Effects of Wage Differentials, MFA, and GSP on Exports in the Bangladesh Textile and Garment Industry

ABSTRACT

In this paper, we investigate the effect of inter-country wage differentials on textile and garment (T&G) exports of Bangladesh and present an account of the important issue of why textile and garment exports are directed from developing countries to developed countries. Our empirical results imply that the wage differentials between developed and developing countries constitute one of the main drivers of T&G exports. In addition, we checked other factors such as the Multi-Fiber Arrangement (MFA) and the Generalized System of Preferences (GSP) by including dummy variables representing the MFA quota withdrawal and the GSP. We found that removal of the MFA had a significant negative effect, as expected. Our study confirms the positive correlation between GSP and exports. After phasing out the MFA and its quota system, the wage differentials not only boost the T&G exports from Bangladesh, but also increase the effectiveness of GSP. Given such findings, we discuss relevant policy implications.

KEYWORDS:

• Bangladesh
• labor costs
• MFA
• textile and garment exports
• wage differentials

Disclosure statement

The authors declare no conflicts of interest.

Notes

1 Our dataset encompasses 81 countries, including least developed countries (LDCs), where some nations may indeed have minimum wages lower than that of Bangladesh. We were mindful of this variation and its potential impact on our analysis. To address this, we carefully considered the wage differentials between Bangladesh and each of its trading partners, regardless of whether Bangladesh had a higher or lower minimum wage in absolute terms.

2 The PPML estimator with fixed effects addresses the endogeneity by accounting for unobserved time-invariant heterogeneity.

Additional information

Funding

The work was supported by the Chungnam National University and National Research Foundation of Korea [grant number NRF-2021S1A5B8096365].