Why African Manufacturers Can't Compete: It's the Roads, Stupid
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In Nairobi last week African officials and businessmen met with their U.S. counterparts for the eighth annual AGOA Forum. Hillary Clinton delivered the keynote speech. AGOA – the Africa Growth and Opportunity Act – is the U.S. law, passed in 2000 and set to remain in force until 2015, which grants preferential duty-free and largely quota-free access to the U.S. market for some 1,800 products from 41 sub-Saharan African countries. To what extent has AGOA helped Africa?

I did not make it to Nairobi last week, but did attend a forum several years ago in Washington. It’s hard not to feel inspired by the positive energy, vision, and hope on constant display at these events. In addition to plenary sessions with high profile speakers there were more specialized seminars discussing strategies to accelerate growth of the handicrafts and apparel and horticultural sectors or to increase regional trade integration within Africa. Plenty of African entrepreneurs were present, especially at the crowning event, a cocktail party at the Smithsonian, where scores of African craftsmen and their distributors displayed and sold their wares.

And yet…AGOA, according to almost any standard, has been a failure. The overall numbers impress. African countries in 2008 exported over $66 billion worth of products to the United States, an increase of almost 30% from the previous year. But more than $62 billion, or 94%, came from oil and gas and minerals, products that would have been exported with or without trade preferences. Economists use a term, “trade diversion,” which refers to a shift of current trade flows from one destination to another, usually as a result of changes in trade preferences or other market conditions. African countries would have exported the same quantities of oil and gold without AGOA, though those exports might have gone to China or France instead of the United States. This year’s trade figures have fallen off a cliff due to the recession and the fall in oil prices. Commerce Department figures show a 59% decline in first quarter AGOA exports as compared to the first quarter of 2008.

The funny thing is, no one talks about oil and minerals at these AGOA Forums. The focus is all on garment manufacturers and basket weavers. Part of this is due to the fiendish complexity of the global textile and apparel trade, which everywhere is hedged about with tariffs, “voluntary” quotas, rules of origin, and preferences. Women hand knitters from Kenya are also more appealing than your average oil company executive. The big issue since AGOA’s inception has been the “third country fabric provision,” which allows African apparel makers to source fabric from, say, China, instead of having to use American or African material. The U.S. textile industry of course does not care for this. But a growing number of African voices are also raised in opposition, claiming that use of third-country fabric prevents development of an integrated textile industry and keeps Africans trapped in low value cut-and-sew operations.

There is scant evidence, though, that removing the third-country fabric provision would release a flood of investment in new spinning and weaving plants across the continent, though it could easily cause the Asian companies that have set up apparel factories in Africa to pick up and move to other locations like Haiti or Central American countries, which enjoy similar U.S. market access preferences and are far more cost competitive than most of Africa.

Only a small number of African countries have textile industries that have really benefited from AGOA. Lesotho, a tiny country completely surrounded by South Africa, has created about 40,000 jobs as a direct result of AGOA, but a truck can reach the South African port of Durban, driving along South Africa’s excellent superhighways, in just a few hours. Lesotho is also part of a customs union with South Africa, so border delays are minimal. More typical is the case of Kenya. Not only is labor productivity half of what it is in Honduras – more than offsetting Kenya’s 30% labor costadvantage – but Kenya’s reject rate on garments is three times higher, and electricity costs  nearly twice as much.

The real killer, though, is the cost of transport. It takes more than 30 days to get a container from Kenya to the U.S. and less than 15 days from Honduras. But it also takes much longer to ship a container to the U.S. from China than from Central America. When it comes to cost, Honduras can import a 20-ft. container of fabric for less than $700, while the cost for a similar cargo to Kenya is more than $2,300. Honduras can ship a 20-ft. container of T-shirts to the U.S. for $500; Kenyan exporters have to pay nearly $2,000 (Note: these figures come mainly from a 2007 World Bank report, Can Sub-Saharan Africa Leap into Global Network Trade?)

Kenya, at least, has a coast and a port. Countries like Uganda or Mali haven’t a prayer. Throughout much of Africa, inland transport accounts for about two-thirds of the total cost of shipment. It costs twice as much to send a container the 650 miles by road between the Port of Dakar in Senegal and Bamako, Mali’s capital, than to ship it the 8,300 miles between Dakar and Shanghai. It can cost $4,000 and take up to a month to carry a container between Kigali, Rwanda and Mombasa.

It is probably too late for the textile and apparel industries in most of Africa. But to develop any other industry that depends on making and moving things – and logistics nowadays accounts for more and more of a product’s value – better transport is essential. AGOA has failed mainly because no amount of trade preferences can compensate for Africa’s crushing cost disadvantages, especially in transport. My fellow blogger, Cecilia Brady, wrote on this site a couple of months ago about the tragicomedy of airlifting cement in Africa because the roads in certain parts of the continent range from bad to nonexistent.

Africa has so many problems – corruption, war, political instability, malaria, HIV, sanitation, and malnutrition to name a few – it is often hard to know which ones to address first. Many development experts have engaged in bitter public arguments over that very question. There may not be a single right answer, but you could do a lot worse than to make roads the top priority

Posted 08-13-2009 1:31 PM by Charles Krakoff