Le­sotho’s ap­parel value chains

Op­por­tu­nity for sus­tain­able de­vel­op­ment?

Lesotho Times - - Business -

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,[3] 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$).

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