Living on borrowed time

Living on borrowed time

MASERU  – IT is lunch-hour in Thetsane Industrial Area and thousands of factory workers have trooped out for a bite and breather.
Here, there is no scrumptious meal but the odd morsels that a meagre minimum wage can buy.

Fat cakes, buns, popcorn and packed lunches are the staple in these streets. For others, it is board games and gossip that keep hunger at bay.
There are nearly 20 000 factory workers in the Thetsane Industrial Area and most of them have the African Growth and Opportunity Act (AGOA), to thank for their jobs. For nearly 20 years AGOA has allowed poor sub-Saharan countries like Lesotho to export apparels to the United States duty-free.

That has given Lesotho a leg up to what is otherwise a dog-eat-dog global textile market dominated by bigger economies like China, Bangladesh, Vietnam and Cambodia. It is that concession that has kept 46 000 Basotho, mostly women, sweating it out on the factory for what looks like miserable wages but is hugely important income to them.

The wages might be below the United Nations’ poverty datum of US$2 a day but they help them keep their heads above water. Without those jobs many will face starvation, as will their dependents. But the trouble is that AGOA was never meant to be a permanent economic arrangement.

Passed in 2000, the Act was originally supposed to last until 2008 but amendments in 2004 extended it to 2015. The extension should have been a boon for Lesotho but it has turned out to be a curse of sorts.
Instead of diversifying its economy Lesotho has become more reliant on the AGOA factories for jobs.

Textiles remain the biggest private sector employer, even as growth in the sector has stalled and factories are shutting down.
The sector has lost nearly 10 000 jobs since 2003 and there are no signs that the trend will change.

Its anything, the uncertainties surrounding AGOA‘s renewal could mean that the sector will continue to shed jobs. There has been no new factory in the sector in the past two years.

Instead, some factories have either shipped out or shutdown altogether.
Yet despite these ominous signs that we are living on borrowed time Lesotho has remained beholden to AGOA. Little wonder there was much squirming and apprehension when AGOA was due for renewal in 2015.
Lesotho and other countries told the US congress that their economies will be doomed without AGOA.

The congress extended it to 2025, giving Lesotho a temporary relief.
But it was clear that AGOA was not going to be there forever.
Even as Lesotho and other countries pleaded for what many industry insiders thought was the last renewal, their textile factories were already squirming.
Orders had dried up as American buyers waited for the renewal. They moved their orders to other countries and some never returned.

That should have served as ample warning to Lesotho that it has to look for new markets outside AGOA or diversify its economy but that doesn’t seem to have happened. Lesotho doesn’t seem to be in a hurry to prepare for the post-AGOA era.

The model of the textile sector has remained largely unchanged for the past three decades. Taiwanese companies have maintained their grip on the sector by hogging access to the AGOA market.

There has been little local participation in the ownership of the textile firms.
The value chain has remained narrow, with companies focusing on basic garments that have low markets and are more susceptible to minor swings in the market. Such garments are the cheapest and easiest to make but also come with the dirtiest jobs.

The average amount a Lesotho factory is paid for a basic garment has remained largely unchanged in the past ten years, even as production costs have continued to gallop.

Inflation has been gobbling their margins. Each year has brought a new round of wage increases that factory owners say they cannot afford.
Trapped in the basic garment market, most factories are unable to graduate into the niche market where the margins are better.
In the meantime the chances of AGOA’s renewal in 2025 are vanishing as the US seeks more “reciprocal” deals with African countries.

Janet Hienzen, a Deputy Assistant of US Trade Representatives, was clear about that policy shift at Cape Town manufacturing conference in June.
“As of now, AGOA is not a permanent answer and it was never meant to be a permanent answer. So what we’re looking for permanent reciprocal trade partnerships,” Hienzen said.
Such words should have shaken the Lesotho government from its slumber but they didn’t.

Instead, it appears to be business as usual. But time is running out for Lesotho to look for other ways to at least conserve those AGOA-based jobs. In five years Lesotho’s textiles should have found new markets or at least found new products to sell to the US. Under AGOA Lesotho can export more than 6000 products to the US but is currently only exporting textiles.

To understand the calamity that will befall Lesotho’s textile industry if AGOA ends you have to look at the numbers. According to 2017 figures there are 65 firms in the textile, clothing and footwear industry.

Of those factories 29 rely on AGOA to sell their products to the United States while 33 have their markets in South Africa. Only three have local customers.
It might look like the sector is gravitating towards the South African market but a deeper look at the numbers reveals a sector that remains dangerously anchored by AGOA. The 29 factories under AGOA have nearly 30 000 jobs compared to the 17 000 in those that sell to South Africa. Those that rely on the local market have a measly 100 jobs.
A look at the main subsectors tells an equally worrying story of a sector that has put its proverbial eggs in one basket.

The denim sector is controlled by three factories owned by Nien Hsing, a Taiwanese owned company, which accounts for nearly 17 million of the 23.3 million of Lesotho’s annual export of jeans to the US.

That means six of the nine factories making denim garments for the South African market have a combined annual production of just over six million pieces.

The story is the same with the employment numbers in the demin factories, with the three AGOA-oriented Nien Hsing firms employing providing 9 500 of the 13 000 jobs. The Nien Hsing factories supply American buyers like Levis Strauss and VF Corporations, which owns the Lee and Wrangler denim brands. Some of their products go to The Children’s Place and Gap Inc, all US retailers.

Factories that rely on AGOA also dominate knit garment manufacturing, with 18600 of 24 500 jobs shared among 21 of the 33 firms in the subsector. That leaves 6200 for the 12 factories that export to South Africa. That bias is also reflected in the annual production figures, with United States importing about 94 million of the 115 million pieces Lesotho produced in 2017. South Africa bought 21 million.

In other words Lesotho has allowed the sector that employs the largest number of people in the private sector to rely heavily on a trade deal that has an expiry date and whose renewal is not guaranteed.
Without AGOA 62 percent of the textile jobs will be history and nearly half of the firms will close.

Maseru alone will lose 25 500 jobs while Maputsoe will shed about 3500, to bring the total carnage to 29 000 jobs. Apart from emptying hundreds of thousands into the streets and shoving them into abject poverty, the demise of the AGOA factories will have ruinous effects on sectors like retail, banking, microfinance and transport.

Nearly every sector will feel the pinch.
Even before the AGOA expires there are signs that Lesotho’s textiles sector is losing its competitive advantage. Asian countries are using their economic muscle to doll out incentives to factory owners. A combination of tax holidays and other sweeteners have made them cheaper destinations for textiles companies.

That they make their own fabric, are closer to ports, have kept the lid on wages and their factories have superior efficiency levels has only strengthened their hand in the battle for investors. The net result is that their textiles are cheaper.

Desperate for better margins in a congested sector, America’s fashion giants and brands are increasingly turning to Asian countries.
Even African countries benefiting from AGOA have upped their game as well. South Africa, Kenya, Mauritius, Kenya and Ethiopia are dangling fat carrots to factory owners and are slowly plucking textile factories from Lesotho.
And it’s not that tough for Lesotho’s factories to move. Since they don’t own the factories they simply pack their sewing machines into containers and hit the road, leaving workers high and dry.

Most of them are controlled from Taiwan and Lesotho is just the ‘factory’.
The finances and orders are controlled from Taiwan where the head offices directly receive the payments for products made in Lesotho. What they have in Lesotho are transactional bank accounts to pay wages and other small running costs.

These arrangements make it easy for factories to move countries without much risk. Some textile companies, like the CGM Group, have long been alive to the dangers of over relying on AGOA.

CGM Group which employs 4000 people at its two factories in Thetsane Industrial area started moving out of the US market in 2012. Today the company doesn’t make a single pair of jeans under AGOA.
Instead, it is focusing on the South African and regional markets.
It customers include the Edcon Group, EXACT, Dona Claire, Milady’s and FIX.

“The answer to AGOA lies in the local and regional markets,” said Madhav Dalvi, the company’s chief executive. It is Dalvi who drove the strategy to wean the company off the AGOA market. Yet he remains worried “about the catastrophe that is likely to happen if AGOA is not renewed”.

Lesotho, Dalvi says, “is sitting on a time bomb”.
He says what has kept AGOA factories in Lesotho is the weak Rand that makes wages cheaper in United States Dollar terms and helps factories make more in Rands.

“If our currency appreciates to around R12 against the US dollar then there will be trouble because our wages will become expensive and AGOA factories will not have reason to remain here,” Dalvi says.
He explains that when the currency appreciates Lesotho’s factories will instantly feel the impact of the 37 percent minimum wage increase that the government pushed through last year. “Our only advantage so far is the wages whose impact is determined by the currency.”

Chaba Mokuku, the project manager of the government’s Economic Diversification Support Project, says Lesotho should be in a rush to reform its business environment to attract new investors and help those already here.
For more than ten years the project has been working on reforms to remove obstacles to business. The main goal is to make it easier to start, operate, sustain and even dissolve a business in Lesotho.

The idea, Mokuku says, is to remove barriers that hinder business.
He calls the reforms “soft interventions that immediately transform the way Lesotho is perceived by both local and foreign investors as an investment destination”.

“It is pointless to go on a drive to attract investors when there are regulations and policies that frustrate the same investors when they come here,” he says.
Mokuku believes that the regulatory reforms are a crucial step towards diversifying its economy.

“We should get rid of the myth that investors need Lesotho. Lesotho should remove obstacles to investment if it wants to grow and diversify its economy,” he says. “The idea is not to diversify way from textiles but open new markets, build business linkages, empower local entrepreneurs and build a strong business ecosystem.”

He however says all these changes will not amount to much unless Lesotho invests in its people by giving them the right skills that prepare them for the coming economic transformation. Lerata Pekane, the principal secretary of the Ministry of Small Business, believes that Lesotho is already steadily diversifying its economy. Although his ministry’s initiatives are not informed by AGOA they might just be what Lesotho urgently needs to prepare for the post-AGOA era.

Pekane says the starting point for Lesotho is to make products for local consumption. “The focus is to grow small and medium companies so that we make things for the local market before they look at the international market. There is a huge market for local products here. We must start by feeding ourselves,” Pekane says.

He is encouraged by the inroads some local companies have made into the South African and regional market.
“We have to strengthen the linkages between small and big companies.”

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