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