Better Factories Program, a i me d a t i m pro v ing Given the weight of the apparel industry in wor k i ng c ond i t i ons i n apparel factories; and Cambodia, and its important role in salaried job the impact that has had on competitiveness creation, we need to understand the effects of and exports. Policy Note Poverty Monitoring and Analysis This note summarizes the main findings in Cambodia in particular experienced significant relation to the impact of two policies: removal gains in exports. Contrary to what might have of the MFA and the establishment of the Better been expected, the rate of increase in Cambodia’s Factories Cambodia (BFC). exports increased after the end of the MFA. Like much of the rest of the world, exports fell during the financial crisis. Recovery after the crisis, Analysis however, has been strong. Exports increased The end of the MFA induced a significant 10.6% in 2012 over 2011. Much of this increase reallocation of apparel production across was in the European market following a revision Figure 1: Change in Apparel Exports as a Function of GDP per capita Fitted values Log Change in Total Apparel Exp 1.5 Botswana 1 Vietnam Azerbaij Cambodia Bosnia a China Peru Spain Jor dan Arg entin Andorr a .5 M adagasc Parag uay Luxembou Bangladesh India Ger many Nether la Sw eden Austria Czech Re Denmar k hst Kazak Belgium Switzer l F rench P F rance Colombia Bulgar ia T urkey M acedoni Pakistan Sri Lanka Nor way F inland Indonesi United K Poland ia Boliv Ecuador Estonia Belarus Lithuani Ur uguay Morocco Ukraine Latvia Chile Romania 0 Ir an, Is sia M alay enia Slov Albania T hailand Japan Australi Cr oatia New Zeal Portug al Ir eland Brazil Iceland Philippi Singapor Honduras Gr eece M auritiu Saint Vi Costa Ri Panama Mexico Hung ary Isr ael -.5 Russian Armenia T rinidad Canada United S M ongolia Dominica South Af M acau, C Korea, R Hong Kon Nepal Swazilan M alta F iji Guyana -1 chell Sey Bahrain Cyprus -1.5 4 6 8 10 12 Log GDP per Capita Source: Lopez-Acevedo and Robertson (2012) countries. Figure 1 shows the relationship between of E U ’s t a r i ff p rov i s i ons f or C a mb odia . But GDP per capita (a proxy for wages), and the exports to the rest of the world also increased change in apparel exports after the end of (45.4%), representing a significant diversification the MFA. The downward-sloping fitted line of Cambodia’s export market. shows that exports shifted from the high-wage countries to the low-wage countries, but wages Table 1 summarizes the empirical results for changes only explain part of the story. Exports fell in within countries presented in Sewing Success. Honduras and Mexico while Vietnam and The nine countries fall into three main Cambodia experienced greater increases in categories. The top four (Bangladesh, Vietnam, exports than that predicted by GDP per capita Pakistan, and India) experienced increases in alone. The other countries experienced smaller exports, employment, and wage premiums. These increases than would be expected by income countries also actively engaged in some form of per capita alone. upgrading or moving up the value chain. On the Policy Note Poverty Monitoring and Analysis Table 1: Summary of results in Sewing Success Across Country Changes Within Country Changes Country Exports Value/Market Share Total Employment Wages Premium Upgrading (% change 04-08) Bangladesh Improved Improved Improved Yes Vietnam Improved Improved Improved Yes Pakistan Stagnant Improved Improved Yes India Improved Improved Improved Yes Sri Lanka Stagnant Declined Declined Yes Cambodia Improved Improved Declined No Change Morocco Stagnant Declined n.a. Yes Honduras Declined Declined Declined No Change Mexico Declined Declined Declined No Change Source: Lopez Acevedo and Robertson (2012). other han d, Mo ro c c o , H o n du ra s , a n d Me x i c o International Labor Organization program brought experienced stagnant or falling exports, falling together buyers, factory managers, labor and em pl o yment, an d fa l l i n g w a g e p re m i u ms . In t h e g o v e r n m e n t i n a n a t t e m p t t o i m p ro v e contrast to the first group, Honduras and Mexico working conditions in the factories. did not enact policies to promote upgrading. In an industry driven by reputation-sensitive Cambodia was somewhat unique, because it buyers in importing countries, concern for labor experienced rising exports and employment conditions and worker treatment may be not without enacting policies to promote upgrading. only a labor rights issue, but also a competitive One possible reason for Cambodia’s exceptional advantage, as the case of Cambodia suggests. performance may be the presence of the Better This program was unique in the world and may Factories Cambodia (BFC) program. This help explain Cambodia’s tremendous success. World Bank studies show that: • the BFP program coincided with significant improvements in working conditions – especially in the areas where compliance was the lowest; • improvements in working conditions do not increase the probability of plant closure, and in some cases may actually decrease it; • ending public disclosure lowered the rate of increase in compliance; • regression in labor standards is very rare; factors related to regression are similar to those affecting compliance; and • retrogression is rare: factories that try out improvements rarely reverse them, which supports the idea that they may not make the factories worse off. Policy Note Poverty Monitoring and Analysis The Road Ahead: An Opportunity for be short-lived, and are highly sensitive to Directed Development changes in the global economic environment. It is important to identify how the change in Understanding the effects of globalization and policy is affecting workers, and through which t r ade o n j o b cre a ti o n , j o b d e s tru c ti o n , a nd channels they are being affected, so that the changes in the quality of jobs is essential for appropriate policy responses can be applied. For the design of sustainable poverty reduction economies that are gaining, it is important to know strategies. The apparel sector is particularly who is benefiting, and what conditions are necess- important for poverty reduction, given the high ary for the poor to benefit from the change in policy. numbers of employees and higher than average If the poor are not benefiting, policy makers need wages. to ask why, and to determine what, if anything, might be done to help the poor capture some The Sewing Success report illustrates that, while of the gains. Cambodia’s apparel sector remained focused on the lower end of the value chain, the Sri Export gains in the apparel industry were not Lankan government worked with the private simply due to industry relocation from higher-wage sector to encourage upgrading and focusing countries to lower-wage countries. Upgrading, on higher value-added items. Interestingly, ownership and domestic policies also seemed employment expanded in Cambodia and fell in to play a role. BFC may have contributed to Sri Lanka, although the total value of exports Cambodia’s growth in the sector post-MFA. increased in both. This comparison highlights Ensuring that all apparel producers are the i mpo rtan ce o f u n d e rs ta n di n g i n d us t r y monitored through BFC may be one way to str u ctu re and p o l i c i e s . Po l i c i e s to m o v e up help guarantee the quality of the industry, and the value chain may cause the industry to to maintain Cambodia’s international reputation move away from precisely those entry-level as a source of compliant production. positions that give opportunities for people to exit poverty, raising the question of what other The current industry boom creates an opportu- policies might be needed to complement policies nity for government and industry stakeholders that facilitate such upward movement. together to resolve bottlenecks, increase pro- ductivity, and distribute gains. Without careful One policy-related concern is that the opportu- direction, the current development opportunity nities for pro-poor apparel production may may escape. The World Bank Office For further information, Funding from the UK’s DFID for the please contact: Trust Fund for Poverty Reduction and No. 113 Norodom Blvd. Phnom Penh - Cambodia Governance Analysis and Coordination Tel: (855 23) 217 304/301 Carlos E. Sobrado, Support program (PRAGACS) is Fax: (855 23) 210 373/504 Senior Poverty Specialist gratefully acknowledged. (Csobrado@worldbank.org) Visit our website: http://www.worldbank.org/cambodia Lyden Kong This note reflects the views of the authors and not Team Assistant necessarily those of the World Bank and the donors. (lkong@worldbank.org )