When the "African Tigers" compete

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This piece was originally produced for the ChinAfrica Econometer

As costs increase in China and other Asian manufacturing countries, the "African Tigers" are competing to absorb displaced manufacturing capacity and become the next leaders of low-cost manufacturing. Recognizing the success of export-led manufacturing growth in bringing the Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan) out of poverty, African business and political leaders are seeking to mimic this success at home. The leading East African economies of Ethiopia, Kenya and Rwanda provide competitive manufacturing environments with unique strengths.

In addition to low labor prices, low-cost African economies benefit from key duty-free and quota-free trade agreements, such as the United States' African Growth and Opportunity Act and the EU's Everything but Arms pact. However, these East African nations face a host of challenges in absorbing Asian manufacturing capacity. For example, many are unable to provide a stable supply of electricity, and thus local enterprises face a costly reliance on generators for electricity.

Ethiopia, Africa's second-most populous country, has been successful in attracting investment from China through the nation's Chinese-constructed special economic zones, such as the Ethio-China Light Manufacturing Special Economic Zone, 30 km outside of Addis Ababa. In this zone, one of China's largest shoe manufacturers, the Huajian Group, began operations in January 2012. Even when their lower productivity is accounted for, Ethiopian workers present a dramatic cost reduction to manufacturers. Ethiopian workers at the Huajian factory receive a monthly wage of $40 per month, whereas the average manufacturing wage in China was $625 per month in 2013.

Manufacturers in these economic zones also benefit from relatively low property and utility costs, in part due to the government's interventions to attract foreign investment. Huajian stated that it achieved profitability within a year of operation, and that its profitability prospects will improve as landlocked Ethiopia improves its underdeveloped transportation system. Currently, the cost to transport a container from Addis Ababa to the nearest port of Djibouti is roughly equal to the cost of shipping from Guangzhou, China to Djibouti. The government seeks to decrease these costs through a 10-year, $4 billion infrastructure development program.

Kenya represents one of the most open and progressive states in Sub-Saharan Africa, and the government has recently approved three special economic zones, one of which will be implemented jointly with the Dongo Kundu Transshipment Freeport. The recent increase in Chinese investment in Kenya means that China is now Kenya's largest source of foreign direct investment.

With the second-highest ranking in the World Bank's Ease of Doing Business index in Sub-Saharan Africa (behind Mauritius), Rwanda presents a uniquely stable business environment. Chinese C&H Garments Co., for instance, recently announced plans to establish a 200-employee factory, which, if successful, will be used as a "proof of concept" to attract other manufacturers to Rwanda.

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