CBDS

Business in Development Studies

Global Value Chains

Are shareholders the main beneficiaries of the global apparel industry?

By Felix Maile and Cornelia Staritz

Who captures most of the profits created in the global apparel industry? When discussing distributive issues in apparel global value chains, scholars, policy makers and activists tend to focus on distributive struggles between five groups of actors: Consumers, fashion brands and retailers, manufacturers, workers, and states. Much of the analysis concludes that the rise of global value chains since the 1990s has enabled fashion brands and retailers (also known as ‘lead firms’) to capture juicy profits, and consumers to benefit from low-cost yet fashionable apparel products. By comparison, manufactures operate with razor thin margins and workers are exposed to harsh working conditions and low wages. States in turn earn limited taxes, given the investment and sourcing attraction policies that are common in special economic zones through which many supplier countries are integrated in the apparel industry. Yet, this analysis factors out one group of actors that is central in distributive matters: The shareholders that own the fashion brands and retailers and that have the claim on the profits that these lead firms generate. In this blog, we question the dominant perception of stock markets serving as the major ‘source of finance’ for apparel corporations to run their operations. Analyzing patterns of value creation and capture as well as corporate financing in the past 30 years, we come to a different conclusion: Stock markets barely contribute to apparel lead firms’ financing. Instead, apparel lead firms have funded stock markets, based on the profits that they generated vis-à-vis manufacturers and workers in their value chains.

In order to understand the distribution between shareholders and actors in global value chains, we draw on the conceptual and methodological toolbox of the corporate financialization literature. This strand of work emerged in the early 2000s, seeking to make sense of a shift in corporate strategy and management practice towards ‘shareholder value’ that had been underway since the 1980s: Financialization scholars have analyzed the balance sheets and income statements of major corporations in order to trace their sources of funding and understand how profits are created and allocated.

The seminal financialization literature of the early 2000s concluded that large firms had shifted their strategy from ‘retain and invest’ to ‘downsize and distribute’. What they meant was that formerly vertically-integrated firms shifted away from reinvesting profits in ‘productive’ means such as machinery, their workforce, or research and development. Instead, they outsourced less profitable parts of the value chain, often to firms based in lower-cost countries, and disbursed their profits to shareholders, either via dividend packages or so called ‘share buybacks’, in which companies repurchase their shares to boost their stock price. Financialization and globalization are therefore closely interrelated and reinforcing processes in the global economy.  

More recent contributions challenged this seminal literature by highlighting the dramatic acceleration of corporate financialization since the turn of the millennium, which changed its characteristics. Central to this were two processes: Globalization expanded on a different scale, with China’s WTO entry in 2001 providing low-cost global value chains centered around China as a backbone of accelerated outsourcing and offshoring, and shifts in financial markets created a low-interest rate environment. This changed the profit capacity of transnational corporations: Rather than ‘downsizing’, transnational corporations have merged, and monopolized global consumer markets both in high income and in emerging economies. Because their dominant position required fewer investments, and low interest rates during this period reduced financing costs, transnational corporations loaded incurring super profits on their shareholders.

This is precisely what happened in the global apparel industry: Since the early 2000s, the ten largest apparel lead firms by annual turnover have quadrupled their revenues, by expanding in established end markets such as the US, Europe, and Japan, but especially in China. The liberalization of apparel trade as well as China’s entry into the WTO in 2001, which soon thereafter accounted for 40% of global apparel exports, put apparel lead firms in a structurally advantageous bargaining position vis-à-vis manufacturers, workers, and supplier countries. As Figure 1 (blue line) depicts, the hyper-competition in the supply base allowed these ten firms to boost profits realized on goods sourced (‘gross margin’) dramatically, from 33% in the mid-1990s to more than 50% by 2010. At the same time, net profits during the same period (orange line) barely exceeded 8%, because apparel lead firms made hefty expenses on their distribution network as well as in brand building and marketing, which is the essential competitive advantage for apparel corporations. However, an ever-larger chunk of these net profits was disbursed to shareholders: Expenses for dividends and share buybacks (‘shareholder payouts’, green line) rose dramatically, from 1,6 % of annual revenue in 2000 to 7,8% in 2022.

Figure 1: Gross profit margins (%), net profit margins (%) and shareholder payouts (%, on annual revenue), top 10 apparel lead firms
Note: The top ten apparel lead firms were selected based on their 2022 revenue. These firms include Nike, Inditex, Adidas, H&M, Fast Retailing, Gap, PVH, VF, Ralph Lauren, Levi’s. To control for global value chains dominated by apparel firms, we excluded high revenue brands that are part of multi-segment luxury conglomerates (LVMH, Kering) and wholesale retailers (Walmart, Target)

While apparel lead firms have distributed the bulk of their profits to shareholders, it is striking that they have barely used stock markets as a source of funding. Figure 2 shows that the annual proceeds lead firms generated from stock issuance since the early 1990s have been fairly meager (blue line), accounting for 0,7% when compared to annual revenues. Most apparel corporations had their public offering on stock markets during the 1970s to 1990s, through which they raised a few hundred million US dollars at the time. Afterwards, new share issuance was rather the exception than the norm. Once these firms turned global, the payouts to shareholders began to amount to several billion US dollars per year. By comparison, the central source of finance for apparel lead firms in the past 30 years have been bonds markets. Proceeds from corporate bonds accounted for 4,7% of revenue on average during that period (orange line), thus exceeding the funds secured from stock issuance by 7 times.

Figure 2: Proceeds generated from share issuance and bond issuance (%, compared to annual revenue)

The distributive relationship between apparel lead firms and their shareholders thus turned into a one-way street. Since the mid-1990s, net financial flows from lead firms to stock markets have been negative for all financial years. By 2022, this net negative finance flow accounted for on average 7,8%, when measured against lead firms’ annual revenues.

Figure 3: Net financial flows between apparel lead firms and stock market (%, compared to annual revenue)
Note: Net financial flows are calculated by comparing annual stock issuance with annual shareholder payouts, benchmarked against firms’ revenues.

These results raise broader questions about the role of stock markets in global capitalism.   Stock markets perform an array of functions: They are an institution of corporate control. Corporations also make use of their own shares as a currency to pay for acquisitions of other firms, and to remunerate their top executives. Stock markets further serve as an institution for ‘firm creation’, because the outlook for an initial public offering acts as a magnet of funding for early stage firms. Finally, as the market turmoil in recent weeks has shown, stock markets have become the central global institution of wealth management, on which institutional investors such as insurances, pension, sovereign wealth funds, hedge funds, but also wealthy individuals and retail investors seek to optimize their investment portfolios. But counterintuitively, stock markets do not function as a significant source of finance for firms. Instead, major transnational corporations, with fashion brands and retailers as a prime example, channel the profits created in global value chains to their shareholders.

Understanding global distributional inequality thus requires linking value creation in globalized production with value capture in global financial markets. The starting point for this is to acknowledge and understand the role of financial markets and actors as one of the main beneficiaries of globalized production, how they impact the business and sourcing strategies of (lead) firms, and ultimately shape the value capture of governments, manufacturers and workers integrated into apparel global value chains.  

Felix Maile is a doctoral researcher in development economics at the University of Vienna.

Cornelia Staritz is Associate Professor in Development Economics at the Department of Development Studies at the University of Vienna.

This blog post has first been published here.

Southern African Garment endeavors and impressions’ – Part 1: The lives of managers – Southern African cross-border manufacturing operations in times of lockdowns

By Andries Bezuidenhout and Søren Jeppesen

A factory in Eswatini, with a notice board of the Eswatini Investment Promotions Authority (EIPA)

The location of garment factories in Southern Africa is often determined by boundaries between countries and the implications that these boundaries have for labour markets. Many of these garment manufacturers are from Asia – especially Taiwan – who locate their operations in Southern Africa to take advantage of the Africa Growth and Opportunities Act (AGOA) of the US, which provides access to the US market as development strategy.

Of course, the future of this “trade, not aid” strategy and its contribution to the US’s soft power is uncertain, due to the new Trump administration – but this is a story for another day (or blog).

Nevertheless, since the early 1990s, several well-established South African owned garment manufacturing operations have also been relocated to both Eswatini (formerly called Swaziland) and Lesotho.

One advantage of this is that workers in the two countries fall under different labour regimes, with much lower minimum wages. Since both Eswatini and Lesotho are part of the Southern African Customs Union (SACU), clothes manufactured in the two countries are not subject to import tariffs when imported back into South Africa, which remains the main market of these firms.

So, in theory, goods can flow freely across the borders between South Africa and its two smaller neighbours. An unforeseen event, of course, was the Covid-19 pandemic, which led to these borders being shut down.

Our travels to visit these factories and to understand how these varying labour regimes play out in practice have led us to make a number of ethnographic observations about the lives of the South African managers of these factories.

The road to the Maputsoe industrial park in Lesotho – it illustrates the rural setting of garment manufacturing here

A first observation to make is that, whilst the manufacturing operations of these companies are now mainly located in Eswatini and Lesotho, their marketing and management arms are still in South Africa’s main urban centres of Johannesburg and Durban. This means that there is constant regional travel between these urban centres and the two neighbouring countries.

In South African terms, Eswatini is driving distance from Johannesburg – you can drive there in a morning, cross the border, and get to the factory with ease. South African managers who run the manufacturing operations (as opposed to marketing and distribution) often relocate their families to Eswatini and typically live in a place called Ezulwini.

Ezulwini (translates to English as “heaven”) is in a valley between two mountain ranges. There are hotels that housed the casinos which were frequented by South Africans at the time of apartheid, when gambling was illegal in South Africa.

More recently, thought, a smart shopping complex called “The Gables” was constructed, housing South African coffee shop franchises (Mugg & Bean), shops, and even a 3D cinema. The complex’s style – its gables – refer to Cape Dutch architecture, a style of colonial South African architecture characteristic of wine estates in the Western Cape.

Eswatini’s garment factories are mostly located in Matsapha, which is a short drive from Ezulwini, and managers can easily move between their residential estates in Ezulwini and Manzini’s industrial district.

Eswatini also has a number of elite private schools, notably Waterford, of which the actor Richard E Grant is an alumnus – an additional advantage for South African managers and their families.

Controversially, Eswatini is a monarchy and notorious for the repression of political dissent from both labour and human rights activists. Policing – even traffic policing – is quite visible and the country has a reputation of being a safe place, that is as long as you don’t challenge the regime. For South Africans from crime-ridden Johannesburg, this could also seem like an advantage.

Our observations are that South African managers running operations in Lesotho follow a different strategy. Lesotho is further from South Africa’s main urban centres – it would take a whole day to drive from Johannesburg or Durban to there. Also, the factories here are in a town called Maputsoe, which is less spectacular than the misty mountains of the Ezulwini valley in Eswatini.

However, the main industrial area in Lesotho, Maputsoe, has the advantage of being right next to the South African border and a town there called Ficksburg. The latter is known as a hub of cherry farming, it has quaint coffee shops and road stalls, as well as established middle class schools and suburbs.

The Eastern Free State, where Ficksburg is located, is known to have beautiful mountain ranges and attracts tourists from the country’s urban centres – notably to a town called Clarens, as well as Rosendal, a small town close to Ficksburg where several well-known South African visual artists reside.

The South African managers of garment manufacturing operations in Lesotho have mostly made homes for themselves in these towns on the border of Lesotho, but still in South Africa. Those who live in the South African town of Ficksburg can cross the border between the two countries on a daily basis with relative ease – a special permit makes this even easier, since they don’t have to go through daily customs checks.

This was until Covid-19 hit.

Interestingly enough, because the South African managers in Eswatini lived in the country, they were able to maintain a presence at their factories. Some switched to the manufacturing of protective gear, such as face masks, but textile supply lines from China were severely disrupted. Also, the South African border was closed for a certain time.

Tragically though, and within the broader context of massive suffering during the pandemic, a prominent South African manager contracted Covid and was not allowed to cross the border into South Africa to seek medical attention. He died of the disease.

In Lesotho, the majority of the South African managers were not able to cross the border into Lesotho to run their operations. However, it turned out that their Basotho colleagues were quite able to manage without them. They had contact on web-based platforms and over the telephone, but when the lockdown ended, and despite disruptions in textile supply lines, these companies recovered quite quickly.

Our main focus here is an ethnographic description of how South African managers decide to run their operations in neighbouring countries, but we have to mention here that the upshot of the Covid-19 pandemic and the lockdown was that there was a reinforcement of regional production networks. It led to a revival of the sourcing of textiles from Southern African manufacturers and garment producers in Eswatini and Lesotho that had previously exported exclusively to the US, redirected some of their orders to the South African market.

But that is also a story for another day (or blog).

By Andries Bezuidenhout, Professor, Department of Sociology, Anthropology and Development Studies, University of Fort Hare, South Africa and Søren Jeppesen, Associate Professor, CBDS, MSC, CBS

Worker power and decent work in apparel export industries

by Kristoffer Marslev and Lindsay Whitfield

Explaining variation in apparel workers’ wages and working conditions, both between producer countries and over time, is a key objective of the Creating and Capturing Value in the Global Apparel Industry project. In this post, we present findings from a comparative analysis of export apparel in Cambodia, Vietnam and Madagascar. These insights feed into a broader conceptual argument about how and why labor regimes change in labor-intensive industries in the global South. This blog post focuses on our empirical findings, but stay tuned, as the conceptual argument will be provided in a later post.

Apparel export production in Madagascar, Cambodia and Vietnam

Madagascar, Cambodia and Vietnam all integrated into apparel GVCs around the same time and under similar socio-economic conditions. In all three countries, export-oriented apparel production emerged in the 1990s, as foreign firms established assembly factories to benefit from lower labor costs and preferential market access to the US and the EU. At the time, the countries had similar socio-economic conditions, being largely agrarian economies with low productivity, high underemployment, and overwhelmingly young – and quickly expanding – workforces. Later, however, they diverged, as the apparel export industries in Cambodia and Vietnam expanded to become the world’s third and seventh largest, while Madagascar’s counterpart stagnated due to political turmoil. A comparative analysis offers several insights; but three are particularly relevant to our thinking on how and why labor regimes change.

Workers’ bargaining power is conditioned by structural transformation

First, the three cases illustrate how workers’ bargaining power is conditioned by what development economists call structural transformation. Structural transformation consists in a set of processes that include absorption of un- and underemployed labor into the formal economy through improved access to alternative livelihoods, as agricultural productivity increases and the industrial sector grows and diversifies, as well as declining fertility rates that change the size and composition of the labor force. Despite their similar starting points, Cambodia, Vietnam and Madagascar subsequently experienced different trajectories of structural transformation, with implications for the ability of workers to challenge prevailing labor regimes.

In the Southeast Asian cases, the apparel export industries expanded in the context of, and contributed to, rapid economic structural transformation. Both Cambodia and Vietnam saw a significant shift of labour from agriculture to industry, rising agricultural productivity, a steep reduction in unpaid family labour, and declining fertility rates, leading to a contraction in the pool of young workers typically taking jobs in apparel factories. As a result, labor markets began tightening, pushing up rural and urban incomes. As wages in export apparel, at the same time, were kept low to maintain competitiveness, apparel factories became less attractive to alternative livelihoods and started facing labor shortages. In Madagascar, by contrast, structural transformation was negligible: employment in agriculture and industry remained virtually unchanged over three decades, agricultural conditions deteriorated due to an increase in natural disasters such as droughts and cyclones; and with high population growth and insufficient job creation, informality and underemployment deepened (see graphs below). In Madagascar, therefore, labor markets did not tighten, and apparel export factories could continue to pull in workers by offering superior conditions.

Figure 1: Indicators on structural transformation

These diverging trajectories of structural transformation are key to explaining the intensity and impact of apparel workers’ collective action across the cases. In Cambodia and Vietnam, looming labor shortages boosted apparel workers’ bargaining power and incentivized largescale labor protests that secured material gains. In Cambodia, following a decade’s erosion of the minimum wage in the export apparel industry, an outburst of strikes (2012-14) resulted in the government implementing a series of minimum wage hikes, a new wage fixing mechanism and other benefits such as employer-paid health insurance and higher maternity pay. In Vietnam, similarly, a major strike wave (2006-2012) – with apparel workers in a lead role – forced the government to increase the minimum wage annually, breaking a long-term decline in workers’ purchasing power.

The unprecedented impact of these strikes was not just rooted in tightening labor markets, but also in shifts in workers’ power towards the state. In Cambodia, the rapid expansion of the apparel workforce made it such a decisive voter bloc that when the political opposition campaigned for higher wages for apparel workers ahead of the 2013 election, it resulted in a near-defeat of the ruling party. Subsequent material concessions to apparel workers can be viewed as an attempt by the incumbent regime to win the support of apparel workers. In Vietnam, where industrial development was more diversified, apparel workers represented a relatively smaller segment – but their leverage was amplified by their ideological centrality to the communist party and the inexperience of the state in dealing with capital-labor conflict. To maintain legitimacy and prevent labor protests from morphing into a political movement, the state resolutely intervened in strikes and frequently raised minimum wages.

In the Southeast Asian cases, hence, structural transformation improved the ability of apparel workers to bargain concessions from their employers and the state, bringing them closer to living wage benchmarks. In Madagascar, by contrast, where surplus labor persisted, structural transformation was limited, and the industrial working class remained marginal, collective action by apparel export workers was more muted and ineffective.

In apparel assembly, the scope of economic upgrading is limited…

A second finding from the comparative analysis is that when workers mobilize and successfully secure material concessions, rising labor costs put pressure on the profitability of apparel export manufacturers – but due to the specificities of apparel assembly and the adverse distributional dynamics of apparel GVCs, the scope of accommodating higher wages through economic upgrading is limited.

In Cambodia, some apparel manufacturers sought to compensate the profit squeeze by introducing labor-saving technologies or move into more complex products with higher unit prices. But they had limited success, as many functions in apparel assembly cannot be automated, and complex products tend to have smaller orders and lower efficiency rates, cancelling out the higher unit prices. Also, the gains from these measures were often captured buyers in the form of lower prices.

Similar responses are evident in Vietnam, although the balance was different. Here, wage increases were more gradual, which gave firms more time to make investments and develop new business strategies; and many factories largely avoided the wage-driven profit squeeze by increasing labor productivity. Especially in key industrial hubs, where labor shortages became endemic, apparel factories invested in labor-saving machines and moved to products with higher unit prices, typically by adding high-end brands of existing buyers. Another strategy was to relocate factories to semi-urban or rural areas with lower wages. Nevertheless, many apparel factories still found it difficult to restore profit margins in the face of rising labor costs. 

… so material gains to workers tend to be contradictory and fragile

With global apparel buyers unwilling to factor wage increases into their prices, and suppliers facing obstacles to economic upgrading, the burden of adjusting to rising labor costs largely falls on workers themselves. A third finding, therefore, is that material concessions achieved through apparel workers’ collective action tend to be contradictory and fragile, as factories and governments take regressive steps to realign labor regimes with the competitive reality of the industry.

This is particularly clear in Cambodia, where wage hikes after the 2012-14 strikes went hand in hand with rising work intensity, escalating production targets and tightening discipline. In parallel, the ruling party initiated a crackdown on the most vocal trade unions, while seeking to win over apparel workers through populist concessions. This repressive turn resulted in a decline in strikes and disputes, which helped to bring labor costs under control. Subsequent minimum wage increases were more modest and failed to keep up with rising living costs.  

Although apparel producers in Vietnam generally fared better, work intensification also occurred, especially in factories that remained in the low-value segments. Alongside upping minimum wages, the government attempted to bring wildcat strikes under control through improved social dialogue at the workplace level; but at the same time, it tightened its grip over civil society, intensifying efforts to suppress forms of association and expression deemed threatening to political stability. In Vietnam, too, did this result in a decline in strike activity and a slowdown of wage gains.

What are the conclusions and policy implications of all this?

This analysis carries lessons for studying labor regimes in other cases. First, in the context of the high capital mobility of apparel assembly, which generally undercuts workers’ bargaining power, processes of structural transformation can increase workers’ capacity to extract concessions from employers and governments. Second, in the context of the asymmetric buyer-supplier relations in apparel GVCs and constraints on economic upgrading in apparel assembly, it is difficult for supplier firms to accommodate rising labor costs. Third, therefore, material gains to workers are often unsustainable, as factories and governments resort to work intensification and labor repression to restore profitability.

Hence, the analysis shows how a broad-based improvement in wages and working conditions of workers in the global apparel industry requires that the power asymmetries of GVCs are addressed. Collective action by apparel workers can only achieve lasting gains if it happens across producer countries, forcing brands and retailers to pay higher prices to factories—something that we have not yet seen. At the same time, the analysis illustrates how countries that integrate into the assembly stages of apparel GVCs must from the outset pursue industrial policies to develop other industries that have greater potential for technological change and, thus, higher wages.

This blog post was first published on the Creating and Capturing Value blog. It is based on the chapter by Kristoffer Marslev and Lindsay Whitfield in the Decent Work in Global Supply Chains Annual Report 2024, which was published earlier this week. The chapter can be downloaded here.

Kristoffer Marslev is a researcher at the Technical University of Denmark.

Lindsay Whitfield is Professor of Business and Development at Copenhagen Business School.

The macro-financial weakness of Europe’s policy on EV manufacturing

By Cornel Ban

Observers of the Chinese EV ascendancy are correct in highlighting how China’s industrial policy, rare earth abundance, and subsidies have left Europe lagging in the race to electrify the automobile industry. Yet, their analysis misses three crucial financial dimensions underpinning China’s success in cleantech innovation and EV leadership.

First, the People’s Bank of China (PBOC) has, for over a decade, implemented targeted financial programs offering lower interest rates for cleantech industries, encompassing the entire EV value chain. This is a stark contrast to the European Central Bank (ECB), which has been notably hesitant to deploy such tools. The ECB briefly flirted with green-targeted lending in 2022 but failed to sustain these measures, missing an opportunity to align monetary policy with Europe’s industrial and climate goals.

Second, China has taken to heart the classical liberal argument that market failures necessitate state intervention in public infrastructure provision. In the context of EVs, this meant prioritizing the construction of a proper nationwide charging network, a move Europe largely neglected. Despite possessing the financial capacity to blanket the continent with EV infrastructure, the EU left the task to market forces that failed to deliver this infrastructure at scale. Even Germany, the country most acutely affected by the automotive crisis, failed to mobilize the needed public investment. The result is a fragmented and underdeveloped charging infrastructure, with a few exceptions in small member states that lack significant car manufacturing sectors.

Finally, China’s state-owned banks, government funds, and venture capital ecosystems have been systematically incentivized to channel massive financing into the EV value chain. Europe’s state-backed financial institutions, by contrast, have largely been bystanders despite their significant resources. Rather than orchestrating a cohesive financing strategy to support electrification in automotive, Europe has appeared content to hope for market-led solutions—a strategy that now risks cementing its position as a technological and industrial laggard.

The implications are stark. As China consolidates its role as the world’s dominant manufacturer and financier of green technology, Europe seems resigned to retreat behind a wall of tariffs and comforting narratives of global standard-setting on decarbonization. But this strategy is ultimately self-defeating. Without bold financial intervention and industrial coordination, Europe risks deeper deindustrialization, forfeiting not only its competitiveness but also its capacity to lead the green transition on its own terms.

Cornel Ban is an Associate Professor in the Department of Organization at Copenhagen Business School

See Cornel Ban’s views on this topic mentioned in the following posts:

https://www.politico.eu/article/northvolt-bankruptcy-ceo-peter-carlsson-resign-eu-battery

https://www.politico.eu/article/tesla-trump-and-the-china-trade-tariff-clash

What determines wages in apparel export firms in Kenya and Ethiopia?

By Florian Schaefer

We have been collecting data on firms and workers in the apparel export sectors on Kenya and Ethiopia to help us better understand the opportunities and challenges that apparel production can bring. The Creating and Capturing Value in the Global Apparel Industry project aims to explain what determines the wages and working condition in supplier firms, and how these can be sustainably improved. This blog post draws on some of the initial results from surveys administered to apparel factory workers in Kenya and Ethiopia to explore the factors that both drive wages and limit wage growth.

Apparel export production in Kenya and Ethiopia

The apparel export industries in Kenya and Ethiopia are relatively small, compared to Asian countries, and mostly include simple apparel assembly. Growth over the last decade was driven by a combination of rising wages in Asia, buyer preferences for diversification into new locations, and tariff-free access to the US market through the African Growth and Opportunity Act, although Ethiopia lost this tariff preference in 2022. Most apparel exporting firms in Ethiopia and Kenya are large supplier firms with production bases in Asia who move or expand small shares of their production, but there are important differences between the two countries. The Ethiopian industry is very recent in origin and exporting firms are largely concentrated in a series of new industrial parks, which were supposed to provide access to cheap electricity and low wages. Most firms that export apparel from Ethiopia are large transnational first tier suppliers. By contrast, the sector in Kenya is much older, with higher wages and more productive workers. Exporters are either large transnational producers or smaller single-factory operations, some of whom act as subcontractors for larger exporters.

Wages depend on decision made across multiple sites and scales

To understand wages paid to production workers in apparel supplier factories in East Africa, or any other production location, we need to trace the pressure for lower wages through the supply chains that define the global apparel industry. As we have documented in previous posts, the global apparel sector is dominated by large buyers, generally multinational enterprises that are able to manage access to lucrative consumer markets through their control of dominant brands or retail operations. Such apparel buyers have been able to build up high levels of bargaining power vis-à-vis their suppliers.

Apparel supplier firms are forced to produce clothes at or below a global ceiling price. Buyers will determine a maximum price they are willing to pay for a particular product and supplier firms that cannot meet that price will no longer receive orders. This trend has been especially apparent in apparel assembly. In short, global buyers want to optimise financial results. They pass this pressure on to supplier firms, who then must seek to become – or remain – profitable within the global ceiling price set by buyers. To survive supplier firms must try to achieve a combination low wages and high productivity, which often means strict factory discipline.
Given that apparel buyers determine an effective global ceiling price that binds all supplier firms engaged in apparel assembly, we hypothesize that the wages paid to workers in supplier firms in Kenya and Ethiopia should not differ significantly across firms in the same production location. Rather, wages will vary across production locations due to differences in local labour markets (including institutions and labour laws) and the extent to which workers are able to effectively mobilise for higher wages and better conditions.

How we find out: matched employer-employee surveys

To help us understand wages differences, we built a unique dataset of matched employer-employee data of firms and workers in the apparel sectors of Ethiopia and Kenya. Our wage data comes from direct interviews with production workers in both countries. Our quantitative dataset comprises two sources. In Kenya, we conducted our own worker and firm survey as part of the Creating & Capturing Value Project (N~400), while in Ethiopia we used a worker and firm survey conducted for the ILO Siraye programme in Ethiopia (N~1,000). In addition, to help us contextualise and interpret our findings, we conducted a large number of qualitative interviews in both countries. What did we find?

Wages are not systematically higher in larger firms

We first explored the relationship between salaries and firm size, using firm size as a proxy for the sophistication of the company given that the larger firms in the industry tend to be transnational first tier suppliers. Figure 1 shows the results for both Ethiopia and Kenya. In Ethiopia, there is no relationship between the wages paid to production workers and the size of the supplier firm. In Kenya, there is a positive relationship, meaning that larger firms do pay slightly higher wages, though the relationship is quite weak. In both countries, firm size is not a convincing predictor of wages paid to production workers. We can also see how much higher workers’ wages are in Kenya compared to Ethiopia. Using market exchange rates at the time of each survey to convert to USD, i.e. not correcting for differences in purchasing power, we find that the mean salary in Ethiopia was just $38 compared to $120 in Kenya.

Figure 1. Salaries and firm size in Ethiopia and Kenya

Wages differ across production locations in the same country

Next, we examine differences in wages across production locations. We do this separately for Kenya and Ethiopia, due to the large institutional differences between these countries. To make sure that any differences we find are meaningful, our analysis controls for basic worker characteristics such as age and sex, and firm characteristics such as size and level of worker unionisation. In Kenya, there are very clear differences between the two major production locations, Athi River and the Kilifi area near Mombasa. Athi River is effectively a suburb of Nairobi, while the firms we sampled in the Mombasa area were all outside of the city itself. Workers in Athi River had much higher wages.

In Ethiopia, differences are less clear and at first glance at least less intuitive. Wages are lowest in Bole Lemi, which is just outside of Addis Ababa (the capital city), and highest in the industrial park near the much smaller city of Adama. The Hawassa Industrial Park, by far the most important apparel production centre in the country, occupies an intermediate position. While there are large differences in the point estimates across locations there is substantially greater variation in wages in each location than in Kenya, meaning that most differences in Ethiopia are not statistically significant.

Figure 2. Salary differences by location in Kenya and Ethiopia

How can we explain these differences?

To understand the reasons for this variation we need to look at differences in labour market institutions between the two countries, and at the extent to which workers in each location have been able to use local labour market conditions and collective agency to their advantage.

Let’s start with Kenya. In Kenya, workers have a degree of institutional power due to laws on minimum wages and high levels of unionization. Annual wage increases in all firms are driven by shifts in the national minimum wages. In part, this helps explain the higher overall wage level. However, differences in wage levels across production locations appear to be determined by workers’ marketplace bargaining power, that is, by the extent that workers are easily able to find a new job. In Athi River, living costs are higher and alternative jobs are more available, thereby driving up reservation wages. On the other hand, in the areas outside of Mombasa workers have few other job opportunities, meaning they have less marketplace bargaining power and are more likely to accept lower wages.

By contrast, Ethiopia has no national minimum wage, and unionization is too recent to have had an impact. Our explanation focuses on associational power, that is the power that workers gain from joining together in collective struggles, and from developments and regional differences in state-labour relations. The ‘older’ industrial parks such as Bole Lemi and Hawassa had very low initial wages rates, which slowed down subsequent wages growth but also has been a key driver of conflict in the parks. For example, Hawassa Industrial Park has seen the most industrial action and the politicization of strikes, which over time led the government to lean on firms to make concessions. In the Bole Lemi Industrial Park, we would expect to see higher wages due to its proximity to the comparatively higher-wage economy of Addis Ababa. However, firms seek to counter this pressure by investing considerable resources to source workers from the surrounding peri-urban area. The comparatively higher wages levels in the Adama Industrial Park are the result of both worker agency and the fact that this park was the last to become operational. The park saw intensive labour activism as apparel supplier firms were setting up in the new industrial park, and the supplier firms corrected for low wages rates paid in the older parks to attract and maintain workers.

What do these findings tell us about the outlook for apparel workers seeking higher wages?

In both Kenya and Ethiopia, workers’ marketplace bargaining power has decreased because of recent crises. Demand for apparel products in key end markets, especially the US, has slackened in recent years due to the impacts of the COVID-19 pandemic and increased competition from the ultra-fast fashion sector, leading to order losses in both countries. In Ethiopia, this was exacerbated by a civil was that led to the loss of preferential access to the US market. Both countries have seen worker layoffs and factory closures (even as some factories moved from Ethiopia to Kenya).

Our finding that differences in wages in apparel assembly factories are driven less by differences between companies and more by variation in local labour market conditions and worker power suggests that while worker power can achieve limited results, worker power is unlikely to improve in a world where global buyers can set ceiling prices for apparel suppliers.

The full paper presenting the analysis is coming, so stay tuned!

Florian Schaefer is a lecturer in international development at King’s College London.