TRALAC - Trade Law Centre

Lesotho Weaves Its Way From Rags to Riches

Friday, 01 August 2003

Source: Business Day

An Inspector hired by the US-based retail chain The Gap is measuring up a garment at the Lesotho Fancy Garments Group.

He has spent two months at the sprawling factory in the capital Maseru ensuring that standards are up to scratch to meet the requirements for The Gap's order.

"It's all been fine. No problems so far," says Jimmy Lasum.

Apart from making garments for The Gap, Lesotho Fancy Garments Group is also manufacturing for US department stores, including JC Penney, Target, WalMart and Sears.

The economy of tiny Lesotho with a population of about 2,2-million is being transformed by Taiwanese investment in the garment industry, driven primarily by access to US markets through the Africa Growth and Opportunity Act (Agoa).

It has meant massive job creation and there is more to come.

These jobs could be in SA, but the Taiwanese factory owners say wages and tough trade unions are a deterrent.

Lesotho Fancy Garments Group is one of a growing number of Taiwanese ventures in Lesotho taking advantage of the tariff and quotafree access of sub-Saharan countries to the US under Agoa.

The Fancy Garments Group employs 35000 people at two factory sites and has plans to build another two facilities in Lesotho.

The nearby CGM factory, owned and run by Andrew Chang, a Taiwanese citizen who has lived for 20 years in SA, employs nearly 7000 workers and makes jeans for Levi Strauss, Lee and a number of other US brands.

Nien Hsing Textile Company employs 7000 people and will ultimately become a vertically integrated, cotton-spinning, denimweaving and jeans-manufacturing enterprise.

According to the Taiwanese government liaison office in Pretoria, 30 Taiwanese manufacturing companies in Lesotho employ nearly 50000 people, about 20% of the country's workforce.

If the choice was on infrastructure alone, these jobs would have come to SA. But across the Caledon River, in Free State, Taiwanese- owned industries are all in capitalintensive sectors such adhesive tapes, woven plastic bag manufacturing and denim weaving.

And they are not investing in new capacity, some complaining that the rand at current levels is pushing them into the red as it rules out exports.

Apart from wage rates, Taiwanese businessmen complain about problems obtaining work permits in SA compared to Lesotho, and this country's high crime rate.

In the mass garment industry, the benchmark for costs is the People's Republic of China. Massive economies of scale and high rates of productivity mean that Lesotho cannot compete on cost alone.

But the tariff and quota-free access gives Taiwanese producers in Lesotho the advantage, although Chinese costs of production in the garment industry are an estimated 30% to 40% lower than those of Lesotho. Even with a 17,5% tariff that they must pay, the Chinese can still sustain a competitive advantage, but the key break the Lesotho garment industry has is that Chinese manufacturers face quotas under the World Trade Organisation's multifibre agreement.

The agreement falls away in January 2005, raising the prospect that the Chinese could effectively swamp the US market.

However, to ensure a wider sourcing of garments and to spread the benefits of trade, the US may push the Chinese to enter into a voluntary quota system similar to that reached with the Japanese on steel.

Another worry for the Lesotho garment industry is that after September next year, Agoa will no longer allow it to use raw materials that are not from Africa or the US.

This could mean higher costs as Asian cloth tends to be cheaper. To deal with this, some firms will soon produce their own cloth from US or African cotton supplies.

In Lesotho the minimum wage for a machine operator in the industry is about R650 a month, compared to R800 in SA.

At CGM, owner Chang says his average wage rate is about R1000 because of a productivity bonus system and overtime payments.

For him, the fact that Lesotho's corporate tax rate at 15% is half of SA's, is also a significant factor.

According to Taiwanese factory owners there is no problem obtaining work visas for technical staff in Lesotho. After 1994, SA became more restrictive and with the new Immigration Act passed this year, it has become even worse.

Most of the Taiwanese who work in Lesotho live in Ladybrand, about 12km from the Lesotho border. After some of their property was destroyed in 1991 and in 1998, they took fright and moved across the border.

The boom in job creation in Lesotho could be an object lesson for SA in small business and job creation.