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Supporting Lesotho’s economic diversification and trade integration: Structural transformation through greater export competitiveness

Supporting Lesotho’s economic diversification and trade integration: Structural transformation through greater export competitiveness
Photo credit: John Hogg | World Bank

10 Aug 2018

This report provides a multifaceted diagnostic overview of Lesotho’s export competitiveness, including an assessment of medium-term impacts of potential trade policy changes, based on the analysis of publicly available data and evidence, by examining export dynamics and outcomes and using field interviews with the public and private sector.

The report examines the relevance of trade for the macroeconomic context, and vice versa, as well as the degree of diversification and sophistication of exports over time and relative to a series of relevant comparators.

It builds on this with CGE analysis of potential impacts based on specific traderelated scenarios as well as diagnostic tools to facilitate the analysis of GVC participation and integration. As such, it aims to provide a comprehensive and forward-looking view of trade and its relevance for Lesotho’s medium- and long-term development.

This report is intended to contribute to the formulation of an export diversification and trade integration strategy for Lesotho and propose policies that may deepen Lesotho’s integration in global and regional value chains in goods and services, as well as to increase linkages from export sectors to the domestic economy. The policy recommendations will aim to strengthen the country’s ability to respond to changing external environment.

Executive Summary

A challenging global context

For a small, landlocked country like Lesotho, improving its trade competitiveness and increasing regional and global integration are essential to growth and economic development. Compared to other countries in its region, Lesotho has benefited from globalization and the emergence of global value chains (GVCs). By taking advantage of the favorable trade preferences into the US market through the American Growth and Opportunities Act (AGOA), Lesotho has developed a substantial manufacturing capacity, particularly in apparel and footwear, and provided jobs for tens of thousands of low-skilled workers, most of whom have been women. Since 2000, GDP per capita has more than doubled.

However, while Lesotho has used trade to drive economic growth, this does not appear to have contributed significantly to poverty reduction in recent years. Moreover, Basotho-owned businesses have struggled to integrate into GVCs as suppliers, resulting in only limited backward linkages to the economy. A tough competitive environment and a slow pace of investment climate reform risk Lesotho losing its competitive edge in its core sectors. Finally, sustained domestic political instability has had a deterrent effect on foreign investors. Political instability is one of the main obstacles cited by firms doing business in Lesotho. These factors have created uncertainty about the sustainability of its current export-driven development model and have limited Lesotho’s ability to further diversify its economy.

Lesotho’s current trade strategy is not sustainable and requires a move away from reliance on exports of low-value added apparel to the US under AGOA. Uncertainty surrounding the future of Lesotho’s AGOA privileges underscores the need for reform and a renewed sense of urgency. Future export growth will be challenged by the emergence of new low-wage competitors in Asia and Africa and the expected erosion of preferential market access in main export destinations over the next decade.

Despite the withdrawal of the United States from the Trans-Pacific Partnership (TPP), the significant difference in tariffs paid by apparel duty-free exports from Lesotho under AGOA and from Vietnam and Malaysia will likely be mostly eliminated in the next decade. Additionally, the current authorization of AGOA will expire in 2025. Although a further re-authorization of AGOA is not ruled out, its potential phase-out or replacement is of key importance for Lesotho since, in the absence of this preferential program, apparel exports will have to compete on equal footing against other low-wage competitors.

Computable General Equilibrium (CGE) analysis carried out for this study finds that the negative impacts due to a sudden suspension of AGOA privileges would reach 1% of GDP in 2020, while exports of textiles and apparel would drop by 16% leading to a drop of textiles and apparel output by 9%. The decline of average real consumption by 0.5% would have significant negative consequences for the population.

This changing external environment is likely to also offer new opportunities to Lesotho’s export industries in the medium term. Through its location, a relatively educated and largely English-speaking workforce, low wages, and significant potential as a tourism destination, Lesotho has the scope to diversify into services industries and integrate into existing and emergent value chains in Southern Africa. Regional integration in sub-Saharan Africa is progressing rapidly, and greater integration and liberalization in SADC and among the tri-partite alliance, as well as movement towards a Continental Free Trade Area means that Lesotho can improve its market access throughout sub-Saharan Africa. This makes a multifaceted diagnostic overview of Lesotho’s export competitiveness, including an assessment of medium-term impacts of potential trade policy changes, particularly salient, and would contribute to the development of the Second National Strategic Development Plan (2017/18-2020/21).

Policy recommendations

The findings emphasize the need for a new approach to trade and trade policy that can provide export-driven growth that is more sustainable and inclusive. Building on Lesotho’s recent DTIS Update (EIF 2012), this report identifies six primary policy recommendations that are intended to be both sufficiently specific and feasible that they can be addressed by relevant government agencies.

  1. Improve access to imported material inputs and technology by i) pursuing tariff reductions within SACU and ii) ensuring that the duty drawback system functions more efficiently and effectively.

  2. Pursue a sustained focus on increasing productivity in AGOA beneficiary sectors, most notably textiles and apparel, and aiming to increase spillovers and linkages from these sectors. This will also require a focus on addressing skills gaps, for example by more effectively linking postsecondary education to the labor market.

  3. Enhance export promotion activities, including improving market information on export opportunities to South Africa, European and other markets, as well as for products other than apparel to the US.

  4. Since a reduction in trade costs could substantially offset any risks from losing AGOA preferences, there would be substantial gains in a coordinated approach to meeting traderelated regulatory requirements and border management and to exploring cross-border coordination mechanisms with the South African authorities.

  5. Undertake a comprehensive analysis of service sector performance in Lesotho and its implications for export-driven growth, identifying the most urgent regulatory issues that need to be addressed.

  6. Develop a comprehensive trade and investment strategy linked to the NSDP II, focusing on i) how to retain and increase investment once AGOA margins have been eroded, ii) determine progress in the implementation of actions recommended in the 2012 DTIS Update and iii) supporting industrialization through participation in regional and global value chains.

This report has been prepared as part of the 2nd phase of the Lesotho Private Sector Development and Economic Competitiveness Project at the request of the Lesotho Ministry of Trade and Industry.