This article first appeared in my weekly column in the Business Daily on July 17, 2016
Africa, East Africa in particular, is gearing up for industrialisation and will continue to position itself as the next and last manufacturing frontier in the world. Wages in Asia continue to rise and in China’s coastal factories noteable increases in wages have occurred over the past 10 years making the country a less attractive manufacturing hub. As a result, factories may relocate and although some may move to inland China, Bangladesh or Cambodia, Africa has appeared on the radar as a viable option.
The World Bank reports that Ethiopian factory wages for unskilled labour are a quarter of Chinese wages. Indeed, East Africa in general is increasingly becoming a focus of attention for the development of manufacturing in Africa; interest in textile and apparel is particularly high. A report by McKinsey makes the point that within sub-Saharan Africa, East African countries, especially Ethiopia and Kenya, are of interest to international apparel buyers. Indeed, for the first time an Africa country, Ethiopia, appeared on the list of countries expected to play more important roles in apparel manufacturing. Kenya and Ethiopia were the top two countries in Africa where global apparel buyers expect to start or increase apparel sourcing. The popular view is that Ethiopia is seen as particularly attractive due to lower labour costs but Kenya is considered to have higher labour productivity. These two factors, namely labour cost and labour productivity, will come under increasing scrutiny if Kenya, and the region, is to effectively position itself as a global manufacturing hub.
If one were to look at these two elements in Kenya an interesting picture emerges. According to the Kenya Country Economic Memorandum 2016 by the World Bank, Kenya has a higher minimum wage than other countries assessed including India, Pakistan, Uganda, Vietnam Bangladesh and Cambodia. The McKinsey report makes the point that manufacturers listed wages as a key challenge of doing business in Kenya where monthly wages for garment workers are in the $120 to $150 range. So selling the cheap labour story in Kenya is a tough sell if sustained interest in manufacturing, especially labour intense manufacturing such as textiles, is to be maintained.
The other angle Kenya would have to push to stand out from the East African crowd would have to be productivity. Here the story is mixed; in June this year a World Bank revealed that Kenyan workers are less productive than their counterparts in Uganda and Ethiopia. However, this is informed by the fact that almost 80 percent of Kenyans are employed in the informal sector which suffers from particularly low levels of productivity. Low productivity in the informal sector dragged the productivity average down. Indeed the World Bank reports stated that labour productivity in Kenya is significantly higher in the formal than in the informal sector. In fact a World Bank study released this year found that even when formal micro-enterprises are compared to informal enterprises labour productivity for micro firms is about 8.4 times that of informal firms surveyed Thus Kenya is in a situation where most people in the informal sector have very low levels productivity juxtaposed with pockets of people with formal jobs who have high levels of productivity. So key questions are: If Kenya is position itself as a manufacturing hub, will formal manufacturers be the only attractive option due to high levels of productivity? What does this mean for job creation in a country with high levels of unemployment? Other questions include: What in formal employment makes Kenyans more productive? How can labour in the informal sector (including informal industry) be made more productive? And is formalisation the only answer?
The point remains however that on average, wage and productivity dynamics in Ethiopia and Uganda are better than Kenya’s. Some argue that comparing Kenya with Uganda and Ethiopia is not useful because conditions differ so greatly between the countries. Kenya is a democracy while Ethiopia and Uganda lean more towards autocratic rule. From an investor and business environment perspective each governing model has its pros and cons.
In short, in order to position itself as an attractive manufacturing destination, Kenya will have to address the issues raised by wage and productivity analyses, while continuing to work on structural constraints such as access to finance, electricity, transport infrastructure and ICT networks.
Anzetse Were is a development economist; firstname.lastname@example.org