Trade, not aid, is what Africa needs

Updated: Mar 23 2005, 05:30am hrs
If there is one region that seems to miss out on the fruits of globalisation, it is sub-Saharan Africa (SSA). The biggest linkage with the international economy for most of the countries has been in the form of recurring aid flows. Aid to Africa has failed to deliver any perceptible increase in prosperity in the region. Consequently, the enthusiasm for aid as a remedy has declined substantially.

The slogan for African development has since changed. The new mantra is trade and not aid. This has manifested itself in a spaghetti bowl of trade preferences for Africa, some bilateral and some unilateral. Europe came up with the Everything but Arms initiative (EBA) and in 2000, the US jumped in with its own initiative.

In the true spirit of the current administration, it was baptised the African Growth and Opportunity Act (AGOA). This Act is a major plank of the US initiatives towards the African continent. It aims at broadly improving economic policymaking, enabling countries to embrace globalisation and secure durable political and economic stability.

As an incentive to adopt these changes, AGOA offers increased preferential access for exports to the United States. AGOA is not a free club and countries have to meet certain criteria (respect for international law, no support for terrorism) to gain entry. By the end of 2004, about 38 countries had become members of AGOA, though in a staggered fashion.

Main AGOA provisions: The key changes introduced by AGOA are as follows:

Extension of GSP preferences: Prior to AGOA, 48 SSA countries were granted preferential access to the US market, paying zero tariffs, subject to certain conditions, for a range of products under the Generalised System of Preferences (GSP). AGOA extended the GSP till 2008 and included new products like petroleum products, apparel and agricultural products.

Removal of quotas on textile and clothing: This was likely to have only a short-term impact as on January 1, 2005, the quotas under Multi Fibre Agreement (MFA) were dismantled.

The granting of duty-free preferences to clothing products in the following categories

(i) Assembled from fabrics and yarns formed and cut in the US, (ii) Assembled from fabrics formed in one or more of the AGOA beneficiaries from US or regional yarns subject to quantitative limits, (iii) Assembled in least developed country (LDCannual income per head of less than $1,500) from any fabric or yarn.

Generosity undermined: Countries should not be worse off as a result of preference. The main question is cardinal: how much is AGOA worth to the African countries This is a difficult question. It depends on the model used to assess gains. A modified question is more fruitful. Is AGOA stingy on generosity, or could it do better, so that a much larger benefit could be bestowed on Africa The answer is yes.

To draw this conclusion, it is important to understand a clause in trade agreements called the rules of origin. The rules of origin assign nationality to the product traded. If the rule is simply that goods from Africa are those that are loaded into ships at African ports, then non-African producers can easily avail of preferences. Thus, rules of origin tend to go back into the production chain to determine the nationality of the product.

Both, the GSP and the apparel preference in AGOA, are subject to rules of origin. The GSP more or less follows the pre-existing rules of origin. The bite of AGOA is in apparel where existing tariffs are relatively higher and some African countries do have an industrial base to cash on the preference. This is where AGOA disappoints. AGOA considers apparel to be African if it is produced using African or American inputs (yarn and fabric).

Since both America and Africa are high-cost producers of yarn and fabric, this restriction eats directly into the preference. The LDCs were exempt from yarn forward rule till 2004.

Mattoo, Roy and Subramanian, in a 2003 paper, estimated the bite of the yarn forward rule in AGOA and found it severely dented the growth in exports (by 40%). The revealed trade under AGOA confirms this, with LDCs experiencing much greater expansion in exports than the non-LDCs.

In the GSP preferences, rules of origin have been made marginally more lenient. What is missing then Missing are the products of special interest to Africa. Several agricultural products are subject to tariff rate quotas (tariff-free only up to a limit) with out of quota tariffs extremely high (tobacco 350%, peanuts 164%, beef 26%). It is not difficult to understand these extreme tariffs based on the American political economy. Petroleum products that have been included already face near-zero tariffs.

By not granting fully unrestricted access, AGOA is substantially less generous than its full potential. Mattoo, et al,estimate that exports will rise by only 8-10% and most of the increase will come in apparel. Now with quotas removed on competitors, the estimated growth in apparel is likely to be lower by a wide margin. Part of the AGOA limitation is the undermining of Africas competitiveness, for which it is hard to hold the preference granting partner responsible.

The writer is a senior research staffer with IFPRI