Garment Quota Expiration No Drastic Impact on Labor

UNCLAS SECTION 01 OF 02 COLOMBO 000537 SIPDIS C O R R E C T E D C O P Y (TRUNCATED LINES CORRECTED) STATE SA/INS, EB/TPP; MCC FOR D NASSIRY AND E BURKE DEPT PASS USTR SENSITIVE, SIPDIS E.O 12958: N/A TAGS: ECON EAID KTEX ETRD CE SUBJECT: Garment Quota Expiration No Drastic Impact on Labor REF: Colombo 533 COLOMBO 00000537 001.2 OF 002 ¶1. (SBU) Summary: While Sri Lankas apparel export growth slowed to 3% from an expected 12% (REFTEL),there has been no drastic impact on labor, as previously expected. Although, there is evidence of about 10,000 job losses, most of the workers have been absorbed back into the industry as larger companies have consolidated and expanded their operations. End Summary. ¶2. (SBU) Sri Lankas garment exports rose 3.1% in 2005 to $2.9 billion. According to Oxfam (Australia) officials, who are preparing a study on the impact of the Multi-Fiber Agreement (MFA) expiration in Sri Lanka, 45 factories closed in 2005 resulting in about 9,500 job losses. The Sri Lankan Labor Department reports a similar number of factory closures and job losses. These data contrast with earlier (pre-MFA phase out) forecasts of up to a 100,000 job losses. ¶3. (SBU) According to Oxfam, International Labor Organization (ILO),and Board of Investment (BOI) sources, the MFA fallout on labor has not been as severe as feared. While there have been closures of small and medium factories, some of which failed to pay mandatory severance and final salaries, there has been no huge unemployment problem. The termination unit of the Labor Ministry, which examines termination disputes, has received applications from only six companies, involving about 350 workers. According to the BOI, the Governments investment promotion agency, and the Labor Department, most workers who lost jobs have been able to find new jobs in the sector as a result of acquisitions or consolidations. For example, at the Katunayake Export Processing Zone (KEPZ),the largest export processing zone in Sri Lanka, several factories that were facing problems have been acquired by larger operators, either directly or through foreclosure. In one case, a large plant with 2,500 employees plans to close its sweater line, due to a lack of orders. Nevertheless, it has decided to absorb all 800 affected workers into an expanded T-shirt line. According to senior managers of the KEPZ, there are around 2,000 vacancies for sewing machine operators in the zone at any given time and most people who lost jobs due to specific factory closures have been able to find other jobs within the zone itself. Some managers have suggested that it is difficult to find work for older operators (over 35) as they are perceived as less productive. ¶4. (SBU) According to a senior manager at one of the largest apparel manufacturing groups, the group has added over 4,000 workers in 2005 to its 30,000 member workforce and has plans to add another 7,000 workers in 2006. Post is aware of several other companies that are expanding operations as well. ¶5. (SBU) Several industry-wide programs are underway to minimize the effect of the MFA fallout. Some of the key initiatives are listed below: -- The industry is redesigning its post-MFA strategy (reftel). -- Sri Lanka is included in the EU GSP-plus program which provides duty free status to products originating from Sri Lanka. Sri Lanka is hoping the EU will relax stringent rules-of-origin criteria to make more garment categories eligible -- Oxfam is working with the Apparel Industry Labor Rights Movement (ALARM),an umbrella organization comprising several trade unions in the garment sector. Oxfam campaigns for increased market access and improvement in labor standards. -- The International Labor Organization (ILO) is hoping to launch its post-MFA program, which was delayed due to the tsunami. ILO has developed a 9-prong strategy to protect SIPDIS workers. ILOs strategy focuses on retrenchment policies, facilitating compensation and retraining. -- The Asia Foundation, with support from USAID, will initiate a program in Sri Lanka to enhance competitiveness through economic reforms. The program is aimed at fostering market conditions that are necessary to support the sustainability and development of the sector. The Asia Foundation will work with local interested parties to produce an agenda for reform in each country and provide technical assistance to streamline procedures and reduce impediments to trade. The program will run simltaneously in two other garment exporting countries, Bangladesh and Cambodia. -- JAAF has partnered with USAID to provide garment-related vocational training at up to four vocational institutes being reconstructed under USAIDs tsunami reconstruction program. JAAF has guaranteed employment with their member companies for graduates. -- JAAF has also sponsored an industry-wide productivity enhancement program that analyzes issues both across the industry and provides analysis and inputs at specific plants. ¶6. (SBU) Comment: There is a lot of hand wringing throughout the garment sector about the post-MFA world. In fact, Sri Lanka continues to do well relative to other countries, and has seen an expansion in those sectors where it has developed expertise and close customer relations. Nonetheless, growth is down because prices have fallen precipitously as increased production in low-cost countries COLOMBO 00000537 002.2 OF 002 (especially China and Bangladesh) challenges Sri Lankas low-cost, but high-standard labor market. While this will remain a key challenge for the garment sector, we suspect that through continued consolidation and industry-led efforts to boost productivity, Sri Lanka will continue to perform well in this sector. End Comment. LUNSTEAD