ADDIS ABABA: As basic wages soar in China, low-end manufacturing is starting to shift to cheaper locations around the world, and frontier African nations such as Ethiopia are positioning themselves to reap the benefits.
With rock-bottom wages, cheap and stable electricity and improving transport infrastructure, the continent’s most populous nation after Nigeria is building a reputation for producing clothes, shoes and other basic goods.
The sector is still in its infancy in what was for decades a Communist-run economic backwater. Bureaucracy and poor transport links mean business costs aren’t quite low.
But state investment in factory zones and the arrival of firms from Turkey, India, the Gulf and China suggest industrialisation is finally taking root in the east African giant, where many still rely on subsistence agriculture.
“We have to move because of manufacturing’s development in China, due to the high increase in wages and in raw materials,” said Nara Zhou, spokeswoman for Huajian, a Chinese company that makes over 300,000 pairs of boots and sandals a month for retailers such as Guess from a factory near the capital. “Ethiopia enjoys stability, the government is eager to industrialise and there is also the low labour cost here — a tenth compared to China,” she added.
For years, investors gave Ethiopia a wide berth, wary of the heavy role played in the economy by a government that shuns the liberalisation seen in other African nations and which has retained its monopoly on telecommunications and bar on foreigners in the financial sector.
However, in the last few years the commercial logic of factory production has started to outweigh those concerns, and the wider effects are dramatic.
The government is projecting gross domestic product (GDP) growth at 11 per cent a year, and even though the International Monetary Fund is more sober its 8.5pc forecast for this year indicates Ethiopia is one of Africa’s — and the world’s — fastest-growing economies.
Despite the government’s socialist roots, there is no minimum wage, letting firms such as Huajian pay salaries of $50-$70 a month — still higher than the average per capita income.
With 90 million people already and annual population growth forecast to exceed 2pc until 2030, the government is desperate to attract labour-intensive investment and jobs.
To this end, it says it has introduced incentives such as tax holidays and subsidised loans to investors with interest rates as low as 8pc — below even the 9.75pc benchmark rate in South Africa, the continent’s most developed economy.
Ethiopia is also investing heavily in hydropower to boost the scope of a grid that offers electricity at 5 US cents per kilowatt hour, compared with 24 cents in neighbouring Kenya.
Even so, bureaucracy and transport impose a major cost on companies, leaving Ethiopia languishing at 141 in a World Bank global trade logistics index published last year.
Importing or exporting a container takes on average 44 days, compared to 26 for Rwanda, another landlocked East African nation.
To this end, the government says it is pouring funds equivalent to two thirds of GDP into new infrastructure every year, expanding the road network to 136,000 km by next year, from just 50,000 km in 2010.
It also has grand plans to build 5,000 km of railway lines by 2020 from less than 800 km at the moment.
Published in Dawn, September 6th , 2014