Lesotho’s apparel value chains
Opportunity for sustainable development?
GLOBAL production lines have multiplied tremendously in the last three decades. At the same time, the production of apparel and textiles has contributed to the economic development of a handful of African countries, including Lesotho. This sector is a major contributor to Lesotho’s economy, and accounted for around one-third of the country’s GDP and 60 percent of its total exports at its peak in 2007. It is also the largest formal employer, employing nearly half of the formally employed workforce and 80 percent of Lesotho’s manufacturing workforce.
The Lesotho textile and apparel industry is well established and mainly driven by global exports, primarily to the US under the Africa Growth and Opportunities Act (AGOA). While the sector has faced a number of challenges, including the end of Multi-fibre Arrangement (MFA) in 2004 and the fallout from the financial crisis in 2008–9, new opportunities have arisen in the last five years. Developments such as the entry of South African clothing manufacturers exporting primarily to the regional market have created a regional value chain that takes advantage of the Southern African Customs Union (SACU).
Figure 1 illustrates the percentage of exports of apparel products to the US market, driven by AGOA, compared with exports to South Africa — which reflect regional trade, as the items are not only exported to South Africa but to the Southern African region through retail value chains. From 2007 to 2010, exports to the US market declined from 95 percent to 74 percent, while exports of textiles to the South African market increased from 3 percent to 17 percent. In 2014, exports to the US through AGOA accounted for 78 percent, while exports to the regional market were at 17 percent.
Participation in the textile and apparel value chains has had a positive impact on Lesotho’s socio-economic development, shown in the positive correlation between increased exports and economic growth and improvements in the well-being of workers. This article addresses three crucial aspects of Lesotho’s participation in the textile and apparel value chains, looking first at the economic impact, then at the social impact, and finally at the sustainability of the industry and the potential for upgrading. It concludes by offering policy recommendations.
Economic impact At the national level, global value chains enable countries to specialise in areas of comparative advantage, thus enhancing productivity growth and supporting wages and incomes, as well as increasing the interdependency and interconnectedness of economies. In 1995, the US was the predominant market for Lesotho, accounting for 76 percent of total exports to the world, while Africa accounted for only 17 percent.
As a result of AGOA in 2000 and ensuing investment by Taiwanese apparel companies, Lesotho’s apparel industry grew substantially and exports to the US jumped threefold, from US$140 million in 2000 to US$456 million in 2004.
The number of apparel firms increased dramatically in the same period, from 21 firms employing 9,847 workers in 1999 to 49 firms employing 53,087 workers. However, as a result of the expiration of the MFA in 2004 the economic crisis of 2008, and the slow economic recovery that followed, the number of employees and firms had dropped to fewer than 39,000 workers and 39 firms by 2015.(2) The uncertainty surrounding the future of AGOA after 2025 could also pose new challenges for Lesotho’s apparel industry.
To grow and sustain Lesotho’s apparel industry, the country has sought to diversify its export markets in the past 20 years. Lesotho’s economic diversification strategy is also intended to buffer against any losses arising from the apparel industry. It includes greater participation in South African value chains that are labour intensive in the sectors of agro-processing, light assembly, manufacturing, and business process outsourcing.
This has resulted, for example, in the automobile sector investing in Lesotho, fostering the participation of local companies in the value chain of brands like BMW, Nissan, and Ford to produce car seats, as well as in diversification into consumer electrical and electronic appliances produced by companies like Philips. The mining sector has also contributed significantly to the decline of apparel exports’ share in total exports.
This has translated into a massive erosion of the US market, from 76 percent in 1995 to Figure 1 38 percent in 2015, largely due to Lesotho’s increased focus on regional trade integration. The US is no longer Lesotho’s only major exporting market, with Africa now accounting for 36 percent of total goods exports (Figure 3). Figure 2 illustrates the evolution of Lesotho’s total exports as compared to apparel exports over the past 20 years.
Investment Productive activities in the apparel and textile sectors can be both labour and capital intensive, with apparel generally being very labour intensive, and textiles usually requiring important physical capital.
In 2015, new factory shells were opened, with construction financed by government and development partners to the value of US$28.4 million. The shells are to be occupied by 10 new companies, eight of which are managed by local Lesotho nationals (Basotho), and they are expected to create more than 5,000 direct jobs.
In addition to the construction of factory shells, the government, through its investment promotion agency, is using incentives to attract investors. An example is the local denim mill, which has invested over US$100 million, signalling long-term commitment to the industry.
South African manufacturers have also shown increased interest in investment in Lesotho through the addition of higher value activities in the country. For example, the largest South African owned firm has undertaken skills development, not only for its low-skilled workers but also for its local managers through leadership training.
The proximity of Lesotho to the head offices of many of the South African manufacturers is also apt for transferring higher value services to Lesotho. One South African manufacturer intends to invest in integrated manufacturing shells that enable both backward and forward linkages, with research, design and marketing functions relocating to Lesotho.
Services The major service components within the Lesotho textile and apparel value chains are transport and logistics, from the sourcing of raw materials to the shipping of products to the market. High-value service components such as product development, research and design, or branding and marketing, are primarily performed at factory head offices in Taiwan or South Africa. Conducting these higher value services remotely is detrimental to the transfer of skills to the Basotho workers, including management and leadership skills.
The government and the World Bank have established two skills development centres in the two economic zones in Maseru and Maputsoe that provide basic skills for the textile sector. However, the South African manufacturers require advanced skills for their complicated products and they are currently supporting the local skills centre to enhance their training to contribute to the transfer of these skills.
Social impact The formal employment of women in the textile sector can contribute significantly to their economic empowerment, the reduction of poverty, and national economic growth. Young women with low levels of education and skills comprise the majority (80 percent) of employees in the textile sector and also head more than half of all households in Lesotho. South Africa oriented manufacturers, through social development projects, are starting to train and empower women to rise to senior management positions.
Basotho women employed in the textile sector have been economically empowered. The wages earned by textile workers have given them increased options and choices in their lives and also increased their role in decision-making both within and outside the household.
However, these wages do not fully cover their basic needs and are not high enough for savings, limiting the possibility of financial assistance from financial institutions. To circumvent this, workers have created their own workbased social investment groups that allow them to have a certain amount of financial assistance and a certain amount of savings.
Through employment in the industry, the workers have access to workplace health programmes that provide them with health education and free health services. Lesotho does not provide social security but health services are highly subsidised, with HIV and tuberculosis treatment provided free at health facilities.
The HIV prevalence rate for Lesotho is 23 percent nationally and 45 percent in the industry. In addition, almost 60 percent (23 out of 39) of Lesotho’s textile factories participate in the Better Work Programme of the International Labour Organization.
This programme has contributed to improvements in occupational safety and health conditions within the participating factories and has also supported worker empowerment through the promotion of factory compliance with national labour laws and regulations. These and other programmes have increased awareness of workers’ rights, especially for women. A recent example was the introduction of paid maternity leave for female workers in the labour code.
Starting in February 2016, a mobile reproductive health clinic — operated by the Seventh Day Adventist health facility, with support from United Nations Population Fund — has been providing important health services in the industrial area, five days a week, free of charge. The mobile clinic provides family planning counselling and supplies, offers antenatal check-ups for pregnant women, and provides HIV counselling, testing, and treatment.
Sustainability The main driver for Lesotho’s textile and ap- parel exports has been the duty-free market access offered by AGOA and SACU. Predictable, stable, and sustainable preferential market schemes play a critical role in the economy of Lesotho. According to Joshua Setipa, Lesotho’s Minister of Trade and Industry, any loss of AGOA privileges would directly impact upon South Africa and other southern African countries.
Lesotho’s only textile mill buys cotton lint from a number of southern African countries, including Malawi, Mozambique, South Africa, Zambia, and Zimbabwe. In 2015, it bought 105,393 cotton bales. However, it is highly likely that should AGOA cease to exist, the mostly Asian-owned firms would not relocate to other parts of Africa, which would thus have a significant negative impact both for Lesotho and other southern African countries.
To improve the sustainability of the sector, the government of Lesotho has embarked on a public-private partnership approach using a strategic set of industrial policy interventions aimed at upgrading the institutional fabric of training and infrastructure. It is also campaigning to increase national ownership by providing Basotho-owned companies that want to participate in the textile and apparel value chain with subsidised factory shells.
There are significant differences between the regional value chain mainly driven by South African producers and the Us/asian value chain in respect of opportunities to upgrade.
The regional market orientation offers added opportunities for social and economic upgrading through empowerment, skills development, and local embedding through regional sourcing, including investing in the development of firms directly in Lesotho — where the relative stability of both labour relations and electricity and water suppliers have helped attract South African investors.
However, the number of workers in firms oriented to the South African market are not in a position to replace Us-oriented firms, as each South African firm employs less than half of the workers employed in the firms targeting the US market.
Moreover, the firms exporting to the South African market could not replace the revenue generated from US exports, as the volumes of goods produced for the regional market represent only a small percentage of those produced for the US market. The South African firms produce small but complicated products with higher margins, while the Us-targeted firms focus on mass production of simple products with low margins requiring low skills.
Conclusion The two apparel product value chains in Lesotho have positively contributed to addressing some of the economic and social challenges faced by the country, including alleviating poverty, by generating employment as well as promoting gender equality, as 80 percent of employees in the sector are women.
Preferential market access, especially to the US, has been the main driver and incentive for foreign direct investment from Asia. However, the transfer of skills or technology has remained limited over the last two decades, as most of the high-value and management functions are based abroad. In addition, local linkages to the industry are limited to the transport, logistics, and banking sectors. The regional value chain, on the other hand, has demonstrated a greater potential for upgrading, especially through workers’ skills development, and sustaining the industry on a long-term basis.
The Lesotho experience has demonstrated elements that are required for successfully engaging in both global and regional value chains. For policymakers, a responsive trade and industrial policy that promotes diversification and reduces dependence on preferential market access is key to benefiting from participating in value chains since it promotes opportunities for backward and forward integration.
Diverse trade and trade-related policy interventions give an opportunity to expand into new markets, integrate the private sector, and upgrade along the value chain. The transfer of skills and technology plays a critical role in enhancing competitiveness within the industry and increasing the diversity of workers’ skills.
Moshe Kao is an independent trade and development consultant and former minister counsellor at the permanent mission of the Kingdom of Lesotho in Geneva.
THE lesotho textile and apparel industry is mainly driven by global exports, primarily to the us under AGOA.
LESOTHO’S exports of apparel products and total exports to the world (in million us$).