6 - Export-oriented Garment Manufacturing and Its Impact on Employment, Productivity and Wages in Cambodia and Laos

Summary

INTRODUCTION

Export-orientation as the vehicle to initiate manufacturing growth in the developing economies became significant only since Shannon International Airport in Ireland and later Kaohsiung in Taiwan began attracting foreign firms to assemble and process labour-intensive goods in the 1960s. Import-substitution had dominated early industrialization until then, including in India, Thailand, Malaysia, the Philippines and China. Export-processing zones (EPZ) then sprung up rapidly in many developing economies, with Malaysia developing over ten of them by 1990 to become the country with the most number at that time. Cambodia and Laos entered the fray in the 1990s to develop EPZs.

Cambodia and Laos developed EPZs from the 1990s to provide the basic infrastructure necessary to complement the preferential access provisions offered by the European Union (through the “everything but arms” clause in 2001) and the United States (through a bilateral trading agreement since 1999). The other developed economies such as Japan and Canada have since followed similar practices. These instruments helped attract massive foreign direct investment targeted at specializing in cut, make and trim (CMT) garment manufacturing operations. The evidence of countries pursuing the EPZ approach to economic development is mixed. Singapore and Ireland managed to stimulate sustained upgrading through a combination of incentives and grants, and the expansion of the requisite supply-side resources such as human capital and R&D labs. However, others such as Bangladesh, the Philippines, Thailand and Indonesia have not managed such a transformation thereby failing to offer households sustained improvements in living standards.

Hence, this chapter uses the systemic quad to examine the extent of knowledge depth achieved in garment firms and the impact of their expansion on the households located in the Phnom Penh and Vientiane metropolitan locations, which are the key garment manufacturing regions in Cambodia and Laos. Section II provides literature review. Section III discusses the methodology and data used in the chapter. Section IV examines the strength and cohesion of relationships of four systemic pillars considered the key institutional pillars necessary to drive upgrading in firms and sustainable improvements in employment, productivity and wages. Sections V and VI examine the state of technological intensities and the impact on employment, exports, productivity and wages. Section VII concludes.