When It Comes To Low-Cost Labor, Is Ethiopia The New China? by [email protected]
Ethiopia continues to post healthy economic growth, attracting global investments particularly for large-scale, light manufacturing, says Zemedeneh Negatu, the managing partner of EY Ethiopia. The country’s low-cost labor pool could make it the new China – even beating out Vietnam and Bangladesh. Boasting double-digit average GDP growth over the past decade, Negatu says Ethiopia is an oasis of stability in an area with unstable pockets. It is also building the largest hydroelectric power dam in Africa to supply much needed electricity to a region with uneven access. “That’s why I say fundamentals will continue to drive growth,” Negatu notes.
An edited version of the interview follows.
[email protected]: We just heard at the Wharton Club of Africa Summit the minister of finance describe Ethiopia as a land in a hurry to attract investment.
Why don’t we start by taking stock of how things stand in Ethiopia in terms of the potential for investment and how this is part of the larger story of Africa as you see it from your perspective.
Zemedeneh Negatu: Ethiopia is a country in a rush and trying to accomplish a lot of things in a very compressed timeframe. There’s good reason. If you go back, say, 12 years, it was an economy that was just muddling along. But since 2002 to 2003, it has almost like it has been supercharged. According to the World Bank, it has grown on average about 10.6%, 10 years in a row. The first few years, we started from a low base. But today, it has the fourth-largest GDP in Africa. Adding 10.6% to a GDP of $70 billion on a nominal basis — or $156 billion on a PPP (purchasing power parity) basis — it starts to become substantial.
I think that gives you a perspective of where it came from. But what’s more important for investors and others is where is it going and how is it going to get there. I think that is probably the more interesting aspect of the discussion. In my view, if it continues to focus on where it has both competitive and comparative advantages (for example, light manufacturing), on transformation of the agricultural sector, and on investment in infrastructure, then the growth forward is sustainable.
“Ethiopia is starting to become the destination of choice for large-scale, light manufacturing, in particular garments and textiles.”
Why manufacturing? This is a country of about 100 million people, a very young population, median age under 20. So you have deployable, available labor. But at the same time affordable. I think that’s the very important component. So, for example, the average monthly cost of manufacturing in Ethiopia is a third of what it is in China. In China, in the coastal areas, it’s up to $600 a month. In Ethiopia, it’s still around $80, maybe $100.
That will give Ethiopia a competitive and comparative advantage. For growth to be sustained, it has to be driven by fundamentals, not piggybacking on the commodity price supercycle because, when commodity prices collapse, what do you do? But if you’re driven by investments in agriculture and manufacturing, you build the infrastructure that is the engine block for the transformation. I’m very confident that the growth can be sustained [even though] there will be bumps along the way.
[email protected]: Can I dive a little deeper into a question you just raised about manufacturing? What happened with Tommy Hilfiger setting up a manufacturing facility in Ethiopia?
Negatu: Well, I’d rather not specifically talk about transactions that are underway. But I can tell you for a fact that a number of large, western garment manufacturers are setting up facilities, entire industrial parks actually, dedicated to global brands. I can mention [clothing chain] HM because the information is already in the public domain. They’re starting to source from Ethiopia. So are many others.
Currently, one of the major Italian brands is building a factory in Ethiopia. The global industrialization transformation which moved large-scale textiles and garments from the U.S. to China in the past 25 to 30 years is now looking for the next China. And Ethiopia is one of them. In southeast Asia you have Vietnam, you have Bangladesh, but Ethiopia is starting to become the destination of choice for large-scale, light manufacturing, in particular garments and textiles, which even the Chinese are offloading, and shoe manufacturing.
This is the trend that we see and this is why we are encouraged, because Ethiopia has positioned itself to take advantage of it. To go back to a point I made earlier about the need for infrastructure for all of these things to happen, you cannot have industrialization in Africa without energy, without power. The Achilles heel of Africa from an industrialization perspective is the lack of power. We can talk about other infrastructure — railways, roads — they’re important. But if the factories don’t have electricity, you can’t industrialize. This is most basic.
In this case, look at what the Ethiopians have done. They’re building the largest hydroelectric power dam in Africa on the Nile river — the Grand [Ethiopian] Renaissance Dam which will contribute 6,000 MW. Investors look at these things. Global investors are looking at our competitive advantages. They see that power is starting to become more available and affordable. Electricity in Ethiopia is the cheapest on earth — four cents per kilowatt hour. Across our border in neighboring countries, electricity costs four times as much. And it’s not as readily available. That’s why I say fundamentals will continue to drive growth. There will be bumps along the way but the fact of the matter is we think this will be sustainable. China is looking for the next China. This is a fact. One of the main countries they’ve identified is Ethiopia.
“Ethiopia has done a very good job of creating a stable environment in a very unstable neighborhood.”
The second part of this whole thing is per capita GDP. To me, that’s a very important measure. You can have a big GDP in aggregate, but is it really being filtered down? In the case of Ethiopia, while its per capita GDP is still low, we’re seeing a 10% to 12% increase per year. Then you can start to see why Unilever is opening a new factory in Ethiopia in July. A lot of these smart investors are starting to come in.
We just did a study in our office. Until three or four years ago, the U.S. relationship with Ethiopia was always looked at through one prism: security. The rest of the Horn of Africa is unstable, they said. There wasn’t much American economic interest. Guess what happened? We just released our study. Between 2013 and 2015, the last two years we have data for, announced American deals in Ethiopia topped $4 billion. And these are blue chip American companies.
The first and only investment KKR has made in Africa is right here. They spent $200 million, which is a lot of money for a non-resource investment for PE funds in Africa. Two years ago, KKR bought the world’s largest producer of cut roses.
Blackstone is now in the process of building the first-of-its-kind oil pipeline. There are lots of pipelines in Africa, but this
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