In the mid 70s, Bangladesh was a poor country with no garment exports to speak of. Fast forward a few years to the 1980s, and garments were the country’s main export. Furthermore, Bangladesh had grown into a household name in the global garment export industry. How did this happen?
Many experts have presented multiple explanations for this. I recently came across one by Professor Mushtaq Khan that surprised me because of its clarity and implications on how to think about development. But before we go into those details, let’s review what happened in Bangladesh.
It all started, as many of these stories do, with the United States and one of its foreign policies. The USA and the European Union wanted to grow their garment manufacturing industries, but local manufacturers were constantly outcompeted by imports from leading textile exporters like South Korea and Turkey. In an effort to address this problem, the US and EU designed a policy that imposed import quotas on the leading textile exporters. As one would expect, most countries would be opposed to such a protectionist policy and so the policy makers sweetened the deal by allowing the poorest countries to export garments to the US and EU without any quotas or restrictions. This policy was enacted in 1974 as the Multi Fibre Arrangement (MFA), after which the US & EU policy makers slept soundly, confident in the belief that no poor countries could increase their textile production capability to the extent of competing with the US and EU.
South Korea — one of the textile exporters hit by the MFA quota — now had a problem: what were they to do with the garments they could no longer sell? As a possible solution, South Korean exporters started looking for countries to partner with in order to bypass these quota restrictions. It so happened that one Bangladeshi investor — Noorul Quader — was not only interested in breaking into the global textile market, he also had the funds to make it happen. However, Noorul realized there was a missing ingredient: not a single ready-made garment factory existed in Bangladesh. The country lacked the necessary technical and organizational know-how.
Noorul Quader approached the Daewoo Corporation — one of the South Korean exporters constrained by the MFA quotas — with a proposal for a joint venture: Noorul’s company Desh Garments would fully pay for land, build a factory, purchase the needed machines and raw materials, and hire workers. In exchange, 130 Bangladeshi factory managers would travel to Daewoo’s South Korea facilities for an intensive 6-month training, where they would learn everything about garment production. The training would be paid for entirely by Daewoo. After the training, these workers would return to Bangladesh and take on managerial and supervisory roles at the factory. And what would Daewoo get in return? If Desh Garments became a successful exporter of garments, Daewoo would get around 7% of the sales returns. This might not seem like a large number, but garment manufacturing is a very low margin venture, and in that world, 7% is a significant return. Note how the two parties shared the business risk: while Daewoo risked paying for manager training that might not work out, Desh Garments took on the majority of the risk by spending huge amounts on upfront capital costs. However, if Desh succeeded, they could access a huge global market reserved for poor countries, and being the first poor country to do so meant almost no competition.
South Korea expected that after they completed the training, it would take 2 years for the Desh factory to start producing quality garments. It took only 6 months. Desh Garments started growing 100% every year after that. Of the 130 managers and supervisors trained in South Korea, 115 eventually left and established new competitive garment factories or joined newly formed companies. And so in a remarkably short amount of time, Bangladesh’s garment manufacturing capacity increased dramatically, and ready-made garments quickly became the country’s number one export.
According to Prof. Mushtaq Khan, most people (including some Bangladeshi experts) don’t understand what happened here. This wasn’t a case of low wages allowing Bangladesh to become globally competitive. Many poor countries with similarly low wages had tried to do the same and penetrate the US garment markets, but only Bangladesh had succeeded. It also wasn’t a simple case of financial investment into a country’s garment industry — multiple governments at the time were also trying to invest in and grow their local garment industries. According to Prof. Khan, the key ingredient in this Bangladesh story, the x-factor to this successful experiment, was the successful transfer of organizational capabilities from Daewoo to Desh Garments (and by extension other Bangladesh factories), which enabled Bangladesh to become a globally competitive player. In an interview with the 80,000 Hours podcast, Prof. Khan goes on to say that no country inherently knows how to produce anything (not even low-tech goods like simple garments), and it isn’t the case that some countries have inherent advantages over others. Building organizational capability takes a long time if left to occur naturally (observe how long countries take to develop globally competitive industries, despite aggressive policies intended to accelerate the process). In the case of Bangladesh, an accidental series of events conveniently resulted in a great incentive structure for both Daewoo and Desh Garments, and consequently a deliberate and focused transfer of garment-related organizational capabilities, which led to the incredibly rapid boom in the Bangladesh garment industry.
The same argument applies to other low-tech products. Why is it that most countries can’t manufacture even the most basic goods at a globally competitive level? Because the required organizational capability is lacking. Therefore, we should spend most of our time thinking about how to quickly transfer organizational capabilities from global leaders to the companies we care about.
So what does Prof. Khan mean by organizational capabilities? It isn’t merely the availability of cash, land, factories, industrial machines or raw materials that makes an industry thrive. It isn’t even skilled manpower alone. A lot of organizations mistakenly assume that hiring a large number of MBAs solves these sorts of problems, but it doesn’t. As Prof. Khan states, organizational capabilities involve more varied and subtle concerns:
“… how do you organize production in a factory? This includes things like, how do you deal with bottlenecks? How do you make sure that your processes are aligned so that the different inputs and outputs are aligned for the fastest throughput of materials? How do you reduce waste? How do you ensure quality control? How do you manage inventories? … actually this has nothing much to do with what you learn in business school. It is to do with how you organize a whole team of people to operate seamlessly as an organic whole.”
While the Desh Garments’ managers visited Daewoo, they weren’t sitting in lecture halls listening to abstract lectures on inventory management — they were observing Daewoo workers’ coordinated responses to real-time problems, the manufacturing pipeline tweaks implemented to deal with supply chain issues, specific points at which quality control checks were implemented, and other nuanced skills. Note that while responding to such problems, an organization often incorporates small efficiency improvements that aggregate into big competitive advantages over time. These are some of the trickiest but most important processes that distinguish world-class organizations from average ones.
Prof. Khan gives another example of missing organizational capabilities: hospitals in less advanced countries. If you’re from one of these countries, you know many of these hospitals are staffed by highly competent doctors and nurses who could easily function at the top of the curve in world-class hospitals. So the problem isn’t a shortage of skilled workers. Many hospitals (at least in urban centers) also have an adequate supply of the required machines, hospital beds and drugs. However, many are incapable of providing world class healthcare. Why is this? As Prof. Khan notes:
“The reason is not the quality of the people or the quality of the machines. It’s how it’s organized. Are you doing the cleaning properly? Are you managing the flow of tests so that the right tests go at the right time to the right doctor for the right patient? Are you managing your entry so that the beds are kept just about full enough, but not overly full? Are you managing your quality control and your ordering of spare parts. And this is where it fails.”
This “organizational capability” is a compelling framework for thinking about many aspects of development, and provides practical ideas on how to improve our institutions. Think about the highly successful organizations in your society. What organizational capabilities do they have that other organizations struggle to replicate? Can you think of any policies, strategies or accidents of history that led to their current success? For organizations that are lagging behind their counterparts, how can you incentivize transfer of the required organizational capabilities?
Leave a comment to share your thoughts on this idea, and any related examples from your experience. Prof. Khan goes on to relate this notion of organizational capabilities to many other aspects of society, including rule of law, designing effective policies and dealing with corruption. Let us know if you’re interested, and we’ll dive into these topics in future articles.
Thanks for reading!
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PS: If you’d like to learn more about Prof. Mushtaq Khan’s work or if you’re interested in working with them, reach out to mk100@soas.ac.uk or visit their website: https://ace.soas.ac.uk/.
