Can Sri Lanka benefit as apparel companies leave China?

In view of rising wages of garment workers in China and thus apparel companies leaving and investing in other countries, could Sri Lanka's garment industry scoop up some of China's business? This was one of the questions posed at the Sri Lanka Economic Forum 2016, which took place on January 7 and 8 in Colombo.

“China is still about a third of the world's exports of apparel, and the wages have tripled in the last ten years. There's a lot of movement out of China and a lot of investment from China in other countries as well in the garment sector,” stated Christopher Woodruff, economics professor at the University of Warwick.

Among stiff competition from low-wage countries in the region like Bangladesh, India and Pakistan, Sri Lanka has carved a niche for itself within the garment sector that builds on the reputation of its well managed apparel factories. (In comparison: while the minimum wage for garment workers in Bangladesh is 70 US dollars a month, the basic salary in the garment industry in Sri Lanka comes to 88 US dollars.)

“Everybody looks at Sri Lankan companies as the best managed companies in the region in the apparel sector; and they have to be, because wages are higher and they are competing against low wage countries,” Woodruff added, counting Ethiopia, Myanmmar and Bangladesh as particularly strong competitors due to their low wages (around 40 US dollars a month in Ethiopia and around 80 US dollars in Myanmar).

According to Woodruff, there is an opportunity for Sri Lanka: He points to the limit as to how fast low-wage countries can grow and the fact that apparel companies are moving out even there. He does warn though that as competitors will copy Sri Lanka's practices, its "industry growth will die off". However, he points to Sri Lanka's garment worker shortage as a possible solution as this could potentially lead more apparel manufacturers to look for automated processes, which in turn could boost productivity.

In terms of the future development, Riccardo Hausmann, director of the Harvard Centre for International Development that furnished an initial growth diagnosis for the country, pointed to a stop in growth of Sri Lanka's traditional industries like apparel, agriculture and tea, as the country "transitions into a post-knowledge economy, similar to countries like Thailand, Turkey and Costa Rica in the 1990s", adding that “they didn't abandon the old things. They went into new things with value addition.”

After tourism and tea exports, the garment sector is Sri Lanka's third most important industry, with the United States being the most important export market. Textile and garment exports increased in 2014 by 9.4 percent, reaching a volume of 4.929 billion US dollars, compared to 4.508 billion US dollars in 2013.

In the next ten years, Sri Lanka wants to more than double its export target for garments and textiles, aiming to reach 10 billion US dollars by 2025. According to the Sri Lanka Apparel Exporters Association, this will be achieved by selling to strong regional economies that can afford higher-quality Sri Lankan apparel products.

Image: Sri Lanka Economic Forum 2016