How Trade Arrangements such as AGOA can drive Industrialisation in Less Developed Africa

By John Stuart
03 Sep 2020
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How Trade Arrangements such as AGOA can drive Industrialisation in Less Developed Africa

The African Growth and Opportunity Act (AGOA) is an act of the United States Congress, passed in 2000 and with the purpose of granting qualifying sub-Saharan African (SSA) countries preferential access to the massive US market. It is not a free trade agreement and the arrangement is not reciprocal. SSA exporters do not have blanket duty-free access to the US market. AGOA significantly enhances market access for qualifying countries in SSA.

Twenty years later, the effects of AGOA have been interesting. Table 1 ranks the top 27 AGOA exports in terms of their importance to SSA exporters and the extent of preferential access out of the total. The biggest beneficiary by far has been South Africa (SA), the most industrialised SSA nation and the one with the most diversified economy. SA has been able to leverage AGOA to increase exports in several categories: various manufactured product categories such as motor vehicles, machinery, metal articles, chemicals but also agricultural products. While these opportunities have undoubtedly benefitted South Africa, the net impact on South Africa’s industrialisation has not been significant.

The process of industrialisation, whereby there is a rising share over time of manufactured goods in the overall output of a nation, is regarded by economists as very important to economic development. The opposite change, deindustrialisation, is a slowly declining total output share of manufactured goods and is generally a pattern observed as a developed nation moves into the post-industrial, service-driven state of development. When this same pattern is observed in developing nations, it is termed premature deindustrialisation and is a cause for concern. Various recent studies, including tralac research, have observed this pattern for much of SSA, triggering debate around the possible causes and potential solutions.

In classic development theory, trade is as important a driver of development as is manufacturing specialisation, the division of labour and mechanisation. In fact, trade is a form of specialisation that allows a nation to focus resources and efforts on a few product types in which a relative advantage is developed. However, for this to work, foreign markets need to be found with sufficient demand to permit the expansion of the domestic industry.

This is where preferential trade access has such an important role to play. Nascent industries are rarely competitive from the start; they need time, practice and reinvestment, just like individual businesses. Many SSA developing countries tried and failed to create manufacturing industries because they were unable to become competitive, especially vis a vis the newly industrialised nations of the Far East. The exporters of SSA are still to this day, largely dependent on resource-based industries and exports, with a few exceptions. These exceptions are especially interesting given that the two most significant of them are less developed countries (LDCs).

These two SSA LDC exporters are Madagascar and Lesotho. Madagascar’s two dominant export markets are France and the US. Of its four top exports over the last five years, manufactured clothing items (HS61 and HS62) together exceeded its top single export: coffee, tea, maté and spices, in at least one of those years.

For Lesotho the figures are even more striking. Its exports of products in HS61 and 62 together exceeded those of its top individual resource-based export exports (71, diamonds etc.) in all but one year over the last five. Like Madagascar, the US is its second most important export partner, although in this case its most important trade partner is its customs union partner, South Africa.

The data in Table 1 assists in understanding these successes. It lists 27 of the most important AGOA export products from Africa[1], with a column giving the importance of the share of AGOA exports out of total exports. A second column contains calculations on the proportion of preferential access out of total export value and a third contains notes on the main exporters involved in each product group. Note that a low figure for the preferential access proportion does not necessarily indicate low utilisation of preferences, but rather a low preference coverage for that overall chapter. It could also mean that most of the chapter is accessible at MFN rates (such as HS09 – coffee, tea, maté and spices).

AGOA exports to the US Stuart Aug 2020

We may expect a positive impact on a nation’s industrialisation where the export under AGOA is both an important share of its overall exports and where there is significant preferential access. This is precisely the case with HS61 and HS62, but the same pattern is not seen in any other of the chapters. Trade Map data shows that from 2001 to 2004, Lesotho’s exports to the US of these products rose approximately 200%, while Madagascar’s rose by about 100% (after initially dipping in 2002). Both countries’ exports suffered from the 2008 financial crisis but subsequently returned to pre-AGOA levels.

It is these longer term positive shifts in export performance that are more likely to affect industrialisation. In fact, the post AGOA period is associated with industrialisation in both Lesotho and Madagascar, as Figure 1 illustrates. This figure plots manufacturing’s share out of total output for Lesotho, Madagascar and the SSA aggregate for 1999, 2009 and 2018.

Industrialisation SSA Stuart Aug 2020

While SSA shows a pattern consistent with deindustrialisation, Lesotho and Madagascar buck this trend and show a net increase in manufacturing’s share of output over the AGOA period. This is impressive for countries that are, after all, classified as LDCs. Of course, other industrialisation drivers would have to have been in place, such as an appropriate policy environment and the availability of investment. However, success breeds more success and an important trigger in this case was undoubtedly the preferential access granted under AGOA. We know this from the extent of the importance of the US as a trade partner and the importance of the two manufactured product groups in the export basket of these two LDCs.

Preferential trade access to global ‘north’ markets has an important role to play in the industrialisation of SSA. As the global economy navigates the Covid-19 crisis and its many setbacks for economies, it is to be hoped that preferential access to the developing countries of SSA will not be reversed but rather extended. There are other success stories in waiting.

[1] The table ranks HS chapters from the largest to smallest entries in the first data column, i.e. in order of the importance of AGOA exports to total exports by AGOA countries.

About the Author(s)

John Stuart

John Stuart

John Stuart is an economist and policy analyst with special interests in trade, economic integration, data visualisation and economic modelling. He began his career in academia at Rhodes University and later the University of Cape Town, after which he entered private consulting first with AFReC (Pty) Ltd and subsequently with PBS (Pty) Ltd. Besides economics research and teaching, he has experience in project management, general management, public sector performance management, systems analysis and entrepreneurship. He holds an M. Com degree in Economics from the University of Natal (Durban).

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