V
Ik'tiiHimic riHiniibxiitii for Afrkii ESPD/WPS/2000/5
TnMr of Conlnifs
Introduction 1
I. Review of the Textile and Clothing Industry in Africa 2
II. Africa and the Multilateral Trading System 4
2.1 Opportunities generated by the Multilateral
Trading System within the framework of the WTO 4 2.2 Major constraints inhibiting export of African
Textile and clothing products 6
,2.3 Impact of the phasing out of MFA on Africa's Textile
And Clothing Industry 8
HI. Analytical Framework of Dynamic Competitiveness 9
3.1 Theoretical Foundation 9
3.2 Empirical Analysis 12
IV. Conclusion 14
Bibliography 15
Inlroiliirlimi
■he aftermath of the Uruguay Round is characterized by the prospects of increased competition for African textile and clothing products in the world market, and this study examines their potential to compete effectively in this market, in the long run.
It follows a study undertaken by the Economic Commission for Africa (ECA) in 1999 to examine how Africa could raise its competitiveness in the global trading system, taking into account its export structure and major constraints facing it. The textile and clothing industry and the leather and footwear industry are identified as having the potential to help transform the African economies as they did for other developing countries in other parts of the world.
2. The study is country-based, using dynamic competitiveness analysis to determine the long run competitiveness of the industry in selected African countries1 compared to those in some of their foreign competitors2. These countries are chosen using two criteria. The first criterion is the completeness of their data series for the period between 1980 and 1996, as published in the Industrial Statistics Yearbook, Volume I - General Industrial Statistics and Volume II - Commodity Production Statistics of the Statistical Office of the United Nations.
Unfortunately not all countries feature continuously in each publication and so some of them have data missing for significant periods of time. The second is the significance of the textile and clothing industry to these countries. Each of them has a relatively significant textile and clothing industry.
3. For the purpose of this study dynamic competitiveness is defined as the growth rate of a static competitive index (SCI) (see below) of countries over time. The dynamic competitiveness criterion is that for African textile and clothing firms to be competitive in future, the rate of growth of their competitive indexes, determined in part by their unit cost of production, should be less than that of their competitors. Whilst dynamic competitiveness examines the concept over a period of time, static competitiveness looks at
competitiveness at a point in time.
4. The textile and clothing industry has manifested increasing significance in African countries since the mid-1980s. In 1985 the industry can be ranked third, after beverages and leather and shoe wear, in terms of adding value to their products.. At constant 1980 prices, the value added to textile and clothing products is 17.8% compared to 17.9% for leather and footwear products and 18.6% for beverages. By 1991/92, the textile and clothing industry has risen to second position with a value added of 17.1%, right after the leather and shoe wear industry that has a value added of 17.4%. That for beverages has fallen to 16.1% during this period.
5. Despite this, the African textile and clothing industry has always lagged behind its competitors in terms of world market share, averaging less than 5% during the twenty-year period of the Multi Fiber Agreement (MFA). Although this agreement allowed for preferential treatment to be given to African countries within the framework of multilateral conventions, such as the European Union-African-Caribbean-Pacific (EU-ACP) Lome conventions, it did not help to change the scenario. However, there are empirical signs
1 These are Botswana, Central African Republic, Egypt, Kenya, Mauritius, Senegal, Zimbabwe 2 The foreign competitors are India, Indonesia, Malaysia, Hong Kong, America (North and South)
that this is changing. Although it may be too early to attribute this change to the phasing out of the MFA, which started on January 1st, 1995, the results of this study show the market share of African textile and clothing products growing at a faster rate during the phase-out period3 than they did during the twenty years of the MFA period4.
6. Furthermore, dynamic competitiveness analysis show that, in the long run, some countries like Zimbabwe has the potential to be more competitive in the long run, than many of their competitors, such as Hong Kong, India, Malaysia, Indonesia, and America.
On the other hand, some present-day performers, such as Mauritius and Egypt, would have to work on controlling the growth rates of their unit costs if they are to remain competitive in future. On the whole, the results of this study show that some African countries have the potential to compete effectively in a post-MFA environment. Hence phasing out the MFA could have positive effects on the African textile and clothing
industry.
7. This paper is divided into four sections. The first reviews the performance of the textile and clothing industry in Africa during the period under review. The next section presents a detailed analysis of the position of Africa in the context of the world trade system by identifying the opportunities generated by the Multilateral Trading System within the framework of the Worid Trade Organization (WTO), the constraints faced by African textile and clothing exports (especially to developed markets), and the impact of Phasing out the MFA on the industry in Africa. The third section presents an analytical framework of dynamic competitiveness, giving its theoretical foundation and using this for an empirical analysis of the industry. The final section summarizes and concludes the study.
I. IVvirw of Ilii1 Tf\lilr anil Molliing Industry in Afrit n
■he performance of the textile industry in Africa is examined by looking at its world market shares, and the growth of these shares for some mill machinery5 and various products of yam6, and fabric7. The performance of the clothing industry is also examined by looking at the market shares and the growth, over time, of these shares for various clothing products8.
9. Table Al in the appendix, show that the average market share for African yarn products during the period under review is 3.1% for cotton, 1.4% for woolen, 0.6% for man-made, and 19.6% for jute. Similarly, the averages for fabrics are 1.4% for cotton, 1.4% for woolen, 1.2% for linen and 1.1% for jute. The largest market share registered for cotton yarn is 3.38% in 1982, whilst that for woolen yarn is 1.56% in 1985, and that for man-made yam is 0.67% in 1993. Over the period, African textile and clothing firms have 3 The phase-out period refers to the period during which the MFA is being phased out. Due to data limitations this refers to the period between 1994(the end of the MFA era) and 1996 (the year for
most recent data available).
4 The MFA period refers to the period between 1974 (the inception of the Agreement) to 1994 (when the ATC started)
5 The machinery considered here are looms, spindles, and rotors.
6 The yam products are cotton, woolen, man-made and jute.
7 The fabrics are those of cotton, woolen, linen and jute.
3 The clothing products are trousers, blouses, dresses for women and girls, skirts, shirts for men and boys, underwear, jackets, coats and overcoats, suits and raincoats.
been gradually losing their market share in cotton yarn and fabric. Although Africa had an average market share of 19.6% of jute yarn, it has only 1.1% of the jute fabric market. This is an effect of tariff escalation in which exports of raw materials are encouraged at the expense of processed goods, by raising the tariff rate with the level of processing.
10. Egypt is the most consistent producer of textile in the continent. It produces a significant part of all yarn and fabric products. South Africa, Mali, Algeria and Burkina Faso, in addition to Egypt are the biggest producers of cotton yarn, whilst Egypt and Niger are the biggest producers of cotton fabric.
11. As far as the African clothing industry is concerned, the situation is not much different either. Table A2 show that the largest market share for any clothing product is that of men and boys' raincoats. This grew at an average rate of 5.4% per annum whilst that for women and girls grew at a rate of 3.3% per annum. The next products of relatively large market shares are dresses, shirts for men and boys, coats for women and girls, and trousers for men and boys. Their average market shares during the period are 4.9%, 4.2%, 4.0%
and 3.9% respectively. For the remaining clothing products, the markets shares are 2.3%
for men and boys' suits, 2.3% for women and girls' underwear, 2.0% for skirts, 1.3% for men and boys' underwear, and 1.1% for blouses. Currently the main producers of clothing include Egypt, Mauritius, Kenya, South Africa and Algeria.
12. According to All Pakistan Textile Mills Association (APTMA) statistics, Africa's average market share for looms between 1992 and 1995 is 5.31%, whilst those for spindle and rotors are 4.83% and 2.37% respectively. As far as the growth rates of these machineries are concerned, looms in Africa, grew at an annual rate of 1.13% during the period, whilst spindle and rotors grew at 0.47% and 3.38% per annum respectively. Table 1 gives the market shares and growth rates of this machinery, over the period, for the various regions of the world.
Table 1: Average Market Share and Growth Rates of Textile Machinery (1992 - 1995)
Looms
Market Share Growth Rate Spindles
Market Share Growth Rate Rotors
Market Share Growth Rate
Africa
%
5.31 1.3
4.83 0.47
2.37 3.38
America
%
12.57 -14.78
14.46 -1.86
14.69 -18.92
Europe
%
17.29 5.09
14.49 -2.78
58.07 2.86
Asia & Oceania
%
64.83 -1.85
66.22 0.99
24.87 1.84 Source: All Pakistan Textile MUIs Association Statistics (Market Share) and Author's
Computation using above statistics (growth rates)
13. While the market share of African looms, spindles and rotors have been growing modestly over the period, the numbers have been shrinking in America - looms and rotors decline at an annual rate of 14.8% and 18.9% respectively. Asia and Oceania experienced an increase in the number of spindles and rotors of 0.99% and 1.84% per annum respectively but the number of looms declined at a rate of 0.85% per annum.
4 II. ilfrirn nml flu- AtnlfilsiliTsil 'IVsnliiMj S
■or the twenty years between 1974 and 1994, world trade on textile and clothing was governed by the Multi Fiber Agreement (MFA) that was characterized by a quota system responsible for much of the distortions in this market. The agreement provided for the application of selective quantitative restrictions giving rise to preferential treatment accorded countries based more on "strategic" political rather than economic
reasons.
15. In an effort to reduce these market distortions, countries agreed to phase out the agreement and replaced it on January 1st 1995, with a ten-year Agreement on Textile and Clothing (ATC), which has a built-in clause that will self-destruct in 2004. This agreement is a transitional instrument built on some key elements that include product coverage and integration into GATT 1994 rules. Products covered in the agreement include yarn, fabric, made-up textile products and clothing. The integration process allows all former MFA or MFA-type restraints to be carried over into the ATC and to continue until the products are fully integrated and the quota system eliminated. The integration process is implemented in four stages - the first stage started on 1st January 1995 to integrate into GATT 1994 rules, 16% by volume of a Member's total 1990 imports of all products, the second stage involved integrating a further 17% on January 1st 1998, and for the third stage, a further 18% on January 1st 2002, all remaining products should be integrated by January 1st 2005 for the final stage. Each importing member decides which products it will integrate at each stage, with the proviso that they shall come from each of the four groups covered. In addition to the integration process, there is a program for liberalizing the restrictions carried over from the MFA by increasing the size of the quotas at annual growth rates of 16% on January 1st 1995, 25% on January 1st 1998, and by 27% on January 1st 2002.
16. Within the framework of the WTO, the Multilateral Trading System generates some opportunities for the African textile and clothing industry by removing the distortions in the market. However, this means overcoming many constraints faced by African exports, both inside and outside the continent. These constraints are also presented below. Another agreement of relevance to successful exports of African textile and clothing products is the Africa Growth and Opportunity Act, which facilitates trade between Sub-Saharan Africa and United States (US). Among the measures of this Act is the removal of import tariff and quota currently applied on imports of African textile and apparel into the US and the promise not to re-instate the same through January 2007.
2.1 »;>|H>rfimitics yeiierntal liy flic AUilfllntcral Trailing System witlilii flic framework of flic WTO
17. The MFA allowed Africa, among other regions, to enjoy preferential treatment from the European Union market. However the small market shares of African textile and clothing products on Tables Al and A2 show that Africa has not been able to make effective use of these privileges. One of the main reasons for this is the stringent rules of origin contained in this agreement. Notwithstanding, Finger and Winters (1996) identified two main areas in which the multilateral trade system can benefit Africa. These are, increased market access for African exports, and obligations of other WTO members. Additional opportunities are found in the desire of the trading system to remove tariff escalation in
industrial markets, allow for BOP protection if the need arises and, review the rules of
origin.
Alnrkct Access for African CiNiirfrtes
18. Unhindered market access for African textile and clothing has the potential to boost the industry in Africa. In October 1997, a high level meeting was hosted by WTO to improve access of thirty three least developed countries in Africa to the United States market subject to certain conditions, and provided long-term guarantees of their present access to the European Union under Lome conventions. The result is the African Growth and Opportunities Act mentioned above, and the on-going review to extend the almost-ending- ACP-EEC agreement, and also make it conform within GATT rules. Dynamic competitiveness analysis show that, in a market unencumbered by any form of trade barriers, some African countries have the potential to be as competitive as their competitors in Asia and America. By reducing these barriers the current multilateral trading system creates an environment conducive for the African textile and clothing industry to maximize its potential in the long run. However, increased market access is also granted to competitors from other parts of the world, so that there would be increased competition to African textile and clothing products.
OMijIirtkNi of WTO members
19. The Trade and Development Centre, a joint venture of the World Bank and WTO, argue that one of the most profound institutional changes that the Uruguay Round induced in the world trading system is the single undertaking. This entails that all members of the WTO should adhere to nearly all the same set of agreements on trading rules. Countries that have made commitments and concessions such as reducing tariff rates and abolishing voluntary export restraints shall be bound by these commitments. Rules and agreements signed should also be implemented. However, the current system did not do away completely with special and differential treatment. Four of such elements remain: the continuation of the GSP; fewer obligations for developing countries in setting their own trade policies; and a more generous time table for taking up Uruguay Round obligations amongst others.
IEuihitoI of Tnrtff Bicalafiwi
20. The present multilateral trading system creates increased opportunities for Africa through the reduction of tariff escalation in industrial markets - tariff rates increase with the stage of processing. This discourages the exports of processed raw materials and had always been a concern for developing countries. Tariff cuts under the Uruguay Round reduced the absolute degree of tariff escalation on imports of manufactures, but Martin and Winters (1995) argue that some escalation still remains.
Articles nllwwiiig Uw IMH' pnricctiMi
21. Articles exist that allow for import restrictions due to BOP problems or infant industry support. WTO, like GATT enables members to protect themselves from two types of foreign import competition: competition from aggregate imports that destabilizes their balance of payments (Article XVIII); and competition that threatens their individual industries, due either to an import surge (Article XIX on temporary safeguards) or to an unfair trade practice (Article VI on anti-dumping and countervailing duties). GATT placed no formal limits on the duration of the safeguards, whereas the WTO limits their duration to
eight years and improves their transparency. These articles give African countries the ability to support their textile and clothing industries within the frameworks of the agreement. Subsidies also receive relatively permissive treatment under WTO law. They fall into three categories: those that are prohibited; those that are actionable for they can be punished subject to proof of injury; and those that are permissible (including those that promote research and development, regional development and environmentalism). The latter group is utilized heavily in the North Atlantic. Export subsidies are also permissible for countries with per capita income equal to, or less than US$ 1,000. Given that most, if not all countries in Sub-Saharan Africa have per capita incomes far below this, supporting domestic industries to promote exports can be adopted as a short and medium trade
strategy.
lEcttewiim flie Ibrics uf Orfyiii
22. By reviewing rules of origin, some of the built-in clauses that indirectly and adversely affect African textile and clothing can be addressed. The Agreement on Rules of Origin aims at long-term harmonization of rules of origin, other than those relating to the granting of tariff preferences, and to ensure that rules do not themselves create unnecessary obstacles to trade. The rules of origin clause in some agreements are so stringent that African textile and clothing firms do not usually meet them, resulting in their products attracting higher tariff rates than those of their Asian competitors.
2.3 Major constraints inliihitliiy cxgtort of Afrfcnn textile nml clothing |HiMhicts
23. The constraints that inhibit the export of African textile and clothing products are wide and varied but their sources can be grouped into two: those that are the result of inappropriate domestic policies and those that accrue as result of policies enacted outside
the continent.
liui|»pr«|iriate domestic iMriktes
24. Inappropriate domestic policies are a source of many supply side constraints that work against exports in general, from Africa. The causes range from inappropriate trade, industry and tax policies to the lack of sectoral linkages in the economies, to the misperception of the role of WTO.
25. In most African countries domestic trade and industrial policies do not create the environment conducive for maximum private sector participation. The lack of tax incentives and the incidence of double taxation arising from taxation at the national as well as local/state/provincial levels create unnecessary costs for the private entrepreneurs. This makes them less cost effective and hence less competitive than they could be in world markets. However in countries where the debt service payments takes up over 40% of national budgets, it is not easy for Economists/Planners to justify tax exemptions needed to lower unit costs in the private sector and thus, make them competitive.
26. The lack of sectoral linkages between agriculture {cotton production) and textile and clothing manufacture, results in the export of raw unprocessed cotton lint from the continent to mills in developed countries at the expense of the domestic textile and clothing industry. Hence the clothing industry ends up importing fabric from abroad thereby violating the rules of origin of some agreements and consequently getting penalized.
27. There also seems to be a misperception among many African policy makers, as to the exact role of WTO with regards to their trade policy. Many see this organization as a development partner much as they see other United Nations agencies and World Bank, and hence expect it to help in making them competitive. However, the institution should be perceived more as referee in a game of trade. It is there for all participants in the game, not only for the losing side. It is supposed to call a foul against the losing side no matter what the scores are. If African countries discriminate against the United States of America, WTO can then authorize US to retaliate. So what African countries need is a trade "coach"
to help them untangle the web of rules, obligations and benefits of and from the multilateral trade system. This is a role that can be taken up by divisions of Economic Commission for Africa (ECA), such as ESPD, RCID or a new Trade Division.
28. In addition, the domestic demand needed to help sustain an infant industry in Africa is absent largely due to low domestic income. Effective demand in the domestic market can help in covering operating costs as firms compete in the world market. Where this effective demand in the domestic market is absent, firms tend to fold even before they can have a foothold in the world market.
29. High transaction costs in Africa are also responsible for making the industries non competitive. These transaction costs include exorbitant communications and transportation costs especially for landlocked countries. In Uganda 70% of the value of merchandise exports goes into transportation and insurance costs as a result of anti-competitive cargo reservation policies.
30. Until recently public sector perceptions of private entrepreneurs were of tax-dodging opportunists, and entrepreneurs were not recognized as the engines for growth and development in the economy. However this is gradually changing, as it was one of the conditions of the structural adjustment programs that they embarked upon during the 1980s. The lack of access to credit is also another problem. Africa has been experiencing credit crunch since the mid-1980s. Whilst the ratio of credit to GDP in Asia has been increasing annually for the last two decades, it has been decreasing in almost all Sub- Saharan African countries (SSA). The lack of a culture for research and development in public and private sectors also creates problems for African exports because the most efficient techniques and recent market trends that are so crucial in enhancing exports eludes the African industry.
31. Another set of constraints that inhibit African exports of textile and clothing products can be found at the firm level. The relatively low quality of some products and the lack of standardization also work against the industry. Baseline capital investments would have to be encouraged in the industry through incentives such as tax exemptions. Timeliness of delivery is a management problem that sometimes overlooks the cost implications of time.
This too has to be addressed to garner and maintain confidence of buyers.
Polick!* Ik!t<hmI Africa
32. Policies taken outside the continent are also partially responsible for inhibiting African textile and clothing exports. These include tariff escalation policies in developed markets as well as regional agreements within the OECD countries. Tariff escalation is used in industrial markets to discourage the imports of processed products and hence to protect domestic industries, by increasing the tariff rate proportionally to the level of processing done to the product.
33. Yates (1997) identified regional agreements outside the continent as one of the inhibitors to African textile and clothing exports. He argues that regional agreements that emerged as a result of common markets within the European Union and North America have had some negative repercussions on African exports. This is, because the number of potential new product lines for African industries may have been reduced by special treatment OECD members provide each other. For instance, while 45% of African clothing exports (and 63% of clothing exports from all developing countries) face quota in OECD markets, only 5% of clothing traded between them face similar barriers.
34. The high costs that are the result of market distortions created by the quota system, also adds to the unit costs of production for African exports, making them less competitive.
Transitional "safeguards' by importing countries (although fairly limited) and protection disguised as labor laws, environmental measures (forcing countries to use relatively more expensive eco-friendiy dyes etc)) are potential inhibitors too, although they are more a problem for countries in Asia than in Africa, at this stage. However, as the African textile and clothing industry develops, it would be rational to expect some confrontation with these barriers.
2.3 liiijwict of flic pluisiity o«t «f A1FA on Africa's Textile and Clothing Indnstr?
35. Phasing out the MFA with the preferences that Africa enjoys through it would seem to create more problems for African textile and clothing exports by eroding the preferences for its exports and increasing competition in the market. Tariff negotiations have led to a reduction in regular rates for large number of products, eroding the significance of the special treatment for developing countries. United Nations Conference on Trade And Development (UNCTAD) (1996) estimates that for SSA, the erosion of preferences will lead to a loss of US $ 900 million or less than 0.3% of 1992 exports. By eliminating the quota system, the phasing out of MFA will increase competition in textiles and clothing among developing countries.
36. Empirically, the impact of phasing out MFA on the textile and clothing industry in Africa can be assessed by examining the growth rate of its market share over the MFA period between 1974 and 1994, and compare it with the growth rate during the phase-out period. However data availability limits the period covered in this study to 1996. Hence for the purposes of this study, the phasing-out period refers to the period between 1994 and 1996. The results of the study on Table A3 show that the MFA had a negative impact on the growth of the textile industry in Africa. The market share of the^eight selected textile products grew at an average rate of -1.9% per annum during this period, but at a rate of - 0.7% per annum during the phasing-out period. So whilst the MFA allowed the African textile industry to enjoy some preferences during the period, the industry actually shrunk at a greater rate than it did during the phasing out period. This may be attributed to the removal of some of the barriers to trade during this period. Given that clauses that have been phased out so far are not necessarily the most inhibiting ones, African textile and clothing can be expected to grow significantly after 2005 when all barriers are removed.
Although it may be too early to definitively attribute all the resurgence of the industry to the phasing-out of the MFA, it cannot be definitely ruled out.
37. The market share of African cotton yarn grew at a rate of - 0.1% per annum during the MFA period, but did not grow at all thereafter. Jute fabric market share shrunk at a rate of 7.7% per annum during the MFA era and also did not grow during the phase-out period.
The most impressive result is that of cotton fabric, which shrunk at a rate of 11.4% per annum during the MFA period but only at 0.1% per annum thereafter. Linen fabric did not
register any change in its market share during or after the MFA. Although woolen yarn registered an increase in the growth rate of its market share from -1.6% to - 0.1% per annum, the growth rate of market share of woolen fabric decreased from- 2.2% to - 5.2%
per annum. The worst case is that of jute yam, the growth rate of its market share decreased from 7.8% to - 2.5% per annum.
38. Phasing out the MFA may have had its worst effects on American (North and South) firms. During the MFA period, the textile industry of these countries grew at a rate of 3.5%
per annum but shrunk at the rate of 8.2% per annum during the phase-out period.
European textile industry saw a lower shrunk rate during the phasing out period than the twenty years under the MFA period. The Asian textile industry is the only industry that actually grew in both periods. It grew at an annual rate of 8.1% during the period and 0.4% per annum during the phase-out period.
39. The picture for the African clothing industry is more or less the same, growing faster (or shrinking less) during the phase-out than the MFA period. Whilst its market share shrunk at the rate of 2.5% per annum during the MFA period, it grew at a rate of 0.1% per annum during the phasing-out period. During this period the market share of both American and European firms shrunk at rates of 0.6% and 0.5% per annum respectively. Asian clothing firms (including those from Oceania) again benefited more from both periods. So whilst African textile and clothing exports can be expected to face an erosion of preference and increased competition when MFA is phased out, the trend with which their market shares are growing, indicates the potential for faster growth after the MFA is totally phased out.
This shows that some African countries exhibit some degree of dynamic competitiveness, which is examined in the following section.
III. itnsilYfii'.'il rnimnvoi-l: of llYiismiir
s explained above, dynamic competitiveness is defined as the growth rate of the static competitive index (SCI) (see below) of countries over time. The dynamic
^competitiveness criterion is that for African textile and clothing firms to be competitive in future, the rate of growth of their competitive indexes, determined in part by their unit cost of production, should be less than that of their competitors. Whilst dynamic competitiveness examines the concept over a period of time, static competitiveness looks at
competitiveness at a point in time.
3.1 Hicorcfical FoiiiMlation
41. The theoretical foundation of this model builds upon and integrates Cockburn et al (1998) with Redding (1999). Whilst examining the dynamic comparative advantage and the welfare effects of trade, Redding (1999) argue that a home economy is said to have a 'dynamic comparative advantage' in a low tech production sector at time t if the rate of growth of the opportunity costs of producing low tech good at time t is lower in the home country. He further states that while static comparative advantage determines patterns of international trade at a given point in time, dynamic comparative advantage explain changes over time.
42. Measuring competitiveness and its sources in the manufacturing sector in Mali, Cockburn et oi (1998) argue that the clearest evidence of a firm's international
10 competitiveness is its profitability relative to international competitors. They define competitiveness as simply the capacity for firms to sell their products profitably, by having a relatively lower unit cost of production than their competitors in the international market.
Unit cost (uc) is usually expressed in physical unit costs, which is the ratio of total cost (TC) to physical output (Q).
uc, = -±-
TC(1)
a
43. This however, does not reflect an important determinant of competitiveness - the different qualities of competing products. Different firms usually produce products of different qualities despite similar cost and output levels. In such cases, using the physical unit cost in cross-country or cross-firm comparisons would be inappropriate because the significance of quality is overlooked. To overcome this problem, Cockburn et al proposes using what they called monetary unit cost, which they define as cost per monetary unit
.. pit (f_L \ Qit ) Pi, (2)
(CFA franc, US $) of production. This is the static competitiveness index (SCI) in this study, and used in its dynamic form to measure dynamic competitiveness of the textile and clothing industry in Africa. This index is given as
Where SCIit - Static Competitiveness Index of Firm i at time t pjt = Average Retail Price of Output of Firm i at time t ucit = Unit Cost of output of Firm i at time t
TQt = Total Cost of Production for Firm i at time t Qit = Total Output of Firm i at time t
44. This model says is that if two firms with equal total cost and total output levels, produces two goods of different qualities (reflected by having different retail prices) then they will have different static competitiveness indexes despite equal physical unit costs.
This is achieved by discounting the unit costs of production, equal in this case, by their respective retail prices. The retail price of each good reflects rational consumers' valuation of the product, where rational consumers are expected to pay a higher price for higher quality. Thus the product of a higher quality fetches a higher retail price in the market and the product is discounted by a higher price resulting in lower static competitiveness index.
This index is inversely related to competitiveness, and therefore reducing it over time can allow firms to become more competitive in the long run.
Btetinniiiaiifi of CmniictHiTCiwu in flic liMkiatrr
45. The key determinants of competitiveness in the textile and clothing industry have been identified to include the level of skills possessed by workers in the industry manifested by their task-level efficiencies; lower costs for factors of production; adequate infrastructure;
institutional and financial support and backstopping; conducive Marco-economic policies (both fiscal and monetary); on-time delivery of products; exposure to, and assimilation of information technology; and the effects of multilateral agreements such as EU-ACP Lome conventions, and the existence of the WTO. Various authors have found these to be statistically significant including Woods and Mayer (1998), Biggs et al (1996), Odhiambo et al (1996), Eibadawi (1998) and Paredes (1988), Rodrik (1994), and Trela and Whaliey (1990). Each of the above determinants affect the static competitiveness index model, either through the total fixed cost, total variable cost components of total cost or through the output component in (1).
46. The methodology used here to determine the dynamic competitiveness of the African textile and clothing industry can be illustrated in two steps.
47. Step I - the static competitive index of production is computed for each country. The United Nations data mentioned above gives the value of total output, and value added to textile production in each country. The difference between these two gives the value of total cost, and the ratio of this to the total value of output gives the index.
48. Step II - dynamic competitiveness is then determined by the growth rate of this static competitiveness index over time, using the dynamic competitiveness criterion formulated
as:
UC(t) _ d[TC{t)lPKQ{t)} . UC*(t) _ 6{TC*(t)/Pw(t)Q*(ty\
UC(t) dtUC(t) UC*(t) dtUC(t) (3)
Where UC (t) = Unit Cost of African firms at time t TC (t) = Total Cost of African firms at time t Q (t) = Output of African Firms at time t.
UC*(t) = Unit costs of a major foreign competitor at time t.
TC*(t) = Total Cost of a major foreign competitor at time t Q*(t) = Output of major foreign competitor at time t.
49. Since the SCI is a cost index, the ideal situation would be a shrink in its growth rate rather than an increase. Hence the more negative the dynamic competitiveness index, the more competitive the country would be in the long run. This is, because for a country to be competitive in the long run, its unit costs of production should be decreasing over time.
50. To compare competitiveness in the long run between two or more countries, an Indicator of Dynamic Competitiveness (InDC) is formulated and defined as the difference between the growth rates of the static competitiveness indexes of the countries. This is specified as
51. Given that the indicator is derived through subtracting the growth rate of the industry in the African country from that of its competitor, the more positive this difference is, the more competitive the African country is to its foreign competitor. On the other hand, the more negative this indicator is, the less competitive the African country is relative to its foreign competitor. The indicator ranges from -co to co {-co < InDC < oo), and can be represented on the number line as in Fig. 1 below.
iPMW = {) 4)
dtUC*(t) dtUQt)
52. An indicator of zero means that the countries would be equally competitive in the long run, whilst an indicator between 0 and co means that the African country would be more competitive in the long run, and that between 0 and -co indicates that the African country would be less competitive than its foreign competitors in the long run. The closer the indicator is to -go (the more negative), the less competitive the African country is, and the closer it is to co (the more positive) the more competitive the country is.
12
Fig.l Indicator of Dynamic Competitiveness for African Countries
-00
Less Competitive 0 More Competitive^
Equally Competitive
3.2 Eni|»irknl Analysis
53. Table A4 shows the static competitiveness indexes for the selected countries during the period between 1980 and 1993, 1994, 1995 or 1996 depending on length of data available for each country. Whilst some countries have complete dataset for the whole period under review (1980 to 1996), for some countries data is missing for the period between 1994 and 1996, for some between 1995 and 1996, and some for 1996. Hence the static competitiveness index for each country is determined up to the last period for which data is available. Given that this index is a ratio of total cost to total output, the higher it is, the less competitive that country is at that point in time. This is because a higher index means a high amount of cost incurred and hence lower value added to output and therefore less competitiveness.
54. Table A5 shows the annual growth rates of these indexes from one year to the next.
The last coiumn shows the annual growth rate for the entire period for each country.
These are the dynamic competitiveness indexes for each country. As indicated above, the more negative this index is, the more competitive the country can be in the long run, because the unit costs of production in the textile and clothing industry in that country is shrinking. Alternatively, the more positive this index is for a country, the less competitive that country would be in the long run because unit costs of production in the industry are
growing over time.
Country Botswana CAR Egypt Kenya Mauritius Senegal Zimbabwe
Average SCI
0.74 1.03 0.76 0.68 0.71 0.77 0.61
Table 2:
DCI 0.22 0.40 1.23 0.30 1.08 0.59 -1.17
Dynamic Competitiveness Results
Long-Term Competitiveness relative to India
M M L M L L M
0.26 0.08 -0.75
0.181 -0.60 -0.11 1.65
America L L L L L L M
-0.53 -0.71 -1.54 -0.61 -1.39 -0.90 0.86
Malaysia L L L L L L M
-0.37 -0.55 -1.38 -0.45 -1.23 -0.74 1.02
Indonesia L L L L L L M
-0.47 -0.64 -1.47 -0.54 -1.33!
-0.84 0.93
Hong Kong M
M L M L L M
0.22 0.04 -0.79 0.14 -0.64 -0.15 1.61 Notes:
SCI = Static Competitiveness Index DCI = Dynamic Competitiveness Index
L = African Country is dynamicaliy less competitive than the foreign competitor M = African Country is dynamically more competitive than the foreign competitor
Source: Author's computation using various years of UNSO's Industrial Statistics Yearbook, Volume I, General Industrial Statistics.
55. Table 2 above summarizes the dynamic and average static competitiveness indexes for the countries. From the table it can be seen that the dynamic index is positive for all the selected African countries besides Zimbabwe. This means that Zimbabwean textile and
clothing firms have managed to reverse the growth rate of their unit costs of production, whereas the other countries have not, and their unit costs are increasing over time. Thus Zimbabwean firms have the potential to be competitive in the long run and stand to benefit from the phasing out of the MFA. With regards to foreign competitors, India and Hong Kong too, have positive indexes meaning that they would not be as dynamically competitive as others. Instead American (North and South), Malaysian, and Indonesian textile and clothing industries have negative dynamic competitiveness indexes meaning that they would be dynamically competitive in the long run.
56. The results above shows that Botswana has dynamic competitiveness index of 0.22 that is 0.26 less than that of India, and 0.22 less than that of Hong Kong. Therefore Botswana has the potential to be more competitive than these two countries in the long run. However, the remaining three foreign competitors, America, Indonesia, and Malaysia have dynamic indexes that are smaller than that of Botswana by 0.53, 0.37, and 0.47 respectively, and are therefore likely to be more competitive in the long run, ceteris paribus.
Similarly, Central African Republic has a dynamic competitiveness index of 0.4, which is lower than those of India and Hong Kong but greater than those of America, Malaysia, and Zimbabwe. Hence Central African Republic also has the potential to be more competitive than the former two but less competitive, in the long run than the latter three. Egypt has a dynamic index of 1.23, which is higher than those of all its foreign competitors and is therefore likely to be less competitive than all of them in the long run. The same goes for Mauritius, which has a dynamic competitiveness index of 1.08. Kenya has an index of 0.68, which is lower than that of India and Hong Kong but more than those of America, Malaysia and Indonesia. Just like Botswana and Central African Republic, it has the potential to be more competitive than India and Hong Kong in the long run, but less competitive than the remaining three. Senegal has an index of 0.59 which is greater than those of all five foreign competitors, although only slightly, in the case of India and Hong Kong. Hence it is likely to be less competitive than the former three but just as competitive as the latter two. Zimbabwe has a dynamic competitiveness index of -1.17 that is less than those of all foreign competitors and hence has the potential to be more competitive than all of them in the long run.
57. The relative positions of the countries to each other are illustrated on Fig. 2 below. The zero line indicates the competitiveness boundary. Indexes above it indicate lack of dynamic competitiveness and the further away from zero (the more positive) they are the less competitive that country would be in the long run. On the other hand, indexes below the zero line indicate dynamic competitiveness with indexes further dawn and away from zero (more negative) being more competitive in the long run. Fig. 2 also shows that the countries can be ranked in descending order of dynamic competitiveness in the order Zimbabwe, America, Indonesia, Malaysia, Botswana, Kenya, Central African Republic, Hong Kong, India, Senegal, Mauritius and Egypt.
14
Fig. 2 Dynamic Competitiveness Rates
1.5 1 0.5
0 -0.5 -1 -1.5
♦
♦
♦ CAR Botswana
Egypt
♦
♦
Kenya Mauritius
♦ Seneqal , ,-
♦ America
♦ Zimbabwe
alWon€,sia
\ong
EV. IIohc
»he MFA is being phased out and by 2005 all textile and clothing products would have been fully integrated into 1994 GATT Rules. The potential results of such an action are the erosion of preference that African countries supposedly enjoy through preferential treatment, and increased competition in world markets. The preferential treatment should have helped boost the African textile and clothing industry during the MFA period, and so phasing-out the agreement should have spelt more problems for the industry. However, the results of this study show that, for selected products, their market share shrunk more during the MFA period than during the phasing-out period. So whilst the African clothing and textile industry will face some erosion of preference and increased competition, with the phasing out of the MFA, some countries have the potential to compete effectively in a post-MFA world. Hence the phasing out of the MFA could have a more positive effect on African textile and clothing than it might seem.
59. Dynamic competitiveness analysis show that the unit cost of production has been shrinking for industries in Zimbabwe faster than it is in India and Hong Kong, Indonesia, Malaysia, and America. The result also show that countries like Botswana and Kenya also has the potential to be more competitive in the long run, than India and Hong Kong if some control is put on costs. However, countries that are performing very well today such as Egypt and Mauritius, unfortunately, have unit costs that are growing over time.
This needs to be held under control if they are to remain competitive in the long run. A country like Senegal needs a little more control on its unit costs to be more competitive than India and Hong Kong and as competitive as the others in the long run.
60. In conclusion, the future for African textile and clothing may not be as bleak as the present situation looks. The results of this study show that the potential exist for some African countries such as Zimbabwe, Botswana, Kenya, and Senegal to be as competitive in the long run as any of their competitors, given that trade barriers are removed and inappropriate domestic policies are effectively addressed.
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^ ^
18 Annexes
Table Al: Market Shares for Selected African Textile Products
1974.000 1980.000 1981.000 1982.000 1983.000 1984.000 1985.000 1986.000 1987.000 1988.000 1989.000 1990.000 1991.000 1992.000 1993.000 ] 994.000 1995.000 1996.000 Average
Cotton 2.934 3.314 3.382 3.146 3.232 3.260 3.155 2.888 2.898 2.836 3.195 3.024 2.943 3.115 3.041 2.901 2.948 2.911 3.1
Yarn Woollen 1.616 1.283 1.359 1.364 1.283 1.409 1.465 1.449 1.421 1.229 1.506 1.462 1.563 1.715 1.493 1.381 1.350 1.373 1.4
Man-Made 0.823 0.558 0.604 0.638 0.501 0.504 0.525 0.526 0.524 0.530 0.562 0.592 0.592 0.629 0.669 0.653 0.662 0.683 0.6
Jute 8.980 15.989 19.015 19.323 21.889 19.602 20.316 18.379 17.240 18.852 20.253 21.053 22.131 25.455 20.149 19.091 18.966 14.783 19.6
Silk 38.822 71.319 61.723 67.751 69.917 70.403 64.785 53.569 0.216 0.205 0.214 0.204 0.104 0.107 0.105 0.107 0.054 0.073 27.1 l/NSO's Industrial Statistics Yearbook
Cotton 2.792 1.819 1.944 2.060 1.898 3.876 1.994 1.950 1.964 1.949 0.943 0.816 0.857 0.839 0.835 0.833 0.827 0.823 1.4 Volume If
Woollen 0.918 0.836 0.859 0.999 0.961 0.936 0.909 0.998 5.498 4.245 2.089 0.885 1.329 1.093 0.477 0.734 0.750 0.431 1.4
Fabric Linen 1.408 0.636 0.623 0.630 0.830 0.975 1.114 1.197 1.205 1.393 1.292 1.424 1.378 1.093 1.491 1.515 1.555 1.630 1.2
Jute 1.805 1.521 1.575 1.601 1.460 1.373 1.278 1.084 1.177 1.252 0.946 0.876 0.890 1.081 0.852 0.806 0.948 0.809 1.1 - Commodity Production Statistics
19 TableA2:MarketSharesforSelectedAfricanClothingProducts 1974.000 1980.000 1981.000 1982.000 1983.000 1984.000 1985.000 1986.000 1987.000 1988.000 1989.000 1990.000 1991.000 1992.000 1993.000 1994.000 1995.000 1996.000 Average
Trouser 4.328 3.818 4.614 4.238 4.372 4.688 4.166 3.847 4.121 4.277 4.410 4.622 2.659 1.657 2.958 3.721 4.316 3.836 3.9 Blouse W&G 1.455 0.850 0.922 0.835 0.797 0.724 1.059 1.008 1.104 1.199 1.390 1.362 1.402 1.395 0.923 1.202 1.386 1.426 1.1 Dress W&G 1.947 4.782 5.678 6.475 6.955 5.182 4.670 4.503 5.092 4.915 5.015 5.780 4.077 4.164 4.607 3.670 4.043 3.685 4.9 Skirt W&G 0.926 1.452 1.753 1.845 1.736 2.345 1.869 2.102 2.054 2.068 2.227 2.046 1.411 1.508 1.580 2.374 2.436 2.544 2.0 Shirts M&B 4.350 6.436 6.532 6.917 0.737 4.692 4.327 3.984 4.190 4.427 3.828 4.241 3.887 3.785 3.300 3.199 3.720 3.070 4.2 Underwear M&B 1.969 1.744 2.122 1.804 1.801 1.570 1.548 1.200 1.441 0.844 1.052 0.960 1.001 0.699 0.728 0.978 1.042 0.889 1.3 Underwear W&G 2.619 2.446 3.093 3.043 3.166 2.602 2.870 2.160 1.970 1.933 1.359 1.758 2.255 1.805 1.752 2.325 2.354 2.194 2.3 Jacket M&B 3.138 3.385 3.587 1.014 2.904 2.558 2.446 2.461 2.753 2.302 2.366 2.527 1.506 1.528 1.060 1.317 1.677 1.147 2.1 Overcoat M&B 32.953 2.584 0.671 0.934 1.066 1.131 0.882 0.787 0.750 0.590 1.116 0.968 0.847 1.010 0.762 0.734 0.763 0.863 1.0 Suits M&B 1.368 4.830 2.735 3.084 2.234 2.486 2.421 2.323 2.326 1.768 2'.107 1.801 2.005 1.863 1.883 1.532 1.600 1.282 2.3 Coats W&G 0.424 0.681 0.684 0.959 0.668 0.399 0.434 0.381 0.401 0.352 0.299 0.244 0.377 0.403 0.546 0.617 0.662 0.674 0.5
Raincoat W&G 3.664 0.773 2.129 3.054 1.776 3.873 1.650 2.229 4.241 4.815 4.557 5.224 2.232 2.645 3.282 4.263 4.415 4.910 3.3
Raincoat M&B 1.657 4.333 6.637 7.048 5.108 7.081 6.409 9.028 8.034 10.338 7.548 4.834 4.671 3.765 2.064 1.449 1.767 1.323 5.4 Source:Author'sComputationusingUNSO'sIndustrialStatisticsYearbook,VolumeII-CommodityProductionStatistics
