Managerial Insights on the Politics of Trade Policy and Economic Development: The Case of Madagascar

By Sadrieh, Farid | Journal of Comparative International Management, June 2012 | Go to article overview

Managerial Insights on the Politics of Trade Policy and Economic Development: The Case of Madagascar


Sadrieh, Farid, Journal of Comparative International Management


1. Introduction

With a view to helping the countries of Sub-Saharan Africa through trade, as opposed to aid, the US government, in May 2000, enacted the African Growth and Opportunity Act (AGOA), allowing duty free access for some African goods to the US. Currently, 33 out of the 48 UN recognized least developed countries (LDC) are located in this region (UNCTAD 2012). The beneficial role of AGOA on US-African trade has been widely recognized, although the extent of its positive effects is debated (Brenton and Hoppe 2006; Brenton and Ikezuki 2004; Nouve, 2005; Rolfe and Woodward 2005).

Madagascar came under the umbrella of AGOA in 2001, and within a few years became the second largest exporter of readymade garments- only behind Lesotho- from sub-Saharan Africa. Among the conditions for eligibility for AGOA benefits is a country's respect for the rule of law (Section 103(5) and 103(7) of AGOA). The unconstitutional transfer of power in Madagascar in March 2009, coupled with the failure of the new government to organize inclusive elections for a return to a constitutional order as demanded by the US and others, led to Madagascar's suspension of AGOA benefits with effect from January 1, 2010. As a result, apparels and textile produced in Madagascar are not currently eligible for duty free access to the US, thus creating serious problems for the $1200-million-a-year Malagasy textile sector that employs over 50,000 people and accounts for about 8% of Malagsy economy (Lough, 2009). The suspension was re-examined at the end of 2010. The adverse impact of this suspension becomes clear from the drastic fall of export of textile products from Madagascar to the US--from US$280 million in 2008 to US$55 million in 2010.

This paper purports to evaluate the prospects of the Malagasy2 textile and apparel industry as it faces unprecedented challenges from within and an increasingly turbulent and hostile external environment. The analysis provided in this paper is mostly based on rich qualitative data gathered by the author prior to, during, and after the political crisis that led to Madagascar's suspension from AGOA.

2. Literature Review

A "Special Economic Zone", sometimes called "Export Processing Zone" (EPZ), is a geographically-defined area specially created in a developing country to facilitate manufacturing for exports and offer free trade conditions and generous regulations to attract foreign direct investment (Madani, 1999). The geographically defined area can be fragmented and dispersed. Indeed a stand-alone factory can be considered as part of an EPZ, along with others in various locations within a country. This is the characteristic of EPZs in Mauritius, Madagascar, and Namibia, among others. Not all production must necessarily be exported, but exports should constitute the predominant activity of the firm. In Madagascar, to qualify for EPZ status, a firm must export 95% of its production. Even though a few non-manufacturing firms are present in Malagasy EPZs (e.g., data processing firms), most EPZ firms are in manufacturing.

The Export Processing Zone: Panacea or False Promise?

The Host Country Perspective

The literature on EPZs, with a few notable exceptions (e.g., Choi 1995; Kumar 1994; Papadopoulos and Malhotra 2007; Woodward and Wolfe 1993) is dominated by the economics of development perspective. Indeed, most researchers have been concerned about measuring whether the host nation's welfare increases as a result of the presence of an EPZ (e.g., Hamada 1974; Warr 1989; Devreux and Chen 1995; 1997).

A second stream of research on EPZs adopted the cost-benefit analytical framework. According to the proponents of this approach, the benefits and costs of an EPZ are identifiable and quantifiable over the lifetime of the project (Jayanthakumaran, 2002). Cost-benefit analyses involve the calculation of opportunity costs, shadow prices and a number of estimations to quantify social benefits and costs in order to determine whether the overall benefits generated by the EPZ outweigh its costs. …

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