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No Good Deed Goes Unpunished – The Case of DFQFs in Africa

September 30, 2011

African Growth and Opportunities Act (AGOA); Source: AGOA.info

The African Growth and Opportunity Act (AGOA) has enabled substantial economic growth in sub-Saharan Africa through duty-free, quota-free (DFQF) access to U.S. markets. The program has created jobs and increased non-oil exports by 240 percent since its inception (up to the recent recession). The success of this program has instigated debate on whether to extend this service to all least developed countries (LDCs). The hope is that extending DFQFs will give developing countries access to the world market and spur economic growth thus eliminating poverty. In a report on regional integration and trade in sub-Saharan Africa, United Kingdom’s aid agency (DFID) claims that releasing barriers for trade will facilitate growth through the transmission of technological innovation, by facilitating competition, and through economies of scale. As is the case in most poverty alleviation schemes, while this “good deed” is a lovely thought, implementing it could have adverse effects on previous growth in sub-Saharan Africa.

A strong critic of the suggestion, Rosa Whitaker from the Whitaker Group responds in her aptly titled, “Killing African Growth With the Best Intentions.” Apparel and agriculture sectors are the most profitable in sub-Saharan Africa. The apparel industry has been largely boosted by the AGOA. However, if DFQF were to expand, these sectors would effectively be trumped by more competitive apparel markets in Bangladesh, Cambodia and Vietnam, the most competitive in the world. With newer, more competitive markets being opened, it will become more difficult for African companies to compete, causing many to shut down.

Clothing factory in Bangladesh; Source: GMB Akash/Panos Pictures

Releasing barriers would also have little effect on alleviating poverty in Asian LDCs. Whitaker explains that for countries with already competitive markets, “the benefits will instead accrue to multinational retailers whose input costs are slashed while the real wages paid to workers remain constant.” In addition there is little human rights law governing how employers treat their workers in this region. Attempting to improve conditions would increase the cost of production and, in turn, make them less competitive. Workers thereby continue to live in poverty despite facilitating competition and economies of scale.

There are also already restrictions in place on sub-Saharan African countries on the types of products they can export DFQF. In a recent G20 Development Working Group (DGW) meeting, several members were congratulated for extending DFQF to cover 97 percent of all products. However, the remaining 3 percent that are not covered are the types of products developing countries would be most interested in exporting. This includes agricultural commodities like cotton, sugar and tobacco.  Coincidence? Probably not considering these products are too “politically sensitive” in the U.S. to receive freer access into the U.S. The program also does little for the poorest farmers who do not have to capacity to compete in a larger, more competitive market.

The question becomes how this program plans to spur economic growth for the poorest when it prohibits them from utilizing their strongest sectors. Ruth Bergen, in a recent post on the Poverty Matters Blog, talks about the business of development and points out that these changes are less about development than they are about business.  A leaked paper by the G20 Development Working Group (DWG) states that “development is crucial for global economic growth.” Connecting business and development is not a horrible concept, especially if it utilizes the private sector to connect with local LDC business.  This could be helpful in creating successful, sustainable projects which can spur development.

It is not a bad idea to extend trade preferences to other developing countries. AGOA has done a lot of good in sub-Saharan Africa. However, varying levels of competition within LCDs and their impact on other LDC markets need to be considered before implementing such a plan. Not taking this into consideration could have an adverse affect on markets.

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