Productivity and the SDGs
～Economic and Social Upgrading for Sustainable Development:
Examples from Apparel Global Value Chain (GVC)～Izumi Ohno
November 19, 2020
National Graduate Institute for Policy Studies (GRIPS)
21 November 2020

Outline
1. The role of business in achieving the Sustainable Development Goals(SDGs)
 Even more vital in with/post COVID-19 world

2. Opportunities and challenges for developing countries
 Capturing diversifying FDI
 Two types of requirements: economic vs. social upgrading

3. Country experiences of upgrading apparel Global Value Chain (GVC) Sri Lanka, Bangladesh, Vietnam, Myanmar & Ethiopia

4. Implications

 Nexus btw. productivity, economic & social upgrading

The Role of Business in Achieving the SDGs
 The SDGs marked big departure from the Millennium

Development Goals (MDGs)

 Committing ALL countries (developed + emerging & developing countries) Bringing business into the scene Vital role of the private sector in achieving the SDGs

 Financial needs
 Huge potential to SDG contribution (job creation, esp. in developing countries) Major business opportunities and innovation drive With/post-COVID 19 world

 Even more critical role of the private sector, toward “Building Back Better (BBB)”

Better Business, Better World

Business & Sustainable Development Commission (Jan. 2017)
 Sustainable business models could open economic opportunities worth up toUS$12 trillion and increase employment by up to 380 million jobs by 2030.
 More than half the value of Global Goals business opportunities arise indeveloping countries
 Proposing “new social contract” btw. business, government and society
SDGs Hotspot Markets inFour Key Economic Areas(Source) BSDC (2017)

Source: Elaborated by the author, based on GRI, UN Global Compact, and WBCSD (“SDG Compass” https://sdgcompass.org/wp-content/uploads/2015/12/019104_SDG_Compass_Guide_2015.pdf )COVID-19 Crisis and the SDGs
 Broad and global impacts, affecting the whole economy & society
 Not just health crisis; deep economic crisis since the Great Depression of the 1930s(-4.4% global growth rate (IMF/WEO Oct. 2020))

 Reversals of Fortune (WB 2020): Along with conflict and climate change, COVID-19

has not only slowed global poverty reduction but reversed it for first time in overtwenty years.
 Pushing up to 100 million additional people into extreme poverty in 2020.

 SDGs should serve as our compass for BBB.
 The role of the private sector has become

vital more than ever (economic, social andenvironmental progress).
 Importance of human-centered approach
Source: World Bank 2020

Expansion of ESG Investment
Japan
Asia
Oceania
CanadaUSEurope

COVID-19 as Accelerator of the Existing
Mega Trends toward the SDGs
 Sustainable and responsible supply chains Triple Bottom Line (economic, social & environmental)

 Expansion of ESG investment

Global Sustainable Investment Alliance(GSIA)
http://www.gsi-alliance.org/wp-content/uploads/2017/03/GSIR_Review2016.F.pdf

 Increased attention to “S”, with COVID-19

 Growing attention to “stakeholder capitalism”(WEF 2020)

 Widespread adoption of sustainable standards

by lead firms in partnership with CSO

 Various kinds of public & private standards (mandatory,voluntary, multilateral, CSO-initiated, etc.)

ESG: Environment, Social & GovernanceCSO: Civil Society Organization
GPIF: Government Pension Investment Fund(Source) JICA

Trend of ESG Investment& SDGs in JapanGPIFKeidanren

Promoting ESG
investment「Charter ofCorporateBehavior」
Referring to SDGs

Japan Securities
Dealers
AssociationJapanese
BankersAssociation「SDGsDeclaration」「Framework」
Referring to SDGs

Opportunities and Challenges for Developing Countries inthe Post-Pandemic World: GVC Participation & Upgrading The pandemic and current geopolitical tension (US vs. China trade war),

together with rising costs of Chinese labor, provide potential opportunities
for developing countries to capture diversifying FDI.
 Such FDI may include green, climate-resilient, future-proof and sustainable sectors

 But, attracting new FDI and sustaining partnership are not automatic.

Climbing up value chain ladder for development is even more challenging.
 Especially, developing countries/firms today are required to satisfy two typesof requirements:
 Economic upgrading (quality, cost & delivery time (QCD))
 Social upgrading (ethical correctness, compliance)Two Types of Requirements: Quality vs. Ethical Correctness(Gereffi & Lee 2014, Gereffi et al. 2011)

 Economic upgrading Aimed at enhancing the quality of products and competitiveness of firms.
 Process upgrading, functional upgrading, chain upgrading, product upgrading

 Social upgrading Aimed at improving the quality of employment, working conditions (e.g. wages,social protection and rights), gender, health & safety, etc.
 Also, green/ climate-friendly industrialization

 Both types of upgrading require investment in human capital,technologies & machineries. Productivity matters !

Value Added

Curve of Value Added Stages (e.g. Apparel GVC)

Sales/Services

R&D

Marketing &Branding

DesignPurchasing

Distribution

Concept

Markets
Logistics

Manufacturing

Location 1

Location 2

Location 3Location 4Location 5

Value Chain Disaggregation(Source) Modified by the author based on A. Wieland (2015) and R. Mundabi (2008)

Economic Upgrading Trajectories of Apparel GVC(Source) Fernandez-Stark, Frederick, Gereffi (2011) “The Apparel GVC: Economic Upgrading and Workforce Development”

Cut, Make andTrim (CMT)

Original
Equipment
Manufacturing(OEM)

Original Design
Manufacturing(ODM)

Full Package
ServiceProvider

Original Brand
Manufacturing(OBM)

Product & Process
UpgradingCountry Experiences of Upgrading Apparel GVC
 Garment & textile sectors are very globalized, employing more than 75

millions of workers, especially in low-income countries (contributing tojob creation, esp. female workers).
 Labor cost advantages, favorable trade agreements, proximity to endmarkets, are key factors to attract lead firms for their destination.
 For many developing countries, apparel industry is the first entry point
into GVCs; but there are risks of leading to “the race of the bottom” or“stacking at the bottom”.
 Social upgrading as precondition for market entry
 Economic upgrading essential to remain and move up the value chain ladder For both types of upgrading, productivity matters

Selected Economic & Social Indicators of Apparel Exports(Source) UN Comtrade statistics, WB World Development Indicators (GNI pc. atlas method). Other data are based on various country reports.
*1: UN Comtrade commodity trade code 61 & 62.

Sri Lanka
 In 1977, Sri Lanka liberalized economy and created EPZs to receive FDI.

Foreign best practices were combined with strict Sri Lankan Labor code.
 Sri Lanka specializes high-end, niche, downstream and knitted garments
including ladies’ underwear. Upstream cotton & textile are not prioritized.
 Top apparel makers are competitive; they achieve high ethical standards(labor & environment). EU/US buyers are happy with Sri Lankan apparel.
 Sri Lanka Institute of Textile & Apparel (SLITA) and other training institutes
have produced many skilled workers.
 12 EPZs under the Board of Investment (BOI) offer one stop service, helping
tenant firms solve problems and achieve high labor & environmental
standards.
 Private dynamism is strong (mainly apparel). The private sector leads thegovernment to draft and implement policies (e.g., post-MFA).
EPZ: Export Processing Zone
MFA: Multi Fiber Arrangement (1974-2004)

Bangladesh World-second largest apparel (ready-made garment: RMG)

exporting country, after China.
 RMG sector accounts for more than 80% of Bangladesh’s exports.

 Employing more than 4 million workers (mostly female migrants from rural areas).

 After Rana Plaza collapse (2013), ACCORD & ALLIANCE were established as alegally-binding agreement btw. brands and trade unions to address fire,electrical, and structural (building) safety standards in the RMG factories.

 The Accord on Fire and Building Safety in Bangladesh (2013-18, extended to 2020): European

RMG retailers
 The Alliance for Bangladesh Worker Safety (2013-18): American RMG retailers

 These coalitions made major progress, fixing over 80% of the problems they

had originally identified.
 In June 2020, a national supply chain initiative (RSC: RMG SustainabilityCouncil) was formed to take over the work by ACCORD & ALLIANCE.

Impacts of Compliance Measures on Firm Performance
BIDS Report (2020) on 508 RMG firms

 No big change in the profitability of the firms over the period 2014-2018. The

compliance can affect the perception of workers about their safety in the very
short run, but it cannot produce real impact on labor productivity or profit.

 Treatment firms （255) incurred more costs to meet compliance standards (building safety & electricalsafety standards, fire safety etc.).
 It appears that implementation of compliance standards affected output growth of small firms badly.

 The betterment of work environment can lead to higher productivity of workers

only in the long run.
 Firms need to increase cost efficiency by minimizing operational costs andadopting more technology-oriented production process.
 In addition to compliance measures, firms must continue product diversification
within RMG and find new markets (as Bangladesh graduates from LDC status in afew years).
(Source) Impact of compliance standards on firm productivity in the RMG industry (BIDS Report: Monzur et al. 2020)

Vietnam Top third garment exporter in the world, following Chinaand Bangladesh.
 Vietnam is considered a “successful” case of ILO/IFCsupported Better Work (BW) Program.
 More than 550 firms are registered (as of late 2018).

 In Vietnam, BW has been implemented in three phases(2009-13, 2013-16, 2017-present): BW conducts the assessment of labor conditions and provides advisory

services & training to the firms (suppliers) which paid registration fees.
 FDI firms can receive assessment reports of their suppliers, once they
paid reporting fees.

International program
focused on evaluating &improving working
conditions in developing
countries.
- Starting from Cambodia(2007), Vietnam,
Indonesia, Bangladesh,
Nicaragua, Haiti &Jordan.

Better Work Program and Firm Performance
The Impact of Better Work (2018), Tufts Univ. Labor Lab.

 The average firm increased its profitability by 25% after four years ofparticipation in BW program.
 Unit costs associated with participation in BW increase with each successive
assessment cycle due to increase in wages.
 The increasing costs per worker in Vietnam are offset by an increase inproductivity and improved sourcing terms. Increased productivity is
captured by workers in the form of higher pay or lower working hours.
 The increasing profits for participating firms is likely attributable to larger
orders. Firms in BW may have also received an increase in price.
(Source) Impact of Better Work: Firm Performance in Vietnam, Indonesia and Jordan (Tufts Univ. Labor Lab.: Brown et al. 2018)
Better Work Vietnam at Glance (ILO/IFC)

Myanmar Myanmar’s garment export is still small, but on the rise. A recent surge in garment

export is driven by tariff-free privileges of EBA (EU) and ASEAN free trade.
 The country stays at the primary stage within apparel GVC—i.e., CMT (cut-maketrim).
 When the Myanmar garment industry was seriously hit by Western sanctions, itturned to Asian markets. In the early 2000s, Japan became the biggest market for
Myanmar’s garment industry (no trade sanctions).
 Japan offered training on IE, sewing skills, quality control, O&M of machines,
which had a profound impact on quality control and skill upgrading. (Interview withSG/MGMA, Nov. 2019)

 EU reinstated Myanmar into GPS in 2013 (i.e., most favorable EBA scheme), which

was followed by the restoration of US’s GSP in 2016. European donors alsosupport social compliance.

EBA: Everything But Arms
GSP: Generalized System of Preferences
MGMA: Myanmar Garment Manufacturers Association

Upgrading Opportunities and End-Markets

ICTSD Study (Samah El-Shahat & Violante de Canossa, 2018) Clear differences btw. Eastern (Japan & Korea) and Western (EU & US) buyers.

 Japanese buyers: emphasizing quality control over other considerations. (Economic upgrading) European buyers: focusing on social & environmental compliance, requiring international standards(e.g., Business Social Compliance Initiative (BSCI)). (Social upgrading) Donor support also reflects such differences.
 Japan: Myanmar Garment HRD Center (METI/JETRO’s assistance to MGMA, 2008-17 ) – Kaizen,

production management, garment inspection, quality promotion, etc. This was followed by JPC
support (2017-18).
 SMART Myanmar (EU: 2013-19), Pyoe Pin (UK), CBI (Netherland), GIZ & AVE, etc. – supporting
compliance (e.g., proper treatment of dyes chemicals and disposed materials). Social Compliance
Academy.

 Challenges to upgrading: Shortage of skilled middle & top management, lack of technical know-how, poor financial

infrastructure, limited capital investment capacity, and low-levels of worker’s efficiency (productivity)

JPC: Japan Productivity Center / AVE: Foreign Trade Association of German Retailers
CBI: Center for the Promotion of Imports from developing countries (Ministry of Foreign Affairs, Netherland)Ethiopia
 Textile & apparel industry is one of the high priority, export-oriented sectors

promoted by the Ethiopian govt. The country also produces cotton.
 From around 2010, European/US brands have started to source from Ethiopia,
attracted by low labor costs & electricity tariffs, preferential market access (AGOA,EBA, etc.). They have invited suppliers from emerging economies (Turkey, India,Sri Lanka, Bangladesh, etc.).
 Like Myanmar, Ethiopia is at the primary stage within apparel GVC (i.e., CMT).
 The Ethiopian govt. is building IPs (some of which are dedicated to textile &apparel industry, i.e., Bole Lemi 1-2 & Hawasa IPs).
 Active business-donor partnership to inclusive & sustainable supply chains.
 H&M working with ILO & Swedish SIDA on Decent Work project; PVH working with govt. & donors to build

environmentally-friendly IP (Hawasa).

 In parallel, Japan has been supporting Kaizen promotion in Ethiopia since 2009.
AGOA: African Growth and Opportunity Act
IP: Industrial Park

Public-Private Partnership for Sustainable Textile & Apparel Supply Chains
Decent Work

Cotton Certification

Better working
conditions; soft skill

Cotton Made in Africa,
Better Cotton
Initiative, etc.

ILO, SIDA, etc.

H&M, PVH
Tchibo, Tesco
etc.
Skill Development& TVET
GIZ, DFID,WB, UNIDO,etc.

CMT firms,Producers, etc.

IPs Infra. Standards
Social & environmental
Compliance
GIZ, WB, UNIDO, ILO,etc.

(Source) Elaborated by the author based on the information obtained from Japan-Ethiopia industrial policy dialogue (July 2017)

ITC Report (2015)• Major destination of Apparel exports: Germany (76%), US (14%), Sudan (6%), UK (6%)• Major destination of Textile exports: Turkey (58%), Germany (14%), Italy (13%), China (11%), US (2%)

JICA’ Support to Kaizen (relatively large projects with institution–building component)
Country

1980s

1990s

2000s

2010s

Asia
Singapore
ThailandCambodia
Latin America
Costa Rica
BrazilArgentina
Paraguay
Europe & Middle East
Hungary
JordanAfricaTunisia
Egypt
Ethiopia
Ghana
Kenya
Tanzania
ZambiaCameroon
South Africa
AU Commission

8390940106

111092

9701

95

06

151800
04

06

09 10
07

95

’13

17

22

1099
1106

1308 09
07

1316

21

1109

11

14 15
122015

1219

14 15
13

1916 1721

16 ’17

21

15

17

19 23

15

1720

15

17

14(Source) Elaborated by Kimiaki Jin, based on Jin, K. 2018, 'Role of Kaizen in Japan's Overseas Development Cooperation' in Otsuka et al. (ed)Applying the Kaizen in Africa-New Avenue for Industrial Development. Palgrave Macmillan

Kaizen in Ethiopia(Photo by the author)

Compatibility btw. Kaizen & Social Compliance?
 JICA has been implementing Kaizen project in Ethiopia over 10 years (since 2009),with strong ownership of the govt. Now EKI consultants can teach basic Kaizen.

 Phase 1 (2009-11): pilot implementation in 28 firms
 Phase 2 (2011-14): establishment of Ethiopian Kaizen Institute (EKI); guidance to 249 firms;

409 Kaizen consultants trained.
 Phase 3 (2015-20): learning advanced Kaizen and diffusing African countries.

 The govt. is also promoting Kaizen national movement, including cities, schools,kindergartens & hospitals.
 Example: MAA Garment in Mekelle (one of the top Kaizen firms in Ethiopia)

 Audit by H&M (safety, child labor, etc.) according to the standards of Sustainable ApparelCoalition
 JICA Kaizen support, followed by METI/JPC/ITOCHU on
quality & productivity improvement Same unit is charged with compliance & Kaizen(Photo by the author)

Asia: Top 5 Management Problems by Country(multiple answers by Japanese companies: %)Year-on-year Wage Increase Rate
FY2019FY2020 (%)(5.1%)(4.3%)(4.3%)(3.9%)( ) shows avg.
annual growthrate of laborproductivity:
2007-17 (basedon APO data)(Source) 2019 JETRO Survey on Business Conditions of JapaneseCompanies in Asia & Oceania, November 21, 2019.

Summary & Implications
 In the SDG era, social compliance has increasingly become a precondition for market

access; COVID-19 also highlights the need for human-centered approach. But, this does
not substitute for the importance of economic upgrading (higher value addition).
 Relationship btw. productivity and compliance is complex. There is high potential that
improved working conditions (e.g. wages, working hours, social benefits) will incentivize
workers, leading to higher labor productivity in the long run.
 The above gains can be sustained only if firms successfully keep upgrading theirproducts and processes. This requires investment in human capital, technologies &machineries.
 Some compliance measures (e.g. fire & building safety) may incur significant costs,
which could affect firms’ financial capability.
 Relatively speaking, Western markets tend to emphasize social compliance & standards,
while Japanese pay greater attention to quality, cost & delivery time (QCD).
 Comprehensive approach (e.g. TQM) is necessary to attain both social and economic
upgrading. Kaizen may be a good entry point to integrate both.