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Why Ethiopia’s Status in Sourcing Is on Very Shaky Ground

More bad news might be coming down the pipeline for Ethiopia’s pandemic-bruised garment industry. Worsening violence and bloodshed in the East African nation’s northern Tigray region, where ethnic tensions have erupted into a humanitarian crisis, could further derail Ethiopia’s ambitions to reinvent itself from a poor, mostly agrarian economy into the next “world’s factory” for apparel and textiles.

Ethiopia has long been considered one of “Africa’s economic wunderkinds,” wrote Dorothee Baumann-Pauly, director of the Geneva Center for Business and Human Rights at the Université de Genève and research director at New York University’s Stern Center for Business and Human Rights, in an op-ed on Wednesday. “Until recently, it had relative political stability in comparison to other countries on the continent.”

With its young, cheap and abundant labor force and generous fiscal incentives for foreign investors, Ethiopia had little trouble attracting a slew of apparel makers from China, Europe, India, South Korea and the United States—including household names such as H&M and PVH Corp.’s Calvin Klein and Tommy Hilfiger—to establish plants in its broadening network of government-built industrial parks.

But there were red flags even before Covid-19 reared its head. In 2019, for instance, the International Monetary Fund (IMF) warned that Ethiopia was at high risk of debt distress. The same year, the Stern Center pilloried its garment sector for paying workers the lowest entry-level wages in the world. Ethiopia doesn’t have a private-sector minimum wage; workers there receive just $26 a month, compared with $207 in Kenya and $244 in South Africa, which “isn’t enough to live on, even in Ethiopia,” Stern Center deputy director Paul Barrett told Sourcing Journal at the time. Meanwhile, manufacturers complained to Baumann-Pauly and her team of the “many challenges of doing business” there, including bureaucratic and logistical roadblocks and an unskilled and inexperienced workforce.

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The coronavirus has further roiled the country. Last May, the IMF noted that Ethiopia is facing a “pronounced economic slowdown and an urgent balance of payment needs owing to the Covid-19 pandemic.” The Jobs Creation Commission estimates that close to 1.4 million jobs across Ethiopia are in jeopardy and approximately 1.9 million people in vulnerable employment could lose their income as a result of the blowback.

The reversal of fortunes has been acute: Although Ethiopia’s textile capacity is dwarfed by its counterparts in Asia—in 2016 it exported just $94 million in garments compared with $29 billion from Vietnam and $253 billion from China, according to World Bank trade data—the industry saw an average growth rate of 51 percent from 2013 to 2018.

Aggravating matters is the escalating scale of conflict in Tigray, which could further spook investors, said Baumann-Pauly. “The new conflict in Ethiopia’s Tigray region could be the tipping point for foreign investors in the garment industry,” she said. “Manufacturers had told us that further political instability in the country could jeopardize all future business.”

There are signs this shift is already happening. Velocity Apparelz Companies, which is based in the Tigray capital of Mekele and makes clothing for H&M and The Children’s Place, has temporarily shuttered, a company representative told Reuters in December. Bangladeshi textile firm DBL, whose facility in Tigray was hit by an explosion in November that knocked out its windows, has evacuated its foreign staff, it told the news agency. H&M has expressed concern about the situation, which it says it is closely monitoring.“We have three suppliers in Tigray, and the production there has come to a halt,” the retailer told Reuters, though it said it would continue to source from its roughly 10 suppliers in Ethiopia.

The collapse of Ethiopia’s garment sector, which employed some 95,000 people at the outset of the pandemic, 70 percent of them women, would be “disastrous,” Baumann-Pauly said. “Tens of thousands of people would lose their jobs and the investments made in this enterprise wasted. In addition, foreign investors and the Ethiopian government need to understand that its collapse could have a symbolic knock-on effect in the region—Ethiopia’s garment sector is often seen as a pioneering experiment proving that structural transformation in Africa is possible.”

That’s not to say garment manufacturing in the country wasn’t already on shaky ground. Baumann-Pauly’s assessments found that workers were dissatisfied with their working conditions and wages and increasingly willing to stop work in protest or quit. “Attrition was high, and production was low,” she said.

The country is further hampered by the fact that most of its textile raw materials must be imported from China or India. While the government advertised the availability of more than 3 million hectares for cash crops such as cotton in 2019, only 60,00 hectares were used to grow the fiber. That figure, too, is “falling as local farmers switch to sugar, sesame, and other more lucrative cash crops,” she said.

A political climate rocked by ethnic tensions beyond Tigray has also translated into further economic uncertainty for investors, Baumann-Pauly added. She described security concerns for local workers and foreign staff at Ethiopia’s flagship Hawassa Industrial Park, where night shifts have been scrapped so workers can get home safely before nightfall. Political demonstrations outside and within the park have also disrupted production. Sidama people, the majority ethnic group in the Hawassa state, have also rallied within factories to demand more jobs for their people, resulting in short-term strikes and park-wide closings. “Such disruptions are a wild card beyond the control of investors, which may set back further investments,” she said.

To mollify and assure investors, buyers and other international stakeholders, Baumann-Pauly says that Prime Minister Abiy Ahmed must stop the blackout in the Tigray region, better protect journalists and civilians and allow independent human-rights groups to assess conditions.

Clothing companies and manufacturers invested in Ethiopia also need to “double down on their commitments to business in Ethiopia” at this critical juncture, meaning they must “stay in the country and speak up to support human rights.”

Even after the dust settles, Baumann-Pauly warned, the road ahead will be long and steep.

“More work will still need to be done by both the government and foreign manufacturers to strengthen the sector. This includes developing a domestic supply chain and establishing a minimum wage that ensures decent living conditions for workers,” she said. “But first, the future of the industry must be secured.”