BY JASWINDER (JAS) BEDI, MBS
The decision to increase the minimum wages on May 1 was unfortunate. It maintains an unnecessary tradition of ceremonial wage increases on Labour Day which do not take cognisance of the entire production chain and implications for the job expansion. In addition, this Labour Day speech was at variance with a lot of promises to reduce production cost, increase productivity in an effort to create more jobs in the country whereby he wants to address the costs of living but at the same time giving into social pressures to afford the costs to live. Both issues are two different subject matters and give different signals to investors and labour intensive value chains. Perhaps we are just unaware of the strain of manufacturing in Kenya.
Pay increases never raise the standard of living, rather they increase inflation. It is an unending vicious loop that as a country we need to snap away from: If the cost of labour goes up, the cost of goods rises as the increase is factored in into the product price. This has various effects: employers either lay off workers or increase use of machines and other efficiencies to cut down on operating costs while foreign investors look elsewhere for cheaper labour. Especially the case of labour intensive industries like textile, apparel and agriculture.
The Kenya Association of Manufacturers (KAM) has persistently called for wages to be pegged on productivity. An increase in productivity lowers inflation and increases purchasing power due to lower prices. This can be done through the adoption of piece-rate pay measures where workers are paid per unit to motivate them and boost production. Ceremonial wage increases on Labour Day are disastrous to industry and to the economy as a whole. Unions do not want to admit that the pay rise will lead to layoffs and even plant shutdowns, but that is the reality on the ground.
One of the hardest hit sectors is the textile and apparel industry. A walk down memory lane to the 80s shows a vibrant textile sector. It was the leading manufacturing activity in the country and ranked 5th in foreign exchange earnings. It encompassed all activities in the value addition chain, from cotton growing and ginning, to fabric and apparel manufacture. Liberalisation soon brought all this to a grinding halt due to an influx of second hand clothing, cheap un-customed goods and dumping and that led to the collapse of the industry.
To salvage the sector, the Export Processing Zone (EPZ) was set up in 1990 to attract investors and also because the industry, like agriculture is labour intensive. In 2008, 50,000 people were directly employed in 44 factories and 5 million or 1.1perdent of the population were indirectly supported as a result of the activities of these companies. But now a repeat collapse of the apparel sector is in the offing. The industry has taken yet another blow while it was still down on its knees recovering from the global economic downturn whereby their customers in the USA crumbled to bankruptcy. According to the latest figures, exports were down 17.9pc in the industry in 2009.
The sector is beset by a myriad of problems. Energy is a hot button issue. In Kenya, 35 percent of total production costs go to energy while in India, that cost is halved at 16 percent. Our energy costs are also higher than any other in the region. In comparison to other African countries, power here at USc 20/kwH costs about six times more than in Ethiopia. In Tanzania it is USc 12/kwH and in Uganda it is USc 10/kwH. Need we mention the frequent power blackouts and the quality of power that affects manufacturers with machinery/process breakdowns.
Further, there is stiff competition from Asian markets such as China, Bangladesh and India which have faster turnaround rates. Bangladesh rakes in $23 billion per annum in revenues and currently pays workers less than half of what will be paid to workers here after the pay raise. Bangladesh does not enjoy duty free entry into the USA as our country does for textiles. Kenya’s revenue is only $292 million per annum on duty free entry. This means the unit cost of production is higher in Kenya and for this reason our exports are stagnant with the duty free advantage not realized. Delays in importing inputs also affect the industry due to port congestion and poor infrastructure. Then, there is the import of second hand clothing and uncustomed goods in the domestic market creating a spiral downward effect for survival. An undying gravy train for the textile industry.
This Labor Day pay rise will be the straw that breaks the camel’s back for the clothing industry. The Jubilee manifesto clearly states the party’s intent to actively grow the manufacturing sector and create one million jobs through tax incentives and by encouraging foreign investment. It recognizes that the industry is hampered by high production costs. Vision 2030 cannot also be achieved without making this industry competitive. Is it not ironic then, that we are not yet 100 days into the new presidency and as we speak 2000 jobs in the clothing industry are already going to fall under the axe while a number of factories have made the decision to shut down and relocate to other countries?
A number of measures could revive the industry if effected quickly. A tax exemption for the next 10 years to give industries a recovery period from the global recession. This phase will allow the industry to stabilise, break even on the initial investments and build profits. The government should also reduce the work permit fee and allow EPZ to operate as authorized economic operators with a green channel for cargo both inbound and outbound . The industry can be cushioned further by state subsidy in energy costs in the short term to create the much-needed jobs that Kenyan desire.
These are the only measures that can save this sinking ship. It is your call, Mr President?
The writer is the immediate past chairman of Kenya Association of Manufacturers and can be reached on firstname.lastname@example.org.