policy assignment 2 - clothing and textiles

8/8/2019 Policy Assignment 2 - Clothing and Textiles

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Policy Analysis

Assignment 2

Policy Brief: The South AfricanClothing and Textiles Sector

23 August 2010

Jonathan Bertscher | BRTJON005

Introduction

Despite its recent poor performance, the South African (SA) clothing and


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textiles (C&T) industry remains strategically important. Its relatively large share

of manufacturing employment and labour intensity justify policy interventions

aimed at unlocking its significant potential.

The problems that plague the industry are rooted in an inability to compete

with foreign competitors. There are valuable opportunities that SA can realise

by exploiting its strengths. Policy measures are thus suggested that address

the problem of how to improve SA's competitiveness domestically and

internationally to unlock its comparative advantages. Priority areas are

identified in terms of the extent to which they limit competitiveness in these

areas.

The policy problem

South Africa's clothing and textiles industry is under severe threat, a fact

underscored by several worrying and persistent trends. Clothing exports to the

country's two largest clothing importers, the US and EU, fell by 89.7% and 63%

in US$ terms, respectively, between their 2003 all-time high and 2007. What

makes this figure particularly bleak is that world clothing imports increased by

19% between 2005 and 2007 alone. Clearly, SA has failed to take advantage of

the potential that this growth represents. The poor performance has been

accompanied by a decrease in formal clothing sector employment of 25.9%

between 2004 and 2007 (Morris & Einhorn 2008)

There is good reason to save the industry, despite its problems. According to

the Clothing and Textile Business Alliance (2005), in 2005 clothing contributed

a substantial 1.8% of overall employment in SA while, combined with textiles,

making up 13.4% of total manufacturing employment. Edwards and Morris

(2007) point out that the informal sector absorbs much of the formal sector

C&T industry unemployment. Despite this, the political and social ramifications

of business closures and formal sector unemployment the social costs as

well as a negative impact on productivity and quality...lower wages, insecure

employment and poor work conditions (Clothing and Textile Business Alliance

2005, p.10) are highly undesirable. The labour-intensive nature of clothing


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manufacture, and its low skill requirements, have led it to be seen as a

stepping stone on the path to industrialisation. By leveraging its potential

comparative advantages, SA can exploit the opportunities that C&Ts represent

in this regard, both domestically and globally (Clothing and Textile Business

Alliance 2005). The Western Cape and KZN have thus identified clothing as a

vital strategic sector (Morris et al. 2004)

To contextualise the priority areas highlighted for intervention, I explain the

reasons for the industry's decline, which, in essence, can be summed up as

overwhelming foreign competition. This raises a natural, and important,

question: what are the underlying factors causing SA's C&T industry to be so

uncompetitive? The answer to this question is the focus of the latter policyrecommendations.

Reasons for the SA C&T industry decline: competition, globalisation

and the rise of Asia

Globalisation has exposed SA to fierce foreign competition that has eaten into

domestic and foreign markets. This can be attributed to (I) a flood of exports bylow income countries after the expiry of the MFA and (II) the emergence of

global, dispersed value chains.

(I) Exports by low income countries after the expiry of the MFA

The Multi Fibre agreement (MFA) expired at the end of 2004, marking the end

of developed country quotas on developing country clothing and textiles. Suchquotas had effectively protected SA's export market from cheaper, chiefly

Asian, alternatives, a fact evidenced by the latter's stellar performance after

2004. While SA's C&T exports were falling, China's rose 55.4% between 2005

and 2007 in US$ terms, seeing its share of world clothing exports rising from

9% in 1990 to 33% in 2007. China and Hong Kong together accounted for 41%

of world clothing exports in 2007, from 23% in 1990. Exports to the EU and US

increased 208% and 324% between 1999 and 2007, respectively ( Morris &

Barnes 2009). Other developing countries have followed this trend, albeit with

less vigour. India's exports increased 282% between 1990 and 2007, while it's


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share of world clothing exports increased by 50% (from a low base of 2%).

Mexico's exports increased 777% over the same period.

The impact on SA manufacturers' share of the domestic market is arguably

more damaging since most sales of clothing and textiles in 2004 were

generated by domestic market demand (Clothing and Textile Business Alliance

2005). Measured in US$ terms, clothing imports sky-rocketed from a mere 4%

to 84% between 2001 and 2004. During the same time, textile imports rose

from 9% to 29% (ibid). Most of these were comprised of imports from China.

(II)Emergence of global, dispersed value chains

Gereffi and Memedovic (2003) define a value chain as the range of activities

involved in the design, production and marketing of a product. Globalisation

has given rise to value chains that are globallydispersed. For example, fabric

made in Italy using wool imported from Australia may be exported to China and

transformed into a sweater, which is marketed by a US agency. Some countries

may be able to create especially cheap wool while manufacturing relatively

expensive textiles; others might create relatively inexpensive fabrics of a givenquality while producing poor quality and expensive wool. Thus each country

might find it has a comparative advantage in one or several activities along the

value chain. Globalisation has permitted production to migrate to countries in

which its industry enjoys a comparative advantage. Likewise, buyers can

source goods and services from countries that give them the best deals (in

terms of a combination of factors that might include price, reliability and

quality).

Generally, the clothing and textiles sector belongs to a the buyer-driven set

of value chains, powered chiefly by wholesalers and retailers, who tend to

market and/or design the clothes that they sell but are manufacturers without

factories (Gereffi & Memedovic 2003) in that they outsource all manufacturing

activities. They control up-stream and down-steam processes and wield

significant power. They can thus enforce odious demands with respect to

standardisation, quality and price.


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Global value chains have impacted SA's C&T industry on fronts domestic and

global. Domestic retailers have shifted procurement to foreign manufacturers,

who have continuously outperformed their SA counterparts (again, in terms of

a combination of variables that include, but are not limited to, price and

quality). This trend has been mimicked in all levels of the value chain. For

instance, local clothing manufacturers have shifted their demand in favour of

foreign textiles, at the expense of domestic producers. At the international

level, firms participating in any level of the value chain can source inputs from

optimal suppliers of any particular service or factor input. SA's C&T industry

has not found its place in this system. It has failed to exploit strengths that

would develop its potential comparative advantages to make a useful

contribution to the global value chain.

Issues underlying SA's inability to compete

The threats to SA's C&T industry essentially reflect a lack of competitiveness.

Globalisation and its resulting changes are not bad in and of themselves and

many countries have taken advantage of the new opportunities that it they

offer. The root cause of the problem then is actually SA's inability to compete ina meaningful and sustainable way. Policy interventions must necessarily

remedy the factors that constrain SA's ability to compete. These factors

include:

1. Inefficiency, low productivity and uncompetitively high prices

2. Unreliable service and long lead times

3. Poor infrastructure, communication and logistics4. Odious terms of trade. For example, the African Growth and

Opportunities Act (AGOA) requires a triple conversion for SA to

benefit from the preferential trade agreement.

Priority areas for Intervention

There are many complex and overlapping problems limiting SA's ability to

compete. But not all can be targeted simultaneously, some are more severely


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limiting than others, and solving some will subsequently have positive or

negative spillover effects on others. Intervention priorities are thus identified.

Hausmann et al. (2005) suggest using the most binding constraints as a

criteria for prioritisation. The method's adaptation to the current context entails

identifying those areas that represent the most profound limitations to the SA

C&T industry and whose elimination will have the most significant positive

impacts. The binding constraints act to suppress SA's strength. An

identification of these strengths, and the opportunities that they present,

reveals its potential comparative advantages.

Identifying SA's strengths

According to the Clothing and Textiles Business Alliance (2005, p.16), SA's

potential competitive advantages lie, in general, in the factors of skills, energy

costs, logistics and marketing. High wage costs and labour inflexibility are a

feature of SA's economy, which does not lend itself to low-quality mass

production. Cape Town is especially strong in high quality garment manufacture

and innovation (ibid, p.14), owing to its creative talent, including productdevelopment, design and marketing.

It is important to note that there are in effect two interrelated problems: one

relating to exports and the other to domestic market supply. SA's potential

advantages in each market differ. Table 1 includes the respective factors,

identified by the Clothing and Textiles Business Alliance (ibid)

Domestic market Export marketFast lead and response times Close proximity to Europe, east coast

of US

and Middle East

High degree of flexibility Language and culture consistent with

Western and Middle Eastern markets

High quality Time zones compatible with Europe

and the Middle East

Strong customer support

Reliability


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Table 1: South Africa's potential comparative advantages in clothing and textiles: export and

domestic markets

SA is well-positioned to target exports at growing C&T markets, such as the

middle east, whose demand is outstripping economic growth. China's mainexport partners, the EU and US, house only 10% of the world population and

China does not have the capacity to supply the entire worlds' demand of

clothing and textiles ( Morris & Barnes 2009). Instead of attempting to compete

head-on with low-cost developing countries in a saturated market obsessed

with races to the bottom, SA's opportunities lie in carving out its own path,

supplying fewer, but superior, goods and services.

Aims of policy interventions:

The opportunities presented above suggest the following aims for policy

interventions:

1. Improve SA's competitiveness in clothing manufacture in export

and domestic markets, concentrating on:a) high-quality garments

b) superior customer service, including flexibility, reliability, conformity

to required standards, and competitive lead times

c) a high degree of creativity with respect to design, marketing and

innovation

d) becoming a second-tier supplier for countries spreading risk

e) strong value chain alignment with firms engaged in upstream anddownstream activities

2. Improve SA's competitiveness in textile production, with special

focus on:

a) high-quality output

b) non-clothing textiles such as industrial and interior fabrics

c) strong value chain alignment with local manufacturers of clothing and

other related goods


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The binding constraints that follow underlie SA's inability to achieve the above

aims.

The most severe constraints to competition

1. Skills gaps and shortages

2. Infrastructure, capital and logistics

3. Public inputs

4. Strong rand and trade distortions

5. Global value chain integration

6. Domestic value chain alignment

7. Relationships with upstream and downstream local firms8. Self-discovery and innovation

Specific policy recommendations

Eliminating the above constraints and achieving the above-mentioned policy

aims require the following specific policy interventions:

1. Skills development

Managerial, technical and operational skills need to be developed. The current

CTFL-SETA programme ostensibly has this responsibility but has as yet proved

ineffective at developing the required skills base. In addition, it has failed to

identify and deal with skills scarcity at the operator level ( Morris & Reed 2009).

Two approaches are possible and I believe a combination of the two to be most

beneficial. First, SETA should be reformed in the following ways:

It should communicate with the C&T sector through deliberation councils

so that it can identify the skills that firms require and ensure that

technical schools offer the relevant courses. At the moment the SETA is

providing insufficient technical training assistance, choosing instead, to

marshal its resources around low-skills training (ibid, p.21) which

demonstrates a clear misalignment of objectives.


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A holistic approach to skills training should be adopted that includes

advanced qualifications and elementary qualifications alike (Ibid) and

offers training relevant to people at different stages in their career or the

business cycle or both. This would ensure that the right training is offered

to the right people at the right time.

Second, an institution should be set up to provide incentives to firms that

provide in-house training or send their staff on courses. This could be in the

form of subsidies, tax rebates or asset depreciation allowances. The latter

would have the added benefit of encouraging capital investment.

2. Increasing investment

A council should be established to encourage investment in capital and

technology. A percentage of tax revenue from the industry should be ring-

fenced for this purpose. It should:

offer incentives in the form of depreciation allowances, subsidies and

low-interest loans for capital investments.

host forums aimed at educating manufacturers about the latest

technologies and the capital that would allow them to provide the goods

that down-stream firms require.

Identify missing public inputs that require government investment and

coordination. Mechanisms need to be in place that communicate

recommendations to the relevant public bodies and ensures that they are

investigated and followed through when necessary.

3. Short-term protection of domestic clothing and textiles with

tariffs fading gradually

Tariffs should gradually fall on clothing and textiles to bring down input costs

and help to sharpen local firms' competitiveness. WTO agreements are making

such tariffs untenable and there are significant welfare benefits to cheap

imports (Morris & Einhorn 2008).

This will make foreign imports relatively cheaper but SA should not attempt to


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compete on price. Its advantage rests in higher-end, niche markets that are

less price elastic than cheaper apparel. Some firms will be unable to compete

and will inevitably fold. However, there will be some unemployment absorption

by the informal sector (Edwards & Morris 2007).

A fund should should be put in place to provide short-term unemployment

insurance for workers in the C&T sector and that will assist unskilled workers in

the industry in acquiring skills necessary for higher-end manufacture. This

should be financed by a percentage of tax revenues on retail, who are set to

benefit substantially from tariff reductions as retailers command the highest

mark-up in the C&T value-chain. The additional taxes acquired by virtue of

greater profits in the retail sector can thus subsidise those that lose furtherdown the value chain.

Short-term protection should be maintained as the industry adjusts to its new

position higher up the value chain and to slow down the inevitable

unemployment impact of cheap foreign imports. These unsustainable measures

should be decreased gradually over time.

4. Improving terms of trade and eliminating distortions

Terms of trade can be improved by maintaining a competitive exchange rate

and negotiating improved trade agreements. Trade distortions can be mitigated

by improving conditions at ports.

Maintaining a competitive exchange rate

The rand must depreciate in order for SA to become competitive in export

markets and to encourage local procurement of inputs to the supply chain by

making foreign imports relatively more expensive. The textile industry would

benefit from increased supply to local and domestic manufacturers while local

clothing manufacturers would gain an advantage in domestic retail markets. In

addition, it would be consistent with analysis by the SARB and the OECD that

the rand is too highly valued and that the local economy would benefit overall

from its devaluation.


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Negotiating improved trade agreements

Preferential trade agreements should be negotiated with economic partners.

This provides an advantage in export markets. For example, AGOA currently

requires a three-stage conversion process before SA can benefit from

preferential access to the US market while other SSA countries require only a

single conversion. This puts SA at a great disadvantage compared to its

neighbours. Such agreements that harm SA's terms of trade should be

renegotiated.

Improving conditions at ports

Infrastructure, oversight and skills of officials need to be upgraded at ports to

eliminate the problems of under invoicing and illegal imports. This would

ensure that the gains brought about by the suggested policy interventions are

not eroded by unaccounted goods entering SA.

5. Improving value chain alignment and integration while exploitingSA's strengths

The local value chain needs to be realigned domestically and integrated into

the global C&T value chain.

Domestic realignment

Councils need to be established that facilitate open and transparent

communication between retailers and manufacturers of clothing and textiles to

improve relationships between the levels of the value chain. Agreements

should be encouraged that commit retailers to orders from manufactures over

the long term, contingent on manufactures meeting specific, pre-specified

standards. Manufacturers an thus tailor their services to the needs of local

retailers and gain a substantial competitive advantage. This also helps to

encourage investment in capital as risks associated with such investments are

significantly reduced.


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Beneficiation should be strengthened to form synergies between levels of the

value chain by coordinating related activities (Clothing and Textile Business

Alliance 2005). For example, textile producers could supply flexible, timely

input to the clothing sector which can in turn offer superior service to retailers.

This requires strengthening of communication between participants at all levels

of the value chain.

Integration into the global C&T value chain

Local manufacturers need to move higher up the global value chain to offer

goods and services with which they can compete. Relationships need to beformed to create global networks of inter-related activities than can benefit

from each others' respective comparative advantages.

An important special case is greater regional value chain integration. SA has an

advantage in SSA textile manufacture. It is thus suited to export its materials to

neighbouring countries with lower wage costs for cut, make and trim (CMT)

transformations. The goods could then be reimported to SA and sold under adomestic label. Optimising such relationships help to enhance SA's strengths

and compensate for its weaknesses.

Textile manufacturers should, in addition, move into non-clothing related

production, such as industrial materials and interior fabrics. They need to

integrate into the global value chains for goods that do not include apparel,

where there is potential for higher returns, and for manufacturers to leveragetheir advantages.

Concluding remarks

There is significant potential for SA to exploit its strengths to realise its latent

comparative advantages in the C&T sector. Domestic and international

opportunities abound. This requires bold and purposeful policy intervention to

eliminate its constraints. Strengthening value chains, improving terms of trade,


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gradually reducing C&T tariffs, increasing investment (including government

inputs) and developing skills are vital for the sustainable success of the SA C&T

industry and to save it from a painful decline.

References

Clothing and Textile Business Alliance, 2005. Submission to DTI regarding theCustomised Sector Programme,

Edwards, L. & Morris, M., 2007. Undressing the numbers: The employmenteffect of import quotas on clothing and textiles.Journal of Development

Perspectives, 2(2), 121140.

Gereffi, G. & Memedovic, O., 2003. The global apparel value chain: whatprospects for upgrading by developing countries, United NationsIndustrial Development Organization, Vienna.

Hausmann, R., Rodrik, D. & Velasco, A., 2005. Growth diagnostics. TheWashington Consensus reconsidered: towards a new global governance.

Hausmann, R., Rodrik, D. & Sabel, C.F., 2008. Policy Brief - ReconfiguringIndustrial Policy: A Framework with an Application to South Africa, Center

for International Development at Harvard.

Morris, M., Esselaar, J. & Barnes, J., 2004. An identification of strategicinterventions at the Provincial Government level to secure the growthand development of the Western Cape Clothing and Textiles Industries.Report to the Western Cape DEEDT (EXTRACTS).

Morris, M. & Barnes, J., 2009. Globalization, the Changed glocal Dynamics ofthe Clothing and Textile Value Chains and the Impact on Sub-SaharanAfrica, Vienna: UNIDO.

Morris, M. & Einhorn, G., 2008. Globalisation, Welfare and Competitiveness: TheImpacts of Chinese Imports on the South African Clothing and TextileIndustry. Competition and Change, 12, 355-376.


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Morris, M. & Reed, L., 2009. Skills Gaps and Shortages in the South AfricanClothing and Textile Industry. In A. Kraak, ed. Pretoria: HSRC Press.

policy assignment 2 - clothing and textiles

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