The shredded rag trade has lessons for the revival of SA manufacturing

No sector symbolises the long-term malaise better than the once-flourishing textile and clothing industry

In a country afflicted with a stagnant economy that can hardly keep pace with population growth, SA’s economic situation can only be described as dire. Unemployment is at its highest level since 2008 at 29%, a rate that almost doubles to more than 56% when it comes to jobless youth. This is politically dangerous given the vast inequalities in society, something acknowledged by President Cyril Ramaphosa in his state of the nation address in June.

The speech was high on aspiration and made all the right noises towards business. In addition to promoting the existing Buy Local campaign, Ramaphosa spoke of creating 2-million jobs for the youth, and in consultation with key industries transforming SA from a mainly raw material exporter to a manufacturing hub with a focus on key value-adding industries.

But if SA’s past record is anything to go by, the future does not look that rosy. No other sector symbolises SA manufacturing’s long-term malaise than the once-flourishing textile and clothing industry. “The challenges of the last few years have been enormous,” says Aldo Agnelli, MD of House of Monatic, which Ramaphosa spotlighted in his address by wearing one of its suits. Established in 1907, House of Monatic is a good example of the fate of the industry as a whole. Employing thousands of people in its heyday in the 1970s, it now accounts for a mere 535 employees.

If Ramaphosa is to have any hope of achieving his commendable aim of serious job creation, it is industries such as this that will have to be revived. Textile and clothing manufacture are great sources of relatively low-skilled jobs that can be created quickly and at low cost. Yet the industry’s fall from grace has been spectacular. Since 2002 employment in the sector has plummeted from 200,000 to a paltry 19,000, with a corresponding 40% fall in output. How could an industry that was so vital to SA’s economic health have been allowed to wither so comprehensively?

There are well-trodden explanations. Trade liberalisation after the advent of democracy is often cited. In an industry where margins are low, it is inevitable that jobs will be lost to countries with lower average wages in the absence of trade tariffs. In addition, SA is far from its main markets of Europe and the US and imports almost all of its raw materials for clothing and textile manufacture. This makes it harder to compete, especially with the global demand for fast fashion.

However, on closer examination it emerges that these factors mask a deeper reality, one where the lack of an integrated government approach has at times hindered the sector as well.

Import tariffs are a case in point. Tariffs on imported fabrics meant to protect local textile and fabric manufacturers have dramatically increased costs to the clothing side of the industry. With the closure of the vast majority of textile mills in SA, many clothing manufacturers are forced to import their raw materials. Agnelli complains that since SA’s last worsted wool mill for the fashion industry closed, domestically produced wool has been sent all the way to Egypt to be processed, and when it returns a 23% tariff is imposed.

Even policies already in place, introduced with the Buy Local campaign in mind, illustrate that poor implementation can adversely affect the sector. Many large clothing manufacturers have been unable to take advantage of preferential procurement regulations aimed at encouraging public bodies to source domestically.

“It’s very difficult to get tenders ... it’s a very sore point for us,” Agnelli says. House of Monatic is unable to take advantage because it fails miserably on its BEE rating, even though 99% of the company’s employees are black. It is ineligible because it does not source its fabrics locally, even though it is impossible to do so anymore. The competitive advantage to tender is cancelled out by a different set of regulations that expose a devastating lack of policy co-ordination.

At the other end of Africa sits Ethiopia, where the difference in government approach towards the industry is matched only by the geographic distance. Ethiopia’s recent export-driven economic expansion, especially in textiles and clothing, has led to it being described as the “rising star” of African manufacturing. The facts speak for themselves: foreign direct investment in the textile and clothing industry has soared from $166.5m in 2013 to $36.8bn in 2017, and it now provides employment to almost 100,000 people.

The source of the country’s success has been its massive investment in industrial parks. Ramaphosa made noises in his state of the nation address about encouraging special economic zones and reviving local industrial parks, but if the Ethiopian example is anything to go by SA will have to gamble big, something it is unlikely to do given the ballooning government debt.

The Ethiopian government recognised that industrial parks alone do not encourage investment, so it also implemented a series of business-friendly policies, including tax incentives, waiving duties on all raw materials, capital and construction equipment, implementing flexible labour laws that allow for all-important shift employment, and supplying reliable and cheap electricity that is half the price of SA’s.

Ethiopia has also prioritised duty-free access to the world’s largest markets in China, US and the EU, and implemented a plan to help the textile and clothing sector exploit it.

While SA is included in the duty-free customs agreement with the US under the Africa Growth and Opportunity Act (Agoa), the SA government has made little attempt to push for inclusion in the third-country fabric waiver provision. Under this provision the textile and clothing sector is excluded from duty-free access to the US market if it imports its raw materials. “What annoys me is that when Agoa came into place our ministries decided that Mauritius can qualify, Namibia can qualify, but not us,” says Agnelli.

The main thrust of SA’s export policy has been a focus on the African market, including signing the African continental free trade agreement in July, which commits to scrapping up to 90% of all tariffs on intra-African trade. But with no steady and readily available sources of raw materials on the continent for the textile and clothing sector, it is doubtful whether duty-free raw material imports will help much. And the industry’s final products may not even be included in the list of duty-free goods, which will be finalised in January. The agreement could even backfire spectacularly for the domestic industry, with duty-free clothing imports from low-cost countries such as Ethiopia posing a sizeable threat.

Trade liberalisation is too often blamed for the collapse of the textile and clothing industry without taking into account a far more complex picture, one where serious government efforts could have helped SA avoid the worst consequences. This leads to the soul-destroying conclusion that an industry that could have done so much to reduce the country’s devastating unemployment rate might have been saved.