Rethinking trade preferences: How Africa can diversify its exports
Paul Collier, Anthony Venables, 28 May 2007
Successful development usually involves fast growth of activities that are new for the countries concerned, e.g. manufacturing, ‘non-traditional’ agriculture, and service. In Asia, such export diversification has strongly assisted development and proved to be contagious: the first countries to diversify, serve both as models and as springboards. In Africa, this process has yet to start.
Africa has lagged behind partly because its economic reforms lagged those of Asia. When export diversification started to boom in Asia in the 1980s, no mainland African country provided a comparable investment climate. Now a number of African cities -- Accra, Dakar, Mombassa, Maputo and Dar-es-Salaam, etc. – offer reasonable investment climates, but they cannot compete with Asian cities that have comparable investment climates since the Asian cities have established clusters of firms in the new export sectors. Such clusters provide firms in the cluster with the advantages of shared knowledge, availability of specialist inputs and a developing pool of experienced labour. A classic chicken-and-the-egg problem.
Until African cities can establish such clusters, firms located in Africa face costs that will be above those of Asian competitors, but because costs are currently higher individual firms have no incentive to relocate. If Africa is to diversify its exports and create employment it must develop such efficient clusters of modern sector activity. Where it is feasible, this offers a more reliable development path than the commodity extraction model which Africa has followed to date.
Trade preferences offer a potential solution to the chicken-and-the-egg problem. Preferences have existed for decades, but until now, such schemes have generally failed to provide developing countries with the opportunity to develop their productive and export capabilities in new areas. They have failed for a number of reasons; they have had limited product coverage; preferences have excluded the countries that are best placed to benefit from them; they have been accompanied by investment-deterring uncertainty; and they have had complex and restrictive regulations, particularly to do with rules of origin.
A new preference scheme, focused on Africa but offering access to substantially all OECD markets is the most ambitious option, but opportunities also exist within existing schemes, or schemes that are currently under negotiation, such as the EU’s Economic Partnership Agreements. Our CEPR Policy Insight argues that the improved preferences should be guided by the following principles
1. Rules of origin should be as generous as possible. The ‘special rule’ in AGOA provides a model of demonstrated efficacy, and so might usefully be extended to sectors beyond apparel.
2. The coverage of products should ideally be wide, as already established by EBA. In particular the current state of tariff discussions in the WTO’s Doha Round (the ‘Hong Kong’ offer) would enable OECD governments to exclude up to 3% of product lines for preferential tariff cuts. This is likely to be too restrictive since it could potentially be used to exclude the few product niches in which entry-level African cities are likely to be viable. The incentives for export activities to establish in Africa will be greatest where the OECD still has significant tariff protection and these products are concentrated primarily in garments and footwear.
3. Country coverage must extend beyond the least developed countries to other African countries that are close to or at the threshold of being able to develop modern sector production and export activity.
4. The duration of a scheme should be time-bound (say to 2015). The introduction of a time limit has an economic rationale, as well as giving WTO compatibility for a non-reciprocal scheme. It would help to create a sense of urgency on the part of both beneficiary governments and donors to coordinate complementary actions that will be necessary for export diversification. Further, as the non-LDCs succeed in getting over the entry threshold, the phase-out of preferences for them will concentrate the preference advantage on the African LDCs. During the coming decade the governments of these countries can prepare their economies for exporting by modelling themselves on the emerging successes in their more advanced neighbours.
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