Trade is one of the most important tools in the fight against poverty. Poverty is in such a critical state in Africa that the continent needs to continuously work towards improving its export abilities in order to finance its own development and create jobs. Access to developed countries’ markets for African countries’ products is limited. Trade and non-trade barriers erected by developed countries render African countries too expensive to compete with developed countries’ products, which results in worsened living standards for African people.

Increased access to developed countries’ markets would assist African countries with fighting poverty. In this view, the Government of the United States of America introduced in 2000 a new trade strategy with Africa, the African Growth and Opportunity Act (AGOA). The primary aim of AGOA is to increase and enhance trade between the US and countries in Sub Saharan Africa by allowing duty-free export of selected products to the US. “The main point of AGOA is to reward countries that perform well,” Mr. Anthony Newton, Director of the economic policy staff in the State Department’s Bureau of African Affairs, said recently. This CAI paper discusses the benefits of AGOA with specific reference to Kenya, Lesotho and Mauritius.

AGOA in Africa

Allowing the sub-Saharan African countries to make their way in the global economy, the Act authorises the US President to designate countries eligible to receive the benefits of AGOA if they are determined to have established, or are making continual progress toward establishing the following: market-based economies; the rule of law and political pluralism; elimination of barriers to U.S. trade and investment; protection of intellectual property; efforts to combat corruption; policies to reduce poverty, increasing availability of health care and educational opportunities; protection of human rights and worker rights; and elimination of certain child labour practices. These criteria have been embraced overwhelmingly by the vast majority of African nations, which are striving to achieve the objectives although none is expected to have fully implemented the entire list.

The most important advantage of this program is that it requires zero tariffs from qualifying African countries for their exports to the large US market, which allows them to continue reaping trade benefits from the opportunities in the American market. Textile and clothing is the Sub-Saharan African industry that has greatly benefited from the AGOA strategy. For instance, statistics show that there has been a slow but constant increase of textile and apparel exports from the qualifying sub-Saharan African countries to the US market, from US$ 798m in 2002 to US$ 914m in 2009.

Kenya’s experience under AGOA initiative

Kenya, the regional trade hub in East Africa, is one of the first sub-Saharan African (SSA) countries to benefit from AGOA. It qualified for the ‘Wearing Apparel’ Provisions early in the 2000s. Kenya’s apparel and textile exports to the US under the AGOA agreement have become a dominant export category to the large US market, thus contributing to the increase in the economic growth rate and intensifying economic and financial activities for businesses operating in apparel and textile activities. Over 95% of Kenya’s export of apparel and textile goods complies with the AGOA provisions. In addition, Kenya is regarded as a Lesser Developed Country, allowing that country the use of third country textile inputs, which means that in the absence of a major expansion of textile production capacity prior to September 2004, it will have to rely on sourcing its textiles from its regional trade partners. This in all likelihood will provide a major boost not only to the Kenyan economy, but also to the trade partners’ textile industries, hence stimulating economic growth and creating jobs.

The AGOA agreement has a major impact on business development in Kenya. The Kenyan apparel and textile industry is one of the major players in the AGOA framework, especially with businesses operating in the export processing zones having contracts with US buyers. Based upon 2008 statistical data, the returns from the AGOA tariff agreement accounted up to US$ 300 million (Sh 2.3 billion) for Kenya’s total export to the US. According to the Economic Survey 2009, direct employment created in the sector heavily supported by the AGOA initiative is 25,776. Even though these statistical facts are encouraging for Kenya, the potential benefits have not yet been fully exploited and utilized by the Kenyan authority. The AGOA has also contributed to attracting businesses from other countries. This has resulted in accruing more tax revenues to the government, more investment in infrastructures, and more income distribution to the workers.

Kenya’s total bilateral trade with the United States expanded upward over the decade 2000 and 2010, from US$ 163 million to US$ 875 million. During this period, Kenya’s exports to the U.S. under AGOA legislation skyrocketed from US$ 36 million to US$ 284 million, with the highest increase from 2003 to 2005. More than 90% of the Kenyan apparel and textile exports to the U.S. have benefited from AGOA legislation and the Generalized System of Preferences.

The agricultural sector played a limited but significant role in increasing Kenya’s share in the US market under the AGOA initiative. Nonetheless, this share under AGOA increased from 1.4% in 2007 to 4.6% in 2009. Yet the sector has immense potential to reduce poverty and create direct and indirect jobs in Kenya. Increased agricultural exports under AGOA help to diversify Kenya’s exports and boost production capacity in the sector.

The presence of AGOA in this country has indeed greatly contributed to the generation of thousands of jobs by driving more FDI into Kenya, thus reducing poverty among populations whose livelihoods depend on rural or mechanised farming. In this view, the establishment of the Export Processing Zones (EPZs) Act by the Kenyan Government under AGOA legislation encourages expansion and diversification of exports, attraction of new productive investment, generation of new employment, foreign exchange earnings and increased technology and skills transfer. For instance, this program has attracted investments from Sri Lanka, India, Taiwan, UAE, USA, Belgium, UK, China and South Africa. Kenya’s local investors have also taken advantage of the program. Currently the ownership composition of the Kenyan EPZs is 56.6% foreign, 24.1% joint ventures, and 19.3% Kenyan. In the ten year period 1999 – 2009, AGOA enactment in Kenya led cumulative private investment in EPZs to rise from Sh 5.9 billion to Sh 21.5 billion. The zero tariff programs led the EPZs jobs to rise from 5,160 in 22 enterprises in 1999, to 30,623 jobs in 83 enterprises in 2009. The zones increased from 16 in 1999 to 40 in 2009, spread across the country. The foreign direct investments in various sectors have injected new technology and skills for global production to international standards. Expatriates are employed in technical, supervisory and managerial cadres.

Lesotho’s experience under AGOA legislation

Rapid expansion of Lesotho’s exports to the US is the most important indicator of bi-lateral trade between the two trading partners. For instance, the statistics record about US$ 215 million trade surplus of Lesotho with the US in early 2001. This had increased to US$ 319 million by late 2002. The AGOA initiative with Lesotho has greatly supported its exports of apparel to the US, making it a meaningful tool of poverty reduction, and business investment promotion. Lesotho has a comparative trade advantage achieved by no other AGOA-eligible country, with the distinction of having virtually 100% of its exports falling under the AGOA initiative. The status of Lesser Developed Country is a window of opportunity for Lesotho to use third country textile inputs for its exports eligibility. Although its textile production is limited, Lesotho relies on textiles from South Africa where the economy was boosted by its textile industry production.

In terms of the business impact, FDI from AGOA exporting companies has increased from M198.9 million in 2000 to M1,329 million in 2008. This improved FDI is attributed to an increase in new companies – the number has risen from 23 in 2000 to 70 new companies at present. A report from the Ministry of Trade, Cooperatives and Marketing shows that the economy has responded positively to AGOA in attracting additional FDI and this resulted in the creation of thousands of jobs and growth in the clothing manufacturing industry exports.

The contribution of the manufacturing industry to the country's economy has also resulted in massive employment and economic multipliers that include formal and informal sector activities. These sectors include road freight transport, security passenger transport, traders that sell food to workers, electricity and communication facilities, and the list goes on. There is no doubt that AGOA has a positive influence on not only poverty reduction, but also on attracting businesses by increasing FDI inflow. The expectation here is that the inward FDI flow to Lesotho will bring with it jobs, transfer of both technology and skills, and diversification of export products and markets, and therefore the reduction of poverty by an efficient distribution of income.

AGOA has a massive impact on business development in Lesotho and its close trading relationships with neighbouring countries, such as South Africa. As such, Lesotho has a long-term potential to develop globally competitive apparel and textile sectors. For instance, the effect of AGOA on direct job creation in the kingdom of Lesotho’s garment sector is observable in the fact that about 60,000 of its 2 million residents are employed in this sector. Lesotho is the largest sub-Saharan African exporter of garments to the US, with about 80% of its textile and garment shipments going stateside. South African retailers are the next biggest purchaser of Lesotho-made garments, followed by Canada and the EU. Smaller volumes also go to Dubai, Qatar, Chile, Japan and Taiwan, the list is long. Boosted by the AGOA legislation, the increased export from Lesotho to the aforementioned partners, has led to massive development of business investments, economic growth, job creation, poverty reduction, improved management skills, etc.

Mauritius’ experience under AGOA agreement

Independent since 1968, the Mauritian economy has developed from a low-income, agriculturally based economy to a middle-income diversified economy with growing industrial, financial, and tourist sectors.

For most of the period from 2000 through 2010, annual growth has been increasing steadily. This remarkable achievement has been reflected in more equitable income distribution, increased life expectancy, lowered infant mortality, and a much improved infrastructure. Sugarcane, a non apparel and textile good, is grown on about 90% of the cultivated land area and accounts for 25% of the country’s total export earnings. Mostly, when elected to the AGOA initiative, Mauritius continues to reap benefits from the US tariff preference and makes its way in the global economy.

On the business impact of AGOA, the Mauritius government's development agenda centres on FDI. Mauritius has attracted more than 9,000 offshore entities, many aimed at commerce in India and South Africa. Investment in the banking sector alone has reached over US$ 1 billion. With a responsible fiscal management, Mauritius was well-poised to take advantage of AGOA. Annually it records a significant trade surplus with the United States, which in 2002 amounted to US$ 253 million (2001: US$ 249 million), suggesting that there are strong indications that the magnitude of trade between Mauritius and the US under the trade agreement will persist in the foreseeable future. And this continues to create thousands of jobs. As at December 2002, the apparel sector employed 72,034 people whilst the textile sector accounted for 4,536 jobs – representing a combined employment of nearly 88% of the EPZ (representing 15.6% of the national employment).

The enactment of AGOA has opened up the large US market to Mauritian exports, thereby giving market access to one of the leading markets of the world. The results of the implementation of the AGOA legislation over the decade are that the local producers have started to exploit the American market. The producers are giving increased recognition to the AGOA initiative effects upon macroeconomic indicators and standard of living. Currently exports to the US as a percentage of total exports is nearing 30%, compared to 10% in 2000. As such, as the rules of origin are exploited and European access becomes more competitive, AGOA has become the panacea for the Mauritian textile and clothing sector. The development of spinning business in Mauritius under AGOA leads to a temporary boom in the construction sector, where temporary jobs are created.

In terms of investment, the implementation the AGOA initiative allows Mauritius to consolidate its integration process in the textile and clothing industry. For instance, business development in the spinning industry has led to building capacity in that sector, and therefore increasing FDI inflow into Mauritius. Since Mauritius is well-poised to benefit from its high credibility and political stability, another comparative advantage it enjoys under the AGOA initiative is the development of other related investments in businesses such as the weaving of fabrics and dyeing of yarn.

Given the constant increase in the real output per capita income in terms of the growth rate, the unemployment rate decreased significantly in the sector under the AGOA initiative. Businesses have developed over the decade, enterprises have accumulated profits, the Mauritius Government has collected tax revenues and economic activities have increased smoothly.

Policy recommendations

Given unquestionable positive effects of AGOA on the economies, businesses and people of Kenya, Lesotho, and Mauritius, the Governments of these countries should focus on identifying products for which they have a comparative advantage in producing and diversify their exports. They may be able to learn from each other’s experience, and develop common trade policies to derive more benefits from AGOA. They should identify and target additional export incentives in order to nudge exporters and businesses toward producing and exporting new products.

In order to benefit from the entire advantage of the AGOA legislation, these three countries, including other sub-Saharan African countries, should undertake reform measures geared at promoting political pluralism and the respect of the rule of law, market-based economies, elimination of barriers to U.S. trade and investment, efforts to combat corruption, policies to reduce poverty, increasing availability of health care and educational opportunities, protection of human rights and worker rights, etc. - the list is endless.

The net benefits suggest that AGOA expands the scope of preferential access of Africa's exports to the United States in key areas such as apparel and textiles, but also non apparel and textile industries. However, it suggests estimated benefits on poverty reduction, but also on investment and business cycles in Kenya, Lesotho and Mauritius, if no restrictive conditions are being imposed on the terms of market access.

The US government should simplify and relax the rules of origins and broaden the use of third country status. The enactment of AGOA has greatly played a leading role in reducing poverty in Kenya, Lesotho and Mauritius and has facilitated and stimulated new business openings of local and offshore enterprises. As a result, poverty levels have been alleviated. All African countries should seek to appropriate and maximise the benefits of preferential access to markets.

NOTES:

Written by Youssuf Keita (1)

(1) Contact Youssuf Keita through Consultancy Africa Intelligence’s Finance and Economy Unit (finance.economy@consultancyafrica.com)