First published: Wednesday, 2 March, 2005

The end of country quotas on textile exports marks one of the most major events of the world economy - one that can cause tectonic shifts in the global business landscape. 

The Multi-Fibre Agreement (MFA), under which these quotas were organised, was put in place in 1974 to protect the textile industries in the US and Europe.

The MFA expired in 1994, but the quotas were continued and managed by the World Trade Organisation with the understanding that they would be terminated at the start of 2005.

That has happened now and the winds of change are palpable.

The US is expected to lose a large number of jobs in this sector, which has anyway dwindled over the past decades. 

In 1974 there were 2.4m workers in the textile sector in the US. By 2000, 40% of these jobs were gone.

What is more worrying is that there are many poor countries that could lose out. 

Anticipating the end of quotas, exports from El Salvador collapsed by 30% last November. It is expected that the apparel sector of the Dominican Republic will lose up to 40% of its jobs.

Big gains for India

Currently, global textile and apparel exports are just short of $500bn a year.

To put this in perspective, India's national income is just over $500bn; Bangladesh's and China's close to $50bn and $1,300bn respectively.

With the quotas gone, total global exports are expected to cross $1,200bn by 2010.

Shifts in shares of this huge industry can lift entire nations out of poverty and, equally, plunge regions into joblessness.

While the gains for China are certain and enormous, India is also expected to reap substantial benefits.

In the first six weeks of the quota-less world, India has made big gains.

Sears and Marks & Spencer are setting up operations in India and Gap Inc is expected to expand its sourcing from India.

It seems likely that in the first quarter of this year garment exports will get a spurt of 50%.

What happens over the next few years will depend critically on government policy.

Currently India exports $14bn worth of textile products. Even without doing much it should reach an export of $40bn by 2010.

But, with a proper blend of policies, it is possible to reach the figure of $80bn. This, apart from the benefit of bringing in foreign exchange and boosting growth, could make a visible dent on unemployment.

For Bangladesh and Pakistan, which rely on textiles for about 70% of their export earnings, it will be harder struggle but they - especially Bangladesh - could also benefit from a quota-less world.

All these countries have cheap labour; the additional advantages that India has are those of size and large foreign-exchange reserves that can (and, I believe, should) be used to boost infrastructure. 

Last month I met Sudhir Dhingra, chairman of Orient Craft, one of the largest Indian exporters, and toured one of his factories in Gurgaon, outside Delhi. 

The unit had 3,800 workers, sitting in modern, assembly-line arrangements in a clean, well-lit factory.

They were producing little dresses and skirts that would be sold by Orient Craft at $4 a piece and would be retailed in the US for $45. 

With margins like this it is not surprising that the global garment manufacture is expected to move entirely to developing countries over the next few years.

Improving infrastructure

Orient Craft had a turnover of $118m last year and this year is expected to cross $160m.

While the Gurgaon factory I visited is one of India's largest, to take full advantage of scale factories need to be several times its size.

To achieve this, government has to play an important coordinating role.

It has to remove its small-scale industry size restrictions, modernise the ports and have more flexible labour markets.

For a product to travel from factory in India to retail outlet in New York takes around 30 days. Most East Asian countries take half that time. 

This is where the ports come in. 

Indian ports are small and riddled with bureaucratic delays. Large liners do not come here.

Most exports have to go out on "feeder vessels" to be transferred to a "mother vessel" in some other port.

Moreover, goods are required to be delivered at the port seven days prior to shipment. In most East Asian ports the cut-off is one day.

The modernisation of ports and transport infrastructure will need money. 

One possibility is to use a small fraction of India's foreign exchange reserves, say $10bn for this and other infrastructural investment.

This would help not just the textile sector but all traded goods.

The initial investment could be recovered in a few years in terms of not just money but jobs; and it could also help the global trade of other South Asian countries.

 Dr. Kaushik Basu, Professor of Economics and Carl Marks Professor of International Studies at Cornell University

This article first appeared on the BBC News Column published in Wednesday, 2 March, 2005.