Lesotho Case Study - Free Essay Example

Lesotho Case Study The Market and the Mountain Kingdom: Change in Lesotho’s Textile Industry Apartheid and the resulting sanctions against South Africa are what ultimately created the textile industry in Lesotho. Aside from the workers that have historically worked across the border in South African mines, the arrival of the textile industry gave Lesotho its first real participation in the global economy. Otherwise the Lesotho economy consists mostly of subsistence farming. The textile industry gives Lesotho an opportunity to participate in trade with the rest of the world and ideally benefit from globalization. Geographically, Lesotho is uniquely landlocked and in a complete enclave of the country of South Africa. It is the abundance of affordable labor that has attracted clothing manufacturing firms, mostly from Asia that then bring the finished products to the world markets, primarily the United States and Europe. Lesotho has been an appealing location for textile ma nufacturing in part because of world trade agreements such as the Multi-Fiber Arrangement (MFA), the Lome Convention and the African Growth and Opportunity act (AGOA). All of these trade agreements have expired or are set to expire in some capacity as of the writing of the subject case study, The Market and the Mountain Kingdom: Change in Lesotho’s Textile Industry written in November of 2006. I will be examining these trade agreements and other factors to determine the costs and benefits of each. Lesotho is at a crucial stage of economic development and the decisions that the government makes will affect the quality of life for the people of Lesotho for years to come. Through this examination of the past there are many lessons to be learned from these previous trade policies. In some ways, these policies benefit other countries more than Lesotho. Hopefully these lessons can be applied to a plan of action for the government of Lesotho. It is my recommendation that the g overnment of Lesotho evaluate the causes and effects of these policies as well as the costs and benefits. Going forward Lesotho should do more to empower and educate its own people rather than rely on preferential trade policies. It is not my point that Lesotho should not take advantage of trade policies while they are in place but it has repeatedly set itself up for failure when trade policies expire. Analysis of Previous Policies Affecting the Lesotho Textile Industry The Lome Convention: The Lome Convention was the first experiment in development and co-operation between Europe and Africa after colonial rule. It was established in 1975 and during the 1980’s greatly benefited Lesotho by providing a developmental spark to the textile industry. It also provided for a smoother separation from British colonization and was a good stepping stone for development. As result, Lesotho along with other former colonies benefited from preferential trade with Europe. However the ag reement went through five major revisions as needs changed and finally expired completely in 2007. The Lome convention can be credited for providing a short-cut to development for developing former colonies but the preferential treatment was not sustainable long term. It originally required that clothing merely be manufactured in a former colony but later was changed to require that the raw materials originate from a former colony as well. Since Lesotho does not produce its own raw materials and imports most of raw materials from China rather than other former colonies, the policy was already outdated before it expired. This left a 17% tariff in place for Lesotho’s access to European markets. This virtually eliminated trade with Europe by 1998. The Multi-Fiber Arrangement (MFA) and, the Agreement on Textiles and Clothing (ATC) The MFA was a multi-nation agreement that created quotas from individual countries on imports to the Unites States. The MFA was active from 1974 to 1994 and was then replaced when the World Trade Organization (WTO) implemented a similar policy called the Agreement on Textiles and Clothing (ATC). The policy expired in 2005 and there are currently no country quotas on textiles. Much like the Lome Convention, the ATC helped to start the Lesotho textile industry and carried it through 2005. The cost is that arguably quotas can hinder free trade in the world market. It gives inefficient countries and unfair advantage over efficient countries. The aggregate world output of textiles is fundamentally lower with the quotas in place. The MFA and ATC provided a great way for Lesotho to participate in world trade but unless the policies are permanent, it is not a sustainable solution. Because quotas facilitate inefficient production of goods, they cannot be in place indefinitely. Eventually, truly fair trade must be allowed among all countries and Lesotho must be able to manufacture textiles as efficient as countries like China if it would like to have its textile industry survive. The African Growth and Opportunity Act (AGOA) The AGOA is a slightly more modern and realistic way to encourage development in African nations. Lesotho is among the 41 African nations that currently qualify for free trade with the United States without an actual free trade agreement. This act originated with 34 countries that were designated as eligible. The eligibility is based upon a criteria of basic human rights and responsible economic development and the president of the United States is given the authority to add or remove AGOA eligibility. For example, Cote dIvoire, was awarded eligibility in 2003 but was then removed from eligibility in 2005. Lesotho was an original AGOA country and has never lost status. Furthermore Lesotho is also designated as one of the Lesser-Developed Countries (LDC) within the AGOA. To qualify as an LDC, a country must have had a per capita gross national product of less than $1,500 a year in 19 98 as measured by the World Bank. This is important to Lesotho because LDC countries qualify for the â€Å"special rule† on textiles. This gives duty- and quota-free treatment on textiles manufactured from materials from other sub-Saharan African or LDC countries or the United States. This puts Lesotho in a unique position because the Lesotho textile industry has mostly been driven by Chinese and Taiwanese companies that import raw textile material from Asia for cut make and trim operations. The special rule makes this possible for now but when the special rule eventually expires, Lesotho is again in danger of the foreign companies pulling out and leaving the textile workers unemployed. The AGOA has been revised numerous times as members gather annually for a forum. In 2007 and the forum in Accra, Ghana Popane Lebesa the Lesotho Minister of Trade and Industry, stated that companies need to be more efficient in order to compete in the global market, and governments must focus on providing â€Å"AID FOR TRADE†. The Minister of Trade is correct but should also add that Lesotho also needs to reduce its dependence on foreign the companies that manage its factories. The AGOA provides for open communications and active management between participating countries. However Lesotho needs to communicate concern because there are parts of the special rule that are scheduled to expire in 2012 and 2015. Currency Concerns When participating in world trade, a nation such as Lesotho must also be aware of foreign exchange rates and currency risk. The currency of Lesotho is called the Loti and is pegged to the South African Rand on a 1:1 basis and both currencies are considered legal tender within Lesotho. The Central Bank of Lesotho is at the direction of the government, the authority of monetary policy for the country. In August 2000, the Central Bank of Lesotho Act came into force. This new Act has conferred considerable autonomy to the Central Bank a nd defines a singular objective for the bank, similar to the central banking system of the United States. However the autonomy and power of the Lesotho Central Bank will be limited as long as there is a policy in place to keep the Loti pegged to the South African Rand. The  Common Monetary Area  (CMA) links  South Africa and  Lesotho in  monetary union. The Rand circulates freely through Lesotho but the Loti is not widely accepted in South Africa. Foreign exchange regulations and  monetary policy  under the CMA reflect the influence of the  South African Reserve Bank. It is probably not realistic for Lesotho to severe its tie to the Rand any time soon but it should work on improving the strength of its own central bank and consider more independence from South Africa as a long term goal. Recommendations for the Government of Lesotho Many outside forces are out of the realm of control of the government of Lesotho such as, foreign policies of other countries, the wo rld economy and foreign currency fluctuations. Although Lesotho does not control these outside forces, it should be doing everything within its power to monitor and interpret these forces. A fundamental understanding of these forces and how they affect Lesotho is vital as it sets its own fiscal and monetary policies as well as its negotiations with other countries on foreign trade. Considering that Lesotho is relatively young with regards to participation in the global economy, the government has done a fine job with development over the past several decades. It was only 1966 when Basutoland gained independence from Great Britain and became Lesotho. It was then a latent effect of the South African Apartheid sanctions that caused clothing anufactures to cross the border and set up operations in Lesotho in the 1980’s. Previous to that, the impact of Lesotho in the world economy was minimal. So considering the youth and inexperience of Lesotho, it is doing a fine job but does need to strive for more improvement. The most salient flaw is Lesotho’s historical dependence on preferential trade policies from Europe and the United States. These policies have been successfully jump-started the textile industry but have historically left Lesotho dependent on them. The problem arises when preferential trade policies expire. The government should always take advantage of these policies but should plan ahead and look for ways to operate competitively as if the preferential policies were not there. Effectively, Lesotho needs to be able to compete with countries like China and Taiwan that are producing textiles more efficiently. With the special rule scheduled to expire and knowing that the AGOA will not likely be in place forever in the same capacity, Lesotho will need to use its time under the AGOA and special rule to work on building and competitive and efficient workforce in order to carry the textile industry as if the AGOA was not in place. Critic s of the AGOA special rule argue that it mostly benefits other countries that import the raw materials because the textile industry in Lesotho is mostly managed by expatriates from Taiwan and China. The workforce benefits by having access to wage labor but there is little opportunity for education and self improvement. Jennifer Chen is the Taiwanese owner of Shinning Century Ltd. , one of the major textile factories. She is also a chairwoman of the Lesotho Textile Exporter’s Association. Chen has been quoted as saying that the Chinese work ethic is being transferred to the people of Lesotho through the textile factories. That is a great thing but rarely transfers into factory workers ever becoming more that cut make and trim labor. All work other than labor such as design, management or finance is handled by expatriates from other countries and does little to empower the people of Lesotho. If foreign managed companies pulled out of Lesotho tomorrow, there would be little m anagement experience left behind and the factory laborers would be forced back into sustenance farming. That is not necessarily a bad thing, Lesotho hould be proud of such resilient people that can survive without world trade but the point of this writing is to enhance its textile industry. In order to sustain a position among world trade Lesotho will need to be able to educate its own citizens who have the desire work in capacities beyond factory labor. A specific recommendation to the government of Lesotho would be to require foreign companies such as Shinning Century to implement mandatory education and training programs for factory workers so that they may learn the business in a further capacity than just labor. The government can partner with companies such as Shinning Century to create such programs without creating such a cost that foreign companies are forced to pull out of Lesotho. It just seems wrong that foreign companies can set up operations in Lesotho and be ready to pull out as soon as world economic conditions change, suddenly leaving tens of thousands of factory workers without employment. If Lesotho had more opportunity for its own people, entrepreneurs from Lesotho could start their own factories and finds ways to produce products for the world market in fair competition with but not dependence on management from China or Taiwan or preferential trade with Europe or the United States. There are numerous programs that Lesotho is already taking advantage of. In July 2007, the Millennium Challenge Corporation signed a five-year, $362. 6 million Compact with Lesotho aimed to reduce poverty and increase economic growth. The Compact entered into force in September 2008, formally initiating the 5-year timeline for project implementation. The Peace Corps of the United States currently has 81 volunteers serving in Lesotho, some of which are business or economic development volunteers. Although it is a small number of volunteers, it gives cit izens of Lesotho an opportunity to learn empowering entrepreneurship skills. Lesotho could also utilize some of these programs to assist in other industries other than textiles like tourism or other industries that can diversify the economic profile of the country. Lesotho should consider investing some more of its own government funds into education. It could pay off in the long run if one day Lesotho could run its textile factories without dependence on Chinese and Taiwanese expatriates. Lesotho should be taking every small step that it can to achieve this goal. In conclusion, the government of Lesotho is doing many things right. When it is kept in perspective that Lesotho only gained independence from Great Britain in 1966, it has made great progress in development. It should also be kept in mind that not all citizens of Lesotho necessarily need the textile industry or world trade. Lesotho has a long storied history of resilience and independence so it should also be unders tood that there is only a portion of the population that desires wage labor and industry. But for those that do, there are numerous trade agreements and programs that Lesotho is already taking advantage of. The best advice for the government of Lesotho is to keep progressing as it has for decades but to turn the focus internally so that programs such as the AGOA benefit the people of Lesotho and not the foreign companies that run its textile industry. Also, the creation of education programs for factory workers will motivate and empower its own people to take control of their own industry. References The Harvard Business Review (2006). The Market and the Mountain Kingdom: Change in Lesotho’s Textile Industry. Looming Difficulties, July 19th 2007, From the Economist Print Edition Read more at Suite101:  The Rise and Demise of The Lome Convention: An Experiment in Dialogue and Development Between Europe and Africa  https://international-politics. suite101. com/article. f m/the_rise_and_demise_of_the_lome_convention#ixzz0fd0IhNd9 African Growth and Opportunity Act data retrieved on 02/18/2020 from: https://www. agoa. gov/eligibility/apparel_eligibility. html Loti and Rand currency information retrieved on 2/17/2010 from: https://www. gocurrency. com/countries/lesotho. htm Info on the Lesotho Central Bank retrieved on 2/18/2010 from: www. centralbank. org. ls/ Peace Corps Data retrieved on 2/19/2010 from: https://www. peacecorps. gov/index. cfm? shell=learn. wherepc. africa. lesotho