Lessons from China might inform urbanisation and industrialisation in Ethiopia, including labour rights and housing policies within an expanding manufacturing market.

As we discuss in the first blog of this China-Africa series, urbanisation in sub-Saharan Africa has so far not been accompanied by a process of industrialisation, contrasting with the development experiences of other regions that have urbanised earlier. This also contrasts starkly with China’s recent development trajectory. Marked by a tight coupling of urbanisation and industrialisation, people leaving agricultural jobs in rural areas found an abundance of urban manufacturing jobs to move into.

To kickstart this process and emulate the urbanisation-industrialisation path that has successfully led to rising national incomes in the past, the Ethiopian government has decided to pursue industrial park construction. These parks are meant to attract foreign export-oriented firms by providing, among other benefits, a large, relatively cheap labour force. The flagship park in this programme is Hawassa Industrial Park (HIP), inaugurated in 2016 and geared towards integrating Ethiopia within global apparel and textile value chains. Impressively, this park was constructed in just nine months by the Chinese Civil Engineering Construction Cooperation at a cost of US$ 245 million.

The arrival of international garment firms, such as the clothing giant PVH, together with a bespoke labour sourcing system, has led to rapid job creation in Hawassa. As of April 2020, 33,199 workers were already employed in the HIP, with an estimated 91% originating from outside of Hawassa. This is a large number of people for any city to absorb and house, but especially for a developing country city like Hawassa. Whilst the importance of housing has been acknowledged, the Ethiopian government is still grappling with how to respond.

The effects of migration on the housing sector and of the housing sector on migrants

If a large increase in demand for housing is unaccompanied by commensurate increases in supply, simple economics would predict a rise in prices to follow. Interestingly, the effects of this mass in-migration have not been reflected in house price inflation in Hawassa. In fact, overall housing inflation for the period since HIP was built is between zero and negative. However, this can largely be explained by circumstantial factors affecting higher-end housing. If we delve deeper and examine inflation figures between 2015 and 2019 by market segment, the segment of housing likely to house HIP workers saw real price hikes of the order of 20 to 43%. This strongly suggests that market supply is not keeping up with rapidly rising demand.

The high cost of housing, in turn, reduces the attractiveness of city life, fuelling the high levels of turnover that have plagued industrial park firms. A further knock-on effect of Hawassa’s housing shortage has been the tendency for migrants to settle on the city’s outskirts, thereby driving the rapid outward expansion of the built-up area of Hawassa. This has been most pronounced in the sub-cities of Tabor and Hawella Tula, where around 30% of tenants work in the HIP. This expansion has not been a formalised, planned process, but has mostly taken place through informal land sales in agricultural areas. In addition to the security threats that housing in unurbanised, sparsely settled areas poses for young, predominantly female workers, this rapid expansion of peri-urban areas creates challenges for future provision of infrastructure, which could have been mitigated through planning processes.

A poorly functioning urban environment is likely to raise rates of turnover among HIP workers as it can reduce worker morale and make working in the industry less financially viable. Excessive worker churn is not good for firms: it forces them to repeatedly incur the expenses of training new workers and of waiting for inexperienced workers to improve their productivity. Moreover, it raises the possibility that workers with better outside options in the labour market, who are presumably more productive, may not be attracted to HIP jobs from the start. Thus, a poorly functioning urban environment raises the costs faced by HIP firms and undermines the park’s overall competitiveness. A combination of policies, including urban policy, is required to significantly reduce turnover in HIP. In the meantime, evidence has shown that self-employment and service sector jobs are still preferred to the manufacturing jobs in HIP and other industrial parks.

Attempts to increase housing supply

The urgency of addressing the housing shortage was very clear to the Industrial Parks Development Corporation (IPDC), the parastatal in charge of running industrial parks. In 2017, IPDC proposed extending a credit facility, through microfinance loans, to homeowners in Hawassa who had vacant land, to construct additional rooms. The rooms themselves were to follow a standard design: 12 m2 with three bunk beds to house a total of six workers. According to the financial specifications of the scheme, these standardised rooms would be rented out at around 30% of the HIP base wage per person, largely in line with affordable housing standards. The loan could be repaid in about three years.

However, this scheme was fraught with challenges. The conceived design fell well below the International Labour Organisation’s (ILO) housing standards. Rather, the rooms were of poor quality and extremely overcrowded. Therefore, IPDC revised it standards to only have four occupants per room. This inevitably meant that rents had to increase to cover the costs of construction, where higher prices were less affordable to most HIP workers. As such, rooms that were constructed saw reduced occupancy rates. This, in conjunction with regulations forbidding the allocation of rooms to non-HIP tenants, undermined homeowners’ capacity to repay the loan. A negotiated reduction in rent prices and an extension of the repayment period to five years helped alleviate some problems, but was not enough to avoid several defaults on the construction loans. Furthermore, it did not resolve the challenge of housing affordability for HIP workers.

Subsequent discussions have centred on the possible construction of dormitories adjacent to HIP and thus closer to the firms. However, as with the previous IPDC scheme, the limited purchasing power of workers has posed considerable challenges. This has been aggravated by the limited capacity of the domestic construction industry and the relatively onerous requirements of ILO standards, which raise overall construction costs. In combination with a weak legislative framework governing public and private sector partnerships, these factors undermine the financial viability of dormitory construction, reducing its attractiveness for private sector developers.

Learning from China’s urban villages

China’s urbanisation and industrialisation story offers an informative example of a policy framework that enabled the housing supply to accommodate a rapid influx of migrants searching for work. As in Ethiopia, growing cities started encroaching on outlying rural areas. However, in contrast to Ethiopia, the Chinese government anticipated and planned for this, acquiring the rights to agricultural land from village collectives. Villagers themselves, in search of new livelihoods, often used their compensation payments to finance the construction of housing which they then rented out to incoming migrants. This alternative livelihood strategy benefited both the villagers and migrants, many of whom were not allowed to settle in cities due to China’s strict settlement regulations.

Dormitory housing also played a role in China’s urbanisation. Contrary to the intent in Ethiopia of using dormitory housing to facilitate the transition to an urban, industrial environment, dormitory housing in China served primarily as a tool for labour control. As dormitories were primarily provided by firms, this strategy allowed firm managers to maximise labour inputs and restrict workers’ ability to easily leave their jobs. As a consequence, workers almost invariably preferred urban village housing over the prospect of being lodged in dormitories. These types of draconian policies fortunately appear absent in the Ethiopian case. However, it is interesting to note that, despite their lack of appeal due to their stark encroachment on worker’s rights, dormitory housing in the Chinese context does seem to help reduce the turnover problem that so often plagues manufacturing firms in early industrialising contexts. Thus, through a combination of urban villages and employer-provided dormitories, housing policy in China’s industrialising towns was able to both ensure a relatively low-cost urban environment and to help maintain worker productivity.

For Africa to unlock the virtuous urbanisation-industrialisation cycle, it needs to attract efficiency-seeking foreign investors. Ethiopia’s industrial park policy, which has drawn inspiration from aspects of China’s development trajectory, is one way to do so. However, such a policy cannot be treated in isolation; as both Ethiopia and China show, it needs to be coupled with forward planning and thinking about how migrant populations, who provide the labour to these parks, can be absorbed within the housing sector. Whilst Ethiopia is still grappling with how to do this on a sustainable scale, China shows how inexpensive solutions benefitting broader swathes of the urban population can be combined with more capital-intensive policies to ensure cities contribute to industrialisation and poverty reduction. However, the Chinese experience also shows that this should not be done at the expense of the rights of workers.

Disclaimer: The views expressed in this post are those of the authors based on their experience and on prior research and do not necessarily reflect the views of the IGC.