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Fashionomics: Can the African Development Bank Revive Africa’s Doomed Industries?

With the rapid rise of garment and textile manufacturing in many Asian countries, namely China and India, Africa has found itself losing the battle for Western markets. Textiles and garment industries in most African countries have been dwindling drastically since the early 2000s. In response, the African Development Bank (AFDB) plans to revitalize these industries with Fashionomics, a new initiative which aims to help members grow their businesses by strengthening the value chain, primarily through capital investments.

However, despite its surface-level appeal, Fashionomics’ investment in small and growing African textile and apparel businesses is misguided. The apparel and textiles industries are labor intensive, and thus capital investment in these industries will not make them competitive in global markets. Thus, Fashionomics’ investment in inherently uncompetitive industries continent-wide will be futile against the force of a liberalizing global economy, in which uncompetitive industries die to make way for cheaper exports. Fashionomics should therefore be downscaled to target a few countries with potential for success, rather than try to revive African textiles continent-wide.

What allows countries like China and India to outcompete African countries in textiles and garment trade? In China and India, labor is relatively more abundant and cheaper than it is in most African countries. The low price of labor in China and India directly lowers the price of goods produced in industries that require labor as a large input into production, and therefore increases the demand for these goods on global markets. In order to maximize efficiency, countries which can produce goods at relatively lower cost should specialize in the production of those goods and trade them for goods which they produce for relatively higher costs. This is what is known as “comparative advantage,” an economic paradigm that shapes global trade.

India and China are the two most populous countries in the world, giving them large pools of trainable workers, many of whom are employed relatively cheaply in textiles. This is a big factor in why these countries are the two largest textile exporters in the world. African countries, on the other hand, have much smaller populations than these giants, which makes labor a relatively more expensive input into production. This explains why textiles and garments made in African countries are generally more expensive than those made in China and India, and therefore don’t fare as well on markets; in fact, the top 10 apparel-exporting countries in Sub-Saharan Africa only make up a half percent of world apparel exports.

However, there was a time when African industries thrived on export markets, in spite of the fact that they were less competitive. This was due to the Multi-Fiber Agreement (MFA), which laid out rules for world trade in garments and textiles before they came under the principles of the World Trade Organization (WTO). Created in 1974, the MFA set quotas on garment and textile exports from developing countries to developed countries. It was a reaction by Western countries to the rapid growth of these industries in the East, particularly China, and allowed developed countries to protect their industries and adjust to the rise of Eastern manufacturing. However, the MFA had a second effect, which was to allow small industries in developing countries preferential access to developed markets, protected through quotas. By stifling Chinese exports of garments and textiles, the MFA allowed African producers to sustain their relatively more expensive exports.

African textile industries relied on these barriers to trade in order to maintain exports. However, the protectionist restrictions of the MFA could not hold out against the liberalizing regime of the WTO. The transition towards liberalized world trade in textiles and garments began with the Uruguay Round, and accelerated when China joined the WTO in 2001. In 2005, the MFA’s restrictions fell away, and trade in textiles and garments came under the rules of the multilateral trading system, which prohibits governments from using trade policy to give advantage to some countries. The results were disastrous for Africa, but a huge boon for China and India. Without trade barriers, eastern garment and textile exports far exceeded African exports. Chinese textile exports quadrupled, from $64 billion in 2000 to $256 billion in 2014, while industries in many African countries were devastated.

When barriers to trade are eliminated, countries are forced to specialize in the production of goods that they produce relatively cheaply and abandon or downsize the production of goods that they produce at a relatively higher cost. Thus liberalization of global trade in textiles has forced many African manufacturers out of business. Many African countries had large textile industries in the age of the MFA, but with increasing liberalization in trade in textiles, these industries have shrunk because demand for their relatively more expensive goods is low.

One such country is Kenya – the largest textile exporter in East Africa until trade liberalization. In 2000, the US enacted the African Growth and Opportunities Act (AGOA), a trade deal that gave tariff-free access to the US market to certain goods from Sub-Saharan African countries, provided that they fulfill certain political conditions. Together, AGOA and the MFA gave Kenyan textile and garment exports the edge they needed over relatively cheaper products from the East. Kenya’s industries thrived, with garment exports increasing 6.3 times between 1999 and 2004.

However, when the MFA restrictions were voided in 2005, these industries abruptly stopped growing, stagnated until 2008, and then fell into decline. Kenyan textile and garment firms have lost foreign customers to Asian suppliers, and domestic customers to cheap imports from the same countries, as well as second-hand products from developed countries. However, while Kenyan producers have suffered, poor consumers have gained considerably from imports of cheaper clothing that cannot be produced so inexpensively by local firms.

Kenya is not the only country whose textiles and garment industries have been hurt by trade liberalization. A host of industries in African countries have suffered the same fate, including South Africa, Lesotho, Tanzania, Swaziland, and Ghana, to name a few. In response to this, the AFDB’s Special Envoy on Gender (SEOG), Geraldine Fraser-Moleketi, launched an initiative to support micro-, small-, and medium-sized African garment and textile businesses in 2015. The goal of the initiative is to strengthen the sector’s value chain in order to grow apparel and textile businesses in Africa. Fashionomics aims to do this primarily by investing in the creation of textiles manufacturing factories.

Low levels of industrialization have continuously held Africa back in manufacturing, and investment in industrialization can increase productivity and lower costs by achieving economies of scale. By lowering the cost of African-manufactured textiles, Fashionomics hopes to both generate demand for African textiles, and for African apparel, which could be cheaper if it used cheaper textile inputs bought at home. With an acute youth unemployment problem continent-wide, anticipated to be exacerbated by an imminent demographic boom, the SEOG hopes that the expansion of these labor-intensive industries will generate demand for labor and alleviate unemployment.

However, while the goals of Fashionomics are laudable, it is unrealistic to hope for the large-scale revival of African textiles and apparel. In both textiles and apparel, labor is the largest cost in production, and thus the lowest-wage producers are the most competitive. For example, the prospects for growth in the Kenyan garment industry will remain low until wages in Asian garment industries significantly exceed those in Kenyan garment industries. No amount of capital investment in this industry can overcome this structural barrier to competitiveness, because it lowers the cost of a lesser input into production. Fashionomics is therefore defying conventional economic wisdom, which tells us that slump of industries in countries like Kenya is the market’s check on high prices, and that welfare improves when consumers buy from lowest-cost producers. Fashionomics will only prop up industries destined for failure, so its resources should be spent elsewhere.

While Fashionomics in its current form is unrealistic, the initiative could be scaled down from a continent-wide initiative, to one that targets countries with right structural advantages for success. Ethiopia is home to the fastest-growing textiles exporters in Africa, booming from $24.8 million in 2005 to $169 million in 2015. Many factors have contributed to the success of both textiles and apparels in Ethiopia, including substantial foreign aid packages used in government-led industrialization, tariff-free access to US markets through AGOA, and most importantly, low wages in manufacturing, making Ethiopia the destination of choice for garment and textiles production. In Ethiopia, the average monthly cost of manufacturing is a third of what it is in China, making it a great area for production. Advanced industrialization, preferential access to the US market, and low wages have combined to make Ethiopian textile and apparel exports competitive on global markets, thus growing the industries and generating employment.

If Fashionomics targeted fundamentally well-positioned industries such as those in Ethiopia, every dollar invested would yield greater developmental returns than if spent on industries continent-wide, many of which could do no better than stagnate even with AFDB aid. Investment in African textiles and apparels should thus be redirected to target countries with environments ripe for success: namely, comparative advantage derived from relatively low labor costs. At such a critical stage in Africa’s development, efforts aimed at buttressing industries that do not have the potential to generate growth and employment are irresponsible and a waste of finances that could be more fruitfully spent elsewhere.