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AddisStandard.com: Economic commentary: Ethiopia’s low wage is a curse, not a blessing

Posted by: Berhane.Habtemariam59@web.de

Date: Wednesday, 25 April 2018

 

Please see details on each of the above indicators throughout the story

Ayele Gelan, (PhD), special to Addis Standard

Addis Abeba, April 25/2018 – The EPRDF government has succeeded in attracting a good number of foreign firms by advertising Ethiopia as a low wage country. Ethiopia’s investment authority publicity materials graphically display Ethiopia’s extremely low wage, also stating that the country does not have a minimum wage applicable to the private sector.  Hailemariam Desalegn, ex-prime minister of Ethiopia, claimed that Ethiopia out smarted the rest of Africa in attracting foreign firms: in order “to achieve our advantage in light manufacturing, we have kept such costs [wage] low”. Abdulfetah Abdulah, Ethiopia’s minister of labor and social affairs also said: “We need to be competitive to attract foreign direct investment and we need to create employment.” said Minister of Labor Social Affairs.  The local English weekly, Addis Fortune, also once came up with a headline: “Wages Too Soon To Ponder”, essentially to dismiss any consideration of labor law to protect workers.

Clearly, the Ethiopian government has seen low wage as a blessing, a comparative advantage to cure the country’s economic malaise. The IFPRI once quoted an Ethiopian Investment Commission report that “the average wage of workers in the leather factories is US$ 45 per month, while the minimum wage in Guangdong is about US$300”. On the other hand, it is reported that “entry-level salaries in Ethiopia range from $35 to $40 per month, significantly below average Chinese manufacturing wages of $629 per month, a figure reported to have tripled between 2000 and 2010.” This means that the wage rate Chinese firms pay in Ethiopia would range between 6% to 14% the prevailing factory wages in China.

In this piece, I will investigate  whether there is any empirical evidence to substantiate Ethiopia’s overzealous commitment to industrialize by capitalizing on low wage.  By doing so, I will attempt to seek answers to these and related questions such as how low is Ethiopia’s wage rate?  How does Ethiopia’s wage and cost of living compare with corresponding figures from the neighboring countries? I will not only confine my analysis to wages paid by foreign firms but also discuss Ethiopia’s wage policy and pay structure more broadly.

An anecdote

Policy makers, researchers, and donors alike have taken it for granted that Ethiopia’s wage is low just like any other developing economy. That Ethiopia is an outlier has largely remained unrecognized.  In spite of researching on the Ethiopian economy for many years, I have come to realize that I was not paying enough attention to the abnormality of Ethiopia’s pay structure.

That was until a random day when I came across with a specific job advert in Kenya.  That job was for a research assistant, a fresh MA graduate in agricultural economics. I learnt that monthly salary for that job was in the range of Ksh90,000 to 120,000 depending on experience.  At the time, the prevailing exchange rate was 1 birr for 5 Ksh.  So I learnt that a young fresh graduate in Kenya was expected to earn about Ksh 105,000 (21,000 birr) per month.

At the time, I knew the most experienced Professor at Addis Abeba University earned a gross salary of around 6,000 birr per month.  It meant that a young graduate, perhaps entering the labor market in Kenya for the first time, earned about four times the salary of a distinguished Ethiopian Professor with 30 or more years teaching and research experience.

I found it mind-boggling – I wondered how Ethiopia got itself into this odd situation.  I am still searching an answer for that question but one thing is clear – that anecdote was a revelation for me, I never thought about Ethiopia’s wage the same way I did before.  It was a powerful anecdote that inspired me to do more in gathering data and examining the patterns. In the subsequent sections, I will present and discuss some of the data I have collected and analyzed.

Teacher’s salaries

I was hanging onto some hope that perhaps the overall the situation was not as disastrous as implied my anecdote. To begin with, I continued to compare Ethiopia with Kenya.  The WageIndicator database provides a comprehensive and very detailed data for many countries in the world.

Detailed data on public sector salaries in Kenya and Ethiopia are available in that database, with all sub-sectors and most salary scales.  For the sake of brevity, I selected teacher’s salary for comparison.  Teacher’s salary scales in both countries followed a ten level structure, from scale 1 to 10 but it would suffice to compare typical salary at entry level (at early elementary school) and the top grade, principal of a high school.

An elementary school teacher, say at kindergarten in Nairobi, earns about the equivalent of $267, while an Ethiopian teacher in the same position earns $38.  This means at entry level Kenyan elementary teacher salary is seven times (or about 600% more than) that of Ethiopia’s.  At the opposite scale, an experienced secondary school principal earns $1,743 per month in Kenya.  The corresponding figure in Ethiopia’s scale is $136.  It follows that at top grade a Kenyan secondary school principal earns about 13 times (or about 1200% more than) her/his counterpart in Ethiopia.

These indicate the anecdote I reported earlier did not represent an isolated incidence at all, it just revealed the tip of the iceberg, a shockingly contrasting patterns of salary structures between the two neighboring countries.

Minimum wage

Ethiopia does not seem to have a universal minimum wage applicable to all sectors and employees. What it has instead is a loosely applicable minimum wage of 420 birr/month ($15.5 at current exchange rate), which is applicable to civil service employment. This is not binding in the rest of the economy, particularly the private sector. In the International Labor Organization (ILO) statistical database, Ethiopia’s minimum wage is reported alongside with figures for other countries in the world.  The year 2012 was the last year Ethiopia’s data was reported in that database.  I selected two neighboring countries, Kenya and Egypt, who had figures for that year and plotted them in the Figure 2.

Ethiopia’s minimum wage was so low that it is less than a tenth of the two neighboring countries (11% and 14%, respectively of minimum wages in Kenya and Egypt).

Average earnings

I have so far benchmarked Ethiopia’s wage in a selected sector (education) and the indicative wage floor, the minimum wage. Now it is appropriate to pull these together and get a sense of magnitude at economy-wide level.  For this, I turn to ILO average monthly earnings database. Data for ten African countries for whom ILO reported data on this indicator is presented in the table below.

The countries are ranked in descending order of the level of their monthly earnings (source: created by the author from ILO 2018 Monthly earnings). In order to smooth out data and avoid relying on data reported on a single year, averages of available years after 2010 was used.

Even at economy-wide level, Ethiopia still compared so miserably with the selected countries. Ethiopia is stuck at the bottom of the pile.  Ethiopia’s monthly average earning ranged from roughly a tenth of Namibia’s and two-third of Rwanda’s.

Cost of living index

The extent to which low wage would adversely affect the standard of living of wage earners critically depend on the country’s cost of living.  Ethiopia’s low wage could be justified if cost of living in Ethiopia is lower than those in other countries. Unfortunately, however, available evidences indicate cost of living in Ethiopia is not low at all.

The cost of living indicators database  provides comprehensive and consistent indicators for most cities in the world. Figure 3 compares Addis Ababa’s cost of living with four other countries in East Africa, alongside with Beijing.  The cost of living indices were constructed by using New York as a yardstick (New York = 100). For instance, Beijing (46%) means, Beijing’s cost of living index is about 46% of that of the cost of living index for New York.

Addis Abeba’s cost of living is about 50% of that of New York, the highest cost of living index plotted in Figure 3.  For instance, Ethiopia’s average economy-wide monthly earning is about a third of that of Egypt but cost of living index in Addis Abeba is roughly twice the corresponding figure for Cairo.  Teachers in Nairobi earn at least seven times more than their counterparts in Addis Abeba but Nairobi’s cost of living is 7% lower than that of Addis Abeba.

According to detailed information in the cost of living index database, the cost a loaf of fresh white Bread (500g) in Addis Abeba is 57% more expensive than its cost in Nairobi. The rent of a three-bedroom apartment in Addis Abeba is at least 150% more than in Nairobi. The cost of a Toyota Corolla 1.6l 97kW Comfort (Or Equivalent New Car) is about 200% more expensive in Addis Abeba than in Nairobi.

Ironically, Addis Abeba’s cost of living index is higher than that of Beijing.  Chinese manufacturers have been enticed to relocate to Addis Abeba on the ground that Ethiopia has an exceptionally low wage, the wage rate in Addis being advertised as a seventh of the prevailing wage rate in China! However, Ethiopian factory workers who are paid less than a seventh of the Chinese wage rate are obliged to survive in a city whose cost of living index is higher than that of Beijing.

Living wage

Another piece of evidence on Ethiopia’s cost of living comes from a recently completed study on living wages, sponsored by the Global Wage Coalition, and conducted through a structured survey of flower farms clustered around Ziway (about 164 km South of Addis Abeba).

The study collected data on the prevailing wages on the flower farms. The study also thoroughly estimated a living wage, that is to say, how much the workers needed to spend to satisfy their basic needs.  The study revealed interesting facts that the living wage in the area was around birr 3,367 but the prevailing wage paid to workers was on average about birr 1,058.  It should be noted that Ziway is a non-metropolitan area, whose cost of living is expected to me much lower than that of Addis Abeba.

The salary the workers were paid covered only a third of their cost of living!  It is anybody’s guess as to how the workers would survive in such dire circumstances.  A familiar coping mechanism is just to cut deep into to their living standards, e.g. eating only once or twice at best per day to try to make ends meet.

A curse indeed!

Evidences adduced in the preceding sections indicate that Ethiopia’s wage policy has been thoroughly misguided in considering the country’s prevailing low wage as a blessing.  Ethiopia’s low wage has been a crippling malaise in the country’s economy, like an elusive illness that remained un-diagnosed for a long period.

A debate over whether or not Ethiopia’s low wage is a curse or a blessing would make sense only if Ethiopia has just a “normally” low wage.  For instance, if Ethiopian teacher’s salary were about 25% or 75% of that of Kenya provided that Ethiopia’s cost of living is not hugely higher than in Kenya, then it would all be fine.  However, here we are talking about Ethiopia’s low wage falling below its neighbor’s by a factor of five to fifteen. In other words, Ethiopia’s wage is not just low, but it is “abnormally” low.  The authorities try to consider this as a comparative economic advantage simply because either they have never bothered to find out how deeply flawed Ethiopia’s wage is or else the authorities were ill-informed about the implication of running an economy based on such a shockingly low wage.

There are far reaching adverse consequences emanating from such an abnormally low wage.  First, the standard of living of citizens is deeply connected to earnings they get from their livelihood activities.  As noted earlier, Ethiopia’s working class are currently getting a living wage that is a fraction of their living wage. Wages, efficiency wages in the jargon, are mechanisms through which workforces are encouraged to exert efforts in in the process of creating wealth.  It is to the best interest of employers to pay reasonable amounts to employees. Efficiency wages serve as incentives to work, a lubricant that smoothens out rough edges in economic relationships.  In a very low wage economy, this inbuilt mechanism is eroded.  The incentive to work fades away.

Second, the implication of low pay for corruption can by no means be exaggerated.  Pathetically small wage in civil services, for instance, does not only mean lack of incentive to work but also nudging employees to resort to getting what they deserve by some other means, such as bribes.

Third, the livelihood of those who do not depend on wages firmly hinges on the purchasing power of wage earners.  For instance, Ethiopia’s farmers are sandwiched between adverse global market conditions and weak domestic market. They are compelled to produce at subsistence level, refraining from producing surpluses for domestic markets.  There were times when Ethiopia’s farmers were enticed to producing surpluses.  They went ahead and produced surpluses, way beyond the economy could absorb. They had to dump their produce at a fraction of their cost of production, selling their assets, such as oxen to pay debts they incurred in buying improved seeds and fertilizers.

But how come?

It is clear from the foregoing discussion that Ethiopia is an odd one out in the world as far as its wage and salary structure is concerned.  But how on earth this peculiar pay structure came into existence in the first place?  Why is Ethiopia so different from the rest of the world?

Seeking answers to such a complex question falls beyond the scope of this piece. I limit my commentary to making general remarks on the possibility of historical factors being responsible for such an anomaly: It is possible to speculate that a responsible explanation may lie in the fact that Ethiopia has never been colonized!

Most other countries in the world have inherited a pay structure rooted in some European colonial legacy. For that reason, pay structures of most developing economies are reasonably comparable. Each country evolved from a common base during the postcolonial era, with some degree of divergence over time.

On the other hand, Ethiopia’s civil service pay, which have set the standards for the rest of the economy, evolved from medieval feudal system, perhaps from zero base in that there were times when citizens performed civil service duties to the government for free, still worse incurring costs themselves, and hence a perverse case of negative wage.  It is from such base that the current structure have evolved at frustratingly slow pace.  That way, Ethiopia’s pay structure remained misaligned with pay structures in rest of the world.  The misalignment has remained in place. Critically, it has never been recognized as an explanatory factor for the country’s socio-economic ailment.

Misdiagnosed, already

The challenges associated with the appallingly low wage in Ethiopia is beginning to attract the attention of the international community. Perhaps in consultation with the Ethiopian government, the ILO has recently sponsored an exploratory study for a minimum wage system in Ethiopia.

The title of the study being commissioned indicates that the ILO has already misdiagnosed Ethiopia’s low wage illness, already deciding minimum wage as a solution. It is just a matter of finding out at which level to set Ethiopia future minimum wage.  As noted earlier, the existing non-binding minimum wage applies only to civil service employees, but inevitably this will be made binding and then extended to cover the rest of the economy, both private and public sectors.

I would argue that the ILO approach to tackle Ethiopia’s low wage amounts to trying to heal a chronic illness by offering a painkiller.  Critically, it should be recognized that minimum wage laws are meant to address anomalies in wage distributions in contexts where there are no problems with the average wage as such, but only that some are paid extremely low wages.  In such cases, minimum wage laws introduce a binding minimum wage, a wage floor, below which it would be illegal for employers to pay, but the law leaves the distribution around the average intact.  This way, members of the society who were left behind because of low wages would be pulled up, allowing them to get a living wage, a level of wage that would enable them to achieve a standard of living deemed acceptable by the society.

However, every wage earner in Ethiopia is paid a level of wage that does not offer a decent living standard. In other words, every wage earner in that country is essentially left behind in two ways – relative to the cost of living (e.g. prevailing wage being a third of the living wage) as well as relative wage rates in the rest of the world.

Ethiopia needs a complete revamping of the wage structure in such a way that the entire wage structure moves to the right, so that Ethiopia would be aligned for the first time with other countries, by removing the embarrassing situation so that Ethiopian teachers would be paid a level of salary comparable to the rest of the developing economies.

 Side effects?

Revamping the entire wage system of a nation is bound to be a complicated business. It requires a thoroughly drawn out and daring policy move to undertake such a paramount task.  Inevitably, there will be some side effects. However, it should be noted that this is going to be a one-off policy move and that there is nothing beyond creative human endeavor.  As always, if there is a political will, certainly there will be a way.

First, possible adverse effect on Foreign Direct Investment immediately comes to mind.  However, there is a strong evidence to suggest that, bizarrely, the abnormally low wage in the country is adversely affecting foreign investors primarily in recruitment and retention of workers.  A study sponsored by Innovations for Poverty Action and completed in 2017 found out that at least 77% of workers employed in Ethiopia’s mushrooming factories quit their jobs within a year of their recruitment on the ground that the factory wages proved to be inferior to their previous earnings in the informal sector, including farming. Importantly, those who left have never considered looking for jobs with other factories.

The other possible adverse effect would be some inflationary pressure.  A carefully coordinated policy package can dampen adverse inflationary effects emanating from adjustments to wages, particularly given that the country has so much underutilized resources, including unemployed or underemployed work force.   In any event, it would not be wise to live with a chronic illness for fear of side effects that may result from a surgical procedure. AS


ED’s Note: Ayele Gelan is an economist by training. He can be reached at augelana@gmail.com


Credit: Fig 1. Source: created by the author, data obtained from website wage indicators database.

Credit: Fig. 2 Source:  created by the author from ILO Minimum wages database

Credit: Monthly Earning Table and Fig. 3 created by the author

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