Minimum Wage SAGA

Minimum Wage SAGA

An Old Challenge Surfaces in the new emerging Industry Zones

Industrial Parks have multifaceted benefits. They attract foreign investors with financial, technological and management capabilities, resources that least developed host countries are usually in short supply. Countries which fast expanded parks, such as Vietnam, achieved tremendous leap in manufacturing, thereby increasing job creation and export revenues.
Ethiopia has long realised these benefits and started building more than a dozen parks. Cheap labour and electricity along with lucrative tax incentives, and quota and tariff free access to the big USA, EU and Chinese markets have attracted investors. The presence of ‘cheap labour’ and highly subsidised electricity has especially contributed to Ethiopia’s leading position in Africa as FDI destination. However, the fact that employees are paid as low as USD35 per month, is hugely contributing to low labour productivity, high staff turnover and poor industrial culture. EBR’s Ashenafi Endale visited the Bole Lemi and Hawasa industrial parks to see the extent of the problem.

Every working day, about 11,000 employees enter and leave the Bole Lemi Industry Park I, Ethiopia’s first industrial park developed by the government. The Park is located in the south eastern outskirt of Addis Ababa on 156 hectares of land. Currently it houses textiles, apparel, and leather companies. .
The first phase of the Park started operation in 2014 with 20 factory sheds. With the financial support from the World Bank, the construction of the second phases of the Park is underway.
Ethiopia started developing industrial parks to attract investment in labour intensive light industries. To achieve this, thirteen industrial parks are currently under construction to house companies engaged in the production of textile and garment, machinery, leather products, pharmaceuticals, and processed agro agricultural products.
Creating job opportunity and earning more hard currency by diversifying export commodities are among the driving forces behind Ethiopia’s industrial policy that has targeted to make the country a hub of light manufacturing in Africa by 2025.
Yet, some gruesome realities in the already operational parks raise questions if indeed Ethiopia can achieve the intended goals. For instance, the export revenue from Bole Lemi currently stands at USD2 million per month, on average. The initial plan was to create employment opportunities for 35,000 youth. On top of these, high employee turnover, absenteeism and low labour productivity, which are key indicators of business inefficiency, particularly for companies that have labour-intensive production process, are becoming prevalent.
“High level of turnover, absenteeism, carelessness, low productivity, late coming and poor work culture are the major challenges hampering the companies in the industrial park from utilizing their full capacity, explains Solomon Asfaw, representative of the Ethiopian Investment Commission (EIC) at the park. “The investors are complaining about the lack of skilled labour and poor work ethics and low productivity.”
In fact, Solomon says the problem is much worse. “If a relative dies, an employee may not come to the work place for as long as a week; what’s worse, the employee may not inform supervisors about it. This highly affects the companies, because replacing an employee incurs costs.” reflects Solomon.
The experience of New Wide Garment Ethiopia Branch, an Indian company operating as one of the 11 foreign companies in Bole Lemi supports Solomon’s observation. Renting 11,000 meter square inside the park, the company produces garment. On May 12, 2017, a list containing names of 24 employees’ was posted on the board of the company. The post notifies that the employees were absent for some time and warns absence for more than five days any more will result in firing.
In fact, Solomon says that due to such challenges, there are companies, particularly Vietnamese, using foreign employees in cutting and sewing lines. “The maximum time foreign companies can use foreigners is three years, after which they should be replaced by locals,” Solomon added.
“The high turnover, absenteeism and low productivity of labour force in Ethiopia is due to the lack of industrial culture and narrow industrial base in the economy,” argues Belachew Mekuria (PhD), deputy commissioner for Industrial Park Division at EIC.
Indeed, with an estimated 80Pct of the population engaged in the sector, agriculture is by far the most important economic activity in Ethiopia. However, due to the high population growth rate and declining farm size in rural areas, the number of youth migrating to the urban areas and looking for jobs has significantly grown in recent years.
In fact, according to Belachew, over a million new job seekers enter the labour market each year. However, these rural youth, whose main stay was agriculture, neither possess the work ethics nor the culture that industries require.
“We are training and incentivizing our employees so that they can become productive and stay at the factory for long,” says Kanan Belarachi, deputy human resource manager at Jay Jay Garment, an Indian company that leased 27,500 square meters of factory shed in the park, which is the second largest area next to South Korean Shints ETP Garment, which leased 38,000 meter square area. The Indian company produces and export toys like teddy bear to USA, UK and other markets.
Belarachi says his company pays ETB850, equivalent with USD36, for entry level employees in sewing and cutting department. “They get full salary if they work the full working hours and days in the month. If they produce more than the required amount, they get bonuses. Including lunch and transport services, the minimum expense at his company sums up to ETB1,000 per employee.”
Salary for employees in cutting and sewing lines at the park ranges from ETB800 to 900. If they work overtime, employees can also get additional income. Yet, employees at the park gravely complain about their wage, and claim that it is the major factor that affects their productivity and pushes them to find another job.
Senait Tenkir, 24, has worked for almost a year at Shints, the biggest textile company operating inside Bole Lemi hiring 4,000 employees in the five factory sheds it leased. Working as quality controller, she currently earns ETB1,300, up from ETB900 when she started working at the company. Before coming to the park, she has worked as housemaid in Saudi Arabia.
“The salary does not cover even my monthly expenses. I am staying here because I wanted to know the skills. I do not know anything when I joined the company first. But I took trainings, learnt how quality garments are produced fast,” Senait told EBR.
She says, wage for employees in the sewing and cutting lines, where the majority workforce is employed, does not increase frequently. “Most workers are unhappy, because they did not get salary increment for longer time. They are highly discouraged to work under such circumstances. I think they can be [motivated] to make more effort, if they are paid better.” She recommends.
Many people working in industrial parks attribute poor labour productivity to low wages. However, there are other issues to explain this. The 5th Ethiopia Economic Update of the World Bank entitled ‘Why so idle? Wages and Employment in a Crowded Labour Market’ identified the trend and constraint of urban labour market in Ethiopia. It explains how a modest shift in labour from agriculture to service and construction contribute up to a quarter of Ethiopia’s per capita growth over the past decade. The document adds that the Ethiopian economy is highly characterised by market inefficiency which affects the labour market. As a result, lower productivity of the private sector in which case employees with less education get lower wage contributes to low labour productivity. The market is also characterised by lower wage jobs taken by skilled labour due to the absence of jobs that fits their qualifications. Highly skilled individuals take such jobs until they get jobs per their qualification.
The report further explains that urbanization is contributing to the structure of work that is changing. Among other contrasts reported are the unemployment rates that have been decreasing but remain high and [increase with a growing] size of a city. Wages increase with education, particularly for those with post-secondary education, but women fetch 28Pct lower wages than men on urban labour markets.
More than half of the employees in the IP are unskilled women with lower education. Hence they get lower wages which they attribute it as a major factor for their low productivity.
Despite these gruesome complaints by their employees, employers in the industrial parks argue that they could not raise employees’ salary anytime soon. “Due to the low productivity and training costs we incurred, we cannot pay more than the current wage. We are already facing high costs while importing raw material due to [high] logistics expenses. These are affecting the profit of our company.” stress Belarachi.
Studies indicate that the flow of foreign investors to developing countries like Ethiopia is mostly perpetuated by the availability of cheap labour, which cuts their operation cost massively. Quite a recent phenomenon indicate that many light manufacturing industries were pushed out of developing countries like China and other countries due to the significant increase in salary and other related cost compared to the time they start.
For instance, in the 1990s most US companies used to outsource and relocate their plants to Mexico. But due to the rise of wage they were forced to look towards China. The “Made in China” stamp, started to appear in every commodity from toys to textiles widely following this trend. But this scenario started to change in recent years because of the rise of wage in Asian countries. This is, forcing companies to look for yet another location where labour is cheap to maximize profit. Nearly two decades after, labour conditions in China is fast changing and becoming more expense. That’s why over 80 million jobs are expected to leave the middle kingdom due to the fast rising labour cost and environmental concerns.
Since profit maximization is the core interest of businesses and cheap labour is abundantly available in the market, investors will be reluctant to raise salary. However, there are evident concerns and bold arguments that the abundant but untrained labour force is costing investors a lot. “We are investing [a lot of resources] in training. Our recommendation for the government is to give attention to the recruitment criteria as well as providing intensive trainings over and again. The [country] must develop the labour force and [equip them with] communication, leadership and technical skills.” said Belarachi.
Education is one of the criteria for recruitment of employees. At Bole Lemi eighth graders are employed, according to Solomon. In the recently opened Hawassa Industry Park (HIP), the requirement is for high school complete.
The HIP is the second park developed by the government. Built with USD250 million on 300 hectares of land in the state of SNNP, 275km south of the capital, it took only nine months to complete the erection of 37 giant factory sheds. Currently, additional 15 sheds are under construction with USD70 million and the construction of the second phase of HIP kicked off last month. Just in the last four months, ten companies have started production. The government hopes HIP will be the game changer, by generating USD1 billion annually and hiring 60,000 workforce, upon full operation in 24 months.
To realize these goals, officials say the lessons from Bole Lemi are taken into considerations while recruiting of employees at HIP. The government has devised Skill Grading and Screening Centre at HIP in order to curve the staff turnover and low productivity. Quota is given for zones in the state HIP is located, to screen, register and grade job seekers and report to the centre. If a given company in the park needs employees to replace or hire new ones, the centre picks from the waiting lists and fills the company’s demand.
Preparing the labour force at Skill Grading and Screening Centre follows some important steps. After recruitment mentioned above, experts from the EIC train the recruited employees about safety, hygiene and work discipline for one week. Additionally, the companies operating at the park train employees that will work in sewing and cutting departments on technical skills at least for three months.
PVH (Philip-Van Heusen) Arvind Manufacturing is one of the companies operating inside HIP. The company that hired 800 employees recently exported 4,000 units of woven shirts to the USA. “Our initial visits and assessment suggest that the local workforce has the potential to be as productive as Vietnamese and therefore deliver lower production costs,” says Dana Perlman, spokesperson of the company. “We generally regard China as having the highest productivity with Vietnam coming in second.”
Belachew agrees that companies are primarily interested in hiring employees with better productivity. For this they require employees with better skills. However, as a country, “high skill alone cannot contribute to economic growth. We have to gear our education system to respond to the future needs of the economy, develop industrial work culture, technology and knowledge transfer methods and procedures, to industrialize and appear on the global value chain map highlights Belachew.
Recognising the aspirations of the companies, Ethiopia is doing its part. “However, we do not have to focus on entry level wage at this time, because government’s primary target is creating jobs. It is better to earn some money instead of sitting idle at home.”
Belachew stresses that industrial parks are not developed by the government looking for profit. “It is mainly to attract and [incentivise] foreign investors to the manufacturing sector which otherwise will be difficult.” He says poorly developed infrastructure, bureaucracy, corrupt land accession process, and power interruption have for long been bottlenecks for industrialisation. The industrial parks are meant to mitigate all these bottlenecks.
Although lower wage is a major incentive for multinational companies, experts indicate that wage rates alone do not determine the flow of foreign direct investment (FDI). Tejvan Pettinger, a graduate of philosophy, politics and economics at Oxford University and runs, believes that factors like labour skills, tax rates, transport and infrastructure as well as the size of an economy have a big role in determining the flow of FDI.
Another study conducted by Farhad Noorbakhsh, Professor, Adam Smith Business School University of Glasgow, UK and his colleagues entitled ‘Low wages or skilled labour?’ reveals that globally FDI flow has been accompanied by very significant changes in the past 70 years. Until the 1950s, FDI was concentrated in the primary sectors and resource-based manufacturing. As time goes by, however, the relative significance of this factor as a determinant of FDI declined and the availability of low-cost unskilled labour was a prominent location-specific determinant of FDI in developing countries.
Noorbakhsh, however, argues that gradual transition from labour-intensive, low-cost, low-skill manufacturing to more capital, knowledge and skill intensive industries is imminent since a similar series of events have played out as countries around the world develop. Even the ‘mighty China’ is moving towards higher-value-added activities rather than trying to win low-wage and low-skill assembly jobs.
Acknowledging the significant changes in the past 70 years in the global arena, Belachew says for the moment the main target of industrial parks in Ethiopia is diffusion of industry culture that will be gained from foreign investors, which will eventually develop the capacity of the local private sector and increase investment towards manufacturing. “Under the current circumstances, the labour has two options: to develop skill and become entrepreneur or going up the career ladder in the parks as professionals.”
Some stakeholders agree that Ministry of Labour and Social Affairs (MoLSA) branch officies inside the industrial parks can also address some of the labour related challenges. Yet, they argue that the lack of national as well as regional minimum wage threshold is complicating things.
Even though the labour proclamation is currently being amended, it will not set minimum wage or introduce a new course for the industrial park culture budding in Ethiopia despite the fact that many developing countries that followed the same path have adopted new labour laws specific to their industrial parks.
Fikru Gebru, director of Harmonious Industrial Relations Directorate at MoLSA, argues that Ethiopia should not advocate for setting national minimum wage at this take off stage of the economy. “We have a huge number of jobless citizens. If we set a minimum wage the portion of the labour force that is willing to work for a payment less than the minimum wage will be out of job.
As a result, wage determination is left to the market and negotiation between employers and employees. However, the labour law allows companies or associations to set minimum wages in their respective sectors or companies. The labour proclamation is in the process of amendment and after recommendations are reviewed, it will be tabled for the Council of Ministers in the near future, according to Fikru.
On the other hand, interventions targeted at mitigating labour productivity are in the pipeline. The government is already allocating land near Bole Lemi to investors in the park, to build dormitories for their workforce. Two companies are already in the process of taking the plots, including Shints, which planned to build dormitories for 4,000 employees, according to Belachew. This is the experience learned from Asian tigers. Ethiopia has crafted strategies on how to capitalize on the resource available around.”
Birhanu Gizaw (PhD), associate professor of industrial engineering at the Addis Ababa Institute of Technology, argues that overlooking the wage issue with the excuse of creating job is not a smart decision. “Due to hazardous issues and health risks, increasing the net salary and allowances of people working in the parks is necessary. Drawing experience of other countries is important to find solution to the problem.” underscores Birhanu.
Noorbakhsh, on the other hand, stress FDI should not only be viewed from the point of employment and source of finance. “FDI can also be a medium for acquiring skills, technology, organizational and managerial practices and access to markets. Moreover, the less a country is developed, the greater is the expectations it places on FDI to solve its resource and skills constraints.” He advises developing countries like Ethiopia to go beyond making available plentiful supplies of low-cost labour and start to craft assets, including human resources with innovatory capabilities and marketing, planning and management skills to sustain the economic growth.
Of course, Ethiopia is investing in the expansion of universities and technical and vocational education. It has also implemented policies to ensure that 70Pct of students in the universities study science and technology disciplines while a bulk of the balance goes to social sciences, business and economic studies. This decision is believed to help produce skilled labour for the burgeoning manufacturing. EBR

5th Year • July 2017 • No. 52

Ashenafi Endale

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