While Kenya and Tanzania have attempted to join global trade through the production of goods in special economic zones, high labour costs threaten to hamper their effort, says World Bank Group chief economist Pinelopi Koujianou Goldberg.
Now, companies are avoiding the region because of the existing poor infrastructure, restrictive trade and investment policies and low adoption of international qualities and standards have made companies avoid East Africa, and in the process crippling the take-off of the manufacturing sector and killing the dream of industrialisation.
In Kenya and Tanzania, manufacturing labour costs stand at $2,200 and $1,700 annually, respectively, compared with $900 in Ethiopia and $800 in Bangladesh.
“Kenya has underperformed in its participation in global value chains even after transitioning to basic manufacturing,” said Ms Goldberg during a media briefing in Nairobi.
She added that even after transiting from a commodity-based GVC to limited manufacturing of mainly agribusiness and apparel within the Export Processing Zones, Kenya’s participation has only increased by 10 percentage points in a quarter of a century.
While Vietnam and Mexico witnessed a significant 57 per cent growth in per capita, Kenya’s growth was a mere four per cent. “GVCs translate into faster growth in per capita but we have not seen that in Africa,” she noted.
She added that GVCs can continue to boost economic growth, create better jobs and reduce poverty if developing countries undertake deeper reforms and developed nations pursue open and predictable policies.
The World Bank contends, a one per cent increase in GVC participation is estimated to boost per capita income by more than one per cent, which is higher than the 0.2 per cent income gained through standard trade.
The biggest growth spurt typically comes when countries transition out of exporting commodities and into exporting basic manufactured products like garments using imported inputs like textiles, akin to what happened in Bangladesh, Cambodia and Vietnam.
Investments in industrial parks, cheap labour, affordable electricity and other incentives like tax breaks have seen Ethiopia overtake Kenya as the preferred investment destination for textile and apparel.
Workers in Ethiopia’s parks are paid a meagre $26 a month compared with Kenya where workers in apparel parks earn $207 per month owing to the fact that Ethiopia has no official minimum wage for the private sector.
Ethiopia has five huge publicly-owned industrial parks and the government has promised to open a total of 30 by 2025. Hawassa Industrial Park, Ethiopia’s flagship park, is the biggest with a total of 25,000 employees, a number that is supposed to grow to 60,000, working two shifts.