This article first appeared in my weekly column with the Business Daily on August 5, 2018
Last week, the Trump administration announced the withdrawal of benefits for Rwanda to export apparel duty-free to the US under the African Growth and Opportunity Act (AGOA). This is largely seen as a response to Rwanda’s decision to ban second-hand clothes into its market. However, there is a larger trend at play here. We are in an era of trade wars, and serious global disagreements as to what is deemed fair, or not, in trade practice and agreements.
Economic nationalism has found a new lifeline. Economic nationalism here refers to a situation in which a country tries to protect its own economy by reducing, for example, the number of imports from other countries. The largest proponent is of course the USA, where Trump has made clear that his ‘America First’ policy means the introduction of targeted protective trade measures against countries seen to be taking advantage of the USA’s ‘generosity’ in trade.
However the USA is not alone, there is upsurge in nationalistic pride in the Global North aimed at safeguarding national economic sovereignty. The Harvard Gazette makes the point that Trump’s election and Britain’s exit from the EU are very encouraging to nationalist groups across Europe, because for the first time, there’s a shift away from international cooperation, sharing sovereignty, to addressing the sovereign rights of specific countries. This is exemplified in the rise of Marine Le Pen and other European nationalist party figures in the Netherlands, Hungary, and Greece who touted Trump’s win as a positive sign of things to come. Intermingled with nationalism is anti-globalization and anti-immigration policies, and economic nationalism which places the economic welfare of the country above all; especially above African nations. The USA and Europe seem tired of ‘babying’ Africa and being ‘soft’ on sovereign African states. They are acutely aware of the problems and suffering in their own countries and communities, and wonder why these issues remain unaddressed while their governments give Africa generous aid and trade packages.
Africa needs to read the signs and prepare for the future. In an era of growing economic nationalism, Africa can expect fewer trade deals that are non-reciprocal where Africa gets access to massive external markets while the other party does not benefit from penetration into African markets. This is not to say there is no concern with the economic nationalist movements. A KMPG survey revealed that two-thirds of UK CEOs are most worried about the growing use of protectionism, which includes measures such as tariffs and quotas on imports, and view populist politics as the greatest threat to their growth.
That aside, Africa must read the signs and note that the era of non-reciprocity is ending. Sadly, and frankly, this trend is emerging during a time when Africa is not prepared either in terms robust trade negotiation teams nor industrialised economic structures that can compete with foreign nations demanding access to African markets. This movement risks relegating Africa to the eternal provider of raw materials as foreign nations push manufactured goods into African markets. It is important that both African governments and private sector begin to address the imminent era of non-reciprocity.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in my weekly column with the Business Daily on April 15, 2018
Ripples of concern spread over Africa when Rwanda was punished by the USA for their ban on the import of used clothing from the USA. In response, the USA announced a 60-day suspension of Rwanda’s AGOA duty free privileges on clothing and footwear.
The Rwandan government is of the view that a prohibition of second hand clothes band is crucial for the Rwandan economy. The argument is simple and argues that a ban all imports of second-hand clothing is necessary to strengthen their textile industry. With textile and apparel a key component of their industrialisation strategy, the ban on used clothes seeks to tap into domestic demand for clothing to strengthen the domestic textile industry.
The view here is that beyond the loss of livelihood issue, the ban on used clothing is a bad idea, not so much because of the ire it will draw from the USA, but because it’s bad economics. Firstly, used clothing allows Africans to buy a wide range of clothes and shoes affordably. At the moment, the price point at which local manufacturers sell their clothes and shoes are too high, particularly for low income Africans who have very limited funds. With a poverty rate of 35.6 percent, the reality is that many Kenyans have to pinch their pockets to clothe themselves. The used clothing market allows millions of Kenyans to buy clothes for as little as KES 30; these price points do not exist in the clothing produced by the domestic textile industry. Thus, in banning used clothing, government would essentially be imposing a fine on the poor, forcing them to put even more of their limited income to basic items such as clothing.
Secondly, local clothes and shoes manufacturers do not have the capacity to meet the demand for clothing and shoes in the domestic market. Thus, a ban on used clothes presents the very real risk of excess demand pushing the price of new clothing even higher.
Thirdly, a ban on used clothing in a context where used clothes are the most cost effective and preferred channel for clothing will create a black market. This shadow market will operate outside legal parameters and will penalise consumers in terms of price point because the risk of peddling contraband will have to be priced into the clothing on sale. Thus, there is the risk that a ban on used clothing will create a shadow market from which many will be forced to buy their clothing, because it will likely still be the cheaper option, but a price point higher than that which existed when the sale of used clothing was legal. Thus again, the poor will be unnecessarily fined due to government policy.
What would make sense is to start a gradual ban on new clothing imports and encourage local manufacturers to make clothes for that domestic new clothing market segment first. This should be coupled with government support to local manufacturers so that local companies can make a wide variety of clothing and shoes available at reasonable prices. A ban on used clothing would only make sense when local manufactures are able to produce clothing and shoes at a price point similar to that in the used clothing market.
Anzetse Were is a development economist; email@example.com
This article first appeared in my weekly column with the Business Daily on September 4, 2016
Last week I attended and presented at a roundtable on Manufacturing in Kenya hosted by the Overseas Development Institute (ODI). The roundtable was under ODI’s Supporting Economic Transformation Programme (SET) which is supported by DFID. As part of the roundtable I developed a paper on manufacturing in Kenya and thought it would be useful to share some insights I unearthed during my research on manufacturing in the East Africa region.
At the moment, the manufacturing sector in Kenya is the largest in the East Africa region. However in terms of growth, other countries in East Africa are growing at a faster rate. Data from ODI indicate that the growth of the manufacturing sector in Kenya is growing far slower than Ethiopia, Rwanda, Tanzania and Uganda. If this trend continues, other East African countries will begin to dominate manufacturing in the region. Further, governments in East Africa seem to be putting in more pronounced effort to build manufacturing through the creation of industrial parks in countries such as Ethiopia and making land available for manufacturing particularly for labour intensive manufacturing. Uganda and Tanzania are also determinedly positioning themselves as investment destinations for manufacturing in Africa. This impetus needs to be more strongly echoed in Kenya from the highest levels of county and national government. Further, while Kenya remains an attractive investment destination for manufacturing, other countries in the region are aggressively courting such investment. And frankly there is a growing sense that the bureaucracy and corruption in Kenya as well as difficulty in getting the right information on requirements linked to building manufacturing plants in the country are hampering investment into the sector.
That said, the good news from a regional perspective is that the East African Community (EAC) is seeking to position itself as the next global manufacturing destination. This is positive and long overdue because clearly there is room for growth in the sector in the region. According to the African Development Bank the combined manufacturing sector of seven countries in Eastern Africa as a whole is only about one-third the size of the manufacturing sector in Vietnam, which has a population one-third the size of the seven countries. If the East Africa region is to become the ‘go-to’ location for investment in manufacturing in Africa, more coordination of manufacturing policy and activity across the EAC as well as with Eastern African countries outside the EAC is needed.
However, from a Kenyan perspective there are issues within the East Africa region that negatively inform the growth of manufacturing in the country. An on-going issue that adversely affects the uptake of manufactured products from Kenya in the region is pricing. Cost of production in Kenya remains high which makes the end price point of Kenyan manufactured goods high. This cost of production issue essentially promotes the purchase of cheap manufactured imports from India and China that have aggressively entered the regional market and routinely undercut Kenyan manufactured equivalents on price point.
Another dynamic affecting the growth of Kenyan manufacturing in the region is related to the competition emerging between manufacturing sectors in East Africa. Due to development of manufacturing in neighbouring countries a scenario is emerging where neighbouring countries seem to want to reserve domestic markets for domestically manufactured products. Thus there is a sense that neighbouring countries in the EAC seek to prevent Kenyan manufactured goods from entering their countries because they want to keep domestic markets to themselves. Thus, perhaps EAC markets are not as open as one would hope.
What is clear is that it that challenges exist for the Kenyan manufacturing sector from a regional perspective. At the same time, there is ample opportunity for the region to sell itself as the manufacturing hub of Africa. The question is how to balance national ambitions with regional development goals; perhaps it is time for a candid conversation on this issue.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in my weekly column with the Business Daily on May 1, 2016
Last week the Overseas Development Institute (ODI) published an interesting paper on export-based manufacturing potential in Sub-Saharan Africa (SSA). The report states that contrary to the common view, production, employment, trade and foreign direct investment in the manufacturing sectors has actually increased over the past decade in SSA. Between 2005 and 2014, manufacturing production more than doubled from $73 billion to $157 billion, growing 3.5% annually in real terms; some are higher with Uganda’s manufacturing growing by 5% over 2010-2014, Zambia’s by 6% over 2008-2012; and Tanzania’s by more than 7% in the last decade. Further, SSA countries are increasingly exporting manufactures to each other (20% of total trade in 2005, 34% in 2014), and a great deal of FDI into manufacturing is among and between African countries.
The report states that there are exceptional manufacturing opportunities in garments and textiles, agro-processing and horticulture, automobiles and consumer goods. However, the share of manufacturing in total employment fell from 10% in 1991 to 8.5% in 2013. This is important to note because although manufacturing is growing, the employment creation ability of the sector seems more muted than it used to be. Perhaps factors such as the growing role of technology in manufacturing is important and may reflect the gradual technological deepening in African manufacturing exports over the past decade.
The report is very sober in noting the reality that Africa’s (all Africa, not just SSA) share in total world manufacturing exports remains less than 1%, and this has fallen marginally since 2010. Yet the good news is that between 2005 and 2014 exports from Africa as a whole (not just SSA) grew at an average annual rate of 10% or higher in the product groups analysed.
In terms of insights on Kenya, Kenya’s share of manufacturing exports is higher than that of Ethiopia and Rwanda. Further, the intra-African trade share in Kenya was high at 67.5 percent in 2013. But, as the report notes, this figure ought to be considered in the reality that the coastal countries with large ports, such as Kenya, facilitate import and export trade in the region pushing trade numbers up. Top manufacture products from Kenya include apparel, clothing and accessories; perfume, cosmetics and cleansers; iron and steel, and inorganic chemicals. However, compared to the peers in the report, Kenya has a lower share of domestic value-added (DVA) content of gross exports as a share of total exported value added with DVA standing at a lower than average 62 percent. The most promising sectors in manufacturing in Kenya detailed in the report, in terms of revealed comparative advantage, include automatic typewriters and word-processing machines, self-adhesive paper and paperboard, hair-nets, safety pins of iron or steel, carbonates, flat-rolled products of iron or non-alloy steel, and leather.
As ODI’s Dirk Willem te Velde states, industrial development is crucial for human development and leads to wealth creation, economy-wide productivity change, greater incomes, significant job creation and resilience throughout the economy. As a development economist, there are two keen points of interest for me in terms of informally assessing the development potential of manufacturing. First, is the extent to which manufacturing can absorb low skilled labour given that Kenya’s population’s average years of schooling is 6.5 years. The second issue is the employment creation potential of manufacturing. For too long Africa has been seen to support the jobless growth phenomena where the economy is growing but formal job creation is lacklustre.
The report provides some insight on these issues by looking at Tanzania. The highest low-skilled employment potential in Tanzania is in agricultural products; this good news given the importance of agriculture to countries such as Kenya and Tanzania. In terms of employment potential, for Tanzania, agriculture comes out on top again. Agricultural products such as high-value vegetables and fruits, processed grains, processed meat, wood products and leather have high employment potential. Thus, the good news is that it is possible for agriculture, a dominant player in African economies, to be best placed to absorb low skilled labour and have high employment potential. This should provide impetus for Kenya to do a similar type of analysis and closely examine the important role agro-processing can have in reaping development dividends for the country. But bear in mind that the issues of high wages is an overall constraint for the sector. Labour costs in SSA are generally higher (when measured relative to GDP per capita) than in low-and middle-income comparator countries in Asia and Latin America.
Anzetse Were is a development economist; email: email@example.com