Nana Ama Temeng- Research Paper AGOA

August 20, 2017 | Autor: Nana Ama Temeng | Categoria: Economic History, Economics, Ethics, Education, International Political Economy
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Nana Ama B. Temeng
African Studies: Policy Design
November 6th 2014

To what extent has the establishment of AGOA helped promote economic development in African countries?
Case studies: Kenya and Lesotho
Introduction
Before 2000, African countries like Kenya and Lesotho depended largely on foreign philanthropy to revive their economies. This has always been the case since post-independence movements against colonialism and imperialism and has also made for discussions amongst analysts as to the effectiveness of this aid. Africa constitutes about 3.2% of international trade and has been characterized by weak export growth, low investment and poor diversification. Given this, African countries and the United States of America enacted The Africa Growth and Opportunity Act (AGOA) in 2000. This paper would discuss the link between trade and development, the achievements and shortcomings of AGOA whilst examining AGOA's potential to set grounds for meaningful trade relations between Sub-Saharan countries and the United States.
AGOA is a trade legislation focused on increasing and enhancing trade between the United States and Sub-Saharan countries by permitting duty free exports to the US. By granting duty and quota-free access to African exports, AGOA would also enable countries attract investments to Africa, thereby helping to stimulate economic growth and development. The AGOA pact signified a deviation from US relations with African countries from aid to develop to economic self-reliance through trade. which basically signified a 'trade-not-aid' approach. To qualify for AGOA, countries must be working to improve the rule of law, human rights, and respect for core labour standards. According to Debt Aids Trade Africa (DATA), an advocacy organization, 37 of 48 sub-Saharan African countries currently qualify for the benefits of this act (DATA).
Most economists argue that there is a link between trade and development. Trade allows producers in specific countries to access markets beyond their national borders. Through exports, it is argued that domestic companies will increase their revenue and therefore nations can acquire higher national income. Free trade improves economic performance by increasing competition amongst domestic firms and allows consumers enjoy quality goods and services. However, protectionist measures such as tariffs and quotas hinder the abilities of African governments increase exports thus reducing the likelihood of growth in African countries. The establishment of AGOA however broke down this barrier by enabling African countries such as Kenya and Lesotho export apparel goods to the US without protectionist constraints.
AGOA is set to expire by September 2015. Currently, African countries are calling for an extension of the expiry date to enable countries benefit more from AGOA's provisions.
Achievements
Supporters of AGOA would confirm that there has been an increase in exports (especially apparel) to the US since AGOA's inception. Between 2001 and 2011, total exports increased by 500% and were valued at $8.5 billion to $53.8 billion respectively. Rising exports have also increased job creation and investment in African countries. It is noteworthy however that a 500% increase is exports does not necessarily mean that there was a dramatic increase exports for every country as the numbers suggest given varying populations and number of products that each country can produce with scarce resources. It is possible that a large part of this 500% increase is possibly due to higher exports from a few countries with high population such as Nigeria.
According to African Development Bank, Lesotho, a beneficiary of the "Special Rule for Apparel" provision of AGOA (classified as a" Lesser Developed Country") increased employment by 36% and this is largely attributed to increased exports from its textile, apparel and footwear industries. An unforeseen benefit of AGOA under this provision is also the fact that it enabled more women to be employed in the textile industry. Increased exports in the textile industry also led to growth in Lesotho's economy from 12.8 % in 2000 to an average 19.4% from 2001-2003 (Central Bank). Prior to AGOA, prospects for growth in Lesotho's then infant textile industry seemed far-fetched until Lesotho gained AGOA eligibility in 2001. The provisions of AGOA therefore fuelled a revival of Lesotho's textile industry with the increase in apparel exports to the US.
One of the first African countries to qualify for AGOA, Kenya's bi-lateral trade with the US improved significantly from 2001. Research from the Organization of Economic Co-operation and Development (OECD), shows that the manufacturing sector, contributed about 13 percent of GDP and expanded by 0.8 per cent in 2001, as against the negative 1.4 per cent in 2000. Total sales grew by 48 per cent in the year due to the African Growth and Opportunity Act (AGOA) initiative.
The AGOA initiative also created more than 30,000 jobs in Kenya by 2004 as a result of the revival of the textile and clothing industries. Textile production at the Export Processing Zones (EPZs) improved growth rates in the manufacturing sector and constitute about 76% of total exports to the US in 2007. Since AGOA, Kenya's exports to the United States have increased from $41 million in 2001 to $326 million in 2007. Exports range from tea, textiles, apparels, handcrafts and processed nuts. This increase however is also coupled with an increase in US imports as well. In 2006, Kenya exported about $353 million to the US and imported approximately $516 million creating a trade deficit worth about $163 million. (Republic of Kenya website)
Besides exports, Lesotho has also benefitted from increased investments through the provisions of AGOA. Following the inception of AGOA in Lesotho, Taiwanese and Chinese came to Lesotho to benefit from free access to the US market increasing manufacturing companies from 23 to 70 in 2008 (Central Bank). Foreign Direct Investments (FDIs) have become the largest contributor to capital inflows to Lesotho and have also increased employment in countries like Lesotho thus the 36% increase in employment rates as earlier mentioned. Lesotho's high reliance on its textile industry in exporting to the US makes it highly susceptible and could have a negative effect on exports as such there is much work to be done to diversify product range. The expiration of MFAs (Multi-Fibre Agreements) resulted in a sharp decline of textile and apparel exports from about $1.7 billion in 2004 to about $870 million in 2011 because markets became open to competition from Asia (USAID). According to USAID, six international companies left Lesotho in 2005 resulting in about 7000 job losses.
Similarly in Kenya, increased exports led to an influx of foreign companies seeking to make use of the US duty-free market.
Challenges
Although AGOA's provisions do make for increased exports and investments, there are many challenges one of which is the small concentration of countries benefitting from US imports under AGOA. About 90% of US imports from AGOA countries are energy related products valued at about $30 billion (US Department of Commerce). This is followed by transportation equipment then textile and apparel. What this means is that although countries like Lesotho and Kenya do remain top-exporters of non-energy products, oil remains the major component of Sub-Saharan Africa- US trade. Most of the energy-related products are imported from oil-producing countries such as Nigeria, Angola and South Africa with Nigeria holding a greater share of crude oil imported into the US. This poses the problem of preference for oil-exporting countries and in effect, slows potential growth in Kenya and Lesotho. In addition, lack of credit facilities pose a great barrier for small and medium-sized businesses in Kenya and Lesotho. As a result, SMEs are unable to fully exploit opportunities under the AGOA act because they lack substantial funds and are stifled by competition arising from foreign companies taking advantage of duty-free exports to the US.
Researches from Brookings Institution Christopher Onyango and Moses Ikiara in their research paper titled "Reflections on Kenya's experience under AGOA" also note the potential erosion of preferences for African countries citing that proposals to extend AGOA provisions to developing countries could also have a negative impact on exports and economic growth in Kenya as markets become open to competition from developing countries in Asia.

Works Cited
Africa Growth and Opportunities Act (AGOA): Economic Impact and Future Prospects (n.d.): n. pag. CBL Economic Review 2011. Central Bank of Lesotho, June 2011. Web. 10 November 2014.
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