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Could New Economic Policies Make South Africa a World-Class Sourcing Destination?

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South Africa’s Eastern Cape is starkly beautiful. It is a region where aloe vera plants flourish and plump zebra graze on the low grass; it is also where Nelson Mandela was born, in one of the many villages inland from East London.

As well as wildebeest and ostrich, these sun-baked plains are filled with disused cotton mills that were once at the heart of South Africa’s apparel industry. Now President Cyril Ramaphosa–with the help of the Centre for Development and Enterprise–is turning the region into an international sourcing hub that will save jobs and rejuvenate the domestic apparel industry.

The country’s long-established and once powerful garment manufacturers were severely damaged around the millennium, when the free market policies of the World Trade Organization opened South Africa’s economy to an influx of imported goods and competition from Asia. The result was mass factory closures—according to Statistics South Africa, garment industry jobs fell from 220,000 in 2002 to 100,000 in 2011. Today, employment in the Eastern Cape is below 35 percent.

As wages rise in China, there has been a window of opportunity for countries around Africa to recuperate some of the industry they lost. The last government, under Jacob Zuma, failed to capitalize on this, but Ramaphosa won on an anti-corruption, pro-economy ticket last February, promising 3 percent economic growth in 2019 and institutional stability to lure in overseas investors and manufacturers.

These measures will no doubt have an impact on the South African apparel manufacturing industry, which still underperforms in relation to its history, the size of the economy and the current unemployment figures. But South African brands urgently need to create a sustainable local supply chain if they are ever going to grow. Equally, Ramaphosa is under pressure to find jobs for the millions of people who are currently out of work. Reviving apparel manufacturing could solve both.

“Unemployment has been a devastating problem, but it is something fashion can help fix,” said Jackie May, former editor of Marie Claire South Africa. “The growing retail industry has the potential to help right one of world’s most unequal societies.”

The government is hoping that the solution to this lies with the Centre for Development and Enterprise, which is developing an export-only processing zone (EPZ) in the Eastern Cape that is set to launch in the next few years, although the exact date is still unspecified. The proposed zone would focus on low-skill manufacturing, particularly clothing, by establishing employer-friendly market rules. This means workers could be hired on low wages and part-time, bypassing South Africa’s strict labour laws.

Businesses in the zone would have to export everything produced to ensure they weren’t competing with local manufacturers, who would still be obliged to pay the minimum wage—one that is, at 3,500 rand ($252) a month, higher than countries such as Cambodia and Ethiopia. Second, they would have to be new investments. Firms would not be allowed to relocate factories from elsewhere to the EPZ and decimate manufacturing in the rest of the country.

Politicians have suggested that if workers in the EPZ were paid the equivalent of about $130 per month, the zone might be able to attract a large number of firms. The assumption may be a correct one, given that Cambodia, where the monthly minimum wage is $140, has attracted hundreds of apparel manufacturers. Adding to the EPZ’s attractiveness is that nearby Nelson Mandela Bay offers two large ports and a business community sophisticated enough to take advantage of this opportunity.

“I’m still unsure about this plan,” May said. “Since the Rana Plaza disaster in Bangladesh [when a clothing factory collapsed in 2013, killing 1,138 people], the world has woken up to the importance of fair and safe working conditions. And while I understand that a low-paid job is better than no job, we should insist on a livable wage for everyone.”

Now that unemployment is the biggest problem facing South Africa, not everyone agrees with her.

“All we need is a more flexible set of rules governing employment, since it is our labour market regime that helps price South African firms out of these markets,” said Ann Bernstein from the Centre for Development and Enterprise.

“[Once the EPZ is up and running] we would ensure there were national minimum standards governing health and safety, working conditions and plant safety, but firms locating in the EPZ need to be free to negotiate employment conditions and wages with workers,” she said. “This would make it possible for them to engage in activities that absorb many unskilled workers by ensuring that the costs of employment were appropriate for the markets in which these firms competed.”

The natural resources add to South Africa’s attractiveness as a sourcing destination. It is already the world’s second-biggest producer of the wool variety used for clothes, and its exports look set to surge by 50 percent to 75 million kilograms in the next three years as demand for the material increases.

“We have been waiting for someone like Cyril [Ramaphosa] for a long time,” Louis de Beer, the director of the South African Wool Association, said. “We have gone through tremendous upheavals, but there is now Cyril-wide support across the country. However, to impact an industry like ours, you need deep pockets. Belarus, Turkey and China—all these countries had government initiatives that have helped them get to the place they are now.”

As well as the EPZ, South Africa could look to implement similar policies to Turkey, a country that also has a relatively high cost of labour and a textile industry that was damaged by the rise of Asian manufacturing.

“What Turkey did was establish government-funded universities of technology, specializing in the design and manufacture of clothing,” Paul Hillard, CEO of the TCI Apparel Group, said. “Its clothing industry attracted talented individuals by creating income tax exemption for them. Turkey also offers free rental and large incentives for foreign retailers looking to setup sourcing offices in their country.”

Today, the Turkish clothing industry is the seventh largest supplier in the world and the third largest to the EU, so if South Africa plays its policies right, it could be counted a similar success story.

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