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Ethiopia: Manufacturing Potential Clouded by Reputational Risks

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East Africa is tipped to become the next textile industry success story, as companies seek to diversify suppliers and reduce reliance on Asian markets. With rapid population growth increasing the availability of cheap labour, and a suite of government-offered financial incentives, Ethiopia in particular is emerging as an ever more attractive option.

However, all is not plain sailing for Western companies seeking to take advantage of the investment opportunity. Ethiopia’s political and economic landscape presents a multitude of risks that require strict management. Large agri-business leases have been granted for plots linked to ‘land grabbing’ accusations, and expanding the amount of land allocated to cotton has ensured that less acreage is available for food production in a notoriously famine-prone country. Allegations of cheap labour and the use of child labourers in the cotton sector are also frequently highlighted by international rights groups.

While Ethiopia can compete on costs, companies require creative solutions if they want garments produced in the country to be seen as part of a sustainable and ethical supply chain.

‘Villagization’ program draws fierce criticism from human rights groups

In 2010, the Ethiopian government launched the ‘villagization’ program, which it claimed would improve the living conditions of rural communities. The policy’s name masks what many prefer to describe as ‘land grabs’ and ‘forced relocation’, and it has been repeatedly criticized by human rights groups and international media. Relocated villagers have reported incidents of brutality against them by security forces, and have alleged failures in the compensation process for lost property and harvests. Resident also claim the new villages suffer from inadequate food, agricultural, health and education facilities.

The government denies that the program is designed to facilitate industrial-scale agri-business land leases for foreign investment. But the reality paints a different picture. A Human Rights Watch report in 2012 found that in Gambella, a region in the west that has been central to the villagization scheme, at least 42 percent of the land has now been leased out to investors.

Within the cotton and textile industries, the problem has been amplified by the location of cotton fields in the Omo Valley, a UNESCO heritage site. Reports have found that the status of some wildlife refuges and protected areas in the region have been changed to make way for cotton farming. A 10,000 hectare cotton farm in the region, owned by a Turkish company, has been singled out by advocacy groups, and a number of Western companies were forced to distance themselves from the firm.

Population increases fuel rising famine risk

The forced removal of families from their farmland also contributes to food insecurity – one of the most pressing and well-publicized issues in Ethiopia. Due to its unpredictable rainfall, traditional farming techniques and complex food market system, the country is highly vulnerable to famine.

Staggering population growth – which will see the working age population grow by 25 million between 2010 and 2025 – is increasing famine vulnerability by reducing food production per person. Combined with the likelihood of more frequent droughts due to climate change, Ethiopia will need a massive overhaul of food production methods in order to prevent a repeat of the famines seen in 1983-85 and 2011-12.

Cotton, which grows at altitudes below 1,400 meters (4,593 feet) in Ethiopia, will be competing for land with millet and sorghum. Ethiopia’s main staple grain, teff, grows above this altitude, but shortages have increased the reliance on other food stuffs. In the event of a future famine, garment companies could see their reputations tarnished. A media narrative accusing the Ethiopian government of favoring international investors and quick economic growth over strengthening the food supply is unlikely to play well for companies seen as complicit in these policies.

Low wages and poor working conditions compound dangers for investors

Concerns over the government’s land policies have been exacerbated by wider criticism of labour conditions in the country. Factory workers are typically paid the minimum wage of about $60 per month, making them cheaper than laborers in Asian textile hubs. Although legal, this pay rate is neither competitive nor sufficient for a living wage. Despite this, the tightly controlled political space does not allow labor unions to operate, so strikes and domestic protests are rare. However, these conditions result in high staff turnover, and poor working conditions expose companies to reputational damage from high-profile NGO campaigns.

Opportunities abound despite high human rights risks

The prize for companies navigating this complex web of risks is access to a low-cost, fully-integrated supply chain – from the domestic cotton market right through to garment exports. The Ethiopian government is trying hard to overcome some of the practical obstacles to investment by allocating space in industrial parks. These developments have their own power grids and superior transport links, as well as ambitious infrastructure development plans for the future. The parks also offer a raft of tax breaks and other financial incentives for companies seeking to invest in the country.

As current experiences highlight, it is possible to find solutions ensuring the Ethiopian supply chain is less controversial. However, the government in Addis Ababa is unlikely to reverse its land policies or move away from the interventionist, state-dominated economic model. The trend for sustainable fashion at both ends of the market, along with heightened levels of scrutiny from the media and NGOs, make the Ethiopian model a challenging environment for apparel companies. They will need to carefully tailor their procurement strategies to meet these complex conditions and balance the expectations of more ethically conscious consumers and investors.

By Emma Gordon, Africa Analyst at risk analysis company Verisk Maplecroft

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